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, 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 October 31, 1996
Common Stock, par value $1.00 per share 5,771,416
ARROW FINANCIAL CORPORATION
FORM 10-Q
SEPTEMBER 30, 1996
INDEX
PART I FINANCIAL INFORMATION
Consolidated Balance Sheets as of September 30, 1996
and December 31, 1995
Consolidated Statements of Income for the Three Month
and Nine Month Periods Ended September 30,
1996 and 1995
Consolidated Statements of Cash Flows for the Nine
Months Ended September 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
Summary 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
<PAGE>
PART I - FINANCIAL INFORMATION
<TABLE>
<CAPTION>
ARROW FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)(Unaudited)
9/30/96 12/31/95
ASSETS
<S> <C> <C>
Cash and Due from Banks $ 22,779 $ 23,406
Federal Funds Sold and Securities Purchased Under
Agreements to Resell 22,000 35,100
Securities Available-for-Sale 176,710 178,645
Securities Held-to-Maturity: (Approximate Fair Value of
$18,773 in 1996 and $14,508 in 1995) 18,337 13,921
Loans and Leases 381,683 517,787
Less: Allowance for Loan Losses (5,549) (12,106)
Net Loans and Leases 376,134 505,681
Premises and Equipment 9,772 13,888
Other Real Estate Owned 225 2,410
Other Assets 13,669 16,739
Total Assets $639,626 $789,790
LIABILITIES
Deposits:
Demand $ 70,223 $ 94,713
Regular Savings, N.O.W. & Money Market Deposit Accounts 256,623 352,302
Time Certificates of $100,000 or More 73,721 57,557
Other Time Deposits 130,245 189,881
Total Deposits 530,812 694,453
Short-Term Borrowings:
Federal Funds Purchased and Securities Sold Under
Agreements to Repurchase 12,852 14,045
Other Short-Term Borrowings 6,698 1,252
Other Liabilities 15,894 12,536
Total Liabilities 566,256 722,286
<PAGE>
SHAREHOLDERS' EQUITY
Preferred Stock, $5 Par Value; 1,000,000 Shares Authorized --- ---
Common Stock, $1 Par Value; 20,000,000 Shares Authorized
(6,577,037 Shares Issued in 1996 and 5,979,124
Shares Issued in 1995) 6,577 5,979
Surplus 54,323 40,938
Undivided Profits 25,704 24,296
Valuation Allowance for Securities Available-for-Sale (268) 1,152
Unallocated ESOP Shares (14,233 in 1996 and 43,130 in 1995) (210) (700)
Treasury Stock (777,777 Shares in 1996 and
309,833 in 1995, at Cost) (12,756) (4,161)
Total Shareholders' Equity 73,370 67,504
Total Liabilities and Shareholders' Equity $639,626 $789,790
</TABLE>
<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,
1996 1995 1996 1995
INTEREST INCOME
<S> <C> <C> <C> <C>
Interest and Fees on Loans and Leases $10,933 $12,043 $33,520 $35,617
Interest on Federal Funds Sold and Securities
Purchased Under Agreements to Resell 193 512 363 767
Interest and Dividends on Securities
Available-for-Sale 2,789 961 8,197 2,726
Interest and Dividends on Securities
Held-to-Maturity 243 1,917 642 5,762
Total Interest Income 14,158 15,433 42,722 44,872
INTEREST EXPENSE
Interest on Deposits:
Time Certificates of $100,000 or More 1,157 1,036 3,144 2,743
Other Deposits 4,375 5,229 13,008 14,698
Interest on Short-Term Borrowings:
Federal Funds Purchased and Securities Sold
Under Agreements to Repurchase 171 144 536 448
Other Short-Term Borrowings 47 71 113 170
Interest on Long-Term Debt --- 24 --- 229
Total Interest Expense 5,750 6,504 16,801 18,288
NET INTEREST INCOME 8,408 8,929 25,921 26,584
Provision for Loan Losses 224 280 672 640
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 8,184 8,649 25,249 25,944
OTHER INCOME
Income from Fiduciary Activities 901 946 2,860 2,891
Fees for Other Services to Customers 1,062 1,225 3,100 3,528
Net Gains on Securities Transactions --- --- 82 ---
Other Operating Income 7,931 285 15,520 5,735
Total Other Income 9,894 2,456 21,562 12,154
OTHER EXPENSE
Salaries and Employee Benefits 3,890 4,200 11,630 12,724
Occupancy Expense of Premises, Net 435 488 1,413 1,556
Furniture and Equipment Expense 425 474 1,295 1,474
Other Operating Expense 1,500 2,015 5,195 7,006
Total Other Expense 6,250 7,177 19,533 22,760
INCOME BEFORE PROVISION FOR INCOME TAXES 11,828 3,928 27,278 15,338
Provision for Income Taxes 4,056 1,438 9,452 5,524
NET INCOME $ 7,772 $ 2,490 $17,826 $ 9,814
Average Shares Outstanding 5,860 6,264 5,993 6,291
Per Common Share:
Earnings $ 1.33 $ .40 $ 2.97 $ 1.56
Dividends Declared .16 .13 .46 .37
Book Value 12.68 10.55 12.68 10.55
Per share amounts have been adjusted for the November 1, 1996 ten percent stock dividend
declared September 25, 1996.
</TABLE>
<TABLE>
<CAPTION>
ARROW FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)(Unaudited)
Nine Months Ended
September 30,
1996 1995
Operating Activities:
<S> <C> <C>
Net Income $17,826 $ 9,814
Adjustments to Reconcile Net Income to Net
Cash Provided by Operating Activities:
Provision for Loan Losses 672 640
Provision for Other Real Estate Owned Losses 54 107
Provision for Impairment of Long-Lived
Assets to Be Disposed Of 1,805 ---
Depreciation and Amortization 1,007 1,262
Compensation Expense for Allocated ESOP Shares 133 ---
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 151,422 10,802
Net Losses (Gains) on the Sale of Loans,
Fixed Assets and Other Real Estate Owned 260 (56)
Decrease (Increase) in Deferred Tax Assets 596 405
Decrease (Increase) in Interest Receivable 1,352 (605)
Increase (Decrease) in Interest Payable (384) 1,180
Decrease (Increase) in Other Assets 1,907 (1,322)
Increase (Decrease) in Other Liabilities 3,742 2,537
Net Cash Provided By Operating Activities 180,310 24,764
Investing Activities:
Proceeds from the Sale of Securities Available-for-Sale 32,252 ---
Proceeds from the Maturities of
Securities Available-for-Sale 30,568 24,024
Purchases of Securities Available-for-Sale (63,322) (33,477)
Proceeds from the Maturities of Securities Held-to-Maturity 659 5,020
Purchases of Securities Held-to-Maturity (5,084) (5,885)
Net Increase in Loans and Leases (22,311) (21,204)
Proceeds from the Sale of Fixed Assets
and Other Real Estate Owned 4,735 1,194
Purchase of Fixed Assets (983) (468)
Net Cash Used In Investing Activities (23,486) (30,796)
Financing Activities:
Net (Decrease) Increase in Deposits (163,641) 53,925
Net (Decrease) Increase in Short-Term Borrowings 4,253 (4,222)
Repayment of Long-Term Debt --- (4,430)
Purchase of Treasury Stock (8,706) (892)
Sale of Treasury Stock for Exercise of Stock Options 250 ---
Disqualifying Disposition of ISO Shares 33 ---
Other Equity Transactions --- 30
Cash Dividends Paid (2,740) (2,301)
Net Cash Provided By (Used In) Financing Activities (170,551) 42,110
Net Increase (Decrease) in Cash and Cash Equivalents (13,727) 36,078
Cash and Cash Equivalents at Beginning of Period 58,506 34,624
Total Cash and Cash Equivalents $ 44,779 $70,702
Cash and Cash Equivalents:
Cash and Due from Banks $22,779 $23,302
Federal Funds Sold and Securities
Purchased Under Agreements to Resell 22,000 47,400
Total Cash and Cash Equivalents $44,779 $70,702
Supplemental Cash Flow Information:
Interest Paid $17,185 $17,108
Income Taxes Paid 7,845 4,608
Transfer of Loans to Other Real Estate Owned 303 585
Change in the Valuation Allowance for
Securities Available-for-Sale (1,420) 1,119
Other Equity Transactions --- 92
Guarantee of ESOP Debt --- (1,173)
Reduction of Unallocated ESOP Shares 490 249
Cancellation of Debentures by Exercise of
Cancellable Mandatory Stock Purchase Contracts --- 370
</TABLE>
ARROW FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FORM 10-Q
SEPTEMBER 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 September 30, 1996 and December 31,
1995; the results of operations for the three and nine month periods
ended September 30, 1996 and September 30, 1995; and the
statements of cash flows for the nine month periods ended
September 30, 1996 and 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 1, 1996 ten percent stock dividend,
declared September 25, 1996.
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 September 30, 1996 did not use
derivative financial instruments to hedge its interest rate risk position.
Consequently, as of September 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 SFAS No. 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.
<PAGE>
ARROW FINANCIAL CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
SEPTEMBER 30, 1996
OVERVIEW
Arrow Financial Corporation (the "Company") is a two 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 and Saratoga
National Bank and Trust Company whose main office is located in
Saratoga Springs, New York. During the third quarter of 1996, the
Company completed the disposition of its Vermont banking
operations, formerly conducted through its wholly-owned subsidiary,
Green Mountain Bank, by completing the second and third of three
sale transactions.
This report contains certain forward looking statements with respect
to the financial condition, results of operations and business of the
Company, including certain predictive statements about a
nonrecurring income item anticipated to be included in fourth quarter
earnings. See "Disposition of Vermont Operations", below. These
forward looking statements are subject to various factors which
could cause actual results to differ materially from those
contemplated by such forward looking statements. These factors
include, but are not limited to, the possibility that certain contingent
payments expected to be received by the Company in connection
with the earlier sale of its Vermont trust operations will not be
received, and the possible development of adverse general
economic conditions or an adverse interest rate environment.
Disposition of Vermont Operations
On August 30, 1996, the Company completed the sale of Green
Mountain Bank's trust business to Vermont National Bank of
Brattleboro, Vermont. A month later, on September 28, 1996, the
Company completed the sale of the remaining six branches of
Green Mountain Bank to ALBANK, FSB, of Albany, New York.
These transactions, along with the January 15, 1996 sale of eight
branches of Green Mountain Bank to Mascoma Savings Bank, of
Lebanon, New Hampshire, concluded the Company's banking
operations in Vermont. All three sales included provisions
for post-closing events. The agreement with Vermont National Bank
provides for an additional payment from Vermont National to the
Company in the fourth quarter of 1996 of up to $570,000, contingent
upon Vermont National's meeting certain business retention goals
for the acquired business. The Company expects to receive some
level of contingent payment, but can give no assurances and will not
recognize any income until receipt of any such payments. For each
of the three sale transactions, the Company provided the buyers with
certain warranties for which the Company has established reserves.
In October of 1996, the Company announced that the Board of
Directors had authorized a stock repurchase program, pursuant to
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. Based on the
Company's outstanding shares and the market price for the
Company's common stock at September 30, 1996, this authorized
repurchase amount, if fully expended, would represent
approximately 8.2% of the Company's outstanding stock. This
authorized repurchase amount in October was in addition to the $10
million stock repurchase program authorized by the Board of
Directors and announced in January 1996. During the first nine
months of 1996, the Company repurchased an aggregate of
418,256 shares of its common stock for a total price of $8.7 million.
The Board of Directors continues to review other alternatives for
utilization of capital.
Results of Operations
The Company reported earnings of $17.8 million for the first nine
months of 1996, compared to earnings of $9.8 million for the first
nine months of 1995. Primary earnings per share were $2.97 and
$1.56 for the two respective periods. Earnings in the 1996 period
included gains on the sales of the Vermont operations cited above
and substantial unanticipated repayments on certain restructured
loans. Earnings in the 1995 period included a $5.0 million pre-tax
settlement payment received 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 nine
months of 1996 and 1995 amounted to $7.7 million and $7.1
million, respectively and reflected core earnings per share of $1.29
and $1.12 for the two respective periods.
The annualized returns on average assets were 3.28% and 1.70%
for the first nine months of 1996 and 1995, respectively. The
annualized returns on average equity were 34.42% and 20.82% for
the first nine months of 1996 and 1995, respectively. Excluding the
nonrecurring items, the returns on average assets were 1.43% and
1.22% and the returns on average equity were 16.08% and 14.97%,
respectively, for the 1996 and 1995 nine month periods.
Total assets were $639.6 million at September 30, 1996, a decrease
of $150.2 million or 19.0% from December 31, 1995, reflecting the
sale of the Company's Vermont operations partially offset by modest
growth in the Company's New York banking operations.
Total shareholders' equity increased $5.9 million to $73.4 million
during the first nine months of 1996. The increase reflected
earnings during the period offset in part by effects of the stock
repurchase program described above, cash dividends paid during
the period and the change in the valuation allowance for securities
available-for-sale. At period-end, the Company and each of its
subsidiary banks qualified as "well-capitalized" under federal
banking regulatory guidelines.
The following table presents the adjustments necessary to arrive at
the recurring net income of the Company.
<TABLE>
<CAPTION>
SUMMARY OF RECURRING INCOME
(Dollars In Thousands)
Three Months Ended Nine Months Ended
Sep 1996 Sep 1995 Sep 1996 Sep 1995
<S> <C> <C> <C> <C>
Net Income, as reported $7,772 $2,490 $17,826 $9,814
Nonrecurring Items, net of tax:
Sale of Vermont Banking Operations (5,170) --- (9,896) ---
Unexpected Payments on
Restructured Loans --- --- (323) ---
Net Securities Transactions --- --- (50) ---
OREO Transactions (1) (29) 156 90
Severance Benefits --- 47 --- 405
Insurance Settlement --- --- --- (3,250)
Recurring Income $2,601 $2,508 $ 7,713 $7,059
Earnings Per Share, as reported $ 1.33 $ .40 $ 2.97 $ 1.56
Earnings Per Share, recurring .44 .40 1.29 1.12
</TABLE>
CHANGE IN FINANCIAL CONDITION
<TABLE>
<CAPTION>
Summary of Consolidated Balance Sheets
(Dollars in Thousands)
Period End Balances: Sep 1996 Dec 1995 Sep 1995
<S> <C> <C> <C>
Securities Held-to-Maturity $ 18,337 $ 13,921 $130,467
Securities Available-for-Sale 176,710 178,645 65,323
Federal Funds Sold 22,000 35,100 47,400
Loans, Net of Unearned Income (1) 381,683 517,787 515,935
Allowance for Loan Losses 5,549 12,106 12,379
Earning Assets (1) 598,730 745,453 759,125
Total Assets 639,626 789,790 802,280
Demand Deposits 70,223 94,713 94,832
Savings, NOW and MMDA Accounts 256,623 352,302 351,155
Time Deposits of $100,000 or More 73,721 57,557 68,442
Other Time Deposits 130,245 189,881 189,981
Total Deposits 530,812 694,453 704,410
Other Borrowed Funds 19,550 15,297 20,863
Shareholders' Equity 73,370 67,504 65,713
</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 $ 4,416 $(112,130) 31.7% (85.9)%
Securities Available-for-Sale (1,935) 111,387 (1.1) 170.5
Federal Funds Sold (13,100) (25,400) (37.3) (53.6)
Loans, Net of Unearned Income (1 (136,104) (134,252) (26.3) (26.0)
Allowance for Loan Losses (6,557) (6,830) (54.2) (55.2)
Earning Assets (1) (146,723) (160,395) (19.7) (21.1)
Total Assets (150,164) (162,654) (19.0) (20.3)
Demand Deposits (24,490) (24,609) (25.9) (26.0)
Savings, NOW and MMDA Accounts (95,679) (94,532) (27.2) (26.9)
Time Deposits of $100,000 or More 16,164 5,279 28.1 7.7
Other Time Deposits (59,636) (59,736) (31.4) (31.5)
Total Deposits (163,641) (173,598) (23.6) (24.6)
Other Borrowed Funds 4,253 (1,313) 27.8 (6.3)
Shareholders' Equity 5,866 7,657 8.7 11.7
(1) Includes Nonaccrual Loans
</TABLE>
Total resources at September 30, 1996 amounted to $639.6 million,
a decrease of $150.2 million or 19.0% from year-end. Total
deposits of $530.8 million at September 30, 1996 decreased $163.6
million from the December 31, 1995 level. Both decreases were
primarily attributable to the sale of the Company's Vermont banking
operations, partially offset by loan and deposit growth experienced
by the Company's New York banks.
<PAGE>
Total loans sold in the Vermont sale transactions were
approximately $148 million and total deposits transferred were
approximately $208 million. While management of the Company
was effecting disposition of the Vermont business, it was also
implementing plans for achieving growth in the Company's two
subsidiary banks in New York. Throughout 1995 and 1996, total
loans and deposits in the New York operations have experienced
steady growth. Changes in the loan portfolios and deposit balances
of the New York banks are discussed in the following section,
"Deposit and Loan Trends."
As discussed above, shareholders' equity increased $5.9 million to
$73.4 million during the first nine months of 1996, resulting from
current year earnings, less stock repurchases, cash dividends and
changes to the available-for-sale investment securities valuation
allowance. The Company paid a $.155 cash dividend, as restated
for the November 1996 ten percent stock dividend, for each of the
first three quarters of 1996. On October 23, 1996 the Board of
Directors declared a $.20 dividend for the last quarter of the year,
payable on December 16, 1996 to Shareholders of record on
December 2,1996.
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 banking operations, which were disposed of prior to
September 30, 1996, 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.
<TABLE>
<CAPTION>
Quarterly Average Deposit Balances
(Excludes Vermont Deposits)
(Dollars in Thousands)
Sep 1996 Jun 1996 Mar 1996
Amount % Amount % Amount %
<S> <C> <C> <C> <C> <C> <C>
Demand Deposits $ 69,216 13 $ 66,299 13 $ 63,156 13
N.O.W. and Super N.O.W. 111,052 21 104,768 20 99,004 20
Savings and M.M.D.A 137,768 26 142,916 28 145,094 29
Time Deposits of
$100,000 or More 84,707 16 78,063 15 66,755 14
Other Time Deposits 127,933 24 120,397 24 117,682 24
Total Deposits $530,676 100 $512,443 100 $491,691 100
</TABLE>
<TABLE>
<CAPTION>
Dec 1995 Sep 1995
Amount % Amount %
<S> <C> <C> <C> <C>
Demand Deposits $ 66,437 13 $ 67,648 14
N.O.W. and Super N.O.W. 103,881 21 88,384 18
Savings and M.M.D.A 142,582 29 150,654 31
Time Deposits of
$100,000 or More 67,141 14 67,475 14
Other Time Deposits 116,702 23 116,468 23
Total Deposits $496,743 100 $490,629 100
</TABLE>
Average deposits for the Company's New York banks increased
$40.0 million, or 8.2%, from the third quarter of 1995 to the third
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 demand
deposits and other time deposits to total deposits remained relatively
constant over the entire period.
The Federal Reserve Board attempts to influence prevailing 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.
<PAGE>
<TABLE>
<CAPTION>
Quarterly Cost of Deposits
(Excludes Vermont Deposits)
Sep 1996 Jun 1996 Mar 1996 Dec 1995 Sep 1995
<S> <C> <C> <C> <C> <C>
Demand Deposits --- % --- % --- % --- % --- %
N.O.W. and Super N.O.W. 2.86 2.69 2.58 2.87 2.62
Savings and M.M.D.A 2.92 2.92 3.00 3.08 3.08
Time Deposits of
$100,000 or More 5.25 5.15 5.37 5.59 5.66
Other Time Deposits 5.23 5.23 5.49 5.64 5.60
Total Deposits 3.45 3.38 3.45 3.57 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. After February 1, 1995,
rates 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 two 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 cost of funds for the third quarter of 1996,
however, increased 7 basis points from the previous quarter as the
Company responded to competitive pricing for NOW accounts and
large municipal time deposit accounts. The average cost of funds
for savings, money market and other time deposit accounts
remained unchanged from the prior quarterly average.
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)
Sep 1996 Jun 1996 Mar 1996
Amount % Amount % Amount %
<S> <C> <C> <C> <C> <C> <C>
Commercial and Commercial
Real Estate $ 84,790 23 $ 87,304 23 $ 87,073 24
Residential Real Estate 123,884 33 122,858 33 120,010 33
Home Equity 29,109 8 28,804 8 29,226 8
Indirect Consumer Loans 99,058 26 92,757 25 82,446 23
Direct Consumer Loans 30,634 8 31,627 9 31,555 9
Credit Card Loans 8,733 2 8,967 2 9,310 3
Total Loans $376,208 100 $372,317 100 $359,620 100
</TABLE>
<TABLE>
<CAPTION>
Dec 1995 Sep 1995
Amount % Amount %
<S> <C> <C> <C> <C>
Commercial and Commercial
Real Estate $ 87,388 25 $ 89,361 25
Residential Real Estate 119,157 34 118,519 34
Home Equity 29,364 8 29,333 8
Indirect Consumer Loans 78,823 22 75,560 22
Direct Consumer Loans 30,022 8 27,831 8
Credit Card Loans 9,413 3 9,334 3
Total Loans $354,167 100 $349,938 100
</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 third quarter of 1996 increased by $26.3 million, or 7.5%, from
the third 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 changes, the former increasing substantially and the latter
decreasing substantially over the period, both in absolute terms and
proportional to other loan types. Indirect consumer loans are
primarily auto loans financed through local dealerships where the
Company acquires the dealer paper. As a percentage of the overall
loan portfolio of the New York banks, these loans increased from
22% to 26% during the period from the third quarter of 1995 to the
third quarter of 1996. Over 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)
Sep 1996 Jun 1996 Mar 1996 Dec 1995 Sep 1995
<S> <C> <C> <C> <C> <C>
Commercial and Commercial
Real Estate 9.76% 9.84% 9.98% 10.07% 10.21%
Residential Real Estate 8.26 8.42 8.55 8.47 8.42
Home Equity 9.10 9.23 9.40 9.76 9.91
Indirect Consumer Loans 8.43 8.52 8.62 8.56 8.50
Direct Consumer Loans 9.45 9.44 9.43 9.90 9.83
Credit Card Loans 16.66 16.55 16.45 15.64 16.45
Total Loans 9.00 9.12 9.26 9.30 9.35
</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
and the repricing characteristics of the Company's loan portfolio.
<TABLE>
<CAPTION>
Summary of the Allowance and Provision for Loan Losses
(Dollars in Thousands)(Loans Stated Net of Unearned Income)
Sep 1996 Jun 1996 Mar 1996 Dec 1995 Sep 1995
<S> <C> <C> <C> <C> <C>
Loan Balances:
Period End Loans $381,683 $487,291 $479,848 $517,787 $515,935
Average Loans,
Year-to-Date 484,872 484,473 482,640 513,266 512,515
Allowance for Loan Losses:
Allowance for Loan Losses,
Begin of Period $12,106 $12,106 $12,106 $12,338 $12,338
Transfer Pursuant to
Branch Sale (6,841) (596) (596) --- ---
Provision for
Loans Losses, YTD 672 448 224 1,170 640
Net Charge-offs, YTD (388) (418) (265) (1,402) (599)
Allowance for Loan Losses,
End of Period $ 5,549 $11,540 $11,469 $12,106 $12,379
Nonperforming Assets:
Nonaccrual Loans $2,477 $2,962 $3,247 $ 4,244 $ 4,927
Loans Past due 90 or More
Days and Still
Accruing Interest 39 806 957 111 371
Loans Restructured and in
Compliance with
Modified Terms --- --- --- --- ---
Total Nonperforming Loans 2,516 3,768 4,204 4,355 5,298
Other Real Estate Owned 225 540 2,215 2,410 2,703
Total Nonperforming Assets $2,741 $4,308 $6,419 $ 6,765 $ 8,001
Performance Ratios:
Allowance to
Nonperforming Loans 220.54% 306.26% 272.81% 277.98% 233.65%
Allowance to Period
End Loans 1.45 2.37 2.39 2.34 2.40
ovision to Average Loans (1) 0.18 0.19 0.19 0.23 0.17
Net Charge-offs to
Average Loans (1) 0.11 0.17 0.22 0.27 0.16
Nonperforming Assets
to Loans & OREO 0.72 0.88 1.33 1.30 1.54
(1) Annualized
</TABLE>
Nonperforming assets amounted to $2.7 million at September 30,
1996, a decrease of $4.0 million, or 59.5%, from year-end 1995.
During 1996, the Company sold nearly all of its nonperforming loans
in connection with the sale of its Vermont banking operations,
effected in two transactions completed in January and September.
The decrease in other real estate owned over the past nine months
primarily represents the sales of properties with a carrying amount
of $1.9 million for a loss of $240 thousand.
<PAGE>
At September 30, 1996, the allowance for loan losses, after
adjustments for the disposition of essentially all of the Vermont based
nonperforming assets, was still more than two times the amount of
nonperforming loans. The ratio of net charge-offs to average loans
for the first nine months of 1996 was at an annualized rate of .11%,
well below the ratios for 1995 and 1994, which were .27% and .56%,
respectively. The annualized ratio of the provision for loan losses
to average loans over the first nine months of 1996 was .18%, which
the Company believed to be adequate in light of the allowance's
substantial coverage of nonperforming loans.
CAPITAL RESOURCES
Shareholders' equity was $73.4 million at September 30, 1996, an
increase of $5.9 million, or 8.7%, from December 31, 1995. The
increase in shareholders' equity was primarily attributable to current
earnings, offset by the repurchase of 418,256 shares of the
Company's common stock at an aggregate cost of $8.7 million, cash
dividends of $2.7 million and by an increase of $1.4 million to the
valuation allowance for securities classified as 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 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 September 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 11.25% 19.68% 20.93%
Glens Falls National Bank & Trust Co. 7.60 13.77 15.03
Saratoga National Bank & Trust Co. 6.98 9.02 10.27
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
September 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 1996 ten percent stock dividend.
On October 23, 1996, the Company declared a dividend of $.20
payable on December 16, 1996 to shareholders of record on
December 2, 1996.
<TABLE>
<CAPTION>
Quarterly Dividends
(restated for the November 1996 stock dividend)
1996 1995
<S> <C> <C>
Fourth Quarter (1996 Payable December 15) $ .200 $ .145
Third Quarter .155 .131
Second Quarter .155 .122
First Quarter .155 .114
Third Quarter Core Earnings Per Share $.44 $.40
Dividend Payout Ratio: (fourth quarter
dividends as a percent of third quarter
core earnings per share) 45.5% 36.3%
</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 September 30, 1996,
core deposits represented more than 71% of the Company's total
assets and stockholders' equity at a level of 11.5% of total assets
represented another substantial source of funds. Large
denomination time deposits, repurchase agreements and other
borrowed funds represented 13.5% of total assets at September 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 third quarter of
1996, average federal funds sold amounted to $14.7 million and
average federal funds purchased were $257 thousand. At
September 30, 1996, federal funds sold amounted to $22.0 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 September 30, 1996, securities available-for-sale
amounted to $176.7 million and averaged $171.8 million for the
quarter then ended.
Another short-term source of funds is a borrowing arrangement
between the Company and 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, most natably 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 the prime rate or US 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 assumptions and repricing
characteristics 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 variety 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.
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. The
Company also manages interest rate risk through selection of
investments and the volume thereof for the securities portfolios.
The Company does not, and in the foreseeable future will not,
use derivative financial instruments to manage interest rate risk.
<TABLE>
<CAPTION>
RESULTS OF OPERATIONS: Three Months Ended September 30, 1996 Compared With
Three Months Ended September 30, 1995
Summary of Earnings Performance
(Dollars in Thousands)
As Reported: Sep 1996 Sep 1995 $ Change % Change
<S> <C> <C> <C> <C>
Net Income $7,772 $2,490 $ 5,282 212.1%
Earnings Per Share 1.33 .40 .93 232.5
Return on Assets 4.20% 1.25% 2.95% 236.0
Return on Equity 45.52% 15.14% 30.38% 200.7
Recurring Earnings:
Net Income $2,601 $2,508 $ 93 3.7%
Earnings Per Share .44 .40 .04 10.0
Return on Assets 1.42% 1.26% .16% 12.7
Return on Equity 16.69% 15.25% 1.44% 9.4
</TABLE>
The Company's net income for the three month period ended
September 30, 1996 was $7.8 million, which compares to earnings
of $2.5 million for the third quarter of 1995. Earnings per share for
the two respective periods were $1.33 and $.40. The $5.3 million
increase in earnings, or $.93 per share, was primarily attributable to
the sale of Green Mountain Bank's remaining banking and trust
operations in the third quarter of 1996. As adjusted for nonrecurring
items, net income for the two comparative quarters was $2.6 million
and $2.5 million, respectively. As adjusted, earnings per share for
the two comparative periods were $.44 and $.40, respectively.
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 1996 Sep 1995 $ Change % Change
<S> <C> <C> <C> <C>
Interest Income $ 14,330 $ 15,599 $ (1,269) (8.1)%
Interest Expense 5,750 6,504 (754) (11.6)
Net Interest Income $ 8,580 $ 9,095 $ (515) (5.7)
Average Earning Assets (1) $690,762 $741,206 $(50,444) (6.8)%
Average Paying Liabilities 570,807 618,060 (47,253) (7.6)
Taxable Equivalent Adjustment 172 166 6 3.6
Yield on Earning Assets (1) 8.25% 8.35% (0.10)% (1.2)%
Cost of Paying Liabilities 4.00 4.17 (0.17) (4.1)
Net Interest Spread 4.25 4.18 0.07 1.7
Net Interest Margin 4.94 4.87 0.07 1.4
(1) Includes Nonaccrual Loans
</TABLE>
On a taxable equivalent basis, net interest income for the third
quarter of 1996 decreased $515 thousand, or 5.7%, over the third
quarter of 1995. The decrease in the 1996 period was principally
attributable to a 6.8% decrease in average earning assets. This
decrease, in turn, was principally the result of the completion in
January 1996 of the first of the Company's three sale transactions
involving its Vermont operations, i.e., the sale of eight branches of
Green mountain Bank to Mascoma Savings Bank. This sale involved
the disposition by the Company of $40 million of loans as well as the
liquidation of a substantial amount of other earning assets needed
to fund the difference between the loans sold and the $101 million of
deposits assumed by Mascoma. The resulting decrease in net interest
income was offset to some degree by the fact that the decrease in
paying liabilities over the same period (7.6%) exceeded the
decrease in earning assets, and also by an eight basis point increase
in the net interest spread between the two periods.
Average earning assets amounted to $690.8 million for the third
quarter of 1996, a $50.4 million, or 6.8%, decrease from the third
quarter of 1995. Average paying liabilities decreased from $618.1
million for the third quarter of 1995 to $570.8 million for the third
quarter of 1996. The decrease in average paying liabilities, like the
decrease in average earning assets, primarily resulted from the
January 1996 branch sale to Mascoma. Decreases in both average
loans and average deposits in Vermont were offset in part by
increases in deposits and loans in the Company's New York based
banking subsidiaries, as discussed in the earlier section on "Deposit
and Loan Trends."
The provision for loan losses was $224 thousand for the quarter
ending September 30, 1996, compared to a $280 thousand
provision 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)
Sep 1996 Sep 1995 $ Change % Change
<S> <C> <C> <C> <C>
Income From Fiduciary Activities $ 901 $ 946 $ (45) (4.8)%
Fees for Other Services to Customers 1,062 1,225 (163) (13.3)
Other Operating Income 7,931 285 7,646 ---
Total Other Income $9,894 $2,456 $ 7,438 302.9
Without Regard to Vermont Disposition:
Other Operating Income $ 262 $ 285 $ (23) (8.1)
Total Other Income 2,225 2,456 (231) (9.4)
</TABLE>
Other income (i.e. noninterest income) amounted to $9.9 million for
the third quarter of 1996, an increase of $7.4 million or 302.9% from
the third quarter of 1995. As adjusted for nonrecurring items, other
income for the two quarters was $2.2 million and $2.5 million,
respectively, a decrease of $231 thousand, or 9.4%.
Income from fiduciary services for the third quarter of 1996
decreased $45 thousand or 4.8% from the third quarter of 1995.
Income for the 1996 period only included two months of operations
for the Vermont trust business, which was sold to Vermont National
Bank at the end of August.
Fees for other services to customers (primarily service charges on
deposit accounts, credit card fee income and servicing income on
sold loans) decreased $163 thousand or 13.3% between the 1995
and 1996 quarters, due in part to the January 1996 sale to Mascoma
of eight Vermont branches. Similarly, other operating income
(primarily credit card processing income and gains on the sale of
other real estate owned, loans and other assets) decreased $23
thousand, or 8.1%, between the two periods.
Other Expense
<TABLE>
<CAPTION>
Summary of Other Expense
(Dollars in Thousands)
Sep 1996 Sep 1995 $ Change % Change
<S> <C> <C> <C> <C>
Salaries and Employee Benefits $3,890 $4,200 $ (310) (7.4)%
Occupancy Expense of Premises, Net 435 488 (53) (10.9)
Furniture and Equipment Expense 425 474 (49) (10.3)
Other Operating Expense 1,500 2,015 (515) (25.6)
Total Other Expense $6,250 $7,177 $ (927) (12.9)
</TABLE>
Other (i.e. noninterest) expense decreased $927 thousand or 12.9%
for the third quarter of 1996 compared with the third quarter of
1995. As in the quarterly comparison of other income above, much
of the decrease between the periods was due to the January 1996
branch sale to Mascoma Savings Bank.
During the comparative periods, salaries and benefits expense
decreased $310 thousand or 7.4%. Expenses relating to both
occupancy and furniture and equipment expense for the quarter
ending September 30, 1996 were below the comparative 1995
period by 10.9% and 10.3%, respectively. Other operating expense
for the third quarter of 1996 decreased $515 thousand or 25.6%
from the 1995 quarter. In addition to the effect of the branch sale,
the decrease may be attributed to decreased costs to carry and
dispose of other real estate owned and a decrease in legal
expenses.
Income Taxes
<TABLE>
<CAPTION>
Summary of Income Taxes
(Dollars in Thousands)
Sep 1996 Sep 1995 $ Change
<S> <C> <C> <C>
Provision for Income Taxes $4,056 $1,438 $2,618
Effective Tax Rate 34.29% 36.61%
</TABLE>
The provisions for federal and state income taxes amounted to $4.1
million and $1.4 million for the third quarter of 1996 and 1995,
respectively. The decrease in the effective rate from 36.61% for the
1995 quarter to 34.29% for the 1996 quarter reflected the fact that
much of the gain in the 1996 period (i.e. that attributable to the sale
of Vermont operations) was not directly subject to state income tax.
<TABLE>
<CAPTION>
RESULTS OF OPERATIONS: Nine Months Ended September 30, 1996 Compared With
Nine Months Ended September 30, 1995
Summary of Earnings Performance
(Dollars in Thousands)
As Reported: Sep 1996 Sep 1995 $ Change % Change
<S> <C> <C> <C> <C>
Net Income $17,826 $9,814 $8,012 81.6%
Earnings Per Share 2.97 1.56 1.41 90.4
Return on Assets 3.28% 1.70% 1.58% 92.9
Return on Equity 34.42% 20.82% 13.60% 65.3
Recurring Earnings:
Net Income $7,713 $7,059 $ 654 9.3%
Earnings Per Share 1.29 1.12 .17 15.2
Return on Assets 1.43% 1.22% .21% 17.2
Return on Equity 16.08% 14.97% 1.11% 7.4
</TABLE>
The Company's net income was $17.8 million for the first nine
months of 1996, compared to earnings of $9.8 million for the first
nine months of 1995. Earnings per share were $2.97 and $1.56 for
the two respective periods.
Reflected in the 1996 earnings are the three separate sale
transactions, in January, August and September 1996, by which the
Company disposed of all its Vermont banking operations. The
1995 period included, as a nonrecurring item, the receipt of a $5.0
million pre-tax settlement payment under the Company's financial
institution bond.
Adjusting for the nonrecurring or special events in both periods, net
income for the first nine months of 1996 increased $654 thousand
or 9.3% over the first nine months of 1995. The increase in core
earnings was primarily attributable to the fact that the decrease in
other expenses exceeded the decrease in net interest income and
other income. 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 1996 Sep 1995 $ Change % Change
<S> <C> <C> <C> <C>
Interest Income $43,201 $45,416 $(2,215) (4.9)%
Interest Expense 16,801 18,288 (1,487) (8.1)
Net Interest Income $26,400 $27,128 $ (728) (2.7)
Average Earning Assets (1) $682,111 $722,311 $(40,200) (5.6)%
Average Paying Liabilities 561,477 608,137 (46,660) (7.7)
Taxable Equivalent Adjustment 479 544 (65) (12.0)
Yield on Earning Assets (1) 8.46% 8.41% 0.05% 0.6%
Cost of Paying Liabilities 4.00 4.02 (0.02) (0.5)
Net Interest Spread 4.46 4.39 0.07 1.6
Net Interest Margin 5.17 5.02 0.15 3.0
(1) Includes Nonaccrual Loans
</TABLE>
On a taxable equivalent basis, net interest income for the first nine
months of 1996 decreased $728 thousand from the comparable
period in 1995. The decrease in the 1996 period was primarily
attributable to a decrease of $40.2 million, or 5.6%, in average
earning assets stemming from the sale of eight Vermont branches
in January of 1996. The decrease in net interest income was
mitigated to some extent by the fact that the decrease in average
paying liabilities exceeded the decrease in average earning assets.
Net interest spread increased 7 basis points between the two periods,
due in part to the unexpected receipt of payments on restructured
loans in the 1996 period.
Average earning assets amounted to $682.1 million for the first nine
months of 1996, a $40.2 million or 5.6% decrease from the first nine
months of 1995. The 5.6% decrease in average earning assets
compared to a 7.7% decrease in average paying liabilities. The
decrease in the average balance of earning assets and paying
liabilities was primarily attributable to the January 1996 disposition of
eight Vermont branches, involving the sale of approximately $40
million of loans and the transfer of approximately $101 million of
deposits, as well as the liquidation of a substantial amount of other
earning assets needed to fund the difference between the loans sold
and the deposits assumed by Mascoma. The sale of the remaining
Vermont banking operations at the end of September 1996, did not
have a significant impact on average balances for the 1996 period.
Partially offsetting these sale transactions, were steady increases in
the deposit and loan portfolios of the New York subsidiary banks,
discussed in the earlier section on "Deposit and Loan Trends."
The provision for loan losses was $672 thousand for the nine month
period ended September 30, 1996, compared to a $640 thousand
provision 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.
<PAGE>
Other Income
<TABLE>
<CAPTION>
Summary of Other Income
(Dollars in Thousands)
Sep 1996 Sep 1995 $ Change % Change
<S> <C> <C> <C> <C>
Income From Fiduciary Activities $ 2,860 $ 2,891 $ (31) (1.1)%
Fees for Other Services to Customers 3,100 3,528 (428) (12.1)
Net Gains on Securities Transactions 82 --- 82 100.0
Other Operating Income 15,520 5,735 9,785 170.6
Total Other Income $21,562 $12,154 $9,408 77.4
Without Regard to Vermont
Disposition & the 1995
Bond Claim Settlement:
Other Operating Income $ 760 $ 735$ 25 3.4
Total Other Income 6,802 7,154 (352) (4.9)
</TABLE>
Other income increased in the first nine months of 1996 by $9.4
million, or 77.4%, over the level for the prior-year period, with the
major factor accounting for the increase being the disposition of the
Vermont business in the 1996 period and the $5.0 million
settlement payment of a bond claim received in the 1995 period.
Without regard to the nonrecurring items, other (i.e. noninterest)
income decreased $352 thousand or 4.9% for the first nine months
of 1996 compared with the first nine months of 1995. Income from
fiduciary services decreased $31 thousand or 1.1% over the first
nine months of 1995, primarily reflecting the sale of the Vermont
trust department in August of 1996. Fees for other services to
customers (primarily service charges on deposit accounts, credit
card fee income and servicing income on sold loans) decreased
$428 thousand or 12.1% between the periods, as a result, in part, of
the January 1996 sale of eight Vermont branches. Other operating
income (primarily third party credit card processing income)
increased $25 thousand, or 3.4%.
Other Expense
<TABLE>
<CAPTION>
Summary of Other Expense
(Dollars in Thousands)
Sep 1996 Sep 1995 $ Change % Change
<S> <C> <C> <C> <C>
Salaries and Employee Benefits $ 11,630 $ 12,724 $ (1,094) (8.6)%
Occupancy Expense of Premises, Net 1,413 1,556 (143) (9.2)
Furniture and Equipment Expense 1,295 1,474 (179) (12.1)
Other Operating Expense 5,195 7,006 (1,811) (25.8)
Total Other Expense $19,533 $22,760 $(3,227) (14.2)
Without Regard to Severance
Benefits & OREO Transactions:
Salaries and Employee Benefits $11,630 $12,101 $ (471) (3.9)
Other Operating Expense 4,955 6,867 (1,912) (27.8)
Total Other Expense 19,293 21,998 (2,705) (12.3)
</TABLE>
Other (i.e. noninterest) expense decreased $3.2 million or 14.2%
for the first nine months of 1996 compared with the first nine
months of 1995. Nonrecurring items included severance benefits
paid in the 1995 period and costs relating to other real estate
owned in both periods.
After making adjustments for these nonrecurring items, total other
expense decreased $2.7 million or 12.3% in the first nine months
of 1996 as compared to the 1995 period. Salaries and employee
benefits, as thus adjusted, decreased 471 thousand between the
periods, reflecting the decrease in the number of employees
resulting from the sale of eight Vermont branches in January of
1996. For similar reasons, occupancy and equipment expenses
decreased by $143 thousand and $179 thousand, respectively.
Other operating expense decreased $1.9 million or 27.8% in the
first nine months of 1996 as compared to the 1995 period. Nearly
one half of the decrease was attributable to a reduction in FDIC
insurance expense. Other significant areas of expense savings
included loan workout expenses and legal expenses.
Income Taxes
<TABLE>
<CAPTION>
Summary of Income Taxes
(Dollars in Thousands)
Sep 1996 Sep 1995 $ Change
<S> <C> <C> <C>
Provision for Income Taxes $ 9,452 $ 5,524 $ 3,928
Effective Rate 34.65% 36.02%
</TABLE>
The provisions for federal and state income taxes amounted to $9.5
million and $5.5 million for the first nine months of 1996 and 1995,
respectively. The decrease in the effective rate from 36.02% for the
1995 period to 34.65% for the 1996 period reflected the fact that
much of the gain in the 1996 period (i.e. that attributable to the sale
of Vermont operations) was not directly subject to state income tax.
<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)
On October 11, 1996, the Company filed a Form 8-K,
relating to (a) the sale on August 30, 1996 of Green
Mountain Bank's trust business to Vermont National
Bank and (b) the September 28, 1996 sale of
substantially all of the remaining deposits and loans and
certain real estate and personal property of Green
Mountain Bank to ALBANK, FSB.
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 7, 1996 s/Michael F. Massiano
Michael F. Massiano, Chairman and
Chief Executive Officer
Date: November 7, 1996 s/John J. Murphy
John J. Murphy, Executive Vice
President and Treasurer/CFO
(Principal Financial Officer and
Principal Accounting Officer)
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> SEP-30-1996
<CASH> 22779
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 22000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 176710
<INVESTMENTS-CARRYING> 18337
<INVESTMENTS-MARKET> 18773
<LOANS> 381683
<ALLOWANCE> 5549
<TOTAL-ASSETS> 639626
<DEPOSITS> 530812
<SHORT-TERM> 19550
<LIABILITIES-OTHER> 15894
<LONG-TERM> 0
<COMMON> 6577
0
0
<OTHER-SE> 66793
<TOTAL-LIABILITIES-AND-EQUITY> 639626
<INTEREST-LOAN> 33520
<INTEREST-INVEST> 8839
<INTEREST-OTHER> 363
<INTEREST-TOTAL> 42722
<INTEREST-DEPOSIT> 16152
<INTEREST-EXPENSE> 16801
<INTEREST-INCOME-NET> 25921
<LOAN-LOSSES> 672
<SECURITIES-GAINS> 82
<EXPENSE-OTHER> 19533
<INCOME-PRETAX> 27278
<INCOME-PRE-EXTRAORDINARY> 17826
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 17826
<EPS-PRIMARY> 2.97
<EPS-DILUTED> 2.97
<YIELD-ACTUAL> 5.17
<LOANS-NON> 2477
<LOANS-PAST> 39
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 12106
<CHARGE-OFFS> 726
<RECOVERIES> 338
<ALLOWANCE-CLOSE> 5549
<ALLOWANCE-DOMESTIC> 5549
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
