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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended March 31, 2005
OR
|_| TRANSITION PERIOD PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934 [ NO FEE REQUIRED ]
For the Transition Period from __________ to __________
Commission File Number: 001-31896
---------
THE WILBER CORPORATION
----------------------------------------------------------
(Exact Name of the Registrant as Specified in its Charter)
New York 15-6018501
-------- ----------
(State or Other Jurisdiction of (I.R.S. Employer Identification Number)
Incorporation or Organization)
245 Main Street, Oneonta, NY 13820
----------------------------------
(Address of Principal Executive Offices) (Zip Code)
607 432-1700
------------
(Registrant's Telephone Number Including Area Code)
Securities Registered Pursuant to Section 12(b) of the Act:
Common Stock, $0.01 par value per share
---------------------------------------
(Title of Class)
Securities Registered Pursuant to Section 12(g) of the Act:
None
----
Indicate by check mark whether the 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 twelve months (or for such shorter period that the Registrant was
required to file such reports) or (2) has been subject to such requirements for
the past 90 days.
YES |X| NO |_|
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
YES |_| NO |X|
As of May 5, 2005, there were issued and outstanding 11,178,092 shares of the
Registrant's Common Stock.
THE WILBER CORPORATION
FORM 10-Q
INDEX
PART I - FINANCIAL INFORMATION
FORWARD-LOOKING STATEMENTS
ITEM 1: Financial Statements (Unaudited)
- ------
Consolidated Statements of Condition
Consolidated Statements of Income
Consolidated Statements of Changes in Stockholders' Equity and
Comprehensive Income
Consolidated Statements of Cash Flows
Notes to Unaudited Consolidated Financial Statements
ITEM 2: Management's Discussion and Analysis of Financial Condition and Results
- ------ of Operations
A. General
B. Financial Condition and Performance Overview
C. Comparison of Financial Condition at March 31, 2005 and
December 31, 2004
D. Comparison of Results of Operation for the Three-months Ended
March 31, 2005 and 2004
E. Liquidity
F. Capital Resources and Dividends
ITEM 3: Quantitative and Qualitative Disclosures about Market Risk
- ------
ITEM 4: Controls and Procedures
- ------
PART II - OTHER INFORMATION
ITEM 1: Legal Proceedings
- ------
ITEM 2: Unregistered Sales of Equity Securities and Use of Proceeds
- ------
ITEM 3: Defaults Upon Senior Securities
- ------
ITEM 4: Submission of Matters to a Vote of Security Holders
- ------
ITEM 5: Other Information
- ------
ITEM 6: Exhibits
- ------ (a) Exhibits
Signature Page
Index to Exhibits
1
FORWARD-LOOKING STATEMENTS
When we use words or phrases like "will probably result," "we expect," "will
continue," "we anticipate," "estimate," "project," "should cause," or similar
expressions in this report or in any press releases, public announcements,
filings with the Securities and Exchange Commission (the "SEC") or other
disclosures, we are making "forward-looking statements" as described in the
Private Securities Litigation Reform Act of 1995. In addition, certain
information we provide, such as analysis of the adequacy of our allowance for
loan losses or an analysis of the interest rate sensitivity of our assets and
liabilities, is always based on predictions of the future. From time to time, we
may also publish other forward-looking statements about anticipated financial
performance, business prospects, and similar matters.
The Private Securities Litigation Reform Act of 1995 provides a safe harbor for
forward-looking statements. We want you to know that a variety of future events
and uncertainties could cause our actual results and experience to differ
materially from what we anticipate when we make our forward-looking statements.
Factors that could cause future results to vary from current management
expectations include, but are not limited to, general economic conditions,
legislative and regulatory changes, monetary and fiscal policies of the federal
government, changes in tax policies, 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.
2
ITEM 1: Financial Statements (Unaudited)
- ------
The Wilber Corporation
Consolidated Statements of Condition (Unaudited)
March 31, December 31,
dollars in thousands except share and per share data 2005 2004
- -----------------------------------------------------------------------------------------------
Assets
Cash and Due from Banks $ 9,500 $ 10,440
Time Deposits with Other Banks 9,799 10,099
--------- ---------
Total Cash and Cash Equivalents 19,299 20,539
Securities
Trading, at Fair Value 1,421 1,504
Available-for-Sale, at Fair Value 242,297 249,415
Held-to-Maturity, Fair Value of $55,983 at March 31, 2005
and $59,324 at December 31, 2004 57,144 59,463
Loans 401,436 391,043
Allowance for Loan Losses (6,378) (6,250)
--------- ---------
Loans, Net 395,058 384,793
--------- ---------
Premises and Equipment, Net 6,224 5,860
Bank Owned Life Insurance 15,109 14,975
Goodwill 4,451 2,682
Intangible Assets, Net 833 377
Other Assets 13,085 11,253
--------- ---------
Total Assets $ 754,921 $ 750,861
========= =========
Liabilities and Stockholders' Equity
Deposits:
Demand $ 59,888 $ 63,746
Savings, NOW and Money Market Deposit Accounts 259,475 241,151
Certificates of Deposit (Over $100M) 75,917 76,346
Certificates of Deposit (Under $100M) 178,285 165,194
Other Time Deposits 26,339 25,492
--------- ---------
Total Deposits 599,904 571,929
--------- ---------
Short-Term Borrowings 24,548 37,559
Long-Term Borrowings 58,187 65,379
Other Liabilities 5,946 8,389
--------- ---------
Total Liabilities 688,585 683,256
--------- ---------
Stockholders' Equity:
Common Stock, $.01 Par Value, 16,000,000 Shares Authorized,
and 13,961,664 Shares Issued at March 31, 2005,
and December 31, 2004 140 140
Additional Paid in Capital 4,224 4,224
Retained Earnings 84,509 83,402
Accumulated Other Comprehensive (Loss) / Income (1,775) 396
Treasury Stock at Cost, 2,783,572 Shares at March 31, 2005
and 2,767,072 Shares at December 31, 2004 (20,762) (20,557)
--------- ---------
Total Stockholders' Equity 66,336 67,605
--------- ---------
Total Liabilities and Stockholders' Equity $ 754,921 $ 750,861
========= =========
See accompanying notes to unaudited consolidated interim financial statements.
3
The Wilber Corporation
Consolidated Statements of Income (Unaudited) Three-Months Ended
March 31,
dollars in thousands except share and per share data 2005 2004
- --------------------------------------------------------------------------------------------------
Interest and Dividend Income
Interest and Fees on Loans $ 6,593 $ 5,939
Interest and Dividends on Securities:
U.S. Government and Agency Obligations 2,341 2,204
State and Municipal Obligations 700 649
Other 44 160
Interest on Federal Funds Sold and Time Deposits 142 144
------------ ------------
Total Interest and Dividend Income 9,820 9,096
------------ ------------
Interest Expense
Interest on Deposits:
Savings, NOW and Money Market Deposit Accounts 589 511
Certificates of Deposit (Over $100M) 581 531
Other Time 1,497 1,302
Interest on Short-Term Borrowings 152 34
Interest on Long-Term Borrowings 690 731
------------ ------------
Total Interest Expense 3,509 3,109
------------ ------------
Net Interest Income 6,311 5,987
Provisions for Loan Losses 240 360
------------ ------------
Net Interest Income After Provision for Loan Losses 6,071 5,627
------------ ------------
Non Interest Income
Trust Fees 328 321
Service Charges on Deposit Accounts 392 341
Commissions Income 138 160
Investment Security Gains, Net 244 719
Increase in Cash Surrender Value of Bank Owned Life Insurance 134 161
Other Service Fees 101 54
Other Income 77 56
------------ ------------
Total Non Interest Income 1,414 1,812
------------ ------------
Non Interest Expense
Salaries and Employee Benefits 2,798 2,671
Net Occupancy Expense of Bank Premises 433 393
Furniture and Equipment Expense 172 174
Computer Service Fees 131 80
Advertising and Marketing 102 85
Professional Fees 196 225
Other Miscellaneous Expenses 721 685
------------ ------------
Total Non Interest Expense 4,553 4,313
------------ ------------
Income Before Taxes 2,932 3,126
Income Taxes (762) (842)
------------ ------------
Net Income $ 2,170 $ 2,284
============ ============
Weighted Average Shares Outstanding 11,186,275 11,209,392
Basic Earnings Per Share $ 0.19 $ 0.20
See accompanying notes to unaudited consolidated interim financial statements.
4
The Wilber Corporation
Consolidated Statements of Changes in Stockholders' Equity and Comprehensive
Income (Unaudited)
Accumulated
Additional Other
Common Paid in Retained Comprehensive Treasury
dollars in thousands except share and per share data Stock Capital Earnings Income (Loss) Stock Total
- -----------------------------------------------------------------------------------------------------------------------------------
Balance December 31, 2003 $ 140 $ 4,224 $ 79,043 $ 1,272 $(20,375) $ 64,304
Comprehensive Income:
Net Income -- -- 2,284 -- -- 2,284
Change in Net Unrealized Gain (Loss)
on Securities, Net of Taxes -- -- -- 1,198 -- 1,198
--------
Total Comprehensive Income 3,482
--------
Cash Dividends ($.095 per share) -- -- (1,065) -- -- (1,065)
-------- -------- -------- -------- -------- --------
Balance March 31, 2004 $ 140 $ 4,224 $ 80,262 $ 2,470 $(20,375) $ 66,721
-------- -------- -------- -------- -------- --------
Balance December 31, 2004 $ 140 $ 4,224 $ 83,402 $ 396 $(20,557) $ 67,605
Comprehensive Income:
Net Income -- -- 2,170 -- -- 2,170
Change in Net Unrealized Gain (Loss)
on Securities, Net of Taxes -- -- -- (2,171) -- (2,171)
--------
Total Comprehensive Loss (1)
--------
Cash Dividends ($.095 per share) -- -- (1,063) -- -- (1,063)
Purchase of Treasury Stock (16,500 shares) (205) (205)
-------- -------- -------- -------- -------- --------
Balance March 31, 2005 $ 140 $ 4,224 $ 84,509 $ (1,775) $(20,762) $ 66,336
-------- -------- -------- -------- -------- --------
See accompanying notes to unaudited consolidated interim financial statements.
5
The Wilber Corporation
Consolidated Statements of Cash Flows (Unaudited)
Three-Months Ended
March 31,
dollars in thousands 2005 2004
- -----------------------------------------------------------------------------------------------------
Cash Flows from Operating Activities:
Net Income $ 2,170 $ 2,284
Adjustments to Reconcile Net Income to Net Cash
Used in Operating Activities:
Provision for Loan Losses 240 360
Depreciation and Amortization 263 102
Net Amortization of Premiums and Accretion of Discounts on Investments 270 543
Available-for-Sale Investment Security Gains, net (247) (678)
Other Real Estate Losses -- 24
Increase in Cash Surrender Value of Bank Owned Life Insurance (134) (161)
Net Decrease (Increase) in Trading Securities 80 (295)
Net Losses (Gains) on Trading Securities 3 (41)
(Increase) Decrease in Other Assets (321) 104
Decrease in Other Liabilities (2,501) (2,361)
-------- --------
Net Cash Used in Operating Activities (177) (119)
-------- --------
Cash Flows from Investing Activities:
Net Cash Acquired from Acquisition of a Branch 22,521 --
Proceeds from Maturities of Held-to-Maturity Investment Securities 2,294 4,015
Purchases of Held-to-Maturity Investment Securities (15) (9,490)
Proceeds from Maturities of Available-for-Sale Investment Securities 19,205 40,326
Proceeds from Sales of Available-for-Sale Investment Securities 5,351 7,394
Purchases of Available-for-Sale Investment Securities (20,977) (38,737)
Net Increase in Loans (2,870) (6,106)
Proceeds from Sale of Loans -- 294
Purchase of Premises and Equipment, Net of Disposals (109) (373)
Proceeds from Sale of Other Real Estate -- 35
-------- --------
Net Cash Provided by (Used in) Investing Activities 25,400 (2,642)
-------- --------
Cash Flows from Financing Activities:
Net Decrease in Demand Deposits, Savings, NOW,
Money Market and Other Time Deposits (5,493) (6,346)
Net Increase in Certificates of Deposit 501 9,159
Net Decrease in Short-Term Borrowings (13,011) (5,283)
Increase in Long-Term Borrowings 16,900 15,000
Repayment of Long-Term Borrowings (24,092) (1,141)
Purchase of Treasury Stock (205) --
Cash Dividends Paid (1,063) (1,065)
-------- --------
Net Cash (Used in) Provided by Financing Activities (26,463) 10,324
-------- --------
Net (Decrease) Increase in Cash and Cash Equivalents (1,240) 7,563
Cash and Cash Equivalents at Beginning of Year 20,539 19,890
-------- --------
Cash and Cash Equivalents at End of Period $ 19,299 $ 27,453
======== ========
See accompanying notes to unaudited consolidated interim financial statements.
6
The Wilber Corporation
Consolidated Statements of Cash Flows (Unaudited), continued
Three-Months Ended
March 31,
dollars in thousands 2005 2004
- --------------------------------------------------------------------------------
Supplemental Disclosures of Cash Flow Information:
Cash Paid during Period for:
Interest $ 3,537 $ 3,137
Income Taxes $ 3,070 $ 2,859
Non Cash Investing Activities:
Change in Unrealized Gain on Securities $ (3,556) $ 1,958
Transfer of Loans to Other Real Estate $ -- $ 59
Fair Value of Assets Acquired $ 8,185 $ --
Fair Value of Liabilities Assumed $ 32,967 $ --
See accompanying notes to unaudited consolidated interim financial statements.
7
The Wilber Corporation
Notes to Unaudited Consolidated Financial Statements
Note 1. Basis of Presentation
The accompanying unaudited consolidated financial statements include the
accounts of The Wilber Corporation (the "Company"), its wholly owned subsidiary
Wilber National Bank (the "Bank") and the Bank's wholly owned subsidiaries. All
significant intercompany accounts and transactions have been eliminated in
consolidation. The accompanying unaudited consolidated financial statements have
been prepared in accordance with accounting principles generally accepted in the
United States of America ("GAAP") for interim financial information and with the
instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do
not include all of the information and footnotes required by GAAP for complete
financial statements.
The preparation of financial statements in conformity with GAAP required
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 financial statements, and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates. In the opinion of management, the unaudited consolidated financial
statements include all necessary adjustments, consisting of normal recurring
accruals, necessary for a fair presentation for the periods presented. The
results for the periods presented are not necessarily indicative of results to
be expected for the entire fiscal year or any other interim period.
The data in the consolidated balance sheet for December 31, 2004 was derived
from the Company's 2004 Annual Report on Form 10-K. The Annual Report on Form
10-K includes the Company's audited consolidated statements of condition as of
December 31, 2004 and 2003, and the consolidated statements of income,
consolidated statements of cash flows, consolidated statements of stockholders'
equity and comprehensive income for each of the years in the three-year period
ended December 31, 2004. That data, along with the interim unaudited financial
information presented in the consolidated statements of condition as of March
31, 2005; and the statements of income, the statements of changes in
stockholders' equity and comprehensive income and cash flows for the
three-months ended March 31, 2005 and 2004 should be read in conjunction with
the 2004 consolidated financial statements, including the notes thereto.
Amounts in prior period's consolidated financial statements are reclassified
when necessary to conform to the current period's presentation.
Note 2. Earnings Per Share
Basic earnings per share (EPS) are calculated by dividing net income available
to common shareholders by the weighted average number of common shares
outstanding during the period. Entities with complex capital structures must
also present diluted EPS, which reflects 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.
Note 3. Guarantees
The Company does not issue any guarantees that would require
liability-recognition or disclosure, other than its stand-by letters of credit.
Stand-by and other letters of credit are conditional commitments issued by the
Company 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. Typically, these instruments have
terms of 12 months or less and expire unused. Therefore, the total amounts do
not necessarily represent future cash requirements.
The estimated fair value of the Company's stand-by letters of credit was $29
thousand and $22 thousand at March 31, 2005 and December 31, 2004, respectively.
The estimated fair value of stand-by letters of credit at their inception is
equal to the fee that is charged to the customer by the Company. Generally, the
Company's stand-by letters of credit have a term of one year. In determining the
fair values disclosed above, the fees were reduced on a straight-line basis from
the inception of each stand-by letter of credit to the respective dates above.
8
Note 4. 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 also 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 Components of Net Periodic Benefit Cost (Benefit), based on a September 30
measurement date, are:
Three-Months Ended
March 31,
dollars in thousands 2005 2004
- -------------------------------------------------------- --------------------
Service Cost $ 170 $ 162
Interest Cost 231 210
Expected Return on Plan Assets (311) (286)
Net Amortization 53 50
----- -----
$ 143 $ 136
===== =====
Note 5. Other Comprehensive Income
The following is a summary of changes in other comprehensive income for the
periods presented:
Three-Months Ended
March 31,
dollars in thousands 2005 2004
- ---------------------------------------------------------------------- -------------------
Unrealized Holding (Losses) Gains Arising During the Period, Net of Tax
(Pre-tax Amount of ($3,309) and $2,636) $(2,021) $ 1,601
Reclassification Adjustment for (Gains) Realized in Net Income
During the Period, Net of Tax (Pre-tax Amount of ($247) and ($678) (150) (403)
------- -------
Other Comprehensive (Loss) Income, Net of Tax of $1,385 and $760 $(2,171) $ 1,198
======= =======
9
Note 6. Goodwill and Intangible Assets
In February 2005 the Company acquired two branches, which were accounted for as
a business combination in accordance with Statement on Accounting Standard
(SFAS) No. 141, "Business Combinations". The Company recorded related goodwill
of $1.769 million and a core deposit intangible of $492 thousand. See PART I,
ITEM 2B.
The following is a summary of the transaction and the related assets acquired
and liabilities assumed:
dollars in thousands
- --------------------------------------------------------------------------------
Deposits Assumed $32,967
Less Assets Acquired:
Loans 7,635
Property Plant and Equipment 440
Other Assets 110
Less Goodwill 1,769
Less Core Deposit Intangible 492
-------
Net Cash Acquired from Acquisition $22,521
=======
The core deposit intangible recorded as a result of the branch acquisition
totaling $492 thousand will be amortized on a straight-line basis over a
five-year period.
10
ITEM 2: Management's Discussion and Analysis of Financial Condition and Results
of Operations
A. General
The primary objective of this quarterly report is to provide: (i) an overview of
the material changes in our financial condition, including liquidity and capital
resources, at March 31, 2005, as compared to December 31, 2004; and (ii) a
comparison of our results of operations for the three-month period ended March
31, 2005, as compared to the three-month period ended March 31, 2004.
Our financial performance is heavily dependent upon net interest income, which
is the difference between the interest 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 in the cash surrender value on bank owned life insurance, other
service fees and other income. Our non-interest expenses primarily consist of
employee salaries and benefits, occupancy and equipment expense, advertising and
marketing expense, computer service fees, professional fees and other expenses.
Results of operations are also influenced by general economic and competitive
conditions (particularly changes in interest rates), government policies,
changes in Federal or State tax law, and the actions of our regulatory
authorities.
Critical Accounting Policies. Our management 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 March 31,
2005 evaluation of the allowance for loan losses indicated that the allowance
was 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. In addition, the assumptions and estimates used in our
internal reviews of non-performing loans and potential problem loans has a
significant impact on the overall analysis of the adequacy of the allowance for
loan losses. While we have concluded that the March 31, 2005 evaluation of
collateral values was reasonable under the circumstances, if collateral
valuations were significantly lowered, our allowance for loan losses would also
require additional provisions for loan losses.
B. Financial Condition and Performance Overview
During the first quarter of 2005, our total assets increased by $4.060 million,
from $750.861 million at December 31, 2004 to $754.921 million at March 31,
2005. The slight net increase in total assets was impacted by the acquisition of
two branch offices during the quarter. More specifically, on February 4, 2005,
we assumed $32.967 million of deposit liabilities and acquired $7.635 million of
loans from HSBC Bank USA, National Association ("HSBC") for their Walton, New
York and Sidney, New York offices. As a result of the acquisition, we recorded
$2.261 million of intangible assets, consisting of $1.769 million of goodwill
and $492 thousand of core deposit intangibles. We also acquired the Walton
office building for $425 thousand. Due to our already existing presence in
Sidney, New York HSBC, closed its Sidney office simultaneously with our
acquisition.
The net proceeds obtained from the HSBC branch acquisition totaling $22.521
million were primarily used to reduce short-term and long-term borrowings during
the quarter. Between December 31, 2004 and March 31, 2005 total deposits
increased by $27.975 million from $571.929 million to $599.904 million, while
total borrowings (both short-term and long-term borrowings) decreased by $20.203
million from $102.938 at December 31, 2004 million to $82.735 million at March
31, 2005.
Between December 31, 2004 and March 31, 2005, the overall credit quality of the
loan portfolio deteriorated modestly. Specifically, total non-performing loans,
potential problem loans and delinquent loans that were 30 or more days past due
(excluding loans placed on non-accrual status) all increased during the quarter.
The allowance for loan losses changed only slightly during the quarter, from
$6.250 million or 1.60% of total loans at December 31, 2004 to $6.378 million at
March 31, 2005 or 1.59% of total loans.
Net income for the first quarter of 2005 was slightly less than net income for
the first quarter of 2004. Specifically, net income decreased by $114 thousand
or 5.0%, from $2.284 million in the first quarter of
11
2004 to $2.170 million during the first quarter of 2005. The decrease in net
income reduced earnings per share from $0.20 in the first quarter of 2004 to
$0.19 in the first quarter of 2005. Several factors contributed to the decrease
in net income between the periods. Specifically, a $324 thousand increase in net
interest income, a $120 thousand decrease in the provision for loan losses and
an $80 thousand reduction in income taxes were negatively offset by a $398
thousand decrease in non-interest income and a $240 thousand increase in non
interest expense. The decrease in other income was primarily driven by a $475
thousand reduction in investment securities gains. During the first quarter of
2004 we realized $719 thousand of investment securities gains as compared to
only $244 thousand in the first quarter of 2005.
The following tables set forth in this quarterly financial report provide
readers with supplementary information, which is not directly obtainable from
the unaudited financial statements provided in PART I, Item 1 of this quarterly
report. These tables are to be read in conjunction with our management
discussion and analysis narrative regarding the financial condition, results of
operations, liquidity and capital resources contained within this report.
Asset and Yield Summary Table:
The following tables set forth the total dollar amount and resultant yields of
interest income from average earning assets, as well as the interest expense on
average interest bearing liabilities for the periods stated. No tax equivalent
adjustments were made. Average balances are daily averages.
12
For the Three-Months Ended March 31,
----------------------------------------------------------------------------
2005 2004
----------------------------------------------------------------------------
Average Interest Average Interest
Outstanding Earned Yield / Outstanding Earned Yield /
Balance /Paid Rate Balance /Paid Rate
----------------------------------------------------------------------------
(Dollars in thousands)
Earning Assets:
Federal funds sold $ 4,356 $ 25 2.33% $ 7,252 $ 18 1.00%
Interest bearing deposits 9,810 117 4.84% 7,520 126 6.74%
Securities (1) 309,013 3,085 4.05% 305,416 3,013 3.97%
Loans, Net (2) 389,866 6,593 6.86% 358,519 5,939 6.66%
----------------------- -----------------------
Total earning assets 713,045 9,820 5.59% 678,707 9,096 5.39%
Non-earning assets 47,046 45,253
-------- --------
Total assets $760,091 $723,960
======== ========
Liabilities:
Savings accounts $ 98,553 $ 152 0.63% $ 93,113 $ 173 0.75%
Money market accounts 32,793 156 1.93% 31,018 64 0.83%
NOW accounts 121,302 281 0.94% 124,772 274 0.88%
Time accounts 275,247 2,078 3.06% 269,136 1,833 2.74%
Borrowings 94,870 842 3.60% 74,948 765 4.11%
----------------------- -----------------------
Total interest bearing liabilities 622,765 3,509 2.29% 592,987 3,109 2.11%
Non-interest bearing deposits 61,705 57,620
Other non-interest bearing liabilities 7,611 7,728
-------- --------
Total liabilities 692,081 658,335
Stockholders' equity 68,010 65,625
-------- --------
Total liabilities and shareholder equity $760,091 $723,960
======== ========
Net interest income $ 6,311 $ 5,987
======== ========
Net interest rate spread (3) 3.30% 3.28%
==== ====
Net earning assets $ 90,280 $ 85,720
======== ========
Net interest margin (4) 3.59% 3.55%
==== ====
Ratio of earning assets to interest bearing
liabilities 114.50% 114.46%
======== ========
(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.
13
Table of Non-performing Assets:
The following table sets forth information regarding non-performing loans and
assets as of the periods indicated.
------------------------------
At March 31, At December 31,
Dollars in Thousands 2005 2004
------------------------------
Loans in Non-Accrual Status:
Residential real estate (1) $ 82 $ 141
Commercial real estate 2,577 2,168
Commercial (2) 535 243
Consumer 5 9
----------------------
Total non-accruing loans 3,199 2,561
Loans Contractually Past Due 90 Days
or More and Still Accruing Interest 272 190
Troubled Debt Restructured Loans -- --
----------------------
Total non-performing loans 3,471 2,751
Other real estate owned 78 78
----------------------
Total non-performing assets $3,549 $2,829
======================
Total non-performing assets as a
percentage of total assets 0.47% 0.38%
======================
Total non-performing loans as a
percentage of total loans 0.86% 0.70%
======================
(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
14
Analysis of the Allowance for Loan Losses Table:
The following table sets forth changes in the allowance for loan losses for the
periods indicated:
Three-Months ended
March 31,
----------------------
2005 2004
----------------------
(Dollars in thousands)
Balance at beginning of period $6,250 $5,757
Charge offs:
Residential real estate (1) 18 112
Commercial real estate -- 43
Commercial (2) -- 48
Consumer 162 120
------------------
Total charge offs 180 323
------------------
Recoveries:
Residential real estate (1) 20 13
Commercial real estate -- --
Commercial (2) 10 20
Consumer 38 66
------------------
Total recoveries 68 99
------------------
Net charge-offs 112 224
Provision for loan losses 240 360
------------------
Balance at end of period $6,378 $5,893
==================
Ratio of net charge-offs during the period to average
loans outstanding during the period (annualized) 0.11% 0.25%
==================
Allowance for loan losses to total loans 1.59% 1.61%
==================
Allowance for loan losses to non-performing loans 183% 170%
==================
(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
15
C. Comparison of Financial Condition at March 31, 2005 and December 31, 2004
Overview. During the first quarter of 2005 our total assets increased by less
than 1% in spite of acquiring two branch offices previously owned by HSBC.
Specifically, total assets only increased by 0.5% or $4.060 million, from
$750.861 million at December 31, 2004 to $754.921 million at March 31, 2005
because the net proceeds obtained in the HSBC acquisition were primarily used to
reduce borrowings rather than acquire additional earning assets. During the
fourth quarter of 2004, we borrowed $15.000 million from a large money center
bank to purchase investment securities in anticipation of replacing the
borrowing with deposit liabilities assumed in the HSBC transaction. Upon
assuming the branch deposits we repaid the $15.000 million short-term borrowing
and, in effect, substituted short-term borrowings with deposit liabilities.
During the quarter an increase in total loans was generally offset by a
reduction in investment securities. Specifically, total loans increased by
$10.393 million or 2.7%, while total investment securities (including trading,
available-for-sale and held-to-maturity) decreased by $9.520 million or 3.1%.
Approximately, $7.6 million of the increase in total loans was due to the HSBC
branch acquisition, while $3.556 million of the decrease in total investment
securities was due to a decrease in the value of the available-for-sale
investment securities due to rising interest rates during the quarter.
Asset Quality. We use several measures to determine the overall credit quality
of our loan portfolio. These include the level of delinquent loans (those 30 or
more days delinquent, excluding loans placed on non-accrual status), the level
of non-performing loans, the level of potential problem loans and the dollar
amount and type of loan charge-offs we experience. Between December 31, 2004 and
March 31, 2005 the credit quality of our loan portfolio declined modestly. The
levels of delinquent loans, non-performing loans, and potential problem loans
increased between the periods. Net loan charge-offs for the quarter totaled $112
thousand, as compared to $224 thousand during the same quarter in 2004.
Total non-performing loans, including non-accruing loans, loans 90 days or more
past due and still accruing interest and troubled debt restructured loans
increased $720 thousand or 26.2%, from $2.751 million at December 31, 2004 to
$3.471 million at March 31, 2005. The increase in non-performing loans was
primarily due to three loans (to one borrower) totaling $666 thousand being
placed into non-accrual status during the quarter.
Potential problem loans are loans, which are currently performing, but where
information about possible credit problems exists. The amount of potential
problem loans may vary significantly from quarter to quarter due to our
significant volume of commercial loans with balances in excess of $1.0 million.
During the first quarter of 2005, potential problem loans increased $827
thousand from $8.662 million at December 31, 2004 to $9.489 million at March 31,
2005. The increase in potential problem loans from the period ended December 31,
2004 to the period ended March 31, 2005 was primarily due to a decline of the
credit-worthiness of two large borrowers during the quarter with combined total
loan balances of $1.649 million offset by the transfer of three substandard
loans (to one borrower) totaling $666 thousand to non-accrual status.
At March 31, 2005, loans that were 30 or more days delinquent (excluding loans
placed on non-accrual status) totaled $4.021 million or 1.00% of loans
outstanding. By comparison at December 31, 2004 we had $2.267 million or 0.58%
of loans outstanding in this same category, a net increase of $1.754 million
between the periods. The increase in delinquent loans was primarily due to four
commercial real estate loans and one residential real estate loan that exceeded
30 days delinquent prior to March 31, 2005.
The allowance for loan losses increased from $6.250 million at December 31, 2004
to $6.378 million at March 31, 2005. The allowance for loan losses as a
percentage of total loans outstanding was very stable at 1.60% of loans
outstanding at December 31 2004, as compared to 1.59% at March 31, 2005. Our
management and Board of Directors deemed the allowance for loan losses as
adequate at March 31, 2005.
The credit quality of the investment securities portfolios, both
available-for-sale and held-to-maturity, remained strong during the quarter. At
March 31, 2005, 99.8% of the securities held in the Company's bond portfolio
were rated "A" or better by Moody's credit rating service; 95.1% were rated AAA.
By comparison, at December 31, 2004, 99.8% were rated "A" or better and 94.1%
were rated AAA.
16
D. Comparison of Results of Operations for the Three-Months Ended March 31, 2005
and 2004
Overview. During the first quarter of 2005, our net income and earnings per
share were $2.170 million and $0.19 respectively. This was a $114 thousand or
5.0% decrease in net income and a $0.01 decrease in earnings per share as
compared to the first quarter of 2004. During the first quarter of 2004 we
earned $2.284 million in net income and earnings per share of $0.20. The two
most significant factors which contributed to the decrease in net income on a
comparable quarter basis were a $475 thousand decrease in investment securities
gains, offset by a $324 thousand increase in net interest income. In the first
quarter of 2005, we recorded $244 thousand in investment securities gains, as
compared to $719 thousand of investment securities gains in the first quarter of
2004.
The decrease in net income resulted in a decrease in both our return on average
assets and return on average stockholders' equity. More specifically, during the
first quarter of 2005 our return on average assets and return on average equity
were 1.16% and 12.94%, respectively, as compared to 1.27% and 14.00% during the
first quarter of 2004.
Net Interest Income. Net interest income is our most significant source of
revenue. During the first quarter of 2005 and first quarter of 2004, net
interest income comprised 82% and 77% of our net revenue (net interest income
plus non-interest income), respectively. In the three-month period ended March
31, 2005, our net interest income was $6.311 million. By comparison, for the
three-month period ended March 31, 2004 our net interest income was $5.987
million. The $324 thousand improvement in net interest income between the
periods was the result of several factors, which are explained below.
During the last two quarters of 2004 and the first quarter of 2005, the Federal
Open Market Committee, raised the target federal funds 175 basis points (seven
increases of 25 basis points). These actions prompted seven corresponding 25
basis point increases in the national prime lending rate, an index to which a
significant portion of our variable rate loan portfolio were tied. These
interest rate increases, along with a $31.846 million or 8.7% increase in
average loans outstanding, increased the interest and fees on loans from $5.939
million in the three-month period ended March 31, 2004 to $6.593 million in the
three-month period ended March 31, 2005. This represents a $654 thousand or
11.0% increase between the periods.
The interest and dividends earned on investment securities also increased on a
comparable quarter basis. The total interest and dividends earned on investment
securities, including trading, available-for-sale and held-to-maturity
securities, increased $72 thousand from $3.013 million during the first quarter
of 2004 to $3.085 million during the first quarter of 2005. The increase was due
to both an increase in the average volume of investment securities totaling
$3.597 million and an 8 basis point improvement in the yield on investment
securities.
The increase in both the yield on earning assets and the volume of earning
assets that drove the improvement in interest income of $724 thousand, were
partially offset by higher funding costs. As short-term interest rates increased
during the last two quarters of 2004 and the first quarter of 2005, we raised
the rates of interest paid on our interest-sensitive deposit accounts,
particularly money market, NOW and time accounts. These increases, coupled with
modest increases in the average volume of all interest-bearing deposit accounts,
offset by a slight decrease in the rate paid on savings accounts, resulted in a
$323 thousand increase in the interest expense on deposit liabilities between
comparable quarters. Interest expense on borrowings also increased by $77
thousand between the periods due to an increase in the average volume of
borrowings in the first quarter of 2005, offset by a decrease in the average
interest rate paid on borrowings.
Rate and Volume Analysis: The purpose of a rate volume analysis is to identify
the dollar amount of change in net interest income due to changes in interest
rates versus changes in the volume of earning assets and interest bearing
liabilities.
Rate and Volume Table:
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.
17
For the Three-months
Ended March 31,
---------------------------
2005 vs. 2004
---------------------------
Rate Volume Total
---------------------------
(In thousands)
Earning assets:
Federal Funds Sold $ 16 $ (9) $ 7
Interest Bearing Deposits (41) 32 (9)
Securities 37 35 72
Loans 127 527 654
---------------------------
Total earning assets 139 585 724
---------------------------
Interest bearing liabilities:
Savings accounts (30) 9 (21)
Money market accounts 88 4 92
NOW accounts 15 (8) 7
Time accounts 202 43 245
Borrowings (108) 185 77
---------------------------
Total interest bearing liabilities 167 233 400
---------------------------
Change in net interest income $ (28) $ 352 $ 324
---------------------------
Net interest income was $324 thousand greater in the three-month period ended
March 31, 2005 than in the three-month period ended March 31, 2004. Interest
income increased $724 thousand due to both an increase in the rate and an
increase in the volume of earning assets. More specifically, $585 thousand of
the increase in interest income was due to the increase in the volume of earning
assets, while $139 thousand of the increase in interest income was due to the
increase in the rate on earning assets. Increases in both the volume and rate on
loans contributed $654 thousand or 90.3% of the net increase in interest income
period over period.
The $724 thousand increase in interest income was offset by a $400 thousand
increase in the cost of interest bearing liabilities; $167 thousand due to the
increase in rate and $233 thousand due to the increase in the volume of interest
bearing liabilities. The interest expense recorded on our most
interest-sensitive liabilities, including time accounts and money market
accounts, increased due to both an increase in volume and an increase in rate.
Specifically, interest expense on time accounts and interest expense on money
market increased $245 thousand and $92 thousand respectively over the comparable
periods. Interest expense on borrowings also increased $77 thousand between
periods, primarily due to an increase in the volume of borrowings, offset by a
lower cost of borrowings. The cost of NOW accounts and savings accounts changed
only modestly on a comparable quarter basis.
Provision for Loan Losses. We recorded a provision for loan losses of $240
thousand for the three-month period ended March 31, 2005, as compared to $360
thousand for the three-month period ended March 31, 2004, a $120 thousand
decrease. During the three-month period ended March 31, 2005, we recorded net
loan charge-offs of $112 thousand. This compares to $224 thousand during the
three-month period ended March 31, 2004 and $208 thousand for the previous
quarter ended December 31, 2004. The favorable reduction in net charge-offs
during the quarter was countered by a modest deterioration in the overall credit
quality of the loan portfolio. Non-performing loans, loans 30 or more days
delinquent (excluding non performing loans) and potential problem loans all
increased during the quarter.
Non-Interest Income. Non-interest income decreased from $1.812 million in the
three-month period ended March 31, 2004 to $1.414 million in the three-month
period ended March 31, 2005, a $398 thousand or 22.0% decrease. This decrease
was primarily driven by a $475 thousand reduction in investment securities
gains. Specifically, during the first quarter of 2004 we recorded $719 thousand
of investment securities gains, as compared to $244 thousand during the first
quarter of 2005. During the first quarter of 2004 we sold $7.394 million of
available-for-sale investment securities to fund loan growth.
18
These sales, along with matured securities and trading securities gains totaling
$41 thousand, resulted in net investment securities gains of $719 thousand for
the quarter. By comparison, during the first quarter of 2005, we only sold
$5.351 million of available-for-sale investment securities. These sales, along
with matured securities and trading securities losses of $3 thousand, resulted
in net investment securities gains of $244 thousand for the first quarter of
2005.
The decrease in investment security gains coupled with a $22 thousand decrease
in commissions income and a $27 thousand decrease in bank owned life insurance
income between the periods were partially offset by a $51 thousand increase in
service charges on deposit accounts, a $47 thousand increase in other service
fees and a $21 thousand increase in other income.
Non-Interest Expense. Non-interest expense increased from $4.313 million for the
quarter ended March 31, 2004 to $4.553 million for the quarter ended March 31,
2005, a $240 thousand or 5.6% increase. Increases in salaries and benefits
expense, occupancy expenses, computer service fees, advertising and marketing
expense and other expenses, were partially offset by small reductions in
furniture and fixture expense and professional fees.
Salaries and employee benefits increased $127 thousand or 4.8%, from $2.671
million during the first quarter of 2004 to $2.798 million during the first
quarter of 2005. Salaries and overtime expense, which is comprised of employee
base salaries, employee commissions, employee incentives, and deferred
compensation expense, increased by $107 thousand or 5.1% between the periods,
from $2.114 million in the first quarter of 2004 to $2.221 million in the first
quarter of 2005. The remaining $20 thousand of net increase in salaries and
benefits expense was due to an increase in F.I.C.A. expense, group life,
retirement plan costs, unemployment insurance and other benefits totaling $46
thousand, offset by decreases in group health, group disability, workers
compensation and employee education costs totaling $26 thousand.
Computer service fee expenses increased from $80 thousand during the first
quarter of 2004 to $131 thousand during the first quarter of 2005, a $51
thousand or 63.8% increase. Throughout the last three quarters of 2004 and the
first quarter of 2005 we executed several new computer system contracts due to:
(i) a core computer operating system conversion scheduled for the second quarter
of 2005, (ii) increased system recovery and information security demands on our
information technology systems, and (iii) the implementation of new customer
delivery systems.
Professional fees decreased $29 thousand or 12.9%, from $225 thousand during the
first quarter of 2004 to $196 thousand during the first quarter of 2005. During
the first quarter of 2004, we incurred significant professional fees related to
the Company's SEC common stock registration and American Stock Exchange listing.
These fees did not recur during the first quarter of 2005. In spite of this
decrease in professional fees during the first quarter of 2005, we expect that
professional fees will increase in the last three quarters of 2005 due to our
efforts to comply with various aspects of the Sarbanes - Oxley Act of 2002.
Occupancy expenses and furniture and fixture expenses increased from $567
thousand during the first quarter of 2004 to $605 thousand during the first
quarter of 2005, a $38 thousand or 6.7% increase. Much of the increase can be
attributed to our recent expansion activities, in particular, the opening of our
Johnson City (Broome County), New York office in March of 2004 and the opening
of our Kingston (Ulster County), New York office in April of 2004.
Other expenses and advertising and marketing expenses increased from $770
thousand on a combined basis in the first quarter of 2004 to $823 thousand on a
combined basis in the first quarter of 2005, a $53 thousand or 6.9% increase.
Although there were various increases and decreases in several components of
other expense and advertising and marketing expense, much of the increase
between the periods can be attributed to expenses associated with the
acquisition of two branch offices from HSBC, namely a $40 thousand increase in
check printing costs, $12 thousand increase in postage and shipping, a $15
thousand increase in travel and entertainment and a $8 thousand increase in
amortization expense.
Income Taxes. Income tax expense decreased from $842 thousand during the
three-month period ended March 31, 2004 to $762 thousand during the three-month
period ended March 31, 2005. The decrease in income tax expense was primarily
due to a decreased amount of pre-tax income. Our effective tax rate decreased
between periods, from 26.9% in the three-month period ended March 31, 2004 to
26.0% in the three-month period ended March 31, 2005. The decrease in the
effective tax rate during the first quarter of 2005 was due to a greater portion
of our pre-tax income being generated from our tax-advantaged
19
subsidiary Wilber REIT, Inc. and a slight increase in non-taxable income.
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
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
Table of Liquidity Measures:
The following table summarizes several of our key liquidity measures for the
periods stated:
------------------------------------------------------------------------
Liquidity Measure March 31, December 31,
Dollars in Thousands 2005 2004
------------------------------------------------------------------------
Cash and Cash Equivalents $19,299 $20,539
------------------------------------------------------------------------
Available for Sale Investment Securities at
Estimated Fair Value less Securities pledged
for State and Municipal Deposits and
Borrowings $68,390 $63,472
------------------------------------------------------------------------
Total Loan to Total Asset Ratio 53.18% 52.08%
------------------------------------------------------------------------
FHLBNY Remaining Borrowing Capacity $21,104 $19,180
------------------------------------------------------------------------
Correspondent Bank Lines of Credit $ 3,800 $ 7,600
------------------------------------------------------------------------
20
In addition to the above liquidity measures, at March 31, 2005 and December 31,
2004 we had $15.109 million and $14.975 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.
Between December 31, 2004 and March 31, 2005, our liquidity position improved
slightly due to the acquisition of the HSBC branch offices. The net cash
acquired from the acquisition of the HSBC branches during the first quarter of
2005 totaling $22.521 million were primarily used to repay borrowings. This, in
turn, increased the amount of our unencumbered available-for-sale investment
securities between the periods. The substantial majority of our unencumbered
available-for-sale investment securities are highly liquid and could be sold
immediately or pledged for borrowing purposes to meet our anticipated or
unanticipated loan and other funding requirements. In addition, the anticipated
principal repayments on existing loans and investment securities, as well as the
anticipated deposit retention levels continue to provide us with an adequate
amount of liquidity.
Our commitments to extend credit and stand-by letters of credit increased by
$9.583 million or 14.3% between December 31, 2004 to March 31, 2005. At March
31, 2005 commitments to extend credit and stand-by letters of credit were
$76.586 million, as compared to $67.003 million at December 31, 2004. This
increase was due to both an increase in home equity line of credit commitments
assumed during the HSBC branch acquisition and additional commercial loan
commitments. Our experience indicates that draws on the commitments to extend
credit and stand-by letters of credit do not fluctuate significantly from
quarter to quarter, and therefore, are not expected to materially impact our
liquidity prospectively.
We recognize that deposit flows and loan and investment prepayment activity are
affected by the level of interest rates, the interest rates and products offered
by competitors, and other factors. Based on our deposit retention experience,
anticipated levels of regional economic activity, particularly moderate levels
of loan demand within our primary market 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 March 31, 2005 stockholders' equity was $66.336 million, $1.269 million or
1.9% below December 31, 2004 stockholders' equity of $67.605 million. The
decrease in stockholders' equity was primarily due to a decrease in accumulated
other comprehensive income. During the quarter accumulated other comprehensive
income decreased by $2.171 million, from accumulated comprehensive income of
$396 thousand at December 31, 2004 to an accumulated comprehensive loss of
$1.775 million at March 31, 2005 due to a decline in the market value of our
available-for-sale investment securities.
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
stockholders' equity, less intangible assets and accumulated other comprehensive
income. Total capital, for this risk-based capital standard, includes Tier 1
capital plus the Company's allowance for loan losses. Similarly, for the Bank to
be considered "well capitalized," it must maintain a Tier 1 capital to
risk-weighted assets ratio of 6.0% and a total capital to risk-weighted assets
ratio of 10.0%. The Company and the Bank exceeded all capital adequacy and well
capitalized guidelines at March 31, 2005 and December 31, 2004. The Company's
Tier 1 capital to risk-weighted assets ratio and total capital to risk-weighted
assets ratio at March 31, 2005 were 12.58% and 13.83%, respectively.
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 March 31, 2005, under
this statutory limitation, the maximum amount that could have been paid by the
Bank subsidiary to the Company,
21
without special regulatory approval, was $7.996 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.
ITEM 3: 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 interest 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 market 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 ALCO.
We manage several 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, which requires 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" our 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 market 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
22
income are totals for the 12-month period beginning April 1, 2005 and ending
March 31, 2006 under ramped shock scenarios.
Interest Rate Sensitivity Table:
-------------------------------------------------------------------------------------------
Interest Rates Dollars in Thousands
-------------------------------------------------------------------------------------------
Projected
Change in Net
Projected Projected Interest Income
Projected Dollar Percentage as a Percent of
Interest Annualized Change in Change in Total
Rate Shock Prime Net Interest Net Interest Net Interest Stockholders'
(1) Rate Income Income Income Equity
-------------------------------------------------------------------------------------------
3.00% 8.75% $24,704 ($975) -3.80% -1.47%
-------------------------------------------------------------------------------------------
2.00% 6.75% $24,153 ($1,526) -5.94% -2.30%
-------------------------------------------------------------------------------------------
1.00% 6.75% $24,800 ($879) -3.42% -1.33%
-------------------------------------------------------------------------------------------
No change 5.75% $25,679 -- -- --
-------------------------------------------------------------------------------------------
-1.00% 4.75% $25,517 ($162) -0.63% -0.24%
-------------------------------------------------------------------------------------------
-2.00% 3.75% $24,844 ($835) -3.25% -1.26%
-------------------------------------------------------------------------------------------
-3.00% 2.75% $24,606 ($1,073) -4.18% -1.62%
-------------------------------------------------------------------------------------------
(1) Under a ramped interest rate shock, interest rates are modeled
to change at a rate of 0.50% per month.
Many assumptions are embedded within our interest rate risk model. These
assumptions were approved by the Bank's ALCO and were 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 decrease by $1.526 million or -2.30% of total
stockholders' equity in a +2.00% ramped interest rate shock. Similarly, we
project that net interest income would decrease by $835 thousand or -1.26% 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 -5.00% 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 counter-balance 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 were
invested in adjustable rate loans and investments at March 31, 2005.
ITEM 4: 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 Rule 13(a)-15(e) and
15(d)-15(e) under the Securities Exchange Act of 1934, as amended) as of March
31, 2005. Based upon that evaluation, the Chief Executive Officer and Chief
Financial Officer concluded that the Company's disclosure controls and
procedures were effective in ensuring that information required to be disclosed
by the Company in reports that it files or submits under the Securities Exchange
Act of 1934 are recorded, processed, summarized and reported within the time
periods specified in the SEC's rules and forms.
23
PART II - OTHER INFORMATION
ITEM 1: Legal Proceedings
- ------
The Company is not 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 2: Unregistered Sales of Equity Securities and Use of Proceeds
- ------
During the three-month period ended March 31, 2005, the rights of holders of our
registered securities were not modified; nor was any other class of security
issued that could materially limit or qualify our registered 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 will be made in the open market or
through private transactions and will be limited to one transaction per week,
and shall be conducted exclusively through Merrill Lynch, a registered
broker-dealer. All such purchases shall be effected in compliance with the laws
of the State of New York, Rule 10b(18) of the Securities Exchange Act of 1934
and the rules and regulations thereunder, and the rules and regulations of the
American Stock Exchange. The following table summarizes the shares repurchased
by us under this repurchase program during the three-month period ended March
31, 2005:
Share Repurchases:
Remaining
Total Number Average Price Share
of Shares Paid per Total Cost Repurchase
Period Purchased Share (1) Authority
-------------------------------------------------------------------------------------------------------
January 1 - January 31, 2005 0 $ -- $ -- $1,318,995
February 1 - February 28, 2005 16,500 12.38 204,300 1,114,695
March 1 - March 31, 2005 0 -- -- 1,114,695
------------------------------------------------------------
Total 16,500 $ 12.38 $ 204,300
(1) Excludes brokerage commissions paid by the Company.
All shares purchased by the Company in the three-month period ended March 31,
2005 were purchased under the publicly announced program.
ITEM 3: Defaults Upon Senior Securities
- ------
The Company did not default on any senior securities during the three-month
period ended March 31, 2005.
ITEM 4: Submission of Matters to a Vote of Security Holders
- ------
None.
24
ITEM 5: Other Information
- ------
None.
ITEM 6: Exhibits
- ------
(a) See Exhibit Index to this Form 10-Q
25
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
THE WILBER CORPORATION
By: /s/ Alfred S. Whittet Dated: 05/05/2005
------------------------- -----------
Alfred S. Whittet
Vice Chairman, President and Chief Executive Officer
By: /s/ Joseph E. Sutaris Dated: 05/05/2005
------------------------- -----------
Joseph E. Sutaris
Treasurer and Chief Financial Officer
26
EXHIBIT INDEX
No. Document
31.1 Certification of Chief Executive Officer Pursuant to 302 of the
Sarbanes-Oxley Act of 2002
31.2 Certification of Chief Financial Officer Pursuant to 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
27