SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.
FORM 10-Q
[X] QUARTERLY REPORT UNDER SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended September 30, 1997
[ ] TRANSITION REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number: 0-12507
ARROW FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
New York 22-2448962
(State or other jurisdiction of (IRS Employer Identification
incorporation or organization) Number)
250 GLEN STREET, GLENS FALLS, NEW YORK 12801
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code:
(518) 745-1000
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for
shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90
days.
Yes X No
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Class Outstanding as of October 31, 1997
Common Stock, par value $1.00 per share 5,483,126
<PAGE>
ARROW FINANCIAL CORPORATION
FORM 10-Q
SEPTEMBER 30, 1997
INDEX
PART I FINANCIAL INFORMATION
Consolidated Balance Sheets as of September 30, 1997
and December 31, 1996
Consolidated Statements of Income for the Three Month
and Nine Month Periods Ended September 30, 1997 and 1996
Consolidated Statements of Cash Flows for the Nine
Months Ended September 30, 1997 and 1996
Notes to Consolidated Financial Statements
Management's Discussion and Analysis of Financial
Condition and Results of Operations
Cautionary Statement under Federal Securities
Laws
Acquisition of Six Fleet Branches
Divestiture and Liquidation of Vermont Operations
Stock Repurchase Program
Overview
Change in Financial Condition
Capital Resources
Liquidity
Interest Rate Risk
Results of Operations: Quarterly Comparison
Results of Operations: Year-to-Date Comparison
PART II OTHER INFORMATION
SIGNATURES
<TABLE>
<CAPTION>
PART I - FINANCIAL CONDITION
ARROW FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)(Unaudited)
<PAGE>
9/30/97 12/31/96
ASSETS
<S> <C> <C>
Cash and Due from Banks $ 29,917 $ 19,572
Federal Funds Sold 34,000 17,925
Cash and Cash Equivalents 63,917 37,497
Securities Available-for-Sale 202,089 171,743
Securities Held-to-Maturity: (Approximate Fair Value of
$45,164 in 1997 and $31,519 in 1996) 43,990 30,876
Loans and Leases 476,863 393,511
Less: Allowance for Loan Losses (6,229) (5,581)
Net Loans and Leases 470,634 387,930
Premises and Equipment 10,798 9,414
Other Real Estate Owned 322 136
Other Assets 28,238 15,007
Total Assets $819,988 $652,603
LIABILITIES
Deposits:
Demand $ 90,103 $ 67,877
Regular Savings, N.O.W. & Money Market Deposit Accounts 339,477 254,312
Time Certificates of $100,000 or More 78,945 83,802
Other Time Deposits 197,653 135,756
Total Deposits 706,178 541,747
Short-Term Borrowings:
Federal Funds Purchased and Securities Sold Under
Agreements to Repurchase 21,517 16,597
Other Short-Term Borrowings 8,063 6,109
Other Liabilities 12,055 13,854
Total Liabilities 747,813 578,307
<PAGE>
SHAREHOLDERS' EQUITY
Preferred Stock, $5 Par Value; 1,000,000 Shares Authorized --- ---
Common Stock, $1 Par Value; 20,000,000 Shares Authorized
(6,577,036 Shares Issued in 1997 and 1996) 6,577 6,577
Surplus 54,658 54,569
Undivided Profits 31,823 26,992
Net Unrealized Gain on Securities Available-for-Sale,
Net of Tax 736 208
Treasury Stock (1,095,010 Shares in 1997 and
817,743 in 1996, at Cost) (21,619) (14,050)
Total Shareholders' Equity 72,175 74,296
Total Liabilities and Shareholders' Equity $819,988 $652,603
See notes to consolidated financial statements.
</TABLE>
<TABLE>
<CAPTION>
ARROW FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in Thousands, Except Per Share Amounts)(Unaudited)
Three Months Nine Months
Ended Sept 30, Ended Sept 30,
1997 1996 1997 1996
<S> <C> <C> <C> <C>
INTEREST AND DIVIDEND INCOME
Interest and Fees on Loans and Leases $10,473 $10,933 $28,267 $33,520
Interest on Federal Funds Sold 411 193 597 363
Interest and Dividends on
Securities Available-for-Sale 3,267 2,789 8,748 8,197
Interest and Dividends on
Securities Held-to-Maturity 680 243 1,983 642
Total Interest and Dividend Income 14,831 14,158 39,595 42,722
INTEREST EXPENSE
Interest on Deposits:
Time Certificates of $100,000 or More 1,084 1,157 3,402 3,144
Other Deposits 5,129 4,375 12,810 13,008
Interest on Short-Term Borrowings:
Federal Funds Purchased and Securities Sold
Under Agreements to Repurchase 210 171 582 536
Other Short-Term Borrowings 81 47 243 113
Total Interest Expense 6,504 5,750 17,037 16,801
NET INTEREST INCOME 8,327 8,408 22,558 25,921
Provision for Loans Losses 500 224 972 672
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 7,827 8,184 21,586 25,249
<PAGE>
OTHER INCOME
Income from Fiduciary Activities 686 901 2,007 2,860
Fees for Other Services to Customers 1,122 1,062 2,712 3,100
Net Gains (Losses) on Securities Transactions --- --- 37 82
Net Gain on Divestiture of Vermont Operations --- 7,669 --- 14,760
Other Operating Income 413 262 1,422 760
Total Other Income 2,221 9,894 6,178 21,562
OTHER EXPENSE
Salaries and Employee Benefits 3,309 3,890 9,212 11,630
Occupancy Expense of Premises, Net 432 435 1,173 1,413
Furniture and Equipment Expense 461 425 1,414 1,295
Other Operating Expense 1,627 1,500 3,989 5,195
Total Other Expense 5,829 6,250 15,788 19,533
INCOME BEFORE PROVISION FOR INCOME TAXES 4,219 11,828 11,976 27,278
Provision for Income Taxes 1,451 4,056 3,789 9,452
NET INCOME $ 2,768 $ 7,772 $ 8,187 $17,826
Average Shares Outstanding 5,843 6,153 5,945 6,293
Per Common Share:
Earnings $ .47 $ 1.26 $ 1.38 $ 2.83
Dividends Declared .19 .15 .57 .44
Book Value 12.54 12.08 12.54 12.08
Tangible Book Value 10.09 11.77 10.09 11.77
Per share amount have been restated for the November 1997 five percent stock dividend.
See notes to consolidated financial statements.
</TABLE>
<TABLE>
<CAPTION>
ARROW FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)(Unaudited)
Nine Months
Ended Sept 30,
1997 1996
Operating Activities:
<S> <C> <C>
Net Income $ 8,187 $17,826
Adjustments to Reconcile Net Income to Net Cash
Provided by Operating Activities:
Provision for Loan Losses 972 672
Provision for Other Real Estate Owned Losses --- 54
Depreciation and Amortization 958 1,007
Compensation Expense for Allocated ESOP Shares --- 133
Net Gain on Divestiture of Vermont Operations --- (14,760)
Gains on the Sale of Securities Available-for-Sale (101) (228)
Losses on the Sale of Securities Available-for-Sale 63 146
Proceeds from the Sale of Loans 1,897 6,664
Net Gains on the Sale of Loans, Fixed Assets and
Other Real Estate Owned (129) 224
Decrease (Increase) in Deferred Tax Assets 797 596
Decrease (Increase) in Interest Receivable (354) 1,352
Increase (Decrease) in Interest Payable 353 (384)
Decrease (Increase) in Other Assets (2,210) 991
Increase (Decrease) in Other Liabilities (2,152) 630
Net Cash Provided By Operating Activities 8,281 14,923
<PAGE>
Investing Activities:
Proceeds from the Sale of Securities Available-for-Sale 23,996 32,252
Proceeds from the Maturities of Securities
Available-for-Sale 22,180 30,568
Purchases of Securities Available-for-Sale (75,661) (63,323)
Proceeds from the Maturities of Securities Held-to-Maturity 1,766 659
Purchases of Securities Held-to-Maturity (14,801) (5,084)
Proceeds from Loans (Acquired) Sold in Branch Transactions (44,190) 147,339
Net Increase in Loans and Leases (41,645) (22,311)
Proceeds from Fixed Assets (Acquired) Sold
in Branch Transactions (1,338) 2,525
Proceeds from the Sales of Fixed Assets and
Other Real Estate Owned 243 2,087
Purchase of Fixed Assets (795) (984)
Proceeds From Sale of Vermont Trust Operations --- 2,430
Net Cash (Used In) Provided By Investing Activities (130,245) 126,158
Financing Activities:
Deposits Assumed (Transferred) in Branch Transactions,
Net of Premium 127,708 (192,953)
Net Increase in Deposits, Excluding Branch Transactions 24,637 45,054
Net (Decrease) Increase in Short-Term Borrowings 6,874 4,253
Purchase of Treasury Stock (7,479 (8,706)
Sale of Treasury Stock for Exercise of Stock Options --- 250
Disqualifying Disposition of ISO Shares --- 33
Cash Dividends Paid (3,356) (2,739)
Net Cash Provided By (Used In) Financing Activities 148,384 (154,808)
Net Increase (Decrease) in Cash and Cash Equivalents 26,420 (13,727)
Cash and Cash Equivalents at Beginning of Period 37,497 58,506
Total Cash and Cash Equivalents $ 63,917 $ 44,779
Supplemental Cash Flow Information:
Interest Paid $16,684 $17,185
Income Taxes Paid 5,146 7,845
Transfer of Loans to Other Real Estate Owned 283 303
See notes to consolidated financial statements.
</TABLE>
ARROW FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FORM 10-Q
SEPTEMBER 30, 1997
1. Financial Statement Presentation
In the opinion of the management of Arrow Financial Corporation
(the "Company"), the accompanying consolidated financial
statements contain all of the adjustments necessary to present fairly
the financial position as of September 30, 1997 and December 31,
1996; the results of operations for the three and nine month periods
ended September 30, 1997 and September 30, 1996; and the
statements of cash flows for the nine month periods ended
September 30, 1997 and September 30, 1996. All such
adjustments are of a normal recurring nature. Certain items have
been reclassified to conform to the 1997 presentation. Per share
amounts have been restated for the November 28, 1997 five percent
stock dividend declared October 22, 1997.
2. Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities
In June 1996, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards ("SFAS") No.
125, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities." SFAS No. 125 is effective for
transfers and servicing of financial assets and extinguishments of
liabilities occurring after December 31, 1996 (except for certain
provisions which were deferred for one year by SFAS No. 127) and
is to be applied prospectively. This statement provides accounting
and reporting standards for transfers and servicing of financial
assets and extinguishments of liabilities based on consistent
application of financial components approach that focuses on
control. It distinguishes transfers of financial assets that are sales
from transfers that are secured borrowings. The adoption of SFAS
No. 125 did not have a material impact on the Company's
consolidated financial position, results of operations, or liquidity.
3. Earnings Per Share
In February 1997, the FASB issued SFAS No. 128, "Earnings Per
Share." SFAS No. 128 simplifies the standards for computing
earnings per share ("EPS") previously found in APB Opinion No. 15,
and makes them comparable to international EPS standards. It
replaces the presentation of primary EPS with a presentation of
basic EPS. It also requires dual presentation of basic and diluted
EPS on the face of the income statement for all entities with complex
capital structures and requires a reconciliation of the numerator and
denominator of the basic and diluted EPS computations. The
statement is effective for financial statements issued for periods
ending after December 15, 1997. Earlier application is not
permitted, although the statement will require restatement of all
prior-period EPS data presented.
4. Reporting Comprehensive Income and Disclosures about
Operating Segments
In June 1997, the FASB issued two statements relating to
disclosures of financial information: SFAS No. 130, "Reporting
Comprehensive Income" and SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information." SFAS No. 130
establishes standards for reporting and displaying of comprehensive
income and its components in a full set of general-purpose financial
statements. SFAS No. 131 establishes standards for the way that
public business enterprises report information about operating
segments. For the Company, both Statements are effective for
interim and annual financial statements beginning with the first
quarter of 1998.
<PAGE>
ARROW FINANCIAL CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
SEPTEMBER 30, 1997
Arrow Financial Corporation (the "Company") is a two bank holding
company headquartered in Glens Falls, New York. The banking
subsidiaries are Glens Falls National Bank and Trust Company
("GFNB") whose main office is located in Glens Falls, New York and
Saratoga National Bank and Trust Company whose main office is
located in Saratoga Springs, New York.
Cautionary Statement under Federal Securities Laws
The information contained in this Quarterly Report on Form 10-Q
contains forward-looking statements that are based on
management's beliefs, certain assumptions made by management
and current expectations, estimates and projections about the
Company's financial condition and results of operations. Words
such as "expects," "believes," "should," "plans," "will," "estimates,"
and variations of such words and similar expressions are intended
to identify such forward-looking statements. These statements are
not guarantees of future performance and involve certain risks and
uncertainties that are difficult to quantify or, in some cases, to
identify. Therefore, actual outcomes and results may differ
materially from what is expected or forecasted in such forward-
looking statements. Factors that could cause or contribute to such
differences include, but are not limited to, changes in economic and
market conditions, including unanticipated fluctuations in interest
rates, effects of state and federal regulation and risks inherent in
banking operations. Readers are cautioned not to place undue
reliance on these forward-looking statements, which speak only as
of the date hereof. The Company undertakes no obligation to revise
or update these forward-looking statements to reflect the occurrence
of unanticipated events.
This Quarterly Report should be read in conjunction with the
Company's Annual Report filed on Form 10-K for December 31,
1996. Per share amounts have been restated for the November 28,
1997 five percent stock dividend declared October 22, 1997.
Acquisition of Six Fleet Branches
On June 27, 1997, the Company completed the acquisition of six
branches in upstate New York from Fleet Bank, a subsidiary of Fleet
Financial Group, Hartford, CT. The branches are located in the
towns of Plattsburgh (2), Lake Luzerne, Port Henry, Ticonderoga
and Warrensburg and became branches of GFNB. GFNB acquired
substantially all deposits at the branches and most of the loans held
by Fleet Bank related to the branches. Total deposit liabilities at the
branches assumed by GFNB were approximately $140 million and
the total amount of the branch-related loans acquired was
approximately $34 million. Under the purchase agreement, GFNB
also acquired from Fleet an additional $10 million of residential real
estate loans not related to the branches.
Divestiture and Liquidation of Vermont Operations
During 1996, the Company completed the divestiture of substantially
all the banking operations of its Vermont subsidiary bank, Green
Mountain Bank ("GMB") in three separate transactions. Total loans
and deposits transferred in these divestiture transactions amounted
to approximately $148 million and $208 million, respectively. The
only substantial Vermont property not sold in the transactions, the
building that served as GMB's main office in Rutland, Vermont, was
being held for sale on September 30, 1997.
On March 21, 1997, GMB filed Articles of Dissolution under Vermont
law. On June 10, 1997, GMB's immediate parent corporation, Arrow
Vermont Corporation also filed Articles of Dissolution under Vermont
law. Neither GMB nor Arrow Vermont Corporation received any
significant unanticipated claim during the statutory claims period
following the filing by the respective entity of its Articles of
Dissolution. During November 1997, GMB distributed of its
remaining capital to Arrow Vermont as the last step in its dissolution,
and Arrow Vermont, in turn, distributed its remaining capital to Arrow
Financial Corporation.
Stock Repurchase Program
On two separate occasions, in spring and fall 1996, the Board of
Directors of the Company authorized an ongoing stock repurchase
program, under which management was given the authority to
repurchase at its discretion, from time to time, in open market or
privately negotiated transactions, up to an aggregate of $20 million
of the Company's outstanding common stock. As of September 30,
1997, the Company had repurchased under the program $16.8
million, or approximately 768 thousand shares. Of this amount $7.5
million (or 291 thousand shares) was reacquired in the first nine
months of 1997, virtually all in the first six months of the year, prior
to the cash acquisition of the six branches from Fleet Bank
discussed above. The Company expects stock repurchases to
resume in forthcoming periods, depending upon market prices,
prevailing capital ratios, anticipated growth and future capital needs.
OVERVIEW
The Company reported earnings of $8.2 million for the first nine
months of 1997, compared to earnings of $17.8 million for the first
nine months of 1996. Earnings per common share were $1.38 and
$2.83 for the two respective periods. Earnings in both periods
included nonrecurring items, including substantial amounts of
nonrecurring other income in the 1996 periods. The nonrecurring
items are listed in the "Analysis of Recurring Net Income" table,
below. Exclusive of nonrecurring items, earnings for the first three
quarters of 1997 and 1996 amounted to $7.3 million and $7.7
million, respectively, and reflected core earnings per share of $1.23
for both periods.
The annualized returns on average assets were 1.55% and 3.29%
for the first nine months of 1997 and 1996, respectively. The
annualized returns on average equity for the two periods were
15.20% and 34.55%, respectively. Excluding the nonrecurring items,
the annualized returns on average assets were 1.38% and 1.43%
and the annualized returns on average equity were 13.63% and
16.08%, for the respective 1997 and 1996 nine month periods.
For the third quarter of 1997, the Company reported earnings of
$2.8 million, compared to earnings of $7.8 million for the third
quarter of 1996. Earnings per common share were $.47 and $1.26
for the two respective periods. As in the year-to-date analysis,
earnings in both periods included nonrecurring items, including
substantial other income in the 1996 period. Exclusive of
nonrecurring items, earnings for the third quarter of 1997 and 1996
amounted to $2.7 million and $2.6 million, respectively, and core
earnings per share of $.46 for the 1997 period, represented an
increase of 9.5% over the $.42 core earnings per share for the
1996 quarter.
The annualized returns on average assets were 1.36% and 4.20%
for the third quarter of 1997 and 1996, respectively. The annualized
returns on average equity for the two periods were 15.38% and
45.52%, respectively. Excluding the nonrecurring items, the
annualized returns on average assets were 1.33% and 1.42% and
the annualized returns on average equity were 15.20% and 16.69%,
for the respective 1997 and 1996 three month periods.
Total assets were $820.0 million at September 30, 1997 an increase
of $167.4 million or 25.6% from December 31, 1996, principally
reflecting the effects of the Fleet branch acquisition, discussed
above, at the end of the second quarter of 1997.
Notwithstanding net income of $8.2 million, total shareholders' equity
decreased $2.1 million to $72.2 million during the first nine months
of 1997. The decrease in shareholders' equity resulted from the
stock repurchase program described above and cash dividends paid
during the period, offset, in part, by an increase in the net unrealized
gain on securities available-for-sale and net earnings for the period.
Despite the decrease in shareholders' equity and the increase in total
assets during the nine month period, the Company's risk-based
capital ratios and Tier 1 leverage ratio at period-end significantly
exceeded regulatory minimums, and both of the Company banks, as
well as the Company, qualified as "well-capitalized" under federal
bank guidelines.
The following table presents the adjustments necessary to arrive at
the recurring net income of the Company.
<TABLE>
<CAPTION>
Analysis of Recurring Net Income
(In Thousands, Except Per Share Amounts)
Three Months Ended Nine Months Ended
Sep 1997 Sep 1996 Sep 1997 Sep 1996
<S> <C> <C> <C> <C>
Net Income, as Reported $2,768 $7,772 $8,187 $17,826
Adjustments, net of Tax:
OREO Transactions (67) (1) (70) 156
Net Securities Transactions --- --- (22) (50)
Gain on Sale of Vermont Operations --- (5,170) --- (9,896)
Restructured Loan Transactions --- --- (166) (323)
Insurance Settlement --- --- (163) ---
State Income Tax Benefit --- --- (464) ---
Recurring Income $2,701 $2,601 $7,302 $7,713
Earnings Per Share, as Reported $ .47 $ 1.26 $ 1.38 $ 2.83
Earnings Per Share, Recurring .46 .42 1.23 1.23
</TABLE
CHANGE IN FINANCIAL CONDITION
</TABLE>
<TABLE>
<CAPTION>
Summary of Consolidated Balance Sheets
(Dollars in Thousands)
$ Change $ Change % Change % Change
Selected Period-End Balances: Sep 1997 Dec 1996 Sep 1996 From Dec From Sep From Dec From Sep
<S> <C> <C> <C> <C> <C> <C> <C>
Federal Funds Sold $ 34,000 $ 17,925 $ 22,000 $ 16,075 $ 12,000 89.7% 54.5%
Securities Available-for-Sale 202,089 171,743 176,710 30,346 25,379 17.7 14.4
Securities Held-to-Maturity 43,990 30,876 18,337 13,114 25,653 42.5 139.9
Loans, Net of Unearned Income (1) 476,863 393,511 381,683 83,352 95,180 21.2 24.9
Allowance for Loan Losses 6,229 5,581 5,549 648 680 11.6 12.3
Earning Assets (1) 756,943 614,055 598,730 142,888 158,213 23.3 26.4
Total Assets 819,988 652,603 639,626 167,385 180,362 25.6 28.2
Demand Deposits 90,103 67,877 70,223 22,226 19,880 32.7 28.3
Savings, NOW and MMDA Accounts 339,477 254,312 256,623 85,165 82,854 33.5 32.3
Time Deposits of $100,000 or More 78,945 83,802 73,721 (4,857) 5,224 (5.8) 7.1
Other Time Deposits 197,653 135,756 130,245 61,897 67,408 45.6 51.8
Total Deposits 706,178 541,747 530,812 164,431 175,366 30.4 33.0
Other Borrowed Funds 29,580 22,706 19,550 6,874 10,030 30.3 51.3
Shareholders' Equity 72,175 74,296 73,370 (2,121) (1,195) (2.9) (1.6)
(1) Includes Nonaccrual Loans
</TABLE>
Total resources at September 30, 1997 amounted to $820.0
million, an increase of $167.4 million or 25.6% from year-end 1996,
and an increase of $180.4 million or 28.2% from September 30,
1996. At the end of the second quarter of 1997, the Company
completed the acquisition from Fleet Bank of six branches in
northeastern New York. The acquisition increased total assets by
approximately $140 million. Intangible assets (goodwill) added as
a result of the acquisition were approximately $13.3 million; as of
September 30, 1997, total intangible assets were $14.1 million, or
approximately 1.7% of total assets. The remaining growth in the
Company's total assets during the first three quarters of 1997 was
primarily attributable to increases in the loan portfolios at both of
the Company's subsidiary banks.
Total deposits of $706.2 million at September 30, 1997
represented an increase of $164.4 million from the December 31,
1996 level and an increase of $175.4 million from September 30,
1996. The Company assumed approximately $140 million of
deposit liabilities in the Fleet branch acquisition at the end of the
second quarter of 1997. The remainder of the increase in deposits
from September 30, 1996 represented growth at the Company's
other branches, as the balances at the newly acquired branches at
September 30, 1997 were substantially unchanged from deposit
levels at the acquisition date, three months previous.
The following discussion focuses more closely on the trend of
balances and yields of the Company's deposit and loan portfolios.
Deposit and Loan Trends
The following analysis on trends in the deposit and loan portfolios
focuses exclusively on the Company's continuously operated New
York banking offices. The Vermont banking operations,
substantially all of which were divested at the end of
September 1996, have been excluded. The quarter ending
September 1997 reflects the balances acquired from Fleet on June
27, 1997.
The following table presents the quarterly average balance by
deposit type and the percentage of total deposits represented by
each deposit type for each of the most recent five quarters.
<TABLE>
<CAPTION>
Quarterly Average Deposit Balances
(Continuously Operated New York Offices Only)
(Dollars in Thousands)
Sep 1997 Jun 1997 Mar 1997 Dec 1996 Sep 1996
Amount % Amount % Amount % Amount % Amount %
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Demand Deposits $ 93,907 14 $ 65,976 12 $ 63,147 12 $ 67,240 12 $ 69,216 13
N.O.W. and Super N.O.W. 155,461 22 128,067 23 122,318 22 125,559 23 111,052 21
Savings and M.M.D.A 167,821 24 128,350 23 129,791 24 133,974 25 137,768 26
Time Deposits of
$100,000 or More 78,927 11 87,350 16 88,704 16 80,462 15 84,708 16
Other Time Deposits 201,125 29 147,910 26 139,261 26 133,041 25 127,934 24
Total Deposits $697,242 100 $557,653 100 $543,221 100 $540,276 100 $530,678 100
</TABLE>
The mix of deposit products acquired from Fleet was similar to the
Company's preacquisition mix of deposits, except that the Company
did not acquire any time deposits of $100,000 or more from Fleet.<PAGE>
<TABLE>
<CAPTION>
Quarterly Cost of Deposits
(Continuously Operated New York Offices Only)
Sep 1997 Jun 1997 Mar 1997 Dec 1996 Sep 1996
<S> <C> <C> <C> <C> <C>
Demand Deposits --- % --- % --- % --- % --- %
N.O.W. and Super N.O.W. 2.98 3.21 3.05 3.04 2.86
Savings and M.M.D.A 2.87 2.83 2.94 2.93 2.92
Time Deposits of $100,000 or More 5.45 5.37 5.25 5.21 5.25
Other Time Deposits 5.42 5.54 5.38 5.34 5.23
Total Deposits 3.54 3.70 3.63 3.52 3.45
</TABLE>
Federal Reserve Bank's Discount Rate Changes 1992 - 1996
Date New Rate Old Rate
January 31, 1996 5.00% 5.25%
February 1, 1995 5.25 4.75
November 15, 1994 4.75 4.00
August 16, 1994 4.00 3.50
May 17, 1994 3.50 3.00
July 2, 1992 3.00 3.50
The Federal Reserve Board attempts to influence the prevailing
federal funds rate and prime interest rates by changing the Federal
Reserve Bank discount rate and/or through open market operations.
In the first quarter of 1997, the prevailing Federal Funds rate
increased by twenty five basis points even though the discount rate
remained unchanged. Accordingly, the Company experienced an
increase in the total cost of deposits resulting from both this increase
in the federal funds rate, as well as from a highly competitive
marketplace for deposits during the first two quarters of 1997, which
moderated somewhat during the third quarter of 1997.
The average cost of funds did not change significantly due to the
acquisition of the Fleet branches. Total deposits assumed at the
closing of the transaction (at June 27, 1997) were approximately
$140 million. Of that amount, non-maturing interest-bearing deposit
accounts (including NOW, Super NOW, Money Market Savings and regular
savings) constituted approximately $66.3 million, and another $56
million constituted time deposits. After closing, the Company began
paying its own rates on the variable rate deposit accounts assumed
(its rate being slightly higher than Fleet's rates, on average) and
continued paying the previously agreed-upon rates on time deposits
assumed (Fleet's rates for such products being similar to the
Company's prevailing rates for time deposits).
The following table presents the quarterly average balance by loan
type and the percentage of total loans represented by each loan
type for each of the most recent five quarters, again excluding loans
in the Vermont subsidiary (during the quarter ending September
1996) but including the loans acquired in the Fleet Bank branch
acquisition (principally affecting the most recent quarter ending
September 1997).
<PAGE>
<TABLE>
<CAPTION>
Quarterly Average Loan Balances
(Continuously Operated New York Offices Only)
(Dollars in Thousands)
Sep 1997 Jun 1997 Mar 1997 Dec 1996 Sep 1996
Amount % Amount % Amount % Amount % Amount %
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial and
Commercial Real Estate $102,211 22 $ 92,874 23 $ 89,673 23 $ 84,059 22 $ 87,789 23
Residential Real Estate 142,863 30 129,289 32 127,032 32 125,897 33 123,884 33
Home Equity 37,100 8 30,399 7 30,012 8 29,863 8 29,109 8
Indirect Consumer Loans 128,086 27 114,141 28 107,371 27 105,227 27 99,059 26
Direct Consumer Loans 51,185 11 34,212 8 33,300 8 32,013 8 30,634 8
Credit Card Loans 7,582 2 7,769 2 8,153 2 8,514 2 8,733 2
Total Loans $469,027 100 $408,684 100 $395,541 100 $385,573 100 376,208 100
</TABLE>
In addition to the loans acquired from Fleet (approximately $44
million), average loan balances at the other offices increased at a
steady pace over the five most recent quarters. Except for credit
card loans, all categories of loans increased over the period, with
indirect consumer loans and commercial loans demonstrating the
most significant changes. Indirect consumer loans are primarily auto
loans financed through local dealerships where the Company
acquires the dealer paper. The Company did not acquire any
indirect consumer loans or credit card loans from Fleet.
<TABLE>
<CAPTION>
Quarterly Taxable Equivalent Yield on Loans
(Continuously Operated New York Offices Only)
Sep 1997 Jun 1997 Mar 1997 Dec 1996 Sep 1996
<S> <C> <C> <C> <C> <C>
Commercial and
Commercial Real Estate 9.56% 9.73% 9.61% 9.36% 9.76%
Residential Real Estate 8.33 8.40 8.47 8.30 8.26
Home Equity 9.20 9.23 9.10 9.08 9.10
Indirect Consumer Loans 8.39 8.35 8.29 8.35 8.43
Direct Consumer Loans 9.00 9.09 9.16 9.33 9.45
Credit Card Loans 16.46 16.84 16.76 16.46 16.66
Total Loans 8.86 8.97 8.96 8.99 9.00
</TABLE>
Yields on the Company's loan portfolio for its continuously operated
New York banking offices remained quite constant over the four
quarters ending June 30, 1997, reflecting the period of general
interest rate stability. The decrease in the yield during the third
quarter of 1997 primarily reflected the placement of one large
commercial real estate loan, with a principal balance of $1.2 million,
on nonaccrual status during the quarter and, to a lesser extent, a
shift in the mix of the loan portfolio.
The following table presents information related to the Company's
allowance and provision for loan losses for each of the past five
quarters. The provision for loan losses and net charge-offs are
reported on a year-to-date basis, and are annualized when
expressed as a percentage of average loans.
<PAGE>
<TABLE>
<CAPTION>
Summary of the Allowance and Provision for Loan Losses
(Dollars in Thousands)(Loans Stated Net of Unearned Income)
Sep 1997 Jun 1997 Mar 1997 Dec 1996 Sep 1996
<S> <C> <C> <C> <C> <C>
Loan Balances:
Period-End Loans $476,863 $462,396 $398,581 $393,511 $381,683
Average Loans, Year-to-Date 424,686 402,149 395,541 459,946 484,872
Allowance for Loan Losses:
Allowance for Loan Losses,
Beginning of Period $5,581 $5,581 $5,581 $12,106 $12,106
Transfer Pursuant to
Branch Acquisition (Sale) 700 700 --- (6,841) (6,841)
Provision for Loan Losses, Year-to-Date 972 472 236 896 672
Net Charge-offs, Year-to-Date (1,024) (344) (192) (580) (388)
Allowance for Loan Losses, End of Period $6,229 $6,409 $5,625 5,581 $ 5,549
Nonperforming Assets:
Nonaccrual Loans $3,034 $2,232 $2,070 $2,297 $2,477
Loans Past due 90 or More Days
and Still Accruing Interest 296 764 292 321 39
Loans Restructured and in
Compliance with Modified Terms --- --- --- --- ---
Total Nonperforming Loans 3,330 2,996 2,362 2,618 2,516
Other Real Estate Owned 322 370 340 136 225
Total Nonperforming Assets $3,652 $3,366 $2,702 $2,754 $2,741
Performance Ratios:
Allowance to Nonperforming Loans 187.06% 213.92% 238.15% 213.18% 220.54%
Allowance to Period-End Loans 1.31 1.39 1.41 1.42 1.45
Provision to Average Loans (annualized) 0.31 0.24 0.24 0.19 0.18
Net Charge-offs to
Average Loans (annualized) 0.32 0.17 0.20 0.13 0.11
Nonperforming Assets to Loans & OREO 0.77 0.73 0.68 0.70 0.72
</TABLE>
The Company's nonperforming assets at September 30, 1997
amounted to $3.7 million, an increase of $898 thousand, or 32.6%,
from December 31, 1996. The increase in nonperforming loans
from year-end was primarily attributable to the one commercial real
estate loan cited above in the yield analysis, offset by improvements
in other nonperforming loans and net charge-offs for the period.
Based on a review of the loan portfolio acquired from Fleet, the
Company increased the allowance for loan losses by $700 thousand
as a purchase acquisition adjustment to goodwill. This amount
represented the allowance for loan losses established for inherent
risk of loss in the loans acquired from Fleet, and is, the Company
believes, consistent with the general loss reserve previously
maintained on the books of Fleet applicable to these loans.
The provision for loan losses for the first three quarters of 1997 was
$972 thousand, compared to a provision of $672 thousand for the
first three quarters of 1996. Net charge-offs for the first nine
months of 1997 were $1.0 million, an increase of $636 thousand
over the first nine months of 1996. The increase was substantially
attributable to a writedown of one large commercial credit in the
1997 period. On an annualized basis, the ratio of the provision to
average loans for the first nine months of 1997 was .31%,
approximately the same as the annualized ratio for the period's net
charge-offs to average loans of .32% but thirteen basis points higher
than the ratio of the provision to average loans for the 1996 period.
The coverage ratio, defined as the ratio of the allowance for loan
losses to nonperforming loans, was 187% at September 30, 1997.
CAPITAL RESOURCES
Shareholders' equity was $72.2 million at September 30, 1997, a
decrease of $2.1 million, or 2.9%, from December 31, 1996. The
decrease in shareholders' equity was primarily attributable to the
repurchase during the period of 290,500 shares of the Company's
common stock at an aggregate cost of $7.5 million and cash
dividends of $3.4 million, which more than offset an increase of $528
thousand in net unrealized gains on securities available-for-sale and
net earnings of $8.2 million for the nine month period.
The Company and its subsidiaries are currently subject to two capital
guidelines, a leverage ratio test and a risk-based capital measure.
The risk-based capital guidelines assign weightings to all assets and
certain off-balance sheet items and establish an 8% minimum ratio
of qualified total capital to risk-weighted assets. At least half of total
capital must consist of "Tier 1" capital, which comprises common
equity, retained earnings and a limited amount of permanent
preferred stock, less goodwill and certain other intangible assets.
Up to half of total capital may consist of so-called "Tier 2" capital,
comprising a limited amount of subordinated debt, other preferred
stock, certain other instruments and a limited amount of loan loss
reserves. The leverage ratio guideline establishes minimum limits
on the ratio of Tier 1 capital to total tangible assets. For top-rated
companies, the minimum leverage ratio is 3%, but lower-rated or
rapidly expanding companies may be required to meet substantially
greater minimum ratios. The FDIC Improvement Act ("FDICIA") of
1991 mandated actions to be taken by banking regulators with
respect to banking institutions suffering from various levels of
undercapitalization as measured by these capital ratios. FDICIA
established five levels of capitalization ranging from "critically
undercapitalized" to "well-capitalized." As of September 30, 1997,
all capital ratios for the Company and its subsidiary banks not only
exceeded the minimum capital standards for financial institutions
established by these guidelines, but also exceeded the FDICIA's
threshold for "well-capitalized" institutions.
On September 30, 1997 the Tier 1 leverage ratios and Tier 1 and
total risk-based capital ratios for the Company and its subsidiaries
were as follows:
<PAGE>
<TABLE>
<CAPTION>
Summary of Capital Ratios
Tier 1 Total
Tier 1 Risk-Based Risk-Based
Leverage Capital Capital
Ratio Ratio Ratio
<S> <C> <C> <C>
Arrow Financial Corporation 7.26% 12.04% 13.29%
Glens Falls National Bank & Trust Company 7.15 12.49 13.74
Saratoga National Bank & Trust Company 7.31 9.23 10.33
Regulatory Minimum 3.00 4.00 8.00
FDICIA's "Well-Capitalized" Standard 5.00 6.00 10.00
</TABLE>
The following table presents the cash dividends paid in 1997 and
1996. On October 22, 1997, the Company declared both a 5%
stock dividend payable November 28, 1997 and a $.21 cash
dividend payable on December 15, 1997 to shareholders of record
on December 1, 1997 (i.e. after distribution of the 5% stock
dividend). Prices have been restated for the November 1997 5%
stock dividend.
<TABLE>
<CAPTION>
Quarterly Stock Prices and Dividends Market Price Cash
(Restated for Stock Dividends) (Bid) Dividends
High Low Declared
<S> <C> <C> <C>
1996 1st Quarter $17.500 $14.250 $.148
2nd Quarter 20.000 17.750 .148
3rd Quarter 19.750 16.875 .148
4th Quarter 22.625 19.750 .190
1997 1st Quarter $23.375 $22.125 $.190
2nd Quarter 26.375 23.375 .190
3rd Quarter 28.625 24.500 .190
4th Quarter n/a n/a .210
</TABLE>
<TABLE>
<CAPTION>
Other Shareholder Information
1997 1996
<S> <C> <C>
Third Quarter Earnings Per Share, as Reported $.47 $1.26
Third Quarter Earnings Per Share, Recurring $.46 $.42
Dividend Payout Ratio: (Fourth quarter dividends as
a percent of third quarter recurring earnings per share) 42.9% 45.5%
Book Value Per Share $12.54 $12.08
Tangible Book Value Per Share $10.09 $11.77
Period-end Stock Price (average of the bid and asked) $28.57 $20.00
Shares Outstanding 5,756 6,074
Stockholders Equity $72,175 $73,370
Market Capitalization $164,460 $121,485
</TABLE>
The Company is not aware of any known trends, events or
uncertainties that will have or that are reasonably likely to have a
materially adverse effect on the Company's capital resources in
forthcoming periods. The Company's regulators have adopted
regulations and examination procedures relating to Year 2000
preparedness. The Year 2000 presents potential financial risk to
companies which have data processing systems that, because of
date formats, are unable to distinguish between the year 1900 and
the year 2000. Banking regulators have required financial
institutions to have a plan which evaluates all application software
which is date dependant and have a plan which is fully implemented
and tested by the end of 1998. Currently, no substantial risk to the
Company's operations or capital are anticipated. Management
continues to monitor the adequacy of the Company's preparations.
LIQUIDITY
The objective of liquidity management is to satisfy cash flow
requirements, principally the needs of depositors and borrowers to
access funds. Liquidity is provided on an ongoing basis through
assumption or "purchase" of liabilities, the maturity of asset balances
and the sale of assets. Liability liquidity arises primarily from the
significant base of "core" and other deposits gathered through a
branch network operating over a dispersed geographical area.
These "core" balances consist of demand deposits, savings, N.O.W.
and money market account balances and small denomination time
deposits. Core deposits are considered to be less volatile in their
movement into and out of financial institutions, as compared to large
denomination time deposits, brokered time deposits and repurchase
agreements, which are perceived as more sensitive to changes in
interest rates than core deposits. Historically, the Company has
maintained high levels of core deposits. At September 30, 1997,
core deposits represented more than 76% of the Company's total
assets. Additionally, stockholders' equity at a level of 8.8% of total
assets represented another substantial source of funds. Large
denomination time deposits, repurchase agreements and other
borrowed funds represented 13.2% of total assets at September 30,
1997.
Federal funds sold are overnight sales of the Company's surplus
funds to correspondent banks, while federal funds purchased
represent overnight borrowings. Federal funds purchased are thus
a source of short-term liquidity. The Company's practice is to be a
net seller of federal funds under normal circumstances, and to avoid
becoming a net purchaser for any extended periods of time. During
the third quarter of 1997, average federal funds sold amounted to
$29.6 million with no federal funds purchases during the quarter.
The high average balance of federal funds sold during the third
quarter of 1997, was due to temporary excess liquidity resulting
from the Fleet branch acquisition in which the deposit liabilities
assumed were substantially greater than the loan balances and
other branch-related assets acquired.
Apart from federal funds purchased, securities available-for-sale
represent the Company's other significant source of meeting short-
term liquidity needs. This liquidity arises both from an ability to sell
the securities quickly without significant impact on Company
earnings, as well as from the ability to use the securities as collateral
for borrowing. At September 30, 1997, securities available-for-sale
amounted to $202.1 million (out of a total investment securities
portfolio of $244.1 million) and averaged $195.5 million for the
quarter then ended.
Other short-term sources of funds include 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
materially adverse effect or make material demands on the
Company's liquidity.
INTEREST RATE RISK
While managing liquidity, the Company must monitor and control
interest rate risk. Interest rate risk is the exposure of the Company's
net interest income to changes in interest rates. Interest rate risk is
directly related to the different maturities and repricing
characteristics of interest-bearing assets and liabilities, as well as to
prepayment risks for mortgage-backed assets, possible early
withdrawal of time deposits, and the fact that the speed and
magnitude of responses to interest rate changes vary by product.
While many of the Company's loan products are indexed to
independent rates, such as prime rates or treasury notes, the rates
on most deposit products are set by management pricing
committees.
The Company's primary short-term measure of interest rate risk
projects net interest income for the ensuing twelve-month period
based on the maturity, prepayment assumption and repricing
characteristics of each individual interest-bearing asset and liability
under a variety of interest rate projections. To make interest rate
projections, the Company obtains information from third party
providers of economic data. The rate projections are applied to
existing interest sensitive assets and liabilities and to expected new
and rollover amounts. The Company estimates net interest income
for the ensuing twelve months using the most likely rate projection
and then using a no-change scenario. Exposure to rising or falling
rates are calculated to cover a distribution of perceived probable
interest rate scenarios. For a long-term measure of interest rate
risk, the Company measures the economic value of equity for
immediate and sustained changes in interest rates.
At September 30, 1997, the Company was operating within
established internal policy limits for both the short-term and long-
term measures of interest rate risk. The deposits and loans
acquired from Fleet did not significantly affect the Company's
interest rate risk position.
The Company is able to reduce interest rate risk by adjusting the mix
of loan products as well as the balance of fixed and variable rate
products within the various loan categories. To a lesser extent, the
Company manages interest rate risk through selection of
investments for the securities portfolios. The Company does not,
and in the foreseeable future will not, use derivative financial
instruments to manage interest rate risk.
RESULTS OF OPERATIONS: Three Months Ended September 30, 1997
Compared With
Three Months Ended September 30, 1996
<TABLE>
<CAPTION>
Summary of Earnings Performance
(Dollars in Thousands, Except Per Share Amounts)
As Reported: Sep 1997 Sep 1996 Change % Change
<S> <C> <C> <C> <C>
Net Income $2,768 $7,772 $(5,004) (64.4)%
Earnings Per Share .47 1.26 (.79) (61.2)
Return on Assets 1.36% 4.20% (2.84) (67.6)
Return on Equity 15.38% 45.52% (30.14)% (66.2)
Recurring Earnings:
Net Income $2,701 $2,601 $100 3.8%
Earnings Per Share .46 .42 .04 9.5
Return on Assets 1.33% 1.42% (.09)% (6.3)
Return on Equity 15.20% 16.69% (1.49)% (8.9)
</TABLE>
The Company's net income for the quarter ended September 30,
1997 was $2.8 million, which compared to earnings of $7.8 million
for the third quarter of 1996. Earnings per share were $.47 and
$1.26 for the respective quarters. The $5.0 million decrease in
earnings was primarily attributable to gains on the sale of the
remaining Vermont banking operations in the third quarter of 1996.
As adjusted for nonrecurring items, net income increased $100
thousand, or 3.8%, from the third quarter of 1996 to the third quarter
of 1997. Decreases in net interest income and other income were
more than offset by savings in the area of salaries and employee
benefits. These and other changes are reviewed in the following
sections on net interest income, other income, other expense and
income taxes.
Net Interest Income
<TABLE>
<CAPTION>
Summary of Net Interest Income
(Taxable Equivalent Basis)
(Dollars in Thousands)
Sep 1997 Sep 1996 Change % Change
<S> <C> <C> <C> <C>
Interest Income $15,047 $14,330 $717 5.0%
Interest Expense 6,504 5,750 754 13.1
Net Interest Income $ 8,543 $ 8,580 $(37) (0.4)
Average Earning Assets (1) $738,713 $690,762 $47,951 6.9 %
Average Paying Liabilities 626,336 570,807 55,529 9.7
Taxable Equivalent Adjustment 216 172 44 25.6
Yield on Earning Assets (1) 8.08% 8.25% (0.17)% (2.1)%
Cost of Paying Liabilities 4.12 4.00 0.12 3.0
Net Interest Spread 3.96 4.25 (0.29) (6.8)
Net Interest Margin 4.59 4.94 (0.35) (7.1)
(1) Includes Nonaccrual Loans
</TABLE>
On a taxable equivalent basis, net interest income for the third
quarter of 1997 decreased $37 thousand, or 0.4%, from net interest
income in the third quarter of 1996. Net interest income was
adversely impacted from both a 17 basis point decrease in the yield
on earning assets and a 12 basis point increase in the cost of paying
liabilities. The 12 basis point increase in the cost of deposit liabilities
was primarily attributable to a 25 basis point increase in the prevailing
federal funds rate early in 1997. A significant shift in the mix of earning
assets between the two periods accounted for the major portion of
the change in the yield on earning assets. After the sale of the
remaining Vermont branches at the end of September 1996, and
particularly after the June 1997 acquisition of six Fleet branches, the
Company maintained a significantly larger portion of its earning
assets in investment securities and federal funds sold, which were
at lower yields than the Company's loan portfolio. This was due to
the fact that the Vermont banking operations maintained a high loan
to deposit ratio during the 1996 period and the differential between
the deposits assumed and the loans purchased in the Fleet branch
acquisition provided a great deal of liquidity that was only gradually
reinvested in investment securities and loans. Moreover, the New
York based loan portfolio experienced a shift in the mix of loan
products favoring lower yielding indirect loans.
Average earning assets amounted to $738.7 million for the third
quarter of 1997, a $48.0 million, or 6.9%, increase from the third
quarter of 1996. Although the volume of average earning assets
increased only modestly between the 1996 and 1997 periods, the
mix of earning assets underwent a significant change over the past
twelve months. Approximately $108 million of loans were sold with
the Vermont branch sale in September 1996 while, as noted above,
the acquisition of the Fleet branches in June 1997 resulted in a
substantial infusion of federal funds that only gradually was
reinvested in investment securities and loans. There was a similarly
modest increase of 9.7% in average paying liabilities between the
1996 and 1997 periods, as the sale o the remaining Vermont
banking operations at the end of the 1996 third quarter was
counterbalanced by the Fleet branch acquisition in June 1997. In
the final Vermont branch sale in September 1996, ALBANK assumed
approximately $108 million of deposit liabilities and in the Fleet
branch acquisition in June 1997, the Company assumed
approximately $140 million of deposit liabilities.
<PAGE>
The provision for loan losses was $500 thousand for the quarter
ended September 30, 1997, compared to a provision of $224
thousand for the 1996 period. The provision for loan losses was
discussed previously under the "Summary of the Allowance and
Provision for Loan Losses" section of this report.
<TABLE>
<CAPTION>
Other Income
Summary of Other Income
(Dollars in Thousands)
Sep 1997 Sep 1996 $ Change % Change
<S> <C> <C> <C> <C>
Income From Fiduciary Activities $ 686 $ 901 $(215) (23.9)%
Fees for Other Services to Customers 1,122 1,062 60 5.6
Gain on Sale of Vermont Operations --- 7,669 (7,669) ---
Other Operating Income 413 262 151 57.6
Total Other Income $2,221 $9,894 $(7,673) (77.6)
</TABLE>
Other income decreased $7.7 million for the third quarter of 1997 as
compared to the third quarter of 1996. All of the decrease was
attributable to the fact that the 1996 period included gains on the
sale of the remaining Vermont operation. Otherwise, total other
income in the 1997 period was virtually unchanged from the 1996
period. Income from fiduciary services decreased $215 thousand,
or 23.9%, from the 1996 level. The decrease was directly
attributable to the sale of the Vermont trust business to Vermont
National Bank in August of 1996, which was part of the Company's
disposition of its Vermont operations. At that time, the Vermont trust
business represented approximately 50% of the Company's trust
business income. Subsequently, the Company has experienced growth in
the New York trust business. Although the Company's financial
results for the third quarter of 1997 includes income from the
branches acquired from Fleet, the Company did not acquire any
trust business from Fleet.
Fees for other services to customers (primarily service charges on
deposit accounts, credit card fee income and servicing income on
sold loans) increased $60 thousand, or 5.6%, reflecting the
offsetting effects of the disposition of the Vermont operations in the
third quarter of 1996 and the acquisition of the Fleet branches in
June 1997. Other operating income (primarily credit card
processing income and gains on the sale of other real estate owned,
loans and other assets) increased $151 thousand between the two
periods. The increase is primarily due to gains on the sale of other
real estate owned in the 1997 period. There were no sales of
investment securities in either period.
<TABLE>
<CAPTION>
Other Expense
Summary of Other Expense
(Dollars in Thousands)
Sep 1997 Sep 1996 $ Change % Change
<S> <C> <C> <C> <C>
Salaries and Employee Benefits $3,309 $3,890 $ (581) (14.9)%
Occupancy Expense of Premises, Net 432 435 (3) (.7)
Furniture and Equipment Expense 461 425 36 8.5
Other Operating Expense 1,627 1,500 127 8.5
Total Other Expense $5,829 $6,250 $(421) (7.2)
</TABLE>
Other (i.e. noninterest) expense decreased $421 thousand, or 7.2%,
from the third quarter of 1996 to the third quarter of 1997. The third
quarter of 1996 represented the last quarter of operating expenses
relating to the Company's Vermont banking operations, whereas the
third quarter of 1997 represented the first full quarter of operating
expenses relating to the six branches acquired from Fleet and the
amortization of goodwill from that acquisition, reflected in other
operating expense.
A $581 thousand reduction in salaries and employee benefits
represented the area of greatest savings over the comparative
periods. The Company also experienced a $3 thousand, or .7%,
decrease in net occupancy expenses. These decreases were offset,
only in part, by a $36 thousand increase in furniture and equipment
expense and a $127 thousand increase in other operating expenses.
The increase to furniture and fixture expense was primarily
attributable to increased depreciation expense associated with the
Company's investment, in late 1996, in data processing equipment
for the production of imaged checking account statements. The
increase to other operating expense, in the comparative three month
period, was fully attributable to amortization of goodwill related to the
Fleet branch acquisition. Otherwise, other operating expense would
have decreased from the third quarter of 1996 to the third quarter of
1997.
<PAGE>
Income Taxes
<TABLE>
<CAPTION>
Summary of Income Taxes
(Dollars in Thousands, Except Per Share Amounts)
Sep 1997 Sep 1996 Change % Change
<S> <C> <C> <C> <C>
Provision for Income Taxes $1,451 $4,056 $(2,605) (64.2)%
Effective Tax Rate 34.39% 34.29% 0.10% 0.3
</TABLE>
The provision for federal and state income taxes amounted to $1.5
million and $4.1 million for the third quarter of 1997 and 1996,
respectively. The 34.39% effective tax rate for the 1997 quarter was
only 10 basis points above the rate for the 1996 period, which
represented the offsetting effects of a greater portion of income in
the 1997 period subject to state income taxes and the benefit of an
increase in tax exempt income.
RESULTS OF OPERATIONS: Nine Months Ended September 30, 1997
Compared With
Nine Months Ended September 30, 1996
<TABLE>
<CAPTION>
Summary of Earnings Performance
(Dollars in Thousands)
As Reported: Sep 1997 Sep 1996 Change % Change
<S> <C> <C> <C> <C>
Net Income $8,187 $17,826 $(9,639) (54.1)%
Earnings Per Share 1.38 2.83 (1.45) (50.9)
Return on Assets 1.54% 3.28% (1.74)% (53.0)
Return on Equity 15.15% 34.42% (19.27)% (56.0)
Recurring Earnings:
Net Income $7,302 $7,713 $(411) (5.3)%
Earnings Per Share 1.23 1.23 --- ---
Return on Assets 1.38% 1.43% (.05)% (3.5)
Return on Equity 13.63% 16.08% (2.45)% (15.2)
</TABLE>
The Company's net income was $8.2 million for the first nine months
of 1997, compared to earnings of $17.8 million for the first nine
months of 1996. Earnings per share were $1.38 and $2.83 for the
two respective periods. As noted in the "Analysis of Recurring
Income" table in the Overview section of this Management's
Discussion and Analysis, there were several nonrecurring items in
both years, most notably the gain in the 1996 period from the
Company's sale of its Vermont banking operations.
Adjusting for the nonrecurring events in both periods, as further
discussed in the following analysis, net income for the first nine
months of 1997 decreased $411 thousand or 5.3% from the first
nine months of 1996. The period-to-period change for the first nine
months of 1997 as compared to the respective 1996 period is
reviewed in the following sections on net interest income, other
income, other expense and income taxes.
<PAGE>
Net Interest Income
<TABLE>
<CAPTION>
Summary of Net Interest Income
(Taxable Equivalent Basis)
(Dollars in Thousands)
Sep 1997 Sep 1996 Change % Change
<S> <C> <C> <C> <C>
Interest Income $40,193 $43,201 $(3,008) (7.0)%
Interest Expense 17,037 16,801 236 1.4
Net Interest Income $23,156 $26,400 $(3,244) (12.3)
Average Earning Assets (1) $657,585 $682,111 $(24,526) (3.6)%
Average Paying Liabilities 547,394 561,477 (14,083) (2.5)
Taxable Equivalent Adjustment 598 479 119 24.8
Yield on Earning Assets (1) 8.17% 8.46% (0.29)% (3.4)%
Cost of Paying Liabilities 4.16 4.00 0.16 4.0
Net Interest Spread 4.01 4.46 (0.45) (10.1)
Net Interest Margin 4.71 5.17 (0.46) (8.9)
Recurring Net Interest Margin 4.71 5.10 (0.39) (7.6)
(1) Includes Nonaccrual Loans
</TABLE>
On a taxable equivalent basis, net interest income for the first nine
months of 1997 decreased $3.2 million, or 12.3%, from the first nine
months of 1996. The decrease in net interest income in the 1997
period was attributable, in part, to a 3.6% decrease in average
earning assets resulting from the effects of the sale of the
remaining Vermont banking operations in September 1996 and the
acquisition of six Fleet branches in June 1997. Net interest margin
decreased 46 basis points for the first nine months of 1997 as
compared to the first nine months of 1996. The change reflects a
29 basis point decrease in the yield on earning assets and a 16 basis
point increase in the cost of paying liabilities. A significant shift in the
mix of earning assets between the two periods accounted for the
major portion of the change in the yield on earning assets. After the
sale of the remaining Vermont branches at the end of September
1996, and particularly after the June 1997 acquisition of six Fleet
branches, the Company maintained a significantly larger portion of
its earning assets in investment securities and federal funds sold,
which were at lower yields than the Company's loan portfolio. This
was due to the fact that the Vermont banking operations maintained
a high loan to deposit ratio during the 1996 period and the
differential between the deposits assumed and the loans purchased
in the Fleet branch acquisition provided a great deal of liquidity that
was only gradually reinvested in investment securities and loans. In
the 1996 period, the yield on loans in the Vermont portfolio had been
boosted as a result of unexpected payments on certain restructured
loans reported in that period as interest income. Moreover, the New
York based loan portfolio experienced a shift in the mix of loan
products favoring lower yielding indirect loans.
Average earning assets amounted to $657.6 million for the first nine
months of 1997, a $24.5 million, or 3.6%, decrease from the first
nine months of 1996. Both the volume and mix of earning assets
underwent significant changes over the past twelve months as
approximately $108 million of loans were sold with the final Vermont
branch sale in September 1996 and the acquisition from Fleet in
June 1997 of both an approximate $44 million in loans and an
approximate $80 million cash differential initially invested in federal
funds and only gradually reinvested in investment securities and
loans. There was a similar decrease of 2.5% in average paying
liabilities. As with the earning asset analysis, branch transactions
had the most significant impact on the change in average paying
liabilities. In the final Vermont branch sale in September 1996, ALBANK
assumed approximately $107 million of deposit liabilities and in the
Fleet branch acquisition in June 1997, the Company assumed
approximately $140 million of deposit liabilities.
The provision for loan losses was $972 thousand for the nine month
period ended September 30, 1997, compared to a provision of $672
thousand for the 1996 period. The provision for loan losses was
discussed previously under the "Summary of the Allowance and
Provision for Loan Losses" section of this report.
<PAGE>
Other Income
<TABLE>
<CAPTION>
Summary of Other Income
(Dollars in Thousands)
Sep 1997 Sep 1996 $ Change % Change
<S> <C> <C> <C> <C>
Income From Fiduciary Activities $2,007 $ 2,860 $ (853) (29.8)%
Fees for Other Services to Customers 2,712 3,100 (388) (12.5)
Net Gains on Securities Transactions 37 82 (45) (54.9)
Gain on the Disposition of Branches --- 14,760 (14,760) ---
Other Operating Income 1,422 760 662 87.1
Total Other Income $6,178 $21,562 $(15,384) (71.3)
Total Other Income without
Branch Transactions $6,178 $ 6,802 $ (624) (9.2)%
</TABLE>
Other income (i.e. noninterest income) for the first three quarters of
1996 reflected the $14.8 million pre-tax gain on the sale of the
Vermont banking operations in three separate transactions: the sale
of eight branches to Mascoma Savings Bank in January 1996, the
sale of the trust business to Vermont National Bank in August 1996
and the sale of the remaining six branches to ALBANK in September
1996.
Without regard to these gain items, other income decreased $624
thousand, or 9.2%, for the first nine months of 1997 compared with
the first nine months of 1996. Income from fiduciary services in the
1997 period which declined $853 thousand, or 29.8%, from the 1996
period, as the Vermont trust business sold in August 1996
represented approximately 50% of the Company's trust business.
Subsequently, the Company has experienced growth in the New
York trust business. The Company did not acquire any trust
business from Fleet in the June 1997 acquisition of six branches in
upstate New York.
Fees for other services to customers (primarily service charges on
deposit accounts, credit card fee income and servicing income on
sold loans) decreased $388 thousand, or 12.5%, between the
periods. The decrease reflected the fact that the disposition of the
Vermont operations in the third quarter of 1996 (producing service
fee related income for a full nine months in 1996 and none in 1997)
was only partially offset by the acquisition of the Fleet branches in
June 1997 (producing service fee related income for only three
months in 1997 versus none in the 1996 period).
Other operating income (primarily credit card processing income
and gains on the sale of loans and other assets)for the first nine
months of 1997 increased $662 thousand over the 1996 period.
The 1997 period included nonrecurring income related to an
insurance settlement and other post-disposition Vermont operations
transactions. As adjusted for nonrecurring transactions, other
operating income for the 1997 period was $54 thousand or 7.1%
above the amount for the 1996 period.
During the first nine months of 1997, the Company recognized net
securities gains of $37 thousand on the sale of $24.0 million of
securities available-for-sale. The sales were effected for the primary
purpose of reinvestment at a higher yield, and secondarily to extend
the average maturity of the available-for-sale portfolio.
Other Expense
<PAGE>
<TABLE>
<CAPTION>
Summary of Other Expense
(Dollars in Thousands)
Sep 1997 Sep 1996 $ Change % Change
<S> <C> <C> <C> <C<
Salaries and Employee Benefits $9,212 $ 11,630 $(2,418) (20.8)%
Occupancy Expense of Premises, Net 1,173 1,413 (240) (17.0)
Furniture and Equipment Expense 1,414 1,295 119 9.2
Other Operating Expense 3,989 5,195 (1,206) (23.2)
Total Other Expense $15,788 $19,533 $(3,745) (19.2)
</TABLE>
Other (i.e. noninterest) expense decreased $3.7 million, or 19.2%,
for the first nine months of 1997 as compared to the first nine
months of 1996. While the Company experienced decreases in all
major categories of other expense, except furniture and equipment
expense, the major reductions occurred in the areas of salaries and
employee benefits and other operating expense. The principal
reason for these decreases was the completion of the disposition of
the Vermont banking business in August and September 1996,
which was only partially offset by the acquisition of six branches from
Fleet in June 1997.
As in the quarter-to-quarter comparison, these decreases were
offset, only in part, by a $119 thousand increase in furniture and
equipment expense. This increase was primarily attributable to
increased depreciation expense associated with the Company's
investment in data processing equipment, late in 1996, principally for
the production of imaged checking account statements.
Income Taxes
<TABLE>
<CAPTION>
Summary of Income Taxes
(Dollars in Thousands)
Sep 1997 Sep 1996 $ Change % Change
<S> <C> <C> <C> <C>
Provision for Income Taxes $3,789 $9,452 $(5,663) (59.9)%
Effective Tax Rate 31.66% 34.65% ( 2.99)% (8.6)
</TABLE>
The provisions for federal and state income taxes amounted to $3.8
million and $9.5 million for the first nine months of 1997 and 1996,
respectively. During the first quarter of 1997, the Company
reached a favorable settlement with the New York Department of
Taxation and Finance over a combined reporting issue. The effects
of the settlement resulted in a $464 thousand decrease in the
Company's provision for income taxes for the first quarter of 1997.
As adjusted for this settlement, the effective tax rates for the first
nine months of 1997 and 1996 were 35.54% and 34.65%,
respectively. As thus adjusted, the effective tax rate increased by 89
basis points from the 1996 period to the 1997 period. The increase
was attributable to the fact that a greater portion of the Company's
taxable income in the 1997 period was subject to New York State
income taxes (Vermont had no income-based tax for banks) offset,
in part, by an increase in tax exempt income for the 1997 period.
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
The Company is not involved in any material pending
legal proceedings, other than ordinary routine litigation
occurring in the normal course of its business.
The Company's subsidiary banks are parties to various
legal claims which arise in the normal course of their
business, for example, lender liability claims that
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 will not, in the current opinion of management,
likely result in any material liability to the subsidiary
banks or the Company.
Item 2. Changes in Securities - None
Item 3. Defaults Upon Senior Securities - None
Item 4. Submission of Matters to a Vote of Security Holders -
None
Item 5. Other Information - None
Item 6. Exhibits and Reports Filed on Form 8-K
(a) Exhibits
Exhibit 27 Financial Data Schedule
(with electronic filing only)
(b) Current Reports Filed on Form 8-K - None
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
ARROW FINANCIAL CORPORATION
Registrant
Date: November 13, 1997 s/Thomas L. Hoy
Thomas L. Hoy, President and
Chief Executive Officer
Date: November 13, 1997 s/John J. Murphy
John J. Murphy, Executive Vice
President and Treasurer/CFO
(Principal Financial Officer and
Principal Accounting Officer)
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-30-1997
<CASH> 29917
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 34000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 202089
<INVESTMENTS-CARRYING> 43990
<INVESTMENTS-MARKET> 45164
<LOANS> 476863
<ALLOWANCE> 6229
<TOTAL-ASSETS> 819988
<DEPOSITS> 706178
<SHORT-TERM> 29580
<LIABILITIES-OTHER> 12055
<LONG-TERM> 0
0
0
<COMMON> 6577
<OTHER-SE> 65598
<TOTAL-LIABILITIES-AND-EQUITY> 819988
<INTEREST-LOAN> 28267
<INTEREST-INVEST> 10731
<INTEREST-OTHER> 597
<INTEREST-TOTAL> 39595
<INTEREST-DEPOSIT> 16212
<INTEREST-EXPENSE> 17037
<INTEREST-INCOME-NET> 22558
<LOAN-LOSSES> 972
<SECURITIES-GAINS> 37
<EXPENSE-OTHER> 15788
<INCOME-PRETAX> 11976
<INCOME-PRE-EXTRAORDINARY> 11976
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 8187
<EPS-PRIMARY> 1.38
<EPS-DILUTED> 1.38
<YIELD-ACTUAL> 4.71
<LOANS-NON> 3034
<LOANS-PAST> 296
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 5581
<CHARGE-OFFS> 1174
<RECOVERIES> 150
<ALLOWANCE-CLOSE> 6229
<ALLOWANCE-DOMESTIC> 6229
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
