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, 1996
Commission file number 0-12507
ARROW FINANCIAL
CORPORATION
(Exact name of registrant as specified in its charter)
NEW YORK
(State or Other Jurisdiction of
Incorporation or Organization)
22-2448962
(I.R.S. Employer 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
Common stock, Par Value $1.00 Per Share
Outstanding at March 13, 1997
5,659,840
State the aggregate market value of the voting stock held by
non-affiliates of registrant.
Aggregate market value
of voting stock
$137,251,000
Based upon the average of the
closing bid and closing asked prices on
the NASDAQ Exchange
March 13, 1997
DOCUMENTS INCORPORATED BY REFERENCE
Portions of Registrant's Proxy Statement for the Annual Meeting
of Shareholders to be held April 30, 1997 (Part III) and
the Annual Report to Shareholders (Part II, Item 8)
ARROW FINANCIAL CORPORATION
FORM 10-K
INDEX
Cautionary Statement under Federal Securities
Laws
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
Cautionary Statement under Federal Securities
Laws: The information contained in this Annual
Report on Form 10-K 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.
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
nationally chartered banks in New York, as well
as several non-bank subsidiaries, the operations
of which are not significant. The Company also
owns an inactive bank charter in Vermont (the
former Green Mountain Bank) as well as a second-
tier bank holding company, also inactive, in
Vermont (Arrow Vermont Corporation), both of
which are in the process of being liquidated. The
Company sold all of its banking operations in
Vermont in 1996 in three separate transactions,
the last of which was completed in September
1996. The Company owns directly or indirectly
all voting stock of all 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 302 full-time equivalent
employees of the Company and the subsidiary banks
at December 31, 1996.
<TABLE>
<CAPTION>
SUBSIDIARY BANKS: GLENS
(Dollars in Thousands) FALLS SARATOGA
NATIONAL NATIONAL
BANK & BANK &
TRUST CO. TRUST CO.
("GFNB") ("SNB")
<S> <C> <C>
Total Assets at Year-End $550,706 $76,115
Trust Assets Under Management at
Year-End (Not Included
in Total Assets) $432,143 $ 2,420
Date Organized 1851 1988
Employees 170 20
State of Headquarters New York New York
Offices 15 2
Counties of Operation Warren Saratoga
Washington
Saratoga Essex
Main Office 50 Glen St. 137 So. Broadway
Glens Falls, Saratoga,
New York New York
</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. 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 the servicing
rights. Loan sales into the secondary market,
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 19 to
the Consolidated Financial Statements in Part II
Item 8 of this report. Except for credit card
loans, 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
summarizes 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, on a parent company-only
basis, 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 of the banks also 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, as a "bank holding company" under
New York State Law, the Company is subject to
regulation by the New York State Banking
Department. The subsidiary 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
banks are members of the Federal Reserve System
and the deposits of each subsidiary bank are
insured by the Federal Deposit Insurance
Corporation ("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 is 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 the aggregate dollar
amount of risk-weighted assets (which is almost
always less than the dollar amount of such assets
without risk weighting). 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 the allowance for loan losses.
The Federal 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 (not risk-weighted). 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 1996
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 its
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."
<TABLE>
<CAPTION>
INDEX TO SECURITIES ACT GUIDE 3, STATISTICAL
DISCLOSURE BY BANK HOLDING COMPANIES
Required Information Location
<S> <C>
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.
</TABLE>
F. LEGISLATIVE DEVELOPMENTS
In 1994, Congress enacted the Riegle-Neal
Interstate Banking and Branching Efficiency Act.
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 are 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
permitted 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 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 transactions.
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 established five capital
classifications for banking institutions, the
highest being "well capitalized." Under
regulations adopted by the federal bank
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. For the Company, these requirements
became effective for Glens Falls National Bank
and Trust Company beginning in 1996.
The FDIC levies assessments on various deposit
obligations of the Company's banking
subsidiaries. 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. 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. In 1996, Congress enacted the
Deposit Insurance Funds Act, under which deposits
insured by the Bank Insurance Fund ("BIF") are
subject to assessment for payment on the
Financing Corporation ("FICO") bond obligation at
1/5 the rate of the Savings Association Insurance
Fund ("SAIF") assessable deposits. Accordingly,
for 1997, BIF-assessable deposits (like the
Company's) will be assessed an additional 1.3
cents per $100 of insured deposits.
Banks and bank holding companies were also
significantly affected by the Financial
Institutions Reform, Recovery and Enforcement Act
of 1989 ("FIRREA"). FIRREA mandated public
disclosure by commercial banks of their Community
Reinvestment Act ratings and mortgage lending
records and imposed cross-liability on any
insured financial institution which is 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.
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.
<TABLE>
<CAPTION>
Name Age Positions Held and Years from Which Held
<S> <C> <C>
Michael F. Massiano 62 Chairman and CEO since 1990. Mr. Massiano retired
as CEO on January 1, 1997. Mr. Massiano has been
with the Company since 1956.
Thomas L. Hoy 48 President and CEO since January 1, 1997 and
President and COO of Glens Falls National Bank
since 1995. Mr. Hoy was Executive Vice President
of Glens Falls National Bank prior to 1995. Mr.
Hoy has been with the Company since 1974.
John J. Murphy 45 Executive Vice President, Treasurer and CFO since
1993. Mr. Murphy has served as Senior Vice
President, Treasurer and CFO of the Company since
1983. Mr. Murphy has been with the Company since
1973.
Gerard R. Bilodeau 49 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. Mr. Bilodeau has been with the Company
since 1969.
</TABLE>
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 and leases one, at market rates.
Saratoga National Bank owns both of its offices.
The Company continues to own the building in
Rutland, Vermont, that served as headquarters for
the Company's Vermont operations prior to the
divestiture of those operations in 1996. The
building was held for sale at December 31, 1996.
Rental costs of premises did not exceed 5% of
operating costs in 1996.
In the opinion of management of the Company, the
physical properties of the Company and the
subsidiary 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, from time to time, the banks encounter
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 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 1996.
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 listed 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 a 1996 ten percent stock dividend
and a 1995 four percent stock dividend.
<TABLE>
<CAPTION>
Market Price Cash
(Bid) Dividends
High Low Declared
<S> <C> <C> <C>
1995 1st Quarter $14.375 $13.500 $.114
2nd Quarter 14.000 12.750 .123
3rd Quarter 15.625 13.125 .131
4th Quarter 17.250 15.375 .145
1996 1st Quarter $18.375 $15.000 $.155
2nd Quarter 21.000 18.625 .155
3rd Quarter 20.750 17.750 .155
4th Quarter 23.750 20.750 .200
</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 2,653 holders of record
of common stock at December 31, 1996.
Item 6: Selected Financial Data
<TABLE>
<CAPTION>
FIVE YEAR SUMMARY OF SELECTED DATA
Arrow Financial Corporation and Subsidiaries
(Dollars In Thousands, Except Per Share Data)
1996 1995 1994 1993 1992
Consolidated Statements of Income Data:
<S> <C> <C> <C> <C> <C>
Interest and Dividend Income $54,875 $60,718 $52,514 $51,836 $57,829
Less: Interest Expense 21,826 24,865 18,202 19,583 28,399
Net Interest Income 33,049 35,853 34,312 32,253 29,430
Less: Provision for Loan Losses 896 1,170 (950) 690 1,677
Net Interest Income After Provision
for Loan Losses 32,153 34,683 35,262 31,563 27,753
Other Income 23,804 14,473 9,049 9,086 8,606
Net Gains (Losses) on Securities
Transactions (101) 23 (481) 26 15
Less: Other Expense 24,774 29,769 31,374 32,118 32,153
Income Before Income Taxes, Extra-
ordinary Item and Cumulative Effect
of Accounting Change 31,082 19,410 12,456 8,557 4,221
Provision for Income Taxes 10,822 6,986 1,131 381 1,331
Income Before Extraordinary Item &
Cumulative Effect of Accounting Change 20,260 12,424 11,325 8,176 2,890
Extraordinary Item: Utilization of Net
Operating Loss Carryforward --- --- --- --- 811
Cumulative Effect of a Change in
Accounting for Income Taxes --- --- --- 1,457 ---
Net Income $20,260 $12,424 $11,325 $ 9,633 $ 3,701
Primary Earnings Per Share:
Income Before Extraordinary Item
and Accounting Change $ 3.40 $ 1.98 $ 1.79 $ 1.31 $ .48
Extraordinary Item and Accounting Change --- --- --- .23 .12
Net Income $ 3.40 $ 1.98 $ 1.79 $ 1.54 $ .60
Fully Diluted Earnings Per Share:
Income Before Extraordinary Item
and Accounting Change $ 3.39 $ 1.97 $ 1.73 $ 1.31 $ .48
Extraordinary Item and Accounting Change --- --- --- .23 .12
Net Income $ 3.39 $ 1.97 $ 1.73 $ 1.54 $ .60
Cash Dividends $ .66 $ .51 $ .33 $ .09 $ ---
Book Value 12.90 10.91 9.27 7.95 6.43
Consolidated Balance Sheet Data:
Total Assets $652,603 $789,790 $746,431 $733,442 $722,415
Securities Available-for-Sale 171,743 178,645 53,868 55,892 55,598
Securities Held-to-Maturity 30,876 13,921 129,735 125,832 97,305
Loans and Leases, Net of Unearned Income 393,511 517,787 507,553 502,784 492,916
Nonperforming Assets 2,754 6,765 7,825 20,136 29,669
Deposits 541,747 694,453 650,485 659,427 657,875
Other Borrowed Funds 22,706 15,297 24,865 12,487 15,162
Long-Term Debt --- --- 5,007 5,289 5,371
Shareholders' Equity 74,296 67,504 58,405 50,069 39,735
Selected Key Ratios:
Return on Average Assets 2.86% 1.60% 1.52% 1.33% .50%
Return on Average Equity 28.78 19.45 20.79 21.03 10.10
Dividend Payout 19.47 25.89 19.08 5.84 ---
Average Equity to Average Assets 9.95 8.22 7.34 6.32 4.97
Per share amounts have been adjusted for the 1996 ten percent and the 1995, 1994, and 1993
four percent stock dividends.
</TABLE>
Item 7: Management's Discussion and Analysis of
Financial Condition and Results of Operations
The following discussion and analysis focuses on
and reviews the Company's results of operations
for each of the years in the three-year period
ended December 31, 1996 and the financial
condition of the Company as of December 31, 1996
and 1995. Per share amounts have been restated
to reflect the ten percent stock dividend paid in
November 1996 and the four percent stock dividend
paid in November 1995. 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 $20.3 million
for 1996, compared to net income of $12.4 million
for 1995. Primary earnings per share were $3.40
and $1.98 for 1996 and 1995, respectively. Book
value per share was $12.90 at December 31, 1996,
an increase of $1.99, or 18.2%, from December 31,
1995. For 1996, cash dividends per share
amounted to 66.4 cents, an increase of 15.1 cents
or 29.4%, from cash dividends paid in 1995. The
following analysis adjusts net income for
nonrecurring items to arrive at a comparative
presentation of the Company's core earnings:
<TABLE>
<CAPTION>
SUMMARY OF CORE EARNINGS
(In Thousands, Except Per Share Data)
1996 1995
<S> <C> <C>
Net Income, as Reported $20,260 $12,424
Adjustments, Net of Tax:
Divestiture of Vermont Banking Operations (10,267) ---
Insurance Settlement --- (3,250)
OREO Transactions 174 136
Severance Benefits --- 388
Net Securities Transactions 57 (12)
Other (323) (218)
Core Net Income $ 9,901 $ 9,468
Core Primary Earnings per Share $ 1.66 $ 1.51
</TABLE>
The company's core earnings for 1996 amounted to
$9.9 million, an increase of $433 thousand from
core earnings of $9.5 million for 1995. As thus
adjusted, core earnings per share were $1.66 and
$1.51, for the two respective years, representing
an increase of 9.9%.
During 1996, in three separate transactions, the
Company completed the divestiture of its Vermont
banking operations realizing an after tax gain of
$10.3 million. The other major nonrecurring
income item in the past two years was the
Company's receipt in May of 1995 of a $5.0
million pre-tax settlement from its financial
institution bond company on a claim for losses
suffered in earlier periods. The core earnings
analysis has also been adjusted for securities
sale transactions, severance benefits for senior
officers of Green Mountain Bank, sales of other
real estate owned, and other nonrecurring items.
Nonperforming assets amounted to $2.8 million at
December 31, 1996, down from $6.8 million at
December 31, 1995. The reduction was primarily
attributable to the disposition of OREO and
nonperforming loans as part of the sale of the
Vermont banking operations in 1996. The
allowance for loan losses was $5.6 million at
December 31, 1996, which represented 213% of the
amount of nonperforming loans.
Divestiture of Vermont Operations
During 1996, in three separate transactions, the
Company completed the divestiture of its Vermont
subsidiary, Green Mountain Bank ("GMB"). In
January, the Company sold eight branches of GMB,
with related deposits and loans, to Mascoma
Savings Bank, Lebanon, NH. In August, the
Company sold GMB's trust business to Vermont
National Bank, Brattleboro, VT. In September, the
Company sold the remaining branches of GMB, with
related deposits and loans, to ALBANK, FSB,
Albany, NY. The Company did not sell the
building which served as GMB's main office in
Rutland, Vermont, which was being held for sale
at December 31, 1996.
Total loans and deposits transferred in these
sales amounted to approximately $148 million and
$208 million, respectively. 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 for loan losses, noninterest
income, noninterest expense and income taxes,
presents the factors that are primarily
responsible for the Company's results of
operations for 1996 and the prior two years.
I. NET INTEREST INCOME (Fully Taxable Basis)
Net interest income represents the difference
between interest earned on loans securities and
other interest-earning assets and interest paid
on deposits and other sources of funds. Changes
in net interest income result from changes in the
level and mix of earning assets and sources of
funds (volume) and changes in the yields earned
and costs paid (rate). 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
the net interest margin.
<TABLE>
<CAPTION>
COMPARISON OF NET INTEREST INCOME
(Dollars In Thousands) (Fully Taxable Basis)
Years Ended December 31, Change From Prior Year
1996 1995 1994 1996 1995
Amount Percent Amount Percent
<S> <C> <C> <C. <C> <C> <C> <C>
Interest Income $55,517 $61,411 $52,985 $(5,894) (9.6)% $ 8,426 15.9%
Interest Expense 21,826 24,865 18,202 (3,039) (12.2) 6,663 36.6
Net Interest Income $33,691 $36,546 $34,783 $(2,855) (7.8) $ 1,763 5.1
</TABLE>
On a tax-equivalent basis, net interest income
was $33.7 million in 1996, a decrease of $2.9
million or, 7.8%, from $36.5 million in 1995. The
$2.9 million decrease in net interest income was,
for the most part, attributable to the decrease
in average earning assets resulting from
divestiture during the year of the Vermont
operations.
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 balances 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>
<CAPTION>
CHANGE IN NET INTEREST INCOME
(In Thousands) (Fully Taxable Basis)(Unaudited)
1996 to 1995
Change in Net Interest Income
Due to:
Volume Rate Total
Interest and Dividend Income:
<S> <C> <C> <C>
Federal Funds Sold $ (560) $ (105) $ (665)
Securities Available-for-Sale 6,882 199 7,081
Securities Held-to-Maturity:
U.S. Treasury and Other
Governmental Agencies (3,108) --- (3,108)
State and Municipal Obligations 279 (38) 241
Mortgage-Backed Securities (3,366) 306 (3,060)
Other Securities (486) --- (486)
Total Securities Held-to-Maturity (6,681) 268 (6,413)
Loans (4,928) (969) (5,897)
Total Interest and Dividend Income (5,287) (607) (5,894)
Interest Expense:
Deposits:
N.O.W./Super N.O.W. (244) 56 (188)
Regular Savings and M.M.D.A. (1,298) (272) (1,570)
Time Certificates of
$100,000 or More 657 (220) 437
Other Time Deposits (1,543) (17) (1,560)
Total Deposits (2,428) (453) (2,881)
Short-Term Borrowings 122 (50) 72
Long-Term Debt (230) --- (230)
Total Interest Expense (2,536) (503) (3,039)
Net Interest Income $(2,751) $ (104) $(2,855)
</TABLE>
<TABLE>
<CAPTION>
1995 to 1994
Change in Net Interest Income
Due to:
Volume Rate Total
Interest and Dividend Income:
<S> <C> <C> <C>
Federal Funds Sold $ 521 $ 285 $ 806
Securities Available-for-Sale 334 823 1,157
Securities Held-to-Maturity:
U.S. Treasury and Other
Governmental Agencies (372) 75 (297)
State and Municipal Obligations 548 45 593
Mortgage-Backed Securities 233 87 320
Other Securities 282 11 293
Total Securities Held-to-Maturity 691 218 909
Loans 956 4,598 5,554
Total Interest and Dividend Income 2,502 5,924 8,426
Interest Expense:
Deposits:
N.O.W./Super N.O.W. 202 1,279 1,481
Regular Savings and M.M.D.A. (1,917) 847 (1,070)
Time Certificates of
$100,000 or More 2,158 442 2,600
Other Time Deposits 1,121 2,319 3,440
Total Deposits 1,564 4,887 6,451
Short-Term Borrowings 288 137 425
Long-Term Debt (230) 17 (213)
Total Interest Expense 1,622 5,041 6,663
Net Interest Income $ 880 $ 883 $1,763
</TABLE>
The following table reflects the components of the
Company's net interest income, setting forth, for
years ended December 31, 1996, 1995 and 1994 (I)
average balances of 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.
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 1996 and 1995 and 34% for 1994)
(Dollars In Thousands) (Unaudited)
<TABLE>
<CAPTION>
Years Ended December 31, 1996
Interest Rate
Average Income/ Earned/
Balance Expense Paid
<S> <C> <C> <C>
Federal Funds Sold $ 12,150 $ 642 5.28%
Securities Available-
for-Sale (1) 173,783 11,105 6.39
Securities Held-to-Maturity:
U.S. Treasury and
Governmental Agencies --- --- ---
State and Municipal 16,700 1,365 8.17
Mortgage-Backed
Securities 575 40 6.96
Other Securities --- --- ---
Total Securities Held-
to-Maturity 17,275 1,405 8.13
Loans & Leases (Net of
Unearned Income) 459,946 42,365 9.21
Total Earning Assets 663,154 55,517 8.37
Allowance For Loan
Losses (10,102)
Cash and Due From Banks 25,303
Other Assets 28,975
Total Assets $707,330
Deposits:
N.O.W./Super N.O.W. $131,438 3,787 2.88
Savings/M.M.D.A. 157,892 4,617 2.92
Time Certificates of
$100,000 or More 79,996 4,198 5.25
Other Time Deposits 156,236 8,333 5.33
Total Interest-Bearing
Deposits 525,562 20,935 3.98
Short-Term Borrowings 18,524 891 4.81
Long-Term Debt. --- --- ---
Total Interest-
Bearing Funds 544,086 21,826 4.01
Demand Deposits 77,479
Other Liabilities 15,374
Total Liabilities 636,939
Shareholders' Equity 70,391
Total Liabilities and
Shareholders' Equity $707,330
Net Interest Income
(Fully Taxable Basis) 33,691
Reversal of Tax Equivalent
Adjustment (642)
Net Interest Income $33,049
Net Interest Spread 4.36%
Net Interest Margin 5.08%
(1) Yields do not give effect to changes in fair value that
are reflected as a component of shareholders' equity.
</TABLE>
<TABLE>
<CAPTION>
Years Ended December 31, 1995
Interest Rate
Average Income/ Earned/
Balance Expense Paid
<S> <C> <C> <C>
Federal Funds Sold $ 22,596 $ 1,307 5.78%
Securities Available-
for-Sale (1) 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%
(1) Yields do not give effect to changes in fair value that
are reflected as a component of shareholders' equity.
</TABLE>
<TABLE>
<CAPTION>
Years Ended December 31, 1994
Interest Rate
Average Income/ Earned/
Balance Expense Paid
<S> <C> <C> <C>
Federal Funds Sold $ 12,490 $ 501 4.01%
Securities Available-
for-Sale (1) 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%
(1) Yields do not give effect to changes in fair value that
are reflected as a component of shareholders' equity.
</TABLE>
<TABLE>
<CAPTION>
CHANGES IN NET INTEREST INCOME DUE TO RATE
YIELD ANALYSIS December 31,
1996 1995 1994
<S> <C> <C> <C>
Yield on Earning Assets 8.37% 8.43% 7.62%
Cost of Interest-Bearing Liabilities 4.01 4.06 3.07
Net Interest Spread 4.36% 4.37% 4.55%
Net Interest Margin 5.08% 5.02% 5.01%
</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
performance of nonperforming loans.
The Federal Reserve Board attempts to influence
prevailing federal funds and prime interest rates
by changing the Federal Reserve Bank discount
rate. The following chart presents recent
changes to the discount rate:
<TABLE>
<CAPTION>
Federal Reserve Bank's Discount Rate Changes 1992 - 1996
Date New Rate Old Rate
<S> <C> <C>
January 31, 1996 5.00% 5.25%
February 1, 1995 5.25 4.75
November 15, 1994 4.75 4.00
August 16, 1994 4.00 3.50
May 17, 1994 3.50 3.00
July 2, 1992 3.00 3.50
</TABLE>
During 1996, the Company experienced minimal
impact on net interest income resulting from
changes in interest rates. Throughout 1996,
interest rates remained quite stable, largely due
to the influence of the Federal Reserve Board's
control of the federal discount rate, which
changed only once at the beginning of the year.
At that time the discount rate decreased 25 basis
points to 5.00%.
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 at
different rates and the pricing on some products
does not change 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 in 1995, the
Company experienced an overall beneficial impact
from generally rising interest rates due to the
fact that average interest-earning assets
increased more rapidly than average 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.
A discussion of the impact on net interest income
resulting from changes in interest rates vis a
vis the repricing patterns of the Company's
interest-bearing assets and liabilities is
included later in this report under Item 7.E.
"Interest Rate Risk."
During 1996 and 1995, the Company received
certain payments on restructured loans in the
Vermont portfolio that had not been factored into
the effective rate on those loans. The payments,
which were recorded as interest income, have been
included in the yields in the table above. These
payments increased the loan yields by seven and
four basis points for the two respective years.
<PAGE>
CHANGES IN NET INTEREST INCOME DUE TO VOLUME
<TABLE>
<CAPTION>
AVERAGE BALANCES
(Dollars in Thousands)
$ Change % Change
1996 1995 1994 1996 1995 1996 1995
<S> <C> <C> <C> <C> <C> <C> <C>
Earning Assets $663,154 $728,707 $694,946 $(65,553) $33,761 (9.0)% 4.9%
Interest-Bearing
Liabilities 544,086 612,480 592,414 (68,394) 20,066 (11.2) 3.4
Demand Deposits 77,479 88,961 87,715 (11,482) 1,246 (12.9) 1.4
Total Assets 707,330 777,429 742,636 (70,099) 34,793 (9.0) 4.7
Earning Assets to
Total Assets 93.75% 93.73% 93.58% .02% .15% 0.0 0.2
</TABLE>
In general, changes in the volume of earning
assets or paying liabilities 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 1996, nearly
all of the $2.9 million decrease in net interest
income was attributable to the change in volume.
The decrease was attributable to the divestiture
of the Vermont banking operations during 1996.
Increases in the volume of loans and deposits, as
well as yields and costs by type, for the New
York banks are discussed later in this report
under Item 7.C. "Financial Condition." In
summary, the New York banks experienced
significant growth during 1996, with some shifting
of emphasis in the loan portfolio from commercial
to consumer loans. There was relatively little
change in the mix of deposit products from 1995 to
1996.
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).
II. PROVISION FOR LOAN LOSSES AND ALLOWANCE FOR
LOAN LOSSES
Through the provision for loan losses, an
allowance (reserve) is maintained for estimated
loan losses. Actual loan losses are charged
against this allowance when they are identified.
In evaluating the adequacy of the allowance for
loan losses, management considers various risk
factors influencing asset quality. The analysis
is performed on a loan by loan basis for impaired
and large balance loans, and by portfolio type for
smaller balance homogeneous loans. 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.
The provision for loan losses is largely
influenced by the level of nonperforming loans,
the expected future levels of nonperforming loans
and by the level of loans actually charged-off
against the allowance for loan losses during the
year.
At December 31, 1996, nonperforming loans amounted
to $2.6 million, a decrease of 39.9% from the
balance at December 31, 1995. The decrease is
primarily attributable to nonperforming loans
transferred in the divestiture of the Vermont
banking operations during 1996. The level of
nonperforming loans for the New York based banks
was virtually unchanged from 1995 to 1996.
During 1996, loan losses charged against the
reserve, net of recoveries, were $580 thousand, or
.13% of average loans for the period. However,
the most significant reduction to the allowance
for loan losses was the amount of the reserve
attributable to loans transferred in the
divestiture of the Vermont banking operations of
$6.8 million. These reductions in the allowance
for loan losses were offset in part by a provision
for loan losses of $896 thousand, or .19% of
average loans for the year.
At December 31, 1996 the allowance for loan losses
was $5.6 million. The allowance for loan losses
was 213% of the amount of nonperforming loans at
that date.
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
was due primarily to 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 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.
The provision for loan losses in 1994 was actually
a credit to the consolidated statement of income
resulting in 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 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 benefit $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.
<TABLE>
<CAPTION>
SUMMARY OF THE ALLOWANCE AND PROVISION FOR LOAN LOSSES
(Dollars In Thousands) (Loans and Leases, Net of Unearned Income)
Years-Ended December 31, 1996 1995 1994 1993 1992
<S> <C> <C> <C> <C> <C>
Loans and Leases at End of Period $393,511 $517,787 $507,553 $502,784 $492,916
Average Loans and Leases 459,946 513,266 502,224 489,326 516,711
Total Assets at End of Period 652,603 789,790 746,431 733,442 722,415
Nonperforming Assets:
Nonaccrual Loans:
Construction and Land Development $ --- $ 104 $ 327 $ 2,534 $ 6,149
Commercial Real Estate 83 1,299 1,050 2,649 7,986
Commercial Loans 1,487 1,979 1,017 2,596 4,168
Other 727 862 1,224 2,082 3,171
Total Nonaccrual Loans 2,297 4,244 3,618 9,861 21,474
Loans Past Due 90 or More Days and
Still Accruing Interest 321 111 231 364 1,486
Restructured Loans in Compliance with
Modified Terms --- --- 580 2,405 1,161
Total Nonperforming Loans 2,618 4,355 4,429 12,630 24,121
Other Real Estate Owned 136 2,410 3,396 7,506 5,548
Total Nonperforming Assets $ 2,754 $ 6,765 $ 7,825 $ 20,136 $ 29,669
Allowance for Loan Losses:
Balance at Beginning of Period $ 12,106 $ 12,338 $ 16,078 $ 17,328 $ 20,387
Transfer with Loan Sales (6,841) --- --- --- ---
Loans Charged-off:
Commercial, Financial
and Agricultural (185) (579) (997) (973) (2,283)
Real Estate - Commercial (104) (369) (689) (1,106) (645)
Real Estate - Construction (2) (101) (1,181) (377) (2,015)
Real Estate - Residential (57) (160) (143) (151) (323)
Installment Loans to Individuals (598) (562) (476) (480) (820)
Lease Financing Receivables -- -- -- -- (9)
Total Loans Charged-off (946) (1,771) (3,486) (3,087) (6,095)
Recoveries of Loans Previously
Charged-off:
Commercial, Financial
and Agricultural 84 76 260 694 724
Real Estate - Commercial 48 104 35 75 48
Real Estate - Construction --- 10 68 55 327
Real Estate - Residential 12 8 143 37 22
Installment Loans to Individuals 222 171 188 285 232
Lease Financing Receivables -- -- 2 1 6
Total Recoveries of Loans
Previously Charged-off 366 369 696 1,147 1,359
Net Loans Charged-off (580) (1,402) (2,790) (1,940) (4,736)
Provision for Loan Losses
Charged to Expense 896 1,170 (950) 690 1,677
Balance at End of Period $ 5,581 $ 12,106 $ 12,338 $ 16,078 $ 17,328
Nonperforming Asset Ratio Analysis:
Net Loans Charged-off as a Percentage
of Average Loans .13% .27% .56 % .40% .92%
Provision for Loan Losses as a
Percentage of Average Loans .19 .23 (.19) .14 .32
Allowance for Loan Losses as a
Percentage of Period-end Loans 1.42 2.34 2.43 3.20 3.52
Allowance for Loan Losses as a
Percentage of Nonperforming Loans 213.18 277.98 278.57 127.30 71.84
Nonperforming Loans as a Percentage
of Period-end Loans .67 .84 .87 2.51 4.89
Nonperforming Assets as a Percentage
of Period-end Total Assets .42 .86 1.05 2.75 4.11
</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
securities available-for-sale.
<TABLE>
<CAPTION>
ANALYSIS OF OTHER INCOME
(Dollars In Thousands) Change
December 31, Amount Percent
1996 1995 1994 1996 1995 1996 1995
<S> <C> <C> <C> <C> <C> <C> <C>
Income from Fiduciary
Activities $ 3,458 $ 3,752 $3,657 $ (294) $ 95 (7.8)% 2.6%
Fees for Other Services 3,959 4,669 4,345 (710) 324 (15.2) 7.5
Net Securities
Gains (Losses) (101) 23 (481) (124) 504 --- ---
Net Gain on Divestiture
of Vermont Operations 15,330 --- --- 15,330 --- --- ---
Other Operating Income 1,057 6,052 1,047 (4,995) 5,005 (82.5) 478.0
Total Other Income $23,703 $14,496 $8,568 $ 9,207 $5,928 63.5 69.2
</TABLE>
Total other income for 1996 was $23.7 million as
compared to $14.5 million for 1995. Without
regard to nonrecurring items included in other
income for the two years, specifically the
divestiture of Vermont operations in 1996, the
financial institution bond recovery in 1995 and
securities sale transactions for both years,
other income was $8.5 million for 1996, compared
to $9.5 million in 1995, a decrease of 10.5%. As
thus adjusted, other income as a percentage of
average assets was 1.20% in 1996, virtually the
same as in 1995.
During 1996, the Company completed the
divestiture of its Vermont banking operations.
The pre-tax gain of $15.3 million is net of
recording the remaining assets and liabilities at
fair value less estimated costs to sell. The
major remaining asset, which at December 31,
1996, was held for sale, was the building in
Rutland, Vermont, which was the former main
office of GMB. Principal remaining liabilities
included pension and post-retirement obligations
of GMB and amounts reserved for costs and
expenses of liquidating GMB's charter.
In 1995, the Company received a $5.0 million
payment from the Company's financial institution
bond carrier, in settlement of a lawsuit filed in
1994 for losses suffered in earlier periods,
covered under the Company's policy.
During 1996, the Company recognized net losses of
$101 thousand on the sale of $51.1 million of
securities classified as available-for-sale.
Most of the sales were made for the purpose of
extending the term of the securities at higher
yields. During 1995, the Company recognized net
gains of $23 thousand on the sale of $4.2 million
of available-for-sale securities. During 1994,
the Company recognized net securities losses of
$481 thousand on the sale of $16.5 million of
available-for-sale securities.
Income from fiduciary activities for 1996 was
$3.5 million, a decrease of $294 thousand, or
7.8% from 1995. On August 31, 1996, the Company
sold its Vermont trust business as part of the
divestiture of Vermont operations. In 1995, the
Vermont trust business represented approximately
42% of the Company's fiduciary income for the
year of $3.8 million. During 1996, the New York
based trust business generated $2.4 million in
income, an increase of $232 thousand, or 10.6%,
from 1995. The increase was attributable to a
$35.3 million increase in assets under
management, which were $434.6 million at December
31, 1996.
Fees for other services include deposit service
charges, safe deposit box fees, credit card
merchant processing fees, and servicing fees on
loans sold with servicing retained by the
Company. These fees amounted to $4.0 million for
1996, a decrease of $710 thousand, or 15.2% from
1995, again reflecting the disposition of the
Vermont operations during 1996. For the New York
based operations, these fees amounted to $3.4
million for both years.
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 amounted to $1.1 million
for both 1996 and 1995.
Total other income for 1995 amounted to $14.5
million, a $5.9 million increase from 1994. The
increase was primarily attributable to a $5.0
million payment received from the Company's
financial institution bond carrier.
Exclusive of the bond recovery and net securities
transactions, total other income in 1995
increased $424 thousand, or 4.7%, above the 1994
level. As adjusted, the ratio of total other
income to average assets was 1.22% for both
years.
Fees for other services to customers 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 credit card
merchant processing income.
Other operating income in 1995 was virtually
unchanged from 1994.
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>
<CAPTION>
ANALYSIS OF OTHER EXPENSE
(Dollars In Thousands)
Change
December 31, Amount Percent
1996 1995 1994 1996 1995 1996 1995
<S> <C> <C> <C> <C> <C> <C> <C>
Salaries and Benefits $14,971 $16,710 $16,204 $(1,739) $ 506 (10.4)% 3.1 %
Net Occupancy Expense 1,790 2,040 2,168 (250) (128) (12.3) (5.9)
Furniture and Equipment 1,677 1,930 2,076 (253) (146) (13.1) (7.0)
Other Operating Expense 6,336 9,089 10,926 (2,753) (1,837) (30.3) (16.8)
Total Other Expense $24,774 $29,769 $31,374$ (4,995) $(1,605) (16.8) (5.1)
</TABLE>
Other expense for 1996 was $24.8 million, a
decrease of $5.0 million, or 16.8%, from 1995.
All four major categories of other expense
decreased as a result of the divestiture of the
Vermont banking operations.
Salaries and benefits for 1996 was $15.0 million,
a decrease of $1.7 million, or 10.4%, from 1995.
Net occupancy expense and furniture and equipment
expense both decreased approximately $250
thousand from 1995, or 12.3% and 13.1%,
respectively.
`
Other operating expense for 1996 was $6.3
million, a decrease of $2.8 million, or 30.3%,
from 1995. In addition to the savings resulting
from the divestiture of the Vermont operations,
the Company experienced decreased costs for FDIC
insurance premiums, legal expenses, expenses
related to problem loans and in costs to maintain
and dispose of OREO. In mid-1995, the FDIC
reduced the insurance premiums for well-
capitalized banks, such as the Company's
subsidiary banks, from 23 cents per $100 of
insured deposits to a flat fee of two thousand
dollars per year.
Other expense for 1995 amounted to $29.8 million,
which compared to $31.4 million for 1994, a
decrease of $1.6 million, or 5.1%. An increase
in salaries and benefits in 1995 was more than
offset by reduced expenses for net occupancy
expense, furniture and equipment expense and
other operating expenses.
Total salaries of $11.1 million for 1995
decreased $284 thousand from the 1994 level. The
effect of fewer employees was only partially
offset by general salary increases. Between 1994
and 1995, employee benefits increased by $790
thousand, of which $652 thousand represented
severance costs incurred the latter year.
Otherwise, a slight decrease in payroll taxes was
offset by increased expenses for pension plans
and health insurance.
From 1995 to 1994, net occupancy expense and
furniture and equipment expense decreased by
$128 thousand and $146 thousand, respectively.
The 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 and other insurance premiums,
as well as to a large reduction in losses on the
sale of OREO.
V. INCOME TAXES
The following table sets forth the Company's
income tax expense and effective tax rates for
the periods presented herein.
<TABLE>
<CAPTION>
INCOME TAXES AND EFFECTIVE RATES
(Dollars in Thousands) Years Ended December 31,
1996 1995 1994
<S> <C> <C> <C>
Provision for Income Taxes $10,822 $6,986 $1,131
Effective Tax Rate 34.8% 36.0% 9.1%
</TABLE>
The provisions for federal and state income taxes
amounted to $10.8 million, $7.0 million and $1.1
million for 1996, 1995 and 1994, respectively.
The 1994 provision was relatively small as a
result of a net operating loss carryforward
tracing from 1991 and changes in the valuation
allowance for deferred tax assets. Eliminating
the effect of these two benefits in 1994, the
effective income tax rates for 1996, 1995 and 1994
were 34.8%, 36.0% and 38.1%, respectively. The
decrease in the effective tax rate in each of the
past two years primarily reflected a relative
increase in the Company's tax exempt loan and
securities portfolios.
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,
investment securities must be classified as held-
to-maturity, trading, or available-for-sale,
depending on the purposes for which such
securities were acquired or are being held.
Securities held-to-maturity are debt securities
that 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 sale 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, 1996,
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
additional 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 1996, 1995 and 1994.
<TABLE>
<CAPTION>
SECURITIES AVAILABLE-FOR-SALE
(In Thousands) December 31,
1996 1995 1994
<S> <C> <C> <C>
U.S. Treasury and Agency Obligations $ 95,733 $114,502 $49,063
State and Municipal Obligations --- 338 2,180
Collateralized Mortgage Obligations 42,894 44,173 475
Other Mortgage-Backed Securities 21,732 10,478 ---
Corporate and Other Debt Securities 9,184 7,300 ---
Mutual Funds and Equity Securities 2,200 1,854 2,150
Total $171,743 $178,645 $53,868
</TABLE>
Other mortgage-backed securities principally
included agency mortgage pass-through
securities. 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 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, 1996. CMO's are
included in the table based on their expected
average life and other mortgage-backed securities
by final maturity date.
<TABLE>
<CAPTION>
MATURITIES OF SECURITIES AVAILABLE-FOR-SALE
(In Thousands) 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 $34,141 $ 50,767 $10,825 $ -- $ 95,733
Collateralized Mortgage
Obligations 1,536 32,230 8,110 1,018 42,894
Other Mortgage-Backed
Securities 335 4,195 1,581 15,621 21,732
Corporate and
Other Debt Securities 1,010 8,174 --- -- 9,184
Mutual Funds and
Equity Securities --- --- --- 2,200 2,200
Total $37,022 $ 95,366 $20,516 $18,839 $171,743
</TABLE>
The following table sets forth the tax-equivalent
yields of the Company's securities available-for-sale portfolio
at December 31, 1996.
<TABLE>
<CAPTION>
YIELDS ON SECURITIES AVAILABLE-FOR-SALE
(Fully Tax-Equivalent Basis) 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 6.68% 6.36% 6.83% --% 6.53%
Collateralized Mortgage
Obligations 9.82 6.71 6.48 7.48 6.79
Other Mortgage-Backed
Securities 5.33 7.00 7.14 7.00 6.98
Corporate and
Other Debt Securities 7.01 7.30 -- -- 7.26
Mutual Funds and
Equity Securities -- -- -- 6.60 6.60
Total 6.80 6.58 6.72 6.98 6.69
</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, 1996. 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 1996 the Company recognized net losses of
$101 thousand on the sale of $51.1 million from
securities within the available-for-sale
portfolio. Proceeds from sales early in the
year were used to provide funds in completing the
branch sale to Mascoma Savings Bank, a
transaction in which the deposit liabilities
assumed by the purchaser substantially exceeded
the purchase price of the loans and other assets
acquired and the deposit premium. Other sales of
securities from the available-for-sale portfolio
were used to extend the maturity dates and
increase the yield on the portfolio.
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
deposits transferred with the sale of eight
branches of Green Mountain Bank to Mascoma
Savings Bank in January 1996.
At December 31, 1996 and 1995, the weighted
average maturity was 2.71 and 2.03 years,
respectively, 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 $16.5 million from the available-for-sale
portfolio. The proceeds were reinvested in
higher yielding securities.
At December 31, 1996, unrealized gains on
securities available-for-sale amounted to $208
thousand, net of tax. Unrealized gains or
losses, net of tax, are reflected as a separate
component of shareholders' equity.
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. The substantial
reduction in the held-to-maturity portfolio
between year-end 1994 and year-end 1995 reflects
the one-time reclassification in November 1995
discussed previously in the introduction to the
investment portfolio discussion.
<TABLE>
<CAPTION>
SECURITIES HELD-TO-MATURITY
(In Thousands) December 31,
1996 1995 1994
<S> <C> <C> <C>
U.S. Treasury and Agency Obligations $ --- $ --- $ 61,390
State and Municipal Obligations 19,765 13,921 10,409
Other Mortgage-Backed Securities 11,111 --- 51,904
Other Securities --- --- 6,032
Total $30,876 $13,921 $129,735
</TABLE>
For information regarding the fair 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, 1996. Other
mortgage-backed securities are allocated to
maturity periods based on final maturity date.
<TABLE>
<CAPTION>
MATURITIES OF SECURITIES HELD-TO-MATURITY
(In Thousands)
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 $1,888 $2,784 $5,417 $ 9,676 $19,765
Other Mortgage-Backed Securities --- --- --- 11,111 11,111
Total Securities Held-to-
Maturity $1,888 $2,784 $5,417 $20,787 $30,876
</TABLE>
The following table sets forth the tax-equivalent
yields of the Company's portfolio of securities
held-to-maturity at December 31, 1996.
<TABLE>
<CAPTION>
YIELDS ON SECURITIES HELD-TO-MATURITY
(Fully Tax-Equivalent Basis)
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 7.07% 8.18% 7.93% 7.97% 7.90%
Other Mortgage-Backed Securities --- --- --- 7.13 7.13
Total Securities Held-to-
Maturity 7.07 8.18 7.93 7.53 7.63
</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, 1996. Yields
on obligations of states and municipalities were
computed on a fully tax-equivalent basis using a
marginal tax rate of 35%.
During 1996 and 1995, the Company sold no
securities from the held-to-maturity portfolio.
The weighted-average maturity of the held-to-
maturity portfolio was 7.5 years and 8.8 years at
December 31, 1996 and 1995, respectively.
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>
<CAPTION>
a. DISTRIBUTION OF LOANS AND LEASES
(Dollars In Thousands) December 31,
1996 1995 1994 1993 1992
Amount % Amount % Amount % Amount % Amount %
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial, Financial
and Agricultural $ 48,372 12 $ 79,993 15 $ 74,455 15 $ 82,317 16 $ 85,428 17
Real Estate - Commercial 36,302 9 71,622 14 81,704 16 95,981 19 110,702 22
Real Estate - Construction 971 1 2,051 1 5,136 1 8,702 2 12,167 2
Real Estate - Residential 168,429 43 238,298 46 230,943 45 221,066 44 198,165 40
Installment Loans to
Individuals 139,395 35 125,762 24 115,291 23 94,656 19 86,323 19
Lease Financing
Receivables 42 -- 61 -- 24 -- 62 -- 131 --
Total Loans and Leases 393,511 100 517,787 100 507,553 100 502,784 100 492,916 100
Allowance for Loan Losses (5,581) (12,106) (12,338) (16,078) (17,328)
Total Loans and Leases,
Net $387,930 $505,681 $495,215 $486,706 $475,588
</TABLE>
During 1996, the Company transferred
substantially all of the loans in its Vermont
banking operation in two branch sale
transactions, to Mascoma Savings Bank in January
1996 and to ALBANK in September 1996. The Vermont
loan portfolio had a higher percentage of
commercial loans than the loan portfolios of the
Company's New York banks. Consequently, the
divestiture of the Vermont banking operations is
largely responsible for the shift in the mix of
the loan portfolio from commercial to consumer
loans between year-end 1995 and year-end 1996.
Also, the Company concentrated its lending
efforts in 1996, in the area of residential real
estate loans and installment loans to individuals
(primarily automobile loans).
Within the installment loan portfolio, the
Company has focused on growth in its indirect
lending program. Indirect loans are vehicle
acquisition 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, 1996, indirect loans amounted to
$107.2 million, or 77% of installment loans.
While the yields on the consumer portfolios
(other than credit card loans) typically are
lower than on the commercial portfolios, the
Company has historically experienced fewer loan
losses in consumer loans than commercial loans,
in proportion to outstanding average loan
balances.
Since 1990, the Company has concentrated its
lending efforts in the area of residential real
estate loans and installment loans to
individuals, while de-emphasizing commercial and
commercial real estate loans. Consequently, each
of the years preceding 1996, both the dollar
amount of loans for commercial and commercial
real estate loans and the percentage of such
loans to total loans decreased from the prior
year, while residential real estate and
installment loans to individuals increased each
year since 1990, both in dollar amount and in
percentage to total loans.
The following table indicates the changing mix in
the Company's New York 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>
<CAPTION>
NEW YORK LOAN PORTFOLIO
Quarterly Average Loan Balances
(Dollars In Thousands)
Quarter Ending
Dec 1996 Sep 1996 Jun 1996 Mar 1996 Dec 1995
<S> <C> <C> <C> <C> <C>
Commercial and
Commercial Real Estate $ 84,059 $ 84,789 $ 87,304 $ 87,073 $ 87,388
Residential Real Estate 125,897 123,884 122,858 120,010 119,157
Home Equity 29,863 29,109 28,804 29,226 29,364
Indirect Consumer Loans 105,227 99,059 92,757 82,446 78,823
Direct Consumer Loans 32,013 30,634 31,627 31,555 30,022
Credit Card Loans 8,514 8,733 8,967 9,310 9,413
Total Loans $385,573 $376,208 $372,317 $359,620 $354,167
</TABLE
Percentage of Total
Quarterly Average Loans
Commercial and
Commercial Real Estate 21.8% 22.6% 23.5% 24.2% 24.7%
Residential Real Estate 32.7 32.9 33.0 33.4 33.6
Home Equity 7.7 7.7 7.7 8.1 8.3
Indirect Consumer Loans 27.3 26.4 24.9 22.9 22.2
Direct Consumer Loans 8.3 8.1 8.5 8.8 8.5
Credit Card Loans 2.2 2.3 2.4 2.6 2.7
Total Loans 100.0% 100.0% 100.0% 100.0% 100.0%
Quarterly Taxable Equivalent
Yield on Loans
Commercial and
Commercial Real Estate 9.36% 9.76% 9.22% 9.98% 10.07%
Residential Real Estate 8.30 8.26 8.42 8.55 8.47
Home Equity 9.08 9.10 9.03 9.40 9.76
Indirect Consumer Loans 8.35 8.43 8.52 8.62 8.56
Direct Consumer Loans 10.73 9.45 9.44 9.43 9.90
Credit Card Loans 16.46 16.66 16.55 16.45 15.64
Total Loans 8.99 9.00 9.12 9.26 9.30
</TABLE>
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, 1996. For purposes of determining
relevant maturities, loans are assumed to mature
at (but not before) their scheduled repayment
dates as required by contractual terms. Demand
loans and overdrafts are included in the "Within
1 Year" maturity category.
<TABLE>
<CAPTION>
MATURITY AND REPRICING OF COMMERCIAL LOANS
(In Thousands) After 1 After
WithinBut Within Five
1 Year 5 Years Years Total
<S> <C> <C> <C> <C>
Commercial, Financial and Agricultural $24,559 $16,395 $ 7,418 $48,372
Real Estate - Construction 340 74 557 971
Total $24,899 $16,469 $ 7,975 $49,343
Fixed Interest Rates $ 2,963 $ 8,678 $ 6,669 $18,310
Variable Interest Rates 21,936 7,791 1,306 31,033
Total $24,899 $16,469 $ 7,975 $49,343
</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
consolidated financial statements because they
are not yet funded. As of December 31, 1996, the
total contingent liability for standby letters of
credit amounted to $1.2 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, which also may be unfunded or
only partially funded from time to time.
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, 1996, the Banks had outstanding
loan unfunded commitments in the aggregate amount
of approximately $60.9 million.
b. RISK ELEMENTS
NONACCRUAL, PAST DUE AND RESTRUCTURED LOANS
The Company designates loans as impaired when the
payment of interest and/or principal is due and
unpaid for a designated period (generally 90
days) or when the likelihood of the full
repayment of principal and interest is, in the
opinion of management, uncertain. Loans are
written off against the allowance for loan losses
for amounts in excess of the fair value of
collateral less estimated costs to sell upon
reaching 120 days delinquent. There were no
material commitments to lend additional funds on
outstanding impaired loans at December 31, 1996.
Loans and leases past due 90 days or more and
still accruing interest, as identified in the
following table, 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 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 at the time of restructure and in
compliance with modified terms are not subject to
the disclosure requirements of SFAS No. 114 in
years subsequent to the year of restructure, and
thus would be included in performing loans.
The Company's nonaccrual, past due and
restructured loans and leases were as follows:
<TABLE>
<CAPTION>
SCHEDULE OF NONPERFORMING LOANS
(Dollars In Thousands) December 31,
1996 1995 1994 1993 1992
Nonaccrual Loans:
<S> <C> <C> <C> <C> <C>
Construction and Land Development $ --- $ 104 $ 327 $ 2,534 $ 6,149
Commercial Real Estate 83 1,299 1,050 2,649 7,986
Commercial Loans 1,487 1,979 1,017 2,596 4,168
Other 727 862 1,224 2,082 3,171
Total Nonaccrual Loans 2,297 4,244 3,618 9,861 21,474
Loans Past Due 90 Days or More
and Still Accruing Interest 321 111 231 364 1,486
Restructured Loans in Compliance
with Modified Terms --- --- 580 2,405 1,161
Total Nonperforming Loans $2,618 $4,355 $4,429 $12,630 $24,121
Total Nonperforming Loans
as a Percentage of Total Loans .67% .84% .87% 2.51% 4.89%
</TABLE>
The following table presents additional
disclosures required by SFAS No. 114 and by the
Securities and Exchange Commission's Industry
Guide 3 relating to impaired loans accounted for
under SFAS No. 114. All loans reported in the
schedule below are included in nonaccrual loans
in the schedule of nonperforming loans above.
The reserves for loans accounted for under SFAS
No. 114 in the schedule below are a component of
the allowance for loan losses discussed earlier
in this report under Item 7.B.II., "Provision for
Loan Losses and Allowance for Loan Losses."
<TABLE>
<CAPTION>
SCHEDULE OF IMPAIRED LOANS ACCOUNTED FOR UNDER SFAS NO. 114
(In Thousands)
December 31, 1996
Recorded Allowance for Carrying
Investment Loan Losses Amount
Measured at the Present Value
of Expected Cash Flows:
<S> <C> <C> <C>
Commercial Loans $1,301 $ 195 $1,106
</TABLE>
<TABLE>
<CAPTION>
December 31, 1995
Recorded Allowance for Carrying
Investment Loan Losses Amount
Measured at the Present Value
of Expected Cash Flows:
<S> <C> <C> <C>
Commercial Loans $1,405 $ 211 $1,194
Measured at the Fair Value
of Collateral:
Commercial Real Estate 258 129 129
Other 444 --- 444
Total $2,107 $ 340 $1,767
</TABLE>
At December 31, 1996, nonaccrual loans amounted
to $2.3 million. Nearly all of the nonaccrual
loans in the Vermont portfolio were transferred
in the 1996 branch sales. The New York based
nonaccrual loans at December 31, 1996 were
virtually unchanged from the level at the prior
year-end. Over one-half of the nonaccrual
balances at December 31, 1996 was attributable to
one borrower whose loan was restructured in 1996.
Payments on that loan were current in accordance
with the restructured terms as of December 31,
1996 and all payments in 1996 were used to reduce
the carrying amount of the loan.
During 1996, income recognized on year-end
balances of nonaccrual loans was $48 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 $232 thousand.
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 between year-end 1994
and 1995 was 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. All loans reported as
restructured and in compliance with modified
terms at December 31, 1994 were still in
compliance with modified terms at year-end 1995
and thus classified as performing at that date.
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 in
1994, $2.4 million of loans reported as
restructured at year-end 1993 was returned to
performing status in 1994 in accordance with SFAS
No. 15, and another $3.5 million was charged,
during 1994, against the allowance for loan
losses. The small remaining difference
represented the improvement in nonaccrual loans,
net of loans newly classified as nonperforming.
During 1993, nonperforming loans decreased $11.5
million, or 47.6%. 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 generally 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
19 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>
<CAPTION>
DISTRIBUTION OF OTHER REAL ESTATE OWNED
(Net of Allowance) (In Thousands) December 31,
1996 1995 1994 1993 1992
<S> <C> <C> <C> <C> <C>
Single Family 1 - 4 Units $ --- $ 82 $1,073 $1,189 $ 892
Commercial Real Estate 86 2,328 2,128 3,418 1,536
Construction & Land Development 50 --- 195 2,899 3,120
Other Real Estate Owned, Net $ 136 $2,410 $3,396 $7,506 $5,548
</TABLE>
The following table summarizes changes in the
net carrying amount of other real estate owned
at December 31 for each of the periods
presented.
<TABLE>
<CAPTION>
SCHEDULE OF CHANGES IN OTHER REAL ESTATE OWNED
(Net of Allowance) (In Thousands)
1996 1995 1994 1993 1992
<S> <C> <C> <C> <C> <C>
Balance at Beginning of Year $2,410 $ 3,396 $ 7,506 $ 5,548 $ 6,145
Properties Acquired Through Foreclosure 302 642 2,493 7,804 6,446
Adjustment for Change in Fair Value (85) (161) (398) (638) (1,160)
Sale (2,491) (1,467) (6,205) (5,208) (5,883)
Balance at End of Year $ 136 $ 2,410 $ 3,396 $ 7,506 $ 5,548
</TABLE>
The following is a summary of changes in the
allowance for OREO losses:
<TABLE>
<CAPTION>
ALLOWANCE FOR OTHER REAL ESTATE OWNED LOSSES
(In Thousands) 1996 1995 1994 1993 1992
<S> <C> <C> <C> <C> <C>
Balance at Beginning of Year $ 370 $ 369 $ 1,150 $1,120 $ --
Additions 85 161 398 638 1,160
Charge-Offs (347) (160) (1,179) (608) (40)
Balance at End of Year $ 108 $ 370 $ 369 $1,150 $1,120
</TABLE>
During 1996, the Company acquired five properties
totaling $302 thousand through foreclosure. Also
during the year, the Company recognized losses of
$330 thousand on the sale of OREO properties with
a carrying amount of $2.5 million, including OREO
disposed of in the Vermont branch sale
transactions described under "Overview", earlier
in this report, and reduced the carrying amount
of the two properties remaining in OREO at
December 31, 1996 by $85 thousand.
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 Company's net increase
in OREO during the year of $2.0 million was
primarily attributable to commercial real estate
properties, in OREO, which increased by more than
$2.0 million during the period, 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 $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. During the year, the Company
disposed of $5.9 million of OREO properties, upon
which the Company recognized net gains of $257
thousand.
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 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, 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
allocated solely 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>
<CAPTION>
ALLOCATION OF THE ALLOWANCE FOR LOAN AND LEASE LOSSES
(Dollars in Thousands)
1996 1995 1994 1993 1992
<S> <C> <C> <C> <C> <C>
Commercial, Financial
and Agricultural $1,946 $ 2,913 $ 2,329 $ 3,908 $ 5,518
Real Estate-Commercial 353 1,755 1,841 3,324 3,626
Real Estate-Construction 49 305 1,994 2,027 2,525
Real Estate-Residential
Mortgage 890 1,616 2,098 1,893 1,803
Installment Loans to
Individuals 1,959 2,365 1,363 2,032 1,770
Lease Financing Receivables -- -- -- -- 15
Unallocated 384 3,152 2,713 2,894 2,071
Total Loans and Leases $5,581 $12,106 $12,338 $16,078 $17,328
PERCENT OF LOANS IN EACH
CATEGORY TO TOTAL LOANS
Commercial, Financial
and Agricultural 12% 15% 15% 16% 17%
Real Estate-Commercial 9 14 16 19 22
Real Estate-Construction 1 1 1 2 2
Real Estate-Residential
Mortgage 43 46 45 44 40
Installment Loans to
Individuals 35 24 23 19 19
Lease Financing Receivables -- -- -- -- --
Total Loans and Leases 100% 100% 100% 100% 100%
</TABLE>
At December 31, 1996, 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>
<CAPTION>
AVERAGE DEPOSIT BALANCES
Years Ended December 31,
(Dollars In Thousands)
1996 1995 1994
Average Average Average
Balance Rate Balance Rate Balance Rate
<S> <C> <C> <C> <C> <C> <C>
Demand Deposits $ 77,479 --% $ 88,961 --% $ 87,715 --%
N.O.W./Super N.O.W. 131,438 2.88 139,879 2.84 129,999 1.92
Savings/M.M.D.A. 157,892 2.92 201,932 3.06 260,336 2.79
Time Certificates
of $100,000 or More 79,996 5.25 67,029 5.61 26,980 4.30
Other Time Deposits 156,236 5.33 185,166 5.34 160,035 4.03
Total Deposits $603,041 3.47 $682,967 3.49 $665,065 2.61
</TABLE>
During 1996, average deposits of $85.4 million
were attributable to the Vermont banking
operations. All Vermont deposits were
transferred during the year in connection with
the branch sales to Mascoma Savings Bank in
January 1996 and ALBANK in September 1996. The
following table presents the quarterly average
balance by deposit type and the percentage of
total deposits represented by each deposit type
for each of the most recent five quarters for the
Company's New York banks exclusively, i.e.
deposits of the Vermont operations have been
eliminated from the presentation.
<TABLE>
<CAPTION>
NEW YORK DEPOSIT PORTFOLIO
Quarterly Average Deposit Balances
(Dollars In Thousands)
Quarter Ending
Dec 1996 Sep 1996 Jun 1996 Mar 1996 Dec 1995
<S> <C> <C> <C> <C> <C>
Demand Deposits $ 67,240 $ 69,216 $ 66,299 $ 63,156 $ 66,437
N.O.W/Super N.O.W 125,559 111,052 104,768 99,004 103,881
Savings and Money Market 133,974 137,768 142,916 145,094 142,582
Time Deposits of $100,000
or More 80,462 84,707 78,063 66,755 67,141
Other Time Deposits 133,041 127,933 120,397 117,682 116,703
Total Deposits $540,276 $530,676 $512,443 $491,691 $496,744
Percentage of Total
Quarterly Average Deposits
Demand Deposits 12.4% 13.0% 12.9% 12.8% 13.4%
N.O.W/Super N.O.W 23.3 20.9 20.4 20.1 20.9
Savings and Money Market 24.7 26.0 27.9 29.5 28.7
Time Deposits of $100,000
or More 14.9 16.0 15.2 13.7 13.5
Other Time Deposits 24.7 24.1 23.6 23.9 23.5
Total Deposits 100.0% 100.0% 100.0% 100.0% 100.0%
</TABLE>
During 1996, the Company experienced nominal
shifts in the mix of deposit products as
decreases in the percentage of demand, savings
and money market savings accounts to total
deposits were offset by increases in the
percentage of N.O.W. and time deposits accounts
to total deposits.
The Federal Reserve Board attempts to influence
prevailing federal funds and prime interest rates
by changing the Federal Reserve Bank discount
rate. Over the past two years, changes in the
discount rate have directly influenced federal
funds rates and prime rates, which in turn have
had an impact upon the Company's cost of funds.
The charts below, demonstrate the positive
correlation between changes in the federal
discount rate and changes in the Company's cost
of funds for its New York operations.
<TABLE>
<CAPTION>
Quarterly Cost of New York Deposits
Quarter Ending
Dec 1996 Sep 1996 Jun 1996 Mar 1996 Dec 1995
<S> <C> <C> <C> <C> <C>
N.O.W/Super N.O.W 3.04% 2.86% 2.69% 2.58% 2.87%
Savings and Money Market 2.93 2.92 2.92 3.00 3.08
Time Deposits of $100,000
or More 5.21 5.25 5.15 5.37 5.59
Other Time Deposits 5.34 5.23 5.23 5.49 5.64
Total Deposits 3.52 3.45 3.38 3.45 3.57
</TABLE>
<TABLE>
<CAPTION>
Federal Reserve Bank Discount Rate Changes 1992 - 1996
Date New Rate Old Rate
<S> <C> <C>
January 31, 1996 5.00% 5.25%
February 1, 1995 5.25 4.75
November 15, 1994 4.75 4.00
August 16, 1994 4.00 3.50
May 17, 1994 3.50 3.00
July 2, 1992 3.00 3.50
</TABLE>
The increase in the discount rate on February 1,
1995 marked the last in a series of interest rate
increases by the Federal Reserve Board beginning
in May of 1994. After February 1, 1995, rates
held steady for twelve months until the Reserve
Board lowered rates by twenty five basis points
on January 31, 1996. The Company's cost of
funds rose throughout 1994 and into 1995 as a
result of these changes. Correspondingly, the
cost of deposits reached a plateau for the last
two quarters of 1995, and as a result of the
January 31, 1996 decrease in the federal discount
rate, the cost of interest-bearing deposits
decreased twelve basis points in the first
quarter of 1996, and decreased an additional
seven basis points for the second quarter of
1996. The cost of funds for the last two
quarters of 1996, however, increased 7 basis
points in each quarter as the Company responded
to competitive pricing for NOW accounts, large
municipal time deposit accounts and other time
deposits. The average cost of funds for savings
and money market accounts in the last two
quarters of the year remained substantially
unchanged from the second quarter average.
V. TIME CERTIFICATES OF $100,000 OR MORE
<TABLE>
<CAPTION>
The maturities of time certificates of $100,000 or more at December 31, 1996 are presented
below. (In Thousands)
Maturing in:
<S> <C>
Under Three Months $60,922
Three to Six Months 12,583
Six to Twelve Months 6,256
1998 1,546
1999 428
2000 1,463
2001 604
Total $83,802
</TABLE>
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 savings 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
sought to maintain a high ratio of core deposits
to total assets. At year-end 1996, core deposits
exceeded 70% of the Company's total assets and
shareholders' equity represented an additional
11.4% of total assets. Large denomination time
deposits, repurchase agreements and other
borrowed funds represented 16.3% of total assets
at December 31, 1996.
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 1996, average federal funds sold
amounted to $12.2 million and federal funds
purchased averaged $1.1 million.
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.
Other sources of funds include term federal funds
arrangements with correspondent banks and a
borrowing arrangement with the Federal Home Loan
Bank.
The Company experienced no liquidity pressures in
completing the sale transactions for its Vermont
banking operations in 1996.
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, 1996, for purposes of projecting
net interest income over the ensuing year, the
Company assumed that short-term interest rates
would rise by fifty basis points over the
following 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, 1996, the Company was
operating within established internal policy
limits for both the short-term and long-term
measures of interest rate risk.
The Company is able to reduce interest rate risk
by adjusting the mix of loan products as well as
the balance of fixed and variable rate products
within the various loan categories. To a lesser
extent, the Company manages interest rate risk
through selection of investments for the
securities portfolios. The Company does not, and
in the foreseeable future, will not use
derivative financial instruments to manage
interest rate risk.
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, 1996. 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 in accordance with the Company's
internal projections on their likely repricing
behavior in the light of historical trends, since
these deposits are not apt to reprice to the full
extent of prime rate changes and reprice over a
period of time after changes to the prime rate.
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.
Certain other assets and liabilities lacking
specific maturities are classified in the "Over
Five Years" category. Nonaccrual loans and
overdrafts are excluded from the loan balances.
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, 1996 was
.87 for both the ensuing cumulative six month and
twelve month repricing periods. These ratios were
within the range of ratios the Company seeks to
maintain.
<TABLE>
<CAPTION>
INTEREST RATE SENSITIVE GAP ANALYSIS
(Dollars In Thousands) Within Three Six to One to Over
Three to Six Twelve Five Five
Months Months Months Years Years Total
Earning Assets:
<S> <C> <C> <C> <C> <C> <C>
Federal Funds Sold $ 17,925 $ --- $ --- $ --- $ --- $ 17,925
Securities Available-for-Sale 63,759 1,763 3,677 70,003 32,180 171,382
Securities Held-to-Maturity 609 516 1,513 5,783 22,455 30,876
Loans and Leases,
Net of Unearned
Income & Nonaccrual Loans 100,408 25,125 50,315 153,128 61,916 390,892
Total Interest Rate
Sensitive Assets 182,701 27,404 55,505 228,914 116,551 611,075
Interest Paying Liabilities:
Regular Savings Accounts 4,513 --- 4,513 81,233 --- 90,259
N.O.W. Accounts 53,431 --- 3,469 65,063 --- 121,963
Money Market Savings Accounts 40,341 --- --- 1,749 --- 42,090
Time Deposits of
$100,000 or More 60,922 12,583 6,256 4,041 --- 83,802
Other Time Deposits 27,191 22,623 46,860 39,082 --- 135,756
Short-Term Borrowings 19,462 244 3,000 --- --- 22,706
Long-Term Debt --- --- --- --- --- ---
Total Interest Rate
Sensitive Liabilities 205,860 35,450 64,098 191,168 --- 496,576
Interest Rate Sensitive Gap $(23,159) $ (8,046) $ (8,593)$ 37,746 $116,551 $114,499
Cumulative Interest Rate
Sensitive Gap $(23,159) $(31,205) $(39,798)$ (2,052) $114,499
Interest Rate Sensitive
Gap Ratio .89 .77 .87 1.20 --- 1.23
Cumulative Interest Rate
Sensitive Gap Ratio .89 .87 .87 1.00 1.23 N/A
</TABLE>
F. CAPITAL RESOURCES AND DIVIDENDS
Shareholders' equity was $74.3 million at
December 31, 1996, as compared to $67.5 million
at December 31, 1995. Changes in shareholders'
equity during 1996 included $16.4 million of
retained earnings which was partially offset by
treasury stock purchases of $10.1.
Most of the treasury stock purchases were
acquired under two initiatives undertaken by the
Company's Board of Directors during the year,
each of which authorized management to repurchase
from time to time, at its discretion, up to $10
million of the Company's common stock in the open
market or privately negotiated transactions.
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 goal is
to provide an adequate return to shareholders
while retaining a sufficient base to provide for
future expansion and comply 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.
<TABLE>
<CAPTION>
The table below sets forth the capital ratios of
the Company and its subsidiary banks as of
December 31, 1996:
Risk-Based Capital Ratios: Arrow GFNB SNB
<S> <C> <C> <C>
Tier 1 19.3% 14.3% 9.5%
Total Capital 20.6 15.6 10.7
Tier 1 Leverage Ratio 11.2 7.9 7.6
</TABLE>
At December 31, 1996, 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).
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, 1996, only
the Company's principal bank subsidiary, 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 $8.6 million.
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 $2.4 million for
the fourth quarter of 1996, a decrease of $176
thousand or 6.7% from the fourth quarter of 1995.
Earnings per share for both periods was $.42.
The decrease in earnings was primarily
attributable to the decrease in earning assets
resulting from the completion of the divestiture
of the Vermont banking operations in the first
three quarters. Average earning assets for the
fourth quarter of 1996 were $606.4 million, a
decrease of $134.8 million or 18.2% from average
earning assets of $741.2 million for the fourth
quarter of 1995.
Accordingly, the Company also experienced a
proportional decrease in net interest income, to
$7.3 million in 1996 (stated on a tax-equivalent
basis) down $1.8 million or 19.8% from the fourth
quarter of 1995. The Company also experienced a
decrease in net interest margin (net interest
income to average earning assets), which was
4.78% and 5.00% for the two respective quarters.
Noninterest income of $2.2 million for the fourth
quarter of 1996 included securities losses of
$183 thousand and income of $570 thousand from a
post-closing upward price adjustment in the sale
of the Vermont trust business upon satisfaction
of a contingency condition. On a comparable
basis, noninterest income decreased $550
thousand, or 23.7% from the fourth quarter of
1995. The decrease was attributable to the sale
of the Vermont trust business and to decreased
deposit servicing fee income resulting from the
transfer of deposits in the sale of branches in
Vermont.
Noninterest expense of $5.3 million for the
fourth quarter of 1996 decreased $1.8 million, or
25.0%, from the fourth quarter of 1995, again,
primarily attributable to the sale of the Vermont
operations.
<TABLE>
<CAPTION>
SELECTED FOURTH QUARTER FINANCIAL INFORMATION
(Dollars In Thousands)
For the Quarter Ended
December 31,
1996 1995
<S> <C> <C>
Interest Income $12,153 $15,846
Interest Expense 5,025 6,577
Net Interest Income 7,128 9,269
Provision for Loan Losses 224 530
Net Interest Income after Provision for Loan Losses 6,904 8,739
Other Income 2,155 2,342
Other Expense 5,255 7,009
Income Before Income Taxes 3,804 4,072
Provision for Income Taxes 1,370 1,462
Net Income $ 2,434 $ 2,610
Weighted Average Number of Shares and
Equivalents Outstanding
Primary 5,847 6,239
Fully Diluted 5,850 6,244
Primary Earnings Per Share $ .42 $ .42
Fully Diluted Earnings Per Share .42 .42
SELECTED RATIOS:
Return on Average Assets 1.49% 1.30%
Return on Average Equity 13.04% 15.58%
Per share amounts have been adjusted for the 1996 ten 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, 1996, which Annual
Report is attached as Exhibit 13 to this Report:
Independent Auditors' Report
Financial Statements:
Consolidated Balance Sheets as of
December 31, 1996 and 1995
Consolidated Statements of Income for the Years
Ended December 31, 1996, 1995 and 1994
Consolidated Statements of Changes in
Shareholders' Equity for the Years
Ended December 31, 1996, 1995
and 1994
Consolidated Statements of Cash Flows for the
Years Ended December 31, 1996, 1995 and 1994
Notes to Consolidated Financial Statements
Supplementary Data: (Unaudited)
Quarterly Financial Data for the Years Ended
December 31, 1996 and 1995
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 30, 1997 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 30, 1997 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 30, 1997 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 30, 1997 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, incorporated by reference from
Exhibit 13 to this Report, the 1996 Annual
Report to Shareholders. 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, 1996 and 1995
Consolidated Statements of Income for
the Years Ended December 31, 1996,
1995 and 1994
Consolidated Statements of Changes in
Shareholders' Equity for the Years
Ended December 31, 1996,
1995 and 1994
Consolidated Statements of Cash Flows
for the Years Ended December 31,
1996, 1995 and 1994
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 from the
Registrant's Current Report on Form 8-K,
filed on August 4, 1995, 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
from the Registrant's Current Report on Form
8-K, filed January 30, 1996, 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 from the Registrant's
Current Report on Form 8-K, filed March 14,
1996, Exhibit 2.1.
2.4 Amendment to Purchase and Assumption
Agreement among Arrow Financial Corporation,
Arrow Vermont Corporation, Green Mountain
Bank and ALBANK, FSB, dated September 26,
1996 incorporated herein by reference from
the Registrant's Current Report on Form 8-K
filed October 11, 1996, Exhibit 2.3.
2.5 Service Purchasing Agreement among Arrow
Financial Corporation, Arrow Vermont
Corporation, Green Mountain Bank and ALBANK,
FSB, dated February 26, 1996 incorporated
herein by reference from the Registrant's
Current Report on Form 8-K filed March 14,
1996, Exhibit 2.2.
2.6 Amendment to Service Purchasing Agreement
among Arrow Financial Corporation, Arrow
Vermont Corporation, Green Mountain Bank and
ALBANK, FSB, dated September 26, 1996
incorporated herein by reference from the
Registrant's Current Report on Form 8-K,
filed October 11, 1996, Exhibit 2.4.
2.7 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 from the
Registrant's Current Report on Form 8-K
filed March 14, 1996, Exhibit 2.3.
3.(I) Certificate of Incorporation of the
Registrant, as amended, incorporated herein
by reference from the Registrant's Annual
Report on Form 10-K for the year ended
December 31, 1990, Exhibit 3.(a).
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 Short-term Incentive Award 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 herein by reference from
Registrant's Annual Report on Form 10-K for
the year ended December 31, 1990, Exhibit
10.(k). *
10.5 Employment Agreement between the Registrant
and John J. Murphy dated December 31, 1990,
incorporated herein by reference from
Registrant's Annual Report on Form 10-K for
the year ended December 31, 1992, Exhibit
10(g)(1). *
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 herein
by reference from Registrant's Annual Report
on Form 10-K for the year ended December 31,
1992, Exhibit 10(j)(1). *
10.7 Select Executive Retirement Plan of the
Registrant effective January 1, 1992
incorporated herein by reference from
Registrant's Annual Report on Form 10-K for
December 31, 1992, Exhibit 10(m). *
10.8 Employee Stock Purchase Plan of the
Registrant, incorporated herein by reference
from Registrant's 1933 Act Registration
Statement on Form S-8 (File number 33-48225;
filed May 15, 1992). *
10.9 Long Term Incentive Plan of the Registrant,
incorporated herein by reference from
Registrant's 1933 Act Registration Statement
on Form S-8 (File number 33-66192; filed
July 19, 1993). *
10.10 Directors Deferred Compensation Plan of
Registrant, incorporated herein by reference
from Registrant's Annual Report on Form 10-K
for December 31, 1993, Exhibit 10(n). *
10.11 Senior Officers Deferred Compensation Plan
of the Registrant, incorporated herein by
reference from Registrant's Annual Report on
Form 10-K for December 31, 1993, Exhibit
10(o).*
10.12 Automatic Dividend Reinvestment Plan of the
Registrant incorporated herein by reference
from Registrant's Annual Report on Form 10-K
for December 31, 1995, Exhibit 10.11.*
* 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
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) The following Current Reports on Form 8-K
were filed during the fourth quarter of 1996:
Filed October 11, 1996:
Amendment to Purchase and Assumption Agreement
among Arrow Financial Corporation, Arrow
Vermont Corporation, Green Mountain Bank and
ALBANK, FSB, dated September 26, 1996.
Filed October 11, 1996:
Amendment to Service Purchasing Agreement
among Arrow Financial Corporation, Arrow
Vermont Corporation, Green Mountain Bank and
ALBANK, FSB, dated September 26, 1996.
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 26, 1997
By: /s/ Thomas L. Hoy
Thomas L. Hoy
President and
Chief Executive Officer
Date: March 26, 1997
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 26, 1997 by the following persons
in the capacities indicated.
/s/ John J. Carusone,Jr.
John J. Carusone
Director
/s/ Michael B. Clarke
Michael B. Clarke
Director
/s/ George C. Frost
George C. Frost
Director
/s/ Kenneth C. Hopper, M.D.
Kenneth C. Hopper, M.D.
Director
/s/ Thomas L. Hoy
Thomas L. Hoy
Director and President
/s/ Edward F. Huntington
Edward F. Huntington
Director
/s/ David G. Kruczlnicki
David G. Kruczlnicki
Director
/s/ Michael F. Massiano
Michael F. Massiano
Director & Chairman
/s/ David L. Moynehan
David L. Moynehan
Director
/s/ Doris E. Ornstein
Doris E. Ornstein
Director
/s/ Daniel L. Robertson
Daniel L. Robertson
Director
EXHIBITS INDEX
Exhibit
Number Exhibit
3.(ii) By-Laws 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
4/26/96 - Article 3.2
12/18/96 - Article 3.2
<PAGE>
BY-LAWS
ARROW FINANCIAL CORPORATION
(A New York Corporation)
(As amended to 12/18/96)
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.
<PAGE>
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 eleven (11).
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.
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.
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 seventy
percent (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 a
concise 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 11
<TABLE>
ARROW FINANCIAL CORPORATION AND SUBSIDIARIES
STATEMENT RE COMPUTATION OF PER SHARE EARNINGS
<CAPTION>
1996 1995 1994 1993 1992
<S> <C> <C> <C> <C> <C>
Primary Earnings Per Share:
Net Income Before Extraordinary Item
& Cumulative Effect of Accounting Change $20,260 $12,424 $11,325 $8,176 $2,890
Extraordinary Item --- --- --- --- 811
Cumulative Effect of Accounting Change --- --- --- 1,457 ---
Net Income $20,260 $12,424 $11,325 $9,633 $3,701
Wesighted Shares Outstanding 5,919 6,277 6,306 6,247 6,074
ESOP Leveraged Shares (29) (25) --- --- ---
Stock Options-
Equivalent Shares 60 33 15 --- ---
Total Equivalent Shares 5,950 6,285 6,320 6,247 6,074
Primary Eanrings Per Share,
Before Extraordinary Item $3.40 $1.98 $1.79 $1.31 $0.48
Primary Earnings Per Share,
Extraordinary Item --- --- --- --- 0.12
Primary Earnings Per Share,
Cumulative Effect of Accounting Change --- --- 0.23 ---
Primary Earnings Per Share $3.40 $1.98 $1.79 $1.54 $0.60
Fully Diluted Earnings Per Share:
Net Income Before Extraordinary Item
& Cumulative Effect of Accounting Change $12,260 $12,424 $11,325 $8,176 $2,890
Debenture Interest Expense, net of tax --- --- 243 --- ---
Fully Diluted Income 12,260 12,424 11,568 8,176 2,890
Extraordinary Item --- --- --- --- 811
Cumulative Effect of Accounting Change --- --- --- 1,457 ---
Net Income $12,260 $12,424 $11,568 $9,633 $3,701
Weighted Shares Outstanding 5,919 6,277 6,306 6,247 6,074
ESOP Leveraged Shares (29) (26) --- --- ---
Stock Options-
Equivalent Shares 81 54 26 --- ---
Debentures --- --- 365 --- ---
Total Equivalent Shares 5,971 6,305 6,697 6,247 6,074
Fully Diluted Earnings Per Share,
Before Extraordinary Item $3.39 $1.97 $1.73 $1.31 $0.48
Fully Diluted Earnings Per Share,
Extraordinary Item --- --- --- --- 0.12
Fully Diluted Earnings Per Share,
Cumulative Effect of Accounting Change --- --- --- 0.23 ---
Fully Diluted Earnings Per Share $3.39 $1.97 $1.73 $1.54 $0.60
</TABLE>
REPORT OF MANAGEMENT
The accompanying consolidated financial
statements of Arrow Financial Corporation and
Subsidiaries are the responsibility of and have
been prepared by management in conformity with
generally accepted accounting principles. These
statements necessarily include some amounts that
are based on best judgments and estimates.
Other financial information in the annual report
is consistent with that in the consolidated
financial statements.
Management is responsible for
maintaining a system of internal accounting
control. The purpose of the system is to
provide reasonable assurance that transactions
are recorded in accordance with management's
authorization, that assets are safeguarded
against loss or unauthorized use, and that
underlying financial records support the
preparation of financial statements. The system
includes written policies and procedures,
selection of qualified personnel, appropriate
segregation of responsibilities, and the ongoing
internal audit function.
The independent auditors conduct an
annual audit of the Company's consolidated
financial statements to enable them to express
an opinion as to the fair presentation of the
statements. In connection with the audit, the
independent auditors consider the internal
control structure, to the extent they consider
necessary to determine the nature, timing and
extent of their auditing procedures. The
independent auditors also prepare
recommendations regarding internal controls and
other accounting and financial related matters.
The implementation of these recommendations by
management is monitored directly by the Audit
Committee of the Board of Directors.
Thomas L. Hoy
President and
Chief Executive Officer
John J. Murphy
Executive Vice President,
Treasurer and
Chief Financial Officer
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,
1996 and 1995, 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, 1996.
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, 1996 and 1995, and
the results of their operations and their cash
flows for each of the years in the three-year
period ended December 31, 1996, in conformity with
generally accepted accounting principles.
KPMG Peat Marwick LLP
Certified Public Accountants
Albany, New York
January 17, 1997
<TABLE>
CONSOLIDATED BALANCE SHEETS
ARROW FINANCIAL CORPORATION AND SUBSIDIARIES
(Dollars in Thousands)
<CAPTION>
December 31,
1996 1995
ASSETS
<S> <C> <C>
Cash and Due from Banks (Note 2) $ 19,572 $ 23,406
Federal Funds Sold 17,925 35,100
Cash and Cash Equivalents 37,497 58,506
Securities Available-for-Sale (Note 3) 171,743 178,645
Securities Held-to-Maturity: (Approximate Fair Value of
$31,519 in 1996 and $14,508 in 1995) (Notes 3 and 18) 30,876 13,921
Loans and Leases (Notes 4 and 18) 393,511 517,787
Less: Allowance for Loan Losses (Note 5) (5,581) (12,106)
Net Loans and Leases 387,930 505,681
Premises and Equipment (Note 6) 9,414 13,888
Other Real Estate Owned (Note 7) 136 2,410
Other Assets 15,007 16,739
Total Assets $652,603 $789,790
LIABILITIES
Deposits:
Demand $ 67,877 $ 94,713
Regular Savings, N.O.W. & Money Market Deposit Accounts 254,312 352,302
Time Deposits of $100,000 or More (Notes 8 and 18) 83,802 57,557
Other Time Deposits (Notes 8 and 18) 135,756 189,881
Total Deposits 541,747 694,453
Short-Term Borrowings: (Note 9)
Federal Funds Purchased and Securities Sold Under
Agreements to Repurchase 16,597 14,045
Other Short-Term Borrowings 6,109 1,252
Other Liabilities 13,854 12,536
Total Liabilities 578,307 722,286
Commitments and Contingent Liabilities
(Notes 3, 11, 16, 17, 19 and 21)
SHAREHOLDERS' EQUITY (Notes 10, 12 and 13)
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 1996 and 5,979,124 in 1995) 6,577 5,979
Surplus 54,569 40,938
Undivided Profits 26,992 24,296
Unallocated ESOP Shares (43,130 Shares in 1995) (Note 12) --- (700)
Valuation Allowance for Securities Available-for-Sale 208 1,152
Treasury Stock (817,743 Shares in 1996 and
309,833 Shares in 1995, at Cost) (14,050) (4,161)
Total Shareholders' Equity 74,296 67,504
Total Liabilities and Shareholders' Equity $652,603 $789,790
See notes to 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,
1996 1995 1994
INTEREST AND DIVIDEND INCOME
<S> <C> <C> <C>
Interest and Fees on Loans and Leases $42,195 $47,988 $42,440
Interest on Federal Funds Sold 642 1,307 501
Interest and Dividends on Securities
Available-for-Sale 11,102 3,999 2,867
Interest and Dividends on Securities Held-to-Maturity 936 7,424 6,706
Total Interest and Dividend Income 54,875 60,718 52,514
INTEREST EXPENSE
Interest on Deposits:
Time Deposits of $100,000 or More 4,198 3,761 1,161
Other Deposits 16,737 20,055 16,204
Interest on Short-Term Borrowings:
Federal Funds Purchased and Securities
Sold Under Agreements to Repurchase 713 604 273
Other Short-Term Borrowings 178 215 121
Interest on Long-Term Debt --- 230 443
Total Interest Expense 21,826 24,865 18,202
NET INTEREST INCOME 33,049 35,853 34,312
Provision for Loan Losses (Note 5) 896 1,170 (950)
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 32,153 34,683 35,262
OTHER INCOME
Income from Fiduciary Activities 3,458 3,752 3,657
Fees for Other Services to Customers 3,959 4,669 4,345
Net Gains (Losses) on Securities Transactions (101) 23 (481)
Net Gain on Divestiture of Vermont Operations (Note 21) 15,330 --- ---
Other Operating Income (Note 14) 1,057 6,052 1,047
Total Other Income 23,703 14,496 8,568
OTHER EXPENSE
Salaries and Employee Benefits (Notes 11, 12 and 13) 14,971 16,710 16,204
Occupancy Expense of Premises, Net 1,790 2,040 2,168
Furniture and Equipment Expense 1,677 1,930 2,076
Other Operating Expense (Note 14) 6,336 9,089 10,926
Total Other Expense 24,774 29,769 31,374
INCOME BEFORE INCOME TAXES 31,082 19,410 12,456
Provision for Income Taxes (Note 15) 10,822 6,986 1,131
NET INCOME $20,260 $12,424 $11,325
Average Shares Outstanding:
Primary 5,950 6,285 6,320
Fully Diluted 5,971 6,305 6,697
Earnings Per Common Share:
Primary $ 3.40 $ 1.98 $ 1.79
Fully Diluted 3.39 1.97 1.73
Per share amounts have been adjusted for the 1996 ten percent and the 1995 four percent
stock dividends.
See notes to consolidated financial statements.
</TABLE>
<TABLE>
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
ARROW FINANCIAL CORPORATION AND SUBSIDIARIES
(Dollars in Thousands)
<CAPTION>
Unallocated Unrealized
Employee Gain (Loss)
Stock Securities
Shares Common Undivided Ownership Available Treasury
Issued Stock Surplus Profits Plan for Sale Stock Total
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1993 5,477,305 $5,477 $32,402 $13,408 $ --- $ 187 $(1,405) $50,069
Net Income --- --- --- 11,325 --- --- --- 11,325
Cash Dividends Declared,
$.324 per Share --- --- --- (2,039) --- --- --- (2,039)
4% Stock Dividend 219,823 220 3,325 (3,545) --- --- --- ---
Stock Purchase Contracts
Exercised 18,581 19 281 --- --- --- --- 300
Stock Options Exercised 10,056 10 94 --- --- --- --- 104
Purchase of Treasury Stock
(35,229 shares) --- --- --- --- --- --- (494) (494)
Valuation Allowance for
Securities Available-
for-Sale --- --- --- --- --- (860) --- (860)
Balance at December 31, 1994 5,725,765 5,726 36,102 19,149 --- (673) (1,899) 58,405
Net Income --- --- --- 12,424 --- --- --- 12,424
Cash Dividends Declared,
$.513 per Share --- --- --- (3,196) --- --- --- (3,196)
4% Stock Dividend 229,966 230 3,851 (4,081) --- --- --- ---
Stock Purchase Contracts
Exercised 23,393 23 303 --- --- --- --- 326
Acquisition of Common Stock
By ESOP (69,500 Shares) --- --- --- --- (1,173) --- --- (1,173)
Allocation of ESOP Stock
(28,537 Shares) --- --- 24 --- 473 --- --- 497
Stock Options Exercised
(92,066 Shares) --- --- 630 --- --- --- 584 1,214
Tax Benefit for Exercise
of Stock Options --- --- 28 --- --- --- --- 28
Purchase of Treasury Stock
(170,583 Shares) --- --- --- --- --- --- (2,846) 2,846)
Valuation Allowance for
Securities Available-
for-Sale --- --- --- --- --- 1,825 --- 1,825
Balance at December 31, 1995 5,979,124 5,979 40,938 24,296 (700) 1,152 (4,161) 67,504
Net Income --- --- --- 20,260 --- --- --- 20,260
Cash Dividends Declared,
$.664 per Share --- --- --- (3,886) --- --- --- (3,886)
10% Stock Dividend 597,912 598 13,080 (13,678) --- --- --- ---
Allocation of ESOP Stock
(44,424 Shares) --- --- 252 --- 700 --- --- 952
Stock Options Exercised
(44,381 Shares) --- --- 249 --- --- --- 287 536
Tax Benefit for Exercise
of Stock Options --- --- 50 --- --- --- --- 50
Purchase of Treasury Stock
(481,584 Shares) --- --- --- --- --- --- (10,176) (10,176)
Valuation Allowance for
Securities Available-
for-Sale --- --- --- --- --- (944) --- (944)
Balance at December 31, 1996 6,577,036 $6,577 $ 54,569 $26,992 $ --- $ 208 (14,050) $74,296
Per share amounts have been adjusted for the 1996 ten percent and the 1995 four percent stock dividends.
Included in the shares issued for the stock dividends in 1996, 1995 and 1994 were treasury shares of 70,707,
10,207 and 7,350, respectively, and for 1996 and 1995, unallocated ESOP shares of 1,294 and 2,167, respectively.
See notes to consolidated financial statements.
</TABLE>
<TABLE>
ARROW FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
<CAPTION>
Years Ended December 31,
1996 1995 1994
Operating Activities:
<S> <C> <C> <C>
Net Income $20,260 $12,424 $11,325
Adjustments to Reconcile Net Income to Net
Cash Provided by Operating Activities:
Provision for Loan Losses 896 1,170 (950)
Provision for Other Real Estate Owned Losses 85 161 398
Depreciation and Amortization 1,200 1,624 2,167
Compensation Expense for Allocated ESOP Shares 252 24 ---
Net Gain on Divestiture of Vermont Operations (15,330) --- ---
Gains on the Sale of Securities Available-for-Sale (243) (51) (73)
Losses on the Sale of Securities Available-for-Sale 344 28 540
Proceeds from the Sale of Loans 4,882 12,397 6,238
Losses (Gains) on the Sale of Loans, Fixed Assets
and Other Real Estate Owned 135 (120) 1,195
Deferred Income Tax Expense (Benefit) 79 272 (1,954)
Decrease (Increase) in Interest Receivable 1,130 (725) (165)
Increase (Decrease) in Interest Payable (561) 1,196 82
Decrease (Increase) in Other Assets 991 (2,904) 580
Increase (Decrease) in Other Liabilities (1,233) 3,751 1,418
Net Cash Provided By Operating Activities 12,887 29,259 20,801
Investing Activities:
Proceeds from the Sale of Securities Available-for-Sale 51,040 4,191 16,059
Proceeds from the Maturities of Securities
Available-for-Sale 36,454 26,407 22,463
Purchases of Securities Available-for-Sale (82,398) (33,921) (38,340)
Proceeds from the Maturities of
Securities Held-to-Maturity 848 6,604 51,257
Purchases of Securities Held-to-Maturity (17,814) (9,157) (55,473)
Proceeds from Loans Sold in Branch Divestitures 147,503 --- ---
Net Increase in Loans and Leases (32,437) (25,206) (16,170)
Proceeds from Fixed Assets Sold in Branch Divestitures 2,525 --- ---
Proceeds from Sales of Fixed Assets and
Other Real Estate Owned 2,513 1,473 4,930
Purchases of Fixed Assets (2,099) (593) (807)
Proceeds from the Sale of Vermont Trust Operations 3,000 --- ---
Net Cash Provided By (Used In) Investing Activities 109,135 (30,202) (16,081)
Financing Activities:
Deposits Transferred in Branch
Divestitures, net of Premium (192,953) --- ---
Net Increase (Decrease) in Deposits 55,989 43,968 (8,942)
Net Increase (Decrease) in Short-Term Borrowings 7,409 (9,568) 12,378
Repayment of Long-Term Debt --- (4,690) (88)
Common Stock Issued --- --- 100
Exercise of Stock Options 412 164 104
Disqualifying Disposition of Incentive Stock Options 50 28 ---
Purchase of Treasury Stock (10,052) (1,881) (494)
Cash Dividends Paid (3,886) (3,196) (2,039)
Net Cash (Used In) Provided By Financing Activities (143,031) 24,825 1,019
Net (Decrease) Increase In Cash and Cash Equivalents (21,009) 23,882 5,739
Cash and Cash Equivalents at Beginning of the Year 58,506 34,624 28,885
Cash and Cash Equivalents at End of the Year $37,497 $58,506 $34,624
Supplemental Cash Flow Information:
Interest Paid $22,387 $23,670 $18,120
Income Taxes Paid 11,235 6,908 1,537
Transfer of Loans to Other Real Estate Owned 302 642 2,493
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 ---
See notes to 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.
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. When necessary, prior
years' financial statements have been
reclassified to conform with the current
financial statement presentations.
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. The cost
of securities is adjusted for amortization of
premium and accretion of discount, which is
calculated on an effective interest rate method.
In November 1995, the Financial
Accounting Standards Board (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
maintained 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.
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 of the collateral less
estimated cost to sell. For other loans,
impairment is determined by comparing the
recorded value for 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. At December 31, 1996 and 1995, the
carrying amount of the Company's mortgage
servicing rights measured under SFAS No. 122
amounted to $57 thousand for each period. At
December 31, 1996 and 1995, the magnitude of the
serviced loans was not considered so substantial
as to require stratification for purposes of
evaluation for impairment. There was no
valuation reserve for mortgage servicing rights
at December 31, 1996 and 1995, as fair value
approximated carrying value.
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 - The Company accounts for
income taxes under the asset and liability method
of accounting for income taxes under SFAS No.
109. Under the asset and liability method,
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. The effect of deferred tax
assets and liabilities for a change in tax rates
is recognized in income in the period that
includes the enactment date. The Company's
policy is that deferred tax assets are reduced by
a valuation reserve if, based on the weight of
available evidence, it is more likely than not
that some or all of the deferred tax assets will
not be realized.
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
$351,000 and $926,000 at December 31, 1996 and
1995, respectively. The related amortization
expense totalled $86,000, $161,000 and $172,000
in 1996, 1995 and 1994, respectively. During
1996, a reduction of $489,000 in intangible
assets was attributable to the disposition of
Vermont operations. 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 at
December 31, 1995. There were no deferred loan
premiums at December 31, 1996. The amount of
loans serviced for others was $21,396,000 and
$66,633,000 at December 31, 1996 and 1995,
respectively.
Long-Lived Assets - On January 1, 1996,
the Company adopted 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 costs to sell.
Adoption of SFAS No. 121 did not have a material
impact on the Company's consolidated financial
position, results of operations, or liquidity.
Transfers and Servicing of Financial
Assets and Extinguishments of Liabilities - In
June 1996, the FASB issued 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. Management of the Company does not
expect that adoption of SFAS No. 125 will have a
material impact on the Company's consolidated
financial position, results of operations, or
liquidity.
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 18.
Use of Estimates - Management of the
Company has made a number of estimates and
assumptions relating to the reporting of assets
and liabilities and the disclosure of contingent
assets and liabilities to prepare these
consolidated financial statements in conformity
with generally accepted accounting principles.
Actual results could differ from those estimates.
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, 1996 and 1995 was approximately
$8,122 and $8,864, 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, 1996 and 1995 is presented below:
<TABLE>
Securities Available-for-Sale:
<CAPTION>
Gross Gross
Amortized Fair Unrealized Unrealized
Cost Value Gains Losses
December 31, 1996
<S> <C> <C> <C> <C>
U.S. Treasury and Agency Obligations $ 95,553 $ 95,733 $ 422 $ 242
Collateralized Mortgage Obligations 42,791 42,894 454 351
Other Mortgage-Backed Securities 21,901 21,732 77 246
Corporate and Other Debt Securities 8,994 9,184 190 ---
Mutual Funds and Equity Securities 2,142 2,200 58 ---
Total Securities Available-for-Sale $171,381 $171,743 $1,201 $ 839
December 31, 1995
U.S. Treasury and Agency Obligations $113,249 $114,502 $1,458 $ 205
State and Municipal Obligations 338 338 --- ---
Collateralized Mortgage Obligations 43,892 44,173 525 244
Other Mortgage-Backed Securities 10,397 10,478 124 43
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
</TABLE>
<TABLE>
Securities Held-to-Maturity:
<CAPTION>
Gross Gross
Amortized Fair Unrealized Unrealized
Cost Value Gains Losses
December 31, 1996
<S> <C> <C> <C> <C>
State and Municipal Obligations $ 19,765 $ 20,423 $663 $ 5
Other Mortgage-Backed Securities 11,111 11,096 --- 15
Total Securities Held-to-Maturity $ 30,876 $ 31,519 $663 $ 20
December 31, 1995
State and Municipal Obligations $ 13,921 $ 14,508 $648 $ 61
Total Securities Held-to-Maturity $ 13,921 $ 14,508 $648 $ 61
</TABLE>
<PAGE>
A summary of the maturities of
securities as of December 31, 1996 is presented
below. Collateral mortgage obligations are
included in the schedule based on their expected
average lives and other mortgage-backed securities
by final maturity date.
<TABLE>
<CAPTION>
Securities Available- Securities Held-
for-Sale to-Maturity
Amortized Fair Amortized Fair
Cost Value Cost Value
<S> <C> <C> <C> <C>
Within One Year:
U.S. Treasury and Agency Obligations $ 33,994 $ 34,141 $ --- $ ---
State and Municipal Obligations --- --- 1,888 1,890
Collateralized Mortgage Obligations 1,498 1,536 --- ---
Other Mortgage-Backed Securities 339 335 --- ---
Corporate and Other Debt Securities 1,001 1,010 --- ---
Total 36,832 37,022 1,888 1,890
From 1 - 5 Years:
U.S. Treasury and Agency Obligations 50,563 50,767 --- ---
State and Municipal Obligations --- --- 2,784 2,893
Collateralized Mortgage Obligations 32,104 32,230 --- ---
Other Mortgage-Backed Securities 4,208 4,195 --- ---
Corporate and Other Debt Securities 7,993 8,174 --- ---
Total 94,868 95,366 2,784 2,893
From 5 - 10 Years:
U.S. Treasury and Agency Obligations 10,996 10,825 --- ---
State and Municipal Obligations --- --- 5,417 5,669
Collateralized Mortgage Obligations 8,188 8,110 --- ---
Other Mortgage-Backed Securities 1,595 1,581 --- ---
Corporate and Other Debt Securities --- --- --- ---
Total 20,779 20,516 5,417 5,669
Over 10 Years:
U.S. Treasury and Agency Obligations --- --- --- ---
State and Municipal Obligations --- --- 9,676 9,971
Collateralized Mortgage Obligations 1,001 1,018 --- ---
Other Mortgage-Backed Securities 15,759 15,621 11,111 11,096
Corporate and Other Debt Securities --- --- --- ---
Mutual Funds and Equity Securities 2,142 2,200 --- ---
Total 18,902 18,839 20,787 21,067
Total Securities $171,381 $171,743 $ 30,876 $ 31,519
</TABLE>
The carrying amount of securities
pledged to secure public and trust deposits and
for other purposes totalled $144,367 and $114,643
at December 31, 1996 and 1995, respectively.
NOTE 4: LOANS AND LEASES (In Thousands)
<TABLE>
Loans and leases at December 31, 1996 and 1995 consisted of the following:
<CAPTION>
1996 1995
<S> <C> <C>
Commercial, Financial and Agricultural $ 48,372 $ 79,993
Real Estate - Commercial 36,302 71,622
Real Estate - Residential 168,429 238,298
Real Estate - Construction 971 2,051
Installment Loans to Individuals 139,395 125,762
Lease Financing, Net of Unearned Income 42 61
Total Loans and Leases $393,511 $517,787
</TABLE>
The carrying amount of net loans and
leases at December 31, 1996 and 1995 was $387,930
and $505,681, respectively. The fair value of
net loans and leases at December 31, 1996 and
1995 was $392,128 and $516,999, 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 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.
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 $4,652 at
December 31, 1996 and $4,277 at December 31,
1995. During 1996 the amount of new loans and
renewals extended to such related parties was
$3,216 and the total of loan repayments was
$3,291.
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>
1996 1995 1994
<S> <C> <C> <C>
Principal Amount at December 31 $2,297 $4,244 $4,197
Gross Interest That Would Have Been Earned
Under Original Terms 232 435 537
Interest Included in Net Income 48 116 162
</TABLE>
NOTE 5: ALLOWANCE FOR LOAN LOSSES (In Thousands)
<TABLE>
The following summarizes the changes in the allowance for loan losses:
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
Balance at Beginning of Year $12,106 $12,338 $16,078
Provision for Loan Losses 896 1,170 (950)
Recoveries 366 369 696
Charge-Offs (946) (1,771) (3,486)
Transfer with Loan Sales (6,841) --- ---
Balance at End of Year $ 5,581 $12,106 $12,338
</TABLE>
At December 31, 1996 and 1995, the
recorded investment in impaired loans amounted to
$1,301 and $2,107, respectively. At December 31,
1996, the allowance for loan losses included
$195, which represented the amount of allowance
related to the impaired loans at that date. 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 in impaired loans for 1996
and 1995 was $1,465 and $1,327, respectively.
During 1996 and 1995, 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, 1996 and 1995 is presented
below:
<CAPTION>
1996 1995
<S> <C> <C>
Bank Premises, Including Land $11,202 $18,489
Equipment, Furniture and Fixtures 8,992 12,931
Leasehold Improvements 20 334
Sub-Total 20,214 31,754
Accumulated Depreciation and Amortization (10,800) (17,866)
Net Premises and Equipment $ 9,414 $13,888
</TABLE>
Amounts charged to operations for
depreciation and amortization totaled $879,
$1,240 and $1,476 in 1996, 1995 and 1994,
respectively.
NOTE 7: OTHER REAL ESTATE OWNED (In Thousands)
<TABLE>
Other real estate owned, net of an allowance for estimated losses, at December 31,
1996 and 1995 consisted of the following:
<CAPTION>
1996 1995
<S> <C> <C>
Single-Family 1 - 4 Units $ --- $ 82
Commercial Real Estate 86 2,328
Construction and Land Development 50 ---
Other Real Estate Owned, Net $ 136 $2,410
</TABLE>
<TABLE>
The following table summarizes changes in the net carrying amount of other real
estate owned at December 31, 1996 and 1995:
<CAPTION>
1996 1995
<S> <C> <C>
Balance at Beginning of Year $2,410 $3,396
Properties Acquired Through Foreclosure 302 642
Adjustments for Change in Fair Value (85) (161)
Sales (2,491) (1,467)
Balance at End of Year $ 136 $2,410
</TABLE>
<TABLE>
The following summarizes the changes in the allowance for other real estate owned
losses:
<CAPTION>
1996 1995
<S> <C> <C>
Balance at Beginning of Year $370 $369
Additions 85 161
Charge-Offs (347) (160)
Balance at End of Year $108 $370
</TABLE>
NOTE 8: TIME DEPOSITS (In Thousands)
<TABLE>
The following summarizes the contractual maturities of time deposits during years
subsequent to December 31, 1996:
<CAPTION>
Time
Deposits Other
of $100,000 Time
or More Deposits
<S> <C> <C>
1997 $79,761 $96,674
1998 1,546 26,893
1999 428 3,606
2000 1,463 5,337
2001 604 3,246
Total $83,802 $135,756
</TABLE>
The carrying value of time deposits at
December 31, 1996 and 1995 was $219,558 and
$247,438, respectively. The fair value of time
deposits at December 31, 1996 and 1995 was
$219,558 and $247,728, respectively. The fair
value of time deposits 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: 1996 1995
<S> <C> <C>
Balance at December 31 $16,597 $14,045
Maximum Month-End Balance 20,099 14,460
Average During the Year 15,043 12,166
Average Rate During the Year 4.72% 4.97%
Rate at December 31 4.39% 4.29%
Other Short-Term Borrowings:
Balance at December 31 $6,109 $1,252
Maximum Month-End Balance 8,336 8,402
Average During the Year 3,430 3,689
Average Rate During the Year 5.20% 5.81%
Rate at December 31 5.50% 5.15%
Average Aggregate Borrowing Rates 4.81% 5.16%
</TABLE>
Securities sold under agreements to
repurchase generally mature within ninety days.
The Company maintains control over the securities
underlying the agreements. Federal funds
purchased represent overnight transactions.
Other short-term borrowings include demand notes
issued to the U.S. Treasury, and Federal Home
Loan Bank (FHLB) borrowings.
The subsidiary banks have lines of credit
available with the FHLB. At December 31, 1996,
the subsidiary banks could borrow up to
approximately $29 million, of which $3 million
was outstanding.
NOTE 10: REGULATORY MATTERS (In Thousands)
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, 1996, 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 $8.6 million.
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.
The Company and its subsidiary banks are
subject to various regulatory capital
requirements administered by the federal banking
agencies. Failure to meet minimum capital
requirements can initiate certain mandatory--and
possibly additional discretionary--actions by
regulators that, if undertaken, could have a
direct material effect on an institution's
consolidated financial statements. Under capital
adequacy guidelines and the regulatory framework
for prompt corrective action, the Company and its
subsidiary banks must meet specific capital
guidelines that involve quantitative measures of
assets, liabilities, and certain off-balance-sheet
items as calculated under regulatory
accounting practices. Capital amounts and
classification are also subject to qualitative
judgments by the regulators about components,
risk weightings, and other factors.
Quantitative measures established by
regulation to ensure capital adequacy require the
Company and its subsidiary banks to maintain
minimum capital amounts and ratios (set forth in
the table below) of total and Tier I capital (as
defied in the regulations) to risk-weighted
assets (as defined), and of Tier I capital (as
defined) to average assets (as defined).
Management believes, as of December 31, 1996,
that the Company and all subsidiary banks meet
all capital adequacy requirements to which they
are subject.
As of December 31, 1996, the most recent
notification from the Federal Reserve Bank of New
York (the primary regulator of the Company) and
the Office of the Comptroller of the Currency
(the primary regulator of the subsidiary banks)
categorized each respective entity as well
capitalized under the regulatory framework for
prompt corrective action. To be categorized as
well capitalized the Company must maintain
minimum total risk-based, Tier I risk-based, and
Tier I leverage ratios as set forth in the table
below. There are no conditions or events since
that notification that management believes have
changed the Company's or its subsidiary banks'
categories.
The Company ("Arrow") and its subsidiary
banks, Glens Falls National Bank and Trust
Company ("Glens Falls National") and Saratoga
National Bank and Trust Company ("Saratoga
National") actual capital amounts and ratios are
presented in the table below as of December 31,
1996:
<TABLE>
<CAPTION>
(Dollars in Thousands) Minimum Amounts
To Be Well
Minimum Amounts Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Purposes
Amount Ratio Amount Ratio Amount Ratio
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1996:
Total Capital
(to Risk Weighted Assets):
Arrow $76,885 20.6% $29,887 8.0 $37,359 10.0%
Glens Falls National 47,902 15.6 24,581 8.0 30,726 10.0
Saratoga National 6,353 10.7 4,741 8.0 5,926 10.0
Tier I Capital
(to Risk Weighted Assets):
Arrow $72,204 19.3% $14,941 4.0% $22,412 6.0%
Glens Falls National 44,050 14.3 12,287 4.0 18,431 6.0
Saratoga National 5,643 9.5 2,371 4.0 3,557 6.0
Tier I Capital
(to Average Assets):
Arrow $72,204 11.2% $25,856 4.0% $25,856 4.0%
Glens Falls National 44,050 7.9 22,360 4.0 27,951 5.0
Saratoga National 5,643 7.6 2,974 4.0 3,717 5.0
</TABLE>
NOTE 11: 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
1996 1995 1996 1995
Actuarial Present Value of Benefit Obligations:
<S> <C> <C> <C> <C>
Vested Benefit Obligation $ 9,430 $ 9,552 $ 2,741 $1,581
Nonvested Benefit Obligation 185 241 --- 6
Accumulated Benefit Obligation 9,615 9,793 2,741 1,587
Effect of Projected Future
Compensation Levels 2,742 2,896 419 487
Projected Benefit Obligation 12,357 12,689 3,160 2,074
Plan Assets at Fair Value 14,233 13,636 --- ---
Plan Assets in Excess of
(Less than) Projected Benefit Obligation 1,876 947 (3,160) (2,074)
Unrecognized Net Loss from Past
Experience Different
from that Assumed and Effect of
Changes in Assumptions 326 1,113 419 186
Unrecognized Prior Service Cost (48) (54) 782 1,296
Unrecognized Net Asset at Transition
(being recognized over 15 years) (500) (589) --- ---
Adjustment Required to Recognize
Minimum Liability --- --- (782) (994)
Prepaid (Accrued) Pension Cost $ 1,654 $ 1,417 $(2,741) $(1,586)
</TABLE>
The following table sets forth the components of the Company's net
periodic pension expense:
<TABLE>
<CAPTION>
Qualified Non-contributory Plan: 1996 1995 1994
<S> <C> <C> <C>
Service Cost - Benefits Earned During the Period $ 588 $ 481 $533
Interest Cost on Projected Benefit Obligation 918 830 788
Actual Return on Plan Assets (2,133) (2,828) (557)
Net Amortization and Deferral 835 1,759 (542)
Net Periodic Pension Expense $ 208 $ 242 $222
Supplemental Nonqualified Plan:
Service Cost - Benefits Earned During the Period $ 56 $ 53 $ 40
Interest Cost on Projected Benefit Obligation 177 142 66
Net Amortization and Deferral 188 165 104
Net Periodic Pension Expense $ 421 $ 360 $210
</TABLE>
The actuarial assumptions used to
determine the projected benefit obligation at
December 31, 1996 and 1995 include a discount
rate of 7.25% for both years, 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 1996 and 1995. The
plan's assets are primarily comprised of
short-term funds and U.S. Treasury obligations,
high grade corporate bonds and marketable equity
securities. At December 31, 1996 and 1995, plan
assets included 102 and 130 shares, respectively,
of Arrow Financial Corporation common stock with
a market value of $2,397 and $2,414,
respectively. During the respective years, the
Plan received $88 and $74 from cash dividends on
the Company's common stock.
During 1996, divestiture of the Company's
Vermont banking operations created one-time
financial accounting transactions for the defined
benefit pension plan and the supplemental
nonqualified plan, above, and for the nonpension
postretirement benefit plan, discussed below. At
December 31, 1996, the prepaid pension cost for
the defined benefit plan included a curtailment
gain amounting to $445; the accrued pension cost
for the supplemental nonqualifed plan reflected a
$523 reduction of unrecognized prior service
costs and recognition of $551 in additional
benefits provided by the plan; and the accrued
postretirement benefit cost for the nonpension
plan included a curtailment loss of $561. Net
expenses for these transactions were charged to
the net gain on the disposition of Vermont
operations (see Note 21) and, therefore, are not
included in the net periodic pension expense
above, or the net periodic postretirement benefit
expense below.
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, 1996 and 1995:
<TABLE>
<CAPTION>
1996 1995
Accumulated Postretirement Benefit Obligation:
<S> <C> <C>
Retirees $3,112 $2,794
Fully Eligible Active Plan Participants 221 177
Other Active Plan Participants 1,338 1,570
Total Accumulated Postretirement Benefit Obligation 4,671 4,541
Unrecognized Transition Obligation
(Being Recognized Over 20 Years) (1,939) (2,977)
Unrecognized Prior Service Costs (66) ---
Unrecognized Net Loss from Past Experience Different
from that Assumed and Effect of Changes in Assumptions (449) (303)
Accrued Postretirement Benefit Cost $2,217 $1,261
</TABLE>
<TABLE>
Net periodic postretirement benefit cost for the years ended December 31, 1996, 1995
and 1994, included the following components:
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
Service Cost $121 $106 $128
Interest Cost 326 305 304
Net Amortization and Deferral 176 172 203
Net Periodic Postretirement Benefit Expense $623 $583 $635
</TABLE>
For measurement purposes, the assumed
annual rate of increase in the per capita cost of
covered health care benefits for 1996 was 10% for
medical benefits and 8% for dental benefits; the
rate was assumed to decrease gradually to 5.5% by
2005, for both medical and dental benefits, 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, 1996 by $153 and
the aggregate of the service and interest cost
components of net periodic postretirement benefit
cost for the year then ended by $12. The
weighted-average discount rate used in
determining the accumulated postretirement
benefit obligation at December 31, 1996 and 1995
was 7.25% for both years, and the assumed rate of
increase in future compensation was 4.5% for both
years.
NOTE 12: 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 note required the Company to contribute the
amount necessary for the ESOP to discharge its
current obligations which included principal and
interest payments on the note. The Company's ESOP
provision amounted to $840 in 1996 and $750 for
both 1995 and 1994. As the debt was repaid,
shares were released from collateral and
allocated to active employees, based on the
proportion 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 were reported as unallocated ESOP
shares in shareholders' equity. As shares were
released from collateral, the Company reported
compensation expense equal to the current market
price of the shares, and the shares became
outstanding for earnings per share computations.
As of Decmeber 31, 1996, the debt was fully
repaid.
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
consolidated financial statements was $100, $81
and $67 in 1996, 1995 and 1994, 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 $393,
$478 and $520 for 1996, 1995 and 1994,
respectively. The Company's subsidiary banks
have a variety of performance based incentive
compensation plans for their employees.
NOTE 13: STOCK OPTION PLANS (Dollars In
Thousands, Except Per Share Amounts)
The Company has established fixed
Incentive Stock Option and Non-qualified Stock
Option Plans. As amended, these programs
reserved 583,377 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. At
December 31, 1996, 119,007 shares remained
available for grant under these plans. 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
ten percent stock dividend declared in 1996 and
the four percent stock dividend declared in 1995.
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.
The Company applies APB Opinion No. 25
and related Interpretations in accounting for its
plans. Accordingly, no compensation cost has
been recognized for its stock option plans. 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 fair value of each option grant is estimated
on the date of grant using the Black-Scholes
option-pricing model with the following weighted-
average assumptions used for grants in 1996 and
1995, respectively: dividend yield of 3.25% for
each year; expected volatility of 21.3% and
24.0%; risk free interest rates of 6.05% and
5.68%; and expected lives of 7.0 years for each
year. Pro forma disclosures for the Company for
the years ending December 31, 1996 and 1995 are
as follows:
<TABLE>
<CAPTION>
1996 1995
Net Income:
<S> <C> <C>
As Reported $20,260 $12,424
Pro Forma 20,191 12,419
Primary Earning Per Share:
As Reported $3.40 $1.98
Pro Forma 3.39 1.98
Fully Diluted Earnings Per Share:
As Reported $3.39 $1.97
Pro Forma 3.38 1.97
</TABLE>
A summary of the status of the Company's stock option plans as of
December 31, 1996, 1995 and 1994 and changes during the years ending on those
dates is presented below:
<TABLE>
<CAPTION>
1996 1995 1994
Weighted- Weighted- Weighted-
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
Options:
<S> <C> <C> <C> <C> <C> <C>
Outstanding at January 1 288,071 12.42 341,177 10.87 286,442 10.31
Granted 51,000 23.94 66,990 16.02 77,792 12.89
Exercised (78,120) 11.19 (117,808) 10.00 (11,505) 8.74
Forfeited (4,400) 16.02 (2,288) 12.89 (11,552) 12.53
Outstanding at Year-end 256,551 15.02 288,071 12.42 341,177 10.87
Exercisable at Year-end 120,171 148,216 218,675
Weighted-Average Fair Value
of Options Granted During
the Year $5.81 $4.03
</TABLE>
<TABLE>
The following table summarizes information about the Company's stock options at
December 31, 1996:
<CAPTION>
Options Outstanding Options Exercisable
Weighted-
Average Weighted- Weighted-
Range of Number Remaining Average Number Average
Exercise Outstanding Contractual Exercise Exercisable Exercise
Prices At 12/31/96 Life Price at 12/31/96 Price
<S> <C> <C> <C> <C> <C>
$4.86-9.90 47,823 6.3 years $ 8.73 42,562 $ 8.58
$11.57-13.43 95,137 6.0 12.74 61,960 12.65
$16.02 62,591 8.9 16.02 15,649 16.02
$23.94 51,000 9.9 23.94 --- ---
$4.86-23.94 256,551 7.5 15.02 120,171 11.65
</TABLE>
NOTE 14: OTHER OPERATING INCOME AND OTHER OPERATING EXPENSE (In Thousands)
<TABLE>
Other operating income included in the consolidated statements of income are
as follows:
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
Financial Institution Bond Recovery $ --- $5,000 $ ---
All Other 1,849 1,052 1,047
Total Other Operating Income $1,849 $6,052 $1,047
</TABLE>
<TABLE>
Other operating expenses included in the consolidated statements of income are as
follows:
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
Advertising and Promotion $ 572 $ 694 $ 634
Stationery and Printing 644 735 736
Telephone and Communications 681 707 733
Postage 909 989 1,018
Legal 838 805 508
Other Real Estate Owned Losses, Net 271 209 1,716
Other Real Estate Owned Expenses 85 215 407
FDIC and Other Insurance 258 1,147 2,004
All Other 2,079 3,588 3,170
Total Other Operating Expense $6,336 $9,089 $10,926
</TABLE>
NOTE 15: INCOME TAXES (In Thousands)
The consolidated provision for income taxes is summarized below:
<TABLE>
<CAPTION>
1996 1995 1994
Current Tax Expense:
<S> <C> <C> <C>
Federal $ 9,378 $5,650 $2,015
State 1,347 1,064 1,070
Total Current Tax Expense 10,725 6,714 3,085
Deferred Tax Expense:
Federal 409 321 (1,893)
State (312) (49) (61)
Total Deferred Tax Expense (Benefit) 97 272 (1,954)
Total Consolidated Provision for Income Taxes $10,822 $6,986 $1,131
</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 1996 and
1995, and 34% for 1994 to pre-tax income from
continuing operations as a result of the
following:
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
Computed Tax Expense at Statutory Rates $10,879 $6,793 $4,235
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)
Tax-Exempt Income (440) (492) (307)
Nondeductible Interest Expense 53 74 35
State Taxes, Net of Federal Income Tax Benefit 673 659 666
Other Items, Net (343) (48) 121
Total Consolidated Provision for Income Taxes $10,822 $6,986 $1,131
</TABLE>
<TABLE>
The components of deferred income tax expense (benefit) for the years ended December
31, 1996, 1995 and 1994 are as follows:
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
Deferred Tax Expense (Exclusive of the Effects
of the Decrease in the Valuation Allowance for
Deferred Tax Assets) $ 97 $272 $ 1,665
Decrease in Beginning of the Year Balance
of the Valuation Allowance for
Deferred Tax Assets --- --- (3,619)
Total Deferred Tax Expense (Benefit) $ 97 $272 $(1,954)
</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, 1996 and 1995 are
presented below:
<CAPTION>
1996 1995
<S> <C> <C>
Deferred Tax Assets:
Allowance for Loan Losses $2,300 $4,607
Pension and Deferred Compensation Plans 2,188 1,251
Deferred Expenses 1,699 1,063
Total Gross Deferred Tax Assets 6,187 6,921
Deferred Tax Liabilities:
Pension Plans 555 653
Depreciation 297 412
Deferred Income 447 475
Other 250 646
Total Gross Deferred Tax Liabilities 1,549 2,186
Net Deferred Tax Asset $4,638 $4,735
</TABLE>
Management believes that the realization
of the recognized net deferred tax asset of
$4,638 at December 31, 1996, is more likely than
not, based on existing carryback ability,
available tax planning strategies and expectations
as to future taxable income. Accordingly, there
was no valuation allowance for deferred tax
assets as of December 31, 1996. Not included in
net deferred tax assets above are deferred tax
liabilities relating to unrealized gains on
securities available for sale of $154 at December
31, 1996 and $793 at December 31, 1995.
NOTE 16: LEASE COMMITMENTS (In Thousands)
At December 31, 1996, the Company was
obligated under a number of noncancellable
operating leases for land, buildings and
equipment. Certain of these leases provide for
escalation clauses and contain renewal options
calling for increased rentals if the lease is
renewed.
Future minimum lease payments on
operating leases at December 31, 1996 were as
follows:
Operating
Leases
1997 $ 70
1998 49
1999 39
2000 39
2001 39
Later Years 646
Total Minimum Lease Payments $882
NOTE 17: 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>
1996 1995
Fixed Variable Total Fixed Variable Total
<S> <C> <C> <C> <C> <C> <C>
Commitments to Extend Credit $ --- $60,919 $60,919 $ --- $75,899 $75,899
Standby Letters of Credit --- 1,185 1,185 --- 3,352 3,352
</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 18: 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>
1996 1995
Carrying Fair Carrying Fair
Amount Value Amount Value
<S> <C> <C> <C> <C>
Securities Held-to-Maturity (Notes 1 and 3) $ 30,876 $ 31,519 $ 13,921 $ 14,508
Net Loans and Leases (Notes 1 and 4) 387,930 392,128 505,681 516,999
Time Deposits (Notes 1 and 8) 219,558 219,558 247,438 247,728
</TABLE>
NOTE 19: SIGNIFICANT GROUP CONCENTRATIONS OF
CREDIT RISK (In Thousands)
Most of the Company's loans are with
customers in northeastern New York. Although the
loan portfolios of the subsidiary banks are well
diversified, tourism has a substantial impact on
the northeastern New York economy. 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 20: PARENT ONLY FINANCIAL INFORMATION (In
Thousands)
Condensed financial information for
Arrow Financial Corporation is as follows:
<TABLE>
<CAPTION>
BALANCE SHEETS December 31,
1996 1995
ASSETS
<S> <C> <C>
Cash in Subsidiary Banks $ --- $ 269
Interest-Bearing Deposits with Subsidiary Banks 374 388
Cash and Cash Equivalents 374 657
Securities Available-for-Sale 50 44
Investment in Subsidiaries at Equity 83,588 69,949
Premises and Equipment, Net 19 30
Other Assets 3,136 2,047
Total Assets $87,167 $72,727
LIABILITIES
Short-Term Debt with Nonbank Subsidiary $ 6,375 $ ---
Note Payable - ESOP --- 700
Other Liabilities 6,496 4,523
Total Liabilities 12,871 5,223
SHAREHOLDERS' EQUITY
Common Stock 6,577 5,979
Surplus 54,569 40,938
Undivided Profits 26,992 24,296
Unallocated ESOP Shares --- (700)
Valuation Allowance for Securities Available-for-Sale 208 1,152
Treasury Stock, at Cost (14,050) (4,161)
Total Shareholders' Equity 74,296 67,504
Total Liabilities and Shareholders' Equity $87,167 $72,727
</TABLE>
<TABLE>
<CAPTION>
STATEMENTS OF INCOME Years Ended December 31,
Income: 1996 1995 1994
<S> <C> <C> <C>
Dividends from Bank Subsidiaries $ 3,990 $3,155 $ 2,075
Dividends from Nonbank Subsidiaries 2,569 3,129 ---
Interest and Dividends on Securities
Available-for-Sale 2 16 15
Other Income (Including Management Fees) 8,214 7,454 7,498
Net Gains on Securities Transactions --- 51 70
Total Income 14,775 13,805 9,658
Expense:
Interest Expense 421 244 409
Salaries and Benefits 5,666 5,727 5,087
Occupancy and Equipment 995 969 1,015
Other Expense 1,764 1,406 1,496
Total Expense 8,846 8,346 8,007
Income Before Income Tax Benefit and Equity
in Undistributed Net Income of Subsidiaries 5,929 5,459 1,651
Income Tax Benefit 244 270 448
Income Before Equity in Undistributed
Net Income of Subsidiaries 6,173 5,729 2,099
Equity in Undistributed Net Income of Subsidiaries 14,087 6,695 9,226
Net Income $20,260 $12,424 $11,325
</TABLE>
<TABLE>
<CAPTION>
STATEMENTS OF CASH FLOWS Years Ended December 31,
1996 1995 1994
Operating Activities:
<S> <C> <C> <C>
Net Income $20,260 $12,424 $11,325
Adjustments to Reconcile Net Income to Net Cash
Provided by Operating Activities:
Undistributed Earnings of Subsidiaries (14,087) (6,695) (9,226)
Depreciation and Amortization 12 38 41
Compensation Expense for Allocated ESOP Shares 252 24 ---
Gains on the Sale of Securities Available-for-Sale --- (51) (70)
Deferred Income Tax Benefit (740) (229) (643)
Changes in Other Assets and Liabilities 1,622 686 1,218
Net Cash Provided by Operating Activities 7,319 6,197 2,645
Investing Activities:
Proceeds from the Sale of Securities Available-for-Sale --- 469 596
Purchases of Securities Available-for-Sale (1) --- (680)
Purchases of Securities Held-to-Maturity --- --- ---
Capital Investment in Subsidiary Banks (500) --- (1,000)
Return of Capital from Subsidiary Banks --- --- 2,000
Sale of Fixed Assets to Subsidiaries --- 859 ---
Purchases of Fixed Assets --- --- (23)
Net Cash (Used in) Provided by Investing Activities (501) 1,328 893
Financing Activities:
Net Increase in Short-Term Borrowings 6,375 --- ---
Repayment of Long-Term Debt --- (4,470) ---
Common Stock Issued --- --- 100
Exercise of Stock Options 412 164 104
Disqualifying Disposition of Incentive Stock Options 50 28 ---
Purchase of Treasury Stock (10,052) (1,881) (494)
Cash Dividends Paid (3,886) (3,196) (2,039)
Net Cash Used in Financing Activities (7,101) (9,355) (2,329)
Net (Decrease) Increase in Cash and Cash Equivalents (283) (1,830) 1,209
Cash and Cash Equivalents at Beginning of the Year 657 2,487 1,278
Cash and Cash Equivalents at End of the Year $ 374 $ 657 $2,487
Supplemental Cash Flow Information:
Interest Paid $ 288 $ 277 $ 404
Income Taxes Paid 11,235 6,908 1,537
Cancellation of Debentures by Exercise of Cancellable
Mandatory Stock Purchase Contracts --- 370 200
</TABLE>
NOTE 21: DIVESTITURE OF VERMONT OPERATIONS (In
Thousands)
During 1996, the Company, in three
separate transactions, completed the divestiture
of its Vermont banking operations. This included
the transfer of approximately $208 million of
deposits, the sale of approximately $148 million
of loans and the sale of the Vermont trust
operation. The net gain on the divestiture was
$15.3 million.
Principal components of the net gain
included: premium on deposits transferred ($15.7
million), proceeds from the sale of the trust
operation ($3.0 million) and a gain on the loans
sold ($2.6 million), partially offset by personnel
costs relating to severance and the costs of
benefits related to the Company's pension and
postretirement plans, as described in Note 11
($1.7 million), the writedown of certain fixed
assets, principally the main office ($2.0 million)
and other net costs ($2.3 million), which included
professional fees, reserves for certain warranties
provided to the purchasers, losses on various
other assets and miscellaneous costs.
The Company did not transfer the main
office located in Rutland, Vermont. At December
31, 1996, the Company was holding the building for
sale and it was carried at estimated fair value
less costs to sell and included in other assets on
the consolidated balance sheet.
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
Consent of Independent Certified Public Accountants
The Board of Directors
Arrow Financial Corporation
We consent to incorporation by reference in the following
registration statements:
File No. 2-98735 on Form S-8,
File No. 2-98736 on Form S-8
File No. 33-48225 on Form S-8, and
File No. 33-66192 on Form S-8
of Arrow Financial Corporation of our report dated January
17, 1997, relating to the consolidated balance sheets of Arrow
Financial Corporation and subsidiaries as of December 31, 1996 and
1995, and the related consolidated statements of income, changes in
shareholders' equity, and cash flows for the three-year period
ended December 31, 1996, which report appears in the December 31,
1996 Annual Report on Form 10-K of Arrow Financial Corporation.
KPMG Peat Marwick
March 25, 1997
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 19572
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 17925
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 171743
<INVESTMENTS-CARRYING> 30876
<INVESTMENTS-MARKET> 31519
<LOANS> 393511
<ALLOWANCE> 5581
<TOTAL-ASSETS> 652603
<DEPOSITS> 541747
<SHORT-TERM> 22706
<LIABILITIES-OTHER> 13854
<LONG-TERM> 0
<COMMON> 6577
0
0
<OTHER-SE> 67719
<TOTAL-LIABILITIES-AND-EQUITY> 652603
<INTEREST-LOAN> 42195
<INTEREST-INVEST> 936
<INTEREST-OTHER> 11744
<INTEREST-TOTAL> 54875
<INTEREST-DEPOSIT> 20935
<INTEREST-EXPENSE> 21826
<INTEREST-INCOME-NET> 33049
<LOAN-LOSSES> 896
<SECURITIES-GAINS> (101)
<EXPENSE-OTHER> 24774
<INCOME-PRETAX> 31082
<INCOME-PRE-EXTRAORDINARY> 31082
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 20260
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</TABLE>
