Attached files
| file | filename |
|---|---|
| EX-21 - EXHIBIT 21 - Wilber CORP | ex21.htm |
| EX-13 - EXHIBIT 13 - Wilber CORP | ex13.htm |
| EX-23 - EXHIBIT 23 - Wilber CORP | ex23.htm |
| EX-32.1 - EXHIBIT 32.1 - Wilber CORP | ex32-1.htm |
| EX-31.2 - EXHIBIT 31.2 - Wilber CORP | ex31-2.htm |
| EX-31.1 - EXHIBIT 31.1 - Wilber CORP | ex31-1.htm |
| EX-32.2 - EXHIBIT 32.2 - Wilber CORP | ex32-2.htm |
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THE
WILBER CORPORATION
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ANNUAL
REPORT ON SECURITIES AND EXCHANGE COMMISSION FORM 10-K
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for
the Year-Ended December 31, 2009
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The
Annual Report on Form 10-K that follows is not part of the proxy solicitation
material.
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UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-K
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[ X
] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For
the fiscal year ended December 31, 2009
Commission
file number: 001-31896
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The
Wilber Corporation
(Exact
name of registrant as specified in its charter)
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New
York
(State
or other jurisdiction of incorporation or organization)
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15-6018501
(I.R.S.
Employer Identification No.)
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245
Main Street, P.O. Box 430, Oneonta, NY
(Address
of principal executive offices)
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13820
(Zip
Code)
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607-432-1700
(Registrant’s telephone number,
including area code)
None
(Former name, former address and
former fiscal year, if changed since last report)
Securities
registered pursuant to Section 12(b) of the Act:
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Title
of each class
Common
Stock, $0.01 par value per share
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Name
of each exchange on which registered
NYSE
Amex
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Securities
registered pursuant to Section 12(g) of the
Act: None
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Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act.
Yes
[ ] No [ X ]
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Exchange Act.
Yes
[ ] No [ X ]
Indicate
by check mark whether registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
Yes [ X ]
No [ ]
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K (§229.405 of this chapter) is not contained herein, and will not
be contained, to the best of the registrant’s knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. [ ]
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company. See definition of “Large accelerated filer,” “accelerated
filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange
Act. (Check one).
Large
accelerated filer
[ ] Accelerated
filer [ X
] Non-accelerated
filer [ ] Smaller Reporting
Company [ X ]
1-K
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
Yes
[ ] No [ X ]
As of
June 30, 2009, the aggregate market value of the registrant’s common stock held
by non-affiliates of the registrant was $67.9 million, based upon the closing
price as reported on the NYSE Amex [formerly the American Stock
Exchange]. Although directors and executive officers of the
registrant were assumed to be “affiliates” for the purposes of this calculation,
the classification is not to be interpreted as an admission of such
status. There were no classes of non-voting common stock authorized
on June 30, 2009.
Indicate
the number of shares outstanding of each of the issuer’s classes of common
stock, as of the latest practicable date.
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Common
Stock
(Common
Stock, $0.01 par value per share)
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Outstanding
at March 11, 2010
10,704,145
shares
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Documents
Incorporated by Reference
Portions
of the registrant’s definitive Proxy Statement for the registrant’s Annual
Meeting of Shareholders to be held on April 30, 2010 are incorporated by
reference.
2-K
This
page intentionally left blank
3-K
THE
WILBER CORPORATION
FORM
10-K
INDEX
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BUSINESS
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A.
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General
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B.
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Market
Area
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C.
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Lending
Activities
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i.
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Loan
Products and Services
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ii.
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Loan
Approval Procedures and Authority
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iii.
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Credit
Quality Practices
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D.
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Investment
Securities Activities
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E.
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Sources
of Funds
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F.
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Electronic
and Payment Services
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G.
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Trust
and Investment Services
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H.
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Insurance
Services
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I.
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Supervision
and Regulation
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i.
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The
Company
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ii.
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The
Bank
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J.
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Competition
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K.
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Legislative
and Regulatory Developments
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RISK
FACTORS
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UNRESOLVED
STAFF COMMENTS
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PROPERTIES
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LEGAL
PROCEEDINGS
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REMOVED
AND RESERVED
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MARKET
FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS, AND ISSUER
PURCHASES OF EQUITY SECURITIES
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A.
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Market
Information; Dividends on Common Stock; and Recent Sales of Unregistered
Securities
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B.
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Use
of Proceeds from Registered
Securities
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C.
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Purchases
of Equity Securities by Issuer and Affiliated
Purchasers
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SELECTED
FINANCIAL DATA
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MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
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A.
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General
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B.
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Performance
Overview for the Year Ended December 31,
2009
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C.
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Financial
Condition
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i.
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Comparison
of Financial Condition at December 31, 2009 and December 31,
2008
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4-K
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D.
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Results
of Operations
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i.
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Comparison
of Operating Results for the Years Ended December 31, 2009 and December
31, 2008
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E.
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Liquidity
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F.
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Capital
Resources and Dividends
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FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA
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CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
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CONTROLS
AND PROCEDURES
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OTHER
INFORMATION
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DIRECTORS,
EXECUTIVE OFFICERS AND CORPORATE
GOVERNANCE
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A.
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Directors
of the Registrant
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B.
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Executive
Officers of the Registrant Who Are Not
Directors
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C.
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Compliance
with Section 16(a) of the Exchange
Act
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D.
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Code
of Ethics
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E.
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Corporate
Governance
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EXECUTIVE
COMPENSATION
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SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS
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CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
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A.
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Related
Transactions
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B.
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Director
Independence
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PRINCIPAL
ACCOUNTING FEES AND SERVICES
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EXHIBITS
AND FINANCIAL STATEMENT SCHEDULES
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FORWARD-LOOKING STATEMENTS
When we
use words or phrases like "will probably result," "we expect," "will continue,"
"we anticipate," "estimate," "project," "should cause," or similar expressions
in this report or in any press releases, public announcements, filings with the
Securities and Exchange Commission ("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 Company’s liquidity, 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, including volatility and disruption in national and
international financial markets, legislative and regulatory changes, government
intervention in the U.S. financial system, monetary and fiscal policies of the
federal government, changes in tax policies, tax rates and regulations of
federal, state and local tax authorities, changes in consumer preferences,
changes in interest rates, deposit flows, cost of funds, demand for loan
products, demand for financial services, competition, changes in the quality or
composition of the Company’s loan and investment portfolios, changes in
accounting principles, policies or guidelines, and other economic, competitive,
governmental, and technological factors affecting the Company’s operations,
markets, products, services and fees.
Please do
not rely unduly on any forward-looking statements, which are valid only as of
the date made. Many factors, including those described above, could
affect our financial performance and could cause our actual results or
circumstances for future periods to differ materially from what we anticipate or
project. We have no obligation to update any forward-looking
statements to reflect future events that occur after the statements are made and
we specifically disclaim such obligation.
PART
I
ITEM 1: BUSINESS
A.
General
The
Wilber Corporation (“the Company”), a New York corporation, was originally
incorporated in 1928. The Company held and disposed of various real
estate assets until 1974. In 1974, the Company and its real estate
assets were sold to Wilber National Bank (“Bank”), a national bank established
in 1874. The Company’s real estate assets were used to expand the
banking house of Wilber National Bank. The Company was an inactive
subsidiary of the Bank until 1982. In 1983, under a plan of
reorganization, the Company was re-capitalized, acquired 100% of the voting
stock of the Bank, and registered as a bank holding company within the meaning
of the Bank Holding Company Act of 1956 (“BHCA”).
The
business of the Company consists primarily of the ownership, supervision, and
control of the Bank. The Bank is chartered by the Office of the
Comptroller of the Currency (“OCC”), and its deposits are insured up to
applicable limits by the Federal Deposit Insurance Corporation
(“FDIC”). The Company, through the Bank and the Bank’s subsidiaries,
offers a full range of commercial and consumer financial products, including
business, municipal, and consumer loans, deposits, trust and investment
services, and credit-related insurance products. The Bank serves its
customers through twenty- two full-service branch banking offices located in
Otsego, Delaware, Schoharie, Chenango, Ulster, Broome, Saratoga and Onondaga
counties, New York, an ATM network, and electronic / Internet banking
services. In addition, the Bank operates two representative loan
production offices in Clifton Park, New York (Saratoga County) and Kingston, New
York (Ulster County). The Bank’s main office is located at 245 Main
Street, Oneonta, New York, 13820 (Otsego County). The Bank employed
277 full-time equivalent employees at December 31, 2009. The Bank’s
website address, which also serves as the Company’s main website address, is
www.wilberbank.com.
The
Bank’s subsidiaries include Wilber REIT, Inc. and Western Catskill Realty,
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 and
other real estate.
In 2007,
the Company acquired Provantage Funding Corporation, a New York State licensed
mortgage banking company based in Clifton Park, New York (Saratoga
County). In 2008 Provantage Funding Corporation was merged into the
Bank and now operates as Provantage Home Loans (“Provantage”), a division of the
Bank.
During
2008, the Bank sold its 62% ownership interest in Mang–Wilber
LLC. Prior to its sale, Mang-Wilber LLC was operated as the Bank’s
insurance agency subsidiary and provided a full range of personal and commercial
property and casualty, life, and health insurance products to the Bank’s
customers. Mang-Wilber LLC was dissolved following the sale of the
Bank’s interest to its former joint venture partner.
The
Company’s and its subsidiaries’ (collectively “we” or “our”) principal business
is to act as a financial intermediary and lending institution in the communities
they 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 and upstate New York communities that we
serve. To a lesser extent, we borrow funds from institutional
sources, principally the Federal Home Loan Bank of New York
(“FHLBNY”). We target our lending activities to consumers and
municipalities in the immediate geographic areas we serve and to small and
mid-sized businesses in the immediate geographic areas we serve as well as a
broader statewide region. Our investment activities primarily consist
of purchases of U.S. Treasury, U.S. Government Agency, and U.S. Government
Sponsored Entities obligations, as well as municipal, mortgage-backed, and high
quality corporate debt instruments. Through our Trust and Investment
Division, we provide personal trust, agency, estate administration, and
retirement planning services for individuals, as well as custodial and
investment management services to institutions. We also offer stocks,
bonds, and mutual funds through a third party broker-dealer firm.
B. Market
Area
The
Company’s market area is generally defined as central and upstate New York
State. The Company’s principal office and the Bank’s main office are
located in Oneonta, New York, which is approximately 70 miles southwest of
Albany, New York, the state’s capital, and 170 miles northwest of New York
City. Eighteen of the Company’s twenty-two full-service branch
offices are located in four rural counties north and west of the Catskill
Mountains, namely Otsego, Delaware, Schoharie and Chenango. The
economies in this market are driven by several small colleges; tourism; farming;
hospitals; small, independently owned retailers, restaurants, motels; and light
manufacturing. The National Baseball Hall of Fame (Cooperstown, New
York), several youth sport camps, and outdoor recreation such as camping,
hunting, fishing, and skiing, bring seasonal activity to several communities
within this market area. The estimated median family income in all
four of these rural counties is about 20% below the national average median
family income. The combined estimated population of these four
counties is 192,247 persons. Based on the June 30, 2009 FDIC deposit
summary report, the combined deposits of these four rural counties was $3.093
billion. Our deposit base within this four county area totaled
$709.727 million at June 30, 2009, representing a 22.95% market
share.
The
remaining four full-service offices and both representative loan production
offices are located in select, more densely populated markets in central and
upstate New York. In particular, we have a full-service branch office
located in Broome County, a full-service branch office in Onondaga County, a
full-service branch office and loan production office in Saratoga County and a
full-service branch office and loan production office in Ulster
County. The estimated median family income in Onondaga, Saratoga and
Ulster Counties exceeds the national average median family income, while Broome
County is slightly below the national average. The total estimated
population of these four counties is 1,047,700 persons. Based on the
June 30, 2009 FDIC deposit summary report, the combined deposits of these four
counties was $15.952 billion. Our deposit base within this four county area
totaled $75.202 million, representing less than a 1% market share.
In 2007
we adopted a strategic plan to increase the Company’s geographic market area
into more densely populated markets in central and upstate New York
State. In accordance with this plan, in 2007 we acquired Provantage
and opened a full-service branch office in Halfmoon, New York (Saratoga County)
in 2008. Similarly, we opened a representative loan production office
in Cicero, New York (Onondaga County) and converted it into a full-service
branch in 2009. The central and upstate markets in which we operate
have generally not been significantly impacted by the sub-prime mortgage crisis
and high rates of foreclosure experienced in other sections of the United
States. We did, however, begin to observe a noticeable decline in the
performance of some of our commercial real estate borrowers during 2009 due to
declining occupancy rates and decreases in property lease income. In
conjunction with our strategic plan, we anticipate that our expansion into the
more densely populated markets throughout New York State will continue during
2010.
C.
Lending Activities
General. The
Company, through the Bank, engages in a wide range of lending activities,
including commercial lending, primarily to small and mid-sized businesses;
mortgage lending for 1-4 family and multi-family properties including home
equity loans; mortgage lending for commercial properties; consumer installment
and automobile lending; and to a lesser extent, agricultural
lending.
Over the
last several decades we have implemented lending strategies and policies that
are designed to provide flexibility to meet customer needs while minimizing
losses associated with borrowers’ inability or unwillingness to repay
loans. The loan portfolio, in general, is fully collateralized, and
many commercial loans are further secured by personal guarantees. We
do not commonly grant unsecured loans to our customers. Annually, we
utilize the services of an outside consultant to conduct reviews of the larger,
more complex commercial real estate and commercial loan portfolios to assess
adherence to underwriting standards and loan policy guidelines.
We
periodically engage 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 maintain direct
contact with the borrower when we are not the lead bank, 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
our total loans outstanding and are comprised of approximately 30
borrowers.
If deemed
appropriate for the borrower and for the Bank, we place certain loans in
federal, state, or local government agency or government sponsored loan
programs. These placements often help reduce our exposure to credit
losses and often provide our borrowers with lower interest rates on their
loans.
i. Loan
Products and Services
Residential Real
Estate. We originate 1-4 family residential mortgage loans
through Provantage. Some of these loans are sold into the secondary
market to third party investors, while others are retained for our loan
portfolio. The terms on these loans are typically 15 to 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 consists principally of owner-occupied, primary
residence properties and, to a lesser extent, investment properties for
off-campus student housing, which surround each of the local colleges within our
market and second homes. Our property appraisal process,
debt-to-income limits for borrowers, and established loan-to-value limits
dictate our residential real estate lending practices. We also offer
residential construction financing to borrowers that meet our credit
underwriting guidelines. In the regular course of our business, we do
not originate or purchase sub-prime, Alt-A, negative amortizing, or other higher
risk residential mortgages.
We
originate and retain home equity loans. Our home equity loans are
typically granted as adjustable rate lines of credit. The interest
rate on the line of credit adjusts periodically and is tied to the Wall Street Journal Prime
loan rate. The loan terms generally include a second lien position on
the borrower’s residence and a 10-year interest only repayment
period. At the end of a 10-year term, the home equity line of credit
is either renewed by the borrower or placed on a scheduled principal and
interest payment plan by the Bank.
Commercial Real
Estate. We originate commercial real estate loans to finance
the purchase of undeveloped and 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, local retailers,
developers and landlords for national retail chains and motels. We
also finance properties for commercial office and other owner-occupied
commercial 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 terms are 12 to 18
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 to finance the
purchase of equipment, trucks, or automobiles utilized in their business, and
for long-term working capital needs. 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 operational needs. 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 may be invested in investment
securities on a short-term basis, usually overnight, through a securities
repurchase agreement between the Bank and the customer.
Demand
loans and time notes are often granted to borrowers to provide short term or
“bridge” financing for special orders, contracts, or projects. These
loans are often secured with a lien on business assets, liquid collateral,
and/or personal guarantees.
On a
limited basis we also provide inventory financing or “floor plans” for
automobile dealers. Floor plan lines of credit create unique risks
that require close oversight by the Bank’s lending
personnel. Accordingly, we have developed special procedures,
including regular inventory checks for floor plan lines of credit, to ensure
that the borrower maintains sufficient collateral at all times.
We offer
accounts receivable financing to qualified borrowers as a traditional working
capital line of credit or 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 and Commercial Letters of
Credit. We offer standby and commercial letters of credit for
our business customers. Standby letters of credit are not funded
loans, but rather guarantees to pay other creditors of the customer should the
customer fail to meet certain payment obligations required by the third party
creditor. Those guarantees are primarily issued to support public and
private borrowing arrangements, including bond financing and similar
transactions. Because the issuance of a standby or commercial letter
of credit creates a contingent liability for the Bank, they are underwritten in
the same manner as loans. Accordingly, a 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 amount of the
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 goods and
services of our customers need. The consumer loans are generally
offered for a shorter term than residential mortgages because the collateral
typically has an estimated useful life of 5 to 10 years and tends to depreciate
rapidly. Automobile loans comprise the largest portion of our
consumer loan portfolio. The financial terms of our automobile loans
are determined by the age and condition of the vehicle, and the ability of the
borrower to make scheduled principal and interest payments on the
loan. We obtain a lien on the vehicle and collision insurance
policies are required on these loans. Although we lend directly to
borrowers, the majority of our automobile loans are originated through auto
dealerships within our primary market area. We commonly refer to
these as indirect automobile or indirect installment loans.
We also
offer cash secured and unsecured personal lines of credit for well-qualified
borrowers, as well as an overdraft line of credit product called ChequeMate,
which provides our customers with an option to eliminate overdraft fees should
they overdraw their checking account. Our ChequeMate lines of credit
are typically unsecured and are generally limited to less than $4 thousand per
account.
ii. Loan
Approval Procedures and Authority
General. The
Bank’s Board of Directors delegates the authority to provide loans to borrowers
through the Bank’s loan policies. The policies are modified, reviewed
and approved on an as needed basis, but no less than annually, to assure that
lending policies and practices meet the needs of borrowers, mitigate perceived
credit risk, comply with applicable laws and regulations and reflect current
economic conditions. Currently, we use a six-tier structure to
approve loans. All lending authorities within this tiered structure
are based on the borrower’s aggregate credit relationship, rather than on
individual loan requests, and are limited to loans that are not classified as
“special mention” or worse on the Bank’s risk rating
system. Loans we classify as special mention are loans that are generally
performing, but the borrower’s financial
strength appears to be deteriorating.
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
$11.300 million for loans not fully secured by readily marketable collateral and
$18.800 million for loans secured by readily marketable collateral at December
31, 2009. However, during 2009 we have generally limited new single
borrower credit relationships to $2.500 million to mitigate credit concentration
risk. 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 thousand. If conditions merit, the
Board of Directors may authorize exceptions to our loan policy pursuant to its
special approval procedures.
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 independent directors and meets on an as-needed
basis, but no less than one time per month. Its lending authority for
loans not secured by readily marketable collateral is limited to $5.000
million. The Committee may also approve loans up to 100% of the
Bank’s legal lending limit if the loan is secured by readily marketable
collateral such as stocks and bonds. The Loan and Investment
Committee is also responsible for ratifying and affirming all loans made that
exceed $25 thousand, approving collateral releases, authorizing charge-offs in
excess of $25 thousand, 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 created the Officers Loan Committee. The
Officers Loan Committee is comprised of four voting members, including the
Bank’s Chief Executive Officer (“CEO”), the Regional President – Senior Lending
Officer, the Regional President – Commercial Lending and the Regional President
– Capital District. A Regional Vice President can substitute for any of the
voting members in their absence. The Officers Loan Committee may
approve secured and unsecured loans up to $3.750 million and up to 100% of the
Bank’s legal lending limit if the loan is secured by readily marketable
collateral. The Committee also has the authority to adjust loan rates
from time to time as market conditions dictate. Loan charge-offs up
to $25 thousand and collateral releases within prescribed limits established by
the Board of Directors are also approved by the Officers Loan
Committee. All actions of the Officers Loan Committee are reported to
the Loan and Investment Committee for ratification.
Fourth,
the CEO, a Regional President and the Senior V.P. and Senior Credit Officer by
unanimous vote may approve secured and unsecured loans up to $1.250 million. The
lending authority of this group is limited to loans and credit relationships
that have not been classified as criticized on the Bank’s risk rating
system.
Fifth,
the senior officers and loan officers of the Bank may combine their lending
authority within certain predetermined limits established in the Bank’s loan
policy up to $750 thousand.
Sixth,
through the loan policy, individual loan officers are provided specific loan
limits by category of loan. Each officer’s lending limits are
determined based on the individual officer’s experience, past credit decisions,
and expertise.
Our goal
for the loan approval process is to provide adequate review of loan proposals
while at the same time responding quickly to customer requests. We
complete a credit review and maintain a credit file for each
borrower. The purpose of the file is to provide the history and
current status of each borrower’s relationship and credit standing, so that a
loan officer can quickly understand the borrower’s status and make a fully
informed decision on a new loan request. We require that all business
borrowers submit audited, reviewed, or compiled internal financial statements or
tax returns no less than annually.
Loans to Directors and Executive
Officers. Loans to members of the Board of Directors (and
their related interests) are granted under the same terms and conditions as
loans made to unaffiliated borrowers. Any fee that is normally
charged to other borrowers is also charged to the members of the Board of
Directors. Loans to executive officers are limited by banking
regulations. There is no regulatory loan limit established for
executive officers to purchase, construct, maintain or improve a residence, or
to finance the education of a dependent. However, any loans to
executive officers which are not for the construction, improvement, or purchase
of a residence, not used to finance a dependent’s education, or not secured by
readily marketable collateral, are limited to a maximum of $100
thousand. In addition, we require that all loans made to executive
officers be reported to the Board of Directors at the next Board of Directors
meeting.
iii.
Credit Quality Practices
General. One of
our key objectives is to maintain strong credit quality of the Bank’s loan
portfolio. We strive to accomplish this objective by maintaining a
diversified mix of loan types, limiting industry concentrations, and monitoring
regional economic conditions. In addition, we use a variety of
strategies to protect the quality of individual loans within the loan portfolio
during the credit review and approval process. We evaluate both the
primary and secondary sources of repayment and complete a financial statement
review and cash flow analysis for commercial borrowers. We also
generally require personal guarantees on small business loans,
cross-collateralize loan obligations, complete on-site inspections of the
business, and require the company to adhere to financial
covenants. Similarly, in the event a modification to an outstanding
loan is requested, we reevaluate the loan under the proposed terms prior to
making the modification. If we approve the modification, we often
secure additional collateral or impose stricter financial
covenants. In the event a loan becomes delinquent, we follow
collection procedures to ensure 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 nonperforming 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 management
continuously monitors the past due status of the loan
portfolio. Criticized loans, nonperforming loans and delinquent loans
are reported to the Directors’ Loan and Investment Committee
monthly. Separate collection procedures have been established for
residential mortgage, consumer, and commercial loans.
On
residential mortgage loans 15 days past due we send the borrower a notice that
requests immediate payment. At 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 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 10 days past due, we send the borrower a notice that 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 30 of past due status. Loans 60 to 90 days
past due are generally subject to repossession of
collateral. Consumer loan risk ratings are generally determined by
their past due status.
We send
past due notices to borrowers with commercial term loans, demand notes, and time
notes (including commercial real estate) when the loan reaches 10 days past
due. Between days 15 to 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 30 days
past due, the loan officer, the supervising Regional President and the Senior
Credit Officer decide whether to pursue further action against the
borrower.
Loan Portfolio Monitoring
Practices. Our loan policy requires that management
continually monitor the status of the loan portfolio by regularly reviewing and
analyzing reports that 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
thousand, 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
securing the loan, and the strength of the secondary payment resources
including, but not limited to, the ability and willingness of the loan
guarantors to make timely principal and interest payments on the
loan. Loans classified as “substandard” typically exhibit some or all
of the following characteristics:
• the borrower lacks current financial
information;
• the business of the borrower is
poorly managed;
• the borrower’s business becomes
highly-leveraged or appears to be insolvent;
• the borrower exhibits inadequate cash
flow to support the debt service;
• the loan is chronically delinquent;
or
• the industry in which the business
operates has become unstable or volatile.
Loans we
categorize as a “pass” are generally performing per contractual terms and do not
exhibit the characteristics of special mention or substandard
loans.
Allowance for Loan
Losses. The allowance for loan losses is an amount which, in
the opinion of management, is necessary to absorb losses embedded in the loan
portfolio. We continually monitor the allowance for loan losses to
determine its reasonableness. On a quarterly basis, our management
prepares a formal assessment of the allowance for loan losses and submits it to
senior management and 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 loan portfolios, we consider local economic conditions, the growth
and composition of these loan portfolios, the trend in delinquencies, changes in
underwriting standards, the trend in loan charge-offs and other relevant
economic and market factors to estimate the embedded losses in the loan
portfolio. For large commercial loans, we evaluate specific
characteristics of each loan, including the borrower’s current cash flow, debt
service coverage and payment history, business conditions in the borrower’s
industry, the collateral and guarantees securing the loan, and our historical
experience with similarly structured loans to arrive at a risk
rating. We then estimate losses for these loans based on these
characteristics, risk ratings and other economic factors. And
finally, we specifically estimate losses on nonperforming loans through
impairment testing. The adequacy of our allowance for loan losses is
also reviewed by a third party loan review firm engaged by the Company and by
the OCC on a periodic basis. Their comments and recommendations are factored
into the determination of the allowance for loan losses.
The
allowance for loan losses is increased by the provision for loan losses, which
is recorded as an expense on our consolidated statement of
income. Loan charge-offs are recorded as a reduction in the allowance
for loan losses. Loan recoveries are recorded as an increase in the
allowance for loan losses.
Nonperforming
Loans. There are three categories of nonperforming
loans: (i) those 90 or more days delinquent and still accruing
interest, (ii) nonaccrual loans, and (iii) troubled debt restructured loans
(“TDR”). We place individual loans on nonaccrual status when timely
collection of contractual principal and interest payments appears
unlikely. This generally occurs when a loan becomes 90 days
delinquent. When deemed prudent, however, we may place loans on
nonaccrual status before they become 90 days delinquent. Upon being
placed on nonaccrual 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 nonaccrual 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 nonaccrual
loan is applied to principal until ultimate repayment becomes
expected.
Commercial
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 TDR.
A loan is
considered to be a TDR when we grant a special concession to the borrower
because the borrower’s financial condition has deteriorated to the point where
servicing the loan under the original terms becomes difficult or challenges the
financial viability of the business. Such concessions include the
reduction of interest rates, forgiveness of principal or interest, extension of
time for repayment, or other similar modifications to the original
terms. TDR loans that are in compliance with their modified terms and
that yield a market rate may be removed from TDR status in the calendar year
after the year in which the restructuring took place.
Our goal
is to minimize the number of nonperforming loans because of their negative
impact on the Company’s earnings and capital.
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 that we have acquired through an insubstance foreclosure,
formal foreclosure proceedings or acceptance of a deed in lieu of foreclosure
are called Other Real Estate Owned (“OREO”). OREO is carried at the
lower of the recorded investment in the loan or the fair value of the real
estate, less estimated costs to sell. Write-downs from the unpaid
loan balance to fair value are charged to the allowance for loan
losses.
Loan
Charge-Offs. We charge off loans or portions of loans that we
deem non-collectible and can no longer justify carrying as an asset on the
Bank’s balance sheet. We determine if a loan should be charged-off by
analyzing all possible sources of repayment. Once the responsible
loan officer or designated Collections Department personnel determines that the
loan is not collectible, he/she completes a “Recommendation for Charge-off”
form, which is subsequently reviewed and approved by the Bank’s Loan and
Investment Committee (or by the Officers Loan Committee for charge-offs less
than $25 thousand).
D.
Investment Securities Activities
General. Our Board
of Directors has final authority and responsibility for all aspects of the
Company’s investment activities. It exercises this authority by
setting the Investment Policy and appointing the Loan and Investment Committee
to monitor adherence to the policy. The Board of Directors delegates
its powers by appointing designated investment officers to purchase and sell
investment securities for the account of the Company. The CEO and the
Senior Vice President of Bank Investments have the authority to make investment
purchases within the limits set by the Board of Directors. All
investment securities transactions are reviewed monthly by the Loan and
Investment Committee and the Board of Directors.
The
Bank’s investment securities portfolio is primarily comprised of high-grade
fixed income debt instruments. Investment purchases are generally
made when we have funds that exceed the present demand for loans. Our
primary investment objectives are to:
|
|
(i)
|
minimize
risk through strong credit quality;
|
|
|
(ii)
|
provide
liquidity to fund loans and meet deposit
run-off;
|
|
|
(iii)
|
diversify
the Bank’s assets;
|
|
|
(iv)
|
generate
a favorable investment return;
|
|
|
(v)
|
meet
the pledging requirements of state, county and municipal
depositors;
|
|
|
(vi)
|
manage
the risk associated with changing interest rates;
and
|
|
|
(vii)
|
match
the maturities of securities with deposit and borrowing
maturities.
|
Our
current investment policy generally limits securities investments to U.S.
Government, U.S. Agency and U.S. Sponsored Entity securities, corporate debt,
municipal bonds, pass-through mortgage backed securities issued by Government
National Mortgage Association (“Ginnie Mae”), Federal National Mortgage
Association (“Fannie Mae”) and Federal Home Loan Mortgage Corporation (“Freddie
Mac”), and collateralized mortgage obligations issued by these same
entities.
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.
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, including, but not limited to equity securities required for
membership in the Federal Reserve Bank of New York and FHLBNY.
E.
Sources of Funds
General. Our
lending and investment activities are highly dependent upon our ability to
obtain funds. Our primary source of funds is customer
deposits. To a lesser extent we have borrowed funds from the FHLBNY
and entered into repurchase agreements to fund our loan and investment
activities.
Deposits. We offer
a variety of deposit accounts to our customers. The fees, interest
rates, and terms of each deposit product vary to meet the unique needs and
requirements of our depositors. Presently, we offer a variety of
accounts for consumers, businesses, not-for-profit organizations and
municipalities including: demand deposit accounts, interest bearing transaction
accounts, money market accounts, statement savings accounts, passbook savings
accounts, and fixed and variable rate certificates of deposit. The
majority of our deposit accounts are owned by individuals and businesses who
reside near our branch locations. Municipal deposits are generally
derived from the local and county taxing authorities, school districts near our
branch locations, and, to a limited degree, New York State public
funds. Accordingly, deposit levels are dependent upon the speed and
volume of tax collections, regional economic conditions, as well as more general
national and statewide economic conditions, local competition, and our pricing
decisions.
Brokered
deposits are deposit accounts acquired through brokers. These
depositors do not typically reside in the Bank’s geographic market or maintain
other account relationships with the Bank. The interest rates paid on
brokered deposits can be higher or lower than local interest rates for similar
accounts, however, the account retention rates on brokered deposits are
typically lower than the account retention rates on non-brokered deposits held
by customers residing in our geographic markets. Due to these
factors, we limit, but do not exclude, the use of brokered
deposits.
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 borrowings 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 borrowing 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 counterparty to
repurchase those securities at an agreed upon price and date. In
addition, when necessary, we borrow overnight federal funds from other banks or
borrow monies from the Federal Reserve Bank’s discount window.
Deposit
account structures, fees and interest rates, as well as funding strategies, are
determined by the Bank’s Asset and Liability Committee (“ALCO”). The
ALCO is comprised of the Bank’s senior managers and meets on a bi-weekly
basis. The ALCO reviews general economic conditions, the Bank’s need
for funds, and local competitive conditions prior to establishing funding
strategies and interest rates to be paid. The actions of the ALCO are
reported to the Directors’ Loan and Investment Committee and the full Board of
Directors at their regularly scheduled meetings.
F.
Electronic and Payment Services
General. We offer
a variety of electronic services to our customers. Most of the
services are provided for convenience purposes and are typically offered in
conjunction with a deposit or loan account. Certain electronic and
payment services are provided using marketing arrangements and third party
services, branded with the Bank’s name. These services often provide
us with additional sources of fee income or reduce our operating and transaction
expenses. Our menu of electronic and payment services include point
of sale transactions, debit card payments, ATMs, merchant credit and debit card
processing, Internet banking, Internet bill pay services, automated voice
response attendant, wire transfer services, remote deposit capture services,
automated account overdraft services, automated clearing house services, direct
deposit of Social Security and other payments, loan auto-draft 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, 2009 and December 31, 2008, we had $336.949 million and $300.840
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 or held for safekeeping as of the
dates noted:
Trust
Assets Summary Table:
|
December
31,
|
||||
|
2009
|
2008
|
|||
|
in
thousands
|
Number
of
Accounts
|
Estimated
Market
Value
|
Number
of
Accounts
|
Estimated
Market
Value
|
|
Trusts
|
344
|
$157,590
|
348
|
$140,413
|
|
Estates
|
2
|
143
|
2
|
519
|
|
Custodian,
Investment Management and Others
|
260
|
179,216
|
245
|
159,908
|
|
Total
|
606
|
$336,949
|
595
|
$300,840
|
We also
provide investment services through a third party provider, INVEST Financial
Corp., for the purchase of mutual funds, annuities and small retirement
plans.
H.
Insurance Services
General. 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 Land Record
Services, LLC. Title insurance is sold in conjunction with
origination of residential and commercial mortgages. We own a small
ownership interest in Land Record Services, LLC and receive profit distributions
based upon the overall performance of the agency.
From 1998
through the second quarter of 2008, the Bank operated an insurance agency
through a joint venture with a regional independent insurance
agency. The agency, Mang–Wilber LLC, was licensed to sell, within New
York State, various insurance products including life, health, property, and
casualty insurance products to both consumers and businesses. The
Bank sold its interest in the agency in June 2008.
I.
Supervision and Regulation
Set forth
below is a brief description of certain laws and regulations governing the
Company, the Bank, and its subsidiaries. The description does not
purport to be complete, and is qualified in its entirety by reference to
applicable laws and regulations.
i. The
Company
Bank Holding Company
Act. The Company is a bank holding company registered with,
and subject to regulation and examination by, the Board of Governors of the
Federal Reserve System ("Federal Reserve Board") pursuant to the BHCA, as
amended. The Federal Reserve Board regulates and requires the filing of reports
describing the activities of bank holding companies, and conducts periodic
examinations to test compliance with applicable regulatory requirements. The
Federal Reserve Board has enforcement authority over bank holding companies,
including, among other things, the ability to assess civil money penalties, to
issue cease and desist or removal orders, and to require a bank holding company
to divest subsidiaries.
The BHCA
prohibits a bank holding company from acquiring direct or indirect ownership or
control of more than 5% of the voting shares of any bank, or increasing such
ownership or control of any bank, without the prior approval of the Federal
Reserve Board. The BHCA further generally precludes a bank holding company from
acquiring direct or indirect ownership or control of any non-banking entity
engaged in any activities other than those which the Federal Reserve Board has
determined to be so closely related to banking or managing and controlling banks
as to be a proper incident thereto. Some of the activities that have
been found to be closely related to banking are: operating a savings
association, mortgage company, finance company, credit card company, factoring
company, or collection agency; performing certain data processing services;
providing investment and financial advice; underwriting and acting as an
insurance agent for certain types of credit-related insurance; real and personal
property leasing; selling money orders, travelers' checks, and U.S. savings
bonds; real estate and personal property appraising; and providing tax planning
and preparation and check guarantee services.
Under
provisions of the BHCA enacted as part of the Gramm-Leach-Bliley Act of 1999
(“GLBA”), a bank holding company may elect to become a financial holding company
(“FHC”) if all of its depository institution subsidiaries are well-capitalized
and well-managed under applicable guidelines as certified in a declaration filed
with the Federal Reserve Board. In addition to the activities listed above,
FHC’s may engage, directly or through a subsidiary, in any activity that the
Federal Reserve Board, by regulation or order, has determined to be financial in
nature or incidental thereto, or is complementary to a financial activity and
does not pose a risk to the safety and soundness of depository institutions or
the financial system. Pursuant to the BHCA, a number of activities are expressly
considered to be financial in nature, including insurance and securities
underwriting and brokerage. The Company has not elected to become an
FHC.
The BHCA
generally permits a bank holding company to acquire a bank located outside of
the state in which the existing bank subsidiaries of the bank holding company
are located, subject to deposit concentration limits and state laws prescribing
minimum periods of time an acquired bank must have been in existence prior to
the acquisition.
A bank
holding company must serve as a source of strength for its subsidiary
bank. The Federal Reserve Board may require a bank holding company to
contribute additional capital to an undercapitalized subsidiary
bank. The Company is subject to capital adequacy guidelines for bank
holding companies (on a consolidated basis), which are substantially similar to
the FDIC-mandated capital adequacy guidelines applicable to the
Bank.
Federal Securities
Law. The Company is subject to the information, reporting,
proxy solicitation, insider trading, and other rules contained in the Securities
Exchange Act of 1934 (the "Exchange Act") and the regulations of the SEC
thereunder. In addition, the Company must comply with the corporate
governance and listing standards of the NYSE Amex to maintain the listing of its
common stock on the exchange.
Newly Adopted SEC
Rules. In December 2009, the SEC adopted certain proxy
disclosure rules regarding compensation and corporate governance, with which the
Company must comply. They include: (i) increased disclosure as it
relates to stock and option award compensation; (ii) disclosure regarding any
potential conflict of interest of any compensation consultants of the Company;
(iii) enhanced disclosure regarding experience, qualifications, skills and
diversity of its directors and any director nominees; and (iv) information
relating to the leadership structure of the Company’s board of directors and the
Board’s role in the risk management process. Additionally, the new rules require
the Company and other registrants to report the voting results of annual
meetings in a much more timely manner on Form 8-K, rather than on a quarterly or
annual report.
Sarbanes-Oxley Act of
2002. The Company is also subject to the Sarbanes-Oxley Act of
2002 (the “Sarbanes-Oxley Act”). The Sarbanes-Oxley Act revised the
laws affecting public companies’ corporate governance, accounting obligations,
and corporate reporting by: (i) creating a new federal accounting oversight
body; (ii) revamping auditor independence rules; (iii) enacting new corporate
responsibility and governance measures; (iv) enhancing disclosures by public
companies, their directors, and their executive officers; (v) strengthening the
powers and resources of the SEC; and (vi) imposing new criminal and civil
penalties for securities fraud and related wrongful conduct.
The SEC
has adopted regulations under the Sarbanes-Oxley Act, including: executive
compensation disclosure rules, standards of independence for directors who serve
on the Company’s Audit Committee; disclosure requirements as to whether at least
one member of the Company’s Audit Committee qualifies as a “financial expert” as
defined in the SEC regulations; whether the Company has adopted a code of ethics
applicable to its chief executive officer, chief financial officer, or those
persons performing similar functions; and disclosure requirements regarding the
operations of Board nominating committees and the means, if any, by which
security holders may communicate with directors.
ii. The
Bank
The
following discussion is not, and does not purport to be, a complete description
of the laws and regulations applicable to the Bank. Such statutes and
regulations relate to required reserves, investments, loans, deposits, issuances
of securities, payments of dividends, establishment of branches, and other
aspects of the Bank’s operations. Any change in such laws or
regulations by the OCC, the FDIC, or Congress could materially adversely affect
the Bank.
General. The Bank
is a national bank subject to extensive regulation, examination, and supervision
by the OCC, as its primary federal regulator, and by the FDIC, as its deposit
insurer. The Bank's deposit accounts are insured up to applicable
limits by the Deposit Insurance Fund of the FDIC. The Bank must file
reports with the Federal Financial Institution Examination Council (“FFIEC”),
OCC and the FDIC concerning its activities and financial condition and must
obtain regulatory approval before commencing certain activities or engaging in
transactions such as mergers and other business combinations or the
establishment, closing, purchase or sale of branch offices. This
regulatory structure gives the regulatory authorities extensive discretion in
the enforcement of laws and regulations and the supervision of the
Bank.
Business
Activities. The Bank's lending, investment, deposit, and other
powers derive from the National Bank Act, FFIEC Interagency and OCC
regulations. These powers are also governed to some extent by the
FDIC under the Federal Deposit Insurance Act and FDIC
regulations. The Bank may make mortgage loans, commercial loans and
consumer loans, and may invest in certain types of debt securities and other
assets. The Bank may offer a variety of deposit accounts including
savings, certificate (time), demand, and NOW accounts.
Standards for Safety and
Soundness. The OCC has adopted guidelines prescribing safety
and soundness standards. These guidelines establish general standards relating
to capital adequacy, asset quality, management, earnings performance, liquidity
and sensitivity to market risk. In evaluating these safety and
soundness standards, the OCC also evaluates internal controls and information
systems, internal audit systems, loan documentation, credit underwriting,
exposure to changes in interest rates, asset growth, compensation, fees, and
benefits. In general, the guidelines require appropriate systems and
practices to identify and manage the risks and exposures specified in the
guidelines. The OCC may order an institution that has been given
notice that it is not satisfying these safety and soundness standards to submit
a compliance plan, and if an institution fails to do so, the OCC must issue an
order directing action to correct the deficiency and may issue an order
directing other action. If an institution fails to comply with such an order,
the OCC may seek to enforce such order in judicial proceedings and to impose
civil money penalties.
Branching. Generally,
national banks may establish branch offices within New York to the same extent
as New York chartered banks may do so. Additionally, national banks
may generally branch into other states that permit interstate branching to the
same extent as commercial banks chartered under the laws of that
state.
Transactions with Related
Parties. The Federal Reserve Act governs transactions between
the Bank and its affiliates. In general, an affiliate of the Bank is
any company that controls, is controlled by, or is under common control with the
Bank. Generally, the Federal Reserve Act limits the extent to which the Bank or
its subsidiaries may engage in “covered transactions” with any one affiliate to
10% of the Bank’s capital stock and surplus, and contains an aggregate limit of
20% of capital stock and surplus for covered transactions with all affiliates.
Covered transactions include loans, asset purchases, the issuance of guarantees,
and similar transactions. The Bank's loans to insiders must be made on terms
that are substantially the same as, and follow credit underwriting procedures
that are not less stringent than, those prevailing for comparable transactions
with unaffiliated persons and that do not involve more than the normal risk of
repayment or present other unfavorable features. The loans are also
subject to maximum dollar limits and must generally be approved by the
Board.
Capital Requirements. Capital
adequacy is measured within guidelines defined as either Tier 1 capital
(primarily shareholders’ equity), Tier 2 capital (certain debt instruments and a
portion of the reserve for loan losses). There are two measures of
capital adequacy for banks: i) the Tier 1 leverage ratio and ii) 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 (sum of 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, 2009 and 2008. See Part II, Item 7.F. entitled
"Capital Resources and Dividends" and Note 14 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 its shareholder 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, however, pursuant
to an informal agreement executed between the Bank and the OCC during 2009, the
OCC must approve dividends prior to being declared by the Bank’s Board of
Directors.
Insurance of Deposit
Accounts. The Bank is an insured depository institution
subject to assessment by, and the payment of deposit insurance premiums to, the
FDIC. Deposit insurance premiums are determined by a number of factors,
including the insured depository’s supervisory condition and several of its
financial ratios. During 2005, the Federal Deposit Insurance Reform
Act of 2005 (“FDIRA”) was enacted into law. Under FDIRA, when the
FDIC Deposit Insurance Fund to industry-wide aggregate insured deposits or
reserve ratio falls below 1.15%, the FDIC is required to establish a plan to
restore the fund to 1.15% within five years. Due to the high rate of
bank failures during the second half of 2008 and throughout 2009, the Deposit
Insurance Fund reserve ratio was underfunded at -0.39% at December 31, 2009 as
compared to 0.36% at December 31, 2008. To address this anticipated
undercapitalized position the FDIC approved an interim rule in February 2009 to
charge a special assessment of 20 cents per $100 of domestic deposits on the
banking industry in order to quickly restore its Deposit Insurance
Fund. Immediately following the FDIC’s special assessment
announcement, several comments were provided by member institutions and banking
industry advocates, including the American Bankers Association, recommending
that the FDIC consider alternative Deposit Insurance Fund funding options
including an increase in the FDIC’s line of credit with the U.S. Department of
Treasury. After further deliberations, the FDIC announced a final
rule that required member institutions to pay a special assessment of 5 basis
points based on each member institution’s total assets less its Tier 1 capital
at June 30, 2009. In addition a final rule was issued, which required
member institutions to re-capitalize the Deposit Insurance Fund through a
special prepaid assessment. The special prepaid assessment was
collected from member institutions in December 2009 and included estimated
quarterly premiums for the fourth quarter of 2009 and for all quarterly periods
in 2010, 2011 and 2012. The Bank’s prepaid assessment amount was
$6.687 million. We recorded an immediate charge (expense) of $439
thousand against this amount on December 31, 2009 to recognize the fourth
quarter 2009 premium assessment. The remaining prepaid premium
totaling $6.248 million will be amortized quarterly during 2010, 2011 and 2012
until it is fully exhausted. In addition, under the final rule the
FDIC will increase member premiums by 3 basis points for 2011 and
2012. Due to the weakened state of the banking industry, current and
anticipated Deposit Insurance Fund capitalization levels and other factors, we
anticipate incurring significant FDIC premium assessment expenses for several
quarters prospectively.
In
addition to the Deposit Insurance Fund premiums, the FDIC levies an assessment
based on the Bank’s deposit accounts under the Deposit Insurance Funds Act of
1996. Under the Deposit Insurance Funds Act, deposits that
were insured by the Bank Insurance Fund (“BIF”), such as the deposits of
the Bank, were subject to an assessment for payment on bond obligations
financing the FDIC’s Savings Association Insurance Fund (“SAIF”). The
assessment rate is adjusted quarterly, depending on the need of the
fund. At December 31, 2009 and 2008, the assessment rate was 1.06%
and 1.14% cents per $100 of insured deposits, respectively.
Federal Reserve
System. All depository institutions must maintain with a
Federal Reserve Bank reserves against their transaction accounts (primarily
checking, NOW, and Super NOW accounts) and nonpersonal time accounts. In all
years preceding 2008, these reserves were maintained as vault cash or
noninterest-bearing accounts, thereby reducing the Bank’s earnings
potential. In the fourth quarter of 2008 the Federal Reserve Banks
announced that they would begin to pay interest on member banks’, required
reserve balances, as well as excess reserve balances. As of December
31, 2009, the Bank was in compliance with applicable reserve
requirements.
Loans to One
Borrower. The Bank generally may not make a loan or extend
credit to a single or related group of borrowers in excess of 15% of its
unimpaired capital and surplus. Up to an additional 10% of unimpaired
capital and surplus can be lent if the additional amount is fully secured by
readily marketable collateral. At December 31, 2009, the Bank’s legal
lending limit on loans to one borrower was $11.274 million for loans not fully
secured by readily marketable collateral and $18.790 million for loans secured
by readily marketable collateral. At that date, the Bank did not have
any loans or agreements to extend credit to a single or related group of
borrowers in excess of its legal lending limit.
Real Estate Lending
Standards. OCC regulations generally require each national
bank to establish and maintain written internal real estate lending standards
that are consistent with safe and sound banking practices and appropriate to the
size of the bank and the nature and scope of its real estate lending activities.
The standards also must be consistent with accompanying OCC guidelines, which
include loan-to-value ratios for the different types of real estate
loans.
Community Reinvestment
Act. Under the federal Community Reinvestment Act (the “CRA”),
the Bank, consistent with its safe and sound operation, must help meet the
credit needs of its entire community, including low and moderate income
neighborhoods. The OCC periodically assesses the Bank's compliance
with CRA requirements. The Bank received a satisfactory rating for
CRA on its last performance evaluation conducted by the OCC as of March 20,
2006.
Fair Lending and Consumer Protection
Laws. The Bank must also comply with the federal Equal Credit
Opportunity Act and the New York Executive Law, which prohibit creditors
from discrimination in their lending practices on bases specified in these
statutes. In addition, the Bank is subject to a number of federal statutes and
regulations implementing them, which are designed to protect the general public,
borrowers, depositors, and other customers of depository institutions. These
include the Bank Secrecy Act, the Truth in Lending Act, the Home Ownership and
Equity Protection Act, the Truth in Savings Act, the Home Mortgage Disclosure
Act, the Fair Housing Act, the Real Estate Settlement Procedures Act, the
Electronic Funds Transfers Act, the Fair Credit Reporting Act, the Right to
Financial Privacy Act, the Expedited Funds Availability Act, the Flood Disaster
Protection Act, the Fair Debt Collection Practices Act, Helping Families Save
Their Homes Act, and the Consumer Protection for Depository Institutions Sales
of Insurance regulation. The OCC and, in some instances, other
regulators, including the U.S. Department of Justice, may take enforcement
action against institutions that fail to comply with these laws.
Prohibitions Against Tying
Arrangements. National banks are prohibited, subject to some
exceptions, from extending credit to or offering any other service, or fixing or
varying the consideration for such extension of credit or service, on the
condition that the customer obtain some additional service from the bank or its
affiliates or not obtain services of a competitor of the bank.
Privacy
Regulations. OCC regulations generally require the Bank to
disclose its privacy policy. The policy must identify with whom the
Bank shares its customers’ “nonpublic personal information,” at the time of
establishing the customer relationship and annually thereafter. In
addition, the Bank must provide its customers with the ability to “opt out” of
having their personal information shared with unaffiliated third parties and not
to disclose account numbers or access codes to non-affiliated third parties for
marketing purposes. The Bank’s privacy policy complies with OCC
regulations.
The USA PATRIOT Act. The Bank
is subject to the USA PATRIOT Act, which gives the federal government powers to
address terrorist threats through enhanced domestic security measures, expanded
surveillance powers, increased information sharing, and broadened anti-money
laundering requirements. The USA PATRIOT Act imposes affirmative obligations on
financial institutions, including the Bank, to establish anti-money laundering
programs which require: (i) the establishment of internal policies, procedures,
and controls; (ii) the designation of an anti-money laundering compliance
officer; (iii) ongoing employee training programs; and (iv) an independent audit
function to test the anti-money laundering program. The OCC must consider the
Bank’s effectiveness in combating money laundering when ruling on merger and
other applications.
J.
Competition
We face
competition in all the markets we serve. Traditional competitors are
other local commercial banks, savings banks, savings and loan institutions, and
credit unions, as well as local offices of major regional and money center
banks. Also, non-banking financial organizations, such as consumer
finance companies, mortgage brokers, insurance companies, securities firms,
money market funds, mutual funds and credit card companies offer substantive
equivalents of transaction accounts and various loan and financial
products. As a result of the enactment of the GLBA , other
non-banking financial organizations now may offer comparable products to those
offered by the Company and establish, acquire, or affiliate with commercial
banks themselves.
K.
Legislative and Regulatory Developments
Deposit
Insurance. On January 12, 2010, the FDIC issued an advance
notice of proposed rulemaking (“ANPR”) seeking comment on ways that the FDIC's
risk-based deposit insurance assessment system could be changed to account for
the risks posed by certain employee compensation programs. The FDIC is exploring
whether and how to incorporate employee compensation criteria into the
risk-based assessment system to adequately compensate the Deposit Insurance Fund
for the risks inherent in the design of certain compensation programs. The FDIC
states in the ANPR that it seeks to provide incentives for institutions to adopt
compensation programs that better align employees' interests with the long-term
interests of the bank and its stakeholders, including the FDIC. Should the ANPR
result in the adoption of a final regulation by the FDIC, the Company will
evaluate the effect, if any, that the regulation will have on its deposit
insurance premiums.
New Legislative
Developments. Various federal bills that would significantly
affect banks are introduced in Congress from time to time. The
Company cannot estimate the likelihood of any currently pending banking bills
being enacted into law, or the ultimate effect that any such potential
legislation, if enacted, would have upon its financial condition or results of
operations.
ITEM
1A: RISK FACTORS
The
investment performance of our common shares is affected by several material risk
factors. These factors (summarized below) can affect our financial
condition or results of operations. Accordingly, you should be aware
of these risk factors and how each may potentially affect your investment in our
common stock.
General Economic and Competitive
Conditions. Regional and local economic factors including
employment and unemployment conditions, population growth, and price and wage
scale changes, may impact the demand for our products and services, the level of
customer deposits, or credit status of our borrowers. National and
international economic conditions including credit markets, equity markets, raw
materials costs, energy prices, consumer demand, and consumer trends, may impact
the demand for our commercial borrowers’ products and services, which, in turn,
can affect our financial condition and results of operation.
National,
regional, and local competitive conditions can negatively impact our financial
condition or results of operations. Our existing competition may
begin offering new products and services, change the price for existing products
and services, or open new offices in direct competition with our
offices. In addition, new competitors can establish a physical
presence in our market or begin offering products and services through the
Internet or other remote channels that compete directly with our products and
services. All of these factors are dynamic and may affect the demand
for our products and services, and, in turn, our financial condition and results
of operations.
Real Estate Market
Conditions. At December 31, 2009, real estate served as
the principal source of collateral with respect to approximately 71.7% of the
Bank’s loan portfolio. A prolonged depression in the value of
residential and commercial real estate securing its loans could adversely impact
our consolidated financial condition and results of operations. Given
our heavy reliance on real estate lending, this could have a significant adverse
affect on our financial condition and results of operations.
Credit Risk. One
of our main functions as a financial intermediary is to extend credit, in the
form of loans, commitments and investments, to individuals, businesses, state,
local and federal government and U.S. Government Sponsored Entities within and
outside of our primary market area. The risk associated with these
extensions of credit pose significant risks to earnings and capital that need to
be controlled and monitored by management. Losses incurred by us due
to the failure by borrowers to repay loans or other extensions of credit will
negatively affect our financial condition and results of
operations.
The Financial Performance of Large
Borrowers. Our financial condition and results of operations
are highly dependent upon the credit worthiness and financial performance of our
borrowers. The Bank has many borrowers or groups of related borrowers
whose total indebtedness with the Bank exceeds $1.000 million. The
financial performance of these borrowers is a material risk factor that may
affect our financial condition or results of operations.
Allowance for Loan Losses May Not Be
Sufficient to Cover Actual Loan Losses. The Bank’s management,
under the control and supervision of the Board of Directors, continually
monitors the credit status of the Bank’s loan portfolio. The adequacy
of the allowance for loan losses is reviewed quarterly by the Board of
Directors, and periodically by an independent loan review firm under the
direction of the Bank’s Audit Committee, the OCC, and the Company’s external
auditors. However, because the allowance for loan losses is an
estimate of embedded losses and is based on management’s experience and
assumptions, there is no certainty that the allowance for loan losses will be
sufficient to cover actual loan losses. Actual loan losses in excess
of the allowance for loan losses would negatively impact our financial condition
and results of operations.
Changes in Interest Rates and
Capital Markets. Our financial condition and results of
operations are highly dependent upon the amount of the interest income we
receive on our earning assets and the interest we pay for our funding and
capital resources. Accordingly, changes in interest rates and capital
markets can affect our financial condition and results of
operations.
Fraud
Risk. Financial institutions are inherently exposed to fraud
risk. A fraud can be perpetrated by a customer of the Bank, an
employee, a vendor, or members of the general public. A loss due to
fraud that is determined not to be insured under our fidelity insurance coverage
could negatively affect our financial condition or results of
operations.
Changes in Laws, Regulations, and
Policies. Financial institutions are highly regulated
companies and are subject to numerous laws and regulations. Changes
to these laws or regulations, particularly at the federal and state level, may
materially impact the business climate we operate within, which, in turn, may
impact the economic return on our common shares, financial condition, or results
of operations.
Changes in the Financial Condition
of U.S. Government Agencies, U.S. Government Sponsored Enterprises, and Local
and State Governments. We invest substantially in debt
instruments backed or issued by U.S. Government Agencies, U.S. Government
Sponsored Enterprises, and local and state governments. A
deterioration of the credit standing of any of these issuers of debt may
materially impact our financial condition or results of operations.
Financial Condition of New York
State. The Company operates in the central and upstate regions
of New York State. New York State is currently operating with
significant budget deficits that have and are expected to continue to negatively
affect the households, businesses and municipalities operating within the
State. Many of the school districts, town and city governments and
not-for-profit organizations who benefit from State funding to balance their
operating budget or finance an infrastructure improvement are our
customers. Reductions in funding from New York State to these
entities can negatively impact the operations and credit-worthiness of these
customers, and potentially, our results of operation, particularly if an
investment security we hold, issued by a New York State municipality, were to be
downgraded or the issuer defaulted on its debt payments.
Actions of Regulatory
Authorities. The Company and the Bank are subject to the
supervision of several federal and state regulatory bodies. These
regulatory bodies have authority to issue, change, and enforce rules and
regulations including the authority to assess fines. Changes to these
regulations may impact the financial condition or results of operations of the
Company or the Bank. See Item 1 I. of this Annual Report on Form 10-K
for additional explanation regarding the regulations to which the Company and
the Bank are subject.
Changes in the Company’s Policies or
Management. Our financial condition and results of operations
depend upon the policies approved by the Board of Directors and the practices of
management. Changes in our policies or management practices,
particularly credit policies and practices of the Bank, may affect our financial
condition or results of operations.
Incidents Affecting Our
Reputation. The demand for our products and services is
influenced by our reputation and the reputation of our management and
employees. Public incidents that negatively affect the reputation of
the Company or the Bank, including, but not limited to, breaches in the security
of customer information or unfair or deceptive practices, or violations of law
may adversely impact our financial condition, results of operations, or economic
performance of the Company’s common stock.
Technology
Risk. We deploy various forms of technology to facilitate and
process customer and internal transactions. In addition, we gather,
store and summarize various forms of computer generated data to analyze the
Company’s services, business processes and financial
performance. Although we maintain various policies and procedures,
including data back-up and recovery procedures to mitigate technology risk, in
the event one of our systems were to fail it could have an adverse impact on our
financial condition or results of operations.
Dividend
Policy. The Company historically has paid a quarterly dividend
to its common stockholders. A reduction or discontinuation of this
practice could negatively affect the value of our common stock.
Liquidity of the Company’s Common
Shares. The Company’s common stock is lightly traded on the
NYSE Amex. This condition may make it difficult for shareholders with
large common stock ownership positions to sell or liquidate shares at a suitable
price.
Changes to the Markets or Exchanges
On Which the Company’s Common Shares Are Traded. The Company’s
common shares trade on the NYSE Amex. Changes to the NYSE Amex
trading practices or systems, reputation or financial condition, or rules which
govern trading on the NYSE Amex may impact our shareholders’ ability to buy or
sell their common shares at a suitable price. In addition, the
Company’s common stock is included in the broad-market Russell 3000
Index®. In the event the Company’s common stock was dropped from
inclusion in the Russell 3000 Index® it could negatively affect the market price
and liquidity of the stock.
Goodwill
Impairment. Annually, we evaluate goodwill for
impairment. In addition, if our common stock were to trade
consistently below book value, or other triggering events were to occur, we
would re-evaluate the amount of goodwill and any related
impairment. If impairment is warranted, the amount would be recorded
through the income statement as a reduction to current period
earnings.
ITEM 1B: UNRESOLVED STAFF COMMENTS
The
Company has not been subject to any comments by the SEC during the period
covered by this Annual Report on Form 10-K that remain unresolved.
ITEM 2: PROPERTIES
The
Company and the Bank are headquartered at 245 Main Street, Oneonta, New
York. The three buildings that comprise our headquarters are owned by
the Bank and also serve as our main office. In addition to our main
office, we own seventeen branch offices and lease four branch offices and two
loan production offices at market rates.
In the
opinion of management, the physical properties of the Company are suitable and
adequate. All of our properties are insured at full replacement
cost.
ITEM 3: LEGAL PROCEEDINGS
From time
to time, the Company becomes subject to various legal claims that arise in the
normal course of business. At December 31, 2009, the Company was not
the subject of any material pending legal proceedings, other than ordinary
routine litigation occurring in the normal course of its
business. The various pending legal claims against the Company will
not, in the opinion of management based upon consultation with legal counsel,
result in any material liability to the Company and will not materially affect
our financial position, results of operations or cash flow.
Neither
the Company, the Bank, nor any of the Bank’s subsidiaries have been subject to
review by the Internal Revenue Service of any transactions that have been
identified as abusive or that have a significant tax avoidance
purpose.
ITEM 4. REMOVED AND RESERVED
PART
II
ITEM
5: MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS, AND ISSUER PURCHASES OF EQUITY SECURITIES
A. Market
Information; Dividends on Common Stock; and Recent Sales of Unregistered
Securities
The
common stock of the Company ($0.01 par value per share) trades on the NYSE Amex
(formerly the American Stock Exchange) under the symbol “GIW.” The
following table shows the high and low trading prices for the common stock and
quarterly dividend paid to our security holders for the periods
presented:
Common
Stock Market Price and Dividend Table:
|
2009
|
2008
|
|||||||||||||||||||||||
|
High
|
Low
|
Dividend
|
High
|
Low
|
Dividend
|
|||||||||||||||||||
|
4th
Quarter
|
$ | 8.65 | $ | 5.52 | $ | 0.060 | $ | 7.90 | $ | 5.54 | $ | 0.095 | ||||||||||||
|
3rd
Quarter
|
$ | 12.00 | $ | 7.76 | $ | 0.060 | $ | 8.98 | $ | 7.70 | $ | 0.095 | ||||||||||||
|
2nd
Quarter
|
$ | 14.15 | $ | 6.78 | $ | 0.060 | $ | 9.00 | $ | 8.31 | $ | 0.095 | ||||||||||||
|
1st
Quarter
|
$ | 8.40 | $ | 6.71 | $ | 0.095 | $ | 9.10 | $ | 8.52 | $ | 0.095 | ||||||||||||
At March
9, 2010, there were 523 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 9, 2010 was
$6.63 per share.
We have
not sold any unregistered securities in the past five years.
B. Use of
Proceeds from Registered Securities
None.
C.
Purchases of Equity Securities by Issuer and Affiliated Purchasers
None.
ITEM
6: SELECTED FINANCIAL DATA
The
comparability of the information provided in the following 5-Year Summary Table
of Selected Financial Data and the Table of Selected Quarterly Financial Data
have not been materially impacted by any significant business combinations,
dispositions of business operations, or accounting changes other than those
provided in the footnotes to our financial statements provided in PART II, Item
8, of this document.
Five-Year
Summary Table of Selected Financial Data:
|
The
Wilber Corporation and Subsidiary
|
As
of and for the Year Ended December 31,
|
|||||||||||||||||||
|
2009
|
2008
|
2007
|
2006
|
2005
|
||||||||||||||||
|
(in
thousands, except per share data)
|
||||||||||||||||||||
|
Consolidated
Statements of Income Data:
|
||||||||||||||||||||
|
Interest
and Dividend Income
|
$ | 46,838 | $ | 46,392 | $ | 46,030 | $ | 43,341 | $ | 40,310 | ||||||||||
|
Interest
Expense
|
14,502 | 19,958 | 21,474 | 18,360 | 14,930 | |||||||||||||||
|
Net
Interest Income
|
32,336 | 26,434 | 24,556 | 24,981 | 25,380 | |||||||||||||||
|
Provision
for Loan Losses
|
3,570 | 1,530 | 900 | 1,560 | 1,580 | |||||||||||||||
|
Net
Interest Income After Provision for Loan Losses
|
28,766 | 24,904 | 23,656 | 23,421 | 23,800 | |||||||||||||||
|
Noninterest
Income (Excl. Investment Securities Gains, Net)
|
5,484 | 6,227 | 6,956 | 5,455 | 5,156 | |||||||||||||||
|
Investment
Securities Gains, Net
|
3,850 | 82 | 80 | 514 | 469 | |||||||||||||||
|
Noninterest
Expense
|
28,110 | 23,724 | 20,857 | 20,032 | 18,966 | |||||||||||||||
|
Income
Before Provision for Income Taxes
|
9,990 | 7,489 | 9,835 | 9,358 | 10,459 | |||||||||||||||
|
Provision
for Income Taxes
|
2,589 | 1,673 | 2,128 | 2,206 | 2,715 | |||||||||||||||
|
Net
Income
|
$ | 7,401 | $ | 5,816 | $ | 7,707 | $ | 7,152 | $ | 7,744 | ||||||||||
|
Per
Common Share:
|
||||||||||||||||||||
|
Earnings
(Basic)
|
$ | 0.70 | $ | 0.55 | $ | 0.73 | $ | 0.66 | $ | 0.69 | ||||||||||
|
Cash
Dividends
|
0.275 | 0.380 | 0.380 | 0.380 | 0.380 | |||||||||||||||
|
Book
Value
|
6.82 | 6.42 | 6.61 | 5.99 | 6.08 | |||||||||||||||
|
Tangible
Book Value ¹
|
6.39 | 5.97 | 6.13 | 5.52 | 5.61 | |||||||||||||||
|
Consolidated
Period-End Balance Sheet Data:
|
||||||||||||||||||||
|
Total
Assets
|
$ | 906,577 | $ | 924,874 | $ | 793,680 | $ | 761,981 | $ | 752,728 | ||||||||||
|
Securities
Available-for-Sale
|
173,302 | 216,744 | 237,274 | 228,959 | 235,097 | |||||||||||||||
|
Securities
Held-to-Maturity
|
69,391 | 44,454 | 52,202 | 62,358 | 54,939 | |||||||||||||||
|
Gross
Loans
|
587,237 | 583,861 | 445,105 | 406,920 | 404,958 | |||||||||||||||
|
Allowance
for Loan Losses
|
8,622 | 7,564 | 6,977 | 6,680 | 6,640 | |||||||||||||||
|
Deposits
|
753,740 | 765,873 | 657,494 | 629,044 | 604,958 | |||||||||||||||
|
Long-Term
Borrowings
|
60,627 | 59,970 | 41,538 | 42,204 | 52,472 | |||||||||||||||
|
Short-Term
Borrowings
|
12,650 | 21,428 | 15,786 | 18,459 | 19,357 | |||||||||||||||
|
Shareholder's
Equity
|
72,919 | 67,459 | 69,399 | 63,332 | 67,717 | |||||||||||||||
|
Selected
Key Ratios:
|
||||||||||||||||||||
|
Return
on Average Assets
|
0.79 | % | 0.67 | % | 0.99 | % | 0.95 | % | 1.02 | % | ||||||||||
|
Return
on Average Equity
|
10.63 | % | 8.35 | % | 11.84 | % | 11.20 | % | 11.40 | % | ||||||||||
|
Net
Interest Margin (tax-equivalent)
|
3.77 | % | 3.46 | % | 3.62 | % | 3.81 | % | 3.82 | % | ||||||||||
|
Efficiency
Ratio ²
|
71.25 | % | 68.42 | % | 61.76 | % | 61.14 | % | 57.67 | % | ||||||||||
|
Dividend
Payout
|
39.29 | % | 69.09 | % | 52.05 | % | 57.58 | % | 55.07 | % | ||||||||||
|
Asset
Quality:
|
||||||||||||||||||||
|
Nonperforming
Loans ³
|
12,880 | 7,211 | 6,136 | 2,529 | 4,918 | |||||||||||||||
|
Nonperforming
Assets ⁴
|
14,564 | 7,369 | 6,383 | 2,632 | 4,938 | |||||||||||||||
|
Net
Loan Charge-Offs to Average Loans
|
0.42 | % | 0.19 | % | 0.14 | % | 0.38 | % | 0.30 | % | ||||||||||
|
Allowance
for Loan Losses to Period-End Loans
|
1.47 | % | 1.30 | % | 1.57 | % | 1.64 | % | 1.64 | % | ||||||||||
|
Allowance
for Loan Losses to Nonperforming Loans
|
67 | % | 105 | % | 114 | % | 264 | % | 135 | % | ||||||||||
|
Nonperforming
Loans to Period-End Loans
|
2.19 | % | 1.24 | % | 1.38 | % | 0.62 | % | 1.21 | % | ||||||||||
|
¹
|
Tangible
book value numbers exclude goodwill and intangible assets associated with
prior business combinations.
|
|
²
|
The
efficiency ratio is calculated by dividing total noninterest expense less
amortization of intangibles and other real estate expense by
tax-equivalent net interest income plus noninterest income other than
securities gains and losses.
|
|
³
|
Nonperforming
loans include nonaccrual loans, troubled debt restructured loans and
accruing loans 90 days or more delinquent.
|
|
⁴
|
Nonperforming
assets include nonperforming loans and OREO properties acquired through
insubstance foreclosure, voluntary deed transfer, legal foreclosure or
similar proceedings. Excludes properties acquired by the
Company for its own development.
|
Table of
Selected Quarterly Financial Data:
|
2009
|
2008
|
|||||||||||||||||||||||||||||||
|
Selected
Unaudited Quarterly Financial Data
|
Fourth
|
Third
|
Second
|
First
|
Fourth
|
Third
|
Second
|
First
|
||||||||||||||||||||||||
|
(in
thousands)
|
||||||||||||||||||||||||||||||||
|
Interest
income
|
$ | 11,448 | $ | 11,858 | $ | 11,765 | $ | 11,767 | $ | 11,890 | $ | 11,804 | $ | 11,298 | $ | 11,400 | ||||||||||||||||
|
Interest
expense
|
2,938 | 3,263 | 3,826 | 4,475 | 4,804 | 4,960 | 4,939 | 5,255 | ||||||||||||||||||||||||
|
Net
interest income
|
8,510 | 8,595 | 7,939 | 7,292 | 7,086 | 6,844 | 6,359 | 6,145 | ||||||||||||||||||||||||
|
Provision
for loan losses
|
850 | 570 | 950 | 1,200 | 630 | 500 | 175 | 225 | ||||||||||||||||||||||||
| Net interest income afterprovision for loan losses | 7,660 | 8,025 | 6,989 | 6,092 | 6,456 | 6,344 | 6,184 | 5,920 | ||||||||||||||||||||||||
| Investment security gains(losses), net | 1,228 | 1,172 | 1,009 | 441 | 4 | (86 | ) | (19 | ) | 183 | ||||||||||||||||||||||
|
Other
noninterest income
|
1,451 | 1,425 | 1,418 | 1,190 | 1,298 | 1,460 | 2,122 | 1,347 | ||||||||||||||||||||||||
|
Noninterest
expense
|
7,494 | 7,049 | 7,186 | 6,381 | 5,719 | 6,001 | 6,381 | 5,623 | ||||||||||||||||||||||||
| Income before income tax expense | 2,845 | 3,573 | 2,230 | 1,342 | 2,039 | 1,717 | 1,906 | 1,827 | ||||||||||||||||||||||||
|
Income
tax expense
|
844 | 839 | 637 | 269 | 451 | 334 | 499 | 389 | ||||||||||||||||||||||||
|
Net
income
|
$ | 2,001 | $ | 2,734 | $ | 1,593 | $ | 1,073 | $ | 1,588 | $ | 1,383 | $ | 1,407 | $ | 1,438 | ||||||||||||||||
|
Basic
earnings per share
|
$ | 0.19 | $ | 0.26 | $ | 0.15 | $ | 0.10 | $ | 0.15 | $ | 0.13 | $ | 0.13 | $ | 0.14 | ||||||||||||||||
| Basic weighted average sharesoutstanding | 10,582,917 | 10,512,987 | 10,503,704 | 10,503,704 | 10,503,704 | 10,503,704 | 10,503,704 | 10,503,704 | ||||||||||||||||||||||||
| Net interest margin (tax equivalent) ¹ | 4.01 | % | 3.92 | % | 3.67 | % | 3.46 | % | 3.54 | % | 3.48 | % | 3.36 | % | 3.42 | % | ||||||||||||||||
|
Return
on average assets
|
0.87 | % | 1.15 | % | 0.68 | % | 0.47 | % | 0.71 | % | 0.63 | % | 0.66 | % | 0.71 | % | ||||||||||||||||
|
Return
on average equity
|
10.90 | % | 15.59 | % | 9.34 | % | 6.44 | % | 9.09 | % | 7.93 | % | 8.08 | % | 8.30 | % | ||||||||||||||||
|
Efficiency
ratio ²
|
72.24 | % | 67.55 | % | 73.70 | % | 71.74 | % | 64.64 | % | 68.16 | % | 70.88 | % | 70.10 | % | ||||||||||||||||
|
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 noninterest expense less
amortization of intangibles and other real estate expense by
tax-equivalent net interest income plus noninterest 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
subsidiary for each of the years in the two-year period ended December 31,
2009. This discussion and tabular presentations should be read in
conjunction with the accompanying Consolidated Financial Statements and Notes
presented in PART II, Item 8, of this document.
Our
financial performance is heavily dependent upon net interest income, which is
the difference between the interest and dividend income earned on our loans and
investment securities less the interest paid on our deposits and
borrowings. Results of operations are also affected by the provision
for loan losses, investment securities gains (losses), service charges on
deposit accounts, trust and investment service fees, commission income, the net
gain on sale of loans, the increase in the cash surrender value on bank owned
life insurance, gain on sale of insurance agency subsidiary, other service fees
and other income. Our noninterest expenses consist of salaries,
employee benefits, occupancy expense, furniture and equipment expense, computer
service fees, advertising and marketing, professional fees, FDIC premium
assessment, collection expense, other miscellaneous expenses and income
taxes. Results of operations are also influenced by general economic
conditions (particularly changes in financial markets and interest rates),
competitive conditions, government policies, changes in federal or state tax
law, and the actions of our regulatory authorities.
Critical Accounting Policies.
Management of the Company considers the accounting policy relating to the
allowance for loan losses to be a critical accounting policy given the
uncertainty in evaluating the level of the allowance required to cover credit
losses inherent in the loan portfolio and the material effect that such
judgments can have on the results of operations. While management’s
current evaluation of the allowance for loan losses indicates that the allowance
is adequate, under adversely different conditions or assumptions, the allowance
would need to be increased. For example, if historical loan loss
experience significantly worsened or if current economic conditions deteriorated
further, 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 nonperforming loans and potential
problem loans have a significant impact on the overall analysis of the adequacy
of the allowance for loan losses. While management has concluded that
the evaluation of collateral values was reasonable under the circumstances for
each of the reported periods, if collateral valuations were significantly
lowered, the Company’s allowance for loan losses would also require an
additional provision for loan losses.
Our
policy on the allowance for loan losses is disclosed in Note 1 of the
Consolidated Financial Statements. A more detailed description of the
allowance for loan losses is included in PART II, Item 7 C.i., of this
document. All accounting policies are important, and as such, we
encourage the reader to review each of the policies included in Note 1 of the
Consolidated Financial Statements (provided in PART II, Item 8, of this
document) to obtain a better understanding of how our financial performance is
reported.
Recently Issued Accounting
Pronouncements not Yet Adopted. In June 2009 the FASB issued
two new accounting standards, which change the way entities account for
securitizations and special purpose entities. The first standard
enhances the reporting for transfers of financial assets, including
securitization transactions. It also requires companies to report
where they have continuing exposure to the risks related to transferred
financial assets and eliminates the concept of a "qualifying special-purpose
entity." In addition, it changes the requirements for
derecognizing financial assets and requires additional disclosures about all
continuing involvements with transferred financial assets, including information
about gains and losses resulting from transfers during the
period. This standard also requires additional year-end and interim
disclosures. It became effective for our Company on January 1, 2010
and must be applied to transfers that occurred before and after its effective
date. Based on our current activities, adoption of this standard had
no impact on our financial condition or results of operation.
The
second new standard amends a previous standard to change how a company
determines when an entity that is insufficiently capitalized or is not
controlled through voting (or similar rights) should be consolidated. The
determination of whether a company is required to consolidate an entity is based
on, among other things, an entity’s purpose and design and a company’s ability
to direct the activities of the entity that most significantly impact the
entity’s economic performance. This standard also requires additional
disclosures about the reporting entity’s involvement with variable-interest
entities and any significant changes in risk exposure due to that involvement as
well as its effect on the entity’s financial statements. This
standard also requires additional year-end and interim
disclosures. It became effective for our Company on January 1,
2010. Based on our current activities, adoption of this standard had
no impact on our financial condition or results of operation.
In
January 2010 FASB issued a clarification and amendment to its accounting
standard regarding disclosure of assets and liabilities measured at fair
value. The amendment requires companies to provide a separate
disclosure for transfers in and out of Levels 1 and 2, including a description
of the reasons for the transfer. It also requires companies to report
activity in Level 3 fair value measurements on a gross basis, including
information about purchases, sales, issuances and settlements. The
amendments also clarify existing disclosures related to disaggregated reporting,
model inputs and valuation techniques. The new disclosures are
effective for the first quarter of 2010, except for the gross reporting of Level
3 activity, which is effective beginning the first quarter of
2011. Upon implementation, these amendments may result in additional
disclosures in our interim and annual reports.
B.
Performance Overview for the Year Ended December 31, 2009
Most of
our earnings performance measures improved during 2009, as compared to 2008,
including, net income, earnings per share, return on assets and return on
equity. We recorded $7.401 million in net income during 2009, as
compared to $5.816 million in 2008, a $1.585 million or 27.3% increase between
comparable periods. Similarly, earnings per share increased $0.15 or
27.3%, from $0.55 in 2008 to $0.70 in 2009. During 2009 return on
assets and return on equity were 0.79% and 10.63%, respectively, as compared to
0.67% and 8.35% during 2008, respectively. The improvements in these
key performance measures were largely driven by significant improvements in net
interest income and noninterest income, offset, in part, by significant
increases in the provision for loan losses and noninterest expense.
During
2009, net interest income improved significantly due to an increase in the
average volume of loans outstanding, our highest yielding earning asset, and a
significant decrease in the expense recorded on our interest-bearing liabilities
due primarily to a general decline in deposit funding costs.
The
increase in noninterest income between 2008 and 2009 was largely attributed to a
significant increase in net investment securities gains. As interest
rates dropped in 2008 and remained low during 2009, the market value on many of
our available-for-sale investment securities increased. We sold or
had called $120.286 million of these available-for-sale securities throughout
2009 and recorded net investment securities gains totaling $3.676 million, a
$3.166 million increase over 2008. We sold primarily mortgage-backed
securities where underlying mortgage rates were 6% or higher, anticipating that
market values would decline due to high levels of refinancing.
During
2009, we recorded $3.570 million in the provision for loan losses, as compared
to $1.530 million in 2008, a $2.040 million increase between the annual
periods. The significant increase in the provision for loan losses
between the periods was attributable to a decline in the general credit quality
of our loan portfolio between the periods.
Total
noninterest expense increased from $23.724 million in 2008 to $28.110 million in
2009, a $4.386 million or 18.5% increase between the periods. We
recorded a $1.981 million increase in our FDIC premium assessment and $1.175
million increase in employee benefits expense due to both increased pension and
split-dollar life insurance buy-out settlement costs, between 2008 and
2009.
The
information provided in ITEM 7, Parts C through F that follow provide
additional information as to the financial condition, results of operations,
liquidity, and capital resources of the Company.
C.
Financial Condition
i.
Comparison of Financial Condition at December 31, 2009, and December 31,
2008
Please
refer to the Consolidated Financial Statements presented in PART II, Item 8, of
this document.
Summary of Financial
Condition
Due to
generally weak economic conditions during 2009, we curbed our asset growth rate
targets and focused the Company’s resources on increasing current period net
income and shareholders’ equity. Due to these efforts, total assets
decreased from $924.874 million at December 31, 2008 to $906.577 million at
December 31, 2009, an $18.297 million or 2.0% decrease. Conversely,
shareholders’ equity increased $5.460 million or 8.1%, from $67.459 million at
December 31, 2008 to $72.919 million at December 31, 2009.
Between
December 31, 2008 and 2009 the level of nonperforming loans, potential problem
loans, delinquent loans, impaired loans and net charge-offs
increased. Although we did not originate or hold in the normal course
of our business subprime or Alt-A residential mortgage loans or investment
securities backed by subprime or Alt-A mortgage loans, and have not experienced
any significant losses due to these practices, during 2009 we recorded increases
in net loan charge-offs on our consumer installment loans (primarily secured by
automobiles), commercial loans and commercial real estate loans. Due
to the economic recession, increased rates of unemployment and a decline in the
operating performance of many of our commercial borrowers’ business operations,
the overall quality of our portfolio declined during 2009. If the
credit quality of the loan portfolio weakened further, it could negatively
affect the results of operations in future periods.
We
monitor our liquidity position on a regular basis and do not unduly rely on the
wholesale credit markets for our funding. The substantial majority of
our funding is provided through customer deposits. For these reasons,
we maintained adequate amounts of liquidity to fund our business operations
throughout 2009 and expect this condition to be maintained in 2010 and
beyond.
Asset
Composition
Our
assets are comprised of earning and nonearning assets. Earning assets
include our investment securities, performing loans, interest-bearing deposits
at other banks and federal funds sold. Nonearning assets include OREO
and other assets acquired as the result of repossession or foreclosure,
nonperforming loans, facilities, equipment, goodwill and other intangibles,
noninterest bearing deposits at other banks and cash. We generally
maintain approximately 92% to 96% of our total assets in earning
assets. During 2009 the composition of our assets did not change
significantly. The earning assets to total assets ratio at December 31, 2009 was
95.8%, as compared to 95.2% at December 31, 2008. The total loans to
total assets ratio was 64.8% at December 31, 2009, as compared to 63.1% at
December 31, 2008. The investment securities portfolio, including
trading, available-for-sale, held-to-maturity and other investments, comprised
27.6% of our total assets at December 31, 2009, versus 29.0% at December 31,
2008.
Total
Assets
At
December 31, 2009 total assets were $906.577 million. This compares
to total assets of $924.874 million at December 31, 2008. During
2009, we tempered our asset growth plan and actively deleveraged the
Company. This entailed targeting strategic reductions in the
Company’s total deposits and borrowings in concert with decreases in selected
asset categories. The deleveraging plan was executed in an effort to
mitigate risk and increase our capital position in light of challenging economic
conditions. By contrast, total assets increased $131.194 million or
16.5% during 2008 due to our expansion into new markets throughout the central
and upstate New York marketplace and company-wide focus on
growth. During 2009, deposit liabilities decreased $12.133 million or
1.6%, from $765.873 million at December 31, 2008 to $753.740 million at December
31, 2009. On a combined basis, short-term and long-term borrowings
also decreased $8.121 million or 10.0% between December 31, 2008 and December
31, 2009. Our short-term borrowings consist of overnight repurchase
agreements between the Bank and its business customers. We attribute
this decrease to a reduction in our business customers’ working capital levels,
and to a lesser extent, interest rates paid on our repurchase
agreements.
Investment
Securities
Our
investment securities portfolio consists of trading, available-for-sale, and
held-to-maturity securities. The following table summarizes our
trading, available-for-sale, and held-to-maturity investment securities
portfolio for the periods indicated.
Summary
of Investment Securities:
|
At
December 31,
|
||||||||||||||||||||||||
|
2009
|
2008
|
2007
|
||||||||||||||||||||||
|
Amortized
Cost
|
Estimated
Fair
Value
|
Amortized
Cost
|
Estimated
Fair
Value
|
Amortized
Cost
|
Estimated
Fair
Value
|
|||||||||||||||||||
|
(in
thousands)
|
||||||||||||||||||||||||
|
Trading
¹:
|
$ | 1,194 | $ | 1,165 | $ | 1,391 | $ | 1,155 | $ | 1,167 | $ | 1,430 | ||||||||||||
|
Available-for-Sale:
|
||||||||||||||||||||||||
|
U.S.
Treasuries
|
$ | - | $ | - | $ | - | $ | - | $ | 5,997 | $ | 6,070 | ||||||||||||
|
Obligations
of U.S. Government
Corporations
and Agencies
|
- | - | - | - | 7,997 | 8,015 | ||||||||||||||||||
|
Obligations
of States and Political
Subdivisions
(Municipal Bonds)
|
32,872 | 32,956 | 36,205 | 36,776 | 48,861 | 48,718 | ||||||||||||||||||
|
Mortgage
- Backed Securities
|
139,192 | 140,268 | 176,116 | 178,828 | 172,719 | 171,395 | ||||||||||||||||||
|
Corporate
Securities
|
- | - | 1,047 | 1,012 | 2,294 | 2,293 | ||||||||||||||||||
|
Equity
Securities
|
78 | 78 | 128 | 128 | 866 | 783 | ||||||||||||||||||
|
Total
Available-for-Sale
|
$ | 172,142 | $ | 173,302 | $ | 213,496 | $ | 216,744 | $ | 238,734 | $ | 237,274 | ||||||||||||
|
Held-to-Maturity:
|
||||||||||||||||||||||||
|
Obligations
of States and Political
Subdivisions
(Municipal Bonds)
|
$ | 14,407 | $ | 14,678 | $ | 13,961 | $ | 14,146 | $ | 17,874 | $ | 18,018 | ||||||||||||
|
Mortgage-Backed
Securities
|
54,984 | 55,469 | 30,493 | 30,863 | 34,328 | 33,725 | ||||||||||||||||||
|
Total
Held-to-Maturity
|
$ | 69,391 | $ | 70,147 | $ | 44,454 | $ | 45,009 | $ | 52,202 | $ | 51,743 | ||||||||||||
|
¹
|
These
securities are held by the Company for its non-qualified Executive
Deferred Compensation plan.
|
||||||||||||
Between
December 31, 2008 and December 31, 2009, our total investment securities
portfolio (including trading, available-for-sale, and held-to-maturity)
decreased $18.495 million or 7.0%. During 2009 we received proceeds
from sales, maturities and calls of securities totaling $190.319 million, versus
new purchases of $170.862 million. During 2009, particularly during
the third and fourth quarters, we actively reduced our total assets as part of
our plan to deleverage the Company and improve our earnings and capital
ratios. This included selling significant portions of our
available-for-sale investment securities portfolio and realizing gains to
increase net income and our regulatory capital levels. During 2009,
we sold or had called $120.286 million of available-for-sale securities, which
represented approximately 55% of our total available-for-sale securities balance
at December 31, 2008. On a net basis, including purchases, sales and
changes in fair value due to changes in market interest rates, the fair value of
our available-for-sale securities portfolio decreased $43.442 million or 20.0%
during 2009, from $216.744 million at December 31, 2008 to $173.302 million at
December 31, 2009.
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,
2009, the net unrealized gain on the available-for-sale investment securities
portfolio was $1.160 million. By comparison, at December 31, 2008,
the net unrealized gain on the available-for-sale investment securities
portfolio was $3.247 million. Although we sold or had called $120.286
million of available-for-sale securities throughout 2009 and recorded gains on
the sale totaling $3.676 million, low market interest rates at December 31, 2009
resulted in a net unrealized gain on the available-for-sale securities
portfolio.
During
2009 we continued to maintain a concentration in mortgage-backed
securities. These included both mortgage pass-through securities and
collateralized mortgage obligations. At the end of 2009, our
mortgage-backed securities portfolio comprised 80.0% of the carrying value of
our investment securities portfolio. This compares to 79.8% and 70.7%
at the end of 2008 and 2007, respectively. Approximately 78.2% of our
mortgage-backed securities were backed by the full faith and credit of the U.S.
Government through a GinnieMae guarantee. Of the remaining 21.8% of
our mortgage-backed securities portfolio, 19.9% (or $38.188 million at par
value) was guaranteed by Fannie Mae and Freddie Mac, which are U.S. Government
Sponsored Enterprises. Only 1.9% (or $3.621 million at par value) of
the mortgage-backed securities portfolio was guaranteed by private-label issuers
rated AAA and AA-1 by Moodys.
Although
98.1% of our mortgage-backed securities were guaranteed by U.S. Government
Agencies and U.S. Government Sponsored Enterprises, they are susceptible to
prepayment risk. For example, if residential mortgage interest rates
dropped significantly, the yield on our mortgage-backed securities would likely
decline. When mortgage rates are low, homeowners often refinance
their existing mortgage loans or purchase new homes. This increases
the amount of principal payments we receive on our mortgage-backed securities,
which, in turn, increases the amount of net amortization expense we record as an
offset to interest income, thereby decreasing the yield on these
securities.
The
overall credit quality of our debt securities is strong. At December
31, 2009, 99.6% of the securities held in our available-for-sale and
held-to-maturity investment securities portfolios (excluding notes issued
directly by the Bank to local municipalities) were rated “A” or better by Moodys
credit rating services and 89.4% were rated “AAA.” This compares to
99.8% and 85.8%, respectively, at December 31, 2008.
Although
the economic recession of 2009 has negatively affected the financial strength of
most states and municipalities, the credit quality of our municipal bond
portfolio remained strong at December 31, 2009. We purchase our municipal
securities based on the underlying creditworthiness of the issuing municipality
and have not relied on the insurance enhancement attached to the
security. The following table summarizes the amounts at their par
value and associated credit rating on our municipal securities
portfolio.
Obligations
of States and Political Subdivisions (Municipal Bonds) Credit Quality
Table:
|
December
31, 2009
|
||||||||
|
AAA
¹
|
AA
|
A
|
BAA
|
Not
Rated
|
Total
|
|||
|
Uninsured
/
Un-
enhanced
|
Insured
/
Enhanced
|
Uninsured
/
Un-
enhanced
|
Insured
/
Enhanced
|
Un-
Enhanced
|
Enhanced
|
Enhanced
|
Un-
Enhanced
|
|
|
(in
thousands)
|
||||||||
|
$
12,480
|
$ 800
|
$ 5,160
|
$
13,585
|
$ 810
|
$ 3,925
|
$ 480
|
$ 380
|
$37,620
|
|
33.2%
|
2.1%
|
13.7%
|
36.1%
|
2.2%
|
10.4%
|
1.3%
|
1.0%
|
|
|
Total
AAA
|
$13,280
|
Total
AA
|
$
18,745
|
Total
A
|
$ 4,735
|
|||
|
35.3%
|
49.8%
|
12.6%
|
||||||
|
¹
|
Moodys ratings
|
|||||||||
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, 2009. All amortizing security
principal payments, including collateralized mortgage obligations and mortgage
pass-through securities, are included based on their expected average
lives. Callable securities, primarily callable agency securities and
municipal bonds are assumed to mature on their maturity
date. Available-for-sale securities are shown at fair
value. Held-to-maturity securities are shown at their amortized
cost. The yields on debt securities shown in the table below are
calculated by dividing annual interest, including accretion of discounts and
amortization of premiums, by the amortized cost of the securities at December
31, 2009. Yields on obligations of states and municipalities exempt
from federal taxation were not tax-effected.
Investment
Securities Maturity Table:
|
At
December 31, 2009
|
||||||||||
|
In
One Year or Less
|
After
One Year
through
Five Years
|
After
Five Years
through
Ten Years
|
After
Ten Years
|
Total
|
||||||
|
Carrying
Value
|
Weighted
Average
Yield
|
Carrying
Value
|
Weighted
Average
Yield
|
Carrying
Value
|
Weighted
Average
Yield
|
Carrying
Value
|
Weighted
Average
Yield
|
Carrying
Value
|
Weighted
Average
Yield
|
|
|
(in
thousands)
|
||||||||||
|
Obligations
of States and Political
Subdivisions
(Municipal Bonds)
|
$10,744
|
3.32%
|
$
15,411
|
4.51%
|
$14,686
|
4.10%
|
$
6,522
|
4.53%
|
$ 47,363
|
4.12%
|
|
Mortgage-Backed
Securities
|
32,708
|
4.69%
|
94,197
|
3.99%
|
43,109
|
3.92%
|
25,238
|
4.42%
|
195,252
|
4.15%
|
|
Total
securities¹
|
$43,452
|
4.35%
|
$109,608
|
4.06%
|
$57,795
|
3.97%
|
$31,760
|
4.44%
|
$242,615
|
4.14%
|
|
¹
|
This
table excludes trading securities totaling $1.165 million and equity
securities totaling $78 thousand at December 31,
2009.
|
At
December 31, 2009, the approximate weighted average life for all of the Bank’s
available-for-sale and held-to-maturity debt securities was 3.7
years. By comparison, at December 31, 2008 the approximate weighted
average life for the Bank’s available-for-sale and held-to-maturity debt
securities was 2.4 years. These estimates: (i) were provided by a
third party investment securities analyst and are used to provide comparisons
with other companies in the banking industry, (ii) are based upon the projected
cash flows (to the most likely call date) of our investment securities portfolio
taking into consideration the unique characteristics of the individual
securities held by us, and (iii) may fluctuate significantly from period to
period due to our concentration in mortgage-backed securities. The
increase in the weighted average life of the portfolio between the comparable
periods was principally due to decreases in both anticipated cash flows from our
mortgage-backed securities portfolio and expected calls of municipal
securities. Between December 31, 2008 and December 31, 2009, we
received proceeds totaling $190.319 million from principal payments and
prepayments of the available-for-sale and held-to-maturity investment securities
portfolio and sales of the available-for-sales security
portfolio. This represents a 73% turnover of the investment
securities portfolio during 2009. A significant portion of these
proceeds were reinvested in pass-through mortgage backed securities with longer
average lives than those securities that amortized, matured or were sold during
2009.
Other
Investments
At
December 31, 2009 we held $5.941 million of non-marketable equity securities
including: $3.881 million in FHLBNY stock; a $1.833 million equity interest in a
small business investment company, Meridian Venture Partners II, L.P; $158
thousand of Federal Reserve Bank of New York stock; $34 thousand in New York
Business Development Corporation stock; and $35 thousand in a small title
insurance agency. By comparison, at December 31, 2008, the estimated
fair value of our nonmarketable equity securities totaled $5.693 million, a $248
thousand or 4.4% net increase between the periods. Due to minimum
membership stock requirements, we increased our capital stock in the FHLBNY from
$3.667 million at December 31, 2008 to $3.881 million at December 31, 2009, a
$214 thousand increase.
We own
common stock of FHLBNY which enables us to borrow funds under the FHLBNY advance
program and qualify for membership. Published reports indicate that
certain member banks of the Federal Home Loan Bank system, which include eleven
other regionally based Federal Home Loan Banks, may be subject to accounting
rules and asset quality risks that could result in materially lower regulatory
capital levels. In an extreme situation, it is possible that the
capitalization of one of the banks in the Federal Home Loan Bank system,
including FHLBNY could be substantially diminished or reduced to
zero. Consequently, given that there is no market for our FHLBNY
common stock, we believe that there is a risk that our investment could be
deemed other than temporarily impaired at some time in the future. In
addition, it is possible that the FHLBNY will discontinue or suspend its
dividend payments to members in the event its regulatory capital levels
diminish. If either of these events occur, it may adversely affect
our results of operations and financial condition.
Interest Bearing Balances
with Banks and Federal Funds Sold
Interest
bearing balances with (other) banks and federal funds sold are the assets that
we generally rely on to meet our daily funding needs. Prior to 2009,
in the normal course of our business, we primarily sold and purchased federal
funds to and from other banks to meet these funding needs. We only
sold federal funds to well-capitalized banks that carried strong credit ratings
because federal funds sold are generally an unsecured obligation of the
counterparty. Due to the global financial crisis in the second half
of 2008 and related tightness in the inter-bank credit markets, during the
fourth quarter of 2008 the Federal Reserve Banks announced a program whereby
they would begin to pay interest on members’ required and excess
reserves. Due to the safety of the Federal Reserve Bank of New York,
we began leaving most of our excess reserves on deposit at the Federal Reserve
Bank of New York, in lieu of selling unsecured federal funds to other commercial
banks. These excess reserves were classified as interest bearing
balances with banks. On a combined basis, at December 31, 2009 we
held $24.039 million in interest bearing balances at other banks and federal
funds sold, versus $35.954 million at December 31, 2008. Due to
significant volatility in our daily overnight funds position it is most
appropriate to compare our average outstanding balances in these
categories. During 2009 our average overnight funds position,
including federal funds sold and interest bearing balances at other banks, was
$28.230 million or 3.0% of average total assets. By comparison,
during 2008 our average overnight funds position was $23.376 million or 2.7% of
average total assets. These levels were within management’s informal
target of maintaining approximately $10.0 to $30.0 million of overnight funds to
meet the anticipated and unanticipated short-term liquidity needs of the
Company.
Loan
Portfolio
General. The
average outstanding balance of our loan portfolio was $597.762 million during
2009, as compared to $498.997 million during 2008, a $98.765 million or 19.8%
increase. During 2007, we adopted a strategic plan that focused the
Company’s resources on increasing earning assets by acquiring new lines of
business and expanding our geographic markets into more populated and growing
regions of upstate and central New York State. In line with this
strategy, in 2007 we acquired Provantage, a New York State licensed mortgage
bank located in Saratoga County, New York. In 2008 we established a
representative loan production office in Cicero, New York (Onondaga County) and
hired several experienced commercial and residential mortgage
lenders. We also aggressively marketed our small business, consumer,
and residential mortgage loans in both our core rural markets and more densely
populated markets, including Johnson City, New York (Broome County) and
Kingston, New York (Ulster County).
These
efforts resulted in substantial growth in our total loans
outstanding. Although we generated significant increases in interest
income due to an increase in the volume of loans outstanding, we began to
experience deterioration in most of our credit quality measures in early 2009
related, in part, to the slowing economy and its effect on our
borrowers. Accordingly, we modified our strategic plan during the
first quarter of 2009. In particular, we changed our focus to improve
current period earnings, increase shareholders’ equity and raise our regulatory
capital ratios in light of the economic recession. This modification
of our strategy resulted in only a moderate increase in loans outstanding
between the periods ended December 31, 2008 and 2009. Total loans
increased from $583.861 million at December 31, 2008 to $587.237 million at
December 31, 2009, a $3.376 million or 0.6% increase between the
periods.
The
following table summarizes the composition of our loan portfolio over the prior
five-year period.
Distribution
of Loans Table:
|
At
December 31,
|
||||||||||||||||||||||||||||||||||||||||
|
2009
|
2008
|
2007
|
2006
|
2005
|
||||||||||||||||||||||||||||||||||||
|
Amount
|
Percent
|
Amount
|
Percent
|
Amount
|
Percent
|
Amount
|
Percent
|
Amount
|
Percent
|
|||||||||||||||||||||||||||||||
|
(in
thousands)
|
||||||||||||||||||||||||||||||||||||||||
|
Residential
real estate ¹
|
$ | 177,720 | 30.3 | % | $ | 171,061 | 29.3 | % | $ | 127,113 | 28.6 | % | $ | 117,815 | 29.0 | % | $ | 124,367 | 30.7 | % | ||||||||||||||||||||
|
Commercial
real estate
|
240,823 | 41.0 | % | 229,867 | 39.4 | % | 161,071 | 36.2 | % | 152,128 | 37.4 | % | 143,552 | 35.4 | % | |||||||||||||||||||||||||
|
Commercial
²
|
93,928 | 16.0 | % | 99,397 | 17.0 | % | 83,622 | 18.8 | % | 74,033 | 18.2 | % | 69,651 | 17.2 | % | |||||||||||||||||||||||||
|
Consumer
|
74,766 | 12.7 | % | 83,536 | 14.3 | % | 73,299 | 16.5 | % | 62,944 | 15.5 | % | 67,388 | 16.6 | % | |||||||||||||||||||||||||
|
Total
loans
|
587,237 | 100.0 | % | 583,861 | 100.0 | % | 445,105 | 100.0 | % | 406,920 | 100.0 | % | 404,958 | 100.0 | % | |||||||||||||||||||||||||
|
Less:
|
||||||||||||||||||||||||||||||||||||||||
|
Allowance
for loan losses
|
(8,622 | ) | (7,564 | ) | (6,977 | ) | (6,680 | ) | (6,640 | ) | ||||||||||||||||||||||||||||||
|
Net
loans
|
$ | 578,615 | $ | 576,297 | $ | 438,128 | $ | 400,240 | $ | 398,318 | ||||||||||||||||||||||||||||||
|
¹
|
Includes
loans secured by 1-4 family residential dwellings, 5+ family residential
dwellings, home equity loans and residential construction
loans. Excludes residential mortgage loans held for
sale.
|
|||||||||||||
|
²
|
Includes
commercial and industrial loans, agricultural loans and obligations (other
than securities and leases) of states and political subdivisions in the
United States.
|
|||||||||||||
Between
December 31, 2005 and December 31, 2009 our commercial real estate portfolio
increased $97.271 million or 67.8%. At December 31, 2009, commercial
real estate loans comprised 41.0% of our total loan portfolio. This
compares to 35.4% at December 31, 2005. Throughout the period covered
in the table above, we concentrated our efforts on opening new offices and
hiring commercial lenders in large, more densely populated
markets. These efforts also contributed to the increase in the
outstanding balances in our commercial loan portfolio. At December
31, 2009, commercial loan balances outstanding totaled $93.928
million. This compares to $69.651 million at December 31,
2005.
In
addition, during the first quarter of 2007 we acquired Provantage to improve our
residential mortgage lending capabilities and increase the outstanding balances
in our residential mortgage portfolio. At December 31, 2009, the
outstanding balance of our residential mortgage portfolio was
$177.720 million. This compares to $117.815 million at December
31, 2006, a $59.905 million or 50.8% increase over the three-year period since
the acquisition of Provantage.
During
2009, we tightened our underwriting standards for consumer lending, principally
installment-type loans secured by new and used automobiles, due to increased
loan charge-off levels and challenges posed by the economic
recession. These actions, as well as a decline in demand for consumer
credit, resulted in an $8.770 or 10.5% decrease in consumer loans outstanding
between December 31, 2008 and December 31, 2009. The substantial
majority of our consumer loans outstanding are indirect loans originated through
automobile dealerships located in our central and upstate New York
markets. At December 31, 2008, our indirect automobile loan portfolio
was comprised of 5,576 accounts, totaling $62.713 million. This
compares to 5,382 accounts totaling $55.582 million at December 31, 2009, a 3.5%
net decrease in accounts and an 11.4% net decrease in indirect automobile loans
outstanding.
The
following table sets forth the amount of loans maturing in our
portfolio. The full principal amounts outstanding for all loans are
shown based on their final maturity date. The full principal amounts
outstanding on demand loans without a repayment schedule and no stated maturity,
financed accounts receivable, and overdrafts are reported as due within one
year. The table has not been adjusted for scheduled principal
payments or anticipated principal prepayments.
Loan
Maturity Table:
|
Within
One
Year
|
One
Through
Five
Years
|
More
Than
Five
Years
|
Total
|
|||||||||||||
|
(in
thousands)
|
||||||||||||||||
|
Residential
real estate
|
$ | 2,662 | $ | 24,583 | $ | 150,475 | $ | 177,720 | ||||||||
|
Commercial
real estate
|
22,331 | 22,269 | 196,223 | 240,823 | ||||||||||||
|
Commercial
|
45,311 | 19,729 | 28,888 | 93,928 | ||||||||||||
|
Consumer
|
4,834 | 59,275 | 10,657 | 74,766 | ||||||||||||
|
Total
loans receivable
|
$ | 75,138 | $ | 125,856 | $ | 386,243 | $ | 587,237 | ||||||||
The
following table sets forth fixed and adjustable rate loans with maturity dates
after December 31, 2010.
Table of
Fixed and Adjustable Rate Loans:
|
Due
After December 31, 2010
|
||||||||||||
|
Fixed
|
Adjustable
|
Total
|
||||||||||
|
(in
thousands)
|
||||||||||||
|
Residential
real estate
|
$ | 122,131 | $ | 52,928 | $ | 175,059 | ||||||
|
Commercial
real estate
|
131,729 | 86,763 | 218,492 | |||||||||
|
Commercial
|
38,439 | 10,178 | 48,617 | |||||||||
|
Consumer
|
67,122 | 2,809 | 69,931 | |||||||||
|
Total
loans
|
$ | 359,421 | $ | 152,678 | $ | 512,099 | ||||||
Commitments and Lines of
Credit. Standby and commercial letters of credit are
conditional commitments issued by us to guarantee the performance of a customer
to a third party. Those guarantees are primarily issued to support
public and private borrowing arrangements, including bond financing and similar
transactions. The credit risk involved in issuing standby and
commercial letters of credit 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, 2009 and December 31, 2008, standby and commercial letters of
credit totaled $13.451 million and $12.779 million, respectively. At
December 31, 2009 and December 31, 2008, the fair value of the Bank’s standby
letters of credit was not significant. The following table summarizes
the expirations of our standby and commercial letters of credit as of December
31, 2009.
Standby
and Commercial Letters of Credit Expiration Table:
|
Commitment
Expiration of Standby Letters of Credit
|
||||
|
(in
thousands)
|
||||
|
Within
one year
|
$ | 1,564 | ||
|
After
one but within three years
|
263 | |||
|
After
three but within five years
|
5,445 | |||
|
Five
years or greater
|
6,179 | |||
|
Total
|
$ | 13,451 | ||
In
addition to standby letters of credit, we have issued lines of credit and other
commitments to lend to our customers. Commitments to extend credit
are agreements to lend to a customer as long as there is no violation of any
condition established in the loan agreement. Commitments generally
have fixed expiration dates or other termination clauses and may require payment
of a fee. These include home equity lines of credit, commitments for
residential and commercial construction loans, commercial letters of credit, and
other personal and commercial lines of credit. At December 31, 2009
and December 31, 2008, we had outstanding unfunded loan commitments of $96.859
million and $126.717 million, respectively, representing a $29.858 million or
23.6% decrease period over period. The significant decrease in the
unfunded loan commitments was primarily due to a decrease in commercial real
estate and other construction loan commitments, and to a lesser extent, a
decrease in the unused portion of commercial lines of credit.
Asset Quality and Risk
Elements
General. One of
our key objectives is to maintain strong credit quality of the Bank’s loan
portfolio. The following narrative provides summary information and
describes our experience regarding the quality and risk elements of our loan
portfolio.
Delinquent
Loans. At December 31, 2009, we had $8.469 million of loans
that were 30 to 89 days past due (excluding nonperforming
loans). This equaled 1.44% of total loans outstanding. By
comparison, at December 31, 2008 we had $6.095 million of loans that were 30 to
89 days past due (excluding nonperforming loans). This equaled 1.04%
of total loans outstanding. The increase in delinquent loans between
the periods was principally due to an increase in the level of delinquent loans
in the commercial real estate loan portfolio and, to a lesser extent, an
increase in delinquency in the 1-4 family residential mortgage
loans. We attribute the increase in delinquency in these sectors of
the loan portfolio to the regional and national economic recession and the
related difficulties it has placed on many of our borrowers’ ability to repay
their loans in a timely manner.
Nonaccrual, Past Due and
Restructured Loans. The following chart sets forth information
regarding nonperforming assets for the periods stated.
Table of
Nonperforming Assets:
|
At
December 31,
|
||||||||||||||||||||
|
2009
|
2008
|
2007
|
2006
|
2005
|
||||||||||||||||
|
(in
thousands)
|
||||||||||||||||||||
|
Loans
in Nonaccrual Status:
|
||||||||||||||||||||
|
Residential
real estate
|
$ | 702 | $ | 439 | $ | 895 | $ | 450 | $ | 327 | ||||||||||
|
Commercial
real estate
|
9,843 | 4,516 | 4,341 | 1,626 | 2,287 | |||||||||||||||
|
Commercial
|
1,568 | 843 | 843 | 271 | 1,191 | |||||||||||||||
|
Consumer
|
36 | 47 | 7 | - | 61 | |||||||||||||||
|
Total
nonaccruing loans
|
12,149 | 5,845 | 6,086 | 2,347 | 3,866 | |||||||||||||||
|
Loans
Contractually Past Due 90 Days or More and Still Accruing
Interest
|
731 | 1,366 | 50 | 182 | 181 | |||||||||||||||
|
Troubled
Debt Restructured Loans
|
- | - | - | - | 871 | |||||||||||||||
|
Total
nonperforming loans
|
12,880 | 7,211 | 6,136 | 2,529 | 4,918 | |||||||||||||||
|
Other
Real Estate Owned ¹
|
1,684 | 158 | 247 | 103 | 20 | |||||||||||||||
|
Total
nonperforming assets
|
$ | 14,564 | $ | 7,369 | $ | 6,383 | $ | 2,632 | $ | 4,938 | ||||||||||
|
Total
nonperforming assets as a percentage of total assets
|
1.61 | % | 0.80 | % | 0.80 | % | 0.35 | % | 0.66 | % | ||||||||||
|
Total
nonperforming loans as a percentage of total loans
|
2.19 | % | 1.24 | % | 1.38 | % | 0.62 | % | 1.21 | % | ||||||||||
|
¹
|
Includes
only properties acquired through insubstance foreclosure, voluntary deed
transfer, legal foreclosure or similar proceedings. Excludes
properties acquired by the Company for its own
development.
|
||||||||||
Total
nonperforming loans, including nonaccruing loans and loans 90 days or more past
due and still accruing interest, increased from $7.211 million at December 31,
2008 to $12.880 million at December 31, 2009, a $5.669 million or 78.6% increase
between the periods. The increase in nonperforming loans between the
comparable periods was principally due to an increase in nonperforming loans
secured by commercial real estate properties. In particular, during
2009, three commercial real estate borrowers with an outstanding loan balance at
December 31, 2009 totaling $6.241 million were moved from accrual to nonaccrual
status. We recorded partial charge-offs totaling $514 thousand on the
loans to two of these borrowers during 2009 and identified $77 thousand of
specific impairment in the allowance for loans losses on the third borrower at
December 31 2009. These amounts were determined based on the
estimated fair value of the properties we hold as collateral on these loans,
less the estimated costs to sell. The economic slowdown experienced
in the central and upstate New York State markets in which we operate have
negatively impacted the operating cash flows of many of our commercial real
estate borrowers, including these three borrowers, which contributed
significantly to the increase in nonperforming loans in this category during
2009. Nonperforming loans were 2.19% of total loans outstanding at
December 31, 2009 and 1.24% of total loans outstanding at December 31,
2008.
Impaired
Loans. The following table provides information on impaired
loans for the periods presented:
|
As
of and for the Year Ended
December 31, |
||||||||
|
2009
|
2008
|
|||||||
|
(in
thousands)
|
||||||||
|
Impaired
Loans
|
$ | 12,957 | $ | 8,620 | ||||
|
Allowance
for Impaired Loans
|
721 | 1,160 | ||||||
|
Average
Recorded Investment in Impaired Loans
|
12,171 | 7,327 | ||||||
The level
of impaired loans increased from $8.620 million at December 31, 2008 to $12.957
million at December 31, 2009. In spite of the significant increase in
total impaired loans, only $5.844 million of the impaired loans required
specific reserve allocations totaling $721 thousand. By comparison,
at December 31, 2008, $5.120 million of the impaired loans had a specific
allowance for loan loss reserve allocation of $1.160 million. We
attribute the decrease in specific reserve allocations to management’s general
practice of obtaining strong collateral positions in the loans it
originates. In addition, during 2009 we recorded charge-offs on
several loans in which allowance for loan loss impairment amounts were
identified in previous periods.
OREO and Repossessed
Assets. OREO and repossessed assets consists of real estate
and other property formerly pledged as collateral on loans that have been
acquired by us through foreclosure proceedings or repossession, as well as, real
estate properties acquired by us through an acceptance of a deed in lieu of
foreclosure or in-substance foreclosure. OREO is carried at the lower
of the recorded investment in the loan or the fair value of the real estate,
less estimated costs to sell. Between December 31, 2008 and December
31, 2009, we recorded a significant increase in OREO due largely to the
in-substance acquisition of a building formerly used to collateralize a loan to
an automobile dealership.
Potential Problem
Loans. Potential problem loans are loans that are currently
performing, but where known information about possible credit problems of the
related borrowers causes management to have doubts as to the ability of such
borrowers to comply with the present loan repayment terms and may
result in disclosure of such loans as nonperforming at some time in the
future. Potential problem loans are typically loans classified by our
loan rating system as “substandard.” Potential problem loans may
fluctuate significantly from period to period due to a rating upgrade of loans
previously classified as substandard or a rating downgrade of loans previously
carried in a less risky credit classification, particularly those with balances
in excess of $1.000 million. We have identified
through normal credit review procedures potential problem loans totaling $24.866
million or 4.2% of total loans outstanding at December 31, 2009. By
comparison, at December 31, 2008, potential problem loans totaled $16.099
million or 2.8% of total loans outstanding. This represents an $8.767
million or 54.4% increase in potential problem loans between December 31, 2008
and December 31, 2009. We generally attribute the increase in
potential problem loans to the weak and/or declining operating performance of
many of our commercial borrowers’ due to difficult economic
conditions. Management cannot predict economic conditions or other
factors that may impact each potential problem loan. Accordingly,
there can be no assurance that other loans will not become 90 days or more past
due, be placed on nonaccrual status, become restructured, or require increased
allowance coverage and provision for loan losses.
Loan
Concentrations. We classify our loan portfolio by collateral
type and industry to determine and monitor the level of our loan
concentrations. We generally consider industry concentrations to
exist when the total loan obligations (outstanding loans and unfunded
commitments) to the industry exceed 25% of the Bank’s total risk-based
capital. The Bank’s total risk-based capital at December 31, 2009 was
$77.780 million, which established our industry concentration threshold at
$19.445 million. In addition, our policy on loan concentrations
targets maximum industry concentration at 50% of the Bank’s total risk-based
capital or $38.890 million at December 31, 2009. We also review the
geographic concentration and economic trends within each industry concentration
to further segment and analyze the risk.
Furthermore,
the OCC generally considers construction and development loans in excess of 100%
of the Bank’s risk-based capital and nonowner occupied commercial real estate
loans, including multi-family and construction and development, in excess of
300% of the Bank’s risk-based capital ($233.340 million at December 31, 2009) to
be concentrations of credit. We did not exceed either of the OCC
benchmarks during 2009 and actively monitor our portfolio diversification by
loan-type, as well as industry type. The following narrative
summarizes our concentrations of credit.
At
December 31, 2009 our outstanding loan and unfunded commitments to nonowner
occupied commercial real estate borrowers, as defined in regulatory, guidance
totaled $185.922 million or 239% of total risk-based
capital. Although non-owner occupied commercial real estate loans
have been identified by the OCC as a higher risk loan type than owner occupied
commercial real estate, our historical experience does not support this
conclusion. Between December 31, 2008 and December 31, 2009 the level
of delinquent loans, nonperforming loans and potential problem loans secured by
owner and nonowner occupied commercial real estate has increased markedly due to
difficult economic conditions. Commercial real estate secured
delinquent loans 30 to 89 days past due (excluding nonperforming loans)
increased from $996 thousand or 0.4% of commercial real estate loans outstanding
at December 31, 2008 to $4.692 million or 1.9% of commercial real estate loans
outstanding at December 31, 2009. Similarly, nonperforming commercial
real estate loans increased from $5.438 million or 2.4% of commercial real
estate loans outstanding at December 31, 2008 to $6.716 million or 2.8% of
commercial real estate loans outstanding at December 31,
2009. Accordingly, we closely monitor the financial condition of
borrowers whose loans are secured by commercial real estate.
Due to
weakening economic conditions, during 2009 we did not proactively seek new
construction and development loans. This decreased aggregate
outstanding loan balances and unfunded commitments from $47.137 million or 65.0%
of the Bank’s total risk-based capital at December 31, 2008 to $24.538 million
or 31.6% of the Bank’s total risk-based capital at December 31,
2009. These levels are well within the 100% of risk-based capital
benchmark established by the OCC. However, similar to our commercial
real estate secured loan portfolio, the level of nonperforming loans in this
loan type increased significantly between December 31, 2008 and December 31,
2009. Nonperforming construction and development loans outstanding at
December 31, 2009 totaling $3.604 million were comprised of loans to two
borrowers, as compared to no nonperforming loan balances at December 31
2008. Accordingly, we closely monitor the progress of construction
and the financial condition of borrowers whose loans are secured by undeveloped
or underdeveloped commercial real estate.
At
December 31, 2009 we had 94 loans with $34.945 million in total loan obligations
to borrowers who operate in the automotive and other vehicle dealership
industry. The total loan obligations to this industry sector
represented 44.9% of the Bank’s total risk-based capital and consisted of more
than 45 borrowers whose primary revenue is derived from the retail sale and
servicing of new and used motor vehicles, motorcycles, commercial and/or
recreational vehicles. Loans to this industry consist of commercial
real estate mortgages, equipment financing, working capital lines of credit, and
inventory lines (dealer floor plans). We maintained 21 dealer floor
plan lines within this portfolio totaling $16.220 million, $12.649 million of
which was outstanding at December 31, 2009. Due to the significant
risk posed by dealer floor plan lending, management monitors the dealer floor
plan loans by conducting inventory reviews on a monthly basis. At
December 31, 2009, there were 11 loans to 7 borrowers within the automotive and
other vehicle industry concentration with $5.689 million in aggregate loan
obligations outstanding that were classified as substandard. Consumer
demand for new and used automobiles and recreational vehicles can vary
significantly from period to period due to a variety of factors including, but
not limited, to consumer spending, employment, inflation and fuel
prices. In addition, changes in market interest rates can affect
consumer demand and inventory carrying costs. We monitor these
factors and adjust our lending policies and practices to borrowers in this
sector in an effort to mitigate credit risk.
At
December 31, 2009, we had 68 loans with $33.443 million in total loan
obligations or 43.0% of the Bank’s total risk-based capital to borrowers who
operate in the lodging industry, including hotels, motels, bed and breakfast
inns, and a limited number of campgrounds and boarding houses. At
December 31, 2009 the loans to this industry sector were comprised of 48
borrowers. The single largest borrower has $5.977 million in total
loans outstanding on 6 separate motel properties. Another 9 borrowers
have loans exceeding $1.000 million. The lodging properties that we
finance are geographically dispersed throughout our market area and the broader
statewide region. Many of these properties, however, are dependent
upon tourism and have a seasonality that peaks in July and August. In
addition, the lodging industry, particularly the luxury segment, is affected by
personal income, employment levels and corporate profits, all of which
experienced declines during 2009. At December 31, 2009, $30.009
million of these loans were deemed to be of acceptable risk (“pass-rated”) by
our management, with no delinquency noted. Five loans in the
hotel/motel sector with an outstanding balance of $2.798 million were risk rated
as substandard at December 31, 2009 due to insufficient cash flow generated by
the operations of the business.
At
December 31, 2009, loan obligations to the healthcare industry, including hospitals and
medical practices, totaled $17.438 million or 22.4% of the Bank’s total
risk-based capital. This portfolio was comprised of approximately 58
loans including 7 loans to hospitals. The largest borrower in this
industry was also the Bank’s largest borrower and had outstanding loans and
unfunded commitments totaling $8.998 million at December 31,
2009. Within this industry sector only 1 borrower with 2 outstanding
loans totaling $179 thousand were nonperforming and classified as
substandard.
At
December 31, 2009, loan obligations to the residential and independent care
facilities totaled $20.478 million or 26.3% of the Bank’s total risk-based
capital. This portfolio was comprised of approximately 64 loans at
December 31, 2009. The residential, independent and assisted care
living facilities depend significantly on Medicare and other government
reimbursement rates, which are projected to decrease moderately during
2010. One loan within this portfolio with an outstanding balance of
$1.821 million was classified as a special mention credit at December 31,
2009.
At
December 31, 2009, loan obligations to the finance and insurance industry
totaled $19.514 million or 25.1% of the Bank’s total risk-based
capital. This portfolio is comprised of 31 loans at December 31,
2009. Since the substantial majority of the loan obligations to this
sector are to borrowers who provide short and long term financing for the
construction and acquisition of real property, this industry sector is
inherently dependent on the residential and commercial real estate
markets. For these reasons, the financing provided by our borrowers
to their customers are closely monitored. Two loans within this
industry sector with an outstanding balance totaling $230 thousand were
classified as special mention at December 31, 2009.
Although
we have not identified “strip malls” as its own industry classification, and
therefore, not subject to our single industry concentration limit, we have
identified $37.071 million of total loan obligations to borrowers in this sector
at December 31, 2009. Within this segment 1 borrower with $3.875
million in loans outstanding was classified as substandard. A second
borrower in this sector with an outstanding loan balance of $170 thousand was
classified as nonperforming.
At
December 31, 2009, we had 25 borrowers whose total loan obligations were equal
to or exceeded $3.889 million or 5.0% of our total risk-based
capital. In aggregate, these borrowers’ total loan obligations were
$129.720 million comprised of $105.488 million in outstanding loans and $24.233
million in unfunded commitments. Although these large relationships
were dispersed among borrowers who operate in various industries, the decline in
the financial condition of one or more of our large borrowers could
significantly impact the credit quality of our loan portfolio. At
December 31, 2009, 1 of these large borrowers, with total loans outstanding of
$1.598 million was classified as substandard. In addition, there was
an additional $3.469 million in unfunded commitments to this
borrower.
Summary of Loss Experience
(Charge-Offs) and Allowance for Loan Losses. The following
table sets forth the analysis of the activity in the allowance for loan losses,
including charge-offs and recoveries, for the periods indicated.
Analysis
of the Allowance for Loan Losses Table:
|
Years
Ended December 31,
|
||||||||||||||||||||
|
2009
|
2008
|
2007
|
2006
|
2005
|
||||||||||||||||
|
(in
thousands)
|
||||||||||||||||||||
|
Balance
at beginning of year
|
$ | 7,564 | $ | 6,977 | $ | 6,680 | $ | 6,640 | $ | 6,250 | ||||||||||
|
Charge
offs:
|
||||||||||||||||||||
|
Residential
real estate
|
2 | 37 | 109 | 56 | 20 | |||||||||||||||
|
Commercial
real estate
|
1,660 | 87 | 120 | 2 | - | |||||||||||||||
|
Commercial
|
160 | 234 | 216 | 1,161 | 364 | |||||||||||||||
|
Consumer
|
1,378 | 1,028 | 721 | 887 | 1,091 | |||||||||||||||
|
Total
charge offs
|
3,200 | 1,386 | 1,166 | 2,106 | 1,475 | |||||||||||||||
|
Recoveries:
|
||||||||||||||||||||
|
Residential
real estate
|
8 | 104 | 22 | 31 | 39 | |||||||||||||||
|
Commercial
real estate
|
73 | 43 | 105 | 73 | - | |||||||||||||||
|
Commercial
|
64 | 41 | 137 | 143 | 29 | |||||||||||||||
|
Consumer
|
543 | 255 | 299 | 339 | 217 | |||||||||||||||
|
Total
recoveries
|
688 | 443 | 563 | 586 | 285 | |||||||||||||||
|
Net
charge-offs
|
2,512 | 943 | 603 | 1,520 | 1,190 | |||||||||||||||
|
Provision
for loan losses
|
3,570 | 1,530 | 900 | 1,560 | 1,580 | |||||||||||||||
|
Balance
at end of year
|
$ | 8,622 | $ | 7,564 | $ | 6,977 | $ | 6,680 | $ | 6,640 | ||||||||||
|
Ratio
of net charge-offs during the year to average loans outstanding during the
year
|
0.42 | % | 0.19 | % | 0.14 | % | 0.38 | % | 0.30 | % | ||||||||||
|
Allowance
for loan losses to total loans
|
1.47 | % | 1.30 | % | 1.57 | % | 1.64 | % | 1.64 | % | ||||||||||
|
Allowance
for loan losses to nonperforming loans
|
67 | % | 105 | % | 114 | % | 264 | % | 135 | % | ||||||||||
We
recorded $2.512 million in net charge-offs on loans during
2009. Based on $597.762 million of average loans outstanding during
2009, this represents 0.42% in net charge-offs. By comparison, during
2008 we recorded $943 thousand in net charge-offs on loans or 0.19% on average
loans outstanding of $498.997 million. During 2009, we experienced a
significant increase in the amount of net charge-offs on loans secured by
commercial real estate and, to a lesser extent, an increase in net charge-offs
on consumer loans. The weak national and regional economy negatively
affected the operating cash flows of many businesses and industries, including
most sectors of the commercial real estate market. The operating
performance of a significant number of our commercial real estate borrowers
weakened during 2009 causing significant increases in delinquent loans,
nonperforming loans and ultimately charge-offs.
Net
charge-offs on consumer loans increased from $773 thousand in 2008 to $835
thousand in 2009, a $62 thousand or 8.0% increase. We attribute the increase in
net charge-offs on consumer loans to a weak economy, higher levels of
unemployment and underemployment and a moderate increase in the average
outstanding balance of consumer loans between 2008 and 2009.
During
2009 net charge-offs on residential mortgage loans and commercial loans were
low. We recorded a $6 thousand net recovery in residential mortgage
loans and $96 thousand in net-charge offs on commercial loans. We do
anticipate, however, greater amounts of net charge-offs on commercial loans
during 2010 due to an increase in delinquency and increased operating
difficulties among our commercial borrowers.
The
allowance for loan losses was $8.622 million or 1.47% of total loans outstanding
at December 31, 2009. This compares to $7.564 million or 1.30% of
total loans outstanding at December 31, 2008. During 2009 we
identified a significant number and amount of substandard loans, which in
combination with other weaker credit quality measures, including a significant
increase in nonperforming loans, required an increase in the allowance for loan
losses. We recorded $3.570 million in the provision for loan losses
during 2009 due to these factors, an increase in substandard loans and a
weakened credit and economic environment. By comparison, we recorded
$1.530 million in the provision for loan losses during 2008.
The
allowance for loan losses to nonperforming loans decreased from 105% at December
31, 2008 to 67% at December 31, 2009. During 2009, we charged-down the balances
on several nonperforming loans, which reduced the allowance for loan losses and
the ratio of the allowance for loan losses to nonperforming loans
to. Most of these charge-downs included specific impairment amounts
identified in previous periods.
Both our
management and Board of Directors deemed the allowance for loan losses adequate
at December 31, 2009 and December 31, 2008. In spite of overall
weaker loan quality during 2009 and an increase in total impaired loans to
$12.957 million we only identified $721 thousand of specific reserves on
impaired loans at December 31, 2009. Of the $12.957 million of
impaired loans, only $5.844 million of the impaired loans required specific
allowance for loan loss reserve allocations. By comparison, at
December 31, 2008, $5.120 million of the $8.620 million in impaired loans had a
specific allowance for loan loss reserve allocation of $1.160
million. This means that at December 31, 2009, we allocated $7.901
million of the allowance for loans losses to factors other than specifically
identified loan impairment amounts, versus $6.404 million at December 31, 2008.
This represents a $1.497 million or 23.4% increase attributed to these other
factors, including increases in charge-offs, nonperforming, delinquent and
potential problem loans. We attribute the decrease in specific
reserve allocations to our general practice of obtaining strong collateral
positions in the loans we originate. Our determination of the
adequacy of the allowance for loan losses is based on our evaluation of the
credit quality of the loan portfolio, our historical loss experience, current
economic conditions, current and past underwriting and credit administration
practices. However, because the Allowance for Loan Losses is an
estimate of probable losses and is based on management’s experience and
assumptions, there is no certainty that the allowance for loan losses will be
sufficient to cover actual loan losses. Actual loan losses in excess
of the allowance for loan losses would negatively impact our financial condition
and results of operations.
Allocation of the Allowance for Loan
Losses. We allocate our allowance for loan losses among the
loan categories indicated in the following table. Although we
estimate and allocate probable losses by category of loan, this allocation
should not be interpreted as the precise amount of future charge-offs or a
proportional distribution of future charge-offs among loan
categories. Additionally, since management regards the allowance for
loan losses as a general balance, the amounts presented do not represent the
total balance available to absorb future charge-offs that might occur within the
designated categories.
Subject
to the qualifications noted above, an allocation of the allowance for loan
losses by principal classification and the proportion of the related loan
balance represented by the allocation is presented below for the periods
indicated.
Loan Loss
Summary Allocation Table:
|
At
December 31,
|
||||||||||
|
2009
|
2008
|
2007
|
2006
|
2005
|
||||||
|
Amount
of
Allowance
for
Loan
Losses
|
Percent
of
Allowance
for
Loan
Losses
in
Each
Category
|
Amount
of
Allowance
for
Loan
Losses
|
Percent
of
Allowance
for
Loan
Losses
in
Each
Category
|
Amount
of
Allowance
for
Loan
Losses
|
Percent
of
Allowance
for
Loan
Losses
in
Each
Category
|
Amount
of
Allowance
for
Loan
Losses
|
Percent
of
Allowance
for
Loan
Losses
in
Each
Category
|
Amount
of
Allowance
for
Loan
Losses
|
Percent
of
Allowance
for
Loan
Losses
in
Each
Category
|
|
|
(in
thousands)
|
||||||||||
|
Residential
real estate
|
$ 820
|
9.5%
|
$ 538
|
7.1%
|
$ 607
|
8.7%
|
$ 501
|
7.5%
|
$ 595
|
9.0%
|
|
Commercial
real estate
|
4,587
|
53.2%
|
3,143
|
41.6%
|
2,969
|
42.6%
|
3,083
|
46.2%
|
3,171
|
47.8%
|
|
Commercial
|
1,436
|
16.7%
|
2,108
|
27.9%
|
1,799
|
25.8%
|
1,462
|
21.9%
|
1,512
|
22.8%
|
|
Consumer
|
1,443
|
16.7%
|
1,540
|
20.4%
|
1,383
|
19.8%
|
1,114
|
16.7%
|
1,114
|
16.8%
|
|
Unallocated
|
337
|
3.9%
|
235
|
3.1%
|
219
|
3.1%
|
520
|
7.8%
|
248
|
3.7%
|
|
Total
|
$ 8,622
|
100.0%
|
$ 7,564
|
100.0%
|
$ 6,977
|
100.0%
|
$ 6,680
|
100.0%
|
$ 6,640
|
100.0%
|
During
2009, we significantly increased our allowance for loan losses allocation on
commercial real estate loans due to increases in charge-offs, delinquent loans,
and nonperforming loans. In addition, due to weak economic
conditions, including higher vacancy rates on commercial real estate properties,
we raised the allocation amounts in this sector of the
portfolio. Between December 31, 2008 and December 31, 2009, the
allocation for commercial real estate loans increased from $3.143 million or
41.6% of the allowance for loan losses to $4.587 million or 53.2% of the
allowance for loan losses. Conversely, a smaller proportion of the
allowance for loan losses was allocated to commercial loans due to a decrease in
the historical loss factor applied to this sector of the portfolio, offset, in
part, by an increase in allocation amounts due to weak economic
conditions. The change in the allowance for loan loss amounts
allocated to the residential real estate loans and consumer loans were generally
due to changes in the composition of our loan portfolio. During 2009
the outstanding balance of consumer loans, as well as the amounts allocated in
the allowance for loan losses for consumer loans,
decreased. Conversely, the outstanding balance of residential
mortgage loans and the amounts allocated to the allowance for loans losses for
residential mortgage loans, increased.
Other Nonearning 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 minimum
noninterest bearing target balances at our correspondent banks. At
December 31, 2009, we maintained $10.004 million or 1.1% of total assets in
these categories of nonearning assets. This compares to $8.467
million or 0.9% of total assets at December 31, 2008.
Premises and
Equipment. The net book value of premises and equipment
decreased $478 thousand or 7.4%, from $6.482 million at December 31, 2008 to
$6.004 million at December 31, 2009. During 2009 we did not purchase,
dispose or sell any Company or Bank premises. The decrease in
premises and equipment between December 31, 2008 and December 31, 2009 was due
principally to an increase in the accumulated depreciation on the Company’s
equipment.
Bank-Owned Life
Insurance. The cash surrender value of bank-owned life
insurance at December 31, 2009 was $16.994 million, as compared to $16.402
million at December 31, 2008, a $592 thousand or 3.6%
increase. Throughout 2009, the Bank held policies on 15 former and
current members of the Bank’s senior management. The cash surrender
value on each policy was increased throughout the year at the net crediting rate
applied by the various insurance carriers. The policies’ were issued
by five life insurance companies who all carry strong financial strength
ratings. The net crediting rates applied on each policy were
determined by each insurance carrier based on the performance of their general
account.
Goodwill and Other Intangible
Assets. Goodwill was unchanged between December 31, 2008 and
December 31, 2009. During 2009 we did not acquire any new businesses,
nor did we incur any impairment on previous acquisitions. Goodwill
totaled $4.619 million at December 31, 2009 and 2008.
The
Company has only one reporting unit. Annually we test the Company’s
goodwill for impairment. Based on our testing, no impairment was
warranted during 2009. Should our common stock value trade
consistently below our book value, or other triggering event, we would
re-evaluate the amount of goodwill through an impairment test. If
impairment is warranted, the amount would be recorded through the income
statement as a reduction to current period earnings.
During
2008 other intangible assets decreased $99 thousand, from $107 thousand at
December 31, 2008 to $8 thousand at December 31, 2009. The decrease
was due to the amortization of core the deposit intangible asset recorded in
prior period bank branch acquisitions.
Pension Asset. At
December 31, 2009, our pension plan assets exceeded our pension plan liabilities
by $1.247 million resulting in the recording of a pension asset. By
comparison at December 31, 2008, our pension plan liabilities exceeded our
pension plan assets by $869 thousand, resulting in a plan
liability. The swing between a pension liability at December 31, 2008
and pension asset at December 31, 2009 was due to several
factors. During 2009, the assets held by our pension plan generated
strong investment returns. In addition during the fourth quarters of
2009 and 2008, we contributed $1.000 million and $2.000 million, respectively,
toward the plan. The increase in the plan’s assets due to these
factors was offset, in part, by an increase in the plan participant
liability. See Note 11 of the Consolidated Financial Statements
contained in PART II, Item 8, of this document for additional detail on the
Company’s defined benefit pension plan.
Other
Assets. Other assets are principally comprised of OREO,
interest receivable, prepaid taxes, prepaid insurance, prepaid FDIC
insurance premiums, computer software, net deferred tax assets, deferred taxes
on investment securities, deferred taxes on the pension plan, other assets,
returned/rejected check items, other prepaid items, other intangible assets and
other accounts receivable. Other assets increased $6.191 million or
72.9%, from $8.489 million at December 31, 2008 to $14.680 million at December
31, 2009. The substantial increase in other asset between the periods
was due in large part to our FDIC prepaid deposit insurance
assessment. In the fourth quarter of 2009, the FDIC adopted a final
rule to assess and collect from its member institutions a special prepaid
deposit insurance assessment to replenish its Deposit Insurance
Fund. The special prepaid assessment was collected from member
institutions in December 2009 and included estimated quarterly FDIC insurance
premiums for the fourth quarter of 2009 and for all quarterly periods in 2010,
2011 and 2012. The Bank’s prepaid deposit insurance assessment
totaled $6.248 million at December 31, 2009 and will be amortized quarterly
during 2010, 2011 and 2012 until it is fully exhausted.
Composition of
Liabilities
Deposits. Deposits
are our primary funding source. At December 31, 2009 and December 31,
2008 deposits represented approximately 90% of our total
liabilities. Total deposits at December 31, 2009 were $753.740
million. This compares to $765.873 million at December 31, 2008, a
$12.133 million or 1.6% decrease. During 2009, we tempered our asset
growth plan and actively deleveraged the Company. This entailed
targeting strategic reductions in certain categories of deposit liabilities, as
well as selected asset categories. The deleveraging plan was executed
in an effort to mitigate risk, increase net income and boost our capital
position in light of challenging economic conditions. The execution
of the plan included significant interest rate reductions in all of our deposit
liability categories, including, savings accounts, NOW accounts, money market
deposits and certificates of deposit. There is an inherent lag
between our deposit pricing actions and the flow of customer
deposits. For this reason and our 2008 growth strategy, our average
outstanding deposit balances increased from $714.015 million in 2008 to $779.430
million in 2009. Conversely, due to the implementation of our
deleveraging strategy our 2009 year end deposit liability balances dropped below
2008 year-end deposit liability balances.
During
2009 the composition of our deposit liabilities changed
significantly. In particular, our interest-bearing nonmaturity
deposit balances increased $35.750 million or 10.8% between December 31, 2008
and December 31, 2009, while our certificate of deposit portfolio (including
certificates over and under $100 thousand) decreased $50.755 million or 14.9%
over the same period. We decreased the interest rates paid on our
short-term certificates of deposit and maintained relatively competitive
interest rates on our money market and NOW accounts during 2009. Our
depositors reacted by increasing their NOW and money market deposit account
balances, and to a lesser extent, savings accounts, while reducing the funds
invested in certificates of deposit, particularly those with maturities of one
year or less.
The
following table indicates the amount of our time accounts by time remaining
until maturity as of December 31, 2009.
Time
Accounts Maturity Table:
|
Maturity
as of December 31, 2009
|
||||||||||||||||||||
|
3
Months
or
Less
|
Over
3 to
6
Months
|
Over
6 to
12
Months
|
Over
12
Months
|
Total
|
||||||||||||||||
|
(in
thousands)
|
||||||||||||||||||||
|
Certificates
of Deposit of $100,000 or more
|
$ | 46,833 | $ | 15,417 | $ | 16,757 | $ | 46,411 | $ | 125,418 | ||||||||||
|
Certificates
of Deposit less than $100,000
|
16,326 | 17,571 | 35,181 | 96,200 | 165,278 | |||||||||||||||
|
Total
of time accounts
|
$ | 63,159 | $ | 32,988 | $ | 51,938 | $ | 142,611 | $ | 290,696 | ||||||||||
Borrowings and Other Contractual
Obligations. Total borrowed funds consist of short-term and
long-term borrowings. Short-term borrowings consist primarily of
securities sold under agreements to repurchase with our customers and other
third parties. Long-term borrowings consist of monies we borrowed
from the FHLBNY for various asset funding requirements and wholesale funding
strategies. Total borrowed funds were $73.277 million or 8.8% of
total liabilities at December 31, 2009, as compared to $81.398 million or 9.5%
of total liabilities at December 31, 2008, an $8.121 million or 10.0% decrease
between the periods.
Short-term
borrowings decreased from $21.428 million at December 31, 2008 to $12.650
million at December 31, 2009, a $8.778 million or 41.0% decrease. The
decrease was principally due to a decrease in customer repurchase agreement
balances.
Long-term
borrowings increased $657 thousand between December 31, 2008 and December 31,
2009. During 2009 we secured $5.000 million of new long-term advances
at the FHLBNY, principally to fund the origination of new fixed-rate residential
mortgage loans. This increase was offset by the repayment of $4.343
million in amortizing FHLBNY advances originated during the current and prior
periods. See Note 10 of the Consolidated Financial Statements
contained in PART II, Item 8, of this document for additional detail on our
borrowed funds.
In
connection with our financing and operating activities, we have entered into
certain contractual obligations. At December 31, 2009, our future
minimum cash payments, excluding interest, associated with these contractual
obligations, which include borrowed funds and operating leases, were as
follows:
Contractual
Obligations:
|
Payments
Due by Period
|
||||||||||||||||||||||||||||
|
2010
|
2011
|
2012
|
2013
|
2014
|
Thereafter
|
Total
|
||||||||||||||||||||||
|
(in
thousands)
|
||||||||||||||||||||||||||||
|
Long-term
debt obligations
|
$ | 4,939 | $ | 4,664 | $ | 26,642 | $ | 7,548 | $ | 3,733 | $ | 13,101 | $ | 60,627 | ||||||||||||||
|
Operating
lease obligations
|
353 | 337 | 306 | 158 | 109 | 887 | 2,150 | |||||||||||||||||||||
|
Capital
lease obligations
|
124 | 96 | 67 | 24 | 1 | - | 312 | |||||||||||||||||||||
|
Total
contractual obligations
|
$ | 5,416 | $ | 5,097 | $ | 27,015 | $ | 7,730 | $ | 3,843 | $ | 13,988 | $ | 63,089 | ||||||||||||||
D. Results
of Operations
i.
Comparison of Operating Results for the Years Ended December 31, 2009 and
December 31, 2008
Please
refer to the Consolidated Financial Statements presented in PART II, Item 8, of
this document.
Summary. We
recorded net income and earnings per share of $7.401 million and $0.70,
respectively, for 2009. This compares to $5.816 million in net income
and $0.55 in earnings per share in 2008. The $1.585 million or 27.3%
increase in net income and $0.15 increase in earnings per share between
comparable periods were due to several factors. We recorded
significant increases in both net interest income and noninterest income in
2009, as compared to 2008. The increase in net interest income
totaling $5.902 million or 22.3% was due, in large part, to a significant
increase in average loans outstanding (our highest yield earning asset) and a
significant decrease in the cost of interest-bearing liabilities. In
addition, due primarily to the low interest rate environment that prevailed in
2009, we sold or had called $120.286 million of our available-for-sale
investment securities and recorded $3.676 million in gains on the sale of these
securities. This compares to sales or calls on available-for-sale securities
totaling $32.632 million during 2008 and $510 thousand in gains.
The
improvements in net interest income and noninterest income were offset, in part,
by significant increases in the provision for loan losses, noninterest expense
and income taxes. The increase in the provision for loan losses was
due to the general deterioration in most of our loan quality metrics between
comparable years, and the need to replenish the allowance for loan losses for
charge-offs recorded as determined by our allowance model. The
increase in noninterest expense between comparable years was largely
attributable to significant increases in the FDIC premium assessment, employee
benefits expense, and to a lesser extent, salaries, computer service fees and
loan collection expense.
Our
return on average assets and return on average equity were 0.79% and 10.63%,
respectively, for 2009, as compared to 0.67% and 8.35%, respectively, during
2008. Our dividend payout ratio was 39% during 2009. We
declared and paid dividends totaling $0.275 per share during 2009 on earnings
per share of $0.70. Due to the need to preserve the Company’s capital
resources, particularly in these uncertain economic times, the Company’s Board
of Directors declared a quarterly dividend of $0.06 per share for the last three
quarters of 2009. This compares to a $0.095 dividend per share in the
first quarter of 2009 and all four quarters of 2008, a $0.035 decrease in the
quarterly dividend.
Net Interest
Income. Net interest income is our most significant source of
revenue. Net interest income is comprised of the interest and
dividend income generated on our earning assets, including, but not limited to,
loans and investment securities, less interest expense on our interest bearing
liabilities, including, customer deposits and borrowings. During
2009, net interest income comprised 77% of our total revenues (net interest
income plus noninterest income). The remaining 23% was due to
noninterest income. This compares to 81% and 19%, respectively, for
2008. The decrease in net interest income to total revenues between
2008 and 2009 was largely due to the significant increase in net gains recorded
on the sale, maturity and call of the available-for-sale investment securities
portfolio between periods.
The
following Asset and Yield
Summary Table, and Rate
and Volume Table and the associated narrative provide detailed net
interest income information and analysis that are important to understanding our
results of operations.
The
following table summarizes the total dollar amount of interest income from
average earning assets and the resultant yields, as well as the interest expense
and rate paid on average interest bearing liabilities. The average
balances presented are calculated using daily totals and averaging them for the
period indicated.
Asset and
Yield Summary Table:
|
For
the Years Ended December 31,
|
||||||||||||||||||||||||
|
2009
|
2008
|
|||||||||||||||||||||||
|
Average
Outstanding
Balance
|
Interest
Earned
/
Paid
|
Yield
/
Rate
|
Average
Outstanding
Balance
|
Interest
Earned
/
Paid
|
Yield
/
Rate
|
|||||||||||||||||||
|
(in
thousands)
|
||||||||||||||||||||||||
|
Earning
Assets:
|
||||||||||||||||||||||||
|
Federal
funds sold
|
$ | 821 | $ | - | 0.00 | % | $ | 16,399 | $ | 391 | 2.38 | % | ||||||||||||
|
Interest-
bearing deposits
|
27,409 | 63 | 0.23 | % | 6,977 | 193 | 2.77 | % | ||||||||||||||||
|
Securities
¹
|
269,959 | 11,221 | 4.16 | % | 296,988 | 13,002 | 4.38 | % | ||||||||||||||||
|
Loans
²
|
598,359 | 35,554 | 5.94 | % | 499,163 | 32,806 | 6.57 | % | ||||||||||||||||
|
Total
earning assets
|
896,548 | 46,838 | 5.22 | % | 819,527 | 46,392 | 5.66 | % | ||||||||||||||||
|
Nonearning
assets
|
35,936 | 43,050 | ||||||||||||||||||||||
|
Total
assets
|
$ | 932,484 | $ | 862,577 | ||||||||||||||||||||
|
Liabilities:
|
||||||||||||||||||||||||
|
Savings
accounts
|
$ | 70,901 | $ | 205 | 0.29 | % | $ | 69,557 | $ | 291 | 0.42 | % | ||||||||||||
|
Money
market accounts
|
195,613 | 1,845 | 0.94 | % | 135,770 | 2,802 | 2.06 | % | ||||||||||||||||
|
NOW
accounts
|
114,106 | 831 | 0.73 | % | 87,680 | 1,021 | 1.16 | % | ||||||||||||||||
|
Time
& other deposit accounts
|
327,932 | 8,924 | 2.72 | % | 347,238 | 13,126 | 3.78 | % | ||||||||||||||||
|
Borrowings
|
74,346 | 2,697 | 3.63 | % | 71,557 | 2,718 | 3.80 | % | ||||||||||||||||
|
Total
interest-bearing liabilities
|
782,898 | 14,502 | 1.85 | % | 711,802 | 19,958 | 2.80 | % | ||||||||||||||||
|
Noninterest
bearing deposits
|
70,878 | 73,770 | ||||||||||||||||||||||
|
Other
noninterest bearing liabilities
|
9,103 | 7,330 | ||||||||||||||||||||||
|
Total
liabilities
|
862,879 | 792,902 | ||||||||||||||||||||||
|
Shareholders'
equity
|
69,605 | 69,675 | ||||||||||||||||||||||
|
Total
liabilities and shareholders' equity
|
$ | 932,484 | $ | 862,577 | ||||||||||||||||||||
|
Net
interest income
|
$ | 32,336 | $ | 26,434 | ||||||||||||||||||||
|
Net
interest rate spread
³
|
3.37 | % | 2.86 | % | ||||||||||||||||||||
|
Net
earning assets
|
$ | 113,650 | $ | 107,725 | ||||||||||||||||||||
|
Net
interest margin 4
|
3.61 | % | 3.23 | % | ||||||||||||||||||||
|
Net
interest margin (tax-equivalent)
|
3.77 | % | 3.46 | % | ||||||||||||||||||||
|
Ratio
of earning assets to interest-bearing liabilities
|
114.52 | % | 115.13 | % | ||||||||||||||||||||
|
¹
|
Securities
include trading, available-for-sale, held-to-maturity and other
investments. They are shown at average amortized cost with net
unrealized gains or losses on securities available-for-sale included as a
component of non-earning assets.
|
|
²
|
Average
loans include loans held for sale, net deferred loan fees and costs,
nonaccrual loans and excludes the allowance for loan
losses.
|
|
³
|
Net
interest rate spread represents the difference between the weighted
average yield on interest-earning assets and the weighted average cost of
interest-bearing liabilities.
|
|
⁴
|
The
net interest margin, also known as the net yield on average
interest-earning assets, represents net interest income as a percentage of
average interest-earning assets.
|
The level
of our net interest income is dependent on several factors including, but not
limited to: our ability to attract and retain deposits, our ability
to generate and retain loans, regional and local economic conditions, regional
competition, capital market conditions, the national interest rate environment,
as well as our tolerance for risk. Throughout 2009 and 2008, our net
interest income was affected by all of these factors.
We
recorded $32.336 million in net interest income during 2009, versus $26.434
million during 2008, a $5.902 million or 22.3% increase. Similarly,
tax-equivalent net interest margin increased from 3.46% in 2008 to 3.77% in
2009. The increase in net interest income and tax-equivalent net interest margin
between comparable years was due to a significant increase in our average
outstanding earning asset balances, particularly loans, and a significant
decrease in funding costs. During 2009 we recorded $46.838 million in
interest income versus $46.392 million in 2008, a $446 thousand or 1.0% increase
in spite of significant decreases in the yield on all categories of earning
assets. Interest expense, by comparison, decreased $5.456 million or
27.3%, from $19.958 million in 2008 to $14.502 million in 2009.
During
2009, average outstanding earning assets increased $77.021 million or 9.4%, from
$819.527 million in 2008 to $896.548 million in 2009, while the average yield on
our earning assets decreased 44 basis points between comparable periods, from
5.66% in 2008 to 5.22% in 2009. During 2008, we embarked on a market
expansion and asset growth strategy. The strategy included the hiring
of several lending professionals and establishment of branch offices in Greater
Syracuse and Capital District markets of central and upstate New
York. Although we curbed our growth strategy during the first half of
2009, average earning assets increased between comparable years due to the
inherent lag in implementing these strategies. Between September 2007
and December 2008, the Federal Open Market Committee lowered the target federal
funds interest rate by 500 basis points, from 5.25% to 0.25%, due to a rapidly
slowing national economy. This, in turn, caused a decrease in the
national prime lending rate, an interest rate to which a significant portion of
our loan portfolio is indexed. These actions, along with decreases in
other short-term interest rates, reduced the yield on all categories of our
earning assets between comparable years, including federal funds sold, interest
bearing deposits (at other banks), investment securities and
loans. Our strategy to grow the earning assets, with a special
emphasis on loans, our highest yielding portfolio, counteracted the precipitous
drop in earning asset yields between comparable years.
We
recorded $35.554 million of interest income on loans during 2009, as compared to
$32.806 million in 2008, a $2.748 million or 8.4% increase despite a 63 basis
point decrease in yield between the periods. The average outstanding
balance of our loan portfolio was $598.359 million in 2009, as compared to
$499.163 million in 2008, a $99.196 million or 19.9% increase, while loan yields
decreased from 6.57% in 2008 to 5.94% in 2009. During 2008, we hired
several experienced commercial lenders to staff our Cicero, New York office and
continued to originate new loans in our core markets and the Capital
District. These actions resulted in an increase in the average
outstanding balance of loans in each successive quarter of 2008 and the first
two quarters of 2009, in spite of our decision to curb our growth strategy
during 2009. The persistence of very low market interest rates
throughout 2009 resulted in a drop in the average yield on loans.
We
recorded $11.221 million in interest income on our investment securities
portfolio during 2009. By comparison, we recorded $13.002 million in
interest income on our investment securities portfolio during
2008. The decrease in interest income on the investment securities
portfolio totaling $1.781 million or 13.7% was due primarily to decreases in
both investment securities market yields and the average outstanding balance in
our investment securities portfolio. The average yield on the
investment securities portfolio decreased from 4.38% in 2008 to 4.16% in 2009,
while the average outstanding balance of the portfolio decreased from $296.988
million in 2008 to $269.959 million in 2009. During 2009, we
experienced significant turnover in our investment securities portfolio due to
sales, maturities or calls and increased the average outstanding balances of the
loan portfolio. These factors drove down the average outstanding
balance of the investment securities portfolio. In addition, the
proceeds from these activities were reinvested into new investment securities at
lower effective yields.
On a
combined basis, we recorded $63 thousand in interest income on federal funds
sold and interest-bearing deposits (at other banks) during 2009. This
compares to $584 thousand in interest income during 2008. The
decrease in interest income on federal funds sold and interest-bearing deposits
(at other banks) between comparable years was principally due to a precipitous
drop in market interest rates between 2008 and 2009.
Between
2008 and 2009, the rate on all categories of interest bearing liabilities
decreased. The weighted average rate on all interest bearing
liabilities totaled 2.80% in 2008, as compared to 1.85% in
2009. Similarly, total interest expense decreased $5.456 million
between comparable years in spite of a $71.096 million or 10.0% increase in
average outstanding interest bearing liabilities. We recorded $14.502
million in total interest expense during 2009, as compared to $19.958 million in
2008. The significant decrease in market interest rates between
comparable years allowed us to reduce the average rate paid on all categories of
our interest-bearing liabilities, including money market deposit accounts and
time and other deposit accounts, our two largest and highest cost
interest-bearing deposit liabilities.
During
2009, we recorded $1.845 million of interest expense on our money market deposit
accounts at an average rate of 0.94%. By comparison, during 2008 we
recorded $2.802 million of interest expense at an average rate of
2.06%. The 112 basis point decrease in the average rate on these
deposit liabilities was principally due to a significant reduction in the
interest rate offered on our “Wealth Management” money market deposit
account. The average outstanding balance of money market accounts
increased from $135.770 million in 2008 to $195.613 million in
2009. We attribute this increase to our depositors’ willingness to
hold investable funds in readily available money market accounts and their
corresponding reluctance to invest funds into certificates of deposit during a
time when market interest rates for short-term time deposits were at historical
lows.
Similarly,
the interest expense recorded on time and other deposit accounts decreased
$4.202 million between comparable years. During 2009 the average rate
paid on time and other deposit accounts was 2.72%, versus 3.78% in 2008, a 106
basis point decrease. As market rates for certificates of deposit remained very
low during 2009 our maturing certificates of deposit were renewed or replaced by
new certificates at lower rates of interest. The average outstanding
balance of time and other deposits decreased from $347.238 million in 2008 to
$327.932 million in 2009 because certificate of deposit yields were low, which,
we believe, caused our depositors to invest their funds into NOW and money
market accounts that could be accessed quickly without penalty.
Between
2008 and 2009, the average outstanding balance of NOW accounts increased $26.426
million or 30.1%, but the average interest rate paid decreased 43 basis points,
from 1.16% during 2008 to 0.73% during 2009. As a result of these
changes, interest expense on NOW accounts decreased from $1.021 million in 2008
to $831 thousand in 2009, a $190 thousand or 18.6% decrease between comparable
years. During 2009, our municipal depositors increased the level of
their operating account balances held in NOW accounts due to significant
reductions in short-term certificate of deposit rates. The effective
yield on municipal NOW accounts exceeded the effective yield on certificates of
deposits with maturities of one year or less throughout most of
2009.
Between
comparable years, the average rate paid on savings accounts decreased from 0.42%
in 2008 to 0.29% in 2009. Although the interest rate offered on
savings accounts were at historical lows throughout 2009, the average
outstanding balance in savings accounts increased slightly from $69.557 million
during 2008 to $70.901 million during 2009, a $1.344 million or 1.9%
increase. Interest expense on savings accounts decreased from $291
thousand in 2008 to $205 thousand in 2009. We attribute the slight
increase in average outstanding savings account deposits between 2008 and 2009
to our depositors’ reluctance to invest their funds in short-term certificates
of deposit at historically low rates of interest.
Interest
expense on borrowings decreased slightly from $2.718 million during 2008 to
$2.697 million during 2009, a $21 thousand or 0.8% decrease. Although
average total borrowings outstanding increased between periods, the average rate
paid on borrowings decreased from 3.80% in 2008 to 3.63% in 2009 due to a
precipitous decrease in the interest rates paid on repurchase agreements with
our customers.
Rate and Volume
Analysis. The following table presents changes in interest
income and interest expense attributable to changes in volume (change in average
balance multiplied by prior year rate), changes in rate (change in rate
multiplied by prior year volume), and the net change in net interest
income. The net change attributable to the combined impact of volume
and rate has been allocated to each in proportion to the absolute dollar amount
of change. The table has not been adjusted for tax-exempt
interest.
Rate and
Volume Table:
|
Year
Ended December 31,
|
||||||||||||
|
2009
vs. 2008
|
||||||||||||
|
Rate
|
Volume
|
Total
|
||||||||||
|
(in
thousands)
|
||||||||||||
|
Earning
assets:
|
||||||||||||
|
Federal
funds sold
|
$ | (197 | ) | $ | (194 | ) | $ | (391 | ) | |||
|
Interest-bearing
deposits
|
(302 | ) | 172 | (130 | ) | |||||||
|
Securities
|
(636 | ) | (1,145 | ) | (1,781 | ) | ||||||
|
Loans
|
(3,350 | ) | 6,098 | 2,748 | ||||||||
|
Total
earning assets
|
(4,485 | ) | 4,931 | 446 | ||||||||
|
Interest
bearing liabilities:
|
||||||||||||
|
Savings
accounts
|
(91 | ) | 5 | (86 | ) | |||||||
|
Money
market accounts
|
(1,900 | ) | 943 | (957 | ) | |||||||
|
NOW
accounts
|
(443 | ) | 253 | (190 | ) | |||||||
|
Time
& other deposit accounts
|
(3,410 | ) | (792 | ) | (4,202 | ) | ||||||
|
Borrowings
|
(124 | ) | 103 | (21 | ) | |||||||
|
Total
interest bearing liabilities
|
(5,968 | ) | 512 | (5,456 | ) | |||||||
|
Change
in net interest income
|
$ | 1,483 | $ | 4,419 | $ | 5,902 | ||||||
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.
Net
interest income increased $5.902 million between 2008 and
2009. Between the periods we recorded a $446 thousand increase in
interest income and a $5.456 million decrease in interest
expense. The increase in interest income between comparable periods
was driven by a significant increase in the average loan balances
outstanding. The decrease in interest expense was driven by a
reduction in the average interest paid on all categories of interest-bearing
liabilities, offset, in part, by an increase in the average volume of money
market accounts, NOW accounts and borrowings, and to a much lesser extent,
savings.
Between
September 2007 and December 2008, the Federal Open Market Committee lowered the
federal funds target rate by 500 basis points due to a weakening national
economy. The precipitous drop in the federal funds rate and other
market interest rates caused a significant reduction in both our
interest-earning asset yields and interest-bearing liability
costs. Conversely, the strategy adopted in 2008 to increase the
Company’s earning assets contributed to increases in both interest income and
interest expense due to volume factors. More specifically, net
interest income increased $4.419 million between the years due to volume
factors, as compared to $1.483 million due to rate factors. Between
2008 and 2009, the volume of earning assets (on a net basis) increased $77.021
million, including a $99.196 million increase in average loans outstanding
between the periods.
Throughout
2007, 2008 and the first quarter of 2009, we focused our personnel and marketing
resources on increasing the outstanding balances in our loan portfolio with the
goal of increasing interest income. Due to these efforts, we steadily
increased the average outstanding balances in our loan portfolio. Although we
curbed the rate of asset growth during the last three quarters of 2009, on a
comparable period basis, average outstanding loan balances increased from
$499.163 million in 2008 to $598.359 million in 2009. The growth in
the average outstanding loan balances contributed $6.098 million of additional
interest income between comparable years. This improvement, however,
was offset by a $3.350 million decrease in interest income due to a decrease in
the average yield on loans between comparable years as market interest rates
dropped. Due to these two factors, the interest income recorded on
loans increased $2.748 million between comparable years.
We
recorded only $63 thousand in interest income on federal funds sold and interest
bearing deposits (at other banks) during 2009. During the fourth
quarter of 2008, the Federal Reserve Bank of New York changed its long standing
policy of not paying interest on required and excess reserves held by member
institutions to paying interest on required and excess
reserves. Given the comparable Federal Reserve deposit interest rate
and the open market rates for federal funds sold during 2009, we invested the
large majority of our overnight excess reserve balances at the Federal Reserve
Bank of New York. Due to these factors, the combined interest income
on federal funds sold and interest bearing deposits decreased $521 thousand,
$499 thousand attributable to rate and $22 thousand attributable to
volume.
The
interest income recorded on the investment securities portfolio decreased $1.781
million between 2008 and 2009 due to both rate and volume
factors. During the last three quarters of 2008 and the first two
quarters of 2009, we significantly increased the average volume of loans
outstanding. To help fund this growth in loans outstanding and take
advantage of an increase in the value of our available-for-sale investment
securities portfolio, we reduced our average investment securities balances
outstanding by $27.029 million between comparable years. Similarly,
due to a declining interest rate environment and the high level of turnover
within the investment securities portfolio during 2009, the yield on our
investment securities portfolio decreased from 4.38% in 2008 to 4.16%
2009. Between comparable years, the interest income earned on
investment securities decreased $1.145 million due to volume and $636 thousand
due to rate factors.
We
recorded $8.924 million in interest expense on time and other deposit accounts
during 2009, as compared to $13.126 million in 2008. We offered lower
rates of interest on new and renewed certificates as interest rates dropped
between the later part of 2007 and December 31, 2009. As interest
rates dropped, many of our customers opted to deposit their funds in nonmaturity
deposit accounts, primarily money market deposit accounts. The
decrease in interest rates and the corresponding decline in time and other
deposit account balances drove down interest expense $4.202 million or 32.0%
between comparable periods, $3.410 million due to rate and $792 thousand due to
volume.
Interest
expense on money market deposit accounts decreased $957 thousand between 2008
and 2009. As short-term interest rates decreased between comparable
periods, we lowered the interest rate paid on money market deposit accounts
causing a $1.900 million decrease in interest expense due to rate
factors. Between comparable periods, however, we increased the
average volume of money market accounts outstanding due to an increase in
municipal deposits and our Wealth Management accounts. This increased
interest expense on this deposit liability portfolio $943 thousand between
comparable years due to volume factors.
As
interest rates dropped over the last several quarters we decreased the interest
rates paid on statement savings and passbook savings accounts, resulting in a
$91 thousand decrease in interest expense between 2008 and 2009. This
was offset, in part, by an increase in interest expense on savings accounts due
to an increase in average outstanding balances totaling $5
thousand.
The
average rate paid on NOW accounts decreased from 1.16% in 2008 to 0.73% in
2009. Despite the decrease in the average rate paid on these
accounts, the average outstanding balance in the NOW account portfolio increased
from $87.680 million in 2008 to $114.106 million in 2009 due principally to an
increase in municipal deposit accounts. Between comparable periods,
interest expense on NOW accounts decreased $190 thousand. The
increase in the volume of NOW accounts increased interest expense $253 thousand
between comparable periods, but was offset by a $443 thousand decrease in
interest expense due to a decrease in rate.
In the
second half of 2008, we secured long-term borrowings to fund our long-term
fixed-rate residential mortgage and commercial real estate loans. The
interest rates on these new long-term borrowings were generally less than the
interest rates on maturing long-term borrowings. In addition, due to lower
market interest rates between 2008 and 2009, we decreased the average rate paid
on our customer repurchase agreements. These actions caused a drop in
our average cost of borrowings from 3.80% in 2008 to 3.63% in 2009. An increase
in the average volume of borrowings increased interest expense by $103 thousand,
while the decrease in the average rate paid on borrowings decreased interest
expense by $124 thousand, resulting in a $21 thousand net decrease in interest
expense on borrowings.
Provision for Loan
Losses. We recorded $3.570 million in the provision for loan
losses during 2009. This compares to $1.530 million during 2008, a
$2.040 million increase. During 2009, we experienced a significant
decline in most of our loan quality metrics, nonperforming loans, delinquent
loans, impaired loans and potential problem loans. This trend,
coupled with deteriorating economic conditions and a significant increase in net
charge-offs during 2009, resulted in a substantial increase in the provision for
loan losses. We recorded $2.512 million in net charge-offs during
2009 versus $943 thousand in net charge-offs in 2008, a $1.569 million
increase. Net charge-offs to average loans outstanding totaled 0.42%
in 2009, as compared to 0.19% in 2008, a 23 basis point
increase. Loans 30 to 89 days delinquent increased from $6.095
million or 1.04% of total loans outstanding at December 31, 2008 to $8.469
million or 1.44% of total loans outstanding at December 31,
2009. Nonperforming loans totaled $12.880 million or 2.19% of total
loans outstanding at December 31, 2009, as compared to $7.211 million or 1.24%
of total loans outstanding at December 31, 2008. This represents a
$5.669 million increase in nonperforming loans and a 95 basis point increase in
nonperforming loans to total loans outstanding between the
periods. Although total impaired loans increased from $8.620 million
at December 31, 2008 to $12.957 million at December 31, 2009, the allowance for
impaired loans decreased from $1.160 million at December 31, 2008 to $721
thousand at December 31, 2009. Lastly, potential problem loans
increased from $16.099 million or 2.76% of loans outstanding at December 31,
2008 to $24.866 million or 4.23% of loans outstanding at December 31,
2009.
Noninterest
Income. Noninterest income is comprised of trust fees, service
charges on deposit accounts, net investment securities gains (losses), net gain
on sale of loans, income on bank-owned life insurance, other service fees and
other income. In addition, during the first two quarters of 2008 we
held a majority ownership interest in an insurance agency
subsidiary. During that period we recorded commission income on the
policies sold through the agency, as well as a gain on the sale of the agency in
the second quarter of 2008.
We
recorded $9.334 million in noninterest income during 2009, versus $6.309 million
in 2008, a $3.025 million or 47.9% increase between comparable
years. The largest contributing factor toward the increase in
noninterest income was a substantial increase in net investment securities gains
between comparable periods, and to a lesser extent, increases in service charges
on deposit accounts, the net gain on sale of loans and other service
fees. We recorded $3.850 million in net investment securities gains
during 2009, as compared to $82 thousand in 2008. Service charges on
deposit accounts, net gain on sale of loans and other service fees increased
$143 thousand, $125 thousand and $39 thousand, respectively, between 2008 and
2009. The improvements in these items were offset, in part, by a $133
thousand decrease in trust fees, a $25 thousand decrease in income on bank-owned
life insurance and a $18 thousand decrease in other income. In
addition, during 2008 we recorded $246 thousand in commission income in our
former insurance agency subsidiary and a $628 thousand gain on the sale of our
ownership interest in the agency. There were no revenues earned on
this activity in 2009.
In 2009,
we recorded $3.676 million of net gains on $120.286 million of sales and calls
of our available-for-sale investment securities. This compares to
$510 thousand in net gains recorded during 2008 on the sales and calls totaling
$32.632 million. As interest rates remained near historical lows
during 2009, we captured gains by selling selected available-for-sale investment
securities. In addition, we recorded $174 thousand of net investment
securities gains on our trading portfolio in 2009. This compares to
$428 thousand in net investment securities losses on the trading portfolio
during 2008. Our trading securities portfolio consists of mutual
funds and individual equity and debt securities held by the Company’s executive
deferred compensation plan. Gains recorded on trading securities are
offset by equal amounts of salaries expense. Similarly, losses
recorded on trading securities are offset by equal amounts of decreases in
salaries expense. The executive deferred compensation plan is not a
funded plan.
During
2009 we recorded a net gain on the sale of loans totaling $383
thousand. This compares to $258 thousand in 2008, a $125 thousand or
48.4% increase between the comparable periods. The premiums we earn
on residential mortgage loans originated by Provantage and sold into the
secondary residential mortgage market increased substantially between comparable
years. Residential mortgage interest rates dropped precipitously
between 2008 and 2009, spurring a moderate wave of refinancing activity in our
markets. In addition, to mitigate our interest rate risk exposure, we
increased the proportion of residential mortgage loan originations sold into the
secondary market between comparable periods.
We
recorded $2.291 million in service charges on deposit accounts during 2009,
versus $2.148 million during 2008. The $143 thousand or 6.7% increase
in service charges on deposit accounts was due principally to fee increases on
business checking accounts implemented by management in 2008 and an increase in
ATM fees between the periods.
During
2009 we earned $1.514 million in trust fees. This compares to $1.647
million during 2008, a $133 thousand or 8.1% decrease. The decrease
in trust fees between comparable periods was due largely to a decline in estate
settlement fees between the periods. During 2008, we recorded $182
thousand in estate settlement fees, as compared to $34 thousand in estate
settlement fees in 2009, a $148 thousand or 81.3% decrease between the
comparable periods.
During
2009 we recorded a $592 thousand increase in the cash surrender value of
bank-owned life insurance. This compares to a $617 thousand increase
during 2008, a $25 thousand or 4.1% decrease between comparable
periods. Due to general declines in the financial markets and the
related decrease in crediting rates on the cash surrender value of our
bank-owned life insurance policies, we experienced a moderate drop in our income
on our life insurance policies between 2008 and 2009.
Other
service fees are comprised of numerous types of fee income including merchant
credit card processing fees, official check and check cashing fees, travelers’
check sales, wire transfer fees, letter of credit fees, U.S. government bond
sales, certificate of deposit account registry service fees, and other
miscellaneous service charges and fees. Other service fees increased
$39 thousand or 17.5% between 2008 and 2009 due principally to an increase in
letter of credit fees between comparable years.
Other
income is comprised of numerous types of fee income, including investment
services income, rental income, safe deposit box income, check printing fee
income, title insurance agency income and profit sharing distributions from a
life and disability credit insurance trust in which we hold an ownership
interest. Other income decreased from $460 thousand in 2008 to $442
thousand in 2009, an $18 thousand or 3.9% decrease. Several small
positive and negative variances on these items contributed to the net decrease
in other income, the most significant of which was a $32 thousand decrease in
the profit share distributions from the credit insurance trusts in which we hold
a small ownership interest.
Noninterest
Expense. Noninterest expense is comprised of salaries,
employee benefits, occupancy expense, furniture and equipment expense, computer
service fees, advertising and marketing expense, professional fees, FDIC premium
assessments, loan collection expense and other miscellaneous
expenses. Total noninterest expense increased $4.386 million or 18.5%
on a comparable period basis, from $23.724 million in 2008 to $28.110 million in
2009. The substantial increase in total noninterest expense between
comparable periods was due to several factors, including significant increases
in our FDIC premium assessment, salaries expense, employee benefits expense,
loan collection expense, computer service fees, and to a lesser extent,
occupancy expense and professional fees.
During
2009, we recorded $12.040 million in salaries expense, versus $11.281 million in
2008, a $759 thousand or 6.7% increase between the periods. Between
comparable periods, we recorded a $636 thousand net increase on our executive
deferred compensation plan due to increases in plan asset values carried in our
trading account. During 2009, we recorded a $219 thousand increase in
salaries expense due to an increase in the value of our executive deferred
compensation plan assets, as compared to a net reduction in expense totaling
$417 thousand during 2008 due to a decrease in the value of our executive
deferred compensation plan assets. The remainder of the increase in
salaries expense was principally due to employee wage increases between the
annual periods.
We
recorded $3.624 million in employee benefits expense during 2009, versus $2.449
million during 2008, a $1.175 million or 48.0% increase between the
periods. The increase in employee benefits expense between the
comparable years was largely due a significant increase in pension expense and
other benefits. During 2009, we recorded a $470 thousand pension
expense, as compared to a $393 thousand net pension benefit during
2008. The Company’s defined benefit plan pension assets performed
well for several years preceding 2008. Due to significant declines in
the equity markets, however, the pension assets lost substantial value by the
end of 2008, causing us to record a net expense in 2009 despite freezing plan
benefits in 2006. In addition, during the third quarter of 2009, we
executed a cash buy-out of a split-dollar life insurance benefit program with 10
senior managers of the Bank under agreements originally established in the late
1990’s. We recorded $312 thousand in other benefits during the third
quarter of 2009 in connection with the termination of these
benefits. No similar transactions were recorded during
2008. Finally, F.I.C.A. expense and group health insurance increased
$42 thousand and $26 thousand, respectively, between the
periods. These increases were partially offset by a $30 thousand
decrease in our group life insurance costs between the periods.
We
recorded $2.080 million in FDIC premium assessment expense during 2009, as
compared to $99 thousand in 2008. The increase in the FDIC premium
assessment was due to several factors. In the fourth quarter of 2008
we exhausted our FDIC insurance premium credit, which was initially provided in
2007, and began to incur premium expense to recapitalize the Deposit Insurance
Fund. During the second quarter of 2009, the FDIC levied a special
assessment upon its member banks to restore the Deposit Insurance Fund to
required capitalization levels. We recorded $437 thousand of FDIC
premium expense due to this special assessment. In December 2009, the
FDIC assessed and collected a special prepaid assessment from its member
institutions, which included estimated quarterly premiums for the fourth quarter
of 2009 and for all quarterly periods in 2010, 2011 and 2012. The
Bank’s prepaid assessment amount was $6.687 million. We recorded an
immediate charge (expense) against this amount on December 31, 2009 to recognize
the fourth quarter 2009 premium assessment. And finally, between
comparable years the average outstanding balance of our insurable deposits
increased substantially in connection with the Bank’s growth
strategy. Due to the weakened state of the banking industry, current
and anticipated Deposit Insurance Fund capitalization levels and other factors,
we anticipate incurring significant FDIC premium assessment expenses for several
quarters prospectively. In addition, the FDIC has announced it will
increase member premiums by 3 basis points for 2011 and 2012.
Loan
collection expense includes the payment of various insurance and tax payments on
behalf of our borrowers to protect the Bank’s interest in its loan
collateral. During 2009, we incurred and paid past due taxes and
lapsed insurance premiums for several large or delinquent borrowers and incurred
$694 thousand in expense related to these payments. By comparison, we
incurred $188 thousand in similar expenses during 2008. The increase
between periods was due to the general decline in the credit quality of our loan
portfolio during 2009 and the related inability of our borrowers to meet their
tax and insurance obligations.
Computer
service fees increased $259 thousand or 17.9% between comparable years, from
$1.447 million in 2008 to $1.706 million 2009. During 2008, we
transferred our core computer system from our main office location in Oneonta,
New York to a service bureau environment in Albany, New York to reduce operating
risk, enhance our business continuity plan and minimize disruption of customer
service. Due to the change in our core operating system environment,
we incurred $348 thousand of additional vendor-related expenses between 2008 and
2009. This increase was partially offset by an $89 thousand net
decrease in other computer related service fees.
During
2009, we incurred $528 thousand of advertising and marketing
expenses. This compares to $656 thousand in 2008, a $128 thousand or
19.5% decrease. During 2008, we incurred significant advertising
expenses to launch our entry into the Greater Syracuse and Capital District, New
York markets. These efforts were substantially curtailed during
2009.
We
recorded $940 thousand in professional fees during 2009, versus $871 thousand in
professional fees during 2008, a $69 thousand or 7.9% increase between
comparable periods. We incurred a significant increase in legal and
other professional fees between comparable periods, a significant portion of
which was to register 3,457,960 million shares of the Company’s common stock,
$.01 par value, with the SEC in connection with our Amended and Restated
Dividend Reinvestment and Direct Stock Purchase Plan. In addition,
during 2009, we incurred additional professional fees for certain contracted
internal audits in connection with the Company’s internal audit
plan.
On a
combined basis, occupancy expense of Company premises and furniture and
equipment expense decreased $49 thousand or 1.6%, from $3.090 million in 2008 to
$3.041 million in 2009. During 2009, we did not embark on any major
market expansion plans requiring the acquisition of new equipment due to
modification of our strategic plan to curb growth. As a result,
equipment related maintenance and repair costs decreased approximately $57
thousand between comparable years.
Other
miscellaneous expenses include directors’ fees, fidelity insurance, the Bank’s
OCC assessment, correspondent bank services, service expenses related to the
Bank’s accounts receivable financing services, charitable donations and customer
relations, other losses, dues and memberships, office supplies, postage and
shipping, subscriptions, telephone expense, employee travel and entertainment,
software amortization, intangible asset amortization expense, minority interest
expense, stock exchange listing fees, gain or loss on the disposal of assets,
other real estate losses and several other miscellaneous
expenses. During 2009 other miscellaneous expenses decreased $186
thousand or 5.1%, from $3.643 million in 2008 to $3.457 million in
2009. The following table itemizes the individual components of other
miscellaneous expenses that increased (or decreased) significantly between
comparable periods:
Table of
Other Miscellaneous Expenses:
|
Year
|
||||||||||||
|
Description
of other miscellaneous expense
|
2009
|
2008
|
Increase
/
(Decrease)
|
|||||||||
|
(in
thousands)
|
||||||||||||
|
Fidelity
insurance
|
$ | 72 | $ | 109 | $ | (37 | ) | |||||
|
OCC
assessment
|
212 | 189 | 23 | |||||||||
|
Correspondent
bank services
|
188 | 152 | 36 | |||||||||
|
Miscellaneous
loan servicing expenses
|
231 | 152 | 79 | |||||||||
|
Dues
and memberships
|
76 | 123 | (47 | ) | ||||||||
|
Office
supplies
|
389 | 332 | 57 | |||||||||
|
Postage
and shipping
|
368 | 328 | 40 | |||||||||
|
Travel
and entertainment
|
191 | 264 | (73 | ) | ||||||||
|
Amortization
of software
|
205 | 249 | (44 | ) | ||||||||
|
Other
losses
|
37 | 136 | (99 | ) | ||||||||
|
Minority
interest expense
|
- | 34 | (34 | ) | ||||||||
|
Other
real estate owned expenses
|
48 | 1 | 47 | |||||||||
|
Impairment
/ sale of fixed assets and other real estate
|
153 | 283 | (130 | ) | ||||||||
|
All
other miscellaneous expense items, net
|
1,287 | 1,291 | (4 | ) | ||||||||
|
Total
Other Miscellaneous Expense
|
$ | 3,457 | $ | 3,643 | $ | (186 | ) | |||||
By
comparison, during 2008 we recorded $283 thousand in losses on the impairment
and sale of fixed assets, most of which was due to the abandonment of a plan to
build a branch office. Specifically, we abandoned the development of
a branch office in Dewitt, New York (Onondaga County) and recorded a $178
thousand expense for site planning, architectural design, and engineering
studies in 2008. The remaining losses totaling $105 thousand were due
to losses incurred on the sale of OREO. During 2009 we incurred $153
thousand in net losses on the impairment and sale of fixed assets and OREO, $134
thousand, of which, was attributable to an additional write-down on this same
site due to a decrease in the appraised value of the property. We
expect to incur significant increases in our OREO related expenses during 2010
due to increased foreclosures and similar proceedings in connection with
commercial real estate loans.
Income
Taxes. Income tax expense increased from $1.673 million during
2008 to $2.589 million during 2009. The increase in income tax
expense was primarily due to a significant increase in income before tax between
comparable periods. The effective tax rate increased between periods
increased, from 22.3% in 2008 to 25.9% in 2009. A smaller proportion
of our income was derived from tax-exempt sources such as municipal bonds and
notes and bank-owned life insurance during 2009 than in 2008 resulting in an
increase in our effective tax rate between comparable periods. In
both periods, our effective tax rate was below statutory tax rates because a
significant portion of our pre-tax income was generated from nontaxable revenues
including interest income on state and municipal investment securities and
increases in the cash surrender value of bank-owned life
insurance. In addition, 60% of the dividends paid by our real estate
investment trust subsidiary to its shareholders are deductible for New York
State tax purposes. This decreases our New York State effective tax
rate to the alternative minimum tax rate of 3%, as compared to the New York
State statutory Bank tax rate of 7.1%.
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:
|
|
●
|
maintaining
the appropriate levels of currency throughout our branch system to meet
the daily cash needs of our
customers,
|
|
|
●
|
balancing
our mandated deposit or “reserve” requirements at the Federal Reserve Bank
of New York,
|
|
|
●
|
maintaining
adequate cash balances at our correspondent banks,
and
|
|
|
●
|
assuring
that adequate levels of federal funds sold, liquid assets, and borrowing
resources are available to meet obligations, including reasonably
anticipated daily fluctuations.
|
The
following list represents the sources of funds available to meet our liquidity
requirements. Our primary sources of funds are denoted by an asterisk
(*).
|
Sources
of Funding
|
|
•
Currency*
|
|
•
Federal Reserve and Correspondent Bank Balances*
|
|
•
Federal Funds Sold*
|
|
•
Loan and Investment Principal and Interest Payments*
|
|
•
Investment Security Maturities and Calls*
|
|
•
Demand Deposits and NOW Accounts*
|
|
•
Savings and Money Market Deposits*
|
|
•
Certificates of Deposit and Other Time Deposits*
|
|
•
Repurchase Agreements*
|
|
•
FHLBNY Advances / Lines of Credit*
|
|
•
Sale of Available-for-Sale Investment Securities
|
|
•
Brokered Deposits
|
|
•
Correspondent Lines of Credit
|
|
•
Federal Reserve Discount Window Borrowings
|
|
•
Sale of Loans
|
|
•
Proceeds from Issuance of Equity Securities
|
|
•
Branch Acquisition
|
In
addition to the daily funds management process, we also monitor certain
liquidity ratios and complete a liquidity assessment on a monthly
basis. The monthly evaluation report, known as the Liquidity
Contingency Scorecard, is reviewed by the ALCO and the Bank’s Board of
Directors. The report provides management with various ratios and
financial market data that are compared to limits established within the Bank’s
Asset and Liability Management Policy. It was designed to provide an
early warning signal for a potential liquidity crisis. Based on the
limits established in our Asset and Liability Management Policy, at December 31,
2009 the Bank maintained adequate levels of liquidity.
The
following table summarizes several of our key liquidity measures for the periods
stated:
Table of
Liquidity Measures:
|
Liquidity
Measure
|
At
December 31,
|
|
|
2009
|
2008
|
|
|
(in
thousands)
|
||
|
Cash
and cash equivalents
|
$ 34,043
|
$ 44,421
|
|
Available-for-Sale
and Held-to-Maturity investment securities at estimated fair value less
securities pledged for state and municipal deposits and
borrowings
|
$ 4,890
|
$ 20,337
|
|
Total
loan to total asset ratio
|
64.80%
|
63.10%
|
|
FHLBNY
remaining borrowing capacity
|
$ 16,832
|
$ 7,032
|
|
Available
correspondent bank lines of credit
|
$ 12,000
|
$ 15,000
|
|
Brokered
certificate of deposit line of credit
|
$ 90,332
|
$ -
|
Between
December 31, 2008 and December 31, 2009, our balance sheet liquidity, namely our
cash and cash equivalents and our unpledged investment securities, decreased due
primarily to our strategy to deleverage the Bank and improve our capital
ratios. However, our overall liquidity position, including our off
balance funding facilities, improved significantly between December 31, 2008 and
December 31, 2009 because in 2009 we were approved to participate in a
nationally recognized FDIC-approved brokered certificate of deposit
program. The unused portion of the facility allows us to bid weekly
for FDIC-insured certificate of deposits as long as we continue to meet program
conditions including maintaining our well-capitalized status. The
certificate of deposit terms range from 4-weeks to 3-years with higher levels of
availability in the shorter term pools.
At
December 31, 2009 we maintained $34.043 million in cash and cash equivalents,
$4.890 million in unpledged available-for-sale (at estimated fair value) and
held-to-maturity investment securities, and $28.832 million of readily available
lines of credit at other banks (excluding the brokered certificate of deposit
line of credit) to fund any anticipated or unanticipated growth in earning
assets. This compares to $44.421 million in cash and cash
equivalents, $20.337 million in unpledged available-for-sale (at estimated fair
value) and held-to-maturity investment securities, and $22.032 million of
readily available lines of credit at other banks on December 31,
2008. In aggregate, these potential funding sources provided $158.097
million of short- and long-term liquidity at December 31, 2009, as compared to
$86.790 million at December 31, 2008, a $71.307 million increase between
periods. Our total loan to total asset ratios of 64.8% at December
31, 2009 and 63.1% at December 31, 2008 were low relative to those of our
comparative peer group of financial institutions.
Our
commitments to extend credit and standby letters of credit decreased between
December 31, 2008 and December 31, 2009. Commitments to extend credit
and standby letters of credit totaled $110.310 million at December 31, 2009,
versus $139.496 million at December 31, 2008, a $29.186 million or 20.9%
decrease. The decrease between periods was principally due to
decreases in commitments to fund commercial real estate construction
loans. Our experience indicates that draws on the commitments to
extend credit and standby letters of credit do not fluctuate significantly from
quarter to quarter. We, however, will closely monitor our liquidity
position over the next several quarters to assure adequate levels of short-term
funding are available to fund our off-balance sheet commitments.
On a
quarterly basis we also prepare a forward-looking 90-day sources and uses report
to determine future liquidity needs. Based on this report, our
deposit retention experience, anticipated loan and investment funding and
prepayment activity, the product offerings of our competitors, the level of
interest rates, the level of regional economic activity, and our current pricing
strategies, we anticipate that we will have sufficient levels of liquidity to
meet our funding commitments over the next 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 maintaining a sufficient capital base to
provide for future expansion and complying with all regulatory
standards.
Due to
the growth in total shareholders’ equity during 2009, and to a lesser extent, a
decrease in total assets at December 31, 2009, our total shareholders’ equity to
total assets increased from 7.29% at December 31, 2008 to 8.04% at December 31,
2009. Total shareholders’ equity increased $5.460 million or 8.1%
between December 31, 2008 and December 31, 2009. Total shareholders’
equity was $72.919 million at December 31, 2009, as compared to $67.459 million
at December 31, 2008. The net increase in shareholders’ equity
between periods was due to a few factors. During 2009, we recorded
net income of $7.401 million. In addition, we recorded a decrease in
the net actuarial loss on our defined benefit plan and split-dollar life
insurance benefit totaling $975 thousand. These were offset, in part,
by cash dividend payments totaling $2.890 million and a $1.281 decrease in
accumulated other comprehensive income due to a decrease, net of tax in the
market value of our available-for-sale investment securities
portfolio. And finally, during 2009, we raised $1.255 million of
shareholders’ equity by reissuing our common stock, $.01 par value, through a
Dividend Reinvestment and Direct Stock Purchase Plan (“the
Plan”). The Company registered 3,457,960 treasury shares with the SEC
under the Plan and reissued 184,405 of these shares during
2009. Under the Plan, the Company’s registered shareholders may
reinvest all or part of their dividend payments on each dividend payable date,
and / or purchase additional shares monthly through the optional cash investment
feature. In addition, prospective shareholders may purchase the
shares directly from the Company. During the fourth quarter of 2009,
we offered a 5% discount on shares issued by the Company through December 31,
2009. The maximum amount of optional cash investments that can be
made by individual participants is $300,000 in any calendar year.
The
Company and the Bank are both subject to regulatory capital guidelines as
established by federal bank regulators. Under these guidelines, in
order to be “adequately capitalized” the Company and the Bank must both maintain
a minimum ratio of Tier 1 capital to average assets and Tier 1 capital to
risk-weighted assets of 4.0% and a minimum ratio of total capital to
risk-weighted assets of 8.0%. Tier 1 capital is comprised of
shareholders’ equity less intangible assets and accumulated other comprehensive
income. Total capital for this risk-based capital standard includes
Tier 1 capital plus allowable portions of the Company’s allowance for loan
losses. Similarly, for the Bank to be considered “well capitalized,”
it must maintain a Tier 1 capital to average assets ratio of 5.0%, a Tier 1
capital to risk-weighted assets ratio of 6.0% and a total capital to
risk-weighted assets ratio of 10.0%. The Company exceeded all capital
adequacy guidelines, and the Bank exceeded all “well capitalized” guidelines at
December 31, 2009 and December 31, 2008.
In
addition, the Bank’s Board of Directors has established a minimum capital policy
that exceeds “well capitalized” regulatory standards to ensure the safety and
soundness of the Company’s banking subsidiary. The Bank’s Tier 1
capital to average assets ratio, Tier 1 capital to risk-weighted assets ratio
and total capital to risk-weighted assets ratio at December 31, 2009 were 7.72%,
11.34% and 12.59%, respectively. This compares to 7.28%, 10.19% and
11.39%, respectively, at December 31, 2008.
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. At December
31, 2009, under statutory limitations, the maximum amount that could have been
paid by the Bank subsidiary to the Company without special regulatory approval
was approximately $10.122 million. These statutory limitations
notwithstanding, the Bank entered into an informal agreement with the OCC during
the third quarter of 2009, which requires the Bank’s Board of Directors to
obtain OCC approval prior to declaring a dividend. The ability of the
Company and the Bank to pay dividends in the future is and will continue to be
influenced by regulatory policies and practices, capital guidelines, and
applicable laws.
ITEM
8: FINANCIAL STATEMENTS AND SUPPLEMENTARY
DATA
Report
of Independent Registered Public Accounting Firm
The Board
of Directors and Shareholders of The Wilber Corporation:
We have
audited the accompanying consolidated statements of condition of The Wilber
Corporation and subsidiaries (“the Company”) as of December 31, 2009 and
2008, and the
related consolidated statements of income, changes in shareholders' equity and
comprehensive income, and cash flows for the years then ended. These
consolidated financial statements are the responsibility of the Company’s
management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of The Wilber Corporation and
subsidiaries as of December 31, 2009 and 2008, and the results of their
operations and their cash flows for each of the years then ended, in conformity
with U.S. generally accepted accounting principles.
We also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), The Wilber Corporation and subsidiaries’
internal control over financial reporting as of December 31, 2009, based on
criteria established in Internal Control - Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO), and our report dated March 11, 2010 expressed an
unqualified opinion on the effectiveness of the Company’s internal control over
financial reporting.
/s/ KPMG
LLP
Albany,
New York
March 11,
2010
The
Wilber Corporation
Consolidated
Statements of Condition
|
December
31,
|
December
31,
|
|||||||
|
in
thousands except share and per share data
|
2009
|
2008
|
||||||
|
Assets
|
||||||||
|
Cash
and Due from Banks
|
$ | 10,004 | $ | 8,467 | ||||
|
Interest
Bearing Balances with Banks
|
22,648 | 35,475 | ||||||
|
Federal
Funds Sold
|
1,391 | 479 | ||||||
|
Total
Cash and Cash Equivalents
|
34,043 | 44,421 | ||||||
|
Securities
|
||||||||
|
Trading,
at Fair Value
|
1,165 | 1,155 | ||||||
|
Available-for-Sale,
at Fair Value
|
173,302 | 216,744 | ||||||
|
Held-to-Maturity,
Fair Value of $70,147 at December 31, 2009
|
||||||||
|
and
$45,009 at December 31, 2008
|
69,391 | 44,454 | ||||||
|
Other
Investments
|
5,941 | 5,693 | ||||||
|
Loans
Held for Sale
|
576 | 118 | ||||||
|
Loans
|
587,237 | 583,861 | ||||||
|
Allowance
for Loan Losses
|
(8,622 | ) | (7,564 | ) | ||||
|
Loans,
Net
|
578,615 | 576,297 | ||||||
|
Premises
and Equipment, Net
|
6,004 | 6,482 | ||||||
|
Bank
Owned Life Insurance
|
16,994 | 16,402 | ||||||
|
Goodwill
|
4,619 | 4,619 | ||||||
|
Pension
Asset
|
1,247 | - | ||||||
|
Other
Assets
|
14,680 | 8,489 | ||||||
|
Total
Assets
|
$ | 906,577 | $ | 924,874 | ||||
|
Liabilities
and Shareholders’ Equity
|
||||||||
|
Deposits:
|
||||||||
|
Demand
|
$ | 70,437 | $ | 72,168 | ||||
|
Savings,
NOW and Money Market Deposit Accounts
|
365,908 | 330,158 | ||||||
|
Certificates
of Deposit (Over $100M)
|
125,418 | 149,332 | ||||||
|
Certificates
of Deposit (Under $100M)
|
165,278 | 192,119 | ||||||
|
Other
Deposits
|
26,699 | 22,096 | ||||||
|
Total
Deposits
|
753,740 | 765,873 | ||||||
|
Short-Term
Borrowings
|
12,650 | 21,428 | ||||||
|
Long-Term
Borrowings
|
60,627 | 59,970 | ||||||
|
Pension
Liability
|
- | 869 | ||||||
|
Other
Liabilities
|
6,641 | 9,275 | ||||||
|
Total
Liabilities
|
833,658 | 857,415 | ||||||
|
Shareholders’
Equity:
|
||||||||
|
Common
Stock, $.01 Par Value, 16,000,000 Shares Authorized,
|
||||||||
|
and
13,961,664 Shares Issued at December 31, 2009
|
||||||||
|
and
December 31, 2008
|
140 | 140 | ||||||
|
Additional
Paid in Capital
|
4,224 | 4,224 | ||||||
|
Retained
Earnings
|
98,222 | 93,966 | ||||||
|
Accumulated
Other Comprehensive Loss
|
(2,866 | ) | (2,560 | ) | ||||
|
Treasury
Stock at Cost, 3,273,555 Shares at December 31, 2009
|
||||||||
|
and
3,457,960 Shares at December 31, 2008
|
(26,801 | ) | (28,311 | ) | ||||
|
Total
Shareholders’ Equity
|
72,919 | 67,459 | ||||||
|
Total
Liabilities and Shareholders’ Equity
|
$ | 906,577 | $ | 924,874 | ||||
|
See
accompanying notes to consolidated financial statements.
|
||||||||
The
Wilber Corporation
Consolidated
Statements of Income
|
Year
Ended December 31,
|
||||||||
|
in
thousands except share and per share data
|
2009
|
2008
|
||||||
|
Interest
and Dividend Income
|
||||||||
|
Interest
and Fees on Loans
|
$ | 35,554 | $ | 32,806 | ||||
|
Interest
and Dividends on Securities:
|
||||||||
|
U.S.
Government and Agency Obligations
|
9,208 | 10,396 | ||||||
|
State
and Municipal Obligations
|
1,631 | 2,286 | ||||||
|
Other
|
382 | 320 | ||||||
|
Interest
on Federal Funds Sold and Interest Bearing Balances at Other
Banks
|
63 | 584 | ||||||
|
Total
Interest and Dividend Income
|
46,838 | 46,392 | ||||||
|
Interest
Expense
|
||||||||
|
Interest
on Deposits:
|
||||||||
|
Savings,
NOW and Money Market Deposit Accounts
|
2,881 | 4,114 | ||||||
|
Certificates
of Deposit (Over $100M)
|
3,146 | 4,653 | ||||||
|
Certificates
of Deposit (Under $100M)
|
5,271 | 7,903 | ||||||
|
Other
Deposits
|
507 | 570 | ||||||
|
Interest
on Short-Term Borrowings
|
88 | 268 | ||||||
|
Interest
on Long-Term Borrowings
|
2,609 | 2,450 | ||||||
|
Total
Interest Expense
|
14,502 | 19,958 | ||||||
|
Net
Interest Income
|
32,336 | 26,434 | ||||||
|
Provision
for Loan Losses
|
3,570 | 1,530 | ||||||
|
Net
Interest Income After Provision for Loan Losses
|
28,766 | 24,904 | ||||||
|
Noninterest
Income
|
||||||||
|
Trust
Fees
|
1,514 | 1,647 | ||||||
|
Service
Charges on Deposit Accounts
|
2,291 | 2,148 | ||||||
|
Commission
Income
|
- | 246 | ||||||
|
Investment
Security Gains, Net
|
3,850 | 82 | ||||||
|
Net
Gain on Sale of Loans
|
383 | 258 | ||||||
|
Increase
in Cash Surrender Value of Bank Owned Life Insurance
|
592 | 617 | ||||||
|
Other
Service Fees
|
262 | 223 | ||||||
|
Gain
on Sale of Insurance Agency Subsidiary
|
- | 628 | ||||||
|
Other
Income
|
442 | 460 | ||||||
|
Total
Noninterest Income
|
9,334 | 6,309 | ||||||
|
Noninterest
Expense
|
||||||||
|
Salaries
|
12,040 | 11,281 | ||||||
|
Employee
Benefits
|
3,624 | 2,449 | ||||||
|
Occupancy
Expense of Company Premises
|
2,002 | 1,994 | ||||||
|
Furniture
and Equipment Expense
|
1,039 | 1,096 | ||||||
|
Computer
Service Fees
|
1,706 | 1,447 | ||||||
|
Advertising
and Marketing
|
528 | 656 | ||||||
|
Professional
Fees
|
940 | 871 | ||||||
|
FDIC
Premium Assessment
|
2,080 | 99 | ||||||
|
Loan
Collection Expense
|
694 | 188 | ||||||
|
Other
Miscellaneous Expenses
|
3,457 | 3,643 | ||||||
|
Total
Noninterest Expense
|
28,110 | 23,724 | ||||||
|
Income
Before Taxes
|
9,990 | 7,489 | ||||||
|
Income
Taxes
|
(2,589 | ) | (1,673 | ) | ||||
|
Net
Income
|
$ | 7,401 | $ | 5,816 | ||||
|
Weighted
Average Shares Outstanding
|
10,526,010 | 10,503,704 | ||||||
|
Basic
Earnings Per Share
|
$ | 0.70 | $ | 0.55 | ||||
|
See
accompanying notes to consolidated financial statements.
|
||||||||
Consolidated
Statements of Changes in Shareholders' Equity and Comprehensive
Income
|
Accumulated
|
||||||||||||||||||||||||
|
Additional
|
Other
|
|||||||||||||||||||||||
|
Common
|
Paid
in
|
Retained
|
Comprehensive
|
Treasury
|
||||||||||||||||||||
|
in
thousands except share and per share data
|
Stock
|
Capital
|
Earnings
|
Income
(Loss)
|
Stock
|
Total
|
||||||||||||||||||
|
Balance
at December 31, 2007
|
$ | 140 | $ | 4,224 | $ | 93,618 | $ | (272 | ) | $ | (28,311 | ) | $ | 69,399 | ||||||||||
|
Comprehensive
Income:
|
||||||||||||||||||||||||
|
Net
Income
|
- | - | 5,816 | - | - | 5,816 | ||||||||||||||||||
|
Change
in Net Unrealized Gain on Securities, Net of
Taxes
|
- | - | - | 2,886 | - | 2,886 | ||||||||||||||||||
|
Change
in Net Actuarial Loss on Defined Benefit Plan,
Net
of Taxes
|
- | - | - | (5,047 | ) | - | (5,047 | ) | ||||||||||||||||
|
Change
in Net Actuarial Loss on Split-
Dollar
Life Insurance Benefit
|
- | - | - | (127 | ) | - | (127 | ) | ||||||||||||||||
|
Total
Comprehensive Income
|
3,528 | |||||||||||||||||||||||
|
Effect
of Change in Measurement Date of Pension Plan
|
- | - | 60 | - | - | 60 | ||||||||||||||||||
|
Cumulative
Effect Adjustment to Record Liability for
Split-Dollar
Life Insurance Policies
|
- | - | (1,537 | ) | - | - | (1,537 | ) | ||||||||||||||||
|
Cash
Dividends ($.38 per share)
|
- | - | (3,991 | ) | - | - | (3,991 | ) | ||||||||||||||||
|
Balance
at December 31, 2008
|
$ | 140 | $ | 4,224 | $ | 93,966 | $ | (2,560 | ) | $ | (28,311 | ) | $ | 67,459 | ||||||||||
|
Comprehensive
Income:
|
||||||||||||||||||||||||
|
Net
Income
|
- | - | 7,401 | - | - | 7,401 | ||||||||||||||||||
|
Change
in Net Unrealized Gain on Securities, Net of
Taxes
|
- | - | - | (1,281 | ) | - | (1,281 | ) | ||||||||||||||||
|
Change
in Net Actuarial Loss on Defined Benefit
Plan,
Net of Taxes
|
- | - | - | 973 | - | 973 | ||||||||||||||||||
|
Change
in Net Actuarial Loss on
Split
-Dollar Life Insurance Benefit
|
- | - | - | 2 | - | 2 | ||||||||||||||||||
|
Total
Comprehensive Income
|
7,095 | |||||||||||||||||||||||
|
Cash
Dividends ($.275 per share)
|
- | - | (2,890 | ) | - | - | (2,890 | ) | ||||||||||||||||
|
Sale
of Treasury Stock under Dividend Reinvestment
and
Direct Stock Purchase Plan (184,405 shares)
|
- | - | (255 | ) | - | 1,510 | 1,255 | |||||||||||||||||
|
Balance
at December 31, 2009
|
$ | 140 | $ | 4,224 | $ | 98,222 | $ | (2,866 | ) | $ | (26,801 | ) | $ | 72,919 | ||||||||||
|
See
accompanying notes to consolidated financial statements.
|
||||||||||||||||||||||||
The
Wilber Corporation
Consolidated
Statements of Cash Flows
|
Year
Ended December 31,
|
||||||||
|
in
thousands
|
2009
|
2008
|
||||||
|
Cash
Flows from Operating Activities:
|
||||||||
|
Net
Income
|
$ | 7,401 | $ | 5,816 | ||||
|
Adjustments
to Reconcile Net Income to Net Cash
|
||||||||
|
Provided
by Operating Activities:
|
||||||||
|
Provision
for Loan Losses
|
3,570 | 1,530 | ||||||
|
Depreciation
and Amortization
|
1,658 | 1,596 | ||||||
|
Net
Amortization of Premiums and Accretion of Discounts on
Investments
|
637 | 452 | ||||||
|
Loss
on Disposal of Fixed Assets
|
4 | 192 | ||||||
|
Available-for-Sale
and Held-to-Maturity Investment Security Gains, net
|
(3,676 | ) | (510 | ) | ||||
|
Deferred
Income Tax Expense
|
382 | 831 | ||||||
|
Other
Real Estate Losses
|
149 | 91 | ||||||
|
Increase
in Cash Surrender Value of Bank Owned Life Insurance
|
(592 | ) | (617 | ) | ||||
|
Net
Decrease (Increase) in Trading Securities
|
164 | (153 | ) | |||||
|
Net
(Gains) Losses on Trading Securities
|
(174 | ) | 428 | |||||
|
Gain
on Sale of Insurance Agency Subsidiary
|
- | (628 | ) | |||||
|
Net
Gain on Sale of Mortgage Loans
|
(383 | ) | (258 | ) | ||||
|
Originations
of Mortgage Loans Held for Sale
|
(17,616 | ) | (6,179 | ) | ||||
|
Proceeds
from Sale of Mortgage Loans Held for Sale
|
17,541 | 6,775 | ||||||
|
Buyout
of Split-Dollar Life Insurance Benefit
|
(769 | ) | - | |||||
|
Increase
in Other Assets
|
(7,086 | ) | (2,387 | ) | ||||
|
Decrease
in Other Liabilities
|
(600 | ) | (1,658 | ) | ||||
|
Net
Cash Provided by Operating Activities
|
610 | 5,321 | ||||||
|
Cash
Flows from Investing Activities:
|
||||||||
|
Proceeds
from Maturities of Held-to-Maturity Investment Securities
|
13,985 | 12,627 | ||||||
|
Proceeds
from Maturities of Available-for-Sale Investment
Securities
|
56,048 | 45,650 | ||||||
|
Proceeds
from Sales and Calls of Available-for-Sale and Held-to-Maturity Investment
Securities
|
120,286 | 32,632 | ||||||
|
Purchases
of Held-to Maturity Investment Securities
|
(39,078 | ) | (5,305 | ) | ||||
|
Purchases
of Available-for-Sale Investment Securities
|
(131,784 | ) | (52,561 | ) | ||||
|
Net
Increase in Other Investments
|
(248 | ) | (911 | ) | ||||
|
Net
Increase in Loans
|
(7,944 | ) | (140,073 | ) | ||||
|
Purchase
of Premises and Equipment, Net of Disposals
|
(478 | ) | (1,720 | ) | ||||
|
Proceeds
from Sale of Premises and Equipment
|
- | 31 | ||||||
|
Proceeds
from Sale of Insurance Agency Subsidiary
|
- | 1,258 | ||||||
|
Proceeds
from Sale of Other Real Estate
|
114 | 68 | ||||||
|
Net
Cash Provided by (Used in) by Investing Activities
|
10,901 | (108,304 | ) | |||||
|
Cash
Flows from Financing Activities:
|
||||||||
|
Net
Increase in Demand Deposits, Savings, NOW,
|
||||||||
|
Money
Market and Other Deposits
|
38,622 | 77,344 | ||||||
|
Net
(Decrease) Increase in Certificates of Deposit
|
(50,755 | ) | 31,035 | |||||
|
Net
(Decrease) Increase in Short-Term Borrowings
|
(8,778 | ) | 5,642 | |||||
|
Increase
in Long-Term Borrowings
|
5,000 | 22,000 | ||||||
|
Repayment
of Long-Term Borrowings
|
(4,343 | ) | (3,568 | ) | ||||
|
Sale
of Treasury Stock
|
1,255 | - | ||||||
|
Cash
Dividends Paid
|
(2,890 | ) | (3,991 | ) | ||||
|
Net
Cash (Used in) Provided by Financing Activities
|
(21,889 | ) | 128,462 | |||||
|
Net
(Decrease) Increase in Cash and Cash Equivalents
|
(10,378 | ) | 25,479 | |||||
|
Cash
and Cash Equivalents at Beginning of Period
|
44,421 | 18,942 | ||||||
|
Cash
and Cash Equivalents at End of Period
|
$ | 34,043 | $ | 44,421 | ||||
|
Supplemental
Disclosures of Cash Flow Information:
|
||||||||
|
Cash
Paid during Period for:
|
||||||||
|
Interest
|
$ | 15,092 | $ | 19,781 | ||||
|
Income
Taxes
|
3,521 | 2,147 | ||||||
|
Noncash
Investing Activities:
|
||||||||
|
Change
in Net Unrealized Gain on Securities, Net of Tax
|
(1,281 | ) | 2,886 | |||||
|
Transfer
of Loans to Other Real Estate
|
1,654 | 70 | ||||||
|
Value
of Assets Disposed of
|
- | 630 | ||||||
|
See
accompanying notes to consolidated financial statements.
|
||||||||
Note
1. Summary of Significant Accounting Policies
The
Wilber Corporation (“Company”) operates 22 branches serving Otsego, Delaware,
Schoharie, Ulster, Chenango, Onondaga, Saratoga, and Broome Counties through its
wholly-owned subsidiary Wilber National Bank (“Bank”), and also operates 2 loan
production offices located in Saratoga and Ulster Counties. The
Parent Company's primary source of revenue is interest earned on commercial,
mortgage, and consumer loans to customers of the Bank who are predominately
individuals and small and middle-market businesses. Collectively, the
Parent Company and the Bank are referred to herein as “the
Company.”
The
Consolidated Financial Statements of the Company conform to accounting
principles generally accepted in the United States of America (“GAAP”). The
following is a summary of the more significant policies:
Principles
of Consolidation — The Consolidated Financial Statements include the accounts of
the Parent Company and its wholly owned subsidiary after elimination of
inter-company accounts and transactions. In the “Parent Company Only Financial
Statements,” the investment in subsidiary is carried under the equity method of
accounting.
Management’s
Use of Estimates — The preparation of the Consolidated Financial Statements in
conformity with GAAP requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the Consolidated Financial
Statements and the reported amounts of revenue and expense during the reporting
period. Estimates that are particularly susceptible to change in the
near term are used in connection with the determination of the allowance for
loan losses. 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, excess reserves at the
Federal Reserve Bank of New York, 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
held-to-maturity, available-for-sale, or trading. Held-to-maturity
securities are those that the Company has the intent and ability to hold to
maturity, and are reported at amortized cost. Available-for-sale
securities are reported at fair value, with net unrealized gains and losses
reflected in shareholders' equity as accumulated other comprehensive income
(loss), net of the applicable income tax effect. Trading securities
are reported at fair value, with unrealized gains and losses reflected in the
income statement. Transfers of securities between categories are
recorded at full value at the date of transfer.
Non-marketable
equity securities, including Federal Reserve Bank of New York and Federal Home
Loan Bank of New York stock required for membership in those organizations, are
carried at cost.
Management
generally classifies trading securities as “Level 1” securities consisting of
mutual funds and individual equity and debt securities held by the Company’s
executive deferred compensation plan, and are obtained from national exchanges
and active secondary markets. The price evaluations for our “Level 2”
available-for-sale securities are good faith opinions as to what a buyer in the
marketplace would pay for a security (typically in an institutional round lot
position) in a current sale. The evaluation considers interest rate
movements, new issue information, and other pertinent data. Fair
values for investments are based on quoted market prices, where available, as
provided by third party vendors. If quoted market prices are not
available, fair values provided by the vendors are based on quoted market prices
of comparable instruments in active markets and/or based on a matrix pricing
methodology that employs the Securities Industry and Financial Markets
Association standard calculations for cash flow and price/yield analysis, or
live benchmark bond pricing, or terms/conditions data available from major
pricing sources. The Company does not hold any securities classified
as “Level 3” defined as: Valuation techniques based on unobservable
inputs and supported by little or no market activity.
Premiums
and discounts are amortized or accreted over the life of the related security as
an adjustment to yield using a straight line method for bullet maturity
securities and a method that approximates the interest method for amortizing
securities. 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.
Note
1. Summary of Significant Accounting Policies, Continued
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 a combination of
earnings and/or other comprehensive income, resulting in the establishment of a
new cost basis for the security.
Loans —
Loans are reported at their outstanding principal balance plus standard
costs associated with originating or acquiring loans and other deferred
costs less deferred fees received. Interest income on loans is
accrued based upon the principal amount outstanding less the amortization of the
total deferred costs over the life of the loan plus the accretion of the
deferred fees over the life of the loan.
Loans are
placed on non-accrual status when timely collection of principal and interest in
accordance with contractual terms is doubtful. Loans are transferred
to non-accrual status generally when principal or interest payments become 90
days delinquent, unless the loan is well secured and in the process of
collection, or sooner when management concludes that circumstances indicate the
borrower may be unable to meet contractual principal or interest
payments. When a loan is transferred to non-accrual status, all
interest previously accrued in the current period but not collected is reversed
against interest income in that period. Interest accrued in a prior
period and not collected is charged off against the allowance for loan
losses.
If
ultimate repayment of a non-accrual loan is expected, any payments received are
applied in accordance with contractual terms. If ultimate repayment of principal
is not expected, any payment received on a non-accrual loan is applied to
principal until ultimate repayment becomes expected. When in the
opinion of management the collection of principal appears unlikely, the loan
balance is charged off in total or in part. If ultimate repayment of
principal is not expected, any payment received on a non-accrual loan is applied
to principal until ultimate repayment becomes expected. Non-accrual
loans are returned to accrual status when they become current as to principal
and interest or demonstrate a period of performance under the contractual terms
and, in the opinion of management, are fully collectible as to principal and
interest. The previously applied cash interest payments to principal
are recognized over the remaining maturity of the loan.
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 TDR status after a period of performance.
Allowance
for Loan Losses — The allowance for loan losses is the amount that, 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 function 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
adjustments to the allowance for loan losses are made periodically by changes to
the provision for loan losses.
The
allowance for loan losses related to impaired loans is based on one of three
methodologies, either: i) the discounted cash flows using the loan’s
initial effective interest rate, ii) the market value of the loan, or iii) 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 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.
Note
1. Summary of Significant Accounting Policies, Continued
Management
always maintains an allowance for loan losses that it deems adequate to cover
the risk inherent in the loan portfolio. Nonetheless, while
management uses available information to recognize loan losses, future additions
or reductions 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”) — OREO consists of both properties formerly pledged
as collateral on loans that which have been acquired by the Company through
foreclosure proceedings or acceptance of a deed in lieu of foreclosure, and
properties acquired outside of foreclosure proceedings and pending final
disposition. Also included is Bank premises and equipment acquired
with the prior intent of development for branch operations, but with a
subsequent decision to halt development and sell the property. 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 real estate
expenses. 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 39 years for buildings and from 3 to 20 years for furniture and
equipment. Maintenance and repairs are charged to expense as
incurred. It is the Company’s policy to directly expense capital
items in amounts less than $2,000.
Bank-Owned
Life Insurance (“BOLI”) —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
basis. Deferred tax assets and liabilities are recognized for future
tax consequences attributable to temporary differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases and operating loss and tax credit carry
forwards. Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the years in which
temporary differences are expected to be recovered or settled. The
effect on deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment
date.
The
Company recognizes interest and penalties accrued on any unrecognized tax
positions as a component of income tax expense.
Pension —
The Company maintains a noncontributory, defined benefit pension plan that was
frozen effective February 28, 2006. Under the frozen plan, no future
benefits will be accrued for plan participants, nor will any new participants be
enrolled in the plan. The Company also maintains 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. The Company
recognizes the over-funded or under-funded status of the defined benefit
postretirement plan as an asset or liability on its balance sheet and recognizes
changes in the funded status in comprehensive income in the year in which the
change occurred. Gains and losses, prior service costs or credits,
and transition assets or obligations that had not yet been included in net
periodic benefit cost are recognized as components of the ending balance of
accumulated other comprehensive income, net of tax.
Supplemental
Executive Retirement Plan (“SERP”) — The Bank has executed SERP agreements with
two former executives. Monthly a distribution is made to each retired
executive per the benefits defined in the agreement. The SERP is
recorded as an Other Benefits expense with an offsetting liability to Deferred
Compensation.
Split-Dollar
Life Insurance Plan — The Company provides a split-dollar life insurance plan to
former members of senior management. The post retirement aspect of
the split-dollar life insurance arrangement is recognized as a liability on the
Consolidated Statements of Condition. The benefit obligation is
re-evaluated annually and is recorded as a change to the Company’s liability
with an offsetting amount recorded in other comprehensive income. The
cost of insurance is recognized through the income statement.
Note
1. Summary of Significant Accounting Policies, Continued
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, or otherwise charged
to retained earnings.
Dividend
Reinvestment and Direct Stock Purchase Plan – Issuance of the Company’s common
stock under the Board approved DRSPP will be administered and recorded on the
Company’s books in accordance with the prospectus and registration statement on
file with the SEC.
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, presents 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
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 applicable income
taxes), the unrecognized pension gain/loss/cost (net of applicable income taxes)
for the period, and the net actuarial gain or loss on split-dollar life
insurance benefits. Accumulated other comprehensive income (loss) represents the
sum of these items as of the balance sheet date and is presented in the
consolidated statement of changes in shareholders’ equity and comprehensive
income.
Segment
Reporting — The Company's operations are solely in the banking industry and
include the provision of traditional commercial banking services. The
Company operates solely in the geographical region of central and upstate New
York State. The Company has identified separate operating segments;
however, these segments do not meet the quantitative thresholds for separate
disclosure.
Goodwill
and Other Intangible Assets —Acquired intangible assets (other than goodwill)
are amortized over their useful economic life, while goodwill and any acquired
intangible assets with an indefinite useful economic life are not amortized, but
are reviewed for impairment on an annual basis.
When
facts and circumstances indicate there may be an impairment of amortizable
intangible assets, the Company evaluates the recoverability of the asset
carrying value, using estimates of the undiscounted future cash flows over the
remaining asset life. Any impairment loss is measured by the excess
of carrying value over fair value.
Goodwill
impairment tests are performed on an annual basis as of August 31, and when
events or circumstances dictate that re-evaluation is warranted. In
these tests, the fair value of each reporting unit is compared to the carrying
amount of that reporting unit in order to determine if impairment is
indicated. If so, the implied fair value of the reporting unit’s
goodwill is compared to its carrying amount and the impairment loss is measured
by the excess of carrying value over fair value.
Recent Accounting
Pronouncements. The following accounting pronouncements were
adopted by the Company during 2009.
On
January 1, 2009, the Company adopted the Accounting Standards Codification (ASC)
Topic 820-10-15, Fair Value
Measurements and Disclosures for certain non financial assets and non
financial liabilities, except those that are recognized or disclosed at fair
value in the financial statements on a recurring basis (at least
annually). The exceptions listed above were required to be and were
disclosed in 2008. The adoption of ASC Topic 820-10-15 had no impact
on the Company’s financial statements.
Note
1. Summary of Significant Accounting Policies, Continued
On
January 1, 2009, the Company adopted the provisions of the ASC Topic 815-10-50,
Derivatives and
Hedging. The new standard was intended to improve financial
reporting about derivative instruments and hedging activities by requiring
enhanced disclosures to enable investors to better understand their effects on
an entity’s financial position, financial performance, and cash
flows. The adoption of ASC Topic 815-10-50 had no impact on the
Company’s financial statements.
In the
second quarter of 2009, the Company adopted ASC Topic 825-10-50, Fair Value Measurements and
Disclosures relating to interim periods. This topic amended
other fair value disclosure topics to require disclosures about fair value of
financial instruments for interim reporting periods of publicly traded companies
as well as in annual financial statements. The interim disclosure is included in
the Fair Value note of these Consolidated Financial Statements.
In the
second quarter of 2009, the Company adopted ASC Topic 320-10-65, Recognition and Presentation of
Other-Than-Temporary Impairments (“OTTI”). The objective of an
OTTI analysis under existing U.S. GAAP is to determine whether the holder of an
investment in a debt or equity security for which changes in fair value are not
regularly recognized in earnings (such as securities classified as
held-to-maturity or available-for-sale) should recognize a loss in earnings when
the investment is impaired. An investment is impaired if the fair
value of the investment is less than its amortized cost basis.
This
topic amended the OTTI guidance in U.S. GAAP for debt securities to make the
guidance more operational and to improve the presentation and disclosure of OTTI
on debt and equity securities in the financial statements. It did not
amend existing recognition and measurement guidance related to OTTI of equity
securities. The adoption of ASC Topic 320-10-65 did not significantly
impact the Company’s financial statements.
In the
second quarter of 2009, the Company adopted the provision of ASC Topic
820-10-35, Determining Fair
Value When the Volume and Level of Activity for the Asset or Liability Have
Significantly Decreased and Identifying Transactions That Are Not Orderly.
This topic provided additional guidance for estimating fair value when
the volume and level of activity for the asset or liability have significantly
decreased. This topic also included guidance on identifying
circumstances that indicate that a transaction is not orderly. It
emphasized that even if there has been a significant decrease in the volume and
level of activity for the asset or liability and regardless of the valuation
technique(s) used, the objective of a fair value measurement remains the
same. Fair value is the price that would be received to sell an asset
or paid to transfer a liability in an orderly transaction (that is, not a forced
liquidation or distressed sale) between market participants at the measurement
date under current market conditions. The adoption of ASC Topic
820-10-35 did not significantly impact the Company’s financial
statements.
In May
2009, the Financial Accounting Standards Board issued ASC Topic 855-10, Subsequent
Events. This topic addresses accounting
and disclosure requirements related to subsequent events. It requires
management to evaluate subsequent events through the date the financial
statements are either issued or available to be issued, depending on the
Company’s expectation of whether it will widely distribute its financial
statements to its shareholders and other financial statement
users. Companies are required to disclose the date through which
subsequent events have been evaluated. ASC Topic 855-10 became
effective for the Company’s financial statements for periods ending after June
15, 2009.
In
February 2010, the ASC Topic 855-10 was amended due to a potential conflict with
SEC guidance. As amended, the entities required to disclose
subsequent events were refined to be classified as either a SEC filer or a
conduit bond obligor for conduit debt securities that are traded in a public
market. The disclosure requirement was expanded to include revised financial
statements; which include financial statements revised as a result of correction
of an error or retrospective application of GAAP. The requirement to disclose
the date through which the subsequent events have been evaluated was
eliminated.
In June
2009, the Financial Accounting Standards Board (“FASB”) issued a pronouncement
which establishes the FASB Accounting Standards Codification (the
“Codification”) as the source of authoritative accounting principles recognized
by the FASB to be applied by non-governmental entities in the preparation of
financial statements in conformity with GAAP. Rules and interpretive
releases of the Securities and Exchange Commission (“SEC”) under authority of
federal securities laws are also sources of authoritative guidance for SEC
registrants. All guidance contained in the Codification carries an
equal level of authority. All non-grandfathered, non-SEC accounting
literature not included in the Codification is superseded and deemed
non-authoritative. The new pronouncement was effective for the
Company’s financial statements for periods ending after September 15,
2009. The pronouncement did not have a significant impact on the
Company’s financial statements.
Note
1. Summary of Significant Accounting Policies, Continued
Subsequent Events – The
Company has evaluated whether any subsequent events that requires recognition or
disclosure have taken place through the date these financial statements were
issued. There were no subsequent events that materially affected
these Consolidated Financial Statements.
|
Note
2. Federal Reserve Bank Requirement
|
|
The
Company is required to maintain a clearing balance with the Federal
Reserve Bank of New York. The required clearing balance at
December 31, 2009 was $1.300
million.
|
|
Note
3. Investment Securities
|
|
The
amortized cost and fair value of investment securities are shown in the
table below. The trading securities are comprised of mutual
funds and individual equity and debt securities held for the Company's
executive deferred compensation
plan.
|
|
December
31, 2009
|
||||||||||||||||
|
Gross
|
Gross
|
|||||||||||||||
|
Amortized
|
Unrealized
|
Unrealized
|
Estimated
|
|||||||||||||
|
in
thousands
|
Cost
|
Gains
|
Losses
|
Fair
Value
|
||||||||||||
|
Available-for-Sale
Portfolio
|
||||||||||||||||
|
Obligations
of States and Political Subdivisions
|
$ | 32,872 | $ | 496 | $ | 412 | $ | 32,956 | ||||||||
|
Mortgage-Backed
Securities
|
139,192 | 1,800 | 724 | 140,268 | ||||||||||||
|
Equity
Securities
|
78 | - | - | 78 | ||||||||||||
| $ | 172,142 | $ | 2,296 | $ | 1,136 | $ | 173,302 | |||||||||
|
Trading
Portfolio
|
$ | 1,194 | $ | 55 | $ | 84 | $ | 1,165 | ||||||||
|
Held-to-Maturity
Portfolio
|
||||||||||||||||
|
Obligations
of States and Political Subdivisions
|
$ | 14,407 | $ | 277 | $ | 6 | $ | 14,678 | ||||||||
|
Mortgage-Backed
Securities
|
54,984 | 832 | 347 | 55,469 | ||||||||||||
| $ | 69,391 | $ | 1,109 | $ | 353 | $ | 70,147 | |||||||||
|
December
31, 2008
|
||||||||||||||||
|
Gross
|
Gross
|
|||||||||||||||
|
Amortized
|
Unrealized
|
Unrealized
|
Estimated
|
|||||||||||||
|
in
thousands
|
Cost
|
Gains
|
Losses
|
Fair
Value
|
||||||||||||
|
Available-for-Sale
Portfolio
|
||||||||||||||||
|
Obligations
of States and Political Subdivisions
|
$ | 36,205 | $ | 582 | $ | 11 | $ | 36,776 | ||||||||
|
Mortgage-Backed
Securities
|
176,116 | 2,815 | 103 | 178,828 | ||||||||||||
|
Corporate
Securities
|
1,047 | - | 35 | 1,012 | ||||||||||||
|
Equity
Securities
|
128 | - | - | 128 | ||||||||||||
| $ | 213,496 | $ | 3,397 | $ | 149 | $ | 216,744 | |||||||||
|
Trading
Portfolio
|
$ | 1,391 | $ | 9 | $ | 245 | $ | 1,155 | ||||||||
|
Held-to-Maturity
Portfolio
|
||||||||||||||||
|
Obligations
of States and Political Subdivisions
|
$ | 13,961 | $ | 194 | $ | 9 | $ | 14,146 | ||||||||
|
Mortgage-Backed
Securities
|
30,493 | 430 | 60 | 30,863 | ||||||||||||
| $ | 44,454 | $ | 624 | $ | 69 | $ | 45,009 | |||||||||
|
Note
3. Investment Securities, Continued
|
|
The
following tables provide information on temporarily impaired
securities:
|
|
December
31, 2009
|
||||||||||||||||||||||||
|
Less
Than 12 Months
|
12
Months or Longer
|
Total
|
||||||||||||||||||||||
|
Estimated
|
Unrealized
|
Estimated
|
Unrealized
|
Estimated
|
Unrealized
|
|||||||||||||||||||
|
in
thousands
|
Fair
Value
|
Losses
|
Fair
Value
|
Losses
|
Fair
Value
|
Losses
|
||||||||||||||||||
| Obligations of States and Political Subdivisions | $ | 10,567 | $ | 415 | $ | 67 | $ | 3 | $ | 10,634 | $ | 418 | ||||||||||||
|
Mortgage-Backed
Securities
|
73,663 | 1,027 | 1,422 | 44 | 75,085 | 1,071 | ||||||||||||||||||
| $ | 84,230 | $ | 1,442 | $ | 1,489 | $ | 47 | $ | 85,719 | $ | 1,489 | |||||||||||||
|
December
31, 2008
|
||||||||||||||||||||||||
|
Less
Than 12 Months
|
12
Months or Longer
|
Total
|
||||||||||||||||||||||
|
Estimated
|
Unrealized
|
Estimated
|
Unrealized
|
Estimated
|
Unrealized
|
|||||||||||||||||||
|
in
thousands
|
Fair
Value
|
Losses
|
Fair
Value
|
Losses
|
Fair
Value
|
Losses
|
||||||||||||||||||
| Obligations of States and Political Subdivisions | $ | 1,625 | $ | 20 | $ | - | $ | - | $ | 1,625 | $ | 20 | ||||||||||||
|
Mortgage-Backed
Securities
|
32,052 | 106 | 1,976 | 57 | 34,028 | 163 | ||||||||||||||||||
|
Corporate
Securities
|
1,012 | 35 | - | - | 1,012 | 35 | ||||||||||||||||||
| $ | 34,689 | $ | 161 | $ | 1,976 | $ | 57 | $ | 36,665 | $ | 218 | |||||||||||||
|
The
above unrealized losses are considered temporary, based on the
following:
|
||||||||
|
Obligations
of states and political subdivisions and corporate securities: The
unrealized losses on these investments were caused by market interest rate
increases since the time of purchase. The contractual terms of
these investments require the issuer to settle the securities at par upon
maturity of the investment. Because the decline in fair value
is attributed to market interest rates and not credit quality, and because
the Company has the ability and intent to hold these investments until a
market price recovery, which may be to maturity, these investments are not
considered other than temporarily impaired.
|
||||||||
|
Mortgage-backed
securities: The unrealized losses on investments in
mortgage-backed securities were caused by market interest rate differences
between the time of purchase and the measurement date. All of
the contractual cash flows of these securities are rated AAA or backed by
various U.S. Government Agencies or U.S. Government Sponsored Enterprises
such as Government National Mortgage Association, Federal National
Mortgage Association and Federal Home Loan Mortgage
Corporation. 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. Although principal payments on mortgage-backed
securities are received monthly, they are included based on the final
contractual maturity date, while equity securities have no stated maturity
and are excluded from the following
tables.
|
||||||||
|
December
31, 2009
|
||||||||
|
Amortized
|
Estimated
|
|||||||
|
in
thousands
|
Cost
|
Fair
Value
|
||||||
|
Available-for-Sale
Securities
|
||||||||
|
Due
in One Year or Less
|
$ | 11,600 | $ | 11,756 | ||||
|
Due
After One Year Through Five Years
|
17,178 | 17,711 | ||||||
|
Due
After Five Years Through Ten Years
|
20,191 | 20,341 | ||||||
|
Due
After Ten Years
|
123,095 | 123,416 | ||||||
| $ | 172,064 | $ | 173,224 | |||||
|
Note
3. Investment Securities, Continued
|
||||||||
|
December
31, 2009
|
||||||||
|
Amortized
|
Estimated
|
|||||||
|
in
thousands
|
Cost
|
Fair
Value
|
||||||
|
Held-to-Maturity
Securities
|
||||||||
|
Due
in One Year or Less
|
$ | 7,466 | $ | 7,561 | ||||
|
Due
After One Year Through Five Years
|
7,417 | 7,731 | ||||||
|
Due
After Five Years Through Ten Years
|
15,524 | 16,100 | ||||||
|
Due
After Ten Years
|
38,984 | 38,755 | ||||||
| $ | 69,391 | $ | 70,147 | |||||
|
Proceeds
from sales and calls of available-for sale investment securities were
$120.286 million and $32.632 million for the years ended December 31, 2009
and 2008, respectively.
|
||||||||
|
The
following table sets forth information with regard to securities gains and
losses realized on sales or calls of available-for-sale and
held-to-maturity securities:
|
||||||||
|
Year
Ended December 31,
|
||||||||
|
in
thousands
|
2009
|
2008
|
||||||
|
Gross
Gains
|
$ | 3,677 | $ | 565 | ||||
|
Gross
Losses
|
1 | 55 | ||||||
| Net Securities Gains | $ | 3,676 | $ | 510 | ||||
|
Federal
Home Loan Bank of New York ("FHLBNY") and Federal Reserve Bank stock
totaling $4.039 million at December 31, 2009 and $3.860 million at
December 31, 2008 is carried at cost as fair values are not readily
determinable. Both investments are classified in other
investments on the Company's consolidated statements of condition and are
required for membership. The FHLBNY common stock we own enables
us to borrow funds under the FHLBNY advance program and qualify for
membership. As a member of the FHLBNY, the Company is
required to hold shares of Federal Home Loan Bank stock. The Company’s
holding requirement varies based on its activities, primarily its
outstanding borrowings, with the FHLBNY. The Company’s
investment in FHLB stock is carried at cost. The Company
conducts a periodic review and evaluation of its Federal Home Loan Bank
stock to determine if any impairment exists. The factors considered
include, among other things, significant deterioration in earnings
performance, credit rating, asset quality; significant adverse change in
the regulatory or economic environment; and other factors that raise
significant concerns about the ability for a Federal Home Loan Bank to
continue as a going concern.
|
||||||||
|
At
December 31, 2009, investment securities with an amortized cost of
$219.468 million and an estimated fair value of $221.379 million were
pledged as collateral for certain public deposits, borrowings, and other
purposes as required or permitted by
law.
|
||||||||
|
Note
4. Loans
|
||||||||
|
December
31,
|
||||||||
|
in
thousands
|
2009
|
2008
|
||||||
|
Residential
Real Estate
|
$ | 177,720 | $ | 171,061 | ||||
|
Commercial
Real Estate
|
240,823 | 229,867 | ||||||
|
Commercial
|
93,928 | 99,397 | ||||||
|
Consumer
|
74,766 | 83,536 | ||||||
| $ | 587,237 | $ | 583,861 | |||||
|
Less:
Allowance for Loan Losses
|
(8,622 | ) | (7,564 | ) | ||||
|
Net
Loans
|
$ | 578,615 | $ | 576,297 | ||||
|
At
December 31, 2009, $71.910 million in residential real estate loans were
pledged as collateral for FHLBNY advances.
|
|||
|
As
of the dates 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
collectability or present other unfavorable features. Loan
transactions with related parties are as
follows:
|
|||
|
December
31,
|
||||||||
|
in
thousands
|
2009
|
2008
|
||||||
|
Balance
at Beginning of Year
|
$ | 11,325 | $ | 16,900 | ||||
|
Loan
Payments
|
(2,117 | ) | (6,073 | ) | ||||
|
Decreases
Due to Director and Executive Officer Attrition
|
(5,140 | ) | - | |||||
|
New
Loans and Advances
|
3,575 | 498 | ||||||
|
Ending
Balance
|
$ | 7,643 | $ | 11,325 | ||||
|
Note
5. Allowance for Loan Losses
|
||||||||
|
Changes
in the allowance for loan losses are presented in the following
summary:
|
||||||||
|
Year
Ended December 31,
|
||||||||
|
in
thousands
|
2009
|
2008
|
||||||
|
Balance
at Beginning of YearA
|
$ | 7,564 | $ | 6,977 | ||||
|
Provision
for Loan Losses
|
3,570 | 1,530 | ||||||
|
Recoveries
Credited
|
688 | 443 | ||||||
|
Loans
Charged-Off
|
(3,200 | ) | (1,386 | ) | ||||
|
Ending
Balance
|
$ | 8,622 | $ | 7,564 | ||||
|
The
following provides information on impaired loans for the periods
presented:
|
||||||||
|
As
of and For the Year
|
||||||||
|
Ended
December 31,
|
||||||||
|
in
thousands
|
2009
|
2008
|
||||||
|
Impaired
Loans
|
$ | 12,957 | $ | 8,620 | ||||
|
Allowance
for Impaired Loans
|
721 | 1,160 | ||||||
|
Average
Recorded Investment in Impaired Loans
|
12,171 | 7,327 | ||||||
|
At
December 31, 2009, $5.844 million of the impaired loans had a specific
allowance for loan losses reserve allocation of $721 thousand compared to
$5.120 million of impaired loans at December 31, 2008 with a related
reserve allocation of $1.160 million.
|
|||
|
The
Company recorded interest income related to impaired loans of $82 thousand
and $215 thousand for the years ended December 31, 2009 and 2008,
respectively.
|
|||
|
The
following table sets forth information with regards to nonperforming
loans:
|
|||
|
Year
Ended December 31,
|
||||||||
|
in
thousands
|
2009
|
2008
|
||||||
|
Loans
in Nonacccrual Status
|
$ | 12,149 | $ | 5,845 | ||||
|
Loans
Contractually Past Due 90 Days or More and Still Accruing
Interest
|
731 | 1,366 | ||||||
|
Total
Nonperforming Loans
|
$ | 12,880 | $ | 7,211 | ||||
|
The
Company did not record any interest income related to nonaccrual loans for
the years ended December 31, 2009 and 2008. Had the loans in
nonaccrual status performed in accordance with their original terms,
additional interest income of $640 thousand and $450 thousand would have
been recorded for the years ended December 31, 2009 and 2008,
respectively.
|
|
Note
6. Commitments and Contingencies
|
|||
|
Credit
Commitments
|
|||
|
Financial
instruments whose contract amounts represent credit risk consist of the
following:
|
|||
|
December
31,
|
||||||||
|
in
thousands
|
2009
|
2008
|
||||||
|
Commitments
to Extend Credit
|
$ | 96,859 | $ | 126,717 | ||||
|
Commercial
and Standby Letters of Credit
|
13,451 | 12,779 | ||||||
|
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. Commercial letters of credit are conditional commitments
on the part of the Company to facilitate payment, for the account of a
borrower, for goods and services in the ordinary course of business that
become payable upon fulfillment of certain conditions. Standby
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. 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.
|
|||
|
If
deemed necessary, the amount of collateral obtained on commercial and
standby letters of credit by the Company upon extension of credit, is
based upon management's credit evaluation of the
borrower. Collateral held varies and can include residential
and commercial real estate.
|
|||
|
The
estimated fair value of the Company’s standby letters of credit was $16
thousand and $12 thousand at December 31, 2009 and December 31, 2008,
respectively. The estimated fair value of standby letters of
credit at their inception is equal to the fee that is charged to the
customer by the Company. Generally, the Company’s standby
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 standby letter of credit to the
respective dates above.
|
|||
|
Lease
Obligations
|
|||
|
Future
payments under operating and capital lease obligations as of December 31,
2009 are as follows:
|
|||
|
in
thousands
|
Amount
|
||
|
2010
|
$ 499
|
||
|
2011
|
450
|
||
|
2012
|
387
|
||
|
2013
|
193
|
||
|
2014
|
121
|
||
|
Thereafter
|
887
|
||
|
Legal
Contingencies
|
|
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
7. Premises and Equipment
|
||||||||
|
December
31,
|
||||||||
|
in
thousands
|
2009
|
2008
|
||||||
|
Land
|
$ | 589 | $ | 589 | ||||
|
Buildings
|
8,104 | 8,094 | ||||||
|
Furniture,
Fixtures and Equipment
|
6,289 | 6,350 | ||||||
| $ | 14,982 | $ | 15,033 | |||||
|
Less:
Accumulated Depreciation
|
(8,978 | ) | (8,551 | ) | ||||
| $ | 6,004 | $ | 6,482 | |||||
|
Depreciation
expense was $951 thousand and $930 thousand for the years ended December
31, 2009 and 2008, respectively.
|
|
Note
8. Goodwill and Intangible Assets
|
||||||||
|
Goodwill
and intangible assets are presented in the following
table:
|
||||||||
|
December
31,
|
||||||||
|
in
thousands
|
2009
|
2008
|
||||||
|
Goodwill
|
$ | 4,619 | $ | 4,619 | ||||
|
Core
Deposit Intangible
|
||||||||
|
Intangible
Assets, Gross
|
$ | 777 | $ | 777 | ||||
|
Less:
Accumulated Amortization
|
(769 | ) | (670 | ) | ||||
|
Intangible
Assets, Net
|
$ | 8 | $ | 107 | ||||
|
Amortization
expense on intangible assets was $99 thousand for 2009 and $114 thousand
for 2008. The core deposit intangible is amortized over a
weighted average period of approximately five years. The
unamortized portion of the core deposit intangible of $8 thousand will be
amortized during 2010.
|
|
Note
9. Deposits
|
||||||||
|
The
following table sets forth contractual maturities of all other time
deposits:
|
||||||||
|
December
31, 2009
|
||||||||
|
in
thousands
|
Amount
|
%
|
||||||
|
2010
|
$ | 148,085 | 50.94 | |||||
|
2011
|
53,748 | 18.49 | ||||||
|
2012
|
25,246 | 8.68 | ||||||
|
2013
|
37,618 | 12.94 | ||||||
|
2014
|
15,645 | 5.38 | ||||||
|
Thereafter
|
10,354 | 3.57 | ||||||
| $ | 290,696 | 100.00 | ||||||
|
At
December 31, 2009, Christmas Club accounts totaling $267 thousand are
included as a component of Other Deposits in the Company's consolidated
statements of condition. These accounts are considered time
deposits with a one-year maturity and are scheduled to mature in 2010, but
are excluded from this maturity
schedule.
|
|
Note
10. Borrowings
|
||||||||
|
The
following is a summary of borrowings:
|
||||||||
|
December
31,
|
||||||||
|
in
thousands
|
2009
|
2008
|
||||||
|
Short-Term
Borrowings:
|
||||||||
|
Securities
Sold Under Agreements to Repurchase
|
$ | 12,165 | $ | 19,337 | ||||
|
Treasury
Tax and Loan Notes
|
485 | 2,091 | ||||||
|
Total
Short-Term Borrowings
|
$ | 12,650 | $ | 21,428 | ||||
|
Long-Term
Borrowings:
|
||||||||
|
Advances
from Federal Home Loan Bank of New York
|
||||||||
|
Bearing
Interest at 4.31% Due November 2015
|
4,000 | 4,000 | ||||||
|
Bearing
Interest at 5.03%, Due January 2009
|
- | 56 | ||||||
|
Bearing
Interest at 3.85%, Due January 2010
|
37 | 251 | ||||||
|
Bearing
Interest at 3.12%, Due March 2011
|
727 | 1,252 | ||||||
|
Bearing
Interest at 5.89% to 5.95%, Due July 2011
|
357 | 556 | ||||||
|
Bearing
Interest at 5.30%, Due December 2011
|
508 | 733 | ||||||
|
Bearing
Interest at 4.11%, Due January 2012
|
341 | 488 | ||||||
|
Bearing
Interest at 4.42%, Due January 2015
|
571 | 668 | ||||||
|
Bearing
Interest at 6.26%, Due July 2016
|
560 | 626 | ||||||
|
Bearing
Interest at 5.77%, Due December 2016
|
1,158 | 1,287 | ||||||
|
Bearing
Interest at 6.04%, Due January 2017
|
589 | 653 | ||||||
|
Bearing
Interest at 6.46%, Due July 2021
|
365 | 385 | ||||||
|
Bearing
Interest at 5.07%, Due January 2025
|
3,283 | 3,423 | ||||||
|
Bearing
Interest at 4.97%, Due October 2014
|
1,844 | 2,168 | ||||||
|
Bearing
Interest at 4.69%, Due March 2012, Callable March 2010
|
5,000 | 5,000 | ||||||
|
Bearing
Interest at 4.34%, Due March 2012, Callable March 2010
|
5,000 | 5,000 | ||||||
|
Bearing
Interest at 4.33%, Due April 2012, Callable January 2010
|
10,000 | 10,000 | ||||||
|
Bearing
Interest at 4.45%, Due October 2012, Callable October 2010
|
2,500 | 2,500 | ||||||
|
Bearing
Interest at 4.12%, Due May 2018, Callable May 2013
|
3,500 | 3,500 | ||||||
|
Bearing
Interest at 3.85%, Due January 2015
|
3,054 | 3,578 | ||||||
|
Bearing
Interest at 3.91%, Due May 2015
|
4,041 | 4,686 | ||||||
|
Bearing
Interest at 4.80%, Due May 2015
|
3,252 | 3,419 | ||||||
|
Bearing
Interest at 4.17%, Due July 2013
|
2,260 | 2,819 | ||||||
|
Bearing
Interest at 4.94%, Due July 2018
|
2,680 | 2,922 | ||||||
|
Bearing
Interest at 3.22%, Due December 2016
|
5,000 | - | ||||||
|
Total
Long-Term Borrowings
|
$ | 60,627 | $ | 59,970 | ||||
|
Borrowings
from the Federal Home Loan Bank of New York ("FHLBNY") are collateralized
by mortgage loans, or mortgage-backed securities. At December
31, 2009, $16.000 million of the long term borrowings were collateralized
by securities with an amortized cost and estimated fair value of $20.658
million and $21.269 million respectively. The
remaining long term borrowings totaling $44.627 million are collateralized
by the Company's mortgage loans. At December 31, 2009, the Bank
had a line of credit of $95.025 million with the FHLBNY. However, based on
outstanding borrowings at FHLBNY, the total potential borrowing capacity
on this line is reduced to $13.808 million at December 31,
2009.
|
||||
|
At
December 31, 2008, $16.000 million of the long term borrowings were
collateralized by securities with an amortized cost and estimated fair
value of $26.103 million and $26.298 million, respectively. The
remaining long term borrowings totaling $43.970 million are collateralized
by the Company's mortgage loans. At December 31, 2008, the Bank
had a line credit of $85.167 million with the FHLBNY. However, based on
outstanding borrowings at FHLBNY, the total potential borrowing capacity
on this line was $7.032 million at December 31,
2008.
|
||||
|
Note
10. Borrowings, Continued
|
||||
|
Information
related to short-term borrowings is as follows:
|
||||
|
As
of and for the
|
||||||||
|
Year
Ended December 31,
|
||||||||
|
in
thousands
|
2009
|
2008
|
||||||
|
Outstanding
Balance at End of Period
|
$ | 12,650 | $ | 21,428 | ||||
|
Average
Interest Rate at End of Period
|
0.43 | % | 1.18 | % | ||||
|
Maximum
Outstanding at any Month-End
|
21,137 | 30,508 | ||||||
|
Average
Amount Outstanding during Period
|
16,604 | 19,383 | ||||||
|
Average
Interest Rate during Period
|
0.53 | % | 1.50 | % | ||||
|
Average
amounts outstanding and average interest rates are computed using weighted
daily averages.
|
||||
|
Securities
sold under agreements to repurchase included in short-term borrowings
represent the purchase of interests in government securities by the Bank’s
customers or other third parties, which are repurchased by the Bank on the
following business day or at stated maturity. The underlying securities
are held in a third party custodian account and are under the Company’s
control. The amortized cost and estimated fair value of
securities pledged as collateral for repurchase agreements was $17.461
million and $17.462 million, respectively, at December 31,
2009. The amortized cost and estimated fair value of securities
pledged as collateral for repurchase agreements was $30.149 million and
$30.700 million, respectively, at December 31, 2008. These
amounts are included in the total of investment securities pledged
disclosed in the Investment Securities Note
3.
|
||||
|
Note
11. Employee Benefit Plans
|
|
Pension
Plan
|
|||||||||
|
The
Company's defined benefit pension plan has been frozen since February
2006. Under the frozen plan, no future benefits will be accrued
for plan participants, nor will any new participants be enrolled in the
plan. This plan is sponsored by the Company's bank
subsidiary. Prior to being frozen, the plan covered employees
who had attained the age of 21 and completed one year of service. Although
the plan was frozen, the Company maintains the responsibility for funding
the plan. The Company's funding practice is to contribute at
least the minimum amount annually to meet minimum funding requirements.
The funded status of the Company’s defined benefit pension plan has and
will continue to be affected by market conditions. We expect to
continue to fund this plan on an as needed basis and do not foresee any
issues or conditions that could negatively impact the payment of benefit
obligations to plan participants. The Company elected to make a
contribution in the amount of $1.000 million in 2009. 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 changes in the plan's projected benefit
obligation and plan assets and the plan's funded status and amounts
recognized in the consolidated statements of condition based on a December
31, measurement date. For the year ended December 31, 2008, the
Company recorded transition costs through a $60 thousand, net of tax,
adjustment to Retained Earnings for the fourth quarter of 2007 in
accordance with the new measurement date of December 31. Prior
to December 31, 2008, the measurement date for plan assets and the benefit
obligation was as of September 30. As such, for the year ended
December 31, 2008, the change in the plan's projected benefit obligation
and plan assets in the following table represents the fifteen-month period
beginning October 1, 2007 and ending December 31,
2008.
|
|||||||||
|
in
thousands
|
2009
|
2008
|
||||||
|
Change
in Benefit Obligation:
|
||||||||
|
Benefit
Obligation at Beginning of Year
|
$ | 16,205 | $ | 14,914 | ||||
|
Service
Cost
|
151 | 193 | ||||||
|
Interest
Cost
|
961 | 1,134 | ||||||
|
Actuarial
Loss and Expected Expenses
|
642 | 1,076 | ||||||
|
Benefits
Paid
|
(935 | ) | (1,112 | ) | ||||
|
Projected
Benefit Obligation at End of Year
|
$ | 17,024 | $ | 16,205 | ||||
|
Change
in Plan Assets:
|
||||||||
|
Fair
Value of Plan Assets at Beginning of Year
|
$ | 15,336 | $ | 19,786 | ||||
|
Actual
Gain (Loss) on Plan Assets and Actual Expenses
|
2,870 | (5,338 | ) | |||||
|
Employer
Contribution
|
1,000 | 2,000 | ||||||
|
Benefits
Paid
|
(935 | ) | (1,112 | ) | ||||
|
Fair
Value of Plan Assets at End of Year
|
$ | 18,271 | $ | 15,336 | ||||
|
Funded
Status at End of Year
|
$ | 1,247 | $ | (869 | ) | |||
|
The
amount totaling $1.247 million at December 31, 2009, was recognized as a
Pension Asset in the consolidated statement of condition. The
underfunded amount totaling $869 thousand at December 31, 2008, was
recognized as a Pension Liability in the consolidated statement of
condition.
|
|
Amounts
recognized in accumulated other comprehensive income, pretax, consist of
the following at December 31,:
|
|
in
thousands
|
2009
|
2008
|
||||||
|
Net
Loss
|
$ | 5,635 | $ | 7,220 | ||||
|
Note
11. Employee Benefit Plans, Continued
|
|||||||||
|
The
following table presents a comparison of the accumulated benefit
obligation and plan assets:
|
|||||||||
|
in
thousands
|
2009
|
2008
|
||||||
|
Projected
Benefit Obligation
|
$ | 17,024 | $ | 16,205 | ||||
|
Accumulated
Benefit Obligation
|
17,024 | 16,205 | ||||||
|
Fair
Value of Plan Assets
|
18,271 | 15,336 | ||||||
|
Components
of Net Periodic Benefit Cost are:
|
||||||||
|
in
thousands
|
2009
|
2008
|
||||||
|
Service
Cost
|
$ | 151 | $ | 154 | ||||
|
Interest
Cost
|
961 | 907 | ||||||
|
Expected
Return on Plan Assets
|
(1,117 | ) | (1,454 | ) | ||||
|
Amortization
of Net Actuarial Loss
|
475 | - | ||||||
| $ | 470 | $ | (393 | ) | ||||
|
Amounts
recognized in other comprehensive income, pretax, during 2009 and 2008
consist of the following:
|
|
in
thousands
|
2009
|
2008
|
||||||
|
Net
Actuarial (Gain) Loss
|
$ | (1,111 | ) | $ | 8,232 | |||
|
Amortization
of Net Actuarial Loss
|
(475 | ) | - | |||||
| $ | (1,586 | ) | $ | 8,232 | ||||
|
Gains
and losses in excess of 10% of the greater of the benefit obligation or
the fair value of assets are amortized over the average remaining service
period of active participants. We expect that $328 thousand of
net actuarial loss included in accumulated other comprehensive loss at
December 31, 2009 will be recognized as components of net periodic benefit
cost in 2010.
|
|||||||||
|
The
following weighted-average assumptions were used to determine the benefit
obligation of the plan as of:
|
|||||||||
|
2009
|
2008
|
|||||||
|
Discount
Rate
|
5.78 | % | 6.10 | % | ||||
|
Expected
Return on Plan Assets
|
7.50 | % | 7.50 | % | ||||
|
The
following weighted-average assumptions were used to determine the net
periodic benefit cost of the plan for the years ended December
31,:
|
||||||||
|
2009
|
2008
|
|||||||
|
Discount
Rate
|
6.10 | % | 6.25 | % | ||||
|
Expected
Return on Plan Assets
|
7.50 | % | 7.50 | % | ||||
|
The
following benefit payments, which reflect expected future service, as
appropriate, are expected to be paid over the next ten
years:
|
|
in
thousands
|
|||||||||
|
2010
|
$ 941
|
||||||||
|
2011
|
959
|
||||||||
|
2012
|
987
|
||||||||
|
2013
|
1,055
|
||||||||
|
2014
|
1,135
|
||||||||
|
2015-2019
|
6,008
|
||||||||
|
Note
11. Employee Benefit Plans, Continued
|
||||||||
|
The
plan's weighted average asset allocations by asset category at December 31
are as follows:
|
||||||||
|
2009
|
2008
|
|||||||
|
Equity
Securities
|
48.0 | % | 50.0 | % | ||||
|
Debt
Securities
|
40.0 | % | 43.0 | % | ||||
|
Other
|
12.0 | % | 7.0 | % | ||||
| 100.0 | % | 100.0 | % | |||||
|
Investment
Strategy
|
|||||||||
|
The
plan assets are invested in the New York State Bankers Retirement System
(the "System"), which was established in 1938 to provide for the payment
of benefits to employees of participating banks. The System is
overseen by a Board of Trustees who meet quarterly and set the investment
policy guidelines. The System utilizes two investment
management firms, (which will be referred to as Firm I and Firm
II). Firm I is investing approximately 70% of the total
portfolio and Firm II is investing approximately 30% of the portfolio,
each firm operates under a separate written investment policy approved by
the Board of Trustees. The System's investment objective is to
exceed the investment benchmarks in each asset category. Each
firm reports at least quarterly to the Investment Committee and
semi-annually to the Board.
|
|||||||||
|
The
System's overall investment strategy is to achieve a mix of approximately
97% of investment for long-term growth and 3% for near-term benefits
payments with a wide diversification of asset types, fund strategies and
fund managers. The target allocations for System assets are
shown in the table below. Cash equivalents consist primarily of
short term investment funds. Equity securities primarily
include investments in common stock and depository
receipts. Fixed income securities include corporate bonds,
government issues and mortgage-backed securities. Other
financial instruments primarily include rights and
warrants.
|
|||||||||
|
The
weighted average expected long-term rate of return is estimated based on
current trends in the System's assets as well as projected future rates of
return on those assets and reasonable actuarial assumptions based on the
guidance provided by the Actuarial Standards Board, practice of Selection
of Economic Assumptions for Measuring Pension Obligations for long term
inflation, and the real and nominal rate of investment return for a
specific mix of asset classes. The following assumptions were
used in determining the long-term rate of return:
|
|||||||||
|
Equity
securities
|
Dividend
discount model, the smoothed earnings yield model and equity risk premium
model.
|
||||||||
|
Fixed
income securities
|
Current
yield-to maturity and forecasts of future yields.
|
||||||||
|
Other
financial instruments
|
Comparison
of the specific investment's risk to that of fixed income and equity
instruments and using judgment.
|
||||||||
|
The
long term rate of return considers historical
returns. Adjustments were made to historical returns in order
to reflect expectations of future returns. These adjustments
were due to factor forecasts by economists and long-term U.S. Treasury
yields to forecast long-term inflation. In addition, forecasts
by economists and others for long-term GDP growth were factored into the
development of assumptions for earnings growth and per capital
income.
|
|||||||||
|
Effective
March 2009, the System revised its investment guidelines. The
System currently prohibits its investment managers from purchasing the
following investments:
|
|||||||||
|
Equity
securities
|
Securities
in emerging market countries as defined by the Morgan Stanley Emerging
Markets Index, short sales, unregistered securities and margin
purchases.
|
||||||||
|
Note
11. Employee Benefit Plans, Continued
|
|||||||||
|
Fixed
income securities
|
Securities
of BBB rating or less, Collateralized Mortgage Obligations that have an
inverse floating rate and whose payments don't include principal or which
aren't certified and guaranteed by the U.S. Government, asset-backed
securities that aren't issued or guaranteed by the U.S. Government, or its
agencies or its instrumentalities, non-agency residential subprime or
ALT-A mortgage-backed securities and structured notes.
|
||||||||
|
Other
financial instruments
|
Unhedged
currency exposure in countries not defined as "high income economies" by
the World Bank.
|
||||||||
|
All
other investments not prohibited by the System are
permitted. At December 31, 2009, the System holds certain
investments which are no longer deemed acceptable to
acquire. These positions will be liquidated when the investment
managers deem that such liquidation is in the best interest of the
System.
|
|||||||||
|
|
Percentage
of Plan Assets
at December 31, |
Weighted-
Average Expected |
||||||||||||||
|
Asset
Category
|
Target Allocation2010 |
2009
|
2008
|
Long-
Term Rate of Return |
||||||||||||
|
Cash
equivalents
|
0 - 20 | % | 13.6 | % | 10.0 | % | 0.0 | % | ||||||||
|
Equity
securities
|
40 - 60 | % | 45.9 | % | 48.0 | % | 4.60 | % | ||||||||
|
Fixed
income securities
|
40 - 60 | % | 40.5 | % | 41.4 | % | 2.10 | % | ||||||||
|
Other
financial instruments
|
0 - 5 | % | 0.0 | % | 0.06 | % | 0.0 | % | ||||||||
|
Fair
value is defined as the exchange price that would be received for an asset
or paid to transfer a liability (an exit price) in the principal or most
advantageous market for the asset or liability in an orderly transaction
between market participants on the measurement date. Valuation
techniques used to measure fair value must maximize the use of observable
inputs and minimize the use of unobservable inputs. The
standard describes a fair value hierarchy based on the levels of inputs,
of which the first two are considered observable and the last
unobservable, that may be used to measure fair value which are the
following:
|
|||||||||
|
Level
1 - Quoted prices in active markets for identical assets or
liabilities.
|
|||||||||
|
Level
2 - Inputs other than level 1 that are observable, either directly or
indirectly, such as quoted prices for similar assets or liabilities;
quoted prices in markets that are not active; or other inputs that are
observable or can be corroborated by observable market data for
substantially the full term of the assets or
liabilities.
|
|||||||||
|
Level
3 - Unobservable inputs that are supported by little or no market activity
and that are significant to the fair value of the assets or
liabilities. There are currently no level 3
assets.
|
|||||||||
|
In
instances in which the inputs used to measure fair value fall into
different levels of the fair value hierarchy, the fair value measurement
has been determined based on the lowest level input that is significance
to the fair value measurement in its entirety. The System's
assessment of the significant of a particular item to the fair value
measurement in its entirety requires judgment, including the consideration
of inputs specific to the asset.
|
|||||||||
|
There
are no significant concentrations of risk within plan
assets.
|
|||||||||
|
Note
11. Employee Benefit Plans, Continued
|
|||||||||
|
The
following table (rounded to the nearest thousands) represents the fair
value hierarchy of the Company's plan assets (investments) measured at
fair value on a recurring basis as of December 31,
2009.
|
|||||||||
|
Level
1
|
Level
2
|
Level
3
|
Total
|
|||||||||||||
|
in
thousands
|
Inputs
|
Inputs
|
Inputs
|
Fair
Value
|
||||||||||||
|
Cash
Equivalents:
|
||||||||||||||||
|
Short-term
Investment Funds
|
$ | - | $ | 2,478 | $ | - | $ | 2,478 | ||||||||
|
Equities:
|
||||||||||||||||
|
Common
Stock
|
8,181 | - | - | 8,181 | ||||||||||||
|
Depository
Receipts
|
113 | - | - | 113 | ||||||||||||
|
Other
Equities
|
90 | - | - | 90 | ||||||||||||
|
Total
Equities
|
8,384 | - | - | 8,384 | ||||||||||||
|
Fixed
Income Securities:
|
||||||||||||||||
|
Corporate
Bonds
|
- | 1,742 | - | 1,742 | ||||||||||||
|
Government
Issues
|
- | 3,044 | - | 3,044 | ||||||||||||
|
Collateralized
Mortgage Obligations
|
- | 442 | - | 442 | ||||||||||||
|
FHLMC
|
- | 739 | - | 739 | ||||||||||||
|
FNMA
|
- | 1,140 | - | 1,140 | ||||||||||||
|
GNMA
I
|
- | 200 | - | 200 | ||||||||||||
|
Other
Fixed Income Securities
|
- | 102 | - | 102 | ||||||||||||
|
Total
Fixed Income Securities
|
- | 7,409 | - | 7,409 | ||||||||||||
|
Total
System Investments
|
$ | 8,384 | $ | 9,887 | $ | - | $ | 18,271 | ||||||||
|
The
following is a reconciliation of Level 3 assets for which significant
unobservable inputs were used to determine fair
value:
|
|
Balance
at Beginning of Year
|
$ | 72 | |||
|
Change
in Unrealized Appreciation(Depreciation)
|
29 | ||||
|
Realized
Loss
|
(32 | ) | |||
|
Sale
Proceeds
|
(69 | ) | |||
|
Balance
at End of Year
|
$ | - | |||
|
Discount
Rate - Annually, the Company establishes a discount rate to determine the
value of the plan's benefit obligation. The Company uses the
Citigroup Pension Liability Spot Rate Index (CPLSRI) as a basis for
determining the discount rate for the plan. A weighted average
CPLSRI is developed based on the anticipated benefit payments to arrive at
the plan's discount rate.
|
|||||||||
|
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.
|
|||||||||
|
Note
11. Employee Benefit Plans, Continued
|
|||||||||
|
Supplemental
Retirement Income Agreement
|
|||||||||
|
In
addition to the Company’s noncontributory defined benefit pension plan,
there are two supplemental employee retirement plans for two former
executives. The amount of the liabilities recognized in the
Company’s consolidated statements of condition associated with these plans
was $900 thousand at December 31, 2009 and $989 thousand at December 31,
2008. For the years ended December 31, 2009, and 2008, the
Company recognized $8 thousand, and $73 thousand, respectively, of expense
related to those plans. The discount rate used in determining
the actuarial present values of the projected benefit obligations was
5.60% at December 31, 2009.
|
|||||||||
|
Defined
Contribution Plan
|
|||||||||
|
Employees
that meet certain age and service requirements are eligible to participate
in the Company sponsored 401(k) Plan. Under the plan,
participants may make contributions, in the form of salary deferrals, up
to the maximum Internal Revenue Code limits. Under the Safe
Harbor provision of the Plan, the Company makes an annual qualified
nonelective contribution equal to 3% of the participant's compensation for
the plan year. The Company made additional discretionary profit
sharing contributions in 2008, none were made in 2009. The
expense included in employee benefits in the consolidated statements of
income for this plan amounted to $405 thousand and $398 thousand in 2009
and 2008, respectively.
|
|||||||||
|
Split-Dollar
Life Insurance Benefit
|
|||||||||
|
In
the third quarter of 2009, the Company executed a cash buy-out with ten
members of senior management who were participating in the split-dollar
life insurance benefit. The Company is required to recognize
the post retirement aspects of an endorsement-type split-dollar life
insurance arrangement as a liability. Accordingly, as a result
of the buy-out, the Company recorded a $1.055 million reduction in
the liability, as well as a reduction in the service and interest
cost.
|
|||||||||
|
The
following table sets forth the components of split-dollar life insurance
expense (benefit) as well as changes in the plan's projected benefit
obligation and plan assets and the plan's funded status and amounts
recognized in the consolidated statements of condition based on a December
31, measurement date.
|
|||||||||
|
in
thousands
|
2009
|
2008
|
||||||
|
Change
in Benefit Obligation:
|
||||||||
|
Benefit
Obligation at Beginning of Year
|
$ | 1,743 | $ | 1,537 | ||||
|
Service
Cost
|
17 | 22 | ||||||
|
Interest
Cost
|
90 | 100 | ||||||
|
Cost
of Insurance Payments
|
(48 | ) | (43 | ) | ||||
|
Actuarial
Loss
|
310 | 127 | ||||||
|
Settlements
|
(1,055 | ) | - | |||||
|
Projected
Benefit Obligation at End of Year
|
$ | 1,057 | $ | 1,743 | ||||
|
Change
in Plan Assets:
|
||||||||
|
Fair
Value of Plan Assets at Beginning of Year
|
$ | - | $ | - | ||||
|
Employer
Contribution
|
1,103 | 43 | ||||||
|
Cost
of Insurance Payments
|
(48 | ) | (43 | ) | ||||
|
Settlement
Payments
|
(1,055 | ) | - | |||||
|
Fair
Value of Plan Assets at End of Year
|
$ | - | $ | - | ||||
|
Unfunded
Status at End of Year
|
$ | 1,057 | $ | 1,743 | ||||
|
Amounts
recognized in accumulated other comprehensive income, pre tax, consist of
the following at December 31,:
|
||||||||
|
in
thousands
|
2009
|
2008
|
||||||
|
Net
Loss
|
$ | 125 | $ | 127 | ||||
|
Note
11. Employee Benefit Plans, Continued
|
|||||||||
|
The
following table presents a comparison of the accumulated benefit
obligation and plan assets:
|
|||||||||
|
in
thousands
|
2009
|
2008
|
||||||
|
Projected
Benefit Obligation
|
$ | 1,057 | $ | 1,743 | ||||
|
Accumulated
Benefit Obligation
|
1,057 | 1,743 | ||||||
|
Fair
Value of Plan Assets
|
- | - | ||||||
|
Components
of Net Periodic Benefit Cost are:
|
||||||||
|
in
thousands
|
2009
|
2008
|
||||||
|
Service
Cost
|
$ | 17 | $ | 22 | ||||
|
Interest
Cost
|
90 | 100 | ||||||
|
Settlement
Costs
|
312 | - | ||||||
| $ | 419 | $ | 122 | |||||
|
Amounts
recognized in other comprehensive income, pretax, during 2009 and 2008
consist of the following:
|
||||||||
|
in
thousands
|
2009
|
2008
|
||||||
|
Net
Actuarial Gain (Loss)
|
$ | (310 | ) | $ | (127 | ) | ||
|
Settlement
of Net Actuarial Loss
|
312 | - | ||||||
| $ | 2 | $ | (127 | ) | ||||
|
The
following weighted-average assumptions were used to determine the benefit
obligation of the plan as of:
|
||||||||
|
2009
|
2008
|
|||||||
|
Discount
Rate - Benefit Obligation of the Plan as of December 31,
|
5.65 | % | 6.15 | % | ||||
|
Discount
Rate - Net Periodic Benefit Cost for the year ended December
31,
|
6.15 | % | 6.58 | % | ||||
|
Discount
Rate - Annually, the Company establishes a discount rate to determine the
value of the plan's benefit obligation. The Company uses the
Citigroup Pension Liability Spot Rate Index (CPLSRI) as a basis for
determining the discount rate for the plan. A weighted average
CPLSRI is developed based on the anticipated benefit payments to arrive at
the plan's discount rate.
|
|||||||||
|
The
following benefit payments, are expected to be paid over the next ten
years:
|
|||||||||
|
in
thousands
|
|||||||||
|
2010
|
$ 53
|
||||||||
|
2011
|
56
|
||||||||
|
2012
|
58
|
||||||||
|
2013
|
59
|
||||||||
|
2014
|
59
|
||||||||
|
2015-2019
|
278
|
||||||||
|
The
Company is expected to make a contribution $53 thousand in 2010 to
directly fund the Plan's benefit payment obligation.
|
|||||||||
|
Gains
and losses in excess of 10% of the greater of the benefit obligation or
the fair value of assets are amortized over the average remaining
mortality period of the participants. We expect that $1
thousand of net actuarial loss included in accumulated other comprehensive
loss at December 31, 2009 will be recognized as a component of net
periodic benefit cost in 2010.
|
|||||||||
|
Note
12. Income Taxes
|
|||
|
Income
tax expense attributable to income before taxes is comprised of the
following:
|
|||
|
Year
Ended December 31,
|
||||||||
|
in
thousands
|
2009
|
2008
|
||||||
|
Current:
|
||||||||
|
Federal
|
$ | 1,947 | $ | 717 | ||||
|
State
|
260 | 125 | ||||||
|
Total
Current
|
2,207 | 842 | ||||||
|
Deferred:
|
||||||||
|
Federal
|
379 | 635 | ||||||
|
State
|
3 | 196 | ||||||
|
Total
Deferred
|
382 | 831 | ||||||
|
Total
Income Tax Expense
|
$ | 2,589 | $ | 1,673 | ||||
|
The
components of deferred income taxes, which are included in the
consolidated statements of condition, are:
|
|||
|
Year
Ended December 31,
|
||||||||
|
in
thousands
|
2009
|
2008
|
||||||
|
Assets:
|
||||||||
|
Allowance
for Loan Losses
|
$ | 3,244 | $ | 2,823 | ||||
|
Deferred
Compensation
|
978 | 1,063 | ||||||
|
Pension
Liability
|
2,183 | 2,797 | ||||||
|
Tax
Attribute Carryforwards
|
64 | 247 | ||||||
|
Other
|
263 | 265 | ||||||
| 6,732 | 7,195 | |||||||
|
Liabilities:
|
||||||||
|
Securities
Discount Accretion
|
405 | 373 | ||||||
|
Defined
Benefit Pension Plan
|
2,662 | 2,457 | ||||||
|
Equity
Investment
|
503 | 520 | ||||||
|
Goodwill
Amortization
|
614 | 518 | ||||||
|
Net
Unrealized Gain on Securities Available-for-Sale
|
449 | 1,256 | ||||||
|
Other
|
217 | 0 | ||||||
| 4,850 | 5,124 | |||||||
|
Net
Deferred Tax Assets at End of Year
|
1,882 | 2,071 | ||||||
|
Net
Deferred Tax Assets at Beginning of Year
|
2,071 | 1,538 | ||||||
|
Decrease
(Increase) in Net Deferred Tax Asset
|
189 | (533 | ) | |||||
|
Prior
Year Decrease in Net Adjustment to Accumulated Other
Comprehensive
Income
|
(1,541 | ) | (177 | ) | ||||
|
Current
Year Decrease in Net Adjustment to Accumulated Other
Comprehensive
Income
|
1,734 | 1,541 | ||||||
|
Deferred
Tax Expense
|
$ | 382 | $ | 831 | ||||
|
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 the deferred tax asset is more
likely than not to be recognized and as such no valuation allowance is
necessary.
|
|
Note
12. Income Taxes, Continued
|
||||||||
|
A
reconciliation of the statutory federal income tax rate to the effective
income tax rate is as follows:
|
||||||||
|
Year
Ended December 31,
|
||||||||
|
2009
|
2008
|
|||||||
|
Statutory
Federal Income Tax Rate
|
34.0 | % | 34.0 | % | ||||
|
Variances
from Statutory Rate:
|
||||||||
|
State
Income Tax, Net of Federal Tax Benefit
|
1.7 | 2.8 | ||||||
|
Tax
Exempt Income
|
(11.4 | ) | (15.2 | ) | ||||
|
Other
|
1.6 | 0.7 | ||||||
|
Effective
Tax Rate
|
25.9 | % | 22.3 | % | ||||
|
The
Company is currently open to audit by the Internal Revenue Service and for
New York State for the years ending December 31, 2006 through
2009.
|
|
Note
13. Other Comprehensive Income
|
||||||||
|
The
following is a summary of changes in other comprehensive income for the
periods presented:
|
||||||||
|
Year
Ended December 31,
|
||||||||
|
in
thousands
|
2009
|
2008
|
||||||
|
Unrealized
Holding Gains Arising During the Period, Net of Tax
|
||||||||
|
(Pre-tax
Amount of $1,590 and $5,210)
|
$ | 974 | $ | 3,194 | ||||
|
Reclassification
Adjustment for Gains Realized in Net Income
|
||||||||
|
During
the Period, Net of Tax (Pre-tax Amount of ($3,676) and
($503))
|
(2,255 | ) | (308 | ) | ||||
|
Net
Actuarial Loss on Split-Dollar Life Insurance Benefit
|
2 | (127 | ) | |||||
|
Change
in Pension Asset/Liability (Pre-tax Amount of $1,586 and
($8,232))
|
973 | (5,047 | ) | |||||
|
Other
Comprehensive Income
|
$ | (306 | ) | $ | (2,288 | ) | ||
|
Components
of Accumulated Other Comprehensive Loss are:
|
||||||||
|
As
of December 31,
|
||||||||
|
in
thousands
|
2009
|
2008
|
||||||
|
Unrealized
Gain on Securities, Net of Taxes
|
$ | 710 | $ | 1,991 | ||||
|
Net
Actuarial Loss on Split-Dollar Life Insurance Benefit
|
(125 | ) | (127 | ) | ||||
|
Net
Actuarial Pension Loss, Net of Taxes
|
(3,451 | ) | (4,424 | ) | ||||
|
Accumulated
Other Comprehensive Loss
|
$ | (2,866 | ) | $ | (2,560 | ) | ||
|
Note
14. 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.
|
||||||||||||
|
For
Capital
|
||||||||||||||||||||||||
|
Actual:
|
Adequacy
Purposes:
|
Well
Capitalized:
|
||||||||||||||||||||||
|
in
thousands
|
Amount
|
Ratio
|
Amount
|
Ratio
|
Amount
|
Ratio
|
||||||||||||||||||
|
As
of December 31, 2009
|
||||||||||||||||||||||||
|
Total
Capital to Risk-Weighted Assets:
|
||||||||||||||||||||||||
|
The
Company
|
$ | 78,891 | 12.77 | % | $ | 49,414 | 8.00 | % | N/A | N/A | ||||||||||||||
|
Subsidiary
Bank
|
$ | 77,780 | 12.59 | % | $ | 49,409 | 8.00 | % | $ | 61,761 | 10.00 | % | ||||||||||||
|
Tier
1 Capital to Risk-Weighted Assets:
|
||||||||||||||||||||||||
|
The
Company
|
$ | 71,158 | 11.52 | % | $ | 24,707 | 4.00 | % | N/A | N/A | ||||||||||||||
|
Subsidiary
Bank
|
$ | 70,048 | 11.34 | % | $ | 24,704 | 4.00 | % | $ | 37,057 | 6.00 | % | ||||||||||||
|
Tier
1 Capital to Average Assets:
|
||||||||||||||||||||||||
|
The
Company
|
$ | 71,158 | 7.84 | % | $ | 36,316 | 4.00 | % | N/A | N/A | ||||||||||||||
|
Subsidiary
Bank
|
$ | 70,048 | 7.72 | % | $ | 36,312 | 4.00 | % | $ | 45,390 | 5.00 | % | ||||||||||||
|
As
of December 31, 2008
|
||||||||||||||||||||||||
|
Total
Capital to Risk-Weighted Assets:
|
||||||||||||||||||||||||
|
The
Company
|
$ | 72,928 | 11.46 | % | $ | 50,892 | 8.00 | % | N/A | N/A | ||||||||||||||
|
Subsidiary
Bank
|
$ | 72,465 | 11.39 | % | $ | 50,888 | 8.00 | % | $ | 63,609 | 10.00 | % | ||||||||||||
|
Tier
1 Capital to Risk-Weighted Assets:
|
||||||||||||||||||||||||
|
The
Company
|
$ | 65,293 | 10.26 | % | $ | 25,446 | 4.00 | % | N/A | N/A | ||||||||||||||
|
Subsidiary
Bank
|
$ | 64,830 | 10.19 | % | $ | 25,444 | 4.00 | % | $ | 38,166 | 6.00 | % | ||||||||||||
|
Tier
1 Capital to Average Assets:
|
||||||||||||||||||||||||
|
The
Company
|
$ | 65,293 | 7.33 | % | $ | 35,620 | 4.00 | % | N/A | N/A | ||||||||||||||
|
Subsidiary
Bank
|
$ | 64,830 | 7.28 | % | $ | 35,618 | 4.00 | % | $ | 44,522 | 5.00 | % | ||||||||||||
|
Quantitative
measures established by regulation to ensure capital adequacy require the
maintenance of minimum amounts and ratios (set forth in the table above)
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). The Company and subsidiary bank
meet all capital adequacy requirements to which they are
subject.
|
||||||||||||
|
The
Bank is 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 that have changed the subsidiary
institution’s category.
|
||||||||||||
|
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. At December 31, 2009, under statutory
limitations, the maximum amount that could have been paid by the Bank
subsidiary to the Company without special regulatory approval was
approximately $10.122 million. These statutory limitations
notwithstanding, the Bank entered into an informal agreement with the OCC
during the third quarter of 2009, which requires the Bank’s Board of
Directors to obtain OCC approval prior to declaring a
dividend. The ability of the Company and the Bank to pay
dividends in the future is and will continue to be influenced by
regulatory policies and practices, capital guidelines, and applicable
laws.
|
||||||||||||
|
Note
15. Disclosures about Fair Value of Financial Instruments
|
|||||
|
The
following are the major categories of assets measured at fair value on a
recurring basis at December 31, 2009, using quoted prices in active
markets for identical assets (Level 1), significant other observable
inputs (Level 2), and significant unobservable inputs (Level
3).
|
|||||
|
Level
1
|
|||||||||||||||
|
Quoted
|
Level
2
|
||||||||||||||
|
Prices
in
|
Significant
|
Level
3
|
|||||||||||||
|
Active
Markets
|
Other
|
Significant
|
Total
at
|
||||||||||||
|
for
Identical
|
Observable
|
Unobservable
|
December
31,
|
||||||||||||
|
in
thousands
|
Assets
|
Inputs
|
Inputs
|
2009
|
|||||||||||
|
Description
|
|||||||||||||||
|
Trading
securities
|
|||||||||||||||
|
Cash
and equivalents
|
$ | 71 | $ | 71 | |||||||||||
|
Fixed
income securities
|
276 | 276 | |||||||||||||
|
Equity
securities
|
818 | 818 | |||||||||||||
|
Total
trading securities
|
$ | 1,165 | $ | 1,165 | |||||||||||
|
Available-for-sale
debt securities
|
|||||||||||||||
|
Obligations
of states and political subdivisions
|
$ | 32,956 | $ | 32,956 | |||||||||||
|
Mortgage-backed
securities
|
140,268 | 140,268 | |||||||||||||
|
Total
available-for-sale debt securities
|
$ | - | $ | 173,224 | $ | - | $ | 173,224 | |||||||
|
Available-for-sale
equity securities
|
|||||||||||||||
|
Financial
services industry
|
$ | 50 | $ | 50 | |||||||||||
|
Other
|
$ | 28 | 28 | ||||||||||||
|
Total
available-for-sale equity securities
|
$ | 28 | $ | 50 | $ | - | $ | 78 | |||||||
|
Price
evaluations for our level 1 trading securities portfolio, consisting of
mutual funds and individual equity and debt securities held by the
Company’s executive deferred compensation plan, are obtained from national
exchanges and active secondary markets.
|
|||||
|
Price
evaluations for our level 2 available-for-sale debt securities are good
faith opinions as to what a buyer in the marketplace would pay for a
security (typically in an institutional round lot position) in a current
sale. The evaluation considers interest rate movements, new
issue information, and other pertinent data. Fair values for
investments were based on quoted market prices, where available, as
provided by third party vendors. If quoted market prices were
not available, fair values provided by the vendors were based on quoted
market prices of comparable instruments in active markets and/or based on
a matrix pricing methodology that employs the Securities Industry and
Financial Markets Association standard calculations for cash flow and
price/yield analysis, or live benchmark bond pricing, or terms/conditions
data available from major pricing sources.
|
|||||
|
The
Company's single level 2 available-for-sale equity security is in a thinly
traded market comprised of banks. The price evaluation for this
equity security represents an opinion within this market as to what a
buyer would pay for this security.
|
|||||
|
The
Company reported no significant transfers in and out of Levels 1 and 2
during 2009.
|
|||||
|
Note
15. Disclosures about Fair Value of Financial Instruments,
Continued
|
|||||
|
Disclosure
is required of assets and liabilities measured and recorded at fair value
on a non-recurring basis. For the Company, these include loans
held for sale, collateral dependent impaired loans, other real estate
owned, goodwill and other intangible assets. In accordance with
accounting by creditors for impairment of a loan, the Company had
collateral-dependent impaired loans with a carrying value of approximately
$12.806 million, which had specific reserves included in the allowance for
loan losses of $717 thousand at December 31, 2009. The Company
uses the fair value of underlying collateral to estimate the specific
reserves for collateral-dependent impaired loans. Based on the
valuation techniques used, the fair value measurements for
collateral-dependent impaired loans are classified as Level
3.
|
|||||
|
The
Company currently has nine properties recorded as other real estate
owned. Eight of these properties were the result of debts
previously contracted and are carried at a cost of $1.683 million, as it
is lower than market value. The ninth property was the result
of land previously purchased with the intent of development for branch
operations, but development was later halted with the Company deciding to
sell the property. Through a third party appraisal performed in
the first quarter of 2009, the Company recorded a $134 thousand charge to
earnings related to this property. The following table reports
the fair value of this property as of December 31,
2009:
|
|||||
|
Level
1
|
||||||||||||||||
|
Quoted
|
Level
2
|
|||||||||||||||
|
Prices
in
|
Significant
|
Level
3
|
||||||||||||||
|
Active
Markets
|
Other
|
Significant
|
Total
at
|
|||||||||||||
|
for
Identical
|
Observable
|
Unobservable
|
December
31,
|
|||||||||||||
|
in
thousands
|
Assets
|
Inputs
|
Inputs
|
2009
|
||||||||||||
|
Other
Real Estate Owned
|
$ | - | $ | 277 | $ | - | $ | 277 | ||||||||
|
Disclosure
is required 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. Certain
financial instruments and all nonfinancial instruments are excluded from
disclosure requirements. Accordingly, the aggregate fair value amounts
presented do not represent the underlying value of the
Bank.
|
|||||
|
The
following methods and assumptions were used to estimate the fair value of
each class of financial instruments:
|
|||||
|
Short-Term
Financial Instruments
|
|||||
|
The
fair value of certain financial instruments is estimated to approximate
their carrying value because the remaining term to maturity of the
financial instrument is less than 90 days or the financial instrument
reprices in 90 days or less. Such financial instruments include cash and
due from banks, Federal Funds sold, accrued interest receivable and
accrued interest payable.
|
|||||
|
The
fair value of time deposits with other banks is estimated using discounted
cash flow analysis based on the Company's current reinvestment rate for
similar deposits.
|
|||||
|
Securities
|
|||||
|
Fair
values for investments were based on quoted market prices, where
available, as provided by third party vendors. If quoted market
prices were not available, fair values provided by the vendors were based
on quoted market prices of comparable instruments in active markets and/or
based on a matrix pricing methodology that employs the Securities Industry
and Financial Markets Association standard calculations for cash flow and
price/yield analysis, or live benchmark bond pricing, or terms/conditions
data available from major pricing sources. The fair value of
other investments is estimated at their carrying
value.
|
|||||
|
Note
15. Disclosures about Fair Value of Financial Instruments,
Continued
|
|||||
|
Loans
Held for Sale
|
|||||
|
The
fair value of loans held for sale approximates the carrying
value.
|
|||||
|
Loans
|
|||||
|
The
fair value 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, 2009
|
December
31, 2008
|
|||||||||||||||
|
Carrying
|
Fair
|
Carrying
|
Fair
|
|||||||||||||
|
in
thousands
|
Value
|
Value
|
Value
|
Value
|
||||||||||||
|
Financial
Assets:
|
||||||||||||||||
|
Cash
and Cash Equivalents
|
$ | 34,043 | $ | 34,043 | $ | 44,421 | $ | 44,421 | ||||||||
|
Securities
|
249,799 | 250,555 | 268,046 | 268,601 | ||||||||||||
|
Loans
Held for Sale
|
576 | 576 | 118 | 118 | ||||||||||||
|
Loans
|
587,237 | 588,960 | 583,861 | 591,511 | ||||||||||||
|
Allowance
for Loan Losses
|
(8,622 | ) | (8,622 | ) | (7,564 | ) | (7,564 | ) | ||||||||
|
Net
Loans
|
578,615 | 580,338 | 576,297 | 583,947 | ||||||||||||
|
Accrued
Interest Receivable
|
3,007 | 3,007 | 3,340 | 3,340 | ||||||||||||
|
Financial
Liabilities:
|
||||||||||||||||
|
Demand
|
$ | 70,437 | $ | 70,437 | $ | 72,168 | $ | 72,168 | ||||||||
|
Savings,
NOW and Money
|
||||||||||||||||
|
Market
Deposit Accounts
|
365,908 | 365,908 | 330,158 | 330,158 | ||||||||||||
|
Certificates
of Deposit
|
290,696 | 299,886 | 341,451 | 345,774 | ||||||||||||
|
Other
Deposits
|
26,699 | 26,699 | 22,096 | 22,096 | ||||||||||||
|
Borrowings
|
73,277 | 75,462 | 81,398 | 83,269 | ||||||||||||
|
Accrued
Interest Payable
|
782 | 782 | 1,195 | 1,195 | ||||||||||||
|
Note
16. Parent Company Only Financial Statements
|
||||
|
Presented
below are the condensed statements of condition December 31, 2009, and
2008 and statements of income and cash flows for each of the years in the
two-year period ended December 31, 2009, 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,
|
||||||||
|
in
thousands
|
2009
|
2008
|
||||||
|
Assets
|
||||||||
|
Cash
and Cash Equivalents
|
$ | 983 | $ | 95 | ||||
|
Securities
Available for Sale, at Estimated Fair Value
|
50 | 50 | ||||||
|
Investment
in Subsidiary, Equity Basis
|
71,808 | 66,995 | ||||||
|
Other
Assets
|
1,173 | 1,422 | ||||||
|
Total
Assets
|
$ | 74,014 | $ | 68,562 | ||||
|
Liabilities
and Shareholders’ Equity
|
||||||||
|
Total
Liabilities
|
$ | 1,095 | $ | 1,103 | ||||
|
Shareholders’
Equity
|
72,919 | 67,459 | ||||||
|
Total
Liabilities and Shareholders’ Equity
|
$ | 74,014 | $ | 68,562 | ||||
|
Condensed
Statements of Income
|
||||||||
|
December
31,
|
||||||||
|
in
thousands
|
2009
|
2008
|
||||||
|
Dividends
from Subsidiary
|
$ | 3,054 | $ | 3,103 | ||||
|
Interest
and Other Dividend Income
|
2 | 51 | ||||||
|
Net
Gain on Sale of Securities
|
- | 36 | ||||||
|
Other
Operating Income
|
202 | - | ||||||
| 3,258 | 3,190 | |||||||
|
Operating
Expense
|
909 | 637 | ||||||
|
Income
Before Income Tax Benefit and Equity in Undistributed Income of
Subsidiary
|
2,349 | 2,553 | ||||||
|
Income
Tax Benefit
|
(183 | ) | (211 | ) | ||||
|
Equity
in Undistributed Income of Subsidiaries
|
4,869 | 3,052 | ||||||
|
Net
Income
|
$ | 7,401 | $ | 5,816 | ||||
|
Note
16. Parent Company Only Financial Statements, Continued
|
||||||||
|
Condensed
Statements of Cash Flows
|
||||||||
|
Year
Ended
|
||||||||
|
December
31,
|
||||||||
|
in
thousands
|
2009
|
2008
|
||||||
|
Cash
Flows from Operating Activities:
|
||||||||
|
Net
Income
|
$ | 7,401 | $ | 5,816 | ||||
|
Adjustments
to Reconcile Net Income to Cash
|
||||||||
|
Provided
by Operating Activities:
|
||||||||
|
Investment
Security Gains
|
- | (36 | ) | |||||
|
Decrease
(Increase) in Other Assets
|
259 | (261 | ) | |||||
|
Decrease
in Other Liabilities
|
(18 | ) | (9 | ) | ||||
|
Equity
in Undistributed Income of Subsidiaries
|
(4,869 | ) | (3,052 | ) | ||||
|
Net
Cash Provided by Operating Activities
|
2,773 | 2,458 | ||||||
|
Cash
Flows from Investing Activities:
|
||||||||
|
Proceeds
from Sales of Available-for-Sale Securities
|
- | 805 | ||||||
|
Payments
for Investments in and Advances to Subsidiaries
|
(250 | ) | (100 | ) | ||||
|
Net
Cash (Used in) Provided by Investing Activities
|
(250 | ) | 705 | |||||
|
Cash
Flows from Financing Activities:
|
||||||||
|
Sale
of Treasury Stock
|
1,255 | - | ||||||
|
Cash
Dividends
|
(2,890 | ) | (3,991 | ) | ||||
|
Net
Cash Used in Financing Activities
|
(1,635 | ) | (3,991 | ) | ||||
|
Net
Increase (Decrease) in Cash Equivalents
|
888 | (828 | ) | |||||
|
Cash
and Cash Equivalents at Beginning of Year
|
95 | 923 | ||||||
|
Cash
and Cash Equivalents at End of Year
|
$ | 983 | $ | 95 | ||||
ITEM
9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM
9A: CONTROLS AND PROCEDURES
We have
established disclosure control procedures to ensure that material information
related to the Company, its financial condition, or results of operation is made
known to the officers that certify the Company’s financial reports and to other
members of senior management and the Board of Directors. These
procedures have been formalized through the formation of a Management Disclosure
Committee and the adoption of a Management Disclosure Committee Charter and
related disclosure certification process. The management disclosure
committee is comprised of our senior management and meets at least quarterly to
review periodic filings for full and proper disclosure of material
information.
Our
management, including the Chief Executive Officer and Chief Financial Officer,
evaluated the design and operational effectiveness of the Company’s disclosure
controls and procedures (as defined in Rules 13(a)-15(e) and 15(d)–15(e) under
the Securities Exchange Act of 1934, as amended) as of December 31,
2009. Based upon that evaluation, the Chief Executive Officer and
Chief Financial Officer concluded that the Company’s disclosure controls and
procedures were effective in ensuring that information required to be disclosed
by the Company in reports that it files or submits under the Securities Exchange
Act of 1934 are recorded, processed, summarized and reported within the time
periods specified in the SEC’s rules and forms.
It should
be noted that any system of internal controls, regardless of design, can provide
only reasonable, and not absolute, assurance that the objectives of the control
system are met. In addition, the design of any control system is
based in part upon certain assumptions about the likelihood of future
events. Because of these and other inherent limitations of control
systems, there can be no assurance that any design will succeed in achieving its
stated goals under all potential future conditions, regardless of how
remote.
Management’s
Report on Internal Control Over Financial Reporting
Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting, as such term is defined in Exchange Act Rules
13(a)-15(f). Under the supervision and with the participation of our
management, including our Chief Executive Officer and Chief Financial Officer,
we conducted an evaluation of the effectiveness of our internal control over
financial reporting based on the framework in Internal Control – Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission. Based on our evaluation under the framework in
Internal Control – Integrated
Framework, our management has reasonable assurance that our internal
control over financial reporting was effective as of December 31,
2009. The independent registered public accounting firm of KMPG LLP,
as auditors of the Company’s Consolidated Financial Statements, has issued an
audit report on the effectiveness of the Company’s internal control over
financial reporting as of December 31, 2009.
Report
of Independent Registered Public Accounting Firm
The Board
of Directors and Shareholders of The Wilber Corporation:
We have
audited The Wilber Corporation and subsidiaries’ (the Company) internal control
over financial reporting as of December 31, 2009, based on criteria established
in Internal Control -
Integrated Framework issued by the Committee of Sponsoring Organizations
of the Treadway Commission (COSO). The Company's management is
responsible for maintaining effective internal control over financial reporting
and for its assessment of the effectiveness of internal control over financial
reporting, included in the accompanying Management's Report on Internal
Control Over Financial Reporting. Our responsibility is to
express an opinion on the Company’s internal control over financial reporting
based on our audit.
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
effective internal control over financial reporting was maintained in all
material respects. Our audit included obtaining an understanding of
internal control over financial reporting, assessing the risk that a material
weakness exists, and testing and evaluating the design and operating
effectiveness of internal control based on the assessed risk. Our audit also
included performing such other procedures as we considered necessary in the
circumstances. We believe that our audit provides a reasonable basis
for our opinion.
A
company's internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company's internal
control over financial reporting includes those policies and procedures that (1)
pertain to the maintenance of records that, in reasonable detail, accurately and
fairly reflect the transactions and dispositions of the assets of the company;
(2) provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company’s
assets that could have a material effect on the financial
statements.
Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation
of effectiveness to future periods are subject to the risk that controls may
become inadequate because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate.
In our
opinion, The Wilber Corporation and subsidiaries maintained, in all material
respects, effective internal control over financial reporting as of December 31,
2009, based on criteria established in Internal Control - Integrated
Framework issued by COSO.
We also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated statements of condition of the
Company as of December 31, 2009 and 2008, and the related consolidated
statements of income, shareholders’ equity and comprehensive income, and cash
flows for the years then ended, and our report dated March 11, 2010 expressed an
unqualified opinion on those consolidated financial statements.
/s/KPMG
LLP
Albany,
New York
March 11,
2010
ITEM
9B: OTHER INFORMATION
None.
PART
III
ITEM
10: DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
A.
Directors of the Registrant
Information
contained under the captions Proposal II, "Election of Directors;" "The Nominees
and Continuing Directors" and under "Corporate Governance;” “Board of
Directors;” “Executive Committee;” “Audit and Compliance Committee;”
“Compensation and Benefits Committee;” and “Corporate Governance and Nominating
Committee” in the definitive Proxy Statement for the Annual Meeting of
Shareholders to be held on April 30, 2010, to be filed with the Commission
within 120 days after the end of the fiscal year covered by this Form 10-K, is
incorporated herein by this reference.
B.
Executive Officers of the Registrant Who Are Not Directors
Information
contained in Proposal II under the caption "Executive Officers Who Are Not
Directors" in the definitive Proxy Statement for the Annual Meeting of
Shareholders to be held on April 30, 2010, to be filed with the Commission
within 120 days after the end of the fiscal year covered by this Form 10-K, is
incorporated herein by this reference.
C.
Compliance with Section 16(a) of the Exchange Act
Information
contained under the caption, “Section 16(a) Beneficial Ownership Reporting
Compliance” in the definitive Proxy Statement for the Annual Meeting of
Shareholders to be held on April 30, 2010, to be filed with the Commission
within 120 days after the end of the fiscal year covered by this Form 10-K, is
incorporated herein by this reference.
D. Code
of Ethics
The
Company has adopted a Code of Ethics for adherence by its members of the Board
of Directors, Chief Executive Officer, Chief Financial Officer, Chief Accounting
Officer and other officers of the Company and its affiliates to ensure honest
and ethical conduct; full, fair and proper disclosure of financial information
in the Company's periodic reports; and compliance with applicable laws, rules,
and regulations. The text of the Company’s Code of Ethics, as amended, is posted
and available on the Bank’s website (http://www.wilberbank.com)
under 'About Us.'
E.
Corporate Governance
There
have been no material changes to the procedures by which shareholders of the
Company may recommend director nominees to the Company’s Board.
Information
contained under the captions “Corporate Governance – Audit and Compliance
Committee”, “Audit Committee Report” and “Audit Committee Financial Expert” in
the definitive Proxy Statement for the Annual Meeting of Shareholders to be held
on April 30, 2010, to be filed with the Commission within 120 days after the end
of the fiscal year covered by the Form 10-K, is incorporated herein by this
reference.
ITEM
11: EXECUTIVE COMPENSATION
Information
contained under the captions “Compensation Committee Report” and "Compensation"
in the definitive Proxy Statement for the Annual Meeting of Shareholders to be
held on April 30, 2010, to be filed with the Commission within 120 days after
the end of the fiscal year covered by this Form 10-K, is incorporated herein by
this reference.
ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT AND RELATED STOCKHOLDER MATTERS
Information
contained under the caption "Principal Owners of Our Common Stock" in the
definitive Proxy Statement for the Annual Meeting of Shareholders to be held on
April 30, 2010, to be filed with the Commission within 120 days after the end of
the fiscal year covered by this Form 10-K, is incorporated herein by this
reference.
ITEM
13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
A.
Related Transactions
Information
contained under the caption "Transactions with Directors and Executive Officers"
in the definitive Proxy Statement for the Annual Meeting of Shareholders to be
held on April 30, 2010, to be filed with the Commission within 120 days after
the end of the fiscal year covered by this Form 10-K, is incorporated herein by
this reference.
B.
Director Independence
Information
contained under the captions “Corporate Governance – Audit and Compliance
Committee,” “Compensation and Benefits Committee,” “Corporate Governance and
Nominating Committee,” “Compensation Committee Report” and “Director
Independence” in the definitive Proxy Statement for the Annual Meeting of
Shareholders to be held on April 30, 2010, to be filed with the Commission
within 120 days after the end of the fiscal year covered by the Form 10-K, is
incorporated herein by this reference.
ITEM
14: PRINCIPAL ACCOUNTING FEES AND SERVICES
Information
contained under the caption, "Independent Auditors' Fees – Audit and Non-Audit Fees,"
and “Independent Auditors' Fees – Pre-Approval Policies and
Procedures” in the definitive Proxy Statement for the Annual Meeting of
Shareholders to be held on April 30, 2010, 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
Statements of Condition at December 31, 2009 and
2008
|
|
|
-Consolidated
Statements of Income for the Years Ended December 31, 2009 and
2008
|
|
|
-Consolidated
Statements of Changes in Shareholders’ Equity and comprehensive Income for
the Years Ended December 31, 2009 and
2008
|
|
|
-Consolidated
Statements of Cash Flows for the Years Ended December 31, 2009 and
2008
|
|
|
-Notes
to Consolidated Financial
Statements
|
(2)
None.
(3)
Exhibits: See Exhibit Index to this Form 10-K
(b) See
Exhibit Index to this Form 10-K
(c)
None.
SIGNATURES
Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the Registrant has duly caused this registration statement to be signed on
its behalf by the undersigned, thereunto duly authorized.
|
THE
WILBER CORPORATION
|
||||
|
Date:
|
March
11, 2010
|
By:
|
/s/
Douglas C. Gulotty
|
|
|
Douglas
C. Gulotty
|
||||
|
President
and Chief Executive Officer
|
||||
Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the Registrant and in the
capacities and on the dates indicated.
|
Signatures
|
Title
|
Date
|
||
|
/s/ Douglas
C. Gulotty
|
President
and Chief Executive Officer
|
March
11, 2010
|
||
|
Douglas
C. Gulotty
|
||||
|
/s/
Joseph E. Sutaris
|
Executive
Vice President, Chief Financial
|
March
11, 2010
|
||
|
Joseph
E. Sutaris
|
Officer,
Treasurer & Secretary
|
|||
|
/s/
Brian R. Wright
|
Director,
Chairman
|
March
11, 2010
|
||
|
Brian
R. Wright
|
||||
|
/s/
Alfred S. Whittet
|
Director,
Vice Chairman
|
March
11, 2010
|
||
|
Alfred
S. Whittet
|
||||
|
/s/
Mary C. Albrecht
|
Director
|
March
11, 2010
|
||
|
Mary
C. Albrecht
|
||||
|
/s/
Olon T. Archer
|
Director
|
March
11, 2010
|
||
|
Olon
T. Archer
|
||||
|
/s/
Thomas J. Davis
|
Director
|
March
11, 2010
|
||
|
Thomas
J. Davis
|
||||
|
/s/
Joseph P. Mirabito
|
Director
|
March
11, 2010
|
||
|
Joseph
P. Mirabito
|
||||
|
/s/
James L. Seward
|
Director
|
March
11, 2010
|
||
|
James
L. Seward
|
||||
|
/s/
David F. Wilber, III
|
Director
|
March
11, 2010
|
||
|
David
F. Wilber, III
|
EXHIBIT
INDEX
No. Document
|
3.1
|
Restated
Certificate of Incorporation of The Wilber Corporation (incorporated by
reference as Exhibit A of the Company’s Definitive Proxy Statement -
Schedule 14A (File No. 001-31896) filed with the SEC on March 24,
2005)
|
|
3.2
|
Bylaws
of The Wilber Corporation as Amended and Restated (incorporated by
reference to Exhibit 3.2 of the Company’s Form 8-K Current Report (File
No. 001-31896) filed with the SEC on January 28,
2008)
|
|
10.1
|
Deferred
Compensation Agreement as Amended between Wilber National Bank and Alfred
S. Whittet (incorporated by reference to Exhibit 10.1 of the Company’s
Form 8-K Current Report (File No. 001-31896) filed with the SEC on January
6, 2006)
|
|
10.2
|
Amended
and Restated Wilber National Bank Split-Dollar Policy Endorsement as of
December 31, 2007 for Douglas C. Gulotty (replaces Exhibits 10.2 and 10.3
of the Company’s Form 10/A Registration Statement (No. 001-31896) filed
with the SEC on January 30, 2004)
|
|
10.8
|
Retention
Bonus Agreement as Amended between Wilber National Bank and Douglas C.
Gulotty (incorporated by reference to Exhibit 10.8 of the Company’s Form
8-K Current Report (File No. 001-31896) filed with the SEC on January 6,
2006)
|
|
10.9
|
Retention
Bonus Agreement as Amended between Wilber National Bank and Joseph E.
Sutaris (incorporated by reference to Exhibit 10.8 of the Company’s Form
8-K Current Report (File No. 001-31896) filed with the SEC on January 6,
2006)
|
|
10.11
|
Employment
Agreement between Wilber National Bank and Douglas C. Gulotty
(incorporated by reference to Exhibit 10.11 of the Company’s Form 8-K
Current Report (File No. 001-31896) filed with the SEC on January 6,
2006)
|
|
10.12
|
Employment
Agreement between Wilber National Bank and Joseph E. Sutaris (incorporated
by reference to Exhibit 10.12 of the Company’s Form 8-K Current Report
(File No. 001-31896) filed with the SEC on January 6,
2006)
|
|
10.13
|
Deferred
Compensation Agreement between Wilber National Bank and Alfred S.
Whittet
|
|
13
|
Annual
Report to Shareholders (included in this annual report on Form
10-K)
|
|
14
|
Code
of Ethics, as amended, incorporated by reference to Exhibit 14 of the
Company’s Annual Report on Form 10-K, and available on the Company's
website (http://www.wilberbank.com)
under the link 'About Us.'
|
|
21
|
Subsidiaries
of the Registrant
|
|
23
|
Consent
of Independent Registered Public Accounting
Firm
|
|
31.1
|
Certification
of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley
Act
|
|
31.2
|
Certification
of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley
Act
|
|
32.1
|
Certification
of Chief Executive Officer Pursuant to 18 U.S.C.
1350
|
|
32.2
|
Certification
of Chief Financial Officer Pursuant to 18 U.S.C.
1350
|
93-K