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 June 30, 1996
[ ] 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 Identification
incorporation or organization) 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.
Yes X 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 July
31, 1996
Common Stock, par value $1.00 per share 5,223,893
ARROW FINANCIAL CORPORATION
FORM 10-Q
JUNE 30, 1996
INDEX
PART I FINANCIAL INFORMATION
Consolidated Balance Sheets
as of June 30, 1996 and December 31, 1995
Consolidated Statements of Income
for the Three Month and Six Month
Periods Ended June 30, 1996 and 1995
Consolidated Statements of Cash Flows
for the Six Months Ended June 30, 1996 and 1995
Notes to Consolidated Financial Statements
Management's Discussion and Analysis
of Financial Condition and Results of Operations
Overview
Disposition of Vermont Operations
Results of Operations
Analysis of Recurring Income
Change in Financial Condition
Summary of Consolidated Balance Sheets
Deposit and Loan Trends
Summary of the Allowance and Provision for Loan Losses
Capital Resources
Summary of Capital Ratios
Quarterly Dividends
Liquidity
Interest Rate Risk
Results of Operations: Quarterly Comparison
Summary of Earnings Performance
Net Interest Income
Other Income
Other Expense
Income Taxes
Results of Operations: Year-to-Date Comparison
Summary of Earnings Performance
Net Interest Income
Other Income
Other Expense
Income Taxes
PART II OTHER INFORMATION
SIGNATURES
PART I - FINANCIAL INFORMATION
<TABLE>
<CAPTION>
ARROW FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)(Unaudited)
6/30/96 12/31/95
ASSETS
<S> <C> <C>
Cash and Due from Banks $ 20,463 $ 23,406
Federal Funds Sold and Securities Purchased Under
Agreements to Resell --- 35,100
Securities Available-for-Sale 170,524 178,645
Securities Held-to-Maturity: (Approximate Fair Value of
$16,904 in 1996 and $14,508 in 1995) 16,639 13,921
Loans and Leases 487,291 517,787
Less: Allowance for Loan Losses (11,540) (12,106)
Net Loans and Leases 475,751 505,681
Premises and Equipment 12,672 13,888
Other Real Estate Owned 540 2,410
Other Assets 16,916 16,739
Total Assets $713,505 $789,790
LIABILITIES
Deposits:
Demand $ 79,522 $ 94,713
Regular Savings, N.O.W. &
Money Market Deposit Accounts 286,972 352,302
Time Certificates of $100,000 or More 81,840 57,557
Other Time Deposits 162,169 189,881
Total Deposits 610,503 694,453
Short-Term Borrowings:
Federal Funds Purchased and Securities Sold Under
Agreements to Repurchase 17,509 14,045
Other Short-Term Borrowings 6,625 1,252
Other Liabilities 12,293 12,536
Total Liabilities 646,930 722,286
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 1996 and 1995) 5,979 5,979
Surplus 41,138 40,938
Undivided Profits 32,501 24,296
Valuation Allowance for Securities Available-for-Sale (460)
1,152
Unallocated ESOP Shares (25,262
in 1996 and 43,130 in 1995) (410) (700)
Treasury Stock (684,884 Shares in 1996 and
309,833 in 1995, at Cost) (12,173) (4,161)
Total Shareholders' Equity 66,575 67,504
Total Liabilities and Shareholders' Equity $713,505 $789,790
</TABLE>
<TABLE>
<CAPTION>
ARROW FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in Thousands, Except Per Share Amounts)(Unaudited)
Three Months Six Months
Ended June 30, Ended June 30,
1996 1995 1996 1995
INTEREST INCOME
<S> <C> <C> <C> <C>
Interest and Fees on Loans and Leases $11,013 $11,930 $22,587 $23,574
Interest and Dividends on
Securities Held-to-Maturity:
U.S. Treasury and Other U.S.
Government Agencies and Corporations --- 1,619 --- 3,239
State and Municipal Obligations 205 196 399 361
Other Securities --- 132 --- 245
Interest on Federal Funds Sold and Securities
Purchased Under Agreements to Resell 32 186 170 255
Interest and Dividends on
Securities Available-for-Sale 2,765 980 5,408 1,765
Total Interest Income 14,015 15,043 28,564 29,439
INTEREST EXPENSE
Interest on Deposits:
Time Certificates of $100,000 or More 1,043 980 1,987 1,707
Other Deposits 4,210 5,017 8,633 9,469
Interest on Short-Term Borrowings:
Federal Funds Purchased and Securities Sold
Under Agreements to Repurchase 186 143 365 304
Other Short-Term Borrowings 36 46 66 99
Interest on Long-Term Debt --- 100 --- 205
Total Interest Expense 5,475 6,286 11,051 11,784
NET INTEREST INCOME 8,540 8,757 17,513 17,655
Provision for Loans Losses 224 230 448 360
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 8,316 8,527 17,065 17,295
OTHER INCOME
Income from Fiduciary Activities 989 968 1,959 1,945
Fees for Other Services to Customers 1,024 1,164 2,038 2,303
Net Gains (Losses) on Securities Transactions (30) --- 82 ---
Gain on the Disposition of Branches --- --- 7,091 ---
Other Operating Income 218 5,231 499 5,494
Total Other Income 2,201 7,363 11,669 9,742
OTHER EXPENSE
Salaries and Employee Benefits 3,840 4,599 7,740 8,525
Occupancy Expense of Premises, Net 453 522 978 1,068
Furniture and Equipment Expense 413 498 870 1,000
Other Operating Expense 1,797 2,606 3,696 5,034
Total Other Expense 6,503 8,225 13,284 15,627
INCOME BEFORE PROVISION FOR INCOME TAXES 4,014 7,665 15,450 11,410
Provision for Income Taxes 1,433 2,725 5,396 4,086
NET INCOME $ 2,581 $ 4,940 $10,054 $ 7,324
Average Shares Outstanding 5,392 5,729 5,520 5,735
Per Common Share:
Earnings $ .48 $ .86 $ 1.82 $ 1.28
Dividends Declared .17 .13 .34 .26
Book Value 12.64 11.38 12.64 11.38
Per share amounts have been adjusted for the November 1995 four percent stock dividend.
</TABLE>
<TABLE>
<CAPTION>
ARROW FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)(Unaudited)
Six Months
Ended June 30,
1996 1995
Operating Activities:
<S> <C> <C>
Net Income $10,054 $ 7,324
Adjustments to Reconcile Net Income to Net Cash
Provided by Operating Activities:
Provision for Loan Losses 448 360
Provision for Other Real Estate Owned Losses 215 80
Depreciation and Amortization 651 803
Compensation Expense for Allocated ESOP Shares 68 ---
Gains on the Sale of Securities Available-for-Sale (228) ---
Losses on the Sale of Securities Available-for-Sale 146 ---
Proceeds from the Sale of Loans 43,410 7,249
Net (Gains) Losses on the Sale of Loans, Fixed Assets and
Other Real Estate Owned --- 7
Decrease (Increase) in Deferred Tax Assets 220 837
Decrease (Increase) in Interest Receivable 284 (418)
Increase (Decrease) in Interest Payable (701) 870
Decrease (Increase) in Other Assets 318 (1,048)
Increase (Decrease) in Other Liabilities 458 1,840
Net Cash Provided By Operating Activities 55,343 17,904
Investing Activities:
Proceeds from the Sale of Securities Available-for-Sale 32,236 ---
Proceeds from the Maturities of Securities
Available-for-Sale 25,250 18,681
Purchases of Securities Available-for-Sale (52,069) (23,497)
Proceeds from the Maturities of Securities Held-to-Maturity 521 2,275
Purchases of Securities Held-to-Maturity (3,244) (4,429)
Net Increase in Loans and Leases (13,813) (17,836)
Proceeds from the Sales of Fixed Assets and
Other Real Estate Owned 3,379 987
Purchase of Fixed Assets (805) (338)
Net Cash Used In Investing Activities (8,545) (24,157)
Financing Activities:
Net Increase (Decrease) in Deposits (83,950) 28,228
Net Increase (Decrease) in Short-Term Borrowings 8,837 (5,043)
Purchase of Treasury Stock (8,107) (765)
Sale of Treasury Stock for Exercise of Stock Options 195 ---
Disqualifying Disposition of ISO Shares 33 ---
Cash Dividends Paid (1,849) (1,485)
Net Cash Provided By (Used In) Financing Activities (84,841) 20,935
Net Increase (Decrease) in Cash and Cash Equivalents (38,043) 14,682
Cash and Cash Equivalents at Beginning of Period 58,506 34,624
Total Cash and Cash Equivalents $20,463 $49,306
Cash and Cash Equivalents:
Cash and Due from Banks $20,463 $24,606
Federal Funds Sold and Securities Purchased Under
Agreements to Resell --- 24,700
Total Cash and Cash Equivalents $20,463 $49,306
Supplemental Cash Flow Information:
Interest Paid $11,752 $10,914
Income Taxes Paid 5,180 2,023
Transfer of Loans to Other Real Estate Owned 215 538
Accrued Compensation from Stock
Appreciation Rights Transferred
to Shareholders' Equity upon Exercise
of Tandem Stock Options --- 50
Cancellation of Debentures by Exercise of Cancellable
Mandatory Stock Purchase Contracts --- 263
</TABLE>
ARROW FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FORM 10-Q
JUNE 30, 1996
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 June 30, 1996 and December 31, 1995;
the results of operations for the three and six month periods ended
June 30, 1996 and June 30, 1995; and the statements of cash flows
for the six month periods ended June 30, 1996 and June 30, 1995.
All such adjustments are of a normal recurring nature. Certain items
have been reclassified to conform to the 1996 presentation. Per
share amounts have been restated to reflect the November 1995
four percent stock dividend.
2. 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 June 30, 1996 did not use derivative
financial instruments to hedge its interest rate risk position.
Consequently, as of June 30,1996 and December 31, 1995, SFAS
No. 119 would not have required the Company to provide
disclosures in addition to those already required by SFAS No. 105
and 107.
3. 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 adopted SFAS No. 121 in
the first quarter of 1996, but did not experience any impact on net
income or shareholders' equity.
4. Accounting for Stock-Based Compensation
In October 1995, the FASB issued SFAS No. 123, "Accounting for
Stock-Based Compensation." SFAS No. 123 requires Companies
not using a fair value based method of accounting for employee
stock options or similar plans, to provide pro forma disclosure of net
income and earnings per share as if that method of accounting had
been applied. The Statement is effective for fiscal years beginning
after December 15, 1995. The Company has elected to continue to
account for its stock option plans under APB No. 25, and to provide
at year-end the pro forma disclosures required by SFAS No. 123.
ARROW FINANCIAL CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
JUNE 30, 1996
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.
Disposition of Vermont Operations
On January 15, 1996, the Company completed the sale of eight
branches of Green Mountain Bank to Mascoma Savings Bank,
Lebanon, New Hampshire. On February 27, 1996, the Company
announced definitive agreements for the sale of Green Mountain
Bank's remaining branches and related deposits and loans to
ALBANK FSB, Albany, New York, and the sale of Green Mountain
Bank's trust business to Vermont National Bank, Brattleboro,
Vermont. These sales, subject to regulatory approval, are expected
to close in the third quarter of 1996. If completed in accordance with
the terms of the definitive agreements, the sale to ALBANK may
generate for the Company a gain equal to 7.5% of deposits
transferred (at June 30, 1996, deposits subject to transfer equaled
approximately $108 million), and the sale to Vermont National may
generate a gain in excess of $3.0 million, in each case subject to
adjustments as provided in the agreements. After the completion of
these sales, the Company effectively will have no remaining
operations in Vermont.
Concurrent with the announcement of the sale agreements for
Green Mountain Bank, the Company announced that the Board of
Directors had authorized a stock repurchase program, under which
up to $10 million of common stock may be repurchased from time
to time on the open market or in privately negotiated transactions, at
the discretion of management. During the first six months of 1996,
the Company repurchased an aggregate of 390,756 shares of its
common stock for a total price of $8.1 million. Pending completion
of the sale agreements for the remainder of Green Mountain Bank's
operations, the Board of Directors continues to review strategic
alternatives for the utilization of the sale proceeds.
Results of Operations
The Company reported earnings of $10.1 million for the first six
months of 1996, compared to earnings of $7.3 million for the first
half of 1995. Primary earnings per share were $1.82 and $1.28 for
the two respective periods. Earnings in the 1996 period include a
gain on the sale of the eight Vermont branches to Mascoma Savings
Bank and substantial unanticipated repayments on certain
restructured loans. Earnings in the 1995 period included a $5.0
million pre-tax settlement from the Company's financial institution
bond company on a claim for losses suffered in earlier periods.
Exclusive of nonrecurring items, earnings for the first two quarters of
1996 and 1995 amounted to $5.1 million and $4.6 million,
respectively and reflect core earnings per share of $.93 and $.79 for
the two respective periods.
The annualized returns on average assets were 2.80% and 1.94%
for the first six months of 1996 and 1995, respectively. The
annualized returns on average equity were 28.97% and 23.86% for
the first half of 1996 and 1995, respectively. Excluding the
nonrecurring items, the returns on average assets were 1.56% and
1.20% and the returns on average equity were 15.82% and 14.83%,
respectively, for the 1996 and 1995 six month periods.
Total assets were $713.5 million at June 30, 1996, a decrease of
$76.3 million or 9.7% from December 31, 1995, principally reflecting
the effects of the branch sale to Mascoma Savings Bank on January
15, 1996.
Total shareholders' equity decreased $.9 million to $66.6 million
during the first six months of 1996. Decreases to shareholders'
equity resulted from the stock repurchase program described above
and cash dividends paid during the period and by an
increase in the valuation allowance for securities available-for-sale,
offset by net earnings for the period. The Company's risk-based capital
ratios and Tier 1 leverage ratio significantly exceeded regulatory
minimums at period end and all Company banks qualified as
"well-capitalized" under federal bank guidelines.
<PAGE>
The following table presents the adjustments necessary to arrive at
the recurring net income of the Company.
<TABLE>
<CAPTION>
Analysis of Recurring Income
(In Thousands)
Three Months Ended Six Months Ended
Jun 1996 Jun 1995 Jun 1996 Jun 1995
<S> <C> <C> <C> <C>
Net Income, as Reported $2,581 $4,940 $10,054 $7,324
Adjustments, net of Tax:
OREO Transactions 33 129 155 119
Net Securities Transactions 17 --- (50) ---
Gain on Branch Sale --- --- (4,726) ---
Insurance Settlement --- (3,250) --- (3,250)
Restructured Loan Transactions --- --- (323) ---
Severance Expenses --- 358 --- 358
Recurring Income $2,631 $2,177 $ 5,110 $4,551
Earnings Per Share, as Reported $ .48 $ .86 $ 1.82 $ 1.28
Earnings Per Share, Recurring .49 .38 .93 .79
</TABLE>
<TABLE>
<CAPTION>
CHANGE IN FINANCIAL CONDITION
Summary of Consolidated Balance Sheets
(Dollars in Thousands)
$ Change $ Change % Change % Change
Period End Balances: Jun 1996 Dec 1995 Jun 1995 From Dec From Jun From Dec From Jun
<S> <C> <C> <C> <C> <C> <C> <C>
Securities Held-to-Maturity $ 16,639 $ 13,921 $131,796 $ 2,718 $(115,157) 19.5% (87.4)%
Securities Available-for-Sale 170,524 178,645 60,592 (8,121) 109,932 (4.5) 181.4
Federal Funds Sold --- 35,100 24,700 (35,100) (24,700) (100.0) (100.0)
Loans, Net of
Unearned Income (1) 487,291 517,787 517,165 (30,496) (29,874) (5.9) (5.8)
Allowance for Loan Losses 11,540 12,106 12,183 (566) (643) (4.7) (5.3)
Earning Assets (1) 674,454 745,453 734,243 (70,999) (59,789) (9.5) (8.1)
Total Assets 713,505 789,790 778,483 (76,285) (64,978) (9.7) (8.3)
Demand Deposits 79,522 94,713 88,845 (15,191) (9,323) (16.0) (10.5)
Savings, NOW and
MMDA Accounts 286,972 352,302 330,688 (65,330) (43,716) (18.5) (13.2)
Time Deposits of
$100,000 or More 81,840 57,557 69,410 24,283 12,430 42.2 17.9
Other Time Deposits 162,169 189,881 189,770 (27,712) (27,601) (14.6) (14.5)
Total Deposits 610,503 694,453 678,713 (83,950) (68,210) (12.1) (10.0)
Other Borrowed Funds 24,134 15,297 24,569 8,837 (435) 57.8 (1.8)
Shareholders' Equity 66,575 67,504 64,874 (929) 1,701 (1.4) 2.6
(1) Includes Nonaccrual Loans
</TABLE>
Total resources at June 30, 1996 amounted to $713.5 million, a
decrease of $76.3 million or 9.7% from year-end 1995, and a
decrease of $65.0 million or 8.3% from June 30, 1995. The sale of
eight branches of Green Mountain Bank to Mascoma Savings Bank
on January 15, 1996 reduced total assets by approximately $93.6
million. This decrease was offset, in part, by growth in the loan
portfolios of the Company's two New York based banks, primarily in
the area of consumer loans.
Total deposits of $610.5 million at June 30, 1996 decreased $84.0
million from the December 31, 1995 level. Approximately $101.0
million of deposit liabilities were assumed by Mascoma Savings Bank
from Green Mountain Bank in the branch sale. Partially offsetting this
decrease were deposit increases at the Company's New York based
banks attributable to a seasonal influx of municipal deposits, largely
in time deposits of $100,000 and over. Total deposits for Green
Mountain Bank were $107.9 million at June 30, 1996. Substantially
all of Green Mountain Bank's deposits will be assumed by ALBANK
under the branch sale agreement discussed in the "Overview" above.
While management of the Company has focused in recent periods on
disposing of the Vermont business, the two subsidiary banks in New
York have continued to develop plans for growth in their market
areas. The following table, presenting average loan balances at the
New York banks for the most recent six quarters, indicates a pattern
of steady growth.
<TABLE>
<CAPTION>
Quarterly Average Loan Balances in New York
(In Thousands)
Glens
Falls Saratoga
National National
Bank Bank
<S> <C> <C>
First Quarter of 1995 $295,164 $47,771
Second Quarter of 1995 297,706 48,104
Third Quarter of 1995 300,395 49,544
Fourth Quarter of 1995 304,333 49,832
First Quarter of 1996 308,943 50,676
Second Quarter of 1996 315,862 56,455
</TABLE>
Total shareholders' equity decreased $.9 million to $66.6 million
during the first six months of 1996. The decrease to shareholders'
equity resulted from the stock repurchase program discussed above
and cash dividends paid during the period and by
changes to the available-for-sale investment securities valuation
allowance, offset by net earnings for the period. The Company paid a
$.17 cash dividend for each of the first two quarters of 1996, which
followed dividends of $.16 and $.144 for the fourth and third quarters
of 1995, respectively.
Deposit and Loan Trends
The following analysis on trends in the deposit and loan portfolios
focuses exclusively on the two New York banking subsidiaries;
Vermont operations, which are the subject of definitive sale
agreements, have been excluded.
The following table presents the quarterly average balance by
deposit type and the percentage of total deposits represented by
each deposit type for each of the most recent five quarters for the
Company's New York banks.
<TABLE>
<CAPTION>
Quarterly Average Deposit Balances
(Excludes Vermont Deposits)
(Dollars in Thousands)
Jun 1996 Mar 1996 Dec 1995 Sep 1995 Jun 1995
Amount % Amount % Amount % Amount % Amount %
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Demand Deposits $ 66,299 13 $ 63,156 13 $ 66,437 13 $ 67,648 14 $ 61,137 13
N.O.W. and Super N.O.W. 104,768 20 99,004 20 103,881 21 88,384 18 86,808 18
Savings and M.M.D.A 142,916 28 145,094 29 142,582 29 150,654 31 155,102 32
Time Deposits of
$100,000 or More 78,063 15 66,755 14 67,141 14 67,475 14 62,577 13
Other Time Deposits 120,397 24 117,682 24 116,702 23 116,468 23 113,164 24
Total Deposits $512,443 100 $491,691 100 $496,743 100 $490,629 100 $478,788 100
</TABLE>
Average deposits for the Company's New York banks increased
$33.7 million, or 7.0%, from the second quarter of 1995 to the
second quarter of 1996. Over the five quarters charted in the table
above, the Company experienced a shift in the mix of deposits, with
savings and money market accounts decreasing as a percentage of
total deposits and N.O.W. accounts and time deposits of $100,000
or more increasing in proportion to total deposits. The ratio of other
time deposits to total deposits remained constant over the most
recent five quarters.
The Federal Reserve Board attempts to influence the federal funds
and prime interest rates by changing the Federal Reserve Bank
discount rate. Over the past two years, changes in the discount rate
have directly influenced federal funds and prime rates, which in turn
have had an impact upon the Company's cost of funds. The
"Quarterly Cost of Deposits" analysis and the Federal Reserve Bank
Discount Rate Chart below, demonstrate the positive correlation
between changes in the federal discount rate and changes in the
Company's cost of funds.
<TABLE>
<CAPTION>
Quarterly Cost of Deposits
(Excludes Vermont Deposits)
Jun 1996 Mar 1996 Dec 1995 Sep 1995 Jun 1995
<S> <C> <C> <C> <C> <C>
Demand Deposits --- % --- % --- % --- % --- %
N.O.W. and Super N.O.W. 2.69 2.58 2.87 2.62 2.71
Savings and M.M.D.A 2.92 3.00 3.08 3.08 3.09
Time Deposits of $100,000 or More 5.15 5.37 5.59 5.66 5.71
Other Time Deposits 5.23 5.49 5.64 5.60 5.46
Total Deposits 3.38 3.45 3.57 3.53 3.53
</TABLE>
<TABLE>
<CAPTION>
Federal Reserve Bank's Discount Rate Changes 1992 - 1996
Date New Rate Old Rate
<S> <C> <C>
January 31, 1996 5.00% 5.25%
February 1, 1995 5.25 4.75
November 15, 1994 4.75 4.00
August 16, 1994 4.00 3.50
May 17, 1994 3.50 3.00
July 2, 1992 3.00 3.50
</TABLE>
The increase in the discount rate on February 1, 1995 marked the
last in a series of interest rate increases by the Federal Reserve
Board which had begun in May of 1994. Rates then held steady for
twelve months until the Reserve Board lowered rates by twenty five
basis points on January 31, 1996. The Company's cost of funds
rose throughout 1994 and into 1995 as a result of these changes.
Correspondingly, the cost of deposits reached a plateau for the last
three quarters of 1995, and as a result of the January 31, 1996
decrease in the federal discount rate, the cost of deposits decreased
twelve basis points in the first quarter of 1996, and decreased an
additional seven basis points for the second quarter of 1996.
The following table presents the quarterly average balance by loan
type and the percentage of total loans represented by each loan
type for each of the most recent five quarters for the Company's
New York banks.
<TABLE>
<CAPTION>
Quarterly Average Loan Balances
(Excludes Vermont Loans)
(Dollars in Thousands)
Jun 1996 Mar 1996 Dec 1995 Sep 1995 Jun 1995
Amount % Amount % Amount % Amount % Amount %
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial and Commercial
Real Estate $ 87,304 23 $ 87,073 24 $ 87,388 25 $ 89,361 25 $ 90,130 26
Residential Real Estate 122,858 33 120,010 33 119,157 34 118,519 34 118,308 34
Home Equity 28,804 8 29,226 8 29,364 8 29,333 8 29,306 8
Indirect Consumer Loans 92,757 25 82,446 23 78,823 22 75,560 22 72,539 21
Direct Consumer Loans 31,627 9 31,555 9 30,022 8 27,831 8 26,720 8
Credit Card Loans 8,967 2 9,310 3 9,413 3 9,334 3 8,804 3
Total Loans $372,317 100 $359,620 100 $354,167 100 $349,938 100 $345,807 100
</TABLE>
Average loans of the Company's New York banks increased at a
steady pace over the five most recent quarters. Average loans for
the second quarter of 1996 had increased by $26.5 million, or 7.7%,
from the second quarter of 1995. While most categories of loans
either increased or maintained a relatively constant level, indirect
consumer loans and commercial loans demonstrated the most
significant change. Indirect consumer loans are primarily auto loans
financed through local dealerships where the Company acquires the
dealer paper. As a percentage of overall loan portfolio of the New
York banks, these loans increased from 21% to 25% during the
period from the second quarter of 1995 to the second quarter of
1996. During the same period, commercial and commercial real
estate loans decreased in both total footings and as a percent of
total loans.
<TABLE>
<CAPTION>
Quarterly Taxable Equivalent Yield on Loans
(Excludes Vermont Loans)
Jun 1996 Mar 1996 Dec 1995 Sep 1995 Jun 1995
<S> <C> <C> <C> <C> <C>
Commercial and
Commercial Real Estate 9.22% 9.98% 10.07% 10.21% 10.26%
Residential Real Estate 8.42 8.55 8.47 8.42 8.67
Home Equity 19.03 9.40 9.76 9.91 10.03
Indirect Consumer Loans 8.52 8.62 8.56 8.50 8.36
Direct Consumer Loans 2.21 9.43 9.90 9.83 10.26
Credit Card Loans 16.55 16.45 15.64 16.45 16.72
Total Loans 9.12 9.26 9.30 9.35 9.46
</TABLE>
Yields on the Company's loan portfolio for its New York banks peaked
in the second quarter of 1995 and decreased in each of the
subsequent quarters, reflecting the general trend in interest rates.
The following table presents information related to the Company's
allowance and provision for loan losses for each of the past five
quarters. The provision for loan losses and net charge-offs are
reported on a year-to-date basis, and are annualized when expressed
as numerators in ratios.
<TABLE>
<CAPTION>
Summary of the Allowance and Provision for Loan Losses
(Dollars in Thousands)(Loans Stated Net of Unearned Income)
Jun 1996 Mar 1996 Dec 1995 Sep 1995 Jun 1995
Loan Balances:
<S> <C> <C> <C> <C> <C>
Period End Loans $487,291 $479,848 $517,787 $515,935 $517,165
Average Loans, Year-to-Date 484,473 482,640 513,266 512,515 511,909
Allowance for Loan Losses,
Begin of Period $12,106 $12,106 $12,338 $12,338 $12,338
Transfer Pursuant to Branch Sale (596) (596) --- --- ---
Provision for Loans Losses, YTD 448 224 1,170 640 360
Net Charge-offs, YTD (418) (265) (1,402) (599) (515)
Allowance for Loan Losses,
End of Period $11,540 $11,469 $12,106 $12,379 $12,183
Nonaccrual Loans $2,962 $3,247 $ 4,244 $ 4,927 $5,060
Loans Past due 90 or More Days
and Still Accruing Interest 806 957 111 371 327
Loans Restructured and in
Compliance with Modified Terms --- --- --- --- ---
Total Nonperforming Loans 3,768 4,204 4,355 5,298 5,387
Other Real Estate Owned 540 2,215 2,410 2,703 2,785
Total Nonperforming Assets $4,308 $6,419 $ 6,765 $ 8,001 $8,172
Performance Ratios:
Allowance to Nonperforming Loans 306.26% 272.81% 277.98% 233.65% 226.17%
Allowance to Period End Loans 2.37 2.39 2.34 2.40 2.36
Provision to Average Loans (1) 0.19 0.19 0.23 0.17 0.14
Net Charge-offs to Average Loans (1) 0.17 0.22 0.27 0.16 0.20
Nonperforming Assets to Loans & OREO 0.88 1.33 1.30 1.54 1.57
(1) Annualized
</TABLE>
The Company's nonperforming assets (including both New York and
Vermont operations) at June 30, 1996 amounted to $4.3 million, a
decrease of $2.5 million or 36.3% from December 31, 1995 and a
decrease of $3.9 million, or 47.3%, from June 30, 1995. The
decrease from year-end was primarily attributable to the sale of two
sizable OREO properties during the second quarter of 1996. Of the
$4.3 million in nonperforming assets at June 30, 1996, $3.0 million
was attributable to the New York banks, and the remaining $1.3
million was attributable to Green Mountain Bank.
The provision for loan losses was $448 thousand for the first two
quarters of 1996, compared to a provision of $360 thousand for the
first two quarters of 1995. On an annualized basis, the ratio of the
second quarter provision to average loans was .19%, slightly in
excess of the annualized ratio for the period's net charge-offs to
average loans of .17%. The provision for the six months ended
June 30, 1996 was deemed adequate, in light of the Company's
high coverage ratio compared to industry norms. The coverage
ratio, defined as the ratio of the allowance for loan losses to
nonperforming loans, was 306.26% at June 30, 1996.
CAPITAL RESOURCES
Shareholders' equity was $66.6 million at June 30, 1996, a decrease
of $929 thousand or 1.4% from December 31, 1995. The decrease
in shareholders' equity was primarily attributable to the repurchase
of 390,756 shares of the Company's common stock at an aggregate
cost of $8.1 million and cash dividends of $1.8 million and
by an increase of $1.6 million to the valuation allowance for
securities classified as available-for-sale, offset by net earnings
for the period. 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 shareholders' equity.
The Company and its subsidiaries are currently subject to two 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 qualified total capital to risk-weighted assets. At least half of total
capital must consist of "Tier 1" capital, which comprises 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 or rapidly expanding companies
may be required to meet substantially greater minimum ratios. The
FDIC Improvement Act ("FDICIA") of 1991 mandated actions to be
taken by banking regulators for various levels of undercapitalization
of financial institutions as measured by these capital ratios. FDICIA
established five levels of capitalization ranging from "critically
undercapitalized" to "well-capitalized." As of June 30, 1996, 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 9.04% 14.46% 15.73%
Glens Falls National Bank & Trust Co. 7.79 13.77 15.03
Saratoga National Bank & Trust Co. 7.32 9.46 10.71
Green Mountain Bank 16.53 21.70 23.01
Regulatory Minimum 3.00 4.00 8.00
FDICIA's "Well-Capitalized" Standard 5.00 6.00 10.00
</TABLE>
All capital ratios for the Company and its subsidiary banks at June
30, 1996 were above minimum capital standards for financial
institutions. Additionally, all Company and subsidiary bank capital
ratios at that date were above FDICIA's "well-capitalized" standard.
The following table presents the cash dividends paid in 1996 and
1995, restated for the November 1995 four percent stock dividend.
On July 25, 1996, the Company declared a dividend of $.17 payable
on September 16, 1996.
<TABLE>
<CAPTION>
Quarterly Dividends
1996 1995
<S> <C> <C>
First Quarter $.170 $.125
Second Quarter .170 .135
Third Quarter .170 .144
Fourth Quarter N/A .160
Second Quarter Core Earnings Per Share $.49 $.38
Dividend Payout Ratio: (Third quarter dividends as
a percent of second quarter core
earnings per share) 34.7% 37.9%
</TABLE>
LIQUIDITY
The objective of liquidity management is to satisfy cash flow
requirements, principally the needs of depositors and borrowers to
access funds. Liquidity is provided on an ongoing basis through
assumption or "purchase" of liabilities, the maturity of asset balances
and the sale of assets. Liability liquidity arises primarily from the
significant base of "core" and other deposits gathered through a
branch network operating over a dispersed geographical area. These
"core" balances consist of demand deposits, savings, N.O.W. and
money market account balances and small denomination time
deposits. Core deposits are considered to be less volatile in their
movement into and out of financial institutions, as compared to large
denomination time deposits, brokered time deposits and repurchase
agreements, which are perceived as more sensitive to changes in
interest rates than core deposits. Historically, the Company has
maintained high levels of core deposits. At June 30, 1996, core
deposits represented more than 74% of the Company's total assets
and stockholders' equity at a level of 9.3% of total assets represented
another substantial source of funds. Large denomination time
deposits, repurchase agreements and other borrowed funds
represented 14.9% of total assets at June 30, 1996.
Federal funds sold are overnight sales of the Company's surplus
funds to correspondent banks, while federal funds purchased
represent overnight borrowings. Federal funds purchased are thus
a source of short-term liquidity. The Company's practice is to be a
net seller of federal funds on average, and to avoid extended periods
of purchasing federal funds. During the second quarter of 1996,
average federal funds sold amounted to $2.5 million and average
federal funds purchased were $2.3 million. At June 30, 1996, federal
funds purchased amounted to $3.3 million.
Apart from federal funds purchased, securities available-for-sale
represent the Company's primary means of meeting short-term
liquidity needs. This liquidity arises both from an ability to sell the
securities quickly without significant impact on Company earnings, as
well as from the ability to use the securities as collateral for
borrowing. At June 30, 1996, securities available-for-sale amounted
to $170.5 million and averaged $171.6 million for the quarter then
ended.
Other short-term sources of funds include term federal funds
arrangements with correspondent banks and a borrowing
arrangement with the Federal Home Loan Bank.
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.
INTEREST RATE RISK
While managing liquidity, the Company must monitor and control
interest rate risk. Interest rate risk is the exposure of the Company's
net interest income to changes in interest rates. Interest rate risk is
directly related to the different maturities and repricing characteristics
of interest-bearing assets and liabilities, as well as to prepayment
risks for mortgage-backed assets, possible early withdrawal of time
deposits, and the fact that the speed and magnitude of responses to
interest rate changes varies by product. While many of the
Company's loan products are indexed to independent rates, such as
prime rates or treasury notes, the rates on most deposit products are
set by management pricing committees.
The Company's primary short-term measure of interest rate risk
projects net interest income for the ensuing twelve-month period
based on the maturity, prepayment assumption and repricing
characteristic of each individual interest-bearing asset and liability
under a variety of interest rate projections. The Company obtains
interest rate projections from a third party provider of economic data.
These projections are applied to existing interest sensitive assets and
liabilities and to expected new and rollover amounts. As a base, the
Company projects net interest income for the ensuing twelve months
for the most likely interest rate projection and for a no-change
scenario. Exposures to rising or falling rates are then calculated for
a wide dispersion of possible interest rate scenarios. For a long-term
measure of interest rate risk, the Company measures the economic
value of equity for immediate and sustained changes in interest rates.
At June 30, 1996, the Company was operating within established
internal policy limits for both the short-term and long-term measures
of interest rate risk.
The Company is able to reduce interest rate risk by adjusting the mix
of loan products as well as the balance of fixed and variable rate
products within the various loan categories. To a lesser extent, the
Company manages interest rate risk through selection of investments
for the securities portfolios. The Company does not, and in the
foreseeable future will not, use derivative financial instruments to
manage interest rate risk.
RESULTS OF OPERATIONS: Three Months Ended June 30, 1996 Compared With
Three Months Ended June 30, 1995
<TABLE>
<CAPTION>
Summary of Earnings Performance
(Dollars in Thousands)
As Reported: Jun 1996 Jun 1995 $ Change % Change
<S> <C> <C> <C> <C>
Net Income $2,581 $4,940 $(2,359) (47.7)%
Earnings Per Share .48 .86 (.38) (44.2)
Return on Assets 1.44% 2.57% (1.13)% (44.0)
Return on Equity 15.44% 30.87% (15.43)% (50.0)
</TABLE>
<TABLE>
<CAPTION>
Recurring Earnings: Jun 1996 Jun 1995 $ Change % Change
<S> <C> <C> <C> <C>
Net Income $2,631 $2,177 $ 454 20.9%
Earnings Per Share .49 .38 .11 28.9
Return on Assets 1.47% 1.13% .34% 30.1
Return on Equity 16.81% 13.64% 3.17% 23.2
</TABLE>
The Company's net income for the three month period ended June
30, 1996 was $2.6 million, which compared to earnings of $4.9
million for the second quarter of 1995. Earnings per share for the
two respective periods were $.48 and $.86. The $2.4 million
decrease in earnings, or $.38 per share, was primarily attributable to
receipt by the Company during the 1995 period of a $5.0 million
(pre-tax) payment from its financial institution bond company, in
settlement of a lawsuit filed by the Company in 1994 for claimed
losses recognized in 1991 resulting from the fraudulent actions of
two former officers of Green Mountain Bank.
As adjusted for nonrecurring items, net income increased $454
thousand, or 20.9% from the second quarter of 1995 to the second
quarter of 1996. Net interest income and other income for the
second quarter of 1996, as adjusted for nonrecurring items, were
both below the 1995 period. These decreases were more than
offset, however, by a favorable reduction in noninterest (other)
expense between the two periods. These and other changes are
reviewed in the following sections on net interest income, other
income, other expense and income taxes.
<TABLE>
<CAPTION>
Net Interest Income
Summary of Net Interest Income
(Taxable Equivalent Basis)
(Dollars in Thousands)
Jun 1996 Jun 1995 $ Change % Change
<S> <C> <C> <C> <C>
Interest Income $ 14,169 $ 15,238 $(1,069) (7.0)%
Interest Expense 5,475 6,286 (811) (12.9)
Net Interest Income $ 8,694 $ 8,952 $ (258) (2.9)
Average Earning Assets (1) $675,480 $724,829 $(49,349) (6.8)%
Average Paying Liabilities 557,017 612,387 (55,370) (9.0)
Taxable Equivalent Adjustment 154 195 (41) (21.0)
Yield on Earning Assets (1) 8.44% 8.43% 0.01% 0.1%
Cost of Paying Liabilities 3.96 4.12 (0.16) (3.9)
Net Interest Spread 4.48 4.31 0.17 3.9
Net Interest Margin 5.18 4.95 0.23 4.6
(1) Includes Nonaccrual Loans
</TABLE>
On a taxable equivalent basis, net interest income for the second
quarter of 1996 decreased $257 thousand, or 2.9%, from net interest
income in the second quarter of 1995. The change from the 1995
period was primarily attributable to a $49.3 million or a 6.8%
decrease in average earning assets. The decrease in earning
assets principally resulted from the sale by Green Mountain Bank of
loans and other assets to Mascoma Savings Bank, as part of the
sale of eight branches in January 1996. The change in
net interest income between the periods was positively impacted by
the fact that the decrease in average paying liabilities exceeded the
decrease in average earning assets by $6.0 million.
Net interest income for the second quarter of 1996 as compared to
the second quarter of 1995 also received a benefit from the
changing interest rate environment. While the yield on earning
assets remained virtually unchanged, the cost of paying liabilities
decreased by 17 basis points.
The provision for loan losses was $224 thousand for the quarter
ended June 30, 1996, compared to a provision of $230 thousand for
the 1995 period. The provision for loan losses was discussed
previously under the "Summary of the Allowance and Provision for
Loan Losses" section of this report.
Other Income
<TABLE>
<CAPTION>
Summary of Other Income
(Dollars in Thousands)
Jun 1996 Jun 1995 $ Change % Change
<S> <C> <C> <C> <C>
Income From Fiduciary Activities $ 989 $ 968 $ 21 2.2%
Fees for Other Services to Customers 1,024 1,164 (140) (12.0)
Net Losses on Securities Transactions (30) --- (30) ---
Other Operating Income 218 5,231 (5,013) (95.8)
Total Other Income $2,201 $7,363 $(5,162) (70.1)
Without Regard to the
1995 Bond Settlement:
Other Operating Income $ 218 $ 231 $ (13) (5.6)%
Total Other Income 2,201 2,363 (162) (6.9)
</TABLE>
The principal source of other income (i.e. noninterest income) for the
second quarter of 1995, and the primary reason that other income for the
1995 period exceeded other income for the 1996 period by $5.2 million, was
the Company's receipt in May 1995 of a $5.0 million payment from its
financial institution bond company, in settlement of a lawsuit filed by
the Company in 1994 for losses suffered in 1991 and claimed to have
been covered under the Company's $7.0 million financial institution
bond.
Without regard to the bond settlement, other income
decreased $162 thousand or 6.9% between the second quarter of
1995 and the second quarter of 1996. Income from fiduciary services
increased $21 thousand or 2.2% from the 1995 period to the 1996
period. Income from fiduciary activities was not significantly affected
by the sale of Green Mountain Bank branches to Mascoma Savings
Bank. Fees for other services to customers (primarily service charges
on deposit accounts, credit card fee income and servicing income on
sold loans) decreased $140 thousand or 12.0% primarily due to the
Mascoma transaction. Other operating income (primarily credit card
processing income and gains on the sale of other real estate owned,
loans and other assets) decreased $13 thousand. The decrease,
again, was primarily due to the Mascoma transaction. During the
second quarter of 1996 the Company recognized a loss of $30
thousand on the sale of $14.0 million of securities from the portfolio
of securities classified as available-for-sale. The sales were effected
for the primary purpose of reinvestment at a higher yield, and
secondarily to extend the maturity date on the available-for-sale
portfolio.
Other Expense
<TABLE>
<CAPTION>
Summary of Other Expense
(Dollars in Thousands)
Jun 1996 Jun 1995 $ Change % Change
<S> <C> <C> <C> <C>
Salaries and Employee Benefits $3,840 $4,599 $ (759) (16.5)%
Occupancy Expense of Premises, Net 453 522 (69) (13.2)
Furniture and Equipment Expense 413 498 (85) (17.1)
Other Operating Expense 1,797 2,606 (809) (31.0)
Total Other Expense $6,503 $8,225 $(1,722) (20.9)
Without Regard to Severance Expenses &
OREO Transactions:
Salaries and Employee Benefits $3,840 $4,048 $ (208) (5.1)%
Other Operating Expense 1,747 2,408 (661) (27.5)
Total Other Expense 6,453 7,476 (1,023) (13.7)
</TABLE>
Other (i.e. noninterest) expense decreased $1.7 million or 20.9%
from the second quarter of 1995 to the second quarter of 1996.
While the Company experienced decreases in all major categories
of other expense, the major reductions occurred in the areas of
salaries and employee benefits and other operating expense. The
principal reason for the decrease to salaries and benefits was a
one-time expending, in the 1995 period, of severance benefits.
Following the sale of eight branches to Mascoma Savings Bank in
January of 1996, the Company experienced reductions in most
areas of other operating expense. Two factors in the decrease from
1995 to 1996, not effected by the Mascoma transaction, were the
reduced FDIC deposit insurance premiums that took effect in the
third quarter of 1995 and a decrease in the costs to sell and carry
OREO properties.
After making adjustments for the nonrecurring items (OREO
liquidations and severance expense), total other
expense decreased $1.0 million or 13.7% from the second quarter
of 1995 to the 1996 period. Salaries and employee benefits, as
thus adjusted for nonrecurring expenses, decreased $208 thousand
between the periods. This decrease, along with the $69 thousand
decrease in occupancy expense, and the $85 decrease in furniture
and equipment expense, reflected both the effect of the Mascoma
transaction and the Company's continued effort to reduce operating
expenses. Other operating expense, as thus adjusted, decreased
by $661 thousand or 27.5% between the second quarter of 1995
and 1996.
Income Taxes
<TABLE>
<CAPTION>
Summary of Income Taxes
(Dollars in Thousands)
Jun 1996 Jun 1995 Change
<S> <C> <C> <C>
Provision for Income Taxes $1,433 $2,725 $(1,292)
Effective Tax Rate 35.70% 35.55% 0.15%
</TABLE>
The provisions for federal and state income taxes amounted to $1.4
million and $2.7 million for the second quarter of 1996 and 1995,
respectively. The effective tax rate was virtually unchanged.
RESULTS OF OPERATIONS: Six Months Ended June 30, 1996 Compared With
Six Months Ended June 30, 1995
<TABLE>
<CAPTION>
Summary of Earnings Performance
(Dollars in Thousands)
As Reported: Jun 1996 Jun 1995 $ Change % Change
<S> <C> <C> <C> <C>
Net Income $10,054 $7,324 $2,730 37.3%
Earnings Per Share 1.82 1.28 .54 42.2
Return on Assets 2.80% 1.94% 0.86% 44.3
Return on Equity 28.97% 23.86% 5.11% 21.4
</TABLE>
<TABLE>
<CAPTION>
Recurring Earnings: Jun 1996 Jun 1995 $ Change % Change
<S> <C> <C> <C> <C>
Net Income $5,110 $4,550 $ 560 12.3%
Earnings Per Share .93 .79 .14 17.7
Return on Assets 1.43% 1.21% .22% 18.2
Return on Equity 15.82% 14.83% 0.99% 6.7
</TABLE>
The Company's net income was $10.1 million for the first six
months of 1996, compared to earnings of $7.3 million for the first
six months of 1995. Earnings per share were $1.82 and $1.28 for
the two respective periods. The $2.7 million increase in earnings,
or $.54 per share, as discussed in more detail in the quarterly
analysis above, reflected the gain on the sale of eight branches to
Mascoma Savings Bank in January of 1996, offset in part by receipt
in June 1995 of the $5.0 million settlement under the Company's
financial institution bond. The other major factor was the
period-to-period decrease in other (i.e. noninterest) expense.
Adjusting for the nonrecurring events in both periods, as further
discussed in the following analysis, net income for the first half of
1996 increased $560 thousand or 12.3% over the first half of 1995.
The period-to-period change for the first half of 1996 as compared
to the first half of 1995 is 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)
Jun 1996 Jun 1995 $ Change % Change
<S> <C> <C> <C> <C>
Interest Income $ 28,871 $ 29,817 $ (946) (3.2)%
Interest Expense 11,051 11,784 (733) (6.2)
Net Interest Income $ 17,820 $ 18,033 $ (213) (1.2)
Average Earning Assets (1) $677,776 $712,707 $(34,931) (4.9)%
Average Paying Liabilities 556,799 603,093 (46,294) (7.7)
Taxable Equivalent Adjustment 307 378 (71) (18.8)
Yield on Earning Assets (1) 8.57% 8.44% 0.13% 1.5%
Cost of Paying Liabilities 3.99 3.94 0.05 1.3
Net Interest Spread 4.58 4.50 0.08 1.8
Net Interest Margin 5.29 5.10 0.19 3.7
(1) Includes Nonaccrual Loans
</TABLE>
On a taxable equivalent basis, net interest income for the first half of
1996 decreased $213 thousand from the first half of 1995. The
decrease in net interest income in the 1996 period was primarily
attributable to a 4.9% decrease in average earning assets.
The decrease in net interest income was offset to some extent by the
fact that the decrease in average paying liabilities exceeded the
decrease in average earning assets by $11.3 million.
Net interest income for the first two quarters of 1996 as compared
to the first two quarters of 1995 also received a benefit from
unexpected repayments received on two major loans at Green
Mountain Bank that had been restructured in earlier periods.
Excluding the effect of the repayments on the restructured loans, the
yield on earning assets for the 1996 period would have been 8.42%,
a decrease of two basis points below the yield for the first six months
of 1995.
Average earning assets amounted to $677.8 million for the first half
of 1996, a $34.9 million, or 4.9%, decrease from the first half of
1995. The 4.9% decrease in average earning assets compares to
a 7.7% decrease in average paying liabilities. The decrease
between the two periods in both earning assets and paying liabilities
was primarily attributable to the sale of eight branches to Mascoma
Savings Bank in January 1996. Both of the Company's New York
based banks experienced loan portfolio growth.
The provision for loan losses was $448 thousand for the six month
period ended June 30, 1996, compared to a provision of $360
thousand for the 1995 period. The provision for loan losses was
discussed previously under the "Summary of the Allowance and
Provision for Loan Losses" section of this report.
Other Income
<TABLE>
<CAPTION>
Summary of Other Income
(Dollars in Thousands)
Jun 1996 Jun 1995 $ Change % Change
<S> <C> <C> <C> <C>
Income From Fiduciary Activities $ 1,959 $1,945 $ 14 0.7%
Fees for Other Services to Customers 2,038 2,303 (265) (11.5)
Net Gains on Securities Transactions 82 --- 82 ---
Gain on the Disposition of Branches 7,091 --- 7,091 ---
Other Operating Income 499 5,494 (4,995) (90.9)
Total Other Income $11,669 $9,742 $1,927 19.8
Without Regard to the Bond
Settlement (1995) and
Branch Sale (1996):
Other Operating Income $ 499 $ 494 $ 5 1.0
Total Other Income 4,578 4,742 (164) (3.5)
</TABLE>
Other income (i.e. noninterest income) for the first two quarters of 1996
reflected the $7.1 million gain on the Mascoma transaction, while other
income for the 1995 period reflected the $5.0 million settlement payment
received in May 1995 from the Company's financial institution bond
company, discussed under "Other Income" in the three month comparison, above.
Without regard to the branch sale and bond settlement, other
income decreased $164 thousand or 3.5% for the first
half of 1996 compared with the first half of 1995. Income from
fiduciary services increased $14 thousand or 0.7% over the first half
of 1995. Fees for other services to customers (primarily service
charges on deposit accounts, credit card fee income and servicing
income on sold loans) decreased $265 thousand or 11.5%
between the periods, primarily due to the Mascoma transaction.
Other operating income (primarily credit card processing income
and gains on the sale of loans and other assets) was virtually
unchanged from the prior-year period.
Other Expense
<TABLE>
<CAPTION>
Summary of Other Expense
(Dollars in Thousands)
Jun 1996 Jun 1995 $ Change % Change
<S> <C> <C> <C> <C>
Salaries and Employee Benefits $ 7,740 $ 8,525 $ (785) (9.2)%
Occupancy Expense of Premises, Net 978 1,068 (90) (8.4)
Furniture and Equipment Expense 870 1,000 (130) (13.0)
Other Operating Expense 3,696 5,034 (1,338) (26.6)
Total Other Expense $13,284 $15,627 $(2,343) (15.0)
Without Regard to Severance Expenses &
OREO Transactions:
Salaries and Employee Benefits $ 7,740 $ 7,974 $ (234) (2.9)%
Other Operating Expense 3,455 4,851 (1,396) (28.8)
Total Other Expense 13,043 14,893 (1,850) (12.4)
</TABLE>
Other (i.e. noninterest) expense decreased $2.3 million, or 15.0%,
between the first half of 1995 and the first half of 1996. While the
Company experienced decreases in all major categories of other
expense, the major reductions occurred in the areas of salaries and
employee benefits and other operating expense. The principal
reason for the decrease to salaries and benefits was a one-time
expending, in the 1995 period, of severance benefits. After consummation
of the Mascoma transaction in January 1996, the Company experienced
reductions in most areas of other operating expense. The primary
factor in the decrease from 1995 to 1996, not effected by the
Mascoma transaction, was the reduction in FDIC deposit insurance
premiums that took effect in the third quarter of 1995.
After making adjustments for the nonrecurring items (OREO
liquidations and severance expense), total other expense
decreased $1.9 million, or 12.4%, in the first half of 1996 as
compared to the 1995 period. Salaries and employee benefits, as
thus adjusted, decreased $234 thousand between the periods.
This decrease, together with the $90 thousand decrease in
occupancy expense and the $130 thousand decrease in furniture
and equipment expense, reflected both the effect of the Mascoma
transaction and the Company's continued effort to reduce operating
expenses. Other operating expense, as thus adjusted, decreased
by $1.4 million or 28.8% between the two periods.
Income Taxes
<TABLE>
<CAPTION>
Summary of Income Taxes
(Dollars in Thousands)
Jun 1996 Jun 1995 $ Change
<S> <C> <C> <C>
Provision for Income Taxes $5,396 $4,086 $1,310
Effective Tax Rate 34.93% 35.81% ( 0.88)%
</TABLE>
The provisions for federal and state income taxes amounted to $5.4
million and $4.1 million for the first six months of 1996 and 1995,
respectively. The decrease in the effective tax rate from 1995 to
1996 reflected the fact that much of the gain in the 1996 period (i.e.,
that attributable to the Vermont branch sale) was not directly subject
to state income tax.
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 have arisen in the normal course of
their business. The banks, especially Green Mountain
Bank, have in recent years encountered claims against
them grounded in lender liability of the sort which have
increasingly burdened banks everywhere. These
lender liability claims normally take the form of
counterclaims to lawsuits filed by the banks for
collection of past due loans. The various pending legal
claims against the subsidiary banks, including such
lender liability claims, 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
At the Company's Annual Meeting of
Shareholders held April 24, 1996,
shareholders elected the following
directors to serve three-year terms expiring
in 1999:
Withhold Broker
Director For Authority Non-Votes
Michael B. Clarke 3,575,201 37,561 ---
Kenneth C. Hopper, MD.. 3,575,326 37,436 ---
Michael F. Massiano 3,575,328 37,434 ---
Doris E. Ornstein 3,567,683 45,079 ---
Item 5. Other Information - None
Item 6. Exhibits and Reports Filed on Form 8-K
Exhibit 27 Financial Data Schedule
(with electronic filing only)
No reports on Form 8-K were filed during the Quarter ended June 30, 1996.
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: August 8, 1996
s/ Michael F. Massiano
Michael F. Massiano, Chairman and
President (Chief Executive Officer)
Date: August 8, 1996
s/ John J. Murphy
John J. Murphy, Executive Vice
President and Treasurer/CFO
(Principal Financial Officer and
Principal Accounting Officer)
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0
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