SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.
FORM 10-Q
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended September 30, 1995
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number: 0-12507
ARROW FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
New York 22-2448962
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification
Number)
250 GLEN STREET, GLENS FALLS, NEW YORK 12801
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including
area code: (518) 745-1000
Indicate by check mark whether the registrant (1)
has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or
for 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.
X Yes No
Indicate the number of shares outstanding of each
of the issuer's classes of common stock, as of
the latest practicable date.
Class Outstanding as of October 31, 1995
Common Stock, 5,624,282
par value $1.00 per share
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<TABLE>
<CAPTION>
ARROW FINANCIAL CORPORATION
FORM 10-Q
SEPTEMBER 30, 1995
INDEX
PART I FINANCIAL INFORMATION Page No.
<S> <C>
Consolidated Balance Sheets
as of September 30, 1995
and December 31, 1994 3
Consolidated Statements of Income
for the Three Month and Nine Month
Periods Ended September 30, 1995 and 1994 4
Consolidated Statements of Cash Flows
for the Nine Months Ended
September 30, 1995 and 1994 5
Notes to Consolidated Financial Statements 6
Management's Discussion and Analysis
of Financial Condition
and Results of Operations 7
OTHER INFORMATION 18
SIGATURES 18
EXHIBITS 19
</TABLE>
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PART I - FINANCIAL INFORMATION
<TABLE>
<CAPTION>
ARROW FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)(Unaudited)
Sep 30, Dec 31,
1995 1994
ASSETS
<S> <C> <C>
Cash and Due From Banks $ 23,302 $ 26,624
Securities Held to Maturity: (Approximate Fair
Value of $131,685 in 1995
and $123,519 in 1994)
U.S. Treasury and Other
U.S. Government Agencies
and Corporations 109,786 113,191
State and Municipal Obligations 13,655 10,409
Other Securities 7,026 6,135
Total Securities Held to Maturity 130,467 129,735
Federal Funds Sold and Securities
Purchased Under
Agreements to Resell 47,400 8,000
Securities Available for Sale (At Fair Value) 65,323 53,868
Loans and Leases, Net of Unearned Income 515,935 507,553
Less: Allowance for Loan Losses (12,379) (12,338)
Net Loans and Leases 503,556 495,215
Premises and Equipment 14,041 14,590
Other Real Estate Owned 2,702 3,396
Other Assets 15,489 15,003
Total Assets $802,280 $746,431
LIABILITIES
Deposits:
Demand $ 94,832 $ 93,075
Regular Savings, N.O.W. and
Money Market Deposit Accounts 351,155 359,143
Time Certificates of $100,000 or More 68,442 36,171
Other Time Deposits 189,981 162,096
Total Deposits 704,410 650,485
Short-Term Borrowings:
Federal Funds Purchased
and Securities Sold Under
Agreements to Repurchase 12,543 21,162
Other Short-Term Borrowings 8,100 3,703
Other Liabilities 11,294 7,669
Long-Term Debt 220 5,007
Total Liabilities 736,567 688,026
SHAREHOLDERS' EQUITY
Preferred Stock, $5 Par Value;
1,000,000 Shares Authorized --- ---
Common Stock, $1 Par Value;
20,000,000 Shares Authorized
(5,979,124 Shares Issued in 1995 and
5,725,765 Shares Issued in 1994) 5,979 5,726
Surplus 40,847 36,102
Undivided Profits 22,580 19,149
Valuation Allowance for Securities
Available for Sale 446 (673)
Reserve for Unearned ESOP Shares
(56,929 Shares in 1995 and None in 1994) (924) ---
Treasury Stock at Cost (261,253 Share
s in 1995 and 221,109 Shares in 1994) (3,215) (1,899)
Total Shareholders' Equity 65,713 58,405
Total Liabilities and Shareholders' Equity $802,280 $746,431
</TABLE>
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<TABLE>
<CAPTION>
ARROW FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in Thousands, Except Per Share Amounts)(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
1995 1994 1995 1994
INTEREST INCOME
<S> <C> <C> <C> <C>
Interest and Fees on Loans and Leases $12,043 $10,780 $35,617 $31,258
Interest and Dividends on
Securities Held to Maturity:
U.S. Treasury and Other U.S.
Government Agencies and
Corporations 1,599 1,471 4,838 4,599
State and Municipal Obligations 189 81 550 229
Other Securities 129 55 374 91
Interest on Federal Funds Sold
and Securities Purchased Under
Agreements to Resell 512 165 767 402
Interest and Dividends on
Securities Available for Sale 961 751 2,726 2,122
Total Interest Income 15,433 13,303 44,872 38,701
INTEREST EXPENSE
Interest on Deposits:
Time Certificates of $100,000 or More 1,036 357 2,743 720
Other Deposits 5,229 3,960 14,698 12,083
Interest on Short-Term Borrowings:
Federal Funds Purchased
and Securities Sold
Under Agreements to Repurchase 144 66 448 151
Other Short-Term Borrowings 71 22 170 79
Interest on Long-Term Debt 24 111 229 335
Total Interest Expense 6,504 4,516 18,288 13,368
NET INTEREST INCOME 8,929 8,787 26,584 25,333
Provision for Loan Losses 280 108 640 (1,017)
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 8,649 8,679 25,944 26,350
OTHER INCOME
Income from Fiduciary Activities 946 908 2,891 2,809
Fees for Other Services to Customers 1,225 1,129 3,528 3,212
Net Losses on Securities Transactions --- --- --- (10)
Other Operating Income 285 354 5,735 811
Total Other Income 2,456 2,391 12,154 6,822
OTHER EXPENSE
Salaries and Employee Benefits 4,200 3,992 12,724 12,052
Occupancy Expense of Premises, Net 488 542 1,556 1,718
Furniture and Equipment Expense 474 518 1,474 1,574
Other Operating Expense 2,015 2,302 7,006 8,569
Total Other Expense 7,177 7,354 22,760 23,913
INCOME BEFORE PROVISION
FOR INCOME TAXES 3,928 3,716 15,338 9,259
Provision for Income Taxes 1,438 129 5,524 288
NET INCOME $ 2,490 $ 3,587 $ 9,814 $8,971
Average Shares Outstanding 5,694 5,761 5,719 5,745
Per Common Share:
Earnings $ .44 $ .62 $ 1.72 $ 1.56
Dividends Declared .14 .10 .40 .24
Book Value 11.61 9.92 11.61 9.92
Per share amounts have been adjusted for the November 10, 1995 four percent stock
dividend declared September 27, 1995.
</TABLE>
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<TABLE>
<CAPTION>
ARROW FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)(Unaudited)
Nine Months Ended
September 30,
1995 1994
Operating Activities:
<S> <C> <C>
Net Income $ 9,814 $ 8,971
Adjustments to Reconcile Net Income
to Net Cash Provided by
Operating Activities:
Provision for Loan Losses 640 (1,017)
Provision for Other Real Estate
Owned Losses 107 198
Depreciation and Amortization 1,262 1,709
Gains on the Sale of Securities
Available for Sale --- (3)
Proceeds from the Sale of Loans 10,802 5,433
Net Losses (Gains) on the Sale of Loans,
Fixed Assets and Other Real
Estate Owned (56) 1,192
Decrease (Increase) in Deferred Tax Assets 405 (1,837)
Decrease (Increase) in Interest Receivable (605) 263
Increase (Decrease) in Interest Payable 1,180 63
Decrease (Increase) in Other Assets (1,322) 231
Increase (Decrease) in Other Liabilities 2,537 1,216
Net Cash Provided By Operating Activities 24,764 16,419
Investing Activities:
Proceeds from the Sale of
Securities Available for Sale --- 1,075
Proceeds from the Maturities
of Securities Available for Sale 24,024 14,045
Purchases of Securities Available for Sale (33,477) (24,850)
Proceeds from the Maturities
of Securities Held to Maturity 5,020 47,620
Purchases of Securities Held to Maturity (5,885) (41,743)
Net Increase in Loans and Leases (21,204) (11,021)
Proceeds from the Sale of Fixed
Assets and Other Real Estate Owned 1,194 4,742
Purchase of Fixed Assets (468) (752)
Net Cash Used In Investing Activities (30,796) (10,884)
Financing Activities:
Net Increase in Deposits 53,925 6,866
Net Decrease in Short-Term Borrowings (4,222) (1,918)
Repayment of Long-Term Debt (4,430) (74)
Common Stock Issued --- 165
Purchase of Treasury Stock (57,314 Shares) (892) (63)
Other Equity Transactions 30 ---
Cash Dividends Paid (2,301) (1,378)
Net Cash Provided By Financing Activities 42,110 3,598
Net Increase in Cash and
Cash Equivalents 36,078 9,133
Cash and Cash Equivalents
at Beginning of Period 34,624 28,885
Total Cash and Cash Equivalents $70,702 $38,018
Cash and Cash Equivalents:
Cash and Due from Banks $23,302 $23,718
Federal Funds Sold and Securities
Purchased Under Agreements to Resell 47,400 14,300
Total Cash and Cash Equivalents $70,702 $38,018
Supplemental Cash Flow Information:
Interest Paid $17,108 $13,305
Income Taxes Paid 4,608 1,036
Transfer of Loans to Other
Real Estate Owned 585 1,599
Change in the Valuation Allowance
for Securities Available for Sale 1,119 (838)
Other Equity Transactions 92 ---
Guarantee of ESOP Debt (1,173) ---
Reduction of Unearned ESOP Shares 249 ---
Cancellation of Debentures by Exercise
of Cancellable Mandatory
Stock Purchase Contracts 370 ---
</TABLE>
PAGE 5
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ARROW FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FORM 10-Q
SEPTEMBER 30, 1995
1. Financial Statement Presentation
In the opinion of the management of Arrow Financial Corporation (the
"Company"), the accompanying consolidated financial statements
contain all of the adjustments necessary to present fairly the financial
position as of September 30, 1995 and December 31, 1994; the
results of operations for the three and nine month periods ended
September 30, 1995 and 1994; and the statements of cash flows for
the nine month periods ended September 30, 1995 and 1994. All
such adjustments are of a normal recurring nature. Certain items
have been reclassified to conform to the 1995 presentation. Per
share amounts have been restated to reflect the November 10, 1995 four
percent stock dividend declared September 27, 1995.
2. Accounting by Creditors for Impairment of a Loan
In May 1993, the Financial Accounting Standards Board ("FASB")
released Statement of Financial Accounting Standards ("SFAS") No.
114, "Accounting by Creditors for Impairment of a Loan." SFAS No.
114, as amended by SFAS No. 118, requires that impaired loans,
except for large groups of smaller-balance homogeneous loans, be
measured based on (I) the present value of expected future cash
flows discounted at the loan's effective interest rate, (II) the loan's
observable market price or (III) if the loan is collateral dependent,
the
fair value of the collateral . The Company adopted SFAS No. 114
January 1, 1995 on a prospective basis.
After the adoption of SFAS No. 114, the Company continued to
determine the allowance for loan losses for smaller-balance
homogeneous loans, which include all consumer loans and
commercial loans under $250,000, under SFAS No. 5, "Accounting
for Contingencies." For impaired loans accounted for under SFAS
No. 114, the Company recognizes interest income and allocates cash
payments on a loan by loan basis, based upon the reliability of
collateral valuation methods and demonstrated cash flow
performance.
3. Derivative Financial Instruments
In October 1994, the FASB released SFAS No. 119, "Disclosure
about Derivative Financial Instruments and Fair Value of Financial
Instruments." SFAS No. 119 requires disclosures about amounts,
nature, and terms of derivative financial instruments that are not
subject to SFAS No. 105, "Disclosure of Information about Financial
Instruments with Off-Balance-Sheet Risk and Financial Instruments
with Concentrations of Credit Risk", because they do not result in
off-balance-sheet risk of accounting loss. SFAS No. 119 also requires
disclosures in addition to the requirements of SFAS No. 105 and No.
107, "Disclosures about Fair Value of Financial Instruments." For the
Company, SFAS No.119 is effective for financial statements issued
after 1995. The Company does not trade in derivative financial
instruments and as of September 30, 1995 did not use derivative
financial instruments to hedge its interest rate risk position.
Consequently, as of September 30, 1995 and December 31, 1994,
SFAS No. 119 would not have required the Company to provide
disclosures in addition to those already required by SFAS No. 105
and SFAS No. 107.
4. Accounting for Long-Lived Assets
In March 1995, the FASB released SFAS No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to Be
Disposed Of." SFAS No. 121 requires that long-lived assets and
certain identifiable intangibles to be held and used by an entity be
reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not
be recoverable. SFAS No. 121 requires that long-lived assets and
certain identifiable intangibles to be disposed of be reported at the
lower of carrying amount or fair value less cost to sell. SFAS No. 121
is effective for years beginning after December 15, 1995, with earlier
adoption allowed. The Company plans to adopt SFAS No. 121 in
1996.
5. Accounting for Mortgage Servicing Rights
In May 1995, the FASB released SFAS No. 122, "Accounting for
Mortgage Servicing Rights." SFAS No. 122 amends SFAS No. 65,
"Accounting for Certain Mortgage Banking Activities", to require that
a mortgage banking enterprise recognize as separate assets rights
to service mortgage loans for others, however those servicing rights
are acquired. A mortgage banking enterprise that acquires mortgage
servicing rights either through purchase or origination of mortgage
loans and sells or securitizes those loans
PAGE 6
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with servicing rights retained
should allocate the total cost of the mortgage loans to the mortgage
servicing rights and the loans (without the mortgage servicing rights)
based on their relative fair values if it is practicable to estimate
those
fair values. SFAS No. 122 requires that a mortgage banking
enterprise assess its capitalized mortgage servicing rights for
impairment based on the fair value of those rights and recognize any
impairment through a valuation reserve. The Company is currently
anlayzing the provisions of FAS No. 122 and has not yet determined
the period of adoption.
ARROW FINANCIAL CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
SEPTEMBER 30, 1995
Overview
Arrow Financial Corporation (the "Company") is a three bank holding
company headquartered in Glens Falls, New York. The banking
subsidiaries are: Glens Falls National Bank and Trust Company
whose main office is located in Glens Falls, New York; Saratoga
National Bank and Trust Company whose main office is located in
Saratoga Springs, New York; and Green Mountain Bank, whose main
office is located in Rutland, Vermont.
The following table presents adjustments to net income for the three
month and nine month periods ended September 30, 1995 and 1994
to arrive at the Company's core or recurring net income. The
nonrecurring or special items are more fully described below the
table and in the detailed discussion of the results of operations.
<TABLE>
<CAPTION>
SUMMARY OF RECURRING INCOME
(in thousands)
Three Months Ended Nine Months Ended
Sep 1995 Sep 1994 Sep 1995 Sep 1994
<S> <C> <C> <C> <C>
Net Income, as reported $2,490 $3,587 $9,814 $8,971
Net Operating Loss Benefits --- (1,246) --- (3,148)
Other Items, net of tax:
OREO Transactions (29) 40 90 1,026
Severance Benefits 47 --- 405 ---
Insurance Settlement --- --- (3,250) ---
Credit to the Provision f
or Loan Losses --- --- --- (990)
Recurring Income $2,508 $2,381 $7,059 $5,859
Earnings Per Share, as reported $ .44 $ .62 $ 1.72 $ 1.56
Earnings Per Share, recurring .44 .41 1.23 1.02
</TABLE>
The Company reported earnings of $2.5 million for the third quarter
of 1995 which compares to earnings of $3.6 million for the third
quarter of 1994. Earnings per share for the two respective periods
were $.44 and $.62. The $1.1 million decrease in earnings, or $.18
per share, was primarily attributable to a $1.2 million net operating
loss carryforward benefit recognized in the 1994 period with no
comparable benefit recognized in the 1995 period.
Adjusting for the nonrecurring or speical items as itemized in the
table above,
net income for the third quarter of 1995 increased $127 thousand or
$.03 per share over the 1994 quarter. The principal factors behind
this increase were modest gains in net interest income and other
income and a decrease in other expense.
The annualized return on average assets was 1.25% and 1.91% for
the third quarter of 1995 and 1994, respectively. The annualized
return on average equity was 15.14% and 25.96% for the third
quarter of 1995 and 1994, respectively.
On a year-to-date basis, the Company reported earnings of $9.8
million for the first nine months of 1995 which compares to earnings
of $9.0 million for the first nine months of 1994. Earnings per share
for the two respective periods were $1.72 and $1.56. Each period
saw substantial benefits from nonrecurring items. In the 1995
period, the Company experienced a $3.25 million after-tax benefit as
a result of a $5.0 million settlement in the second quarter from the
Company's financial institution bond company on a claim for losses
suffered in earlier periods, which was offset only partially by a
nonrecurring $405 thousand expense for severance benefits. Net
income for the 1994 period benefited from the utilization of net
operating losses, which reduced the provision for income taxes by
$3.1 million. As discussed above in the quarter-to-quarter
comparison, no comparable benefit was experienced in the 1995
period.
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Adjusting for the nonrecurring items as itemized in the table above,
net income for the first nine months of 1995 increased $1.2 million
or $.21 per share over the 1994 period, due to increases in net
interest income and other income and a reduction in other operating
expense.
The annualized return on average assets was 1.70% and 1.62% for
the first nine months of 1995 and 1994, respectively. The
annualized return on average equity was 20.82% and 22.52% for the
first nine months of 1995 and 1994, respectively.
Total assets amounted to $802.3 million at September 30, 1995,
reflecting an increase of $55.8 million or 7.5% over December 31,
1994. Nonperforming assets amounted to $8.0 million at
September 30, 1995, or a $171 thousand decrease from the
balance at June 30, 1995, but reflected a $176 thousand increase
from the level of nonperforming assets at December 31, 1994.
During the second quarter of 1995, the Company placed on
nonaccrual status a $1.9 million loan to one commercial borrower
that filed for reorganization through bankruptcy.
Shareholders' equity increased $7.3 million or 12.5% from year-end
1994. At period end, the Company qualified as "well-capitalized"
under the capital standards adopted by federal bank regulators, with
risk-based capital ratios and a Tier 1 leverage ratio well in excess of
regulatory requirements. During the third quarter of 1995, the
Company paid a cash dividend of 14.4 cents per share, adjusted for
the 4% stock dividend, and in
October declared a 16 cent dividend for the fourth quarter.
On June 1, 1995, the Company entered into a definitive agreement
to sell eight branches of Green Mountain Bank to Mascoma Savings
Bank of Lebanon, New Hampshire. Pending regulatory approval,
the Company expects to close the sale early in the first quarter of
1996.
On July 8, 1995, the Company redeemed $4.4 million of outstanding
8 1/8 percent subordinated debentures due December 1, 1996 and
cancelled the related mandatory stock purchase contracts.
<TABLE>
<CAPTION>
CHANGE IN FINANCIAL CONDITION
SUMMARY OF CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
Period End Balances: Sep 1995 Dec 1994 Sep 1994
<S> <C> <C> <C>
Securities Held to Maturity $130,467 $129,735 $119,673
Securities Available for Sale 65,323 53,868 64,245
Federal Funds Sold 47,400 8,000 14,300
Loans, Net of Unearned Income (1) 515,935 507,553 504,740
Allowance for Loan Losses 12,379 12,338 12,914
Earning Assets (1) 759,125 699,156 702,958
Total Assets 802,280 746,431 746,455
Total Deposits 704,410 650,485 666,293
Borrowed Funds 20,863 29,872 15,787
Shareholders' Equity 65,713 58,405 56,926
</TABLE>
<TABLE>
<CAPTION>
$ Change $ Change % Change % Change
Period End Balances: From Dec From Sep From Dec From Sep
<S> <C> <C> <C> <C>
Securities Held to Maturity $ 732 $10,794 0.6% 9.0%
Securities Available for Sale 11,455 1,078 21.3 1.7
Federal Funds Sold 39,400 33,100 492.5 231.5
Loans, Net of Unearned Income (1) 8,382 11,195 1.7 2.2
Allowance for Loan Losses 41 (535) 0.3 (4.1)
Earning Assets (1) 59,969 56,167 8.6 8.0
Total Assets 55,849 55,825 7.5 7.5
Total Deposits 53,925 38,117 8.3 5.7
Borrowed Funds (9,009) 5,076 (30.2) 32.2
Shareholders' Equity 7,308 8,787 12.5 15.4
(1) Includes Nonaccrual Loans
</TABLE>
Total resources at September 30, 1995 amounted to $802.3 million,
an increase of $55.8 million or 7.5% from year-end 1994, and an
increase of $55.8 million or 7.5% over September 30, 1994. Sources
of funds for the increase in total assets from year-end 1994 were
primarily increases in deposits, and secondarily, retained earnings,
offset in part by a decrease in borrowed funds. The Company was
able to place $8.4 million of the increase in funds into net loan
growth, while the remainder of the net new funds were placed in
securities and short-term investments.
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<TABLE>
<CAPTION>
Sources of Funds
Period End Balances: Sep 1995 Dec 1994 Sep 1994
<S> <C> <C> <C>
Demand Deposits $ 94,832 $ 93,075 $ 91,744
N.O.W./ Super N.O.W. 158,264 128,158 131,450
Savings/ M.M.D.A. 192,891 230,985 246,961
Time Deposits of
$100,000 or More 68,442 36,171 34,832
Other Time Deposits 189,981 162,096 161,306
Total Deposits $704,410 $650,485 $666,293
Other Borrowed Funds $20,863 $29,872 $15,787
Shareholders' Equity 65,713 58,405 56,926
</TABLE>
<TABLE>
<CAPTION>
$ Change $ Change % Change % Change
From Dec From Sep From Dec From Sep
<S> <C> <C> <C> <C>
Demand Deposits $ 1,757 $ 3,088 1.9% 3.4%
N.O.W./ Super N.O.W. 30,106 26,814 23.5 20.4
Savings/ M.M.D.A. (38,094) (54,070) (16.5) (21.9)
Time Deposits of
$100,000 or More 32,271 33,610 89.2 96.5
Other Time Deposits 27,885 28,675 17.2 17.8
Total Deposits $53,925 $38,117 8.3 5.7
Other Borrowed Funds $(9,009) $5,076 (30.2) 32.2
Shareholders' Equity 7,308 8,787 12.5 15.4
</TABLE>
Total deposits of $704.4 million at September 30, 1995 were $53.9
million above the December 31, 1994 level. During the nine month
period the Company experienced a shift in the mix of deposits. Such
shift is often related to general interest rate changes. From 1989
until early 1992, during a period of generally declining interest rates
the spread in yields between time deposits and savings/money
market accounts began to diminish. As this spread diminished the
Company, and the industry in general, experienced a shift from time
deposits to savings/NOW and money market accounts. Beginning
in April of 1994, however, the prime rate rose steadily from 6.50% to
8.75% by January of 1995. In this rising rate environment, the
Company, and the industry in general, began to experience a
widening in the spread between time deposits and savings/money
market accounts, and a corresponding shift in the mix of deposits
from savings/ money market accounts to time deposits. This trend
continued through the first nine months of 1995, as average time
deposits of $100,000 or more for the quarter ended September 30,
1995, were $33.8 million, or 87.1% above the fourth quarter 1994
totals and average other time deposits for the third quarter of 1995
were $29.1 million, or 18.0% above the average for the fourth
quarter of 1994, while the average of all other deposits, including
demand, NOW and MMDA, between the fourth quarter of 1994 and
the third quarter of 1995 decreased by $30.6 million, or 6.6%.
The following table presents the average balances by deposit type
for the past five quarters and the relative portion of each deposit
type.
<TABLE>
<CAPTION>
Quarterly Average Deposit Balances
Sep 1995 Jun 1995 Mar 1995
Amount % Amount % Amount %
<S> <C> <C> <C> <C> <C> <C>
Demand Deposits $ 93,353 14 $ 84,352 12 $ 85,286 13
N.O.W. and Super N.O.W. 140,454 20 134,495 20 125,995 19
Savings and M.M.D.A 197,013 28 201,788 30 220,557 34
Time Deposits of
$100,000 or More 72,561 10 69,021 10 54,068 8
Other Time Deposits 190,593 28 186,605 28 173,117 26
Total Deposits $693,974 100 $676,261 100 $659,023 100
</TABLE>
<TABLE>
<CAPTION>
Dec 1994 Sep 1994
Amount % Amount %
<S> <C> <C> <C> <C>
Demand Deposits $ 91,446 14 $ 91,656 14
N.O.W. and Super N.O.W. 132,058 20 125,411 19
Savings and M.M.D.A 237,919 36 255,359 38
Time Deposits of
$100,000 or More 38,777 6 34,812 5
Other Time Deposits 161,538 24 158,225 24
Total Deposits $661,738 100 $665,463 100
</TABLE>
<TABLE>
<CAPTION>
Quarterly Cost of Deposits
Sep 1995 Jun 1995 Mar 1995
<S> <C> <C> <C>
Demand Deposits --- % --- % --- %
N.O.W. and Super N.O.W. 2.94 2.93 2.39
Savings and M.M.D.A 3.06 3.07 3.06
Time Deposits of
$100,000 or More 5.67 5.70 5.45
Other Time Deposits 5.55 5.35 4.78
Total Deposits 3.58 3.56 3.19
</TABLE>
<TABLE>
<CAPTION>
Dec 1994 Sep 1994
<S> <C> <C>
Demand Deposits --- % --- %
N.O.W. and Super N.O.W. 2.05 1.84
Savings and M.M.D.A 2.85 2.77
Time Deposits of
$100,000 or More 4.51 4.07
Other Time Deposits 4.25 4.00
Total Deposits 2.73 2.57
</TABLE>
As indicated in the above table, the Company experienced increasing
deposit growth over the second and third quarters of 1995. If the
Company had maintained the same mix of deposits as existed for the
quarter ended September 30, 1994, the cost of total deposits would
have been 3.35% rather than the actual cost of 3.58%. Management
believes the shift from demand/money market deposits to time
deposits may be decelerating. For the quarter ending September 30,
1995, time deposits comprised 38% of total deposits, the same
percentage of total deposits as for the quarter ending June 30, 1995.
This leveling off is consistent with the leveling off of the prime rate
over the first three quarters of 1995.
Demand deposits at September 30, 1995 were 3.4% above the level
at September 30, 1994, and 1.9% above the level of December 31,
1994, which was seasonally high at year-end. The increase in
demand deposits at September 30, 1995 is primarily attributable to
seasonal municipal deposits resulting from annual property tax
collections. Other borrowed funds (primarily repurchase agreements,
treasury tax and loan accounts and debentures) decreased $9.0
million or 30.2% from the
PAGE 9
<PAGE>
December 31, 1994 total. On July 8, 1995,
the Company called the remaining $4.4 million of its December 1996
subordinated debentures. Other changes are attributable to the daily
fluctuations in short-term borrowing balances.
Shareholders' equity amounted to $65.7 million at September 30,
1995, an increase of $7.3 million or 12.5% over the balance at year-end 1994.
The increase was primarily attributable to retained
earnings. As adjusted, the Company paid cash dividends of $.125 ,
$.135 and $.144 for the first three quarters of 1995, respectively, and
has declared a $.16 cash dividend for the fourth quarter of 1995.
Application of Funds
Most of the net new funds received by the Company from December
31, 1994 to September 30, 1995, were placed in federal funds and
securities available for sale. In part, the Company created this liquid
position to accommodate cash needs in connection with the branch
sale to Mascoma Savings Bank, which is more fully discussed in the
following section on Liquidity. However, the Company also
experienced modest growth in the loan portfolio during the nine
month period. The following table analyzes the change in the mix of
the loan portfolio for the past five quarters.
<TABLE>
<CAPTION>
Quarterly Average Loan Balances:
Sep 1995 Jun 1995 Mar 1995
Amount % Amount % Amount %
<S> <C> <C> <C> <C> <C> <C>
Commercial and Commercial
Real Estate $160,269 31 $166,378 32 $162,740 32
Residential Real Estate 175,462 34 174,927 34 174,947 34
Home Equity 45,292 9 44,539 9 43,282 8
Indirect Consumer Loans 86,799 17 83,289 16 80,279 16
Direct Consumer Loans 30,790 6 29,938 6 29,489 6
Other Loans (primarily
credit card loans) 15,094 3 14,840 3 19,149 4
Total Loans $513,706 100 $513,911 100 $509,886 100
</TABLE>
<TABLE>
<CAPTION>
Dec 1994 Sep 1994
Amount % Amount %
<S> <C> <C> <C> <C>
Commercial and Commercial
Real Estate $162,552 32 $167,214 33
Residential Real Estate 176,120 35 175,828 35
Home Equity 42,023 8 40,220 8
Indirect Consumer Loans 76,827 16 72,186 15
Direct Consumer Loans 30,018 6 30,121 6
Other Loans (primarily
credit card loans) 17,130 3 16,366 3
Total Loans $504,670 100 $501,935 100
</TABLE>
<TABLE>
<CAPTION>
Quarterly Taxable Equivalent Yield on Loans:
Sep 1995 Jun 1995 Mar 1995
<S> <C> <C> <C>
Commercial and Commercial
Real Estate 10.30% 10.35% 10.64%
Residential Real Estate 8.38 8.35 8.22
Home Equity 9.59 9.67 9.38
Indirect Consumer Loans 8.42 8.27 8.08
Direct Consumer Loans 9.93 9.93 9.96
Other Loans (primarily
credit card loans) 13.91 14.66 12.36
Total Loans 9.35 9.37 9.32
</TABLE>
<TABLE>
<CAPTION>
Dec 1994 Sep 1994
<S> <C> <C>
Commercial and Commercial
Real Estate 9.75% 9.29%
Residential Real Estate 7.90 7.65
Home Equity 8.80 8.40
Indirect Consumer Loans 7.98 8.02
Direct Consumer Loans 9.81 9.64
Other Loans (primarily
credit card loans) 12.27 12.14
Total Loans 8.85 8.58
</TABLE>
As indicated in the above table, the Company experienced relatively
steady growth in home equity and indirect consumer loans (primarily
auto loans) over the period. Other loan categories remained
relatively level except for commercial loans, which continued to
decrease in both gross balances and in portfolio percentage, as a
result of the Company's decision to de-emphasize that area of
lending. If the Company had maintained the same mix in the loan
portfolio in the third quarter of 1995 as existed for the prior year
period, the taxable equivalent yield on loans would have been 9.37%
rather than the actual yield of 9.35%. In the past, the Company's
exposure to loss in the home equity and indirect portfolios has been
much less than the losses sustained in the commercial and
commercial real estate portfolios. The Company expects that the
trend in the loan portfolio mix will continue for the short term.
PAGE 10
<PAGE>
<TABLE>
<CAPTION>
SUMMARY OF THE ALLOWANCE AND PROVISION FOR LOAN LOSSES
(Dollars in Thousands)(Loans Stated Net of Unearned Income)
Sep 1995 Jun 1995 Mar 1995 Dec 1994 Sep 1994 Dec 1993
<S> <C> <C> <C> <C> <C> <C>
Period End Loans $515,935 $517,165 $508,626 $507,553 $504,740 $502,784
Average Loans,
Year-to-Date 512,515 511,909 509,886 502,224 501,400 489,326
Allowance for
Loan Losses,
Beginning of
Period $12,338 $12,338 $12,338 $16,078 $16,078 $17,328
Provision for
Loans Losses, YTD 640 360 130 (950) (1,017) 690
Net Charge-offs, YTD (599) (515) (258) (2,790) (2,147) (1,940)
Allowance for Loan
Losses, End
of Period $12,379 $12,183 $12,210 $12,338 $12,914 $16,078
Nonaccrual Loans $4,927 $5,060 $2,780 $3,618 $5,287 $ 9,861
Loans 90 Days
or More Past Due
and Still Accruing
Interest 371 327 526 231 128 364
Loans Restructured
and in Compliance
with Modified Terms --- --- 62 580 596 2,405 <PAGE>
Total Nonperforming
Loans 5,298 5,387 3,368 4,429 6,011 12,630
Other Real Estate
Owned 2,703 2,785 3,545 3,396 2,912 7,506
Total Nonperforming
Assets $8,001 $8,172 $6,913 $7,825 $8,923 $20,136
Impaired Loans
(FAS No. 114) (2) $2,557 $2,933 --- --- --- ---
Allowance Allocated
to Impaired Loans 384 440 --- --- --- ---
Performance Ratios:
Allowance to
Nonperforming Loans 233.65% 226.17% 362.53% 278.57% 214.84% 127.30%
Allowance to
Perriod End Loans 2.40 2.36 2.40 2.43 2.56 3.20
Provision to
Average Loans (1) 0.17 0.14 0.10 (0.19) (0.27) 0.14
Net Charge-offs
to Average Loans (1) 0.16 0.20 0.21 0.56 0.57 0.40
Nonperforming Assets
to Loans & OREO 1.54 1.57 1.35 1.53 1.76 3.95
(1) Annualized
(2)All impaired loans were also reported as nonaccrual loans for all periods
presented.
</TABLE>
Nonperforming assets amounted to $8.0 million at September 30,
1995, an increase of $176 thousand or 2.2% from year-end 1994.
During the second quarter of 1995 one of the Company's large
commercial borrowers filed a voluntary bankruptcy petition for
reorganization. Accordingly, the Company placed $1.9 million of the
borrower's loans, net of SBA payment of the guaranteed portion, on
nonaccrual status and established a reserve for estimated losses in
accordance with FAS No. 114. Except for these loans, the Company
would have continued to experience a period-to-period decrease in
nonperforming assets over the past four quarters.
The allowance for loan losses was more than two times the amount
of nonperforming loans at September 30, 1995. The ratio of net
charge-offs to average loans for the first nine months of 1995 was at
an annualized rate of .16%, well below the ratios for 1994 and 1993,
which were .56% and .40%, respectively. The annualized ratio of the
provision for loan losses to average loans over the nine month period
was .17%, which the Company believed to be adequate in light of the
allowance's substantial coverage of nonperforming loans and the size
of the unallocated portion of the allowance.
The annualized ratio of the provision for loan losses to average loans
was negative as of the end of each of the last two quarters of 1994
listed in the above table as a result of the Company's decision to
reduce the level of the allowance for loan losses during the second
quarter of 1994, effected as a $1.5 million credit to the provision for
loan losses.
Capital Resources
Shareholders' equity was $65.7 million at September 30, 1995, an
increase of $7.3 million or 12.5% from December 31, 1994. The
increase was primarily attributable to retained current year earnings
and a $1.1 million favorable change in the valuation allowance for
securities available for sale. The valuation allowance was
established upon the December 31, 1993 adoption of SFAS No. 115
which requires that securities available for sale be carried at fair value
through a valuation reserve in
PAGE 11
<PAGE>
shareholders' equity. During the nine
month period ending September 30, 1995, the Company
repurchased $892 thousand of it outstanding shares at an average
price of $15.54 and established a reserve for unearned ESOP shares,
which amounted to $924 thousand at period end.
The Company and its subsidiaries are currently subject to two sets of
capital guidelines, a leverage ratio test and a risk-based capital
measure. The risk-based capital guidelines assign weightings to all
assets and certain off-balance sheet items and establish an 8%
minimum ratio of qualifying total capital to risk-weighted assets. At
least half of total capital must consist of "Tier 1" capital, which is
comprised of common equity, retained earnings and a limited amount
of permanent preferred stock, less goodwill. Up to half of total capital
may consist of so-called "Tier 2" capital, comprising a limited amount
of subordinated debt, other preferred stock, certain other instruments
and a limited amount of loan loss reserves. The leverage ratio
guideline establishes minimum limits on the ratio of Tier 1 capital to
total tangible assets. For top-rated companies, the minimum
leverage ratio is 3%, but lower-rated companies may be required to
meet substantially greater minimum ratios. The FDIC Improvement
Act of 1991 ("FDICIA") required banking regulators to establish
different categories of capitalization for financial institutions, based
upon these capital ratios. In accordance with FDICIA, the regulators
have established five levels of capitalization ranging from "critically
undercapitalized" to "well-capitalized." As of September 30, 1995,
the Company and its banking subsidiaries all qualified as "well-capitalized"
under these standards. On such date, the Tier 1
leverage and risk-based capital ratios for the Company and its
subsidiaries were as follows:
<TABLE>
<CAPTION>
SUMMARY OF CAPITAL RATIOS
Tier 1 Total
Risk-Based Risk-Based
Leverage Capital Capital
Ratio Ratio Ratio
<S> <C> <C> <C>
Arrow Financial Corporation 8.02% 13.14% 14.41%
Glens Falls National Bank & Trust Co. 7.60 13.48 14.73
Saratoga National Bank & Trust Co. 8.45 11.61 12.87
Green Mountain Bank 9.45 14.18 15.47
Regulatory Minimum 3.00 4.00 8.00
FDICIA's "Well-Capitalized" Standard 5.00 6.00 10.00
</TABLE>
<TABLE>
<CAPTION>
SUMMARY OF QUARTERLY CASH DIVIDENDS PAID
(restated for the November 1995 stock dividend)
1995 1994
<S> <C> <C>
Fourth Quarter (1995 Payable December 15) $ .160 $ .115
Third Quarter .144 .102
Second Quarter .135 .074
First Quarter .125 .065
On October 25,1995, the Company declared a cash dividend of $.16
per share for the fourth quarter, payable December 15, 1995.
Liquidity
The object of the Company's liquidity management is to satisfy cash
flow requirements, principally the need of depositors and borrowers
to access funds. Currently, the Company's liquidity plan has been
modified to satisfy projected extraordinary funding needs in
connection with the Company's planned sale of eight branches
(approximately 13% of the Company's deposits) of the Company's
Vermont subsidiary bank, Green Mountain Bank, to Mascoma
Savings Bank, Lebanon, New Hampshire. These extraordinary
funding needs, and the projected sources of funds, are described in
the following paragraph. Liquidity is provided through the
assumption or "purchase" of liabilities, the maturity of asset balances
and the sale of assets. The Company's liability liquidity arises
primarily from its significant base of "core" and other deposits
gathered through a branch network operating over a dispersed
geographical area. The "core" balances consist of demand
deposits, savings, N.O.W. and money market deposit account
balances and small denomination time deposits. At September 30,
1995, the Company's loan to deposit ratio was 73.2% and averaged
75.8% and 75.3% for the nine months ending September 30, 1995
and 1994, respectively. The Company maintains a securities
available for sale portfolio, short-term investments in Federal funds
and interest-bearing deposits with banks, which serve as a primary
liquidity source. These balances amounted to $112.7 million at
September 30, 1995. As a supplement, various short-term
borrowing facilities have been established. At period-end, the
Company was experiencing no significant liquidity problems or
pressure at any of its subsidiary banks.
PAGE 12
<PAGE>
In connection with the pending sale by Green Mountain Bank of eight
of its branches to Mascoma Savings Bank, it is currently anticipated
that the amount of deposit liabilities to be assumed by Mascoma
from Green Mountain Bank at closing (net of the premium on
deposits) will exceed the amount of loans and other branch-related
assets to be transferred by Green Mountain to Mascoma by $40 -
$45 million. The Company anticipates being able to fund this
amount with available liquid funds at Green Mountain Bank plus up
to $20 million in sales of available for sale securities or loans
(externally in the secondary market or to affiliates) of Green
Mountain Bank. Otherwise, the Company is not aware of any known
trends, events or uncertainties that will have or that are reasonably
likely to have a material effect or make material demands on the
Company's liquidity, capital resources or results of operations.
RESULTS OF OPERATIONS: Three Months Ended September 30, 1995 Compared With
Three Months Ended September 30, 1994
</TABLE>
<TABLE>
<CAPTION>
SUMMARY OF EARNINGS PERFORMANCE
(Dollars in Thousands)
Sep 1995 Sep 1994 $ Change % Change
<S> <C> <C> <C> <C>
Net Income $2,490 $3,578 $(1,088) (30.4)%
Earnings Per Share .44 .62 (.18) (29.0)
Return on Assets 1.25% 1.91% (.66)% (34.6)
Return on Equity 15.14% 25.96% (10.82)% (41.7)
</TABLE>
The Company's net income for the three month period ended
September 30, 1995 was $2.5 million, which compares to earnings
of $3.6 million for the third quarter of 1994. Earnings per share for
the two respective periods were $.44 and $.62. The $1.1 million
decrease in earnings, or $.18 per share, was primarily attributable to
net operating loss tax benefits recognized in the 1994 period, which
were not available in the 1995 period. Adjusting for the 1994 net
operating loss benefit, net income for the third quarter of 1995
increased $127 thousand or $.03 per share over the third quarter of
1994.
The 1995 quarter compared favorably to the 1994 quarter in net
interest income and certain categories of other income and other
expense. These and other changes are reviewed in the following
sections on net interest income, other income, other expense and
income taxes.
Net Interest Income
<TABLE>
<CAPTION>
SUMMARY OF NET INTEREST INCOME
(Taxable Equivalent Basis)
(Dollars in Thousands)
Sep 1995 Sep 1994 $ Change % Change
<S> <C> <C> <C> <C>
Interest Income $ 15,599 $ 13,423 $ 2,176 16.2%
Interest Expense 6,504 4,516 1,988 44.0
Net Interest Income $ 9,095 $ 8,907 $ 188 2.1
Average Earning Assets (1) $741,206 $695,678 $45,528 6.5%
Average Paying Liabilities 618,060 587,964 30,096 5.1
Taxable Equivalent Adjustment 166 120 46 38.3
Yield on Earning Assets (1) 8.35% 7.66% 0.69% 9.0%
Cost of Paying Liabilities 4.17 3.05 1.12 36.7
Net Interest Spread 4.18 4.61 (0.43) (9.3)
Net Interest Margin 4.87 5.08 0.21) (4.1)
(1) Includes Nonaccrual Loans
</TABLE>
On a taxable equivalent basis, net interest income for the third
quarter of 1995 increased $188 thousand, or 2.1%, over the third
quarter of 1994. The improvement in the 1995 period was
principally attributable to a 6.5% increase in average earning assets
which was only partially offset by reductions in the net interest
spread and net interest margin between the two periods, reflecting
the unfavorable change in the mix of paying liabilities discussed
earlier in the section on the change in financial condition (i.e.
PAGE 13
<PAGE>
the move from savings/money market deposits to time deposits). Net
interest income was also positively impacted by the fact that average
paying liabilities increased more slowly than average earning assets
between the periods due largely to retention of earnings.
Average earning assets amounted to $741 million for the third
quarter of 1995, a $45.5 million or 6.5% increase over the third
quarter of 1994. The 6.5% increase in average earning assets
compared to a 5.1% increase in average paying liabilities. Sources
of the increased funds from September 30, 1994, other than paying
liabilities, included retained earnings, sales of OREO and a small
increase in average demand deposits. The $46 thousand, or
38.3%, increase in the taxable equivalent adjustment reflected the
Company's increased investment in tax exempt bonds and loans,
which were maintained at lower than normal levels during the
period when the Company was carrying forward net operating loss
tax benefits.
The provision for loan losses was $280 thousand for the quarter
ending September 30, 1995, compared to a $108 thousand
provision for the 1994 period. The provision for loan losses was
discussed previously under the "Summary of the Allowance and
Provision for Loan Losses".
Other Income
<TABLE>
<CAPTION>
SUMMARY OF OTHER INCOME
(Dollars in Thousands)
Sep 1995 Sep 1994 $ Change % Change
<S> <C> <C> <C> <C>
Income From Fiduciary Activities $ 946 $ 908 $ 38 4.2%
Fees for Other Services to Customers 1,225 1,129 96 8.5
Other Operating Income 285 354 (69) (19.5)
Total Other Income $2,456 $2,391 $ 65 2.7
</TABLE>
Other income (i.e. noninterest income) amounted to $2.5 million for
the third quarter of 1995, an increase of $65 thousand or 2.7% from
the third quarter of 1994.
Income from fiduciary services increased $38 thousand or 4.2% over
the third quarter of 1994. Fees for other services to customers
(primarily service charges on deposit accounts, credit card fee
income and servicing income on sold loans) increased $96 thousand
or 8.5% primarily due to increased service charges on deposit
accounts in the 1995 period. Other operating income (primarily
credit card processing income and gains on the sale of other real
estate owned, loans and other assets) decreased $69 thousand.
The period to period difference was primarily attributable to a gain
on the sale of repossessed property recognized in the 1994 period,
which was offset only in part by gains on the sale of OREO in the
1995 period. In the absence of these transactions, other operating
income would have increased $20 thousand in the third quarter of
1995 as compared to the third quarter of 1994, or 9.0%.
Other Expense
<TABLE>
<CAPTION
SUMMARY OF OTHER EXPENSE
(Dollars in Thousands)
Sep 1995 Sep 1994 $ Change % Change
<S> <C> <C> <C> <C>
Salaries and Employee Benefits $4,200 $3,992 $ 208 5.2%
Occupancy Expense of Premises, Net 488 542 (54) (10.0)
Furniture and Equipment Expense 474 518 (44) (8.5)
Other Operating Expense 2,015 2,302 (287) (12.5)
Total Other Expense $7,177 $7,354 $ (177) (2.4)
</TABLE>
Other (i.e. noninterest) expense decreased $177 thousand or 2.4%
for the third quarter of 1995 compared with the third quarter of
1994. During the comparative periods, salaries and benefits
expense increased $208 thousand or 5.2% as a decrease in gross
salaries was more than offset by an increase in all areas of
employee benefits including pension, insurances and other
employee benefit plans.
Expenses relating to both occupancy and furniture and equipment
expense for the quarter ending September 30, 1995 were below the
comparative 1994 period. The decrease is primarily attributable to
lower depreciation expenses. Other operating expense decreased
$287 thousand or 12.5% between the two comparative quarters
reflecting a $461 thousand reduction in FDIC insurance costs offset
in part by an increase in legal expenses in the 1995 period.
PAGE 14
<PAGE>
Income Taxes
<TABLE>
<CAPTION>
SUMMARY OF INCOME TAXES
(Dollars in Thousands)
Sep 1995 Sep 1994 $ Change
<S> <C> <C> <C>
Provision for Income Taxes $1,438 $129 $ 1,309
</TABLE>
The provisions for federal and state income taxes amounted to $1.4
million and $129 thousand for the third quarter of 1995 and 1994,
respectively. The low level of the provision for the 1994 period
reflected utilization of a net operating loss carryforward and a
reduction in the valuation allowance for deferred tax assets. That
benefit amounted to $1.2 million for the third quarter of 1994. During
the fourth quarter of 1994 the Company utilized the remaining net
operating loss carryforward, and such benefits were not available for
any 1995 period. On a comparative basis, the effective tax rate was
36.6% and 37.0% for the quarters ended September 30, 1995 and
1994, respectively. The decrease in the effective tax rate for the
1995 period was primarily attributable to an increase in the tax exempt
bond and loan portfolios offset in part by a 1% increase in the federal
income tax rate.
RESULTS OF OPERATIONS: Nine Months Ended September 30, 1995 Compared With
Nine Months Ended September 30, 1994
<TABLE>
<CAPTION>
SUMMARY OF EARNINGS PERFORMANCE
(Dollars in Thousands)
Sep 1995 Sep 1994 $ Change % Change
<S> <C> <C> <C> <C>
Net Income $9,814 $8,971 $ 843 9.4%
Earnings Per Share 1.72 1.56 .16 10.3
Return on Assets 1.70% 1.62% 0.08% 4.9
Return on Equity 20.82% 22.52% (1.70)% (7.5)
</TABLE>
The Company's net income was $9.8 million for the first nine months
of 1995, compared to earnings of $9.0 million for the first nine
months of 1994. Earnings per share were $1.72 and $1.56 for the
two respective periods.
The most significant factor in the period-to-period comparison was
the $5.0 million pre-tax settlement under the Company's financial
institution bond received in the second quarter of 1995. The other
principal factor in the comparison, which largely offset the first factor,
was the $3.1 million tax benefit realized in the 1994 period resulting
from the utilization of a net operating loss. A benefit that was not
available or realized in the 1995 period. The net operating loss
carryforward was fully utilized during the last quarter of 1994.
Adjusting for the nonrecurring or special events in both periods,
net income for
the first nine months of 1995 increased $1.2 million or 20.5% over
the first nine months of 1994. The increase in core earnings was
primarily attributable to an increase in net interest income and
secondarily to an increase in other income. These and other
changes are reviewed in the following sections on net interest
income, other income, other expense and income taxes.
PAGE 15
<PAGE>
Net Interest Income
<TABLE>
<CAPTION>
SUMMARY OF NET INTEREST INCOME
(Taxable Equivalent Basis)
(Dollars in Thousands)
Sep 1995 Sep 1994 $ Change % Change
<S> <C> <C> <C> <C>
Interest Income $45,416 $39,040 $6,376 16.3%
Interest Expense 18,288 13,368 4,920 36.8
Net Interest Income $27,128 $25,672 $1,456 5.7
Average Earning Assets (1) $722,311 $693,562 $28,749 4.1%
Average Paying Liabilities 608,137 593,654 14,483 2.4
Taxable Equivalent Adjustment 544 339 205 60.5
Yield on Earning Assets (1) 8.41% 7.53% 0.88% 11.7%
Cost of Paying Liabilities 4.02 3.01 1.01 33.6
Net Interest Spread 4.39 4.52 (0.13) (2.9)
Net Interest Margin 5.02 4.95 0.07 1.4
(1) Includes Nonaccrual Loans
</TABLE>
On a taxable equivalent basis, net interest income for the first nine
months of 1995 increased $1.5 million over the comparative period
in 1994. The improvement in the 1995 period was primarily
attributable to both a 4.1% increase in average earning assets and
to a reduction in the relative amount of nonaccrual loans included in
earning assets. Net interest income was also positively impacted by
the fact that average paying liabilities increased more slowly than
average earning assets between the periods due largely to retention
of earnings and increased levels of demand deposits. Net interest
spread contracted slightly between the two periods, primarily as a
result of the shift in the mix of deposits from savings/money market
deposits to time deposits discussed elsewhere in this report, while
the net interest margin increased slightly between the two periods,
as the faster growth of earning assets as compared to paying
liabilities more than offset the shrinkage in the net interest spread.
Average earning assets amounted to $722 million for the first nine
months of 1995, a $28.7 million or 4.1% increase over the first nine
months of 1994. The 4.1% increase in average earning assets
compares to a 2.4% increase in average paying liabilities. Sources
of funds, other than paying liabilities, included retained earnings,
sales of OREO and an increase in average demand deposits. The
$205 thousand or 60.5% increase in taxable equivalent adjustment
reflected the Company's increased investment in tax exempt bonds
and loans, which were purchased at reduced levels during the
period when the Company was carrying forward net operating loss
tax benefits.
The provision for loan losses was $640 thousand for the nine month
period ended September 30, 1995, compared to a $1.0 million
benefit for the 1994 period. The provision for loan losses was
discussed previously under the "Summary of the Allowance and
Provision for Loan Losses" on page 10 of this report.
Other Income
<TABLE>
<CAPTION>
SUMMARY OF OTHER INCOME
(Dollars in Thousands)
Sep 1995 Sep 1994 $ Change % Change
<S> <C> <C> <C> <C>
Income From Fiduciary Activities $ 2,891 $2,809 $ 82 2.9%
Fees for Other Services to Customers 3,528 3,212 316 9.8
Net Losses on Securities Transactions --- (10) 10 (100.0)
Other Operating Income 5,735 811 4,924 607.2
Total Other Income $12,154 $6,822 $5,332 78.2
Without Regard to the Bond Settlement:
Other Operating Income $ 735 $ 811 $ (76) (9.4)
Total Other Income 7,154 6,822 332 4.9
</TABLE>
Other income increased in the first nine months of 1995 by $5.3
million, or 78.2%, over the level for the prior year period, with the
major factor accounting for the increase being the $5.0 million
settlement payment received in May 1995 from the Company's
financial institution bond company, discussed in more detail in the
Company's June 30, 1995 quarterly report.
PAGE 16
<PAGE>
Without regard to the bond settlement, other (i.e. noninterest)
income increased $332 thousand or 4.9% for the first nine months
of 1995 compared with the first nine months of 1994. Income from
fiduciary services increased $82 thousand or 2.9% over the first nine
months of 1994. Fees for other services to customers (primarily
service charges on deposit accounts, credit card fee income and
servicing income on sold loans) increased $316 thousand or 9.8%
primarily due to increased service charges on deposit accounts and
increased fees from merchant credit card processing in the 1995
period. Other operating income (primarily third party credit card
processing income and gains on the sale of other real estate owned,
loans and other assets) decreased $76 thousand without regard to
the bond settlement. The decrease was primarily due to a gain in
the 1994 period on the sale of repossessed assets.
Other Expense
<TABLE>
<CAPTION>
SUMMARY OF OTHER EXPENSE
(Dollars in Thousands)
Sep 1995 Sep 1994 $ Change % Change
<S> <C> <C> <C> <C>
Salaries and Employee Benefits $ 12,724 $ 12,052 $ 672 5.6%
Occupancy Expense of Premises, Net 1,556 1,718 (162) (9.4)
Furniture and Equipment Expense 1,474 1,574 (100) (6.4)
Other Operating Expense 7,006 8,569 (1,563) (18.2)
Total Other Expense $22,760 $23,913 $(1,153) (4.8)
Without Regard to Severance
Benefits & OREO Transactions:
Salaries and Employee Benefits $12,101 $12,052 $ 49 0.4
Other Operating Expense 6,867 7,015 (148) (2.1)
Total Other Expense 21,998 22,359 (361) (1.6)
</TABLE>
Other (i.e. noninterest) expense decreased $1.2 million or 4.8% for
the first nine months of 1995 compared with the first nine months of
1994. The overall decrease reflected a $1.6 million decrease in
other operating expense, primarily attributable to a decrease in
OREO liquidation expenses, offset in part by a $672 thousand
increase in salary and employee benefits, most of which was
attributable to one-time severance expenses.
After making adjustments for these nonrecurring items, including
OREO liquidation expenses, total other expense decreased $361
thousand or 1.6% in the first nine months of 1995 as compared to
the 1994 period. Salaries and employee benefits, as thus adjusted,
increased $49 thousand between the periods, as a decrease in
gross salaries was offset by an increase in all areas of employee
benefits including pension, insurance and other employee benefit
plans. Occupancy and equipment expenses decreased $262
thousand. The decrease was primarily attributable to lower
depreciation expenses in the 1995 period. Other operating expense
decreased $148 thousand or 2.1% in the first nine months of 1995
as compared to the 1994 period. A $510 thousand reduction in
FDIC and other insurance expense was offset by increases in other
expenses, primarily legal costs.
Income Taxes
<TABLE>
<CAPTION>
SUMMARY OF INCOME TAXES
(Dollars in Thousands)
Sep 1995 Sep 1994 $ Change
<S> <C> <C> <C>
Provision for Income Taxes $ 5,524 $ 288 $5,236
</TABLE>
The provisions for federal and state income taxes amounted to $5.5
million and $288 thousand for the first nine months of 1995 and
1994, respectively. The low level of the provision for the 1994 period
resulted from utilization of a net operating loss carryforward and a
reduction in the valuation allowance for deferred tax assets. That
benefit amounted to $3.1 million for the first nine months of 1994.
During the fourth quarter of 1994 the Company utilized the
remaining net operating loss carryforward, and no such benefit was
not available for the 1995 period. On a comparative basis, the
effective tax rate was 36.0% and 37.1% for the nine month periods
ended September 30, 1995 and 1994, respectively. The decrease
in the effective tax rate for the 1995 period was primarily attributable
to a relative increase in holdings of tax exempt bonds offset in part
by a 1% increase in the federal income tax rate.
PAGE 17
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
The Company is not involved in any material pending
legal proceedings, other than ordinary routine litigation
occurring in the normal course of its business.
The Company's subsidiary banks are parties to various
legal claims which arise in the normal course of their
business. . The various pending legal claims against
the subsidiary banks will not, in the current opinion of
management, likely result in any material liability to the
subsidiary banks or the Company.
Item 2. Changes in Securities - None
Item 3. Defaults Upon Senior Securities - None
Item 4. Submission of Matters to a Vote of Security Holders - None
Item 5. Other Information - None
Item 6. Exhibits and Reports Filed on Form 8-K
Exhibit 27 Financial Data Schedule
(Submitted with Electronic Filing Only) Page 19
On August 4, 1995, the Company filed
a Form relating to (a) the redemption of the
Company's 8 1/8 percent subordinated debentures
due December 1, 1996, and cancellation of the related
mandatory stock purchase contracts, (b) the Company's
entering into an agreement to sell eight branches
of Green Mountain Bank to Mascoma
Savings Bank, and ( c) the resignation of
Green Mountain Bank president, J. Peter
Yankowski.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
ARROW FINANCIAL CORPORATION
Registrant
Date: November 10, 1995 s/ Michael F. Massiano
Michael F. Massiano, Chairman and
President (Chief Executive Officer)
Date: November 10, 1995 s/ John J. Murphy
John J. Murphy, Executive Vice
President and Treasurer/CFO
(Principal Financial Officer and
Principal Accounting Officer)
PAGE 18
<PAGE>
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<ARTICLE> 9
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> SEP-30-1995
<CASH> 23302
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 47400
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 65323
<INVESTMENTS-CARRYING> 130467
<INVESTMENTS-MARKET> 131685
<LOANS> 515935
<ALLOWANCE> 12379
<TOTAL-ASSETS> 802280
<DEPOSITS> 704410
<SHORT-TERM> 20643
<LIABILITIES-OTHER> 11294
<LONG-TERM> 220
<COMMON> 5979
0
0
<OTHER-SE> 59734
<TOTAL-LIABILITIES-AND-EQUITY> 802280
<INTEREST-LOAN> 35617
<INTEREST-INVEST> 5762
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<LOANS-NON> 4927
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<ALLOWANCE-OPEN> 12379
<CHARGE-OFFS> 863
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