SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d) of
The Securities Exchange Act of 1934
For the fiscal year ended December 31, 1995
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 (I.R.S. Employer
Incorporation or Organization) Identification No.)
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
___________________________
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT - NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT
Common stock, Par Value $1.00
(Title of Class)
Indicate by checkmark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will
not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference
in Part III of this Form 10-K or any amendment to this Form 10-K.
Indicate by checkmark 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 such shorter
period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past
90 days.
Yes X No
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practicable date.
Class Outstanding at March 4, 1996
Common stock, Par Value $1.00 Per Share 5,587,735
State the aggregate market value of the voting stock held by non-affiliates
of registrant.
Aggregate market value Based upon the average of the closing bid
of voting stock and closing asked prices on the NASDAQ Exchange
$108,961,000 March 4, 1996
DOCUMENTS INCORPORATED BY REFERENCE
Portions of Registrant's Proxy Statement for the Annual Meeting of
Shareholders to be held April 24, 1996 (Part III) and
the Annual Report to Shareholders (Part II, Item 8)
ARROW FINANCIAL CORPORATION
FORM 10-K
INDEX
PART I
Item 1. Business
A. General
B. Lending Activities
C. Supervision and Regulation
D. Competition
E. Statistical Disclosure (Guide 3)
F. Legislative Developments
G. Executive Officers of the Registrant
Item 2. Properties
Item 3. Legal Proceedings
Item 4. Submission of Matters to a Vote of Security Holders
PART II
Item 5. Market for the Registrant's Common Equity and
Related Stockholder Matters
Item 6. Selected Financial Data
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations
A. Overview
B. Results of Operations
I. Net Interest Income
II. Provision for Loan Losses and
Allowance for Loan Losses
III. Other Income
IV. Other Expense
V. Income Taxes
C. Financial Condition
I. Investment Portfolio
II. Loan Portfolio
a. Distribution of Loans and Leases
b. Risk Elements
III. Summary of Loan Loss Experience
IV. Deposits
V. Time Certificates of $100,000 or More
D. Liquidity
E. Interest Rate Risk
F. Capital Resources and Dividends
G. Fourth Quarter Results
Item 8. Financial Statements and Supplementary Data
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure
PART III
Item 10. Directors and Executive Officers of the Registrant
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial
Owners and Management
Item 13. Certain Relationships and Related Transactions
PART IV
Item 14. Exhibits, Financial Statement Schedules and
Reports on Form 8-K
Signatures
Exhibits Index
PART I
Item 1: Business
A. GENERAL
Arrow Financial Corporation (the "Company"), a New York corporation,
was incorporated on March 21, 1983 and is registered as a bank
holding company within the meaning of the Bank Holding Company Act
of 1956. The Company owns two national banks in New York and one
state-chartered bank in Vermont. The Company owns directly or
indirectly all of the common stock of its subsidiaries.
The business of the Company consists primarily of the ownership,
supervision and control of its bank subsidiaries. The Company
provides its subsidiaries with various advisory and administrative
services and coordinates the general policies and operation of the
subsidiary banks. There were 421 full-time equivalent employees of
the Company and the subsidiary banks at December 31, 1995.
<TABLE>
<CAPTION>
SUBSIDIARY BANKS: GLENS
(Dollars in Thousands) FALLS SARATOGA
NATIONAL NATIONAL GREEN
BANK & BANK & MOUNTAIN
TRUST CO. TRUST CO. BANK
("GFNB") ("SNB") ("GMB")
<S> <C> <C> <C>
Total Assets at Year-End $513,150 $60,890 $234,486
(a) 155,000
Trust Assets Under Management at
Year-End (Not Included
in Total Assets) $397,176 $ 2,082 $258,960
Date Organized 1851 1988 1891
Employees 161 21 109
(a) 76
State of Headquarters New York New York Vermont
Offices 14 2 14
(a) 6
Counties of Operation Warren Saratoga Rutland
Washington Addison
Saratoga Bennington
Essex (b) Orange
(b) Windsor
137 So.
Main Office 250 Glen St. Broadway 80 West St.
Glens Falls, Saratoga, Rutland,
New York New York Vermont
(a) After branch sale on January 15, 1996.
(b) Counties of sold branches.
</TABLE>
Each subsidiary bank offers a full range of commercial and consumer
financial products. The banks' deposit base consists of core
deposits derived principally from the communities which the banks
serve. The banks target their lending activities to consumers and
small and mid-sized companies in the banks' immediate geographic
areas. In addition to traditional banking services, the Company
offers credit card processing services for other financial
institutions and, through its banks' trust departments, provides
retirement planning, trust and estate administration services for
individuals and pension, profit-sharing and employee benefit plan
administration for corporations.
B. LENDING ACTIVITIES
The Company's subsidiary banks engage in a wide range of lending
activities, including commercial and industrial lending primarily to
small and mid-sized companies; mortgage lending for the purchase of
residential and commercial properties; and consumer installment,
credit card and home equity financing. Although the Company's
Vermont bank previously held a substantial amount of construction
and land development loans in its portfolio, this segment of the
portfolio has been steadily reduced in recent years and only a small
number of new loans of this type have been extended. Historically,
the Company has sold a portion of its residential real estate loan
originations into the secondary market, primarily to Freddie Mac and
state housing agencies, while retaining servicing rights. Loan
sales, have diminished in the past three years, however, as the
banks have sought to increase their own portfolios. In addition to
interest earned on loans, the banks receive facility fees for
various types of commercial and industrial credits, and commitment
fees for extension of letters of credit and certain types of loans.
Generally, the Company continues to implement conservative lending
strategies, policies and procedures which are intended to protect
the quality of the loan portfolio. These include stringent
underwriting and collateral control procedures and credit review
systems through which intensive reviews are conducted. It is the
Company's policy to discontinue the accrual of interest on loans
when the payment of interest and/or principal is due and unpaid for
a designated period (generally 90 days) or when the likelihood of
repayment is, in the opinion of management, uncertain. Income on
such loans is thereafter recognized only upon receipt (see Item
7.C.II.b. "Risk Elements").
The banks lend primarily to borrowers within the geographic areas
served by the banks. The banks' combined loan portfolios do not
include any foreign loans or any significant industry concentrations
except as described in Note 21 to the Consolidated Financial
Statements in Part II Item 8 of this report. The portfolios are
substantially secured, and many commercial loans are further secured
by personal guarantees.
C. SUPERVISION AND REGULATION
The following generally describes the regulation to which the
Company and its banks are subject. Bank holding companies and banks
are extensively regulated under both federal and state law. To the
extent that the following information describes statutory or
regulatory provisions, it is qualified in its entirety by reference
to the particular law or regulation. Any change in applicable law
or regulation may have a material effect on the business and
prospects of the Company and the banks.
The Company is a legal entity separate and distinct from its
subsidiaries. Most of the Company's revenues result from management
fees, dividends and undistributed earnings from the subsidiary
banks. The right of the Company, and consequently the right of
creditors and shareholders of the Company, to participate in any
distribution of the assets or earnings of the banks through the
payment of such dividends or otherwise is necessarily subject to the
prior claims of creditors of the banks, except to the extent that
claims of the Company in its capacity as a creditor may be
recognized. Moreover, there are various legal and regulatory
limitations applicable to the payment of dividends to the Company by
its subsidiaries as well as the payment of dividends by the Company
to its shareholders. The ability of the Company and the banks to
pay dividends in the future is, and is expected to continue to be,
influenced by regulatory policies and capital guidelines.
The Company is a registered bank holding company within the meaning
of the Bank Holding Company Act of 1956 (BHC Act) and is subject to
regulation by the Board of Governors of the Federal Reserve System
(Federal Reserve Board). Additionally, the Company is subject to
regulation by the New York State Banking Department. The New York
banks are nationally chartered banks and are subject to the
supervision of and examination by the Office of the Comptroller of
the Currency ("OCC"). The Vermont bank is chartered by the State of
Vermont and is supervised at the state level by the Vermont
Department of Banking, Insurance and Securities and at the federal
level by the Federal Deposit Insurance Corporation ("FDIC"). The
New York banks are members of the Federal Reserve System and the
deposits of each subsidiary bank are insured by the FDIC. The BHC
Act prohibits the Company, with certain exceptions, from engaging,
directly or indirectly, in non-bank activities and restricts loans
by the banks to the Company or other affiliates. Under the BHC Act,
a bank holding company must obtain Federal Reserve Board approval
before acquiring, directly or indirectly, 5% or more of the voting
shares of another bank or bank holding company (unless it already
owns a majority of such shares) or acquiring all or substantially
all of the assets of another bank or bank holding company.
Under the 1994 Riegle-Neal Act, bank holding companies are now able
to acquire banks located in all 50 states (see Item 1.F.
"Legislative Developments".)
The Federal Reserve Board has adopted various "capital adequacy
guidelines" for use in the examination and supervision of bank
holding companies. One set of guidelines are the risk-based capital
guidelines, which assign risk 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 Reserve
Board's other capital guideline is the leverage ratio standard,
which establishes minimum limits on the ratio of a bank holding
company's "Tier 1" capital to total tangible assets. For top-rated
holding companies, the minimum leverage ratio is 3%, but lower-rated
companies may be required to meet substantially greater minimum
ratios. Each subsidiary bank is subject to similar capital
requirements adopted by its primary federal regulator. The year-end
1995 capital ratios of the Company and the banks are set forth in
Part II, Item 7.F. "Capital Resources and Dividends." A holding
company's ability to pay dividends and expand its business through
acquisitions of new subsidiaries can be restricted if capital falls
below these capital adequacy guidelines.
Neither the Company nor any of its subsidiaries is now, or has been
within the past year, subject to any formal or informal regulatory
enforcement order.
D. COMPETITION
The Company and its subsidiaries face intense competition in all
markets that they serve. Traditional competitors are other local
commercial banks, savings banks, savings and loan institutions and
credit unions, as well as local offices of major regional and money
center banks. Also, non-banking organizations, such as consumer
finance companies, insurance companies, securities firms, money
market and mutual funds and credit card companies, which are not
subject to the same array of regulatory restrictions and capital
requirements as the Company and the subsidiary banks, offer
substantive equivalents of transaction accounts, credit cards and
various other loan and financial products.
E. STATISTICAL DISCLOSURE
Statistical disclosure required by Securities Act Guide 3 to be set
forth herein is found in Item 7 "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and Item
8 "Financial Statements and Supplementary Data."
INDEX TO SECURITIES ACT GUIDE 3, STATISTICAL DISCLOSURE BY BANK
HOLDING COMPANIES
Required Information Location
Distribution of Assets, Liabilities
and Stockholders' Equity; Interest
Rates and Interest Differential Part II, Item 7.B.I.
Investment Portfolio Part II, Item 7.C.I.
Loan Portfolio Part II, Item 7.C.II.
Summary of Loan Loss Experience Part II, Item 7.C.III.
Deposits Part II, Item 7.C.IV.
Return on Equity and Assets Part II, Item 6.
Short-Term Borrowings Part II, Item 8. Note 9.
F. LEGISLATIVE DEVELOPMENTS
In 1994, the Riegle-Neal Interstate Banking and Branching Efficiency
Act was enacted. Under the Act, as of September 29, 1995, bank
holding companies were authorized as a matter of federal law to
acquire banks located in any of the 50 states, notwithstanding any
state laws to the contrary, provided all required regulatory and
other approvals have been obtained. Also, under the Act, effective
June 1, 1997, banks headquartered in any state will be permitted to
branch into any other state, except for those states which may enact
legislation prior to June 1, 1997 "opting out" of interstate
branching. States may "opt in" to interstate branching prior to
June 1, 1997, by affirmatively adopting legislation to that effect.
The Act also permits commonly-controlled banks to act as agents for
one another, effective September 29, 1995, by accepting deposits or
loan payments or closing or servicing loans for one another,
regardless of any branching laws to the contrary.
In 1991, the Federal Deposit Insurance Corporation Improvement Act
of 1991 ("FDICIA") was enacted. Among other things, FDICIA requires
the federal banking regulators to take prompt corrective action with
respect to depository institutions that do not meet minimum capital
requirements. FDICIA establishes five capital classifications for
banking institutions, the highest of which is "well-capitalized."
Under regulations adopted by the federal regulators, a banking
institution is considered "well-capitalized" if it has a total
risk-adjusted capital ratio of 10% or greater, a Tier 1
risk-adjusted capital ratio of 6% or greater and a leverage ratio of
5% or greater and is not subject to any regulatory order or written
directive regarding capital maintenance. The Company and its
subsidiary banks are all well-capitalized.
FDICIA also imposed expanded accounting and audit reporting
requirements for depository institutions whose total assets exceed
$500 million.
The FDIC levies assessments on various deposit obligations of the
Company's banking subsidiaries. In 1993, the FDIC implemented a new
risk-based system of assessing deposit insurance premiums to bring
the level of the Bank Insurance Fund (BIF) to a FDICIA required
level of 1.25% of insured deposits. During 1995, the FDIC reduced
the premium paid by the best-rated banks (including all the
Company's subsidiary banks) from $.23 per $100 of insured deposits
to $.04, upon the recapitalization of the BIF. In 1996, the FDIC
insurance premium was further reduced to a flat charge of $2
thousand per year for the highest-rated banks, including all the
Company's subsidiary banks.
Legislation is currently under consideration that would recapitalize
the Savings Association Insurance Fund (SAIF) and merge the SAIF
with the BIF. It is not anticipated that this legislation would
have an immediate impact on the assessment rate for BIF insured
institutions or otherwise would have any negative impact on the
Company or its subsidiary banks.
Banks and bank holding companies are also significantly affected by
the Financial Institutions Reform, Recovery and Enforcement Act of
1989 ("FIRREA"). Although FIRREA dealt primarily with the thrift
industry, it also impacted commercial banking organizations. FIRREA
mandates public disclosure by commercial banks of their Community
Reinvestment Act ratings and mortgage lending records and imposed
cross-liability on any insured financial institutions which are
affiliated with any other insured institution to which the FDIC
gives financial assistance.
Various other banking legislation, including proposals to permit
banks to affiliate with full-service securities underwriting firms
or non-financial organizations (Glass-Steagall Reform) have been
introduced in Congress from time to time. The Company cannot
determine the ultimate effect that any such potential legislation,
if enacted, would have upon its financial condition or operations.
In 1995, the federal bank regulatory authorities promulgated a set
of revised regulations addressing the responsibilities of banking
organizations under the Community Reinvestment Act ("CRA"). The
revised regulations place additional emphasis on the actual
experience of a bank in making loans in low- and moderate-income
areas within its service area as a key determinant in evaluation of
the bank's compliance with the statute. As in the prior
regulations, bank regulators are authorized to bring enforcement
actions against banks under the CRA only in the context of bank
expansion or acquisition affiliations.
G. EXECUTIVE OFFICERS OF THE REGISTRANT
The names and ages of the principal executive officers of the
Company and positions held are presented in the following table.
The officers are elected annually by the Board of Directors.
Name Age Positions Held and Years
from Which Held
Michael F. Massiano 61 Chairman, President and
CEO. Mr. Massiano has
been Chairman and CEO
since 1990 and was
President and CEO of the
Company prior to 1990.
Mr. Massiano is also CEO
of Glens Falls National
Bank.
John J. Murphy 44 Executive Vice President,
Treasurer and CFO. Mr.
Murphy has served as
Treasurer and Chief
Financial Officer of the
Company since 1983.
Thomas L. Hoy 47 President and COO of
Glens Falls National
Bank. Mr. Hoy was
Executive Vice President
of Glens Falls National
Bank prior to 1995.
Gerard R. Bilodeau 48 Senior Vice President and
Secretary since 1994.
Mr. Bilodeau was Vice
President and Secretary
from 1993 to 1994 and was
Director of Personnel
prior to 1993.
Item 2: Properties
The Company is headquartered at 250 Glen Street, Glens Falls, New
York. The building is owned by Glens Falls National Bank and serves
as its main office. Glens Falls National Bank owns thirteen
additional offices. Saratoga National Bank owns both of its
offices. Green Mountain Bank owns its main office and nine other
offices and leases four offices. Of the eight branches sold on
January 15, 1996, six were owned and two were leased. Offices
leased from unrelated third parties are at market rates. Rental
costs of premises did not exceed 5% of operating costs in 1995.
In the opinion of management of the Company, the physical properties
of the Company and the Banks are suitable and adequate.
Item 3: Legal Proceedings
The Company is not the subject of any material pending legal
proceedings, other than ordinary routine litigation occurring in the
normal course of its business.
The Company's subsidiary banks are the subjects of or parties to
various legal claims which arise in the normal course of their
business. For example, the banks, especially Green Mountain Bank,
have in recent periods encountered claims against them grounded in
lender liability, of the sort often asserted against financial
institutions. 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 opinion of management, result in any material liability to
the banks or the Company.
Item 4: Submission of Matters to a Vote of Security Holders
None in the fourth quarter of 1995.
PART II
Item 5: Market for the Registrant's Common Equity and Related
Stockholder Matters
The common stock of Arrow Financial Corporation is traded
over-the-counter. It is registered with and its price is quoted by the
National Association of Securities Dealers, Inc., through its
national quotation system (NASDAQ).
The price ranges below represent actual transactions rounded to the
nearest 1/8 point. Although there may have been isolated sales at
prices outside the parameters shown, the
Company believes that the price ranges fairly represent the trading
ranges.
Per share amounts and market prices have been adjusted for the 1995
four percent stock dividend and the 1994 four percent stock
dividend.
<TABLE>
<CAPTION>
Market Price Cash
(Bid) Dividends
High Low Declared
<S> <C> <C> <C>
1994 1st Quarter $11.375 $10.625 $.065
2nd Quarter 14.750 10.250 .074
3rd Quarter 16.625 14.250 .102
4th Quarter 15.375 13.500 .115
1995 1st Quarter $15.875 $14.875 $.125
2nd Quarter 15.375 14.000 .135
3rd Quarter 17.125 14.375 .144
4th Quarter 19.000 16.875 .160
</TABLE>
The payment of dividends by the Company is at the discretion of the
Board of Directors and is dependent upon, among other things, the
Company's earnings, financial condition and other factors, including
applicable governmental regulations and restrictions. See "Capital
Resources and Dividends" in Part II, Item 7.F. of this report.
There were approximately 2,505 holders of record of common stock
at December 31, 1995.
<TABLE>
Item 6: Selected Financial Data
FIVE YEAR SUMMARY OF SELECTED DATA
Arrow Financial Corporation and Subsidiaries
(Dollars In Thousands, except per share data)
<CAPTION>
1995 1994 1993 1992 1991
Consolidated Statements of Income Data:
<S> <C> <C> <C> <C> <C>
Interest Income $60,718 $52,514 $51,836 $57,829 $ 73,755
Less: Interest Expense 24,865 18,202 19,583 28,399 43,556
Net Interest Income 35,853 34,312 32,253 29,430 30,199
Less: Provision for Loan Losses 1,170 (950) 690 1,677 46,185
Net Interest Income (Loss) After Provision
for Loan Losses 34,683 35,262 31,563 27,753 (15,986)
Other Income 14,473 9,049 9,086 8,606 8,934
Net Gains (Losses) on Securities
Transactions 23 (481) 26 15 684
Less: Other Expense 29,769 31,374 32,118 32,153 31,879
Income (Loss) Before Income Taxes, Extra-
ordinary Item and Cumulative Effect
of Accounting Change 19,410 12,456 8,557 4,221 (38,247)
Provision for (Benefit from) Income Taxes 6,986 1,131 381 1,331 (4,865)
Income (Loss) Before Extraordinary Item &
Cumulative Effect of Accounting Change 12,424 11,325 8,176 2,890 (33,382)
Extraordinary Item: Utilization of Net
Operating Loss Carryforward --- --- --- 811 ---
Cumulative Effect of a Change in
Accounting for Income Taxes --- --- 1,457 --- ---
Net Income (Loss) $12,424 $11,325 $ 9,633 $ 3,701 $(33,382)
Primary Earnings (Loss) Per Share:
Income (Loss) Before Extraordinary Item
and Accounting Change $ 2.17 $ 1.97 $ 1.44 $ .53 $(6.13)
Extraordinary Item and Accounting Change --- --- .25 .13 ---
Net Income (Loss) $ 2.17 $ 1.97 $ 1.69 $ .66 $(6.13)
Fully Diluted Earnings (Loss) Per Share:
Income (Loss) Before Extraordinary Item
and Accounting Change $ 2.17 $ 1.90 $ 1.44 $ .53 $(6.13)
Extraordinary Item and Accounting Change --- --- .25 .13 ---
Net Income (Loss) $ 2.17 $ 1.90 $ 1.69 $ .66 $(6.13)
Cash Dividends $ .56 $ .36 $ .10 $ --- $ .23
Book Value 12.00 10.20 8.74 7.07 6.40
Consolidated Balance Sheet Data:
Total Assets $789,790 $746,431 $733,442 $722,415 $769,942
Securities Held-to-Maturity 13,921 129,735 125,832 97,305 145,250
Securities Available-for-Sale 178,645 53,868 55,892 55,598 ---
Loans and Leases, Net of Unearned Income 517,787 507,553 502,784 492,916 547,419
Nonperforming Assets 6,765 7,825 20,136 29,669 43,890
Deposits 694,453 650,485 659,427 657,875 696,402
Other Borrowed Funds 15,297 24,865 12,487 15,162 25,141
Long-Term Debt --- 5,007 5,289 5,371 7,048
Shareholders' Equity 67,504 58,405 50,069 39,735 34,900
Selected Key Ratios:
Return on Average Assets 1.60% 1.52% 1.33% .50% (4.07)%
Return on Average Equity 19.45 20.79 21.03 10.10 (64.54)
Dividend Payout 25.81 18.05 5.93 --- ---
Average Equity to Average Assets 8.22 7.34 6.32 4.97 6.30
Per share amounts have been adjusted for the 1995, 1994, 1993 and 1992 four percent stock
dividends.
</TABLE>
Item 7: Management's Discussion and Analysis of Financial
Condition and Results of Operations
The following discussion presents an analysis of the Company's
results of operations for each of the years in the three-year period
ended December 31, 1995 and the financial condition of the Company
as of December 31, 1995 and 1994. Per share amounts have been
restated to reflect the four percent stock dividend paid in November
1995 and the four percent stock dividend paid in November 1994. The
discussion below should be read in conjunction with the consolidated
financial statements and other financial data presented elsewhere
herein.
A. OVERVIEW
The Company reported net income of $12.4 million for 1995, which
compared to net income of $11.3 million for 1994. Primary earnings
per share were $2.17 and $1.97 for 1995 and 1994, respectively.
The following analysis adjusts net income for unusual and
nonrecurring items to arrive at a comparative presentation of the
Company's core earnings:
<TABLE>
SUMMARY OF CORE EARNINGS
(In Thousands)
<CAPTION>
1995 1994
<S> <C> <C>
Net Income, as Reported $12,424 $11,325
Net Operating Loss Benefits --- (3,560)
Other Items, Net of Tax:
Insurance Settlement (3,250) ---
OREO Transactions 136 1,133
Credit to the Provision for Loan Losses --- (990)
Severance Benefits 388 ---
Net Securities Transactions (12) 285
Other (218) ---
Recurring Net Income $ 9,468 $ 8,193
Recurring Primary Earnings per Share $ 1.66 $ 1.43
</TABLE>
In May of 1995, the Company received a $5.0 million pre-tax
settlement from the Company's financial institution bond company on
a claim for losses suffered in earlier periods.
During 1994, the Company fully utilized the tax benefits resulting
from net operating losses sustained in 1991. In the second quarter
of 1994, the Company adjusted its reserve for loan losses by means
of a $1.5 million credit to the provision for loan losses, reflected
as income. This adjustment was offset by a similar amount of losses
in the same period on the sale of real estate acquired through
foreclosures (OREO), which was reflected as other operating expense.
The increase in core earnings from 1994 to 1995 is attributable to
an increase in net interest income, increases in all areas of
noninterest income and a decrease in operating expenses.
Nonperforming assets, which include nonaccrual loans, loans past due
90 days or more and still accruing interest, restructured loans in
compliance with modified terms and OREO, amounted to $6.8 million at
December 31, 1995, down from $7.8 million at December 31, 1994. The
reduction was primarily attributable to sales of OREO. The allowance
for loan losses was $12.1 million at December 31, 1995, which
represented 278% of the amount of nonperforming loans at that date.
This position was substantially unchanged from the prior year-end.
Sale of Vermont Operations
On January 15, 1996, the Company completed its sale of eight branches
of Green Mountain Bank in eastern Vermont to Mascoma Savings Bank of
Lebanon, New Hampshire. The following table presents unaudited
consolidated balance sheet information at January 15, 1996 in
comparison to December 31, 1995 and 1994.
<TABLE>
SELECTED BALANCE SHEET INFORMATION
(In Thousands)
<CAPTION>
January 15, December 31, December 31,
1996 1995 1994
<S> <C> <C> <C>
Liquid Assets (1) $204,505 $237,151 $ 88,492
Investments 13,851 13,921 129,735
Loans 474,463 517,787 507,553
Total Assets 712,493 789,790 746,431
Deposits 592,633 694,453 650,485
Shareholders' Equity 72,728 67,504 58,405
(1) Cash and Due From Banks, Federal Funds Sold and Securities Available-for-Sale.
</TABLE>
On February 27, 1996, the Company announced that it had entered into
a definitive agreement with ALBANK FSB, an Albany, New York based
savings bank with Vermont operations, to sell to ALBANK the
remaining six Green Mountain Bank branches including substantially
all remaining loans and deposits of Green Mountain Bank ($112
million and $110 million, respectively, at the date of signing). On
February 27, 1996, the Company entered into a definitive agreement
with Vermont National Bank, Brattleboro, Vermont, to sell to Vermont
National the Green Mountain Bank trust business. After the
completion of these sales, the Company effectively will have no
remaining operations in Vermont.
These and other changes are more fully described in the following
analysis of the results of operations and changes in financial
condition.
B. RESULTS OF OPERATIONS
The following analysis of net interest income, the provision and
allowance for loan losses, noninterest income, other expense and
income taxes, presents the factors that are primarily responsible
for the Company's results of operations for 1995 and the prior two
years.
I. NET INTEREST INCOME (Fully Taxable Basis)
Net interest income represents the difference between interest
earned on loans and investments and interest paid on deposits and
other sources of funds. Changes in net interest income result from
(I) changes in the level and mix of earning assets and sources of
funds (volume) (II) changes in the yields earned and costs paid
(rate), and (III) the relative volume of nonperforming assets. Net
interest margin is the ratio of net interest income to average
earning assets. Net interest income may also be described as the
product of earning assets and net interest margin.
<TABLE>
COMPARISON OF NET INTEREST INCOME
(Dollars In Thousands) (Fully Taxable Basis)
<CAPTION>
Years Ended December 31, Change From Prior Year
1995 1994 1993 1995 1994
Amount Percent Amount Percent
<S> <C> <C> <C> <C> <C> <C> <C>
Interest Income $61,411 $52,985 $52,415 $ 8,426 15.9 % $ 570 1.1 %
Interest Expense 24,865 18,202 19,583 6,663 36.6 (1,381) (7.1)
Net Interest Income $36,546 $34,783 $32,832 $ 1,763 5.1 $ 1,951 5.9
</TABLE>
On a tax-equivalent basis, net interest income was $36.5 million in
1995, an increase of $1.8 million or 5.1% from $34.8 million in
1994. Net interest income, for both 1995 and 1994, was favorably
impacted by both the changing interest rate environment and an
increase in average earning assets. In addition to general changes
in rates and volume, net interest income was enhanced by the
reduction of nonaccrual loans, both in absolute amounts and as a
ratio to earning assets. The Company also benefitted from retained
earnings as a source of funds and from the investment of the
proceeds from OREO sales into earning assets. In 1989, under the
influence of the Federal Reserve Board, interest rates began a
steady decline, and for a two year period beginning in the spring of
1992, the prime rate was unchanged. During that period, the Company
experienced a benefit from a change in the mix of deposits from
higher cost time deposits to lower cost N.O.W. and money market
deposit accounts. During 1994, the prolonged period of falling
interest rates came to an end as the Federal Reserve Board began a
series of interest rate increases which extended into 1995. As a
result, the mix of average deposits in 1994 was virtually the same
as for 1993, but in 1995, depositors began to move a portion of
their deposits back to higher cost time deposits.
ANALYSIS OF CHANGES IN NET INTEREST INCOME
The following table presents net interest income components on a
tax-equivalent basis and reflects changes between periods
attributable to movement in either the average daily balance or
average rates for both earning assets and interest-bearing
liabilities. Changes attributable to both volume and rate have been
allocated proportionately between the categories.
<TABLE>
CHANGE IN NET INTEREST INCOME
(In Thousands) (Fully Taxable Basis)
<CAPTION>
1995 to 1994 1994 to 1993
Change in Net Interest Income Change in Net Interest Income
Due to: Due to:
Volume Rate Total Volume Rate Total
<S> <C> <C> <C> <C> <C> <C>
Interest Income:
Interest-Bearing
Deposits With Banks $ --- $ --- $ --- $ (34) $ (34) $ (68)
Federal Funds Sold 521 285 806 (1,051) 934 (117)
Securities Available-
for-Sale 334 823 1,157 525 (626) (101)
Securities Held-to-Maturity:
U.S. Treasury and Other
Governmental Agencies (372) 75 (297) (776) (469) (1,245)
State and Municipal
Obligations 548 45 593 218 (321) (103)
Mortgage-Backed Securities 233 87 320 1,044 10 1,054
Other Securities 282 11 293 42 71 113
Total Securities Held-
to-Maturity 691 218 909 528 (709) (181)
Loans 956 4,598 5,554 1,097 (60) 1,037
Total Interest Income 2,502 5,924 8,426 1,065 (495) 570
Interest Expense:
Deposits:
N.O.W./Super N.O.W. 202 1,279 1,481 65 (430) (365)
Regular Savings
and M.M.D.A. (1,917) 847 (1,070) 25 (555) (530)
Time Certificates of
$100,000 or More 2,158 442 2,600 507 (54) 453
Other Time Deposits 1,121 2,319 3,440 (516) (469) (985)
Total Deposits 1,564 4,887 6,451 81 (1,508) (1,427)
Short-Term Borrowings 288 137 425 29 29 58
Long-Term Debt (230) 17 (213) (11) (1) (12)
Total Interest Expense 1,622 5,041 6,663 99 (1,480) (1,381)
Net Interest Income $ 880 $ 883 $1,763 $ 966 $ 985 $1,951
</TABLE>
The following table reflects the components of the Company's net
interest income, setting forth, for years ended December 31, 1995,
1994 and 1993 (I) average assets, liabilities and shareholders'
equity, (II) interest income earned on earning assets and interest
expense incurred on interest-bearing liabilities, (III) average
yields earned on earning assets and average rates paid on
interest-bearing liabilities, (IV) the net interest spread (average
yield less average cost) and (V) the net interest margin (yield) on
earning assets. Rates are computed on a tax-equivalent basis.
Nonaccrual loans are included in average loans and leases, while
unearned income has been eliminated.
<TABLE>
AVERAGE CONSOLIDATED BALANCE SHEETS AND NET INTEREST INCOME ANALYSIS
Arrow Financial Corporation and Subsidiaries
(Fully Taxable Basis using a marginal tax rate of 35% for 1995 and 34% for 1994 and 1993)
(Dollars In Thousands) (Unaudited)
<CAPTION>
Years Ended December 31, 1995
Interest Rate
Average Income/ Earned/
Balance Expense Paid
<S> <C> <C> <C>
Interest-Bearing
Deposits With Banks $ --- $ --- ---%
Federal Funds Sold 22,596 1,307 5.78
Securities Available-
for-Sale 66,075 4,024 6.09
Securities Held-to-Maturity:
U.S. Treasury and
Governmental Agencies 57,993 3,108 5.36
State and Municipal 13,271 1,124 8.47
Mortgage-Backed
Securities 48,933 3,100 6.34
Other Securities 6,573 486 7.39
Total Securities Held-
to-Maturity 126,770 7,818 6.17
Loans & Leases (Net of
Unearned Income) 513,266 48,262 9.40
Total Earning Assets 728,707 61,411 8.43
Allowance for Loan
Losses (12,288)
Cash and Due From Banks 28,081
Other Assets 32,929
Total Assets $777,429
Deposits:
N.O.W./Super N.O.W. $139,879 3,975 2.84
Savings/M.M.D.A. 201,932 6,187 3.06
Time Certificates of
$100,000 or More 67,029 3,761 5.61
Other Time Deposits 185,166 9,893 5.34
Total Interest-Bearing
Deposits 594,006 23,816 4.01
Short-Term Borrowings 15,855 819 5.17
Long-Term Debt. 2,619 230 8.78
Total Interest-
Bearing Funds 612,480 24,865 4.06
Demand Deposits 88,961
Other Liabilities 12,097
Total Liabilities 713,538
Shareholders' Equity 63,891
Total Liabilities and
Shareholders' Equity $777,429
Net Interest Income
(Fully Taxable Basis) 36,546
Reversal of Tax Equivalent
Adjustment (693)
Net Interest Income $35,853
Net Interest Spread 4.37%
Net Interest Margin 5.02%
</TABLE>
<TABLE>
AVERAGE CONSOLIDATED BALANCE SHEETS AND NET INTEREST INCOME ANALYSIS
Arrow Financial Corporation and Subsidiaries
(Fully Taxable Basis using a marginal tax rate of 35% for 1995 and 34% for 1994 and 1993)
(Dollars In Thousands) (Unaudited)
<CAPTION>
Years Ended December 31, 1994
Interest Rate
Average Income/ Earned/
Balance Expense Paid
<S> <C> <C> <C>
Interest-Bearing
Deposits With Banks $ --- $ --- ---%
Federal Funds Sold 12,490 501 4.01
Securities Available-
for-Sale 60,591 2,867 4.73
Securities Held-to-Maturity
U.S. Treasury and
Governmental Agencies 64,908 3,405 5.25
State and Municipal 6,761 531 7.85
Mortgage-Backed
Securities 45,221 2,780 6.15
Other Securities 2,751 193 7.02
Total Securities Held-
to-Maturity 119,641 6,909 5.77
Loans & Leases (Net of
Unearned Income) 502,224 42,708 8.50
Total Earning Assets 694,946 52,985 7.62
Allowance for Loan
Losses (16,954)
Cash and Due From Banks 27,009
Other Assets 37,635
Total Assets $742,636
Deposits:
N.O.W./Super N.O.W. $129,999 2,494 1.92
Savings/M.M.D.A. 260,336 7,257 2.79
Time Certificates of
$100,000 or More 26,980 1,161 4.30
Other Time Deposits 160,035 6,453 4.03
Total Interest-Bearing
Deposits 577,350 17,365 3.01
Short-Term Borrowings 9,838 394 4.00
Long-Term Debt. 5,226 443 8.48
Total Interest-
Bearing Funds 592,414 18,202 3.07
Demand Deposits 87,715
Other Liabilities 8,028
Total Liabilities 688,157
Shareholders' Equity 54,479
Total Liabilities and
Shareholders' Equity $742,636
Net Interest Income
(Fully Taxable Basis) 34,783
Reversal of Tax Equivalent
Adjustment (471)
Net Interest Income $34,312
Net Interest Spread 4.55%
Net Interest Margin 5.01%
</TABLE>
<TABLE>
AVERAGE CONSOLIDATED BALANCE SHEETS AND NET INTEREST INCOME ANALYSIS
Arrow Financial Corporation and Subsidiaries
(Fully Taxable Basis using a marginal tax rate of 35% for 1995 and 34% for 1994 and 1993)
(Dollars In Thousands) (Unaudited)
<CAPTION>
Years Ended December 31, 1993
Interest Rate
Average Income/ Earned/
Balance Expense Paid
<S> <C> <C> <C>
Interest-Bearing
Deposits With Banks $ 2,151 $ 68 3.16%
Federal Funds Sold 20,927 618 2.95
Securities Available-
for-Sale 49,489 2,968 6.00
Securities Held-to-Maturity:
U.S. Treasury and
Governmental Agencies 79,060 4,651 5.88
State and Municipal 5,595 634 11.33
Mortgage-Backed
Securities 28,235 1,726 6.11
Other Securities 1,935 79 4.08
Total Securities Held-
to-Maturity 114,825 7,090 6.17
Loans & Leases (Net of
Unearned Income) 489,326 41,671 8.52
Total Earning Assets 676,718 52,415 7.75
Allowance For Loan
Losses (16,954)
Cash and Due From Banks 26,963
Other Assets 37,998
Total Assets $724,725
Deposits:
N.O.W./Super N.O.W. $127,163 2,859 2.25
Savings/M.M.D.A. 259,519 7,787 3.00
Time Certificates of
$100,000 or More 15,077 708 4.70
Other Time Deposits 172,422 7,438 4.31
Total Interest-Bearing
Deposits 574,181 18,792 3.27
Short-Term Borrowings 9,083 336 3.70
Long-Term Debt. 5,359 455 8.49
Total Interest-
Bearing Funds 588,623 19,583 3.33
Demand Deposits 83,971
Other Liabilities 6,317
Total Liabilities 678,911
Shareholders' Equity 45,814
Total Liabilities and
Shareholders' Equity $724,725
Net Interest Income
(Fully Taxable Basis) 32,832
Reversal of Tax Equivalent
Adjustment (579)
Net Interest Income $32,253
Net Interest Spread 4.42%
Net Interest Margin 4.85%
</TABLE>
<TABLE>
CHANGES IN NET INTEREST INCOME DUE TO RATE
YIELD ANALYSIS December 31,
<CAPTION>
1995 1994 1993
<S> <C> <C> <C>
Yield on Earning Assets 8.43% 7.62% 7.75%
Cost of Interest-Bearing Liabilities 4.06 3.07 3.33
Net Interest Spread 4.37% 4.55% 4.42%
Net Interest Margin 5.02% 5.01% 4.85%
</TABLE>
The following items have a major impact on changes in net interest
income due to rate: general interest rate changes, the ratio of the
Company's rate sensitive assets to rate sensitive liabilities
(interest rate sensitive gap) during periods of interest rate
changes and the relative level of nonaccrual loans.
In 1995, the change in net interest income attributable to changes
in interest rates had an $883 thousand positive impact on net
interest income. During the first half of the year, the Company was
still experiencing the effect from rising interest rates which had
begun in the second half of 1994. Various loan and deposit products
react to interest rate changes with different speeds and for some
products not to the full extent of changes in the prime rate.
During 1994, assets in general repriced more quickly than time
deposits. Repricing of short-term deposit products also tended to
lag behind prime rate changes and did not change to the full extent
of prime rate changes. Consequently, the spread between the yield
on earning assets and the cost of interest paying liabilities
increased from 1993 to 1994 by 13 basis points, while decreasing by
18 basis points from 1994 to 1995. Notwithstanding the decrease in
the net interest spread, the Company experienced a beneficial impact
from generally rising interest rates due to the fact that the
increase in average interest bearing assets exceeded the increase in
interest paying liabilities as discussed more fully in the following
section on changes in net interest income due to volume. As a
result, the net interest margin increased from 1994 to 1995, albeit
by only one basis point.
In 1994, the change in net interest income attributable to changes
in interest rates had a $985 thousand positive impact on net
interest income. During the first half of the year, the Company was
still experiencing the effect from falling interest rates in prior
periods, as higher yielding fixed rate loan and time deposit
maturities repriced at current rates. During the second half of the
year the Federal Reserve Board began a series of interest rate
increases and the Company, as well as many financial institutions,
benefitted from a more rapid repricing of earning assets than paying
liabilities. The effect of the downward repricing of fixed rate
loan and time deposit maturities in the first half of the year was
more pronounced than the effect of rising interest rates at the end
of the year, as both the yield on earnings assets and the cost of
paying liabilities fell from 1993 to 1994. The Company also
experienced the benefit of reduced levels of nonaccrual loans, both
in absolute amounts and as a ratio to earning assets, and was able
to apply the proceeds from OREO sales to earning assets. Nonaccrual
loans amounted to $3.6 million and $9.9 million at December 31, 1994
and 1993, respectively, and the proceeds from OREO sales amounted to
$4.8 million in 1994.
<TABLE>
CHANGES IN NET INTEREST INCOME DUE TO VOLUME
AVERAGE BALANCES
(Dollars in Thousands)
<CAPTION>
$ Change % Change
1995 1994 1993 1995 1994 1995 1994
<S> <C> <C> <C> <C> <C> <C> <C>
Earning Assets $728,707 $694,946 $676,718 $33,761 $18,228 4.9% 2.7%
Interest-Bearing
Liabilities 612,480 592,414 588,623 20,066 3,791 3.4 .6
Demand Deposits 88,961 87,715 83,971 1,246 3,744 1.4 4.5
Total Assets 777,429 742,636 724,725 34,793 17,911 4.7 2.5
Earning Assets to
Total Assets 93.73% 93.58% 93.38% .15% .20% .2 .2
</TABLE>
In general, changes in volume will result in corresponding changes
in net interest income. However, changes due to volume can be
enhanced or restricted by shifts in the relative mix between
instruments of different rates. In 1995, the change in volume had
an $880 thousand positive impact on net interest income. Of the
$33.8 million increase in average earning assets from 1994 to 1995,
average loan balances accounted for $11.0 million. The Company used
the remaining funds to increase its liquid assets. Only $20.1
million of the $33.8 million increase in average earning assets was
funded by paying liabilities. The primary sources of funds for the
remainder came from retained earnings ($9.4 million) and proceeds
from the sale of OREO ($1.5 million).
In 1994, the change in volume had a $966 thousand positive impact on
net interest income. Of the $18.2 million increase in average
earning assets from 1993 to 1994, average loan balances accounted
for $12.9 million. The Company used the remaining funds as well as
$8.4 million from decreased average federal funds balances to
increase both the held-to-maturity and available-for-sale securities
portfolios. Only $3.8 million of the $18.2 million increase in
average earning assets was funded by paying liabilities. The
primary sources of funds for the remainder came from retained
earnings ($8.7 million) and proceeds from the sale of OREO ($4.8
million).
II. PROVISION FOR LOAN LOSSES AND ALLOWANCE FOR LOAN LOSSES
Through the provision for loan losses, an allowance (reserve) is
established for estimated future loan losses. Actual loan losses
are charged against this allowance when they occur. In evaluating
the adequacy of the allowance for loan losses, management considers
various risk factors influencing asset quality. This analysis is
based on judgments and estimates and may change in response to
economic developments or other conditions that may influence
borrowers' economic outlook.
On January 1, 1995, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 114, "Accounting by Creditors for
Impairment of a Loan." SFAS No. 114, as amended, requires that
impaired loans, except for large groups of smaller-balance
homogeneous loans, be measured based on (i) the present value of
expected future cash flows discounted at the loan's effective
interest rate, (ii) the loan's observable market price or (iii) the
fair value of the collateral if the loan is collateral dependent.
The Company applies the provisions of SFAS No. 114 to all impaired
commercial and commercial real estate loans over $250,000, and to
all loans restructured subsequent to adoption. Reserves for losses
for the remaining smaller-balance loans are evaluated under SFAS No.
5. Under the provisions of SFAS No. 114, the Company determines
impairment for collateralized loans based on fair value of the
collateral less estimated cost to sell. For other loans, impairment
is determined by comparing the recorded value of the loan to the
present value of the expected cash flows, discounted at the loan's
effective interest rate. The Company determines the interest income
recognition method on a loan by loan basis. Based upon the
borrowers' payment histories and cash flow projections, interest
recognition methods include full accrual, cash basis and cost
recovery.
During 1995, nonperforming assets continued the steady decline begun
in 1991. The primary portion of the decrease in nonperforming
assets in 1995 came from the sale of OREO. Nonaccrual loans
increased $626 thousand or 17.3% from the year-end 1994 balance.
The increase in nonaccrual loans represents the aggregate borrowing
of one large commercial borrower, which was placed on nonaccrual
status in 1995. That loan was accounted for under SFAS No. 114 and
was being carried at its estimated fair value. Loans reported as
troubled debt restructures at December 31, 1994, were classified as
performing in 1995.
Net charge-offs for 1995 of $1.4 million, or .27% of average loans
for the year, was typical of the Company's historical experience
with the exception of 1991 and 1992. The provision for loan losses
of $1.2 million, or .23% of average loans, remained below the
Company's historical average. The 1995 provision, however, was
deemed adequate in consideration of the ratio of the allowance for
loan losses to nonperforming loans, which amounted to 278% at
December 31, 1995.
The provision for loan losses in 1994 was actually a credit to the
provision and a reduction in the allowance for loan losses. During
the second quarter of 1994, with nonperforming assets at
significantly reduced levels and a substantial sale of OREO having
been completed, the Company reduced the unallocated portion of the
allowance for loan losses by $1.5 million. This reduction was
effected by means of a credit to the provision for loan losses. As
a result, for the twelve month period ended December 31, 1994, the
Company's net provision for loan losses was a negative $950
thousand, compared to a provision of $690 thousand in 1993 and $1.7
million in 1992. As a ratio of average loans, the provisions were
(.19)% in 1994 and .14% and .32% for 1993 and 1992, respectively.
While the absolute balance of the allowance for loan losses has
decreased in each of the past four years, the ratio of the allowance
to nonperforming loans has increased or remained steady, with the
ratio at the end of 1995 virtually unchanged from the year-end 1994
level. The balance of the allowance for loan losses was $12.1
million, $12.3 million, $16.1 million and $17.3 million at December
31, 1995, 1994, 1993 and 1992, respectively. The ratio of the
allowance to nonperforming loans was 278%, 279%, 127% and 72% at the
end of the same respective periods.
Net loan losses for 1995 were $1.4 million. These losses compare to
net loan losses of $2.8 million, $1.9 million and $4.7 million for
the years ended December 31, 1994, 1993 and 1992, respectively. As
a ratio to average loans, the net loan losses were .27%, .56%, .40%
and .92% for the same respective periods.
<TABLE>
SUMMARY OF THE ALLOWANCE AND PROVISION FOR LOAN LOSSES
(Dollars In Thousands) (Loans and Leases, Net of Unearned Income)
<CAPTION>
Years-Ended December 31, 1995 1994 1993 1992 1991
<S> <C> <C> <C> <C> <C>
Loans and Leases at End of Period $517,787 $507,553 $502,784 $492,916 $547,419
Average Loans and Leases 513,266 502,224 489,326 516,711 607,601
Total Assets at End of Period 789,790 746,431 733,442 722,415 769,942
Nonperforming Assets:
Nonaccrual Loans:
Construction and Land Development $ 104 $ 327 $ 2,534 $ 6,149 $ 13,163
Commercial Real Estate 1,299 1,050 2,649 7,986 9,133
Commercial Loans 1,979 1,017 2,596 4,168 7,393
Other 862 1,224 2,082 3,171 3,764
Total Nonaccrual Loans 4,244 3,618 9,861 21,474 33,453
Loans Past Due 90 or More Days and
Still Accruing Interest 111 231 364 1,486 329
Restructured Loans in Compliance with
Modified Terms --- 580 2,405 1,161 3,963
Total Nonperforming Loans 4,355 4,429 12,630 24,121 37,745
Other Real Estate Owned 2,410 3,396 7,506 5,548 6,145
Total Nonperforming Assets $ 6,765 $ 7,825 $ 20,136 $ 29,669 $ 43,890
Allowance for Loan Losses:
Balance at Beginning of Period $ 12,338 $ 16,078 $ 17,328 $ 20,387 $ 11,656
Loans Charged-off:
Commercial, Financial
and Agricultural (579) (997) (973) (2,283) (7,804)
Real Estate - Commercial (369) (689) (1,106) (645) (6,804)
Real Estate - Construction (101) (1,181) (377) (2,015) (20,941)
Real Estate - Residential (160) (143) (151) (323) (335)
Installment Loans to Individuals (562) (476) (480) (820) (2,128)
Lease Financing Receivables --- --- --- (9) (8)
Total Loans Charged-off (1,771) (3,486) (3,087) (6,095) (38,020)
Recoveries of Loans Previously Charged-off:
Commercial, Financial
and Agricultural 76 260 694 724 56
Real Estate - Commercial 104 35 75 48 ---
Real Estate - Construction 10 68 55 327 138
Real Estate - Residential 8 143 37 22 81
Installment Loans to Individuals 171 188 285 232 291
Lease Financing Receivables --- 2 1 6 ---
Total Recoveries of Loans
Previously Charged-off 369 696 1,147 1,359 566
Net Loans Charged-off (1,402) (2,790) (1,940) (4,736) (37,454)
Provision for Loan Losses
Charged to Expense 1,170 (950) 690 1,677 46,185
Balance at End of Period $ 12,106 $ 12,338 $ 16,078 $ 17,328 $ 20,387
Nonperforming Asset Ratio Analysis:
Net Loans Charged-off as a Percentage
of Average Loans .27% .56 % .40% .92% 6.16%
Provision for Loan Losses as a Percentage
of Average Loans .23 (.19) .14 .32 7.60
Allowance for Loan Losses as a Percentage
of Period-end Loans 2.34 2.43 3.20 3.52 3.72
Allowance for Loan Losses as a Percentage
of Nonperforming Loans 277.98 278.57 127.30 71.84 54.01
Nonperforming Loans as a Percentage
of Period-end Loans .84 .87 2.51 4.89 6.90
Nonperforming Assets as a Percentage
of Period-end Total Assets .86 1.05 2.75 4.11 5.70
</TABLE>
III. OTHER INCOME
The majority of other (i.e., noninterest) income is derived from
fees and commissions from fiduciary services, deposit account
service charges, computer processing fees to correspondents and
other "core" or recurring sources. Additionally, other income is
influenced by transactions involving the sale of investment
securities.
<TABLE>
ANALYSIS OF OTHER INCOME
<CAPTION>
(Dollars In Thousands) Change
December 31, Amount Percent
1995 1994 1993 1995 1994 1995 1994
<S> <C> <C> <C> <C> <C> <C> <C>
Income from Fiduciary
Activities $ 3,752 $3,657 $3,661 $ 95 $ (4) 2.6% (.1)%
Fees for Other Services 4,669 4,345 4,459 324 (114) 7.5 (2.6)
Net Securities
Gains (Losses) 23 (481) 26 504 (507) -- --
Other Operating Income 6,052 1,047 966 5,005 81 478.0 8.4
Total Other Income $14,496 $8,568 $9,112 $5,928 $(544) 69.2 (6.0)
</TABLE>
Total other income for 1995 amounted to $14.5 million. The $5.9
million increase from 1994 was primarily attributable to a $5.0
million payment received from the Company's financial institution
bond company, in settlement of a lawsuit filed by the Company in
1994 for losses suffered in earlier periods and covered under the
Company's $7.0 million financial institution bond.
Exclusive of the bond recovery and securities transactions, other
income increased $424 thousand in 1995 or 4.7% above the amount
earned in 1994. As adjusted, other income to average assets was
1.22% for both years.
While all areas of other (noninterest) income increased, including
income from fiduciary activities and other operating income, the
largest increase was in fees for other services to customers. These
fees include deposit account service charges, safe deposit box fees,
merchant credit card processing fees and servicing fees on loans
sold with servicing retained by the Company. These fees amounted to
$4.7 million in 1995, compared to $4.3 million in 1994, a 7.5%
increase. The increase was primarily attributable to increases in
service charges on deposit accounts and merchant credit card
processing income.
Other operating income includes, as a primary component, fees earned
on servicing credit card portfolios for correspondent banks. This
category of noninterest income also includes gains on the sale of
loans, other real estate owned and other assets. Without regard to
the bond recovery, other operating income in 1995 was virtually
unchanged from 1994.
Total other income for 1994, was $8.6 million, or 6.0% less than the
$9.1 million recorded in 1993. Exclusive of securities
transactions, other income for 1994 was essentially unchanged from
the prior year, with a small shift from fees for other services to
customers to other operating income. As a percentage of average
assets, noninterest income was 1.15% and 1.26% for 1994 and 1993,
respectively. Without regard to securities transactions the ratios
were 1.22% and 1.25% for the same respective periods.
Income from fiduciary activities in 1994 was virtually unchanged
from the prior year, as was the average dollar amount of assets
under administration. Fees for other services to customers amounted
to $4.3 million in 1994, a decrease of 2.6% from the prior year.
The decrease was primarily attributable to a slight reduction in the
average balance of the serviced loan portfolio and the corresponding
reduction in related servicing fees. Other operating income for
1994 was $1.0 million, an increase of $81 thousand or 8.4% over
1993. The increase was primarily attributable to increased fees
from credit card servicing operations.
IV. OTHER EXPENSE
Other (i.e., noninterest) expense is a means of measuring the
delivery cost of services, products and business activities of the
Company. The key components of other expense are presented in the
following table.
<TABLE>
ANALYSIS OF OTHER EXPENSE
(Dollars In Thousands)
<CAPTION>
Change
December 31, Amount Percent
1995 1994 1993 1995 1994 1995 1994
<S> <C> <C> <C> <C> <C> <C> <C>
Salaries and Benefits $16,710 $16,204 $16,101 $ 506 $ 103 3.1 % .6 %
Net Occupancy Expense 2,040 2,168 2,418 (128) (250) (5.9) (10.3)
Equipment and Furniture 1,930 2,076 2,254 (146) (178) (7.0) (7.9)
Other Operating Expense 9,089 10,926 11,345 (1,837) (419) (16.8) (3.7)
Total Other Expense $29,769 $31,374 $32,118 $(1,605) $ (744) (5.1) (2.3)
</TABLE>
Other expense amounted to $29.8 million for 1995, which compared to
$31.4 million for 1994, a decrease of $1.6 million or 5.1%. An
increase in salaries and benefits was offset by reduced expenses for
occupancy, equipment and other operating expenses.
Total salaries of $11.1 million for 1995 decreased $284 thousand from
the 1994 level. As in the prior year analysis, the effect of fewer
employees was only partially offset by general salary increases. Of
the $790 thousand increase in employee benefits from 1994 to 1995,
severance benefits of $652 thousand paid in 1995 accounted for most
of the increase. Otherwise, slight decreases in payroll taxes and
profit sharing expenses were offset by increased expenses for pension
plans and health insurance.
Occupancy and equipment expenses both decreased from 1994 to 1995
by $128 thousand and $146 thousand, respectively. Both decreases
were primarily attributable to reduced depreciation expenses.
Other operating expense was $9.1 million for 1995, a decrease of $1.8
million or 16.8% from 1994. The decrease was primarily attributable
to a reduction in FDIC deposit insurance premiums and other
insurance, as well as to a large reduction in losses on the sale of
OREO. In mid-1995, the FDIC reduced the deposit insurance rate for
well-capitalized banks from 23 cents per hundred dollars of insured
deposits to 4 cents (and the premium has been further reduced in
1996). All of the Company's banks are well-capitalized.
Other expense amounted to $31.4 million for 1994, a decrease of $744
thousand or 2.3% from the $32.1 million reported for 1993. Except
for a slight increase in salaries and benefits, all areas in 1994
were below 1993 levels.
Total salaries of $11.4 million for 1994 decreased $235 thousand or
2.0% from 1993, with the effect of fewer employees being only
partially offset by selective salary increases. A $338 thousand
increase in employee benefits was attributable to nearly all areas
of employee benefits, including pension, postretirement, profit
sharing and health insurance costs.
Occupancy expenses and furniture and equipment expenses for 1994
decreased by 10.3% and 7.9%, respectively from 1993. The decreases
were attributable to the closing of four small branches in Vermont
in the last two quarters of 1993 and also to general decreases in
depreciation expenses.
Other operating expense of $10.9 million in 1994 decreased $419
thousand or 2.3% from $11.3 million in 1993. Included in other
operating expense in the 1994 period was a loss of $1.5 million on
the sale of OREO, while the 1993 period included a charge of $497
thousand relating to closed branches. The Company experienced a
significant decrease in the costs to carry and dispose of OREO and
other loan workout expenses, which decreased 56.2% or $865 thousand
from 1993 to 1994.
V. INCOME TAXES
The following table sets forth the Company's income tax expense and
effective tax rates for the periods presented herein.
<TABLE>
INCOME TAXES AND EFFECTIVE RATES
<CAPTION>
(Dollars in Thousands) Years Ended December 31,
1995 1994 1993
<S> <C> <C> <C>
Provision for Income Taxes $6,986 $1,131 $ 381
Effective Tax Rate 36.0% 9.1% 4.5%
</TABLE>
The provisions for income taxes amounted to $7.0 million, $1.1
million and $381 thousand for 1995, 1994 and 1993, respectively.
For all of 1993 and into the fourth quarter of 1994, the provision
for income taxes was reduced by a net operating loss carryforward
and changes in the valuation allowance for deferred tax assets.
Without consideration of the net operating loss carryforward and
changes in the valuation allowance, the effective rates for 1995,
1994 and 1993 were 36%, 38% and 37%, respectively. The decrease in
the effective rate from 1994 to 1995 reflects the relative increase
in the Company's tax exempt loan and securities portfolios.
In 1993 the Company recognized a $1.5 million benefit resulting from
the January 1, 1993 adoption of Statement of Financial Accounting
Standards (SFAS) No. 109, "Accounting for Income Taxes." The
benefit was recorded as a cumulative effect of accounting change.
C. FINANCIAL CONDITION
I. INVESTMENT PORTFOLIO
The Company adopted SFAS No. 115 "Accounting for Certain Investments
in Debt and Equity Securities" at December 31, 1993. Under SFAS No.
115, securities held-to-maturity are debt securities which the
Company has both the positive intent and ability to hold to
maturity; such securities are stated at amortized cost. Debt and
equity securities that are bought and held principally for the
purpose of selling them in the near term are classified as trading
securities and are reported at fair value with unrealized gains and
losses included in earnings. Debt and equity securities not
classified as either held-to-maturity or trading securities are
classified as available-for-sale and are reported at fair value with
unrealized gains and losses excluded from earnings and reported net
of taxes in a separate component of shareholders' equity. At
December 31, 1995, the Company held no trading securities.
In November 1995, the FASB issued "A Guide to Implementation of
Statement 115 on Accounting for Certain Investments in Debt and
Equity Securities." The Guide allowed a one-time reclassification
of held-to-maturity securities before December 31, 1995.
Acting under this provision of the Guide, the Company reclassified
$118.2 million of held-to-maturity securities to available-for-sale
in December of 1995. The Company took advantage of this one-time
provision as a means to improve liquidity and to gain some flexibility
in the management of the Company's interest rate risk. See the following
sections D. on liquidity and E. on interest rate risk.
Securities Available-for-Sale:
The following table sets forth the book value of the Company's
securities available-for-sale portfolio, at year-end 1995, 1994 and
1993.
<TABLE>
SECURITIES AVAILABLE-FOR-SALE
(In Thousands)
<CAPTION>
December 31,
1995 1994 1993
<S> <C> <C> <C>
U.S. Treasury and Agency Obligations $114,502 $49,063 $53,694
State and Municipal Obligations 338 2,180 --
Mortgage-Backed Securities 54,651 475 --
Corporate and Other Debt Securities 7,300 -- --
Mutual Funds and Equity Securities 1,854 2,150 2,198
Total $178,645 $53,868 $55,892
</TABLE>
Included in mortgage-backed securities were agency mortgage pass-
through securities and agency collateralized mortgage obligations.
Pass-through securities provide to the investor monthly portions
of principal and interest pursuant to the contractual obligations
of the underlying mortgages. Collateralized mortgage obligations
("CMO's") separate the repayments into two or more components
(tranches), where each tranche has a separate estimated life and
yield. The Company's practice is to purchase pass-through
securities guaranteed by federal agencies and tranches of CMO's
with the shorter maturities.
Regulatory agencies have devised a high-risk test for mortgage-
backed securities. The test evaluates the following: (I) Average
Life Test - the product has an average life of less than 10 years;
(II) Average Life Sensitivity Test - an immediate and sustained
change in interest rates of 300 basis points will not extend the
expected life by more than four years; and (III) Price Sensitivity
Test - an immediate and sustained change in interest rates of 300
basis points will not change the price by more than 17%. The
Company evaluates each mortgage-backed security at the time of
purchase and quarterly thereafter. Although none of the Company's
investments have failed to pass the high-risk test subsequent to
acquisition, it is the Company's policy to analyze the
appropriateness of divesting high-risk securities.
Included in corporate and other debt securities are highly rated
corporate bonds.
The following table sets forth the maturities of the Company's
securities available-for-sale portfolio as of December 31, 1995.
<TABLE>
MATURITIES OF SECURITIES AVAILABLE-FOR-SALE
(In Thousands)
<CAPTION>
After After
Within 1 But 5 But After
One Within Within 10
Year 5 Years 10 Years Years Total
<S> <C> <C> <C> <C> <C>
U.S. Treasury and
Agency Obligations $49,983 $ 64,519 $ -- $ -- $114,502
State and Municipal Obligations 192 64 82 -- 338
Mortgage-Backed Securities 3,311 36,562 8,085 6,693 54,651
Corporate and
Other Debt Securities -- 7,300 --- -- 7,300
Mutual Funds and
Equity Securities -- -- -- 1,854 1,854
Total $53,486 $108,445 $8,167 $8,547 $178,645
</TABLE>
The following table sets forth the tax-equivalent yields of the
Company's securities available-for-sale portfolio at December 31,
1995.
<TABLE>
YIELDS ON SECURITIES AVAILABLE-FOR-SALE
(Fully Tax-Equivalent Basis)
<CAPTION>
After After
Within 1 But 5 But After
One Within Within 10
Year 5 Years 10 Years Years Total
<S> <C> <C> <C> <C> <C>
U.S. Treasury and
Agency Obligations 5.05% 6.63% --% --% 5.93%
State and Municipal Obligations 6.68 10.15 8.78 -- 7.85
Mortgage-Backed Securities 8.88 6.42 7.39 6.81 6.76
Corporate and
Other Debt Securities -- 7.28 -- -- 7.28
Mutual Funds and
Equity Securities -- -- -- 6.72 6.72
Total 5.29 6.60 7.41 6.79 6.25
</TABLE>
The yields for debt securities shown in the table above are
calculated by dividing annual interest, including accretion of
discounts and amortization of premiums, by the carrying value of the
securities at December 31, 1995. Yields on obligations of states
and municipalities were computed on a fully tax-equivalent basis
using a marginal tax rate of 35%. Dividend earnings derived from
equity securities were adjusted to reflect applicable federal income
tax exclusions.
During the last quarter of 1995, the Company recognized net gains of
$23 thousand on sales of $4.2 million from the available-for-sale
portfolio. The proceeds were used to fund the sale of eight
branches of Green Mountain Bank to Mascoma Savings Bank in January
1996.
At December 31, 1995, the weighted average maturity was 2.03 years
for debt securities in the available-for-sale portfolio.
During the last quarter of 1994, the Company recognized net losses
of $481 thousand on sales of $16.6 million from the available-for-
sale portfolio. The proceeds were reinvested in higher yielding
securities.
Net securities gains of $26 thousand were recognized in 1993 on
sales of $23.9 million from the available-for-sale portfolio.
At December 31, 1995, unrealized gains on securities available-
for-sale amounted to $1.2 million, net of tax. Unrealized gains or
losses are reflected as a separate component of shareholders'
equity. These securities, to a great extent, match fixed rate time
deposits of similar maturities. Consequently, the Company did not
recognize the gains during 1995.
Securities Held-to-Maturity:
The following table sets forth the book value of the Company's
portfolio of securities held-to-maturity for each of the last three
years. Year-end amounts and data in the following tables do not
include the securities available-for-sale portfolio discussed
previously.
<TABLE>
SECURITIES HELD-TO-MATURITY
(In Thousands)
<CAPTION>
December 31,
1995 1994 1993
<S> <C> <C> <C>
U.S. Treasury and Agency Obligations $ --- $ 61,390 $ 76,311
State and Municipal Obligations 13,921 10,409 5,006
Mortgage-Backed Securities --- 51,904 43,350
Other Securities --- 6,032 1,165
Total $13,921 $129,735 $125,832
</TABLE>
For information regarding the market value of the Company's portfolio
of securities held-to-maturity, see Note 3 to the Consolidated
Financial Statements in Part II, Item 8 of this report.
The following table sets forth the maturities of the Company's
portfolio of securities held-to-maturity, as of December 31, 1995.
<TABLE>
MATURITIES OF SECURITIES HELD-TO-MATURITY
(In Thousands)
<CAPTION>
After After
Within 1 But 5 But After
One Within Within 10
Year 5 Years 10 Years Years Total
<S> <C> <C> <C> <C> <C>
State and Municipal Obligations $1,984 $1,591 $5,492 $4,854 $13,921
</TABLE>
The following table sets forth the tax-equivalent yields of the
Company's portfolio of securities held-to-maturity at December 31,
1995.
<TABLE>
YIELDS ON SECURITIES HELD-TO-MATURITY
(Fully Tax-Equivalent Basis)
<CAPTION>
After After
Within 1 But 5 But After
One Within Within 10
Year 5 Years 10 Years Years Total
<S> <C> <C> <C> <C> <C>
State and Municipal Obligations 7.48% 8.97% 8.44% 8.58% 8.41%
</TABLE>
The yields for debt securities shown in the tables above are
calculated by dividing annual interest, including accretion of
discounts and amortization of premiums, by the carrying value of the
securities at December 31, 1995. Yields on obligations of states
and municipalities were computed on a fully tax-equivalent basis
using a marginal tax rate of 35%.
During 1995 and 1994, the Company sold no securities from the held-
to-maturity portfolio. The weighted-average maturity of the held-
to-maturity portfolio is 8.8 years.
II. LOAN PORTFOLIO
The amounts and respective percentages of loans and leases
outstanding represented by each principal category on the dates
indicated were as follows:
<TABLE>
a. DISTRIBUTION OF LOANS AND LEASES
(Dollars In Thousands)
<CAPTION>
December 31,
1995 1994 1993
Amount % Amount % Amount %
<S> <C> <C> <C> <C> <C> <C>
Commercial, Financial
and Agricultural $ 79,993 15 $ 74,455 15 $ 82,317 16
Real Estate - Commercial 71,622 14 81,704 16 95,981 19
Real Estate - Construction 2,051 1 5,136 1 8,702 2
Real Estate - Residential 238,298 46 230,943 45 221,066 44
Installment Loans to
Individuals 125,762 24 115,291 23 94,656 19
Lease Financing Receivables 61 -- 24 -- 62 --
Total Loans and Leases 517,787 100 507,553 100 502,784 100
Allowance for Loan Losses (12,106) (12,338) (16,078)
Total Loans and Leases, Net $505,681 $495,215 $486,706
</TABLE>
<TABLE>
DISTRIBUTION OF LOANS AND LEASES
(Dollars In Thousands)
<CAPTION>
December 31,
1992 1991
Amount % Amount %
<S> <C> <C> <C> <C>
Commercial, Financial
and Agricultural $ 85,428 17 $ 97,237 18
Real Estate - Commercial 110,702 22 134,379 25
Real Estate - Construction 12,167 2 24,290 4
Real Estate - Residential 198,165 40 200,112 37
Installment Loans to
Individuals 86,323 19 91,224 16
Lease Financing Receivables 131 -- 177 --
Total Loans and Leases 492,916 100 547,419 100
Allowance for Loan Losses (17,328) (20,387)
Total Loans and Leases, Net $475,588 $527,032
</TABLE>
During 1995 and 1994, the Company concentrated its lending efforts
in the area of residential real estate loans and installment loans
to individuals (primarily automobile loans). Since 1990, the Company
has de-emphasized commercial, commercial real estate and construction
and land development loans. Consequently, balances for these three
classifications continued to decrease, while the overall portfolio
increased $10.2 million, or 2.0%, from 1994 to 1995 and $4.8 million
or 1.0% from 1993 to 1994.
Within the installment loan portfolio, the Company has focused on
growth in its indirect lending program. Indirect loans are loans to
consumers financed through local dealerships where, by prior
arrangement, the Company acquires the dealer paper. At year-end
1992, indirect loans amounted to $42.1 million or 49% of installment
loans. By December 31, 1995, indirect loans amounted to $91.0
million, or 72% of installment loans.
The following table indicates the changing mix in the loan portfolio
by presenting the quarterly average balance for the Company's
significant loan products for the past five quarters. In addition,
the table presents the percentage of total loans represented by each
category as well as the annualized tax-equivalent yield.
<TABLE>
LOAN PORTFOLIO
Quarterly Average Loan Balances
(Dollars In Thousands)
<CAPTION>
Quarter Ending the Last Day of
Dec 1995 Sep 1995 Jun 1995 Mar 1995 Dec 1994
<S> <C> <C> <C> <C> <C>
Commercial and
Commercial Real Estate $160,348 $160,268 $166,378 $168,386 $166,528
Residential Real Estate 176,481 175,462 174,927 174,947 176,120
Home Equity 45,993 45,292 44,539 43,282 42,023
Indirect Consumer Loans 89,721 86,799 83,289 80,279 76,827
Direct Consumer Loans 33,529 36,534 35,964 34,091 34,233
Credit Card Loans 9,425 9,349 8,815 8,902 8,939
Total Loans $515,497 $513,704 $513,912 $509,887 $504,670
Percentage of Total
Quarterly Average Loans
Commercial and
Commercial Real Estate 31.1% 31.2% 32.4% 33.0% 33.0%
Residential Real Estate 34.2 34.2 34.0 34.3 34.9
Home Equity 8.9 8.8 8.7 8.5 8.3
Indirect Consumer Loans 17.5 16.9 16.2 15.6 15.2
Direct Consumer Loans 6.6 7.1 7.0 7.8 6.8
Credit Card Loans 1.8 1.8 1.7 1.7 1.8
Total Loans 100.0% 100.0% 100.0% 100.0% 100.0%
Quarterly Taxable
Equivalent Yield on Loans
Commercial and
Commercial Real Estate 10.21% 10.30% 10.35% 10.29% 9.87%
Residential Real Estate 8.42 8.38 8.35 8.22 7.90
Home Equity 9.44 9.59 9.67 9.38 8.80
Indirect Consumer Loans 8.47 8.42 8.27 8.08 7.98
Direct Consumer Loans 9.88 9.91 9.93 9.96 9.81
Credit Card Loans 15.62 13.91 14.66 12.36 12.27
Total Loans 9.31 9.35 9.37 9.32 8.85
</TABLE>
During 1995, the Company received certain payments on restructured
loans that had not been factored into the effective rate on those
loans. The payments, which were recorded as interest income, have
not been included in the yields in the table above. While the yields
on the consumer portfolios are less than on the commercial
portfolios, the Company has historically experienced fewer loan
losses in consumer loans than commercial loans.
During 1993, the loan portfolio increased $9.9 million, or 2.0%, from
the prior year-end balance. The balances in all categories of
commercial loans, including commercial real estate and construction
and land development loans, decreased during the year, while balances
of loans to consumers and residential real estate loans increased
during the year.
During 1992, the loan portfolio decreased $54.5 million or 10.0%.
In part, this reflected the Company's exercise of prudent lending
standards as well as a decision to reduce total assets and improve
capital ratios. During this period, the various loan categories
maintained the same relative proportions, vis-a-vis one another.
During 1991, certain commercial loans were reclassified as commercial
real estate loans on a prospective basis. Had the reclassification
been made on a retroactive basis, the balances of commercial,
financial and agricultural loan balances and real estate - commercial
loan balances as a percent of total loans and leases for 1990 would
have approximated the respective proportions of these categories in
1991. The 1991 decrease in real estate - construction loans was due
to loan charge-offs and transfers to OREO. The decrease in 1991 of
installment loans to individuals came as a result of a slow-down in
consumer credit demand, particularly automobile financing.
The following table indicates the respective maturities and repricing
structure of the Company's commercial, financial and agricultural
loans and its real estate - construction loans at December 31, 1995.
Scheduled repayments are reported in the maturity category, based
upon the contractual terms, in which the payment is due. Demand
loans and overdrafts are reported as due in one year or less.
<TABLE>
MATURITY AND REPRICING OF COMMERCIAL LOANS
(In Thousands)
<CAPTION>
After 1 After
Within But Within Five
1 Year 5 Years Years Total
<S> <C> <C> <C> <C>
Commercial, Financial and Agricultural $54,822 $7,534 $17,637 $79,993
Real Estate - Construction 1,070 --- 981 2,051
Total $55,892 $7,534 $18,618 $82,044
Fixed Interest Rates $ 5,841 $1,596 $18,618 $26,055
Variable Interest Rates 50,051 5,938 --- 55,989
Total $55,892 $7,534 $18,618 $82,044
</TABLE>
COMMITMENTS AND LINES OF CREDIT
Letters of credit represent extensions of credit granted in the
normal course of business which are not reflected in the
accompanying financial statements. As of December 31, 1995, the
total contingent liability for standby letters of credit amounted to
$3.4 million. In addition to these instruments, the Banks have
issued lines of credit to customers, including home equity lines of
credit, credit card lines of credit, commitments for residential and
commercial construction and other personal and commercial lines of
credit. Commercial lines, generally issued for a period of one
year, are usually extended to provide for the working capital
requirements of the borrower. At December 31, 1995, the Banks had
outstanding loan commitments in the aggregate amount of
approximately $75.9 million.
b. RISK ELEMENTS
NONACCRUAL, PAST DUE AND RESTRUCTURED LOANS
The Company designates loans as nonaccrual when the payment of
interest and/or principal is due and unpaid for a designated period
(generally 90 days) or when the likelihood of repayment is, in the
opinion of management, uncertain. There were no material
commitments to lend additional funds on outstanding nonaccrual loans
at December 31, 1995.
Loans and leases past due 90 days or more and still accruing
interest, as identified in the table below, are those loans and
leases which were contractually past due 90 days or more but because
of expected repayments were still accruing interest.
For years prior to 1995, loans were classified as "restructured" in
accordance with SFAS No. 15, "Accounting by Debtors and Creditors
for Troubled Debt Restructurings."
On January 1, 1995, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 114, "Accounting by Creditors for
Impairment of a Loan." SFAS No. 114, as amended, requires that
impaired loans, except for large groups of smaller-balance
homogeneous loans, be measured based on (I) the present value of
expected future cash flows discounted at the loan's effective
interest rate, (ii) the loan's observable market price or (iii) the
fair value of the collateral if the loan is collateral dependent.
The Company applies the provisions of SFAS No. 114 to all impaired
commercial and commercial real estate loans over $250,000, and to
all loans restructured subsequent to adoption. Reserves for
possible losses for the remaining smaller-balance loans are
evaluated under SFAS No. 5. Under the provisions of SFAS No. 114,
the Company determines impairment for collateralized loans based on
fair value of the collateral less estimated cost to sell. For other
loans, impairment is determined by comparing the recorded value of
the loan to the present value of the expected cash flows, discounted
at the loan's effective interest rate. The Company determines the
interest income recognition method on a loan by loan basis. Based
upon the borrowers' payment histories and cash flow projections,
interest recognition methods include full accrual, cash basis and
cost recovery.
Loans accounted for under SFAS No. 114 may be reported as either
nonaccrual, restructured or performing. Those loans recognizing
interest income on a cash or cost recovery basis are reported as
nonaccrual. Loans restructured under SFAS No. 15 are reported as
restructured if the loan is in compliance with the modified terms.
Under SFAS No. 15, as amended, loans bearing a market rate and in
compliance with modified terms are not subject to the disclosure
requirements of SFAS No. 114 in years subsequent to restructure, and
thus would be included in performing loans. At December 31, 1995,
$2.1 million of nonaccrual loans were accounted for under SFAS No.
114. There were no performing loans at December 31, 1995 for which
the provisions of SFAS No. 114 were first applied in 1995.
The Company's nonaccrual, past due and restructured loans and
leases were as follows:
<TABLE>
SCHEDULE OF NONPERFORMING LOANS
(Dollars In Thousands)
<CAPTION>
December 31,
1995 1994 1993 1992 1991
<S> <C> <C> <C> <C> <C>
Nonaccrual Loans:
Construction and Land Development $ 104 $ 327 $ 2,534 $ 6,149 $13,163
Commercial Real Estate 1,299 1,050 2,649 7,986 9,133
Commercial Loans 1,979 1,017 2,596 4,168 7,393
Other 862 1,224 2,082 3,171 3,764
Total Nonaccrual Loans 4,244 3,618 9,861 21,474 33,453
Loans Past Due 90 Days or More
and Still Accruing Interest 111 231 364 1,486 329
Restructured Loans in Compliance
with Modified Terms --- 580 2,405 1,161 3,963
Total Nonperforming Loans $4,355 $4,429 $12,630 $24,121 $37,745
Total Nonperforming Loans
as a Percentage of Total Loans .84% .87% 2.51% 4.89% 6.90%
</TABLE>
Nonperforming loans amounted to $4.4 million at December 31, 1995,
$74 thousand below the balance at year-end 1994. The increase in
nonaccrual commercial loans from 1994 to 1995 is primarily
attributable to the aggregate borrowing of one commercial borrower,
which was placed on nonaccrual status during 1995. Otherwise,
nonaccrual loans at December 31, 1995 would have decreased from the
prior year-end balance. Loans reported as restructured and in
compliance with modified terms at December 31, 1994 were classified
as performing in 1995.
During 1995, income recognized on year-end balances of nonaccrual
loans was $116 thousand. Income that would have been recognized
during that period on nonaccrual loans if such had been current in
accordance with their original terms and had been outstanding
throughout the period (or since origination if held for part of the
period) was $435 thousand.
Nonperforming loans amounted to $4.4 million at December 31, 1994,
a decrease of $8.2 million or 64.9% from the prior year-end. Of the
$12.6 million in nonperforming loans at December 31, 1993, $2.5
million was transferred to OREO, $2.4 million of loans restructured
in 1993 was returned to performing status in accordance with SFAS
No. 15, and another $3.5 million was charged against the allowance
for loan losses. The small remaining difference represents the
improvement in nonaccrual loans, net of loans newly classified as
nonperforming.
Nonperforming loans decreased $11.5 million or 47.6% during 1993.
During the year $7.8 million of nonaccrual loans and leases was
acquired through foreclosure and transferred to OREO. Much of the
$3.1 million of loan charge-offs during the year was also
attributable to prior year-end nonaccrual loans. The remaining
difference represented a net improvement in the amount of nonaccrual
loans and included the return to performing status of certain
nonaccrual loans. The balance of $2.4 million of restructured loans
in compliance with modified terms as of December 31, 1993
represented three commercial loans restructured during the year.
POTENTIAL PROBLEM LOANS
While levels of nonperforming loans and delinquency trends have
fallen since 1991, the Company expects that there will be continued
exposure in the commercial real estate portfolio in forthcoming
periods and until the regional economy shows substantial
strengthening.
FOREIGN OUTSTANDINGS - None
LOAN CONCENTRATIONS
The loan portfolio is well diversified. There are no concentrations
of credit that exceed 10% of the portfolio, other than the general
categories reported in the previous section of this report. For a
further discussion, see Note 21 to the Consolidated Financial
Statements in Part II, Item 8 of this report.
OTHER REAL ESTATE OWNED
Other real estate owned (OREO) consists of real property acquired in
foreclosure. OREO is carried at the lower of fair value less
estimated cost to sell or cost in accordance with Statement of
Position (SOP) 92-3 "Accounting for Foreclosed Assets." Also, in
compliance with SOP 92-3, the Company's subsidiary banks have
established allowances for OREO losses. The allowances are
established and monitored on a property by property basis and
reflect management's ongoing estimate of the difference between the
property's carrying amount and cost, when the carrying amount is
less than cost. For all periods, all OREO was held for sale.
<TABLE>
DISTRIBUTION OF OTHER REAL ESTATE OWNED
(Net of Allowance) (In Thousands)
<CAPTION>
December 31,
1995 1994 1993 1992 1991
<S> <C> <C> <C> <C> <C>
Single Family 1 - 4 Units $ 82 $1,073 $1,189 $ 892 $ 910
Commercial Real Estate 2,328 2,128 3,418 1,536 3,476
Construction & Land Development --- 195 2,899 3,120
1,759
Other Real Estate Owned, Net $2,410 $3,396 $7,506 $5,548 $6,145
</TABLE>
The following table summarizes changes in the net carrying amount of other
real estate owned at December 31,:
<TABLE>
SCHEDULE OF CHANGES IN OTHER REAL ESTATE OWNED
(Net of Allowance) (In Thousands)
<CAPTION>
1995 1994 1993 1992 1991
<S> <C> <C> <C> <C> <C>
Balance at Beginning of Year $ 3,396 $ 7,506 $ 5,548 $ 6,145 $ 2,552
Properties Acquired 642 2,493 7,804 6,446 7,498
Provision for Estimated Losses (161) (398) (638) (1,160) (612)
Sale of Properties (1,467) (6,205) (5,208) (5,883) (3,293)
Balance at End of Year $ 2,410 $ 3,396 $ 7,506 $ 5,548 $ 6,145
</TABLE>
The following summarizes the changes in the allowance for OREO losses:
<TABLE>
ALLOWANCE FOR OTHER REAL ESTATE OWNED LOSSES
(In Thousands)
<CAPTION>
1995 1994 1993 1992
<S> <C> <C> <C> <C>
Balance at Beginning of Year $ 369 $ 1,150 $1,120 $ --
Additions 161 398 638 1,160
Charge-Offs (160) (1,179) (608) (40)
Balance at End of Year $ 370 $ 369 $1,150 $1,120
</TABLE>
During 1995, the Company acquired $642 thousand of OREO through
foreclosure. The Company recognized losses of $48 thousand on the
sale of OREO properties carried on the books at $1.5 million.
During 1994, the Company acquired $2.5 million of OREO through
foreclosure. The Company recognized losses of $1.4 million on the
sale of OREO properties carried on the books at $6.2 million.
Approximately 65% of the sales took place at an auction of OREO
properties held during the second quarter of 1994.
During 1993, the Company acquired $7.8 million in OREO through
foreclosure, of which $3.6 million was formerly classified as
in-substance foreclosed property. The $2.0 million increase in OREO
during 1993 was primarily attributable to commercial real estate
properties, whereas construction and land development properties
held in OREO decreased $221 thousand during 1993. For the year, the
Company recognized net gains of $366 thousand on the sale of $5.2
million of OREO properties. These net gains partially offset the
$638 thousand provision for estimated OREO losses taken during the
year.
During 1992, the Company acquired an additional $6.4 million in OREO
through foreclosure. The provision for estimated OREO losses of
$1.2 million in 1992 reflects the SOP 92-3 adjustment for estimated
selling costs as well as adjustments for declines in fair value.
The Company disposed of $5.9 million through sales of OREO
properties, upon which the Company recognized net gains of $257
thousand.
During 1991, the Company acquired over $7.5 million in OREO through
foreclosure. The primary OREO acquisitions were in the area of
construction and land development loans. During 1991, the Company
recognized $25 thousand in net gains on sales of $3.3 million of
OREO properties.
III. SUMMARY OF LOAN LOSS EXPERIENCE
The Company monitors credit quality through a continuous review of
the entire loan portfolio. All significant loans (primarily
commercial and commercial real estate) and leases are reviewed at
least semi-annually, and those under special supervision are
reviewed at least quarterly. The boards of directors of the
Company's individual subsidiary banks, upon recommendations from
management, determine the extent of charge-offs and have the final
decision-making responsibility in authorizing charge-offs.
Additionally, regulatory examiners perform periodic examinations of
the banks' loan and lease portfolios and report on these
examinations to the boards of directors.
Provisions for loan losses are determined by the managements of the
subsidiary banks, in consultation with the Company's management, and
are based upon an overall evaluation of the appropriate levels of
the allowances for loan losses. Factors incorporated in such
determination include the existing risk characteristics of the
portfolio, prevailing national and local economic conditions,
historical loss experience and expected performance within a range
of anticipated future economic conditions. The Company's management
believes that the banks' allowances for loan losses are adequate to
absorb reasonably foreseeable loan losses.
The table in Part II, Item 7.B.II. "Provision for Loan Losses and
Allowance for Loan Losses" presents a summary of the activity in the
Company's allowance for loan losses.
ALLOCATION OF THE ALLOWANCE FOR LOAN AND LEASE LOSSES
The allowance for loan losses is a general allowance applicable to
estimated future losses. For internal operating purposes, the
allowance is not allocated among loan categories.
In the following table, the allowance has been distributed for
purposes of complying with disclosure requirements of the Securities
and Exchange Commission. However, this allocation should not be
interpreted as a projection of (I) likely sources of future losses,
(II) likely proportional distribution of future losses among loan
categories or (III) likely amounts of future losses. Since
management regards the allowance as a general balance and has
assigned an unallocated value to the schedule, the amounts presented
do not represent the total balance available to absorb future losses
that might occur within the principal categories.
Subject to the qualifications noted above, an allocation of the
allowance for loan losses by principal classification and the
proportion of the related loan balance is presented below as of
December 31 for each of the years indicated.
<TABLE>
ALLOCATION OF THE ALLOWANCE FOR LOAN AND LEASE LOSSES
(Dollars in Thousands)
<CAPTION>
1995 1994 1993 1992 1991
<S> <C> <C> <C> <C> <C>
Commercial, Financial
and Agricultural $ 2,913 $ 2,329 $ 3,908 $ 5,518 $ 4,596
Real Estate-Commercial 1,755 1,841 3,324 3,626 4,558
Real Estate-Construction 305 1,994 2,027 2,525 6,917
Real Estate-Residential
Mortgage 1,616 2,098 1,893 1,803 1,268
Installment Loans to
Individuals 2,365 1,363 2,032 1,770 1,343
Lease Financing Receivables -- -- -- 15 7
Unallocated 3,152 2,713 2,894 2,071 1,698
Total Loans and Leases $12,106 $12,338 $16,078 $17,328 $20,387
PERCENT OF LOANS IN EACH
CATEGORY TO TOTAL LOANS
Commercial, Financial
and Agricultural 15% 15% 16% 17% 18%
Real Estate-Commercial 14 16 19 22 25
Real Estate-Construction 1 1 2 2 4
Real Estate-Residential
Mortgage 46 45 44 40 37
Installment Loans to
Individuals 24 23 19 19 16
Lease Financing Receivables -- -- -- -- --
Total Loans and Leases 100% 100% 100% 100% 100%
</TABLE>
At December 31, 1995, the allocated reserve for each indicated
classification of loans exceeded 100% of the dollar amount of loans
in such classification that were then reported as nonperforming.
IV. DEPOSITS
The following table sets forth the average balances of and average
rates paid on deposits for the periods indicated.
<TABLE>
AVERAGE DEPOSIT BALANCES
Years Ended December 31,
(Dollars In Thousands)
<CAPTION>
1995 1994 1993
Average Average Average
Balance Rate Balance Rate Balance Rate
<S> <C> <C> <C> <C> <C> <C>
Demand Deposits $ 88,961 --% $ 87,715 --% $ 83,971 --%
N.O.W./Super N.O.W. 139,879 2.84 129,999 1.92 127,163 2.25
Savings/M.M.D.A. 201,932 3.06 260,336 2.79 259,519 3.00
Time Certificates
of $100,000 or More 67,029 5.61 26,980 4.30 15,077 4.70
Other Time Deposits 185,166 5.34 160,035 4.03 172,422 4.31
Total Deposits $682,967 3.49 $665,065 2.61 $658,152 2.86
</TABLE>
During the last half of 1994 and into the first part of 1995, rates
on deposit accounts increased, mirroring, although with some time
lag, the rise in the prime rate that took place over this period.
Changing interest rates also have an impact on the mix of deposits
within the deposit portfolio for the Company, as well as financial
institutions in general. Beginning in the late 1980's until the
middle of 1992, rates declined in small but steady increments, and
then remained stable for the next two years. During that period, as
the price differential between time deposits and short-term
interest-bearing deposits narrowed, depositors transferred a
significant portion of maturing time deposits to savings, N.O.W. and
money market accounts, and some funds left the Company entirely for
competing investment products not offered by financial institutions.
During the recent period of rising interest rates, the Company
experienced a shift in the mix of deposits from short-term back to
time deposits. As interest rates leveled-off and even fell during
the latter part of 1995, the increase in the percentage of time
deposits to total deposits also stabilized. For the third and
fourth quarters of 1995, time deposits averaged 27% of total
deposits.
V. TIME CERTIFICATES OF $100,000 OR MORE
The maturities of time certificates of $100,000 or more at December
31, 1995 are presented below. (In Thousands)
Maturing in: Under 3 3 to 6 6 to 12 Over 12
Months Months Months Months Total
$34,287 $14,438 $5,566 $3,266 $57,557
D. 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 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. Core deposits represented a
substantial proportion of the Company's total assets. At year-end
1995, core deposits represented more than 80% of the Company's total
assets and stockholders' equity contributed 8.5% as a source of
funds. Large denomination time deposits, repurchase agreements and
other borrowed funds represented 9.2% of total assets at December
31, 1995.
Federal funds sold are overnight sales of the Company's surplus
funds to correspondent banks, while federal funds purchased
represent overnight borrowings. 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 1995, average federal
funds sold amounted to $22.6 million and average federal funds
purchased amounted to $480 thousand.
On December 31, 1993, the Company, upon adoption of SFAS No. 115,
segregated its investment portfolio into securities available-for
- -sale and those held-to-maturity. In November 1995, the FASB issued
"A Guide to Implementation of Statement 115 on Accounting for
Certain Investments in Debt and Equity Securities." The Guide
allowed a one-time reclassification of held-to-maturity securities
before December 31, 1995. Acting under those provisions, in
December 1995 the Company reclassified $118.2 million of held-to
- -maturity securities into its available-for-sale portfolio.
Apart from federal funds, securities available-for-sale represent
the Company's primary source of liquidity. This liquidity arises
both from an ability to quickly sell the securities, as well as from
the ability to use the securities as collateral for borrowing.
After completion of the Company's sale of eight branches of Green
Mountain Bank to Mascoma Savings Bank on January 15, 1996, the
Company had $173.4 million of securities in its available-for-sale
portfolio.
Other 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.
E. 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, 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 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 projection and for a
no-change scenario. Exposure to rising or falling rates are
calculated to cover a high distribution of the perceived probable
interest rate scenarios. At December 31, 1995, the Company expected
interest rates to fall early in 1996 and then again later in the
year.
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 December 31, 1995, 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.
The Company prepares an interest rate gap analysis to identify the
repricing pattern of interest-bearing assets and liabilities. The
interest rate sensitive gap is the difference between interest rate
sensitive assets and interest rate sensitive liabilities. The
interest rate sensitive gap ratio is the ratio of interest rate
sensitive assets to interest rate sensitive liabilities. When the
interest rate sensitive gap ratio exceeds the balanced position of
1.0, the Company is susceptible to falling interest rates over the
time horizon indicated, as assets may reprice downward more rapidly
than liabilities. Conversely, the Company is susceptible to rising
rates when the gap ratio for a particular time horizon falls below
the balanced position of 1.0.
While the static gap analysis will reveal mismatches in the
repricing patterns of assets and liabilities, the dynamic modeling
of projected net interest income, as described above, provides a
much more reliable tool for assessing the Company's net interest
income exposure to changes in interest rates.
The following table "Interest Rate Sensitive Gap Analysis" presents
the Company's interest rate sensitive position at December 31, 1995.
For purposes of the table, an asset or liability is considered rate
sensitive within a specified period when it matures or could be
repriced within such period in accordance with its contractual terms
except for certain deposit balances without specific maturities.
These deposit balances have been allocated to various time horizons
to reflect the fact that these deposits do not reprice to the full
extent of prime rate changes, and tend to lag behind changes to the
prime rate. Certain other assets and liabilities lacking specific
maturities are classified in the "Over Five Years" category.
Nonaccrual loans are excluded. Securities available-for-sale are
presented at amortized cost.
Various assets and liabilities that reprice before maturity
demonstrate different repricing patterns. Nearly three-fourths of
the Company's commercial loans are prime based, and consequently,
reprice immediately, or in some cases monthly, upon changes in the
prime rate. The greater portion of variable rate residential real
estate loans reprice annually and are often tied to an average
short-term treasury rate, with the repricing date lagging behind
changes in the indexed rate. Rates on credit card lines are largely
variable at management's discretion and in general reprice more
slowly than prime based loans.
The cumulative gap ratio at December 31, 1995 was 1.06 and 1.21 for
the ensuing six month and twelve month repricing periods,
respectively. These ratios are within the range of ratios the
Company seeks to maintain, although the twelve month ratio is at the
upper threshold of the established range. Since the Company has
more interest-bearing assets than liabilities, the twelve month
ratio of 1.21 should be considered vis-a-vis the total ratio of
1.20, which is what the ratio would have been for each period if
all interest-bearing assets and liabilities were spread evenly
throughout the time periods.
Nearly all of the Company's time deposits are fixed rate, and
therefore, reprice upon maturity. Money market deposit accounts are
immediately repriceable and often fluctuate with the frequency of
prime rate changes, but rarely to the magnitude of changes in the
prime rate. N.O.W. accounts are also subject to immediate rate
changes, but again, rates tend to move more slowly than prime rate
changes and to a smaller degree. Savings accounts, which remained
stable for an extended period of time after deregulation, have been
the least sensitive of deposit balances to interest rate changes.
In response to the FDIC Improvement Act of 1991, regulators have
proposed an interest rate risk analysis that distributes savings,
N.O.W. and money market accounts among the earlier repricing
periods. Such a distribution of the Company's savings, N.O.W. and
money market accounts could have a material impact on the Company's
gap analysis at year-end 1995 if distribution of these deposits are
limited to the first three repricing periods, as presented in the
table below.
<TABLE>
INTEREST RATE SENSITIVE GAP ANALYSIS
(Dollars In Thousands)
<CAPTION>
Within Three Six to One to Over
Three to Six Twelve Five Five
Months Months Months Years Years Total
<S> <C> <C> <C> <C> <C> <C>
Earning Assets:
Securities Held-to-Maturity:
State and Municipal
Obligations $ 843 $ 350 $ 961 $ 1,598 $ 10,169 $ 13,921
Securities Available-for-Sale:
U.S. Treasury and Agency
Obligations 13,998 8,000 30,014 61,237 -- 113,249
State and Municipal
Obligations 163 172 2 1 -- 338
Mortgage-Backed Securities 1,555 787 4,084 42,626 5,237 54,289
Corporate Bonds -- -- -- 3,016 4,008 7,024
Equity Securities -- -- -- -- 1,798 1,798
Federal Funds Sold 35,100 -- -- -- -- 35,100
Loans and Leases,
Net of Unearned
Income & Nonaccrual Loans 168,762 29,126 73,898 156,227 85,530 513,543
Total Interest Rate
Sensitive Assets 220,421 38,435 108,959 264,705 106,742 739,262
Interest Paying Liabilities:
Regular Savings Accounts 22,484 --- --- 111,038 -- 133,522
N.O.W. Accounts 38,560 --- --- 124,861 -- 163,421
Money Market Deposit Accounts 13,634 --- --- 41,725 -- 55,359
Time Deposits of
$100,000 or More 34,287 14,438 5,566 3,266 -- 57,557
Other Time Deposits 59,615 46,043 52,979 31,244 --- 189,881
Short-Term Borrowings 15,297 -- -- --- -- 15,297
Long-Term Debt -- -- --- --- -- ---
Total Interest Rate
Sensitive Liabilities 183,877 60,481 58,545 312,134 --- 615,037
Interest Rate Sensitive Gap $ 36,544 $(22,046) $ 50,414 $(47,429) $106,742 $124,225
Cumulative Interest Rate
Sensitive Gap $ 36,544 $ 14,498 $ 64,912 $ 17,483 $124,225
Interest Rate Sensitive
Gap Ratio 1.20 .64 1.86 .85 -- 1.20
Cumulative Interest Rate
Sensitive Gap Ratio 1.20 1.06 1.21 1.03 1.20 N/A
</TABLE>
F. CAPITAL RESOURCES AND DIVIDENDS
Shareholders' equity was $67.5 million at December 31, 1995, as
compared to $58.4 million at December 31, 1994. The increase was
primarily attributable to retained earnings.
During 1995, in accordance with a program previously approved by the
board of directors, the Company repurchased at market prices 110,687
shares of common stock, at an aggregate purchase price of $1.9
million. At year-end the total treasury stock was 309,833 shares
with a cost basis of $4.2 million. On February 27, 1996, the Company
announced that the board of directors had approved an expanded stock
repurchase program. Under the program, the Company's management is
authorized to repurchase from time to time during the next two years,
at its discretion, up to $10 million of the Company's outstanding
common stock in the open market or privately negotiated transactions.
Based upon the average of the closing bid and asked prices for the
Company's common stock as reported by NASDAQ on March 4, 1996,
completion of this repurchase program would represent over 512,000
shares, or 9.3% of the total number of shares then outstanding.
The maintenance of appropriate capital levels is a management
priority. Overall capital adequacy is monitored on an ongoing basis
by management and reviewed regularly by the Board of Directors. The
Company's principal capital planning goals are to provide an adequate
return to shareholders while retaining a sufficient base to provide
for future expansion and compliance with all regulatory standards.
Under regulatory capital guidelines, the Company and the subsidiary
banks are required to satisfy certain risk-based capital measures.
The minimum ratio of "Tier 1" capital to risk-weighted assets is 4.0%
and the minimum ratio of total capital to risk-weighted assets is
8.0%. For the Company, Tier 1 capital is comprised of shareholders'
equity less intangible assets. Total capital includes a portion of
the allowance for loan losses.
In addition to the risk-based capital measures, the federal bank
regulatory agencies require banks and bank holding companies to
satisfy another capital guideline, the Tier 1 leverage ratio (Tier
1 capital to total assets less goodwill). The minimum Tier 1
leverage ratio is 3.0% for the most highly rated institutions. The
guidelines provide that other institutions should maintain a Tier 1
leverage ratio that is at least 1.0% to 2.0% higher than the 3.0%
minimum level for top-rated institutions.
The table below sets forth the capital ratios of the Company and its
subsidiary banks as of December 31, 1995:
<TABLE>
Risk-Based Capital Ratios:
<CAPTION>
Arrow GFNB GMB SNB
<S> <C> <C> <C> <C>
Tier 1 13.48% 13.71% 14.93% 11.90%
Total Capital 14.75 14.96 16.22 13.15
Tier 1 Leverage Ratio 8.09 7.61 9.73 8.42
</TABLE>
At December 31, 1995, all subsidiary banks and the Company exceeded
the minimum capital ratios established by these guidelines, as well
as the "well-capitalized" thresholds set by federal bank regulatory
agencies pursuant to FDICIA (see the disclosure under "Legislative
Developments" in Part I, Item 1.F. of this report). After the
January 15, 1996 sale of Green Mountain Bank branches to Mascoma
Savings Bank, the Company's consolidated Tier 1 leverage ratio
increased to 9.91% from 8.09% at December 31, 1995.
The principal source of funds for the payment of shareholder
dividends by the Company has been dividends declared and paid to the
Company by its bank subsidiaries. As of December 31, 1995, only the
Company's principal bank subsidiary, the Glens Falls National Bank
and Trust Company ("GFNB") was in a position to pay any material
amount of dividends without prior regulatory approval. At that
time, the maximum amount that could have been paid by GFNB to the
Company was approximately $8.7 million. Payments of dividends by
Green Mountain Bank ("GMB") to the Company were restricted during
1995 as a matter of law by the negative undivided profits account of
GMB, despite the very high capital ratios maintained by GMB (which
became even higher after the sale by GMB of eight branches to
Mascoma Savings Bank on January 15, 1996). In 1995, however, with
regulatory approval, GMB did repurchase a portion of its common
stock from its holding company, Arrow Vermont Corporation, for $3.15
million, thereby achieving the equivalent of a dividend.
See Part II, Item 5 "Market for the Registrant's Common Equity and
Related Stockholder Matters" for a recent history of the Company's
cash dividend payments.
G. FOURTH QUARTER RESULTS
The Company reported earnings of $2.6 million for the fourth quarter
of 1995, an increase of $256 thousand or 10.9% from the fourth
quarter of 1994. During the 1991 - 1994 period, the provision for
income taxes was reduced to low levels because of the availability
of a significant net operating loss carryforward. During the fourth
quarter of 1994 the net operating loss carryforward was fully
utilized. As a result, for the fourth quarter of 1994 the provision
for income taxes was reduced by $415 thousand, while income for the
1995 quarter was fully tax effected.
Net interest income of $9.3 million in 1995 increased $290 thousand
or 3.2% from the fourth quarter of 1994. The increase was primarily
attributable to an increase in average earning assets. Average
earning assets amounted to $747.7 million and $699.1 million for the
fourth quarter of 1995 and 1994, respectively.
Noninterest income of $2.3 million in the fourth quarter of 1995
increased $595 thousand from the respective period in 1994. The
increase was primarily attributable to net securities losses of $471
thousand in the fourth quarter of 1994, while the Company recognized
$23 thousand of net securities gains in the fourth quarter of 1995.
Noninterest expenses decreased $453 thousand or 6.1% in the same
comparative time frame. As discussed above in the year-to-year
analysis, the decrease in noninterest expense between the quarterly
periods was primarily attributable to lower FDIC insurance premiums
and decreased expenses for salaries, offset only partially by
increases in legal and professional fees.
<TABLE>
SELECTED FOURTH QUARTER FINANCIAL INFORMATION
(Dollars In Thousands)
<CAPTION>
For the Quarter Ended
December 31,
1995 1994
<S> <C> <C>
Interest Income $15,846 $13,813
Interest Expense 6,577 4,834
Net Interest Income 9,269 8,979
Provision for Loan Losses 530 67
Net Interest Income after Provision for Loan Losses 8,739 8,912
Other Income 2,342 1,747
Other Expense 7,009 7,462
Income Before Income Taxes 4,072 3,197
Provision for Income Taxes 1,462 843
Net Income $ 2,610 $ 2,354
Weighted Average Number of Shares and
Equivalents Outstanding
Primary 5,672 5,750
Fully Diluted 5,677 6,079
Primary Earnings Per Share $ .46 $ .41
Fully Diluted Earnings Per Share .46 .40
SELECTED RATIOS:
Return on Average Assets 1.30% 1.25%
Return on Average Equity 15.58% 16.44%
Per share amounts have been adjusted for the 1995 four percent stock dividend.
</TABLE>
Item 8: Financial Statements and Supplementary Data
The following audited financial statements and supplementary data
are incorporated herein by reference to the Company's Annual Report
to Shareholders for December 31, 1995, which financial statements
and supplementary data are also filed as Exhibit 13 to this report:
Independent Auditors' Report
Financial Statements:
Consolidated Balance Sheets as of
December 31, 1995 and 1994
Consolidated Statements of Income for the Years Ended
December 31, 1995, 1994 and 1993
Consolidated Statements of Changes in Shareholders' Equity
for the Years Ended December 31, 1995, 1994 and 1993
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1995, 1994 and 1993
Notes to Consolidated Financial Statements
Supplementary Data: (Unaudited)
Quarterly Financial Data for the Years Ended December 31, 1995
and 1994
Item 9: Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure. - None.
PART III
Item 10: Directors and Executive Officers of the Registrant
Item 1, "Election of Directors and Information with Respect to
Directors and Officers" of the Company's Proxy Statement for its
Annual Meeting of Shareholders to be held April 24, 1996 is
incorporated herein by reference. Required information regarding
the Company's Executive Officers is contained in Part I, Item 1.E.,
"Executive Officers of the Registrant."
Item 11: Executive Compensation
Item 1, "Election of Directors and Information with Respect to
Directors and Officers" of the Company's Proxy Statement for its
Annual Meeting of Shareholders to be held April 24, 1996 is
incorporated herein by reference.
Item 12: Security Ownership of Certain Beneficial Owners and
Management
Item 1, "Election of Directors and Information with Respect to
Directors and Officers" of the Company's Proxy Statement for its
Annual Meeting of Shareholders to be held April 24, 1996 is
incorporated herein by reference.
Item 13: Certain Relationships and Related Transactions
Item 1, "Election of Directors and Information with Respect to
Directors and Officers" of the Company's Proxy Statement for its
Annual Meeting of Shareholders to be held April 24, 1996 is
incorporated herein by reference.
PART IV
Item 14: Exhibits, Financial Statement Schedules and Reports on
Form 8-K
A) Documents filed as part of this report:
I Financial Statements:
The following financial statements, the notes thereto, and the
independent auditors' reports thereon are filed as part of
this report. See the index to such financial statements in
Part II, Item 8 of this report.
Independent Auditors' Report
Consolidated Balance Sheets as of December 31, 1995 and
1994
Consolidated Statements of Income for the Years Ended
December 31, 1995, 1994 and 1993
Consolidated Statements of Changes in Shareholders'
Equity for the Years Ended December 31, 1995,
1994 and 1993
Consolidated Statements of Cash Flows for the Years
Ended December 31, 1995, 1994 and 1993
Notes to Consolidated Financial Statements
II Schedules:
All schedules are omitted since the required information is
either not applicable or not required or is contained in the
respective financial statements or in the notes thereto.
III. Exhibits:
The following exhibits are incorporated by reference herein.
Exhibit
Number Exhibit
2.1 Purchase and Assumption Agreement among Arrow Financial
Corporation, Arrow Vermont Corporation, Green Mountain Bank
and Mascoma Savings Bank, dated June 1, 1995 incorporated
herein by reference to Form 8-K dated June 1, 1995 filed as
exhibit 2.1.
2.2 Supplement to Purchase and Assumption Agreement among Arrow
Financial Corporation, Arrow Vermont Corporation, Green
Mountain Bank and Mascoma Savings Bank, dated January 12, 1996
incorporated herein by reference to Form 8-K dated January 15,
1996 filed as exhibit 2.2.
2.3 Purchase and Assumption Agreement among Arrow Financial
Corporation, Arrow Vermont Corporation, Green Mountain Bank
and ALBANK, FSB, dated February 26, 1996 incorporated herein
by reference to Form 8-K dated February 26, 1995 filed as
exhibit 2.1.
2.4 Service Purchasing Agreement among Arrow Financial
Corporation, Arrow Vermont Corporation, Green Mountain Bank
and ALBANK, FSB, dated February 26, 1996 incorporated herein
by reference to Form 8-K dated February 26, 1995 filed as
exhibit 2.2.
2.5 Stock Purchase Agreement among Arrow Financial Corporation,
Arrow Vermont Corporation, Green Mountain Bank and Vermont
National Bank, dated February 27, 1996 incorporated herein by
reference to Form 8-K dated February 26, 1995 filed as exhibit
2.3.
3.(i) Certificate of Incorporation of the Registrant, as amended,
incorporated by reference herein from Registrant's Annual
Report for the year ended December 31, 1990 filed on Form 10-K.
4.1 Indenture and Form of Debenture, incorporated herein by
reference from Registrant's 1933 Act Registration Statement on
Form S-2 (file number 33-10109; effective December 16, 1986).
4.2 Equity Contract Agency Agreement and Form of Equity Contract,
incorporated herein by reference from Registrant's 1933 Act
Registration Statement on Form S-2 (file number 33-10109;
effective December 16, 1986).
10.1 1985 Incentive Stock Option Plan of the Registrant,
incorporated herein by reference from Registrant's 1933 Act
Registration Statement on Form S-8 (file number 2-98736; filed
on July 1, 1985).*
10.2 1985 Non-Qualified Stock Option Plan of the Registrant,
incorporated herein by reference from Registrant's 1933 Act
Registration Statement on Form S-8 (file number 2-98735; filed
July 1, 1985).*
10.3 Executive Incentive Plan of Glens Falls National Bank and
Trust Company, incorporated herein by reference from
Registrant's 1933 Act Registration Statement on Form S-2 (file
number 33-10109; filed December 16, 1986).*
10.4 Employment Agreement between the Registrant and Michael F.
Massiano dated December 31, 1990, incorporated by reference
herein from Registrant's Annual Report for the year ended
December 31, 1990 filed on Form 10-K.*
10.5 Employment Agreement between the Registrant and John J. Murphy
dated December 31, 1990, incorporated by reference herein from
Registrant's Annual Reports for the years ended December 31,
1990 and 1992 filed on Form 10-K.*
10.6 Employment Agreement between the Registrant, its subsidiary
bank, Glens Falls National Bank & Trust Company, and Thomas
L. Hoy dated December 31, 1990, incorporated by reference
herein from Registrant's Annual Reports for the years ended
December 31, 1990 and 1992 filed on Form 10-K.*
10.7 Select Executive Retirement Plan of the Registrant effective
January 1, 1992 incorporated by reference herein from
Registrant's Annual Report for December 31, 1992 on Form 10-K.*
10.8 Long Term Incentive Plan of the Registrant, incorporated by
reference herein from Registrant's 1933 Act Registration
Statement on Form S-8 (File number 33-66192; filed July 19,
1993).*
10.9 Directors Deferred Compensation Plan of Registrant,
incorporated by reference herein from Registrant's Annual
Report for December 31, 1993 filed on Form 10-K.*
10.10 Senior Officers Deferred Compensation Plan of the Registrant,
incorporated by reference herein from Registrant's Annual
Report for December 31, 1993 filed on Form 10-K.*
* Management contracts or compensation plans required to be
filed as an exhibit.
The following exhibits are submitted herewith:
Exhibit
Number Exhibit
3.(ii) By-Laws of the Registrant
10.11 Automatic Dividend Reinvestment Plan of the Registrant
11 Computation of Earnings per Share
13 Annual Report to Shareholders
21 Subsidiaries of the Company
23 Consent of Independent Certified Public Accountants
27 Financial Data Schedule (submitted with electronic filing
only)
(B) No reports on Form 8-K have been filed for the 3 months
ended December 31, 1995.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Registrant has duly caused this
report to be signed on its behalf by the undersigned, thereunto duly
authorized.
ARROW FINANCIAL CORPORATION
Date: March 27, 1996 By: /s/ Michael F. Massiano
Michael F. Massiano
Chairman and President
(Chief Executive Officer)
Date: March 27, 1996 By: /s/ John J. Murphy
John J. Murphy
Executive Vice President,
Treasurer and
Chief Financial Officer
(Principal Financial and
Accounting Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below on March 27, 1996 by the following
persons in the capacities indicated.
/s/ Richard J. Bartlett /s/ David L. Moynehan
Richard J. Bartlett David L. Moynehan
Director Director
/s/ Michael B. Clark
Michael B. Clark Doris E. Ornstein
Director Director
/s/ George C. Frost
George C. Frost Edward C. Pike
Director Director
/s/ Herbert A. Heineman, Jr. /s/ Daniel L. Robertson
Herbert A. Heineman, Jr. Daniel L. Robertson
Director Director
/s/ Kenneth C. Hopper, M.D. /s/ Preston Leete Smith
Kenneth C. Hopper, M.D. Preston Leete Smith
Director Director
/s/ Edward F. Huntington
Edward F. Huntington Thomas C. Webb
Director Director
/s/ David G. Kruczlnicki /s/ Michael F. Massiano
David G. Kruczlnicki Michael F. Massiano
Director Director & Chairman
EXHIBIT INDEX
Exhibit
Number Exhibit
3.(ii) By-Laws of the Registrant
10.11 Automatic Dividend Reinvestment Plan of the Registrant
11 Computation of Earnings per Share
13 Annual Report to Shareholders
21 Subsidiaries of the Company
23 Consent of Independent Certified Public Accountants
27 Financial Data Schedule (submitted with electronic
filing only)
ARROW
FINANCIAL CORPORATION
(A New York Corporation)
BY-LAWS
(Effective 7/2/90)
Revisions:
1/23/91 - Article 3.2
4/24/91 - Article 3.2
7/24/91 - Article 3.2
9/25/91 - Article 3.2
2/26/92 - Article 3.2
2/26/92 - Article 4.1
12/16/92 - Article 3.2
4/20/94 - Article 3.2
4/20/94 - Article 3.20
7/01/95 - Article 3.2
10/25/95 - Article 3.4
BY-LAWS
ARROW FINANCIAL CORPORATION
(A New York Corporation)
(As amended to 10/25/95)
ARTICLE I
Definitions
As used in these By-laws, unless the context otherwise requires, the term:
1.1 "Assistant Secretary" means an Assistant Secretary of the
Corporation.
1.2 "Assistant Treasurer" means an Assistant Treasurer of the
Corporation.
1.3 "Board" means the Board of Directors of the Corporation.
1.4 "Business Corporation Law" means the Business Corporation Law of
the State of New York, as amended from time to time.
1.5 "By-laws" means the initial By-laws of the Corporation, as amended
from time to time.
1.6 "Certificate of Incorporation" means the initial certificate of
incorporation of the Corporation, as amended, supplemented or
restated from time to time.
1.7 "Corporation" means Arrow Financial Corporation
1.8 "Directors" means directors of the Corporation
1.9 "Entire Board" means the total number of directors which the
Corporation would have if there were no vacancies.
1.10 "Office of the Corporation" means the executive office of the
Corporation, anything in Section 102(10) of the Business Corporation
Law to the contrary notwithstanding.
1.11 "Chairman of the Board" means the Chairman of the Board of the
Corporation.
1.12 "President" means the President of the Corporation.
1.13 "Secretary" means the Secretary of the Corporation.
1.14 "Shareholders" means shareholders of the Corporation.
1.15 "Treasurer" means the Treasurer of the Corporation.
1.16 "Vice President" means a Vice President of the Corporation.
<PAGE>
ARTICLE II
Shareholders
2.1 Place of Meetings. Every meeting of shareholders shall be held at
the office of the Corporation or at such other place within or
without the State of New York as shall be designated in the notice of
such meeting or in the waiver of notice
2.2 Annual Meeting. A meeting of shareholders shall be held annually for
the election of directors and the transaction of other business at
such hour and on such business day in April, May or June as may be
determined by the Board and designated in the notice of meeting.
2.3 Special Meeting for Election of Directors, Etc. If the annual meeting
of shareholders for the election of directors and the transaction of
other business is not held within the months specified in Section 2.2,
the Board may call a special meeting of shareholders for the election
of directors and the transaction of other business at any time
thereafter.
2.4 Special Meetings. A special meeting of shareholders, (other than a
special meeting for the election of directors), unless otherwise
prescribed by statute, may be called at any time by the Board or by
the Chairman of the Board or by the Secretary. At any special
meeting of shareholders, only such business may be transacted as
is related to the purpose or purposes of such meeting set forth in the
notice thereof given pursuant to Section 2.6 of the By-laws or in any
waiver of notice thereof given pursuant to Section 2.7 of the By-laws.
2.5 Fixing Record Date. For the purpose of determining the shareholders
entitled to notice of or to vote at any meeting of shareholders or any
adjournment thereof, or to express consent to or dissent from any
proposal without a meeting, or for the purpose of determining
shareholders entitled to receive payment of any dividend or the
allotment of any rights, or for the purpose of any other action, the
Board may fix, in advance, a date as the record date for any such
determination of shareholders. Such date shall not be more than fifty
nor less than ten days before the date of such meeting, nor more than
fifty days prior to any other action. If no such record date is
fixed:
2.5.1 The record date for the determination of shareholders entitled to
notice of or to vote at a meeting of shareholders shall be at the
close of business on the day next preceding the day on which notice
is given, or, if no notice is given, the day on which the meeting is
held;
2.5.2 The record date for determining shareholders for any purpose
other
than that specified in Section 2.5.1 shall be at the close of
business on the day on which the resolution of the Board relating
thereto is adopted. When a determination of shareholders entitled
to notice of or to vote at any meeting of shareholders has been made
as provided in this Section 2.5, such determination shall apply to
any adjournment thereof, unless the Board fixes a new record date
for the adjourned meeting.
2.6 Notice of Meetings of Shareholders. Except as otherwise provided in
Section 2.5 and Section 2.7 of the By-laws, whenever under the
Business Corporation Law or the Certificate of Incorporation or the
By-laws, shareholders are required or permitted to take any action at
a meeting, written notice shall be given stating the place, date and
hour of the meeting and, unless it is the annual meeting, indicating
that it is being issued by or at the direction of the person or
persons calling the meeting. Notice of a special meeting shall also
state the purpose or purposes for which the meeting is called. If,
at any meeting, action is proposed to be taken which would, if taken
entitle shareholders fulfilling the requirements of Section 623 of the
Business Corporation Law to receive payment for their shares, the
notice of such meeting shall include a statement of that purpose and
to that effect. A copy of the notice of any meeting shall be given,
personally or by mail, not less than ten nor more than fifty days
before the date of the meeting, to each shareholder entitled to notice
of or to vote at such meeting. If mailed, such notice shall be deemed
to be given when deposited in the United States mail, with postage
thereon prepaid, directed to the shareholder at his/her address as it
appears on the record of shareholders, or if he/she shall have filed
with the Secretary of the Corporation a written request that notices
to him/her be mailed to some other address, then directed to him/her
at such other address. An affidavit of the Secretary or other person
giving the notice or of the transfer agent of the Corporation that the
notice required by this section has been given shall, in the absence
of fraud, be prima facie evidence of the facts therein stated. When a
meeting is adjourned to another time or place, it shall not be
necessary to give any notice of the adjourned meeting if the time and
place to which the meeting is adjourned are announced at the meeting
at which the adjournment is taken, and at the adjourned meeting any
business may be transacted that might have been transacted at the
meeting as originally called. However, if after the adjournment the
Board fixes a new record date for the adjourned meeting, a notice of
the adjourned meeting shall be given to each shareholder of record
on the new record date who is entitled to notice.
2.7 Waivers of Notice. Notice of meeting need not be given to any
shareholder who submits a signed waiver of notice in person or by
proxy, whether before or after the meeting. The attendance of any
shareholder at a meeting, in person or by proxy, without protesting
prior to the conclusion of the meeting the lack of notice of such
meeting, shall constitute a waiver of notice by him/her.
2.8 List of Shareholders at Meeting. A list of shareholders as of the
record date, certified by the officer of the Corporation responsible
for its preparation, or by a transfer agent, shall be produced at any
meeting of shareholders upon the request thereat or prior thereto of
any shareholder. If the right to vote at any meeting is challenged,
the inspectors of election, or person presiding thereat, shall require
such list of shareholders to be produced as evidence of the right
of the persons challenged to vote at such meeting, and all persons who
appear from such list to be shareholders entitled to vote thereat
may vote at such meeting.
2.9 Quorum of Shareholders; Adjournment. The holders of one-third of
the shares entitled to vote at any meeting of shareholders,
present in person or represented by proxy, shall constitute a quorum
for the transaction of any business at any such meeting, provided that
when a specified item of business is required to be voted on by a
class or series (if the Corporation shall then have outstanding shares
of more than one class or series), voting as a class, the holders of
one-third of the shares of such class or series shall constitute a
quorum (as to such class or series) for the transaction of such item
of business. When a quorum is once present to organize a meeting of
shareholders, it is not broken by the subsequent withdrawal of any
shareholders or their proxies. The holders of a majority of shares
present in person or represented by proxy at any meeting of
shareholders, including an adjourned meeting, whether or not a
quorum is present, may adjourn such meeting to another time and
place.
2.10 Voting; Proxies. Unless otherwise provided in the Certificate of
Incorporation, every shareholder of record shall be entitled to
vote at every meeting of hareholders determined in accordance with
Section 2.5 of the By-laws. Theprovisions of Section 612 of the
Business Corporation Law shall apply in determining whether any
shares may be voted and the persons, if any, entitled to vote such
shares; but the Corporation shall be protected in treating the persons
in whose names such shares stand on the record of shareholders as
owners thereof for all purposes. At any meeting of shareholders (at
which a quorum was once present to organize the meeting), all
matters, except as otherwise provided by law or by the Certificate of
Incorporation or by the By-laws, shall be decided by a majority of the
votes cast at such meeting by the holders of shares present in person
or represented by proxy and entitled to vote thereon, whether or not
a quorum is present when the vote is taken. In voting on any
questions on which a vote by ballot is required by law or is demanded
by any shareholder entitled to vote, the voting shall be by ballot.
Each ballot shall be signed by the shareholder voting or by his proxy,
and shall state the number of shares voted. On all other questions,
the voting may be viva voce. Every shareholder entitled to vote at a
meeting of shareholders or to express consent or dissent without a
meeting may authorize another person or persons to act for him by
proxy. The validity and enforceability of any proxy shall be
determined in accordance with Section 609 of the Business
Corporation Law.
2.11 Selection and Duties of Inspectors at Meetings of Shareholders. The
Board, in advance of any meeting of shareholders, may appoint
one or more inspectors to act at the meeting or any adjournment
thereof. If inspectors are not so appointed, the person presiding at
such meeting may, and on the request of any shareholder entitled to
vote thereat shall, appoint one or more inspectors. In case any
person appointed fails to appear or act, the vacancy may be filled by
appointment made by the Board in advance of the meeting or at the
meeting by the person presiding thereat. Each inspector, before
entering upon the discharge of his/her duties, shall take and sign an
oath faithfully to execute the duties of inspector at such meeting
with strict impartiality and according to the best of his/her ability.
The inspector or inspectors represented at the meeting, shall
determine the number of shares outstanding and the voting power of
each, the shares represented at the meeting, the existence of a
quorum, the validity and effect of proxies, and shall receive votes,
ballots or consents, hear and determine all challenges and questions
arising in connection with the right to vote, count and tabulate all
votes, ballots or consents, determine the result, and shall do such
acts as are proper to conduct the election or vote with fairness to
all shareholders. On request of the person presiding at the meeting
or any shareholder entitled to vote thereat, the inspector or
inspectors shall make a report in writing of any challenge, question
or matter determined by his/her or them and execute a certificate of
any act found by him/her or them. Any report or certificate made by
the inspector or inspectors shall be prima facie evidence of the facts
stated and of the vote as certified by him/her or them.
2.12 Organization. At every meeting of shareholders, the Chairman of the
Board, or in his/her absence the President, shall act as Chairman
of the meeting. The Secretary, or in his/her absence one of the
Assistant Secretaries, shall act as Secretary of the meeting. In case
none of the officers above designated to act as Chairman or
Secretary of the meeting, respectively, shall be present, a Chairman
or a Secretary of the meeting, as the case may be, shall be chosen
by a majority of the votes cast at such meeting by the holders of
shares present in person or represented by proxy and entitled to vote
at the meeting.
2.13 Order of Business. The order of business at all meetings of
shareholders shall be as determined by the Chairman of the
meeting, but the order of business to be followed at any meeting at
which a quorum is present may be changed by a majority of the votes
cast at such meeting by the holders of shares present in person or
represented by proxy and entitled to vote at the meeting.
2.14 Written Consent of Shareholders Without a Meeting. Whenever the
shareholders are required or permitted to take any action by
vote, such action may be taken without a
meeting on written consent, setting forth the
action so taken or to be taken, signed by the
holders of all outstanding shares entitled to vote
thereon. Such consent shall have the same
effect as a unanimous vote of shareholders.
ARTICLE III
Directors
3.1 General Powers. Except as otherwise provided in the Certificate of
Incorporation, the business of the Corporation shall be managed
under the direction of its Board. The Board may adopt such rules and
regulations, not inconsistent with the Certificate of Incorporation or
the By-Laws or applicable laws, as it may deem proper for the
conduct of its meetings and the management of the Corporation. In
addition to the powers expressly conferred by the By-laws, the Board
may exercise all powers and perform all acts which are not required,
by the By-laws or the Certificate of Incorporation or by law, to be
exercised and performed by the shareholders.
3.2 Number and Qualification. The number of directors constituting the
Entire Board is fixed at fourteen (14).
3.3 Qualifications. Each director shall, at the time of his election, be
at
least eighteen (18) years of age, but not more than seventy (70)
years of age.
3.4 Election and Classification. The entire Board of Directors shall be
divided into three (3) classes of not less than three (3) members
each, which classes are designated as Class A, Class B and Class
C. The number of directors of Class A shall equal one-third (1/3) of
the total number of directors as determined in the manner provided
in the By-laws (with any fractional remainder to count as one); the
number of directors of Class B shall equal one-third (1/3) of said
total number of directors (or the nearest whole number thereto); and
the number of directors of Class C shall equal said total number of
directors minus the aggregate number of directors of Classes A and
B. At the election of the first Board of Directors, the class of each
of the members then elected shall be designated. The term of office
of each member then designated as a Class A director shall expire at
the annual meeting of shareholders next ensuing, that of each
member then designated as a Class B director at the annual meeting
of shareholders one year thereafter, and that of each member then
designated as a Class C director at the annual meeting of
shareholders two years thereafter. At each annual meeting of
shareholders held after the election and classification of the first
Board of directors, directors to succeed those whose terms expire at
such annual meeting shall be elected to hold office for a term
expiring at the third succeeding annual meeting of shareholders and
until their respective successors are elected and have qualified or
until their respective earlierdisplacement from office by resignation,
removal or otherwise. Directors shall, except as otherwise required
by law or by the Certificate of Incorporation, be elected by a
plurality of the votes cast at a meeting of shareholders by the
holders of shares entitled to vote in the election. Only persons who
have been nominated in accordance with the following procedures shall
be eligible for election as directors of the Corporation. Nominations
of persons for election to the Board of Directors may be made at any
annual meeting of shareholders or special meeting of shareholders
called and held for such express purpose (a) by or at the direction of
the Board of Directors (or any duly authorized committee thereof) or
(b) by any shareholder of the Corporation who (i) is a shareholder of
record both on the date of the giving of the notice provided for in
this Section 3.4 and on the record date for the determination of
shareholders entitled to vote at such annual or special meeting and
(ii) complies with the notice procedures set forth in this Section 3.4.
In addition to any other applicable requirements, for a nomination to
be made by a shareholder, such shareholder must have given a timely
notice of nomination in proper written form to the Secretary of the
Corporation. To be timely given in the case of an annual meeting, a
shareholder's notice of nomination to the Secretary must be delivered
to or mailed and received at the principal executive offices of the
Corporation not less than one hundred twenty (120) days prior to the
anniversary date of the immediately preceding annual meeting of
shareholders. To be timely given in the case of a special meeting
called and held for such express purpose, a shareholder's notice of
nomination to the Secretary must be delivered to or mailed and received
at the principal executive offices of the Corporation not later than
close of business on the tenth (10th) day following the date on which
the notice of the special meeting was first mailed to shareholders. To
be in proper written form, a shareholder's notice of nomination to the
Secretary must set forth (a) as to each person whom the shareholder
proposes to nominate for election as a director (i) the name, age,
business address and residence address of such person, (ii) the
principal occupation or employment of such person, (iii) the class or
series and number of shares of capital stock of the Corporation which
are owned beneficially or of record by such person and (iv) any other
information relating to such person that may be required to be
disclosed by the Corporation in connection with its solicitations of
proxies for election of directors pursuant to Section 14 of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and
the rules and regulations promulgated thereunder, or as may be required
in order to ascertain that the person meets any prerequisites contained
in applicable law, the Corporation's Certificate of Incorporation or
these Bylaws for serving as a director of the Corporation; and (b) as
to the shareholder giving such notice (i) the name and record address
of such shareholder, (ii) the class or series and number of shares of
capital stock of the Corporation which are owned beneficially or of
record by such shareholder, (iii) a description of all arrangements or
understandings between such shareholder and each proposed
nominee and any other person or persons (including their names)
pursuant to which the nomination(s) are to be made by such
shareholder, (iv) a representation that such shareholder intends to
appear in person or by proxy at the annual meeting to nominate the
person or persons named in the notice of nomination, and (v) any
other information relating to such shareholder that would be required
to be disclosed by the Corporation in connection with its
solicitations of proxies for election of directors pursuant to Section
14 of the Exchange Act and the rules and regulations promulgated
thereunder. Such notice of nomination must be accompanied by a
written consent of each proposed nominee to being named as a nominee
and to serve as a director if elected. No person shall be eligible
for election as a director of the Corporation unless nominated in
accordance with the procedures set forth in this Section 3.4. If the
Chairman of the annual or special meeting determines that a nomination
was not made in accordance with the foregoing procedures, the Chairman
shall declare to the meeting that the nomination was defective and
such defective nomination shall be disregarded.
3.5 Newly Created Directorships and Vacancies. Newly created
directorships resulting from an increase in the number of directors
and vacancies occurring in the Board for any reason, including the
removal of directors without cause, may be filled by vote of a
majority of the directors then in office, although less than a quorum,
at any meeting of the Board, or may be elected by a plurality of the
votes cast by the holders of shares entitled to vote in the election
at a special meeting of shareholders called for that purpose. A
director elected to fill a vacancy shall hold office during the term
to which his/her predecessor had been elected and until his/her
successor shall have been elected and shall qualify, or until his/her
earlier death, resignation or removal.
3.6 Resignations. Any director may resign at any time by written notice
to the Chairman of the Board or the Secretary. Such resignation shall
take effect at the time therein specified, and unless otherwise
specified, the acceptance of such resignation shall not be necessary
to make it effective.
3.7 Removal of Directors. The Entire Board, or less than the Entire
Board, may be removed for cause by vote of the shareholders
or by action of the Board. The Entire Board, or less than the Entire
Board may be removed without cause only in the manner prescribed
in the Certificate of Incorporation.
3.8 Compensation. Each director, in consideration of his/his service as
such, shall be entitled to receive from the corporation such amount
per annum or such fees for attendance at directors' meetings, or both,
as the Board may from time to time determine, together with
reimbursement for the reasonable expenses incurred by him/her in
connection with the performance of his/her duties. Each director who
shall serve as a member of any committee of directors in
consideration of his/her serving as such shall be entitled to such
additional amount per annum or such fees for attendance at
committee meetings, or both, as the Board may from time to time
determine, together with reimbursement for the reasonable expenses
incurred by him/her in the performance of his/her duties. Nothing in
this section contained shall preclude any director from serving the
corporation or its subsidiaries in any other capacity and receiving
proper compensation therefor.
3.9 Place and Time of Meetings of the Board. Meetings of the Board,
regular or special, may be held at such times and places within or
without the State of New York as the Board will by vote determine at
its annual meeting, and may alter or amend from time to time. The
times and places for holding meetings may be fixed from time to time
by resolution of the Board or (unless contrary to resolution of the
Board) in the notice of the meeting.
3.10 Annual Meetings. On the day when and at the place where the
annual meeting of shareholders for the election of directors is held,
and as soon as practicable thereafter, the Board may hold its annual
meeting, without notice of such meeting, for the purposes of
organization, the election of officers and the transaction of other
business. The annual meeting of the Board may be held at any other
time and place specified in a notice given as provided in Section 3.12
of the By-laws for special meetings of the Board or in a waiver of
notice thereof.
3.11 Regular Meetings. Regular meetings of the Board may be held at
such times and places as may be fixed from time to time by the
Board. Unless otherwise required by the Board, regular meetings of
the Board may be held without notice. If any day fixed for a regular
meeting of the Board shall be a Saturday or Sunday or a legal holiday
at the place where such meeting is to be held, then such meeting
shall be held at the same hour at the same place on the first business
day thereafter which is not a Saturday, Sunday or legal holiday.
3.12 Special Meetings. Special meetings of the Board shall be held
whenever called by the Chairman of the Board or the Secretary or by
any three (3) or more directors. Notice of each special meeting of
the Board shall, if mailed, be addressed to each director at the
address designated by him/her for that purpose or, if none is
designated, at his/her last known address not later than 24 hours
before the date on which such meeting is to be held; or such notice
shall be sent to each director at such address by telegraph, Telex,
TWX, cable,wireless, or similar means of communication, or be
delivered to him/he personally, not later than the day before the date
on which such meeting is to be held. Every such notice shall state
the time and place of the meeting but need not state the purpose of
the meeting, except to the extent required by law. If mailed, each
notice shall be deemed given when deposited, with postage thereon
prepaid, in the post office or official depository under the exclusive
care and custody of the United States post office department. Such
mailing shall be by first class mail.
3.13 Adjourned Meetings. A majority of the directors present at any
meeting of the Board, including an adjourned meeting, whether or not
a quorum is present, may adjourn such meeting to another time and
place. Notice of any adjourned meeting of the Board need not be
given to any director whether or not present at the time of the
adjournment. Any business may be transacted at any adjourned
meeting that might have been transacted at the meeting as originally
called.
3.14 Waivers of Notice. Anything in these By-laws or in any resolution
adopted by the Board to the contrary notwithstanding, notice of any
meeting of the Board need not be given to any director who submits
a signed waiver of such notice, whether before or after such meeting,
or who attends such meeting without protesting, prior thereto or at
its commencement, the lack of notice to him/her.
3.15 Organization. At each meeting of the Board, the Chairman of the
Board of the Corporation, or a chairman chosen by the majority of the
directors present, shall preside. The Secretary shall act as
Secretary at each meeting of the Board. In case the Secretary shall
be absent from any meeting of the Board, an Assistant Secretary shall
perform the duties of Secretary at such meeting; and in the absence
from any such meeting of the Secretary and Assistant Secretaries, the
person presiding at the meeting may appoint any person to act as
Secretary of the meeting.
3.16 Quorum of Directors. A majority of the directors shall constitute a
quorum at any meeting of the Board.
3.17 Action by the Board. Except as otherwise provided in Section 3.18 of
the By-laws, all corporate action taken by the board shall be
taken at a meeting of the Board. Except as otherwise provided herein
or by the Certificate of Incorporation or by law, the vote of a
majority of the directors present at the time of the vote, if a quorum
is present at such time, shall be the act of the Board.
Notwithstanding anything herein to the contrary, (1) abolition of the
undertakings contained in Section 16 of a certain Affiliation
Agreement dated August 17, 1989 by and between the Corporation and
United Vermont Bancorporation shall require a vote of seventy percent
(70%) of the full Board of Directors or (2) whenever a vote of the
shareholders of any direct or indirectbanking subsidiary of the
Corporation is required by law or the Charter or the By-laws of such
banking subsidiary, the Corporation shall vote its shares of any such
direct banking subsidiary, and cause the shares of any such indirect
subsidiary held by any other subsidiary of the Corporation to be
voted, only as directed by a seventy percent (70%) vote of the full
Board of Directors.
3.18 Written Consent of Directors Without a Meeting. Any action required
or permitted to be taken by the Board may be taken without a meeting
if all members of the Board consent in writing to the adoption of a
resolution authorizing the action. The resolution and the written
consents thereto by the members of the Board shall be filed with the
minutes of the proceedings of the Board.
3.19 Participation in Meeting of Board by Means of Conference Telephone
or Similar Communications Equipment. Any one or more members of
the Board may participate in a meeting of the Board by means of a
conference telephone or similar communications equipment allowing
all persons participating in the meeting to hear each other at the
same time. Participation by such means shall constitute presence in
person at a meeting.
3.20 Retirement of Directors. Any director who shall have attained the age
of 70 during his/her term office shall retire from the Board at the
first annual meeting of shareholders held on or after his/her
birthdate.
<PAGE>
ARTICLE IV
Executive Committee and Other Committees
4.1 How Constituted and Powers. The Board shall, by resolution adopted
by a majority of the Entire Board, designate from among its members
an Executive Committee of three (3) or more members which shall
have all the authority of the Board, except that it shall have no
authority as to the following matters:
4.1.1 The submission to shareholders of any matter that needs
shareholders' approval;
4.1.2 The filling of vacancies in the Board or in any committee;
4.1.3 The fixing of compensation of the directors for serving on the
Board or on any committee;
4.1.4 The amendment or repeal of the By-laws, or the adoption of new
By-laws;
4.1.5 The amendment or repeal of any resolution of the Board which
includes among its terms a provision that it is not so amendable
or repealable. The Board, by resolution adopted by a majority of
the Entire Board, may designate from among its members other
committees, each consisting of three or more directors, which
shall have the authority provided in such resolution. The
Chairman of the Executive Committee shall vote only in the case
of a tie.
4.2 General. Any committee designated by the Board pursuant to
Section 4.1 of the By-laws, and each of the members and alternate
members thereof, shall serve at the pleasure of such committee, who
may replace any absent member or members at any meeting of such
committee. All corporate action taken by any committee designated
by the Board pursuant to Section 4.1 of the By-laws shall be taken at
a meeting of such committee except that any action required or
permitted to be taken by any committee may be taken without a
meeting if all members of the committee consent in writing to the
adoption of a resolution authorizing the action; in such event the
resolution and the written consents thereto by the members of the
committee shall be filed with the minutes of the proceedings of the
committee. Any one or more members of any committee may
participate in a meeting of such committee by means of conference
telephone or similar communications equipment allowing all persons
participating in the meeting to hear each other at the same time.
Participation by such means shall constitute presence in person at a
meeting. Any committee may adopt such rules and regulations, not
inconsistent with the Certificate of Incorporation or the By-laws or
applicable laws or resolution of the Board designating such
committee, as it may deem proper for the conduct of its meetings and
the exercise by it of the authority of the Board conferred upon such
committee by the resolution of the Board designating such committee.
ARTICLE V
Officers
5.1 Officers. The Board may elect or appoint a Chairman of the Board,
President, one or more Vice Presidents, a Secretary and a Treasurer,
and such other officers as it may determine. All officers shall be
elected or appointed to hold offices until the meeting of the Board
following the next annual meeting of shareholders. The Board may
designate one or more Vice Presidents as Executive Vice Presidents,
and may use descriptive words or phrases to designate the standing,
seniority or area of special competence of the Vice Presidents elected
or appointed by it. Each officer shall hold office for the term for
which he/she is elected or appointed, and until his/her successor
shall have been elected or appointed and qualified or until his/her
death, his/her resignation or his/her removal in the manner provided
in Section 5.2 of the By-laws. Any two or more offices may be held by
the same person, except the offices of President and Secretary;
provided, however, that if all of the issued and outstanding shares of
the Corporation are owned by one person, such person may hold all or
any combination of offices. The Board may require any officers to
give a bond or other security for the faithful performance of his/her
duties, in such amount and with such sureties as the Board may
determine. All officers as between themselves and the Corporation
shall have such authority and perform such duties in the management
of the Corporation as may be provided in the By-laws or as the Board
may from time to time determine.
5.2 Removal of Officers. Any officer elected or appointed by the Board
may be removed by the Board with or without cause. The removal of
an officer without cause shall be without prejudice to his/her
contract rights, if any. The election or appointment of an officer
shall not of itself create contract rights.
5.3 Resignations. Any officer may resign at any time by notifying the
Board or the Chairman of the Board or the Secretary in writing. Such
resignation shall take effect at the date of receipt of such notice or
at such later time as is therein specified, and, unless otherwise
specified, the acceptance of such resignation shall not be necessary
to make it effective. The resignation of an officer shall be without
prejudice to the contract rights of the Corporation, if any.
5.4 Vacancies. A vacancy in any office because of death, resignation,
removal, disqualification or any other cause may be filled for the
unexpired portion of the term by the Board at any regular or special
meeting of the Board.
5.5 Compensation. Salaries or other compensation of the officers may be
fixed from time to time by the Board. No officer shall be prevented
from receiving a salary or other compensation by reason of the fact
that he/she is also a director.
5.6 Chairman of the Board. The Chairman of the Board of Directors shall
preside at all meetings of the stockholders and Directors, and shall
have such other duties as may be assigned to him from time to time
by the Board of Directors. Unless the Board of Directors otherwise
determines, the Chairman of the Board shall be the chief executive
officer and head of the Corporation. Under the supervision of the
Board of Directors and of the executive committee, the chief executive
officer shall have the general control and management of its business
and affairs, subject, however, to the right of the Board of Directors
and of the executive committee to confer any specific power, except
such as may be by statute exclusively conferred on the chief
executive officer, upon any other officer or officers of the
Corporation. The chief executive officer shall perform and do all
acts and things incident to the position of chief executive officer
and such other duties as may be lawfully assigned to him/her from time
to time by the Board of Directors or the executive committee.
5.7 President. The President shall perform such duties as may be
assigned to him/her from time to time by the Board of Directors, by
the executive committee or by the Chairman of the Board. Unless the
Board of Directors otherwise determines, the President shall be chief
operating officer of the Corporation. He/she shall have such
responsibilities as are assigned to him/her by the Board. In the
event the President is designated as chief executive officer by the
Board of Directors, the President shall have and possess all of the
powers and discharge all of the duties of the chief executive officer,
subject to the control of the Board and the executive committee.
5.8 Vice Presidents. At the request of the Chairman of the Board, or in
his/her absence, at the request of the President, or in his/her
absence, at the request of the Board, the Vice President shall (in
such order as may be designated by the Board) perform all of the
duties of the President and so acting shall have all the powers of and
be subject to all restrictions upon the President. Any Vice President
may also, with the Secretary or the Treasurer or an Assistant
Secretary or an Assistant Treasurer, sign certificates for shares of
the Corporation; may sign and execute, in the name of the Corporation,
deeds, mortgages, bonds, contracts or other instruments authorized
by the Board, except in cases where the signing and execution
thereof shall be expressly delegated by the Board or by the By-laws
to some other officer or agent of the Corporation, or shall be
required by law otherwise to be signed or executed; and shall perform
such other duties as from time to time may be assigned to him/her by
the Board or by the Chairman of the Board, or in his/her absence, by
the President.
5.9 Secretary. The Secretary, if present, shall act as Secretary of all
meetings of the shareholders and of the Board, and shall keep the
minutes thereof in the proper book or books to be provided for that
purpose; he/she shall see that all notices required to be given by the
Corporation are duly given and served; he/she may, with the
Chairman of the Board, the President or a Vice President, sign
certificates for shares of the Corporation; he/she shall be custodian
of the seal of the Corporation and may seal with the seal of the
Corporation or a facsimile thereof, all certificates for shares of the
Corporation and all documents the execution of which on behalf of
the Corporation under its corporate seal is authorized in accordance
with the provisions of the By-laws; he/she shall have charge of the
share records and also of the other books, records and papers of the
Corporation relating to its organization and management as a
Corporation, and shall see that the reports, statements and other
documents required by law are properly kept and filed; and shall, in
general perform all the duties incident to the office of Secretary and
such other duties as from time to time may be assigned to him/her by
the Board or by the Chairman of the Board, or in his/her absence, by
the President.
5.10 Treasurer. The Treasurer shall have charge and custody of, and be
responsible for, all funds, securities and notes of the Corporation;
receive and give receipts for moneys due and payable to the
Corporation from any sources whatsoever; deposit all such moneys
in the name of the Corporation in such banks, trust companies or
other depositories as shall be selected in accordance with these
By-laws; against proper vouchers, cause such funds to be disbursed
by checks or drafts on the authorized depositories of the Corporation
signed in such manner as shall be determined in accordance with any
provisions of the by-laws, and be responsible for the accuracy of the
amounts of all moneys so disbursed; regularly enter or cause to be
entered in books to be kept by him/her under his/her direction full
and adequate account of all moneys received or paid by him/her the
account of the Corporation; have the right to require, from time to
time, reports or statements giving such information as he/she may
desire with respect to any and all financial transactions of the
Corporation from the officers or agents transacting the same; render
to the Chairman of the Board or the Board, whenever the Chairman
of the Board or the Board, respectively, shall require him/her so to
do, an account of the financial condition of the Corporation and of
all his/her transactions as Treasurer; exhibit at all reasonable times
his/her books of account and other records to any of the directors
upon application at the office of the Corporation where such books
and records are kept; and, in general, perform all the duties incident
to the office of Treasurer and such other duties as from time to time
may be assigned to him/her by the Board or by the Chairman of the
Board, or in his/her absence, by the President; and he/she may sign
with the Chairman of the Board or the President or a Vice President
certificates for shares of the Corporation.
5.11 Assistant Secretaries and Assistant Treasurers. Assistant
Secretaries and Assistant Treasurers shall perform such duties as
shall be assigned to them by the Secretary or by the Treasurer,
respectively, or by the Board of by the Chairman of the Board or in
his/her absence, by the President. Assistant Secretaries and
Assistant Treasurers may, with the Chairman of the Board or
President or a Vice President, sign certificates for shares of the
Corporation.
ARTICLE VI
Contracts, Checks, Drafts, Bank Accounts, Etc.
6.1 Execution of Contracts. The Board may authorize any officer,
employee or agent, in the name and on behalf of the Corporation, to
enter into any contract or execute and satisfy any instrument, and any
such authority may be general or confined to specific instances, or
otherwise limited.
6.2 Loans. The Chairman of the Board or any other officer, employee or
agent authorized by the By-laws or by the Board may effect loans and
advances at any time for the Corporation from any bank, trust
company or other institution or from any firm, corporation or
individual and for such loans and advances may make, execute and
deliver promissory notes, bonds or other certificates or evidences of
indebtedness of the Corporation, and when authorized so to do may
pledge and hypothecate or transfer any securities or other property
of the Corporation as security for any such loans or advances. Such
authority conferred by the Board may be general or confined to
specific instances or otherwise limited.
<PAGE>
6.3 Checks, Drafts, Etc. All checks, drafts and other orders for the
payment of money out of the funds of the Corporation and all notes
or other evidences of indebtedness of the Corporation shall be signed
on behalf of the Corporation in such manner as shall from time to time
be determined by resolution of the Board.
6.4 Deposits. The funds of the Corporation not otherwise employed shall
be deposited rom time to time to the order of the Corporation in such
banks, trust companies or other depositories as the Board may select
or as may be selected by an officer, employee or agent of the
Corporation to whom such power may from time to time be delegated
by the Board.
ARTICLE VII
Shares and Dividends
7.1 Certificates Representing Shares. The shares of the Corporation
shall be represented by certificates in such form (consistent with the
provisions of Section 508 of the Business Corporation Law) as shall
be approved by the Board. Such certificates shall be signed by the
Chairman of the Board or the President or a Vice President and by
the Secretary or an Assistant Secretary or the Treasurer or an
Assistant Treasurer, and may be sealed with the seal of the
Corporation or a facsimile thereof. The signatures of the officers
upon a certificate may be facsimiles, if the certificate is
countersigned by a transfer agent or registered by a registrar other
than the Corporation itself or its employee. In case any officer who
has signed or whose facsimile signature has been placed upon any
certificate shall have ceased to be such officer before such
certificate is issued, such certificate may, unless otherwise ordered
by the Board, be issued by the Corporation with the same effect as if
such person were such officer at the date of issue.
7.2 Transfer of Shares. Transfers of shares shall be made only on the
books of the Corporation by the holder thereof or by his/her duly
authorized attorney appointed by a power of attorney duly executed
and filed with the Secretary or a transfer agent of the Corporation,
and on surrender of the certificate or certificates representing such
shares properly endorsed for transfer and uponpayment of all
necessary transfer taxes. Every certificate exchanged, returned or
surrendered to the Corporation shall be marked "Canceled", with the
date of cancellation, by the Secretary or an Assistant Secretary or
the transfer agent of the Corporation. A person in whose name shares
shall stand on the books of the Corporation shall be deemed the
owner thereof to receive dividends, to vote as such owner and for all
other purposes as respects the Corporation. No transfer of shares
shall be valid as against the Corporation, its shareholders and
creditors for any purpose, except to render the transferee liable for
the debts of the Corporation to the extent provided by law, until such
transfer shall have been entered on the books of the Corporation by
an entry showing from and to whom transferred.
7.3 Transfer and Registry Agents. The Corporation may from time to time
maintain one or more transfer offices or agents and registry offices
or agents at such place or places as may be determined form time to
time by the Board.
7.4 Lost, Destroyed, Stolen and Mutilated Certificates. The holder of any
shares shall immediately notify the Corporation of any loss,
destruction, theft or mutilation of the certificate representing such
shares, and the Corporation mayissue a new certificate to replace the
certificate alleged to have been lost, destroyed, stolen or mutilated.
The Board may, in its discretion, as a condition to the issue of any
such new certificate, require the owner of the lost, destroyed, stolen
or mutilated certificate, or his/her legal representatives, to
advertise such fact in such manner as the Board may require, and to
give the Corporation and its transfer agents and registrars, or such
of them as the Board may require, a bond in such form, in such sums
and with such surety or sureties as the board may direct, to indemnify
the Corporation and its transfer agents and registrars against any
claim that may be made against any of them on account of the continued
existence of any such certificate so alleged to have been lost,
destroyed, stolen or mutilated and against any expense in connection
with such claim.
7.5 Regulations. The Board may make such rules and regulations as it
may deem expedient, not inconsistent with the By-laws or with the
Certificate of Incorporation, concerning the issue, transfer and
registration of certificates representing shares.
7.6 Limitation on Transfers. If any two or more shareholders or
subscribers for shares shall enter into any agreement whereby the
rights of any one or more of them to sell, assign, transfer, mortgage,
pledge, hypothecate, or transfer on the books of the Corporation, any
or all of such shares held by them shall be abridged, limited or
restricted, and if a copy of such agreement shall be filed with the
Corporation and shall contain a provision that the
certificatesrepresenting shares covered or affected by said
agreement shall have such reference thereto endorsed thereon; and
such shares shall not thereafter be transferred on the books of the
Corporation except in accordance with the terms and provisions of
such agreement.
7.7 Dividends, Surplus, Etc. Subject to the provisions of the Certificate
of Incorporation and of law, the Board:
7.7.1 May declare and pay dividends or make other distributions on the
outstanding shares in such amounts and at such time or times as,
in its discretion, the condition of the affairs of the Corporation
shall render advisable;
7.7.2 May use and apply, in its discretion, any of the surplus of the
Corporation in purchasing or acquiring any shares of the
Corporation, or purchase warrants therefor, in accordance with
law, or any of its bonds, debentures, notes, scrip or other
securities or evidences of indebtedness;
7.7.3 May set aside from time to time out of such surplus or net profits
such sum or sums as, in its discretion, it may think proper, as a
reserve fund to meet contingencies, or for equalizing dividends or
for the purpose of maintaining or increasing the property or
business of the Corporation, or for any other purpose it may think
conducive to the best interests of the Corporation.
ARTICLE VIII
Indemnification
8.1 Indemnification of Others. The Board in its discretion shall have
power on behalf of the Corporation to indemnify any person, other
than a director or officer, made a party to any action, suit or
proceeding by reason of the fact that he/she, his/her testator or
intestate, is or was an employee of the Corporation.
8.2 Insurance. The Board in its discretion shall have the power to
purchase and maintain insurance in accordance with, and subject to,
the provisions of Section 727 of the Business Corporation Law.
<PAGE>
ARTICLE IX
Books and Records
9.1 Books and Records. The Corporation shall keep correct and
complete books and records of account and shall keep minutes of the
proceedings of the shareholders, Board and executive committee, if
any. The Corporation shall keep at the office designated in the
Certificate of Incorporation or at the office of the transfer agent or
registrar of the Corporation in New York State, a recordcontaining the
names and addresses of all shareholders, the number and classof
shares held by each and the dates when they respectively became
the owners of record thereof. Any of the foregoing books, minutes or
records may be in written form or in any other form capable of being
converted into written form within a reasonable time.
9.2 Inspection of Books and Records. Except as otherwise provided by
law, the Board shall determine from time to time whether, and, if
allowed, when and under what conditions and regulations, the
accounts, books, minutes and other records of the Corporation, or
any of them, shall be open to the inspection of the shareholders.
ARTICLE X
Seal
The Board may adopt a corporate seal which shall be in the form of
a circle and shall bear the full name of the Corporation and the year of
its incorporation.
ARTICLE XI
Fiscal Year
The fiscal year of the Corporation shall be determined, and may be
changed, by resolution of the Board.
ARTICLE XII
Voting of Shares Held
Unless otherwise provided in Section 3.17 hereof or by resolution of
the Board, the Chairman of the Board or in his/her absence the President
may, from time to time, appoint one or more attorneys or agents of the
Corporation, in the name and on behalf of the Corporation, to cast as a
shareholder or otherwise in any other corporation, any of whose shares or
securities may be held by the Corporation, at meetings of the holders of
the shares or other securities of such other corporation, and to consent in
writing to any action, by any such other corporation, and may instruct the
person or persons so appointed as to the manner of casting such votes or
giving such consent, and may execute or cause to be executed on behalf of
the Corporation and under its corporate seal, or otherwise, such written
proxies, consents, waivers or other instruments as he may deem necessary
and proper in the premises; or the Chairman of the Board or in his absence,
the President, may himself/herself attend any meeting of the holders of the
shares or other securities of any other such corporation and thereat vote
or exercise any or all other powers of the Corporation as the holder of
such shares or other securities of such other corporation.
ARTICLE XIII
Amendments
The By-laws may be altered, amended, supplemented or repealed, or
new By-laws may be adopted, by vote of the holders of a majority of the
shares of the Corporation entitled to vote in the election of directors or
by vote of a majority of the Board; provided, however, that any alteration,
amendment, supplement or repeal of (1) Section 3.3 of Article III of the
By-laws or of this proviso to Article XIII of the By-laws, shall require
the vote of not less than eighty percent (80%) of the shares entitled to
vote in the election of directors, or the vote of at least eighty percent
(80%) of the Entire Board, for approval and (2) Section 3.2 or 3.17 of
Article III or Section 4.1 of Article IV of the By-laws shall require the
vote of not less than seventypercent (70%) of the Entire Board for
approval. If any By-law regulating an impending election of directors is
adopted, altered, amended, supplemented or repealed by the Board, such
By-law shall be set forth in the notice of the next meeting of shareholders
for election of directors, together with aconcise statement of the changes
made. Any By-laws adopted, altered, amended, or supplemented by the Board
may be altered, amended, supplemented or repealed by the shareholders
entitled to vote thereon.
Exhibit 10.11
AUTOMATIC DIVIDEND REINVESTMENT PLAN
A service for the Shareholders of
ARROW FINANCIAL CORPORATION
ARROW FINANCIAL CORPORATION
AUTOMATIC DIVIDEND REINVESTMENT PLAN
The Arrow Financial Corporation Automatic Dividend Reinvestment Plan
(the "Plan") offers shareholders a convenient and economical way to acquire
additional common stock of Arrow Financial Corporation ("Arrow") without
payment of any brokerage commission or service charge.
Participants in the Plan may reinvest all stock and cash dividends in
the common stock of Arrow as well as make optional cash contributions for
such purchases. Participation in the Plan is entirely voluntary, and you
may join at any time and terminate whenever you wish.
Arrow will administer this plan and act as agent for shareholders who
participate, to the extent and subject to the limitations imposed by law,
including federal securities laws, applicable to purchases and sales by a
publicly held company of its own securities. Arrow will engage one or more
third parties to effect purchases and sales on behalf of the Plan when
required by law, and when not required by law, if Arrow deems it necessary
or appropriate. Presently, Arrow is engaging the services of such a third
party agent.
SHAREHOLDER BENEFITS
1. No service charge or commission on shares purchased - Arrow pays all
service charges associated with the Plan as well as all brokerage
commissions on shares purchased by you.
2. Full Investment of Funds - The Plan permits fractional as well as full
shares to be credited to your account.
3. Added Income - Fractional shares, like full shares, earn dividends.
4. Simplified Record Keeping - All paper work is done for your, and you
receive a detailed quarterly statement.
PLAN OPERATION
By completing and returning the enclosed authorization form, you may
become a Plan participant. Arrow or its designated third party agent will
then invest your dividends, any optional cash contribution, plus dividends
on any shares previously acquired and held for you under the Plan, in
additional shares of Arrow stock. On or about the 1st of each month, any
cash received by the 25th of the previous month from optional contributions
will be used to purchase shares at the then current market price to be
credited to your account accordingly.
TERMINATION
You may terminate your participation at any time by writing to
American Stock Transfer and Trust Company. All dividends with a record
date after receipt of your letter will be sent to you. Upon termination,
certificates for full shares may be issued in your name or sold and
proceeds sent to you. Fractional shares will be automatically converted to
cash and the proceeds remitted to you.
PROXY VOTING
As Arrow shareholders, participants will receive proxy materials,
including a form of proxy reflecting the number of shares owned through the
Plan and otherwise, in connection with any annual or special meeting of
Arrow shareholders. Arrow will vote full shares held for you in accordance
with your instructions subject to the terms and conditions of the Plan.
PARTICIPATION
Holders of record may join the Plan at any time by completing an
authorization form and mailing it to the address on the form. Individuals
who are not shareholders of record may make their initial purchase of Arrow
stock through a cash contribution of $300 or more to the Plan. Optional
cash contributions of up to $10,000 quarterly may be forwarded to American
Stock Transfer and Trust Company for deposit to a participant's account at
any time. There is a minimum cash contribution of $50. (Checks should be
made payable to American Stock Transfer and Trust Company.)
All correspondence concerning the Plan should be direct to:
American Stock Transfer and Trust Company
40 Wall Street
New York, New York 10005
Telephone: (718) 921-8200
TERMS AND CONDITIONS
Plan participants agree that Arrow or its designated third party
agent, will reinvest all of the stock and cash dividends received on the
common shares of Arrow, held by the participant, and dividends on any full
or fractional shares acquired under the Plan, in addition to optional cash
contributions, to the purchase of common shares of Arrow to be held in the
participant's account. Such purchases may be made on any securities
exchange where such shares are traded, in the over-the-counter market, of
in negotiated transactions, and may be on such terms as to price, delivery
and otherwise as Arrow or its designated third party agent may determine to
the extent permitted by law. Optional cash contributions will be invested
in Arrow stock on a monthly basis, generally on, or shortly after the first
of the month. Dividends received into the Plan will be reinvested as soon
as practical after receipt. However, if considered appropriate by Arrow,
or its designated third party agent, such purchases may be made later and
over an extended period of time to the extent permitted by law.
Arrow or its designated third party agent, making purchases for the
participants account, may hold the participant's funds with those of other
shareholders of Arrow participating in the Plan pending purchase of Arrow
stock. The price at which Arrow or its designated third party agent, shall
be deemed to have acquired shares for the participant's account shall be
the average price of all shares purchased by it, as agent for the Plan, in
that investment period.
Arrow may hold the shares of all participants together in its name or
in the name of its nominee. Arrow shall have no responsibility as to the
market value of Arrow common shares acquired for the participant's account.
For a number of reasons, including observance of the Rules and Regulations
of the Securities and Exchange Commission, purchases may be temporarily
curtailed or suspended. Arrow shall not be held accountable for its
inability to make purchases at such times.
As soon as practicable after the completion of an investment on behalf
of a participant, following a dividend payment, Arrow will mail to such
participant a statement indicating the amount invested and the price per
share, the number of shares purchased for all transactions during the
quarter, total shares held in the account, and all year-to-date
transactions for the account. No certificates will be issued to a
participant for such shares unless so requested or until the account is
terminated.
Such requests must be made in writing and will only apply to those
shares already purchased as of the date the request is received. No
certificates for fractional shares will be issued.
The reinvestment of dividends does not relieve the participant of any
income tax which may be payable on such dividends.
Termination may be made at any time by writing to American Stock
Transfer and Trust Company. All dividends with a record date after receipt
of such letter will be sent to the participant along with any voluntary
cash payment received by Arrow but not yet invested. Arrow may terminate
the account by notice in writing mailed to the participant. Upon receipt
of the notice of termination from the participant, Arrow will send
certificates for the full shares in the account. Upon request, Arrow will
sell full shares and deliver the proceeds, less brokerage commissions.
In every case of termination, Arrow will send the participant a check
in an amount equal to the value of any fractional share equivalent based
upon the then current market price of a full share. If a participant
disposes of all shares registered in his/her name, Arrow may, at is option,
terminate the account or determine from the participant to continue
participation in the Plan.
Shares issued by Arrow pursuant to stock dividends or stock splits on
shares held by Arrow for the participant will be credited to the
participant's account. In the event that Arrow make available to its
shareholders rights to purchase additional common shares or any other
securities, Arrow, or its designated third party agent, will sell such
rights accruing to shares held by Arrow under the Plan.
Arrow shall not be liable for any act done in good faith or for any
good faith omission to act, to the extent such disclaimer or liability is
permitted by federal securities law, including, without limitation, any
claims of liability (1) arising out of failure to terminate the
participant's account on the death of such participant prior to receipt of
written notice by Arrow of such death, (2) with respect to the price or
prices at which shares are purchased or sold for the participant's account,
and (3) concerning the times the purchases or sales are made.
Arrow reserves the right to amend, supplement or terminate the Plan,
but such action shall have no retroactive effect that would prejudice the
interest of the participant.
Terms and conditions of this Plan shall be governed by the laws of the
State of New York.
Effective 1/3/96
Mkt. 2/96
Exhibit 11
<TABLE>
ARROW FINANCIAL CORPORATION AND SUBSIDIARIES
STATEMENT RE COMPUTATION OF PER SHARE EARNINGS
<CAPTION>
1995 1994 1993 1992 1991
<S> <C> <C> <C> <C> <C>
Primary Earnings Per Share:
Net Income Before Extraordinary Item
& Cumulative Effect of Accounting Change $12,424 $11,325 $8,176 $2,890 $(33,382)
Extraordinary Item --- --- --- 811 ---
Cumulative Effect of Accounting Change --- --- 1,457 --- ---
Net Income $12,424 $11,325 $9,633 $3,701 $(33,382)
Wesighted Shares Outstanding 5,707 5,732 5,679 5,522 5,438
Stock Options-
Equivalent Shares 6 13 --- --- ---
Total Equivalent Shares 5,713 5,746 5,679 5,522 5,438
Primary Eanrings Per Share,
Before Extraordinary Item $2.17 $1.97 $1.44 $0.53 $(6.13)
Primary Earnings Per Share,
Extraordinary Item --- --- --- 0.13 ---
Primary Earnings Per Share,
Cumulative Effect of Accounting Change --- --- 0.25 --- ---
Primary Earnings Per Share $2.17 $1.97 $1.69 $0.66 $(6.13)
Fully Diluted Earnings Per Share:
Net Income Before Extraordinary Item
& Cumulative Effect of Accounting Change $12,424 $11,325 $8,176 $2,890 $(33,382)
Debenture Interest Expense, net of tax --- 243 --- --- ---
Fully Diluted Income 12,424 11,568 8,176 2,890 (33,382)
Extraordinary Item --- --- --- 811 ---
Cumulative Effect of Accounting Change --- --- 1,457 --- ---
Net Income $12,424 $11,568 $9,633 $3,701 $(33,382)
Weighted Shares Outstanding 5,707 5,732 5,679 5,522 5,438
Stock Options-
Equivalent Shares 25 24 --- --- ---
Debentures --- 333 --- --- ---
Total Equivalent Shares 5,732 6,089 5,679 5,522 5,438
Fully Diluted Earnings Per Share,
Before Extraordinary Item $2.17 $1.90 $1.44 $0.53 $(6.13)
Fully Diluted Earnings Per Share,
Extraordinary Item --- --- --- 0.13 ---
Fully Diluted Earnings Per Share,
Cumulative Effect of Accounting Change --- --- 0.25 --- ---
Fully Diluted Earnings Per Share $2.17 $1.90 $1.69 $0.66 $(6.13)
</TABLE>
Independent Auditors' Report
The Board of Directors and Shareholders of Arrow Financial
Corporation:
We have audited the accompanying consolidated balance
sheets of Arrow Financial Corporation and subsidiaries as of
December 31, 1995 and 1994, and the related consolidated
statements of income, changes in shareholders' equity, and cash
flows for each of the years in the three-year period ended
December 31, 1995. Theses consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audits.
We conducted our audits in accordance with generally
accepted auditing standards. Those standards require that we
plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements
referred to above present fairly, an all material respects, the
financial position of Arrow Financial Corporation and
subsidiaries as of December 31, 1995 and 1994, and the results
of their operations and their cash flows for each of the years
in the three-year period ended December 31, 1995, in conformity
with generally accepted accounting principles.
As discussed in Notes 1 and 17, the Company changed
its method of accounting for income taxes in 1993 to adopt the
provisions of the Financial Accounting Standards Board's SFAS
No. 109, "Accounting for Income Taxes."
KPMG Peat Marwick LLP
Certified Public Accountants
74 North Pearl Street
Albany, NY 12207
January 19, 1996<PAGE>
<TABLE>
Consolidated Balance Sheets
Arrow Financial Corporation and Subsidiaries
(Dollars in Thousands)
<CAPTION>
December 31,
1995 1994
ASSETS
<S> <C> <C>
Cash and Due from Banks (Note 2) $ 23,406 $ 26,624
Federal Funds Sold and Securities Purchased Under
Agreements to Resell 35,100 8,000
Securities Available-for-Sale (Note 3) 178,645 53,868
Securities Held-to-Maturity: (Approximate Fair Value of
$14,508 in 1995 and $123,519 in 1994)
(Notes 3 and 20) 13,921 129,735
Loans and Leases (Notes 4 and 20) 517,787 507,553
Less: Allowance for Loan Losses (Note 5) (12,106) (12,338)
Net Loans and Leases 505,681 495,215
Premises and Equipment (Note 6) 13,888 14,590
Other Real Estate Owned (Note 7) 2,410 3,396
Other Assets 16,739 15,003
Total Assets $789,790 $746,431
LIABILITIES
Deposits:
Demand $ 94,713 $ 93,075
Regular Savings, N.O.W. & Money
Market Deposit Accounts 352,302 359,143
Time Certificates of $100,000
or More (Notes 8 and 20) 57,557 36,171
Other Time Deposits (Notes 8 and 20) 189,881 162,096
Total Deposits 694,453 650,485
Short-Term Borrowings: (Note 9)
Federal Funds Purchased and Securities Sold Under
Agreements to Repurchase 14,045 21,162
Other Short-Term Borrowings 1,252 3,703
Other Liabilities 12,536 7,669
Long-Term Debt (Notes 10 and 20) --- 5,007
Total Liabilities 722,286 688,026
Commitments and Contingent Liabilities
(Notes 3, 13, 18, 19 and 21)
SHAREHOLDERS' EQUITY (Notes 11, 12, 14 and 15)
Preferred Stock, $5 Par Value;
1,000,000 Shares Authorized --- ---
Common Stock, $1 Par Value; 20,000,000 Shares Authorized
(5,979,124 Shares Issued in
1995 and 5,725,765 in 1994) 5,979 5,726
Surplus 40,938 36,102
Undivided Profits 24,296 19,149
Valuation Allowance for
Securities Available-for-Sale 1,152 (673)
Unallocated ESOP Shares (43,130 in 1995) (Note 14) (700) ---
Treasury Stock (309,833 Shares in 1995 and
221,109 in 1994, at Cost) (4,161) (1,899)
Total Shareholders' Equity 67,504 58,405
Total Liabilities and Shareholders' Equity $789,790 $746,431
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE><TABLE>
Consolidated Statements of Income
Arrow Financial Corporation and Subsidiaries
(Dollars in Thousands, Except Per Share Data)
<CAPTION>
Years Ended December 31,
1995 1994 1993
<S> <C> <C> <C>
INTEREST INCOME
Interest and Fees on Loans and Leases $47,988 $42,440 $41,374
Interest on Deposits with Banks --- --- 68
Interest and Dividends on Securities Held-to-Maturity:
U.S. Government, Agencies and Corporations 6,208 6,169 6,348
State and Municipal Obligations 733 332 386
Other Securities 483 205 287
Interest on Federal Funds Sold and Securities
Purchased Under Agreements to Resell 1,307 501 618
Interest and Dividends on
Securities Available-for-Sale 3,999 2,867 2,755
Total Interest Income 60,718 52,514 51,836
INTEREST EXPENSE
Interest on Deposits:
Time Certificates of $100,000 or More 3,761 1,161 708
Other Deposits 20,055 16,204 18,084
Interest on Short-Term Borrowings:
Federal Funds Purchased and Securities
Sold Under Agreements to Repurchase 604 273 155
Other Short-Term Borrowings 215 121 181
Interest on Long-Term Debt 230 443 455
Total Interest Expense 24,865 18,202 19,583
NET INTEREST INCOME 35,853 34,312 32,253
Provision for Loan Losses (Note 5) 1,170 (950) 690
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 34,683 35,262 31,563
OTHER INCOME
Income from Fiduciary Activities 3,752 3,657 3,661
Fees for Other Services to Customers 4,669 4,345 4,459
Net Gains (Losses) on Securities Transactions 23 (481) 26
Other Operating Income (Note 16) 6,052 1,047 966
Total Other Income 14,496 8,568 9,112
OTHER EXPENSE
Salaries and Employee Benefits
(Notes 13, 14 and 15) 16,710 16,204 16,101
Occupancy Expense of Premises, Net 2,040 2,168 2,418
Furniture and Equipment Expense 1,930 2,076 2,254
Other Operating Expense (Note 16) 9,089 10,926 11,345
Total Other Expense 29,769 31,374 32,118
INCOME BEFORE INCOME TAXES AND
CUMULATIVE EFFECT OF ACCOUNTING CHANGE 19,410 12,456 8,557
Provision for Income Taxes (Note 17) 6,986 1,131 381
INCOME BEFORE CUMULATIVE EFFECT
OF ACCOUNTING CHANGE 12,424 11,325 8,176
Cumulative Effect of a Change in Accounting for
Income Taxes --- --- 1,457
NET INCOME $12,424 $11,325 $ 9,633
. . . . . . . . . . . . . . . . . . . . .
Primary Earnings Per Share:
Income Before Accounting Change $ 2.17 $ 1.97 $ 1.44
Accounting Change --- --- .25
Net Income $ 2.17 $ 1.97 $ 1.69
Fully Diluted Earnings Per Share:
Income Before Accounting Change $ 2.17 $ 1.90 $ 1.44
Accounting Change --- --- .25
Net Income $ 2.17 $ 1.90 $ 1.69
Per share amounts have been adjusted for the 1995 four percent and the 1994 four percent
stock dividends.
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
<TABLE>
Consolidated Statement of Changes in Shareholders' Equity
Arrow Financial Corporation and Subsidiaries
(Dollars in Thousands)
<CAPTION>
Shares Common Undivided
Issued Stock Surplus Profits
<S> <C> <C> <C> <C>
Balance at December 31, 1992 5,172,139 $5,172 $28,970 $ 6,998
Net Income --- --- --- 9,633
Cash Dividends Declared,
$.096 per Share --- --- --- (571)
4% Stock Dividend 210,000 210 2,442 (2,652)
Sale of Common Stock 89,704 90 938 ---
Stock Options Exercised 5,462 5 52 ---
Valuation Allowance for
Securities Available-
for-Sale --- --- --- ---
Balance at December 31, 1993 5,477,305 5,477 32,402 13,408
Net Income --- --- --- 11,325
Cash Dividends Declared,
$.356 per Share --- --- --- (2,039)
4% Stock Dividend 219,823 220 3,325 (3,545)
Stock Purchase Contracts
Exercised 18,581 19 281 ---
Stock Options Exercised 10,056 10 94 ---
Purchase of Treasury Stock
(35,229 shares) --- --- --- ---
Valuation Allowance for
Securities Available-
for-Sale --- --- --- ---
Balance at December 31, 1994 5,725,765 5,726 36,102 19,149
Net Income --- --- --- 12,424
Cash Dividends Declared,
$.564 per Share --- --- --- (3,196)
4% Stock Dividend 229,966 230 3,851 (4,081)
Stock Purchase Contracts
Exercised 23,393 23 303 ---
Acquisition of Common Stock
By ESOP (69,500 Shares) --- --- --- ---
Allocation of ESOP Stock
(29,150 Shares) --- --- 24 ---
Stock Options Exercised with
Stock (59,896 Shares) --- --- --- ---
Stock Options Exercised
(92,066 Shares) --- --- 630 ---
Tax Benefit for Exercise
of Stock Options --- --- 28 ---
Purchase of Treasury Stock
(110,687 Shares) --- --- --- ---
Valuation Allowance for
Securities Available-
for-Sale --- --- --- ---
Balance at December 31, 1995 5,979,124 $5,979 $40,938 $24,296
</TABLE?
</TABLE>
<TABLE>
Consolidated Statement of Changes in Shareolders' Equity, Continued
<CAPTION>
Unallocated Unrealized
Employee Gain(Loss)
Stock Securities
Osnership Available Treasury
Plan for Sale Stock Total
<S> <C> <C> <C> <C>
Balance at December 31, 1992 $ --- $ --- $(1,405) $39,735
Net Income --- --- --- 9,633
Cash Dividends Declared,
$.096 per Share --- --- --- (571)
4% Stock Dividend --- --- --- ---
Sale of Common Stock --- --- --- 1,028
Stock Options Exercised --- --- --- 57
Valuation Allowance for
Securities Available-
for-Sale --- 187 --- 187
Balance at December 31, 1993 --- 187 (1,405) 50,069
Net Income --- --- --- 11,325
Cash Dividends Declared,
$.356 per Share --- --- --- (2,039)
4% Stock Dividend --- --- --- ---
Stock Purchase Contracts
Exercised --- --- --- 300
Stock Options Exercised --- --- --- 104
Purchase of Treasury Stock
(35,229 shares) --- --- (494) (494)
Valuation Allowance for
Securities Available-
for-Sale --- (860) --- (860)
Balance at December 31, 1994 --- (673) (1,899) 58,405
Net Income --- --- --- 12,424
Cash Dividends Declared,
$.564 per Share --- --- --- (3,196)
4% Stock Dividend --- --- --- ---
Stock Purchase Contracts
Exercised --- --- --- 326
Acquisition of Common Stock
By ESOP (69,500 Shares) (1,173) --- --- (1,173)
Allocation of ESOP Stock
(29,150 Shares) 473 --- --- 497
Stock Options Exercised with
Stock (59,896 Shares) --- --- (965) (965)
Stock Options Exercised
(92,066 Shares) --- --- 584 1,214
Tax Benefit for Exercise
of Stock Options --- --- --- 28
Purchase of Treasury Stock
(110,687 Shares) --- --- (1,881) (1,881)
Valuation Allowance for
Securities Available-
for-Sale --- 1,825 --- 1,825
Balance at December 31, 1995 $ (700) $1,152 $(4,161) $67,504
Per share amounts have been adjusted for the 1995 four percent and the 1994 four percent
stock dividends. The accompanying notes are an integral part of these consolidated
financial statements.
</TABLE>
<TABLE>
Consolidated Statements of Cash Flows
Arrow Financial Corporation and Subsidiaries
<CAPTION>
(Dollars in Thousands) Years Ended December 31,
1995 1994 1993
Operating Activities:
<S> <C> <C> <C>
Net Income $12,424 $11,325 $ 9,633
Adjustments to Reconcile Net Income to Net
Cash Provided by Operating Activities:
Provision for Loan Losses 1,170 (950) 690
Provision for Other Real Estate Owned Losses 161 398 638
Depreciation and Amortization 1,624 2,167 3,649
Gains on the Sale of Securities Available-for-Sale (51) (73) ---
Losses on the Sale of Securities
Available-for-Sale 28 540 ---
Proceeds from the Sale of Loans 12,397 6,238 12,660
Losses (Gains) on the Sale of Loans, Fixed Assets
and Other Real Estate Owned (120) 1,195 (274)
Deferred Income Taxes (497) (1,950) (2,659)
Decrease (Increase) in Interest Receivable (725) (165) 665
Increase (Decrease) in Interest Payable 1,196 82 (421)
Decrease (Increase) in Other Assets (2,123) 576 (3,388)
Increase (Decrease) in Other Liabilities 3,763 1,418 2,403
Net Cash Provided By Operating Activities 29,247 20,801 23,596
Investing Activities:
Proceeds from the Sale of
Securities Available-for-Sale 4,191 16,059 23,906
Proceeds from the Maturities of Securities
Available-for-Sale 26,407 22,463 33,500
Purchases of Securities Available-for-Sale (33,921) (38,340) (37,005)
Proceeds from the Maturities of
Securities Held-to-Maturity 6,604 51,257 22,039
Purchases of Securities Held-to-Maturity (9,157) (55,473) (72,119)
Net Increase in Loans and Leases (25,206) (16,170) (28,163)
Proceeds from Sales of Fixed Assets and
Other Real Estate Owned 1,473 4,930 6,021
Purchases of Fixed Assets (593) (807) (390)
Net Cash Used In Investing Activities (30,202) (16,081) (52,211)
Financing Activities:
Net Increase (Decrease) in Deposits 43,968 (8,942) 1,552
Net Increase (Decrease) in Short-Term Borrowings (9,568) 12,378 (2,575)
Repayment of Long-Term Debt (4,650) (88) (88)
Common Stock Issued --- 100 843
Exercise of Stock Options 164 104 57
Purchase of Treasury Stock (1,881) (494) ---
Cash Dividends Paid (3,196) (2,039) (571)
Net Cash Provided By (Used In) Financing Activities 24,837 1,019 (782)
Net Increase (Decrease) In Cash and Cash Equivalents 23,882 5,739 (29,397)
Cash and Cash Equivalents at Beginning of the Year 34,624 28,885 58,282
Cash and Cash Equivalents at End of the Year $58,506 $34,624 $28,885
Cash and Cash Equivalents:
Cash and Due From Banks $23,406 $26,624 $22,885
Federal Funds Sold and Securities Purchased Under
Agreements to Resell 35,100 8,000 6,000
Total Cash and Cash Equivalents $58,506 $34,624 $28,885
Supplemental Cash Flow Information:
Interest Paid $23,670 $18,120 $20,004
Income Taxes Paid 6,908 1,537 858
Transfer of Loans to Other Real Estate Owned 642 2,493 7,804
Common Stock Exchanged for Short-Term Borrowings --- --- 100
Common Stock Issued to the Company's ESOP --- --- 85
Cancellation of Debentures by Exercise of Cancellable
Mandatory Stock Purchase Contracts 370 200 ---
Transfer of Securities Held-to-Maturity to
Securities Available-for-Sale 118,200 --- 20,574
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Arrow Financial Corporation (the"Company") is a bank
holding company organized in 1983 under the laws of New York
and registered under the Bank Holding Company Act of 1956. The
accounting and reporting policies of Arrow Financial
Corporation and its subsidiaries conform to generally accepted
accounting principles and general practices within the
industry. Prior years' financial statements have been
reclassified to conform with the current financial statement
presentations.
Principles of Consolidation - The financial statements
of the Company and its wholly-owned subsidiaries are
consolidated and all material intercompany transactions have
been eliminated. In the "Parent Company Only" financial
statements, the investment in wholly owned subsidiaries is
carried under the equity method of accounting.
Cash and Cash Equivalents - Cash and cash equivalents
in the Consolidated Statements of Cash Flows include the
following items: cash at branches, due from bank balances,
cash items in the process of collection and federal funds sold.
Securities -Securities reported as held-to-maturity
are those securities which the Company has both the positive
intent and ability to hold to maturity and are stated at
amortized cost. Securities available-for-sale are reported at
fair value, with unrealized gains and losses, net of taxes,
reported in a separate component of shareholders' equity.
Realized gains and losses are based upon specific
identification.
In November 1995, the FASB issued "A Guide to
Implementation of Statement 115 on Accounting for Certain
Investments in Debt and Equity Securities." The Guide allowed
a one-time reclassification of held-to-maturity securities
before December 31, 1995. Accordingly, the Company
reclassified $118.2 million of held-to-maturity securities to
available-for-sale in December of 1995.
Loans, Leases and Allowance for Loan Losses - Interest
income on commercial loans, mortgages, credit card and
installment loans is accrued and credited to income, based upon
the principal amount outstanding. The financing method of
accounting is used for direct lease contract receivables.
Loan fees and costs, where material, are deferred and
amortized as an adjustment to yield over the lives of the loans
originated.
The allowance for loan losses is established by
charges to operations based upon management's evaluation of the
loan portfolio, current economic conditions, past loan losses
and other factors. In management's opinion, the balance is
sufficient to provide for probable loan losses. While
management uses available information to recognize losses on
loans, future additions to the allowance may be necessary based
on changes in economic conditions in the Company's market area.
In addition, various Federal and State regulatory agencies, as
an integral part of their examination process, review the
Company's allowance for loan losses. Such agencies may require
the Company to recognize additions to the allowance in future
periods, based on their judgments about information available
to them at the time of their examination which may not be
currently available to management.
Loans held for sale are carried at the lower of
aggregate cost or market. As of December 31, 1995, there were
no loans held for sale.
On January 1, 1995, the Company adopted Statement of
Financial Accounting Standards (SFAS) No. 114, "Accounting by
Creditors for Impairment of a Loan." SFAS No. 114, as amended,
requires that impaired loans, except for large groups of
smaller-balance homogeneous loans, be measured based on the
present value of expected future cash flows discounted at the
loan's effective interest rate, the loan's observable market
price or the fair value of the collateral if the loan is
collateral dependent. The Company applies the provisions of
SFAS No. 114 to all impaired commercial and commercial real
estate loans over $250,000, and to all loans restructured
subsequent to adoption. Reserves for loan losses for the remaining
smaller-balance loans are evaluated under SFAS No. 5. Under
the provisions of SFAS No. 114, the Company determines
impairment for collateralized loans based on fair value for the
collateral less estimated cost to sell. For other loans,
impairment is determined by comparing the recorded value of the
loan to the present value of the expected cash flows,
discounted at the loan's effective interest rate. The Company
determines the interest income recognition method on a loan-by-
loan basis. Based upon the borrowers' payment histories and
cash flow projections, interest recognition methods include
full accrual, cash basis and cost recovery. The effect of
adopting SFAS No. 114 was not material to the Company's
consolidated financial statements.
In May 1995, the FASB issued SFAS No. 122, "Accounting
for Mortgage Servicing Rights", which amended SFAS No. 65 to
require that mortgage banking enterprises recognize as separate
assets rights to service loans for others, however those
servicing rights are acquired. The Company adopted SFAS No.
122 as of January 1, 1995, for loans originated after that
date. As of December 31, 1995, the fair value of the Company's
mortgage servicing rights measured under SFAS No. 122 amounted
to $57 thousand. At December 31, 1995, the magnitude of the
serviced loans was not considered so substantial as to require
stratification. There was no valuation reserve for mortgage
servicing rights at December 31, 1995.
Other Real Estate Owned - Real estate acquired by
foreclosure is recorded at the lower of fair value less
estimated costs to sell or cost. Subsequent declines in fair
value, after transfer to other real estate owned, are
recognized through a valuation allowance. Such declines in
fair value along with related operating expenses to administer
such properties are charged directly to operating expense.
Premises and Equipment - Premises and equipment are
stated at cost, less accumulated depreciation and amortization.
Depreciation and amortization included in operating expenses
are stated largely on the straight-line method. The provision
is based on the estimated useful lives of the assets and, in
the case of leasehold improvements, amortization is computed
over the terms of the respective leases or their estimated
useful lives, whichever is less. Gains or losses on
disposition are reflected in earnings.
Assets subject to finance leases are capitalized and
depreciated over the life of the lease with appropriate charges
to operating expense for implicit interest amounts.
Income Taxes - In February 1992, the Financial
Accounting Standards Board issued Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes."
Statement 109 requires a change from the deferred method of
accounting for income taxes of Accounting Principles Board
(APB) Opinion 11 to the asset and liability method of
accounting for income taxes. Under the asset and liability
method of Statement 109, deferred tax assets and liabilities
are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts
of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be
recovered or settled. Under Statement 109, the effect of
deferred tax assets and liabilities of a change in tax rates
is recognized in income in the period that includes the
enactment date.
Effective January 1, 1993, the Company adopted
Statement 109 and has reported the cumulative effect of that
change in the 1993 consolidated statement of income.
Intangible Assets - Intangible assets related to the
acquisition of subsidiary banks and branches, and the related
amortization, are included in other assets and other
noninterest expense, respectively. Intangible assets, which
are being amortized over 15 years, amounted to $926,000 and
$1,087,000 at December 31, 1995 and 1994, respectively. The
related amortization expense totalled $161,000, $172,000 and
$185,000 in 1995, 1994 and 1993, respectively. Gains and
losses on the sale of loans are recognized at the time of sale
and are adjusted to the extent that the average interest rate
on the loans sold, adjusted for a normal servicing fee, differs
from the yield to the buyer. The resulting deferred loan
premium is amortized using the level-yield method over the
estimated remaining life of the loans. Such deferred loan
premiums amounted to $220,000 and $329,000 at December 31, 1995
and 1994, respectively. The amount of loans serviced for
others was $66,633,000 and $72,373,000 at December 31, 1995 and
1994, respectively.
Long-Lived Assets - In March 1995, the FASB released
SFAS No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of." SFAS No.
121 requires that long-lived assets and certain identifiable
intangibles to be held and used by an entity be reviewed for
impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable.
SFAS No. 121 requires that long-lived assets and certain
identifiable intangibles to be disposed of be reported at the
lower of carrying amount or fair value less cost to sell. SFAS
No. 121 is effective for years beginning after December 15,
1995, with earlier adoption allowed. The Company plans to
adopt SFAS No. 121 in 1996. Management anticipates that the
adoption of SFAS No. 121 will not have a material effect on the
Company's consolidated financial statements.
Per Share Computations - Earnings per common share are
determined by using the weighted average number of common
shares and common stock equivalents outstanding during each
year, retroactively adjusted to give effect to the declaration
of stock dividends and stock splits.
Financial Instruments - Statement of Financial
Accounting Standards No. 107, "Disclosures about Fair Value of
Financial Instruments," requires that the Company disclose
estimated fair values for its financial instruments, both on-
and off-balance sheet. The Company is a party to certain
financial instruments with off-balance sheet risk, such as:
commercial lines of credit, construction lines of credit,
credit card lines of credit, overdraft protection, home equity
lines of credit, standby letters of credit and, in prior
periods, loans sold with recourse. The Company's policy is to
record such instruments when funded. Fair value estimates are
made at a specific point in time, based on relevant market
information and information about the financial instrument.
These estimates do not reflect any premium or discount that
could result from offering for sale at one time the Company's
entire holdings of a particular financial instrument. Because
no market exists for a significant portion of the Company's
financial instruments, fair value estimates are based
on judgments regarding future expected loss experience, current
economic conditions, risk characteristics of various financial
instruments, and other factors. These estimates are subjective
in nature and involve uncertainties and matters of significant
judgment and therefore cannot be determined with precision.
Changes in assumptions could significantly affect the
estimates.
Fair value estimates are based on existing on- and
off-balance sheet financial instruments without attempting to
estimate the value of anticipated future business and the value
of assets and liabilities that are not considered financial
instruments. For example, the Company has a substantial trust
department that contributes net fee income annually. The trust
department is not considered a financial instrument, and its
value has not been incorporated into the fair value estimates.
Other significant assets and liabilities that are not
considered financial assets or liabilities include credit card
servicing operations, deferred taxes, property, plant,
equipment, the value of low-cost long-term core deposits and
goodwill. In addition, the tax ramifications related to the
realization of the unrealized gains and losses can have a
significant effect on fair value estimates and have not been
considered in any of the estimates.
The carrying amount of certain short-term assets and
liabilities, namely; cash and due from banks, federal funds
sold, securities sold under agreements to repurchase, demand
deposits, savings, N.O.W. and money market deposits, other
short-term borrowings, accrued interest receivable and accrued
interest payable is a reasonable estimate of fair value. The
fair value estimates of other on- and off-balance sheet
financial instruments, as well as the method of arriving at
fair value estimates, are included in the related footnotes and
summarized in Note 20.
NOTE 2: CASH AND DUE FROM BANKS (In Thousands)
The bank subsidiaries are required to maintain a
reserve balance with the Federal Reserve Bank. The amount of
the required balance at December 31, 1995 and 1994 was
approximately $8,864 and $8,683, respectively.
NOTE 3: SECURITIES (In Thousands)
The fair value of securities, except certain state
and municipal securities, is estimated based on published bid
prices or bid quotations received from securities dealers. The
fair value of certain state and municipal securities is not
readily available through market sources, so fair value
estimates are based on the discounted contractual cash flows
using estimated market discount rates that reflect the credit
and interest rate risk inherent in the instrument, or for
short-term securities, the carrying amount.
A summary of the amortized costs and the approximate
fair values of securities at December 31, 1995 and 1994 is
presented below:
<TABLE>
Securities Held-to-Maturity:
<CAPTION>
Gross Gross
December 31, 1995 Amortized Fair Unrealized Unrealized
Cost Value Gains Losses
<S> <C> <C> <C> <C>
State and Municipal Obligations $ 13,921 $ 14,508 $648 $ 61
Total Securities Held-to-Maturity $ 13,921 $ 14,508 $648 $ 61
December 31, 1994
U.S. Treasury and Agency Obligations $ 61,390 $ 59,046 $--- $2,344
State and Municipal Obligations 10,409 10,375 71 105
Mortgage-Backed Securities 51,904 48,279 11 3,636
Corporate and Other Debt Securities 6,032 5,819 --- 213
Total Securities Held-to-Maturity $129,735 $123,519 $ 82 $6,298
</TABLE>
<TABLE>
Securities Available-for-Sale:
<CAPTION>
Gross Gross
December 31, 1995 Amortized Fair Unrealized Unrealized
Cost Value Gains Losses
<S> <C> <C> <C> <C>
U.S. Treasury and Agency Obligations $113,249 $114,502 $1,458 $ 205
State and Municipal Obligations 338 338 --- ---
Mortgage-Backed Securities 54,289 54,651 649 287
Corporate and Other Debt Securities 7,024 7,300 276 ---
Mutual Funds and Equity Securities 1,798 1,854 56 ---
Total Securities Available-for-Sale $176,698 $178,645 $2,439 $ 492
December 31, 1994
U.S. Treasury and Agency Obligations $50,236 $49,063 $ 1 $1,174
State and Municipal Obligations 2,180 2,180 --- ---
Mortgage-Backed Securities 475 475 --- ---
Mutual Funds and Equity Securities 2,097 2,150 70 17
Total Securities Available-for-Sale $54,988 $53,868 $ 71 $1,191
</TABLE>
<TABLE>
A summary of the maturities of securities as of December 31, 1995 is presented
below:
<CAPTION>
Securities Held- Securities Available-
to-Maturity for-Sale
Amortized Fair Amortized Fair
Cost Value Cost Value
Within One Year:
<S> <C> <C> <C> <C>
U.S. Treasury and Agency Obligations $ --- $ --- $ 50,014 $ 49,983
State and Municipal Obligations 1,984 1,984 192 192
Mortgage-Backed Securities --- --- 3,278 3,311
Corporate and Other Debt Securities --- --- --- ---
Total 1,984 1,984 53,484 53,486
From 1 - 5 Years:
U.S. Treasury and Agency Obligations --- --- 63,235 64,519
State and Municipal Obligations 1,591 1,644 64 64
Mortgage-Backed Securities --- --- 36,375 36,562
Corporate and Other Debt Securities --- --- 7,024 7,300
Total 1,591 1,644 106,698 108,445
From 5 - 10 Years:
U.S. Treasury and Agency Obligations --- --- --- ---
State and Municipal Obligations 5,492 5,827 82 82
Mortgage-Backed Securities --- --- 8,020 8,085
Corporate and Other Debt Securities --- --- --- ---
Total 5,492 5,827 8,102 8,167
Over 10 Years:
U.S. Treasury and Agency Obligations --- --- --- ---
State and Municipal Obligations 4,854 5,053 --- ---
Mortgage-Backed Securities --- --- 6,616 6,693
Corporate and Other Debt Securities --- --- --- ---
Mutual Funds and Equity Securities --- --- 1,798 1,854
Total 4,854 5,053 8,414 8,547
Total Securities $ 13,921 $ 14,508 $176,698 $178,645
</TABLE>
Assets pledged to secure public and trust deposits
and for other purposes totalled
$114,643 and $121,146 at December 31, 1995 and 1994,
respectively.
NOTE 4: LOANS AND LEASES (In Thousands)
<TABLE>
Loans and leases at December 31, 1995 and 1994 consisted of the following:
<CAPTION>
1995 1994
<S> <C> <C>
Commercial, Financial and Agricultural $ 79,993 $ 74,455
Real Estate - Commercial 71,622 81,704
Real Estate - Residential 238,298 230,943
Real Estate - Construction 2,051 5,136
Installment Loans to Individuals 125,762 115,291
Lease Financing, Net of Unearned Income 61 24
Total Loans and Leases $517,787 $507,553
</TABLE>
The carrying amount of net loans and leases at
December 31, 1995 and 1994 was $505,681 and $495,215,
respectively. The fair value of net loans and leases at
December 31, 1995 and 1994 was $516,999 and $500,325,
respectively.
Fair values are estimated for portfolios of loans
with similar financial characteristics. Loans are segregated
by type such as commercial, commercial real estate,
residential mortgage, credit card and other consumer loans.
Each loan category is further segmented into fixed and
adjustable rate interest terms and by performing and
nonperforming categories.
The fair value of performing loans, except
residential mortgage and credit card loans, is calculated by
discounting scheduled cash flows through the estimated
maturity using estimated market discount rates that reflect
the credit and interest rate risk inherent in the loan. The
estimate of maturity is based on historical experience with
repayments for each loan classification, modified, as
required, by an estimate of the effect of current economic and
lending conditions. For performing residential mortgage
loans, written to secondary market standards and the credit
card portfolio, fair value is estimated using quotes from
secondary market sources. For other performing residential
mortgage loans, fair value is estimated by discounting
contractual cash flows adjusted for prepayment estimates using
discount rates based on secondary market sources adjusted to
reflect differences in servicing and credit costs.
Fair value for nonperforming loans is based on recent
external appraisals. If appraisals are not available,
estimated cash flows are discounted using a rate commensurate
with the risk associated with the estimated cash flows.
Assumptions regarding credit risk, cash flows and discount
rates are judgmentally determined using available market
information and specific borrower information.
Certain executive officers and directors, including
their immediate families and organizations in which they are
principals of the company or affiliates, have various loan,
deposit and other transactions with the Company. Such
transactions are on substantially the same terms, including
interest rates and collateral as to loans, as those prevailing
at the time for comparable transactions with others. The
amount of such related party loans was $5,156 at December 31,
1995 and $4,323 at December 31, 1994. During 1995 the amount
of new loans and renewals extended to such related parties was
$4,517 and the total of loan repayments was $3,684.
The Company designates certain loans as nonaccrual
when payment of interest and/or principal is due and unpaid
for a period of, generally, ninety days or the likelihood of
repayment is uncertain in the opinion of management. Loans
are classified as "restructured," in compliance with SFAS No.
15, when the Company grants concessionary terms. The Company
has no material commitments to make additional advances to
nonaccrual or restructured loans. The following table
presents the balance of nonaccrual and restructured loans and
other information implicit to the interest income accounts.
<TABLE>
<CAPTION>
1995 1994 1993
<S> <C> <C> <C>
Principal Amount at December 31 $4,244 $4,197 $12,266
Gross Interest That Would Have Been Earned
Under Original Terms 435 537 1,101
Interest Included in Net Income 116 162 504
</TABLE>
NOTE 5: ALLOWANCE FOR LOAN LOSSES (In Thousands)
<TABLE>
The following summarizes the changes in the allowance for loan losses:
<CAPTION>
1995 1994 1993
<S> <C> <C> <C>
Balance at Beginning of Year $12,338 $16,078 $17,328
Provision for Loan Losses 1,170 (950) 690
Recoveries 369 696 1,147
Charge-Offs (1,771) (3,486) (3,087)
Balance at End of Year $12,106 $12,338 $16,078
</TABLE>
At December 31, 1995 the recorded investment in impaired
loans amounted to $2,107 for which the related allowance for
loan losses was determined in accordance with SFAS No. 114, as
amended. At December 31, 1995 the allowance for loan losses
included $340 which represented the amount of the allowance
related to $1,663 of impaired loans. There was no related
allowance for the remaining $444 of impaired loans. The
average recorded investment of impaired loans for 1995 was
$1,327 and no interest income was recorded on such loans
during the period of impairment.
NOTE 6: PREMISES AND EQUIPMENT (In Thousands)
<TABLE>
A summary of premises and equipment at December 31,
1995 and 1994 is presented below:
<CAPTION>
1995 1994
<S> <C> <C>
Bank Premises, Including Land $18,489 $18,315
Equipment, Furniture and Fixtures 12,931 12,636
Leasehold Improvements 334 334
Sub-Total 31,754 31,285
Accumulated Depreciation and Amortization (17,866) (16,695)
Net Premises and Equipment $13,888 $14,590
</TABLE>
Amounts charged to operations for depreciation and
amortization aggregated $1,240,
$1,476 and $1,820 in 1995, 1994 and 1993, respectively.
NOTE 7: OTHER REAL ESTATE OWNED (In Thousands)
<TABLE>
Other real estate owned, net of an allowance for estimated losses, at December 31,
1995 and 1994 consisted of the following:
<CAPTION>
1995 1994
<S> <C> <C>
Single-Family 1 - 4 Units $ 82 $1,073
Commercial Real Estate 2,328 2,128
Construction and Land Development --- 195
Other Real Estate Owned, Net $2,410 $3,396
</TABLE>
<TABLE>
The following table summarizes changes in the net carrying amount of other real
estate owned at December 31, 1995 and 1994:
<CAPTION>
1995 1994
<S> <C> <C>
Balance at Beginning of Year $3,396 $7,506
Properties Acquired Through Foreclosure 642 2,493
Adjustments for Change in Fair Value (161) (398)
Sales (1,467) (6,205)
Balance at End of Year $2,410 $3,396
</TABLE>
<TABLE>
The following summarizes the changes in the allowance for other real estate owned
losses:
<CAPTION>
1995 1994
<S> <C> <C>
Balance at Beginning of Year $369 $1,150
Additions 161 398
Charge-Offs (160) (1,179)
Balance at End of Year $370 $ 369
</TABLE>
NOTE 8: TIME DEPOSITS (In Thousands)
<TABLE>
<CAPTION>
Under 3 3 to 6 6 to 12 Over 12
Months Months Months Months Total
<S> <C> <C> <C> <C> <C>
Maturities of Time Certificates
of $100,000 or More $34,287 $14,438 $5,566 $3,266 $57,557
</TABLE>
The carrying value of time deposits at December 31,
1995 and 1994 was $247,438 and $198,267, respectively. The
fair value of time deposits at December 31, 1995 and 1994 was
$247,728 and $197,744, respectively. The fair value of time
certificates of deposit is based on the discounted value of
contractual cash flows, except that the fair value is limited
to the extent that the customer could redeem the certificate
after imposition of a premature withdrawal penalty. The
discount rate is estimated using the rates currently offered
for deposits of similar remaining maturities.
NOTE 9: SHORT-TERM BORROWINGS (In Thousands)
<TABLE>
A summary of short-term borrowings is presented
below:
<CAPTION>
Federal Funds Purchased and Securities Sold
Under Agreements to Repurchase: 1995 1994
<S> <C> <C>
Balance at December 31 $14,045 $21,162
Maximum Month-End Balance 14,460 21,162
Average During the Year 12,166 6,674
Average Rate During the Year 4.97% 4.09%
Rate at December 31 4.29% 5.47%
Other Short-Term Borrowings:
Balance at December 31 $1,252 $3,703
Maximum Month-End Balance 8,402 6,587
Average During the Year 3,689 3,163
Average Rate During the Year 5.81% 3.82%
Rate at December 31 5.15% 5.20%
</TABLE>
Securities sold under agreements to repurchase
generally mature within ninety days. Federal funds purchased
represent overnight transactions. Other short-term borrowings
include demand notes issued to the U.S. Treasury, and
short-term notes payable.
The average aggregate borrowing rates were 5.16% and
4.00% for the years 1995 and 1994, respectively.
NOTE 10: LONG-TERM DEBT (In Thousands)
<TABLE>
The following is a summary of the long-term debt at December 31:
<CAPTION>
1995 1994
<S> <C> <C>
8.125% Debentures Due 1996 $ --- $4,787
Obligation Under Capitalized Lease --- 220
Total Long-Term Debt $ --- $5,007
</TABLE>
The 8.125% Debentures were issued on December 23,
1986 in the face amount of $5,000. The debentures were
redeemable, unsecured and subordinated and, if not called,
were to have matured on December 1, 1996. The indenture
agreement contained certain restrictions on disposition of
certain capital stock. The Company redeemed the remaining
debentures on July 8, 1995.
The fair value of long-term debt was determined using
rates currently available to the Company for instruments with
similar terms and maturities. The estimated fair value at
December 31,1994 was $4,843.
NOTE 11: SHAREHOLDERS' EQUITY
On July 8, 1995 the Company cancelled certain
cancellable mandatory stock purchase contracts originally
issued on December 26, 1986. The contracts required the
purchase of $5,100,000 in common stock at a price of $15.20
(as adjusted) per share not later than December 1, 1995.
Prior to the cancellation, $670,000 of the cancellable
mandatory stock purchase contracts had been converted into
common shares of the Company.
NOTE 12: REGULATORY RESTRICTIONS
In the normal course of business, the Company and its
subsidiaries operate under certain regulatory restrictions,
such as the extent and structure of covered intercompany
borrowings and maintenance of reserve requirement balances.
The principal source of the funds for the payment of
shareholder dividends by the Company has been from dividends
declared and paid to the Company by its bank subsidiaries. As
of December 31, 1995, only the Company's principal bank
subsidiary, the Glens Falls National Bank and Trust Company
("GFNB") was in a position to pay dividends without prior
regulatory approval. At that time, the maximum amount that
could have been paid by GFNB to the Company was approximately
$8.7 million.
The Federal Deposit Insurance Corporation Improvement
Act of 1991 (the "Act"), in addition to providing substantial
additional borrowing authority to the FDIC, contained many
provisions that relate to supervisory reforms, deposit
insurance reform, curtailment of the "too big to fail"
doctrine, risk-based deposit insurance premiums, restrictions
on bank activities and consumer matters. Among the key
supervisory reform provisions are: requirements for "prompt
corrective action" of troubled institutions; classification of
institutions based on capital levels, which will be linked to
various sanctions; establishment of noncapital "tripwire"
standards for safety and soundness assessments; annual on-site
examinations; expanded audit requirements and accounting
reforms. Measures involving capital based supervision became
effective December 1992. Effective dates for other provisions
vary.
Under current Federal Reserve regulations, the
Company is prohibited from borrowing from the subsidiary banks
unless such borrowings are secured by specific obligations.
Additionally, the maximum of any such borrowing is limited to
10% of an affiliate's capital and surplus.
NOTE 13: RETIREMENT PLANS (In Thousands)
The Company maintains a non-contributory pension plan
which covers substantially all employees. Benefits are based
on years of service and the participants' final compensation
(as defined). The funding policy is to contribute the maximum
amount that can be deducted for federal income tax purposes.
The Company also maintains a supplemental nonqualified
unfunded retirement plan to provide eligible employees of the
Company and its subsidiaries with benefits in excess of
qualified plan limits imposed by federal tax law.
The following table sets forth the plans' funded
status and amounts recognized in the Company's consolidated
financial statements:
<TABLE>
<CAPTION>
Qualified Plan Nonqualified Plan
1995 1994 1995 1994
Actuarial Present Value of Benefit Obligations:
<S> <C> <C> <C> <C>
Vested Benefit Obligation $ 9,552 $ 8,796 $ 1,581 $ 604
Nonvested Benefit Obligation 241 145 6 ---
Accumulated Benefit Obligation 9,793 8,941 1,587 604
Effect of Projected Future
Compensation Levels 2,896 2,011 487 347
Projected Benefit Obligation 12,689 10,952 2,074 951
Plan Assets at Fair Value 13,636 12,049 --- ---
Plan Assets in Excess of
(Less than) Projected Benefit Obligation 947 1,097 (2,074) (951)
Unrecognized Net Loss from Past
Experience Different from
that Assumed and Effect
of Changes in Assumptions 1,113 1,302 186 (209)
Unrecognized Prior Service Cost (54) (61) 1,296 837
Unrecognized Net Asset at Transition
(being recognized over 15 years) (589) (678) --- ---
Adjustment Required to
Recognize Minimum Liability --- --- (994) (281)
Prepaid (Accrued) Pension Cost $ 1,417 $ 1,660 $(1,586) $ (604)
</TABLE>
<TABLE>
The following table sets forth the components of the Company's net periodic pension
expense:
<CAPTION>
Qualified Non-contributory Plan: 1995 1994 1993
<S> <C> <C> <C>
Service Cost - Benefits Earned During the Period $ 481 $533 $495
Interest Cost on Projected Benefit Obligation 830 788 754
Actual Return on Plan Assets (2,828) (557) (912)
Net Amortization and Deferral 1,759 (542) (189)
Net Periodic Pension Expense $ 242 $222 $148
Supplemental Nonqualified Plan:
Service Cost - Benefits Earned During the Period $ 53 $ 40 $---
Interest Cost on Projected Benefit Obligation 142 66 19
Net Amortization and Deferral 165 104 9
Net Periodic Pension Expense $ 360 $210 $ 28
</TABLE?
The actuarial assumptions used to determine the
projected benefit obligation at December 31, 1995 and 1994
include a discount rate of 7.25% and 8.0%, respectively, and
an assumed rate of increase in future compensation of 4.5% for
both years. The expected rate of return on investments was
9.0% for both 1995 and 1994. The plan's assets are primarily
comprised of short-term funds and U.S. Treasury obligations,
high grade corporate bonds and marketable equity securities.
Plan assets include 130 shares of Arrow Financial Corporation
common stock with a market value of $2,414 at December 31,
1995. During 1995, the Plan received $74 in cash dividends on
the Company's common stock.
On January 1, 1993, the Company adopted Statement of
Financial Accounting Standards (SFAS) No. 106, "Employers'
Accounting for Postretirement Benefits Other than Pensions" on
a prospective basis. Many of the provisions and concepts of
SFAS No. 106 are similar to standards under SFAS No. 87 on
accounting for pensions. The accumulated postretirement
benefit obligation at the date of adoption amounted to
approximately $3,519 and is being amortized over twenty years
as a component of net periodic postretirement benefit cost.
The Company sponsors health and dental care plans
along with term life insurance that provide postretirement
benefits to eligible full and part-time employees. The
medical and life plans are contributory, with retiree
contributions based on length of service. The dental plan is
fully contributory. The accounting for the health plan
provides for automatic increases of Company contributions each
year based on the increase in inflation up to a maximum of 5%.
The Company's policy is to fund the cost of postretirement
benefits in amounts determined at the discretion of
management.
The following table presents the plan's status
reconciled with amounts recognized in the Company's
Consolidated Balance Sheets at December 31, 1995 and 1994:
</TABLE>
<TABLE>
<CAPTION>
1995 1994
Accumulated Postretirement Benefit Obligation:
<S> <C> <C>
Retirees $2,794 $2,679
Fully Eligible Active Plan Participants 177 288
Other Active Plan Participants 1,570 1,175
Total Accumulated Postretirement Benefit Obligation 4,541 4,142
Unrecognized Transition Obligation
(Being Recognized Over 20 Years) (2,977) (3,157)
Unrecognized Net Loss from Past Experience Different
from that Assumed and Effect of Changes in Assumptions (303) (98)
Accrued Postretirement Benefit Cost $1,261 $ 887
</TABLE>
<TABLE>
Net periodic postretirement benefit cost for the years ended December 31, 1995 and
1994, included the following components:
<CAPTION>
1995 1994
<S> <C> <C>
Service Cost $106 $128
Interest Cost 305 304
Net Amortization and Deferral 172 203
Net Periodic Postretirement Benefit Cost $583 $635
</TABLE>
For measurement purposes, a 10.5% annual rate of
increase in the per capita cost of covered health care
benefits was assumed for 1995; the rate was assumed to
decrease gradually to 5.5% for 2005 and remain at that level
thereafter. The health care cost trend rate assumption has a
significant effect on the amounts reported. To illustrate,
increasing the assumed health care cost trend rates by 1
percentage point in each year would increase the accumulated
postretirement benefit obligation as of December 31, 1995 by
$624 and the aggregate of the service and interest cost
components of net periodic postretirement benefit cost for the
year then ended by $9. The weighted-average discount rate
used in determining the accumulated postretirement benefit
obligation at December 31, 1995 and 1994 was 7.25% and 8.0%,
respectively, and the assumed rate of increase in future
compensation was 4.5% for both years.
NOTE 14: OTHER EMPLOYEE BENEFIT PLANS (In Thousands)
The Company maintains an employee stock ownership
plan (ESOP). Substantially all employees of the Company, and
its subsidiaries, are eligible to participate upon
satisfaction of applicable service requirements. During 1995,
the ESOP borrowed $1.2 million from one of the Company's
subsidiary banks to purchase outstanding shares of the
Company's common stock. The ESOP requires the Company to
contribute the amount necessary for the ESOP to discharge its
current obligations which included principal and interest
payments on the note. Contributions to the ESOP amounted to
$750, $750 and $600 for 1995, 1994 and 1993, respectively. As
the debt is repaid, shares are released from colllateral and
allocated to active employees, based on the proporation of
debt and interest paid in the year.
The Company accounts for the ESOP under SOP 93-6,
and accordingly, the shares pledged as collateral are reported
as unallocated ESOP shares in shareholders' equity. As shares
are released from collateral, the Company reports compensation
expense equal to the current market price of the shares, and
the shares become outstanding for earnings per share
computations. The ESOP shares as of December 31, 1995 were as
follows:
1995
Allocated Shares 320
Shares Released for Allocation 29
Unallocated Shares 43
Total ESOP Shares 392
Market Value of Unallocated Shares $798
The Company also sponsors an Employee Stock Purchase Plan
(ESPP). Substantially all employees of the Company, and its
subsidiaries, are eligible to participate upon satisfaction of
applicable service requirements. The aggregate cost of the
ESPP as reflected in the Company's financial statements was
$81, $67 and $63 in 1995, 1994 and 1993, respectively.
The Company also sponsors a Short-Term Incentive Award Plan
for senior management and a Profit Sharing Plan for
substantially all employees. The cost of these plans was
$478, $520 and $417 for 1995, 1994 and 1993, respectively.
The Company's subsidiary banks have a variety of performance
based incentive compensation plans for their employees.
NOTE 15: STOCK OPTION PLANS
The Company has established Incentive Stock Option and
Non-qualified Stock Option Plans. As amended, these programs
reserve 412,432 shares of common stock (adjusted for stock
splits and dividends) for issuance to key employees and
provide for the granting of stock appreciation rights to key
employees. Options may be granted at a price no less than the
greater of the par value or fair market value of such shares
on the date on which such option is granted, and generally
expire ten years from the date of grant. Number of shares and
related prices have been adjusted for the effect of the four
percent stock dividend declared in 1995 and the four percent
stock dividend declared in 1994.
Stock Appreciation Rights, which were granted in tandem with
non-qualified options, entitle the holder of an option to
surrender the unexercised option, or any part thereof and
receive in exchange a payment in cash representing the
difference between the base value and the fair market value of
the common stock of the Company.
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 will adopt SFAS No. 123 in 1996 by providing pro
forma financial disclosures.
The following summarizes the Company's stock option plans.
Price ranges relate to the 1995 activity.
<TABLE>
<CAPTION>
1995 1994 1993
Options:
<S> <C> <C> <C>
Outstanding at January 1 ($5.34 - $14.77) 310,159 260,400 217,596
Granted ($17.63) 60,900 70,720 57,152
Exercised ($5.34 - $14.77) (107,099) (10,459) (5,921)
Cancelled ($14.18) (2,080) (10,502) (8,427)
Outstanding at December 31 ($5.34 - $17.63) 261,880 310,159 260,400
Exercisable at December 31 ($5.34 - $14.77) 134,744 198,795 184,514
</TABLE>
NOTE 16: OTHER OPERATING INCOME AND OTHER OPERATING EXPENSE (In Thousands)
<TABLE>
Other operating income included in the consolidated statements of income are as
follows:
<CAPTION>
1995 1994 1993
<S> <C> <C> <C>
Financial Institution Bond Recovery $5,000 $ --- $ ---
All Other 1,052 1,047 966
Total Other Operating Income $6,052 $1,047 $ 966
</TABLE>
<TABLE>
Other operating expenses included in the consolidated statements of income are as
follows:
<CAPTION>
1995 1994 1993
<S> <C> <C> <C>
Advertising and Promotion $ 694 $ 634 $ 646
Stationery and Printing 735 736 691
Telephone and Communications 707 733 790
Postage 989 1,018 1,031
Legal 805 508 538
Other Real Estate Owned Losses, Net 209 1,716 272
Other Real Estate Owned Expenses 215 407 922
FDIC and Other Insurance 1,147 2,004 2,116
All Other 3,588 3,170 4,339
Total Other Operating Expense $9,089 $10,926 $11,345
</TABLE>
NOTE 17: INCOME TAXES (In Thousands)
<TABLE>
The consolidated provision for income taxes is summarized below:
<CAPTION>
1995 1994 1993
Current Tax Expense:
<S> <C> <C> <C>
Federal $5,650 $2,015 $ 926
State 1,064 1,070 786
Total Current Tax Expense 6,714 3,085 1,712
Deferred Tax Expense:
Federal 321 (1,893) (1,399)
State (49) (61) 68
Total Deferred Tax Expense (Benefit) 272 (1,954) (1,331)
Total Consolidated Provision for Income Taxes $6,986 $1,131 $ 381
</TABLE>
The consolidated provisions for income taxes were less
than the amounts computed by applying
the U.S. Federal Income Tax Rate of 35% for 1995 and
34% for 1994 and 1993 to pre-tax income
from continuing operations as a result of the
following:
<TABLE>
<CAPTION>
1995 1994 1993
<S> <C> <C> <C>
Computed Tax Expense at Statutory Rates $6,793 $4,235 $2,909
Increase (Reduction) in Income Taxes Resulting From:
Change in the Beginning of the Year Balance of
the Valuation Allowance for Deferred Tax
Assets Allocated to Income Tax Expense --- (3,619) (2,809)
Tax-Exempt Income (492) (307) (379)
Nondeductible Interest Expense 74 35 41
State Taxes, Net of Federal Income Tax Benefit 659 666 564
Other Items, Net (48) 121 55
Total Consolidated Provision for Income Taxes $6,986 $1,131 $ 381
</TABLE>
<TABLE>
The components of deferred income tax expense (benefit) for the years ended
December 31, 1995,1994 and 1993 are as follows:
<CAPTION>
1995 1994 1993
<S> <C> <C> <C>
Deferred Tax Expense (Exclusive of the Effects
of the Decrease in the Valuation Allowance for
Deferred Tax Assets) $ 272 $ 1,665 $ 1,478
Decrease in Beginning of the Year Balance
of the Valuation Allowance for
Deferred Tax Assets --- (3,619) (2,809)
Total Deferred Tax Expense (Benefit) $ 272 $(1,954) $(1,331)
</TABLE>
<TABLE>
The tax effects of temporary differences that give rise to
significant portions of the deferred tax assets and deferred tax
liabilities at December 31, 1995 and 1994 are presented below:
<CAPTION>
1995 1994
Deferred Tax Assets:
<S> <C> <C>
Allowance for Loan Losses $4,607 $4,236
Investment Tax Credit Carryforwards --- 292
Alternative Minimum Tax Credit Carryforwards --- 899
Pension and Deferred Compensation Plans 1,251 974
Deferred Expenses 1,063 1,096
Total Gross Deferred Tax Assets 6,921 7,497
Deferred Tax Liabilities:
Pension Plans 653 766
Depreciation 412 468
Deferred Income 796 858
Other 646 719
Total Gross Deferred Tax Liabilities 2,507 2,811
Net Deferred Tax Asset $4,414 $4,686
</TABLE>
The valuation allowance for deferred tax assets as of
January 1, 1994 was $3,619. The net change in the valuation
allowance for the years ended December 31, 1995 and 1994 was
a decrease of $0 and $3,619, respectively. Not included in net
deferred tax assets above are deferred tax liabilities relating
to unrealized gains on securities available for sale of $472
at December 31, 1995 and none at December 31, 1994.
By December 31, 1995, the Company had fully utilized
investment tax credit carryforwards for federal income tax
purposes. In addition, the Company had also fully utilized
alternative minimum tax credit carryforwards.
NOTE 18: LEASE COMMITMENTS (In Thousands)
At December 31, 1995, the Company was obligated under
a number of noncancellable leases for land, buildings and
equipment. Certain of these leases provide for escalation
clauses and contain renewal options calling for increased
rentals as the leases expire.
Future minimum lease payments on operating leases at
December 31, 1995 were as follows:
Operating
Leases
1996 $ 185
1997 154
1998 133
1999 104
2000 33
Later Years 536
Total Minimum Lease Payments $1,145
NOTE 19: FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET
RISK AND CONTINGENT LIABILITIES
(In Thousands)
The Company is party to financial instruments
with off-balance sheet risk in the normal course of
business to meet the financing needs of its customers.
These financial instruments include commitments to
extend credit, standby letters of credit and loans sold
with recourse. Commitments to extend credit include
home equity lines of credit, credit card lines of
credit, commitments for residential and commercial
construction and other personal and commercial lines of
credit. Those instruments involve, to varying degrees,
elements of credit and interest rate risk in excess of
the amount recognized in the consolidated balance
sheets. The contract or notional amounts of those
instruments reflect the extent of the involvement the
Company has in particular classes of financial
instruments.
The Company's exposure to credit loss in the event of
nonperformance by the other party to the financial
instrument for commitments to extend credit and standby
letters of credit and loans sold with recourse written is
represented by the contractual notional amount of those
instruments. The Company uses the same credit policies
in making commitments and conditional obligations as it
does for on-balance sheet instruments.
Financial instruments whose contract amounts
represent credit risk as of December 31 are as follows:
<TABLE>
<CAPTION>
1995 1994
Fixed Variable Total Fixed Variable Total
<S> <C> <C> <C> <C> <C> <C>
Commitments to Extend Credit $ --- $75,899 $75,899 $ --- $77,635 $77,635
Standby Letters of Credit --- 3,352 3,352 --- 4,533 4,533
</TABLE>
Commitments to extend credit are agreements to lend
to a customer as long as there is no violation of any
condition established in the contract. Commitments generally
have fixed expiration dates or other termination clauses and
may require payment of a fee. Since many of the commitments
are expected to expire without being drawn upon, the total
commitment amounts do not necessarily represent future cash
requirements. The Company evaluates each customer's
creditworthiness on a case-by-case basis. Credit card lines
of credit are generally, unsecured. Home equity lines of
credit are secured by residential real estate. Construction
lines of credit are secured by underlying real estate. For
other lines of credit, the amount of collateral obtained, if
deemed necessary by the Company upon extension of credit, is
based on management's credit evaluation of the counter-party.
Collateral held varies, but may include accounts receivable,
inventory, property, plant and equipment, and income-producing
commercial properties.
Standby letters of credit are conditional commitments
issued by the Company to guarantee the performance of a
customer to a third party. The credit risk involved in
issuing letters of credit is essentially the same as that
involved in extending loan facilities to customers.
Under SFAS No. 107 the fair value of commitments to
extend credit is determined by estimating the fees to enter
into similar agreements, taking into account the remaining
terms and present creditworthiness of the counterparties, and
for fixed rate loan commitments, the difference between the
current and committed interest rates. The fair value of
standby letters of credit is based on the fees currently
charged for similar agreements or the cost to terminate the
arrangement with the counterparties. The Company provides
several types of commercial lines of credit and standby
letters of credit to its commercial customers. The pricing of
these services is not isolated as the Company considers the
customer's complete deposit and borrowing relationship in
pricing individual products and services. The commitments to
extend credit also include commitments under home equity lines
of credit, for which the Company charges no fee. Unadvanced
credit card lines comprise the other major category of
commitments to extend credit. The bank charges a nominal
annual fee to the cardholders which covers both the cost to
process purchases made and settled before interest is charged
as well as cash advances and financings of purchases. The
carrying value and fair value of commitments to extend credit
are not material and the Company does not expect to incur any
material loss as a result of these commitments.
In the normal course of business, the Company and its
subsidiary banks became involved in a variety of routine legal
proceedings including so-called "lender liability" claims, in
which borrowers allege that they have suffered loss as a
result of inappropriate actions taken by lending banks. At
present, there are no legal proceedings pending or threatened
which, in the opinion of management and counsel, would result
in a material loss to the Company.
NOTE 20: FAIR VALUE OF FINANCIAL INSTRUMENTS (In Thousands)
The following table presents a summary of the
carrying amount and fair value of the Company's financial
instruments not carried at fair value:
<TABLE>
<CAPTION>
1995 1994
Carrying Fair Carrying Fair
Amount Value Amount Value
<S> <C> <C> <C> <C>
Securities Held-to-Maturity
(Notes 1 and 3) $ 13,921 $ 14,508 $129,735 $123,519
Net Loans and Leases (Notes 1 and 4) 505,681 516,999 495,215 500,325
Time Deposits (Notes 1 and 8) 247,438 247,728 198,267 197,744
Long-Term Debt (Notes 1 and 10) --- --- 5,007 4,843
</TABLE>
NOTE 21: SIGNIFICANT GROUP CONCENTRATIONS OF CREDIT RISK
(In Thousands)
Most of the Company's loans are with customers in
Vermont and northeastern New York. Although the loan
portfolios of the subsidiary banks are well diversified,
tourism has a substantial impact on the Vermont and the
northeastern New York economies. The commitments to extend
credit are fairly consistent with the distribution of loans
presented in Note 4. Generally, the loans are secured by
assets and are expected to be repaid from cash flow or the
sale of selected assets of the borrowers. The Company
evaluates each customer's creditworthiness on a case-by-case
basis. The amount of collateral obtained, if deemed necessary
by the Company upon extension of credit, is based upon
management's credit evaluation of the counterparty. The
nature of the collateral varies with the type of loan and may
include: residential real estate, cash and securities,
inventory, accounts receivable, property, plant and equipment,
income producing commercial properties and automobiles.
NOTE 22: PARENT ONLY FINANCIAL INFORMATION (In Thousands)
<TABLE>
Condensed financial information for Arrow Financial
Corporation is as follows:
<CAPTION>
BALANCE SHEETS December 31,
1995 1994
ASSETS
<S> <C> <C>
Cash in Subsidiary Banks $ 269 $ 79
Interest-Bearing Deposits with Subsidiary Banks 388 2,408
Securities Available-for-Sale 44 475
Investment in Subsidiaries at Equity 69,949 61,421
Premises and Equipment, Net 30 914
Other Assets 2,047 1,693
Total Assets $72,727 $66,990
LIABILITIES
Long-Term Debt $ --- $ 4,787
Note Payable - ESOP 700 ---
Other Liabilities 4,523 3,798
Total Liabilities 5,223 8,585
SHAREHOLDERS' EQUITY
Common Stock 5,979 5,726
Surplus 40,938 36,102
Undivided Profits 24,296 19,149
Unallocated ESOP Shares (700) ---
Valuation Allowance for Securities Available-for-Sale 1,152 (673)
Treasury Stock, at Cost (4,161) (1,899)
Total Shareholders' Equity 67,504 58,405
Total Liabilities and Shareholders' Equity $72,727 $66,990
</TABLE>
<TABLE>
<CAPTION>
STATEMENTS OF INCOME Years Ended December 31,
Income: 1995 1994 1993
<S> <C> <C> <C>
Dividends from Bank Subsidiaries $ 3,155 $2,075 $ 1,000
Dividends from Nonbank Subsidiaries 3,129 --- 30
Interest and Dividends on Securities
Available-for-Sale 54 55 54
Other Income (Including Management Fees) 7,416 7,458 7,044
Net Gains on Securities Transactions 51 70 ---
Total Income 13,805 9,658 8,128
Expense:
Interest Expense 244 409 491
Salaries and Benefits 5,727 5,087 5,030
Occupancy and Equipment 969 1,015 1,020
Other Expense 1,406 1,496 1,497
Total Expense 8,346 8,007 8,038
Income Before Income Tax Benefit and Equity
in Undistributed Net Income of Subsidiaries 5,459 1,651 90
Income Tax Benefit 270 448 796
Income Before Equity in Undistributed
Net Income of Subsidiaries 5,729 2,099 886
Equity in Undistributed Net
Income of Subsidiaries 6,695 9,226 8,747
Net Income $12,424 $11,325 $ 9,633
</TABLE>
<TABLE>
<CAPTION>
STATEMENTS OF CASH FLOWS Years Ended December 31,
1995 1994 1993
Operating Activities:
<S> <C> <C> <C>
Net Income $12,424 $11,325 $ 9,633
Adjustments to Reconcile Net Income to Net Cash
Provided by Operating Activities:
Undistributed Earnings of Subsidiaries (6,695) (9,226) (8,747)
Depreciation and Amortization 38 41 40
Gains on the Sale of Securities
Available-for-Sale (51) (70) ---
Deferred Income Taxes (229) (643) (292)
Changes in Other Assets and Liabilities 698 1,218 (33)
Net Cash Provided by Operating Activities 6,185 2,645 601
Investing Activities:
Net Decrease (Increase) in Interest-Bearing
Deposits with Subsidiary Banks 2,020 (1,199) 108
Proceeds from the Sale of
Securities Available-for-Sale 469 596 ---
Purchases of Securities Available-for-Sale --- (680) ---
Purchases of Securities Held-to-Maturity --- --- (12)
Net Return of Capital from Subsidiary Banks --- 1,000 ---
Sale of Fixed Assets to Subsidiaries 859 --- ---
Purchase of Fixed Assets --- (23) (17)
Net Cash Provided by (Used in) Investing Activities 3,348 (306) 79
Financing Activities:
Net Decrease in Short-Term Borrowings --- --- (1,000)
Repayment of Long-Term Debt (4,430) --- ---
Common Stock Issued --- 100 843
Exercise of Stock Options 164 104 57
Purchase of Treasury Stock (1,881) (494) ---
Cash Dividends Paid (3,196) (2,039) (571)
Net Cash Used in Financing Activities (9,343) (2,329) (671)
Net Increase in Cash and Cash Equivalents 190 10 9
Cash and Cash Equivalents at Beginning of the Year 79 69 60
Cash and Cash Equivalents at End of the Year $ 269 $ 79 $ 69
Supplemental Cash Flow Information:
Interest Paid $ 277 $ 404 $ 412
Income Taxes Paid 6,908 1,537 858
Common Stock Exchanged for Short-Term Borrowings --- --- 100
Common Stock Issued to the Company's ESOP --- --- 85
Transfer of Securities Held-to-Maturity to
Securities Available-for-Sale --- --- 482
Cancellation of Debentures by Exercise of Cancellable
Mandatory Stock Purchase Contracts 370 200 ---
</TABLE>
NOTE 23: DISPOSITION OF GREEN MOUNTAIN BANK BRANCHES
On June 1, 1995 the Company entered into a
definitive agreement with the Mascoma Savings Bank, Lebanon,
New Hampshire, to sell eight branches of the Green Mountain
Bank. On January 15, 1996, the Company completed the sale of
these eight branches, including $40 million of loans and $101
million of deposits. On February 27, 1996, the Company
entered into a definitive agreement with ALBANK FSB, an
Albany, New York based bank, with Vermont operations, to sell
the remaining six Green Mountain Bank branches, including
$112 million of net loans and $110 million of deposits. The Company
also entered into a definitive agreement with Vermont National
Bank, a Vermont institution, to sell the Green Mountain Bank
trust business. After completion of these sales, the Company
will effectively have no remaining operations in Vermont.
NOTE 24: SUMMARY OF FINANCIAL INFORMATION - UNAUDITED
The following quarterly financial information for
1995 and 1994 is unaudited, but, in the opinion of management,
fairly presents the earnings of the Company. Per share
amounts have been adjusted for the 1995 four percent stock
dividend and the 1994 four percent stock dividend.
<TABLE>
<CAPTION>
(In Thousands, Except Per Share Amounts)
1995 Fourth Third Second First
Quarter Quarter Quarter Quarter
<S> <C> <C> <C> <C>
Total Interest Income $15,846 $15,433 $15,043 $14,396
Net Interest Income 9,269 8,929 8,757 8,898
Provision for Loan Losses 530 280 230 130
Net Securities Gains 23 --- --- ---
Net Income 2,610 2,490 4,940 2,384
Earnings Per Share - Primary and Fully Diluted .46 .43 .87 .41
1994
Total Interest Income $13,813 $13,303 $12,832 $12,566
Net Interest Income 8,979 8,787 8,342 8,204
Provision for Loan Losses 67 108 (1,312) 187
Net Securities Losses (471) --- --- (10)
Net Income 2,354 3,587 2,761 2,623
Earnings Per Share - Primary .41 .63 .48 .45
Earnings Per Share - Fully Diluted .40 .60 .46 .44
</TABLE>
Exhibit 21
Arrow Financial Corporation
Subsidiaries
Subsidiary % Common Stock Owned
Subsidiaries of Arrow Financial Corporation:
Glens Falls National Bank & Trust Co. 100
Saratoga National Bank & Trust Co. 100
Arrow Vermont Corporation 100
Subsidiaries of Arrow Vermont Corporation:
Green Mountain Bank 100
Exhibit 23
Arrow Financial Corporation
Consent of Independent Certified Public Accountants
The Board of Directors
Arrow Financial Corporation
We consent to incorporation by reference in the following
registration statements: 1985 Non-Qualified Stock Option Plan,
filed December 16, 1986 (File No. 2-98735); 1985 Incentive Stock
Option Plan, filed December 16, 1986 (File No. 2-98736); 1989
Employee Stock Purchase Plan, as amended and filed May 15, 1992
(File No. 33-48225) and 1993 Long-Term Incentive Plan (File No.
33-66192) of Arrow Financial Corporation of our report dated
January 19, 1995, relating to the consolidated balance sheets of
Arrow Financial Corporation and subsidiaries as of December 31,
1995 and 1994, and the related consolidated statements of income,
changes in shareholders' equity, and cash flows for the
three-year period ended December 31, 1995, which report appears
in the December 31, 1995 Annual Report on Form 10-K of Arrow
Financial Corporation. Our report refers to the adoption of the
provision of Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes".
KPMG Peat Marwick, LLP
Albany, New York
March 22, 1996
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> DEC-31-1995
<CASH> 23406
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 35100
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 178645
<INVESTMENTS-CARRYING> 13921
<INVESTMENTS-MARKET> 14508
<LOANS> 517787
<ALLOWANCE> 12106
<TOTAL-ASSETS> 789790
<DEPOSITS> 694453
<SHORT-TERM> 15297
<LIABILITIES-OTHER> 12536
<LONG-TERM> 0
<COMMON> 5979
0
0
<OTHER-SE> 61525
<TOTAL-LIABILITIES-AND-EQUITY> 789790
<INTEREST-LOAN> 47988
<INTEREST-INVEST> 7424
<INTEREST-OTHER> 5306
<INTEREST-TOTAL> 60718
<INTEREST-DEPOSIT> 23816
<INTEREST-EXPENSE> 24865
<INTEREST-INCOME-NET> 35853
<LOAN-LOSSES> 1170
<SECURITIES-GAINS> 23
<EXPENSE-OTHER> 29769
<INCOME-PRETAX> 19410
<INCOME-PRE-EXTRAORDINARY> 19410
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 12424
<EPS-PRIMARY> 2.17
<EPS-DILUTED> 2.17
<YIELD-ACTUAL> 8.33
<LOANS-NON> 4244
<LOANS-PAST> 111
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 12338
<CHARGE-OFFS> 1771
<RECOVERIES> 369
<ALLOWANCE-CLOSE> 12106
<ALLOWANCE-DOMESTIC> 12106
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 3152
</TABLE>
