SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.
FORM 10-Q
[X] QUARTERLY REPORT UNDER SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended June 30, 1997
[ ] TRANSITION REPORT PURSUANT TO
SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number: 0-12507
ARROW FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
New York 22-2448962
(State or other jurisdiction of (IRS Employer Identification
incorporation or organization) Number)
250 GLEN STREET, GLENS FALLS, NEW YORK 12801
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code:
(518) 745-1000
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for
shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90
days.
Yes X No
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Class Outstanding as of July 31, 1997
Common Stock, par value
$1.00 per share 5,495,026
ARROW FINANCIAL CORPORATION
FORM 10-Q
JUNE 30, 1997
INDEX
PART I FINANCIAL INFORMATION
Consolidated Balance Sheets as of
June 30, 1997 and December 31, 1996
Consolidated Statements of Income
for the Three Month and Six Month
Periods Ended June 30, 1997 and 1996
Consolidated Statements of Cash Flows
for the Six Months Ended June 30, 1997
and 1996
Notes to Consolidated Financial Statements
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Cautionary Statement under Federal Securities Laws
Acquisition of Six Fleet Branches
Divestiture and Liquidation of Vermont Operations
Stock Repurchase Program
Overview
Change in Financial Condition
Capital Resources
Liquidity
Interest Rate Risk
Results of Operations: Quarterly Comparison
Results of Operations: Year-to-Date Comparison
PART II OTHER INFORMATION
SIGNATURES<PAGE>
PART I - FINANCIAL CONDITION
<TABLE>
<CAPTION>
ARROW FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)(Unaudited)
6/30/97 12/31/96
ASSETS
<S> <C> <C>
Cash and Due from Banks $ 25,320 $ 19,572
Federal Funds Sold 48,500 17,925
Cash and Cash Equivalents 73,820 37,497
Securities Available-for-Sale 177,243 171,743
Securities Held-to-Maturity: (Approximate Fair Value of
$44,289 in 1997 and $31,519 in 1996) 43,720 30,876
Loans and Leases 462,396 393,511
Less: Allowance for Loan Losses (6,409) (5,581)
Net Loans and Leases 455,987 387,930
Premises and Equipment 10,748 9,414
Other Real Estate Owned 370 136
Other Assets 30,484 15,007
Total Assets $792,372 $652,603
LIABILITIES
Deposits:
Demand $ 91,583 $ 67,877
Regular Savings, N.O.W. & Money Market Deposit Accounts 322,259 254,312
Time Certificates of $100,000 or More 67,274 83,802
Other Time Deposits 205,473 135,756
Total Deposits 686,589 541,747
Short-Term Borrowings:
Federal Funds Purchased and Securities Sold Under
Agreements to Repurchase 13,958 16,597
Other Short-Term Borrowings 8,265 6,109
Other Liabilities 12,084 13,854
Total Liabilities 720,896 578,307
SHAREHOLDERS' EQUITY
Preferred Stock, $5 Par Value; 1,000,000 Shares Authorized --- ---
Common Stock, $1 Par Value; 20,000,000 Shares Authorized
(6,577,036 Shares Issued in 1997 and 1996) 6,577 6,577
Surplus 54,658 54,569
Undivided Profits 30,153 26,992
Net Unrealized Gain on Securities
ailable-for-Sale, Net of Tax 50 208
Treasury Stock (1,032,010 Shares in 1997 and
817,743 in 1996, at Cost) (19,962) (14,050)
Total Shareholders' Equity 71,476 74,296
Total Liabilities and Shareholders' Equity $792,372 $652,603
See notes to consolidated financial statements.
</TABLE>
<TABLE>
<CAPTION>
ARROW FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in Thousands, Except Per Share Amounts)(Unaudited)
Three Months Six Months
Ended June 30, Ended June 30,
1997 1996 1997 1996
<S> <C> <C> <C> <C>
INTEREST AND DIVIDEND INCOME
Interest and Fees on Loans and Leases $9,094 $11,013 $17,794 $22,587
Interest on Federal Funds Sold 115 32 186 170
Interest and Dividends on Securities
Available-for-Sale 2,719 2,765 5,480 5,408
Interest and Dividends on Securities
Held-to-Maturity 668 205 1,304 399
Total Interest and Dividend Income 12,596 14,015 24,764 28,564
INTEREST EXPENSE
Interest on Deposits:
Time Certificates of $100,000 or More 1,169 1,043 2,318 1,987
Other Deposits 3,973 4,210 7,681 8,633
Interest on Short-Term Borrowings:
Federal Funds Purchased and Securities Sold
Under Agreements to Repurchase 204 186 372 365
Other Short-Term Borrowings 92 36 162 66
Total Interest Expense 5,438 5,475 10,533 11,051
NET INTEREST INCOME 7,158 8,540 14,231 17,513
Provision for Loans Losses 236 224 472 448
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 6,922 8,316 13,759 17,065
OTHER INCOME
Income from Fiduciary Activities 663 989 1,321 1,959
Fees for Other Services to Customers 834 1,024 1,589 2,038
Net Gains (Losses) on Securities Transactions 65 (30) 37 82
Net Gain on the Disposition of Branches --- --- --- 7,091
Other Operating Income 486 218 1,011 499
Total Other Income 2,048 2,201 3,958 11,669
OTHER EXPENSE
Salaries and Employee Benefits 2,969 3,840 5,903 7,740
Occupancy Expense of Premises, Net 363 453 741 978
Furniture and Equipment Expense 474 413 953 870
Other Operating Expense 1,218 1,797 2,363 3,696
Total Other Expense 5,024 6,503 9,960 13,284
INCOME BEFORE PROVISION FOR INCOME TAXES 3,946 4,014 7,757 15,450
Provision for Income Taxes 1,428 1,433 2,338 5,396
NET INCOME $ 2,518 $ 2,581 $ 5,419 $10,054
Average Shares Outstanding 5,658 5,931 5,719 6,072
Per Common Share:
Earnings $ .45 $ .44 $ .95 $ 1.66
Dividends Declared .20 .15 .40 .31
Book Value 12.89 11.49 12.89 11.49
Tangible Book Value 10.30 11.10 10.30 11.10
Per share amounts have been adjusted for the November 1996 ten percent stock dividend.
See notes to consolidated financial statements.
</TABLE>
<TABLE>
CAPTION
<PAGE>
ARROW FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)(Unaudited)
Six Months
Ended June 30,
1997 1996
Operating Activities:
<S> <C> <C>
Net Income $ 5,419 $10,054
Adjustments to Reconcile Net Income to Net Cash
Provided by Operating Activities:
Provision for Loan Losses 472 448
Provision for Other Real Estate Owned Losses 60 215
Depreciation and Amortization 598 651
Compensation Expense for Allocated ESOP Shares --- 68
Net Gain on Divestiture of Vermont Operations --- (7,091)
Gains on the Sale of Securities Available-for-Sale (101) (228)
Losses on the Sale of Securities Available-for-Sale 63 146
Proceeds from the Sale of Loans 1,155 3,866
Net Gains on the Sale of Loans, Fixed Assets and
Other Real Estate Owned (28) ---
Decrease (Increase) in Deferred Tax Assets (21) 220
Decrease (Increase) in Interest Receivable (571) 284
Increase (Decrease) in Interest Payable (32) (701)
Decrease (Increase) in Other Assets (2,706) 138
Increase (Decrease) in Other Liabilities (1,738) (145)
Net Cash Provided By Operating Activities 2,570 7,925
Investing Activities:
Proceeds from the Sale of Securities Available-for-Sale 23,996 32,236
Proceeds from the Maturities of Securities
Available-for-Sale 20,175 25,250
Purchases of Securities Available-for-Sale (49,961) (52,069)
Proceeds from the Maturities of Securities Held-to-Maturity 1,073 521
Purchases of Securities Held-to-Maturity (13,978) (3,244)
Proceeds from Loans (Acquired) Sold in Branch Transactions (44,190) 39,543
Net Increase in Loans and Leases (25,824) (13,813)
Proceeds from Fixed Assets (Acquired)
Sold in Branch Transactions (1,338) 1,533
Proceeds from the Sales of Fixed Assets and
Other Real Estate Owned 93 1,846
Purchase of Fixed Assets (486) (805)
Net Cash (Used In) Provided By Investing Activities (90,440) 30,998
Financing Activities:
Deposits Assumed (Transferred) in Branch Transactions,
Net of Premium 127,708 (93,109)
Net Increase in Deposits, Excluding Branch Transactions 5,048 17,034
Net (Decrease) Increase in Short-Term Borrowings (483) 8,837
Purchase of Treasury Stock (5,822) (8,107)
Sale of Treasury Stock for Exercise of Stock Options --- 195
Disqualifying Disposition of ISO Shares --- 33
Cash Dividends Paid (2,258) (1,849)
Net Cash Provided By (Used In) Financing Activities 124,193 (76,966)
Net Increase (Decrease) in Cash and Cash Equivalents 36,323 (38,043)
Cash and Cash Equivalents at Beginning of Period 37,497 58,506
Total Cash and Cash Equivalents $73,820 $20,463
Supplemental Cash Flow Information:
Interest Paid $10,565 $11,752
Income Taxes Paid 3,596 5,180
Transfer of Loans to Other Real Estate Owned 343 215
See notes to consolidated financial statements.
</TABLE>
ARROW FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FORM 10-Q
JUNE 30, 1997
1. Financial Statement Presentation
In the opinion of the management of Arrow Financial Corporation (the
"Company"), the accompanying consolidated financial statements
contain all of the adjustments necessary to present fairly the financial
position as of June 30, 1997 and December 31, 1996; the results of
operations for the three and six month periods ended June 30, 1997
and June 30, 1996; and the statements of cash flows for the six
month periods ended June 30, 1997 and June 30, 1996. All such
adjustments are of a normal recurring nature. Certain items have
been reclassified to conform to the 1997 presentation. Per share
amounts have been restated to reflect the November 1996 ten
percent stock dividend, declared September 25, 1996.
2. Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities
In June 1996, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards ("SFAS") No.
125, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities." SFAS No. 125 is effective for transfers
and servicing of financial assets and extinguishments of liabilities
occurring after December 31, 1996 (except for certain provisions
which were deferred for one year by SFAS No. 127) and is to be
applied prospectively. This statement provides accounting and
reporting standards for transfers and servicing of financial assets and
extinguishments of liabilities based on consistent application of
financial components approach that focuses on control. It
distinguishes transfers of financial assets that are sales from transfers
that are secured borrowings. The adoption of SFAS No. 125 did not
have a material impact on the Company's consolidated financial
position, results of operations, or liquidity.
3. Earnings Per Share
In February 1997, the FASB issued SFAS No. 128, "Earnings Per
Share." SFAS No. 128 simplifies the standards for computing
earnings per share ("EPS") previously found in APB Opinion No. 15,
and makes them comparable to international EPS standards. It
replaces the presentation of primary EPS with a presentation of basic
EPS. It also requires dual presentation of basic and diluted EPS on
the face of the income statement for all entities with complex capital
structures and requires a reconciliation of the numerator and
denominator of the basic and diluted EPS computations. The
statement is effective for financial statements issued for periods
ending after December 15, 1997. Earlier application is not permitted,
although the statement will require restatement of all prior-period
EPS data presented.
4. Reporting Comprehensive Income and Disclosures about
Operating Segments
In June 1997, the FASB issued two statements relating to disclosures
of financial information: SFAS No. 130, "Reporting Comprehensive
Income" and SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information." SFAS No. 130 establishes
standards for reporting and display of comprehensive income and its
components in a full set of general-purpose financial statements.
SFAS No. 131 establishes standards for the way that public business
enterprises report information about operating segments. For the
Company, both Statements are effective for interim and annual
financial statements beginning with the first quarter of 1998.
ARROW FINANCIAL CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
JUNE 30, 1997
Arrow Financial Corporation (the "Company") is a two bank holding
company headquartered in Glens Falls, New York. The banking
subsidiaries are Glens Falls National Bank and Trust Company
("GFNB") whose main office is located in Glens Falls, New York and
Saratoga National Bank and Trust Company whose main office is
located in Saratoga Springs, New York.
Cautionary Statement under Federal Securities Laws
The information contained in this Quarterly Report on Form 10-Q
contains forward-looking statements that are based on
management's beliefs, certain assumptions made by management
and current expectations, estimates and projections about the
Company's financial condition and results of operations. Words such
as "expects," "believes," "should," "plans," "will," "estimates," and
variations of such words and similar expressions are intended to
identify such forward-looking statements. These statements are not
guarantees of future performance and involve certain risks and
uncertainties that are difficult to quantify or, in some cases, to identify.
Therefore, actual outcomes and results may differ materially from
what is expected or forecasted in such forward-looking statements.
Factors that could cause or contribute to such differences include, but
are not limited to, changes in economic and market conditions,
including unanticipated fluctuations in interest rates, effects of state
and federal regulation and risks inherent in banking operations.
Readers are cautioned not to place undue reliance on these forward-looking
statements, which speak only as of the date hereof. The
Company undertakes no obligation to revise or update these forward-looking
statements to reflect the occurrence of unanticipated events.
This Quarterly Report should be read in conjunction with the
Company's Annual Report filed on Form 10-K for December 31,
1996.
Acquisition of Six Fleet Branches
On June 27, 1997, the Company completed the acquisition of six
branches in upstate New York from Fleet Bank, a subsidiary of Fleet
Financial Group, Hartford, CT. The branches are located in the
towns of Plattsburgh (2), Lake Luzerne, Port Henry, Ticonderoga and
Warrensburg and became branches of GFNB. GFNB acquired
substantially all deposits at the branches and most of the loans held
by Fleet Bank related to the branches. Total deposit liabilities at the
branches assumed by GFNB were approximately $140 million and
the total amount of the branch-related loans acquired was
approximately $34 million. Under the purchase agreement, GFNB
also acquired from Fleet an additional $10 million of residential real
estate loans not related to the branches.
Divestiture and Liquidation of Vermont Operations
During 1996, the Company completed the divestiture of substantially
all the banking operations of its Vermont subsidiary bank, Green
Mountain Bank ("GMB") in three separate transactions. Total loans
and deposits transferred in these divestiture transactions amounted
to approximately $148 million and $208 million, respectively. The
only substantial Vermont property not sold in the transactions, the
building that served as GMB's main office in Rutland, Vermont, was
being held for sale on June 30, 1997.
In the first quarter of 1997, GMB transferred to its immediate parent
corporation, Arrow Vermont Corporation, as a capital distribution,
substantially all of its remaining assets, primarily consisting of
investment securities and other liquid assets. Thereafter, on March
21, 1997, GMB filed Articles of Dissolution under Vermont law. On
June 10, 1997, Arrow Vermont Corporation, in turn, also filed Articles
of Dissolution under Vermont law, having transferred substantially all
of its assets to its parent corporation, Arrow Financial Corporation, by
way of dividend. Neither GMB nor Arrow Vermont Corporation has
received any significant unanticipated claim during the statutory
claims period and GMB anticipates making a final distribution of its
residual capital to Arrow Vermont in redemption of all its capital stock
in the immediate future.
Stock Repurchase Program
On two separate occasions, in spring and fall 1996, the Board of
Directors of the Company authorized an ongoing stock repurchase
program, under which management was given the authority to
repurchase at its discretion from time to time, in open market or
privately negotiated transactions, up to an aggregate of $20 million of
the Company's outstanding common stock. As of June 30, 1997, the
Company had repurchased under the program $15.0 million, of which
$5.8 million was reacquired in the first half of 1997.
OVERVIEW
The Company reported earnings of $5.4 million for the first six
months of 1997, compared to earnings of $10.1 million for the first
half of 1996. Earnings per common share were $.95 and $1.66 for
the two respective periods. Earnings in the 1996 period included the
gain on the sale of eight branches of the Company's Vermont bank,
GMB, to Mascoma Savings Bank and for both periods, the Company
received unanticipated repayments on certain restructured loans.
Exclusive of nonrecurring items, earnings for the first two quarters of
1997 and 1996 amounted to $4.6 million and $5.1 million,
respectively, and reflected core earnings per share of $.81 and $.84
for the two respective periods.
The annualized returns on average assets were 1.66% and 2.80% for
the first six months of 1997 and 1996, respectively. The annualized
returns on average equity for the two periods were 15.04% and
29.34%, respectively. Excluding the nonrecurring items, the
annualized returns on average assets were 1.41% and 1.43% and the
annualized returns on average equity were 12.86% and 15.82%,
respectively, for the 1997 and 1996 six month periods.
Total assets were $792.4 million at June 30, 1997 an increase of
$139.8 million or 21.4% from December 31, 1996, principally
reflecting the effects of the Fleet branch acquisition, discussed above,
at the end of the second quarter of 1997.
Despite the net income of $5.4 million, total shareholders' equity
decreased $2.8 million to $71.5 million during the first six months of
1997. The decrease in shareholders' equity resulted from the stock
repurchase program described above, cash dividends paid during the
period and a decrease in the net unrealized gain on securities
available-for-sale, which in the aggregate exceeded net earnings for
the period. Despite the decrease in shareholders' equity and
increase in total assets during the period, the Company's risk-based
capital ratios and Tier 1 leverage ratio significantly exceeded
regulatory minimums and both of the Company banks, as well as the
Company, qualified as "well-capitalized" under federal bank
guidelines.
The following table presents the adjustments necessary to arrive at
the recurring net income of the Company.
<TABLE>
<CAPTION>
Analysis of Recurring Net Income
(In Thousands, Except Per Share Amounts)
Three Months Ended Six Months Ended
Jun 1997 Jun 1996 Jun 1997 Jun 1996
<S> <C> <C> <C> <C>
Net Income, as Reported $2,518 $2,581 $5,419 $10,054
Adjustments, net of Tax:
OREO Transactions --- 33 --- 155
Net Securities Transactions (39) 17 (22) (50)
Gain on Branch Sale --- --- --- (4,726)
Restructured Loan Transactions (166) --- (166) (323)
Insurance Settlement --- --- (163) ---
State Income Tax Benefit --- --- (464) ---
Recurring Income $2,313 $2,631 $4,604 $5,110
Earnings Per Share, as Reported $ .45 $ .44 $ .95 $ 1.66
Earnings Per Share, Recurring .41 .44 .81 .84
</TABLE>
CHANGE IN FINANCIAL CONDITION
<TABLE>
<CAPTION>
Summary of Consolidated Balance Sheets
(Dollars in Thousands)
$ Change $ Change % Change % Change
Selected Period-End Balances: Jun 1997 Dec 1996 Jun 1996 From Dec From Jun From Dec From Jun
<S> <C> <C> <C> <C> <C> <C> <C>
Federal Funds Sold $ 48,500 $ 17,925 $ --- $ 30,575 $ 48,500 170.6% --.-%
Securities Available-for-Sale 177,243 171,743 170,524 5,500 6,719 3.2 3.9
Securities Held-to-Maturity 43,720 30,876 16,639 12,844 27,081 41.6 162.8
Loans, Net of Unearned Income (1) 462,396 393,511 487,291 68,885 (24,895) 17.5 (5.1)
Allowance for Loan Losses 6,409 5,581 11,540 828 (5,131) 14.8 (44.5)
Earning Assets (1) 731,859 614,055 674,454 117,804 57,405 19.2 8.5
Total Assets 792,372 652,603 713,505 139,769 78,867 21.4 11.1
Demand Deposits 91,583 67,877 79,522 23,706 12,061 34.9 15.2
Savings, NOW and MMDA Accounts 322,259 254,312 286,972 67,947 35,287 26.7 12.3
Time Deposits of $100,000 or More 67,274 83,802 81,840 (16,528) (14,566) (19.7) (17.8)
Other Time Deposits 205,473 135,756 162,169 69,717 43,304 51.4 26.7
Total Deposits 686,589 541,747 610,503 144,842 76,086 26.7 12.5
Other Borrowed Funds 22,223 22,706 24,134 (483) (1,911) (2.1) (7.9)
Shareholders' Equity 71,476 74,296 66,575 (2,820) 4,901 (3.8) 7.4
(1) Includes Nonaccrual Loans
</TABLE>
Total resources at June 30, 1997 amounted to $792.4 million, an
increase of $139.8 million or 21.4% from year-end 1996, and an
increase of $78.9 million or 11.1% from June 30, 1996. At the end
of the second quarter of 1997, the Company completed the
acquisition from Fleet Bank of six branches in northeastern New York.
The acquisition increased total assets by approximately $140 million,
representing virtually all of the gain in total assets during the first six
months of the year. In the second half of 1996, total resources
decreased by approximately $60 million, as the result of the sale of
substantially all of the Company's remaining Vermont operations to
ALBANK in September 1996 (involving disposition of approximately
$100 million in net assets) which was offset in part by growth in total
assets of the Company's two New York based banks, primarily in the
area of consumer loans.
Total deposits of $686.6 million at June 30, 1997 represented an
increase of $144.8 million from the December 31, 1996 level and an
increase of $76.1 million from June 30, 1996. The Company
assumed approximately $140 million of deposit liabilities in the Fleet
branch acquisition at the end of the second quarter of 1997,
representing substantially all of the increase in deposits in the first six
months of the year. In the second half of 1996, by contrast, deposits
decreased by approximately $69 million, as approximately $108
million of deposits in Vermont transferred to ALBANK in September
1996 were offset in part by a $39 million increase in deposits at the
Company's New York banks.
Between June 30, 1996 and June 30, 1997, in the Company's
continuously-owned New York banking operations, total loans
increased at a steady but modest rate, while total deposits also
increased although at a slightly higher rate in the last six months of
1996 than in the first six months of 1997. These trends are further
discussed in the following section of this Report.
Deposit and Loan Trends
The following analysis on trends in the deposit and loan portfolios
focuses exclusively on the Company's continuously operated New
York banking offices. The Vermont banking operations, substantially
all of which were transferred to ALBANK at the end of September
1996, have been excluded. Since the analysis presents average
balances, the acquisition of the six Fleet branches on June 27, 1997
had an insignificant effect on the average balances for the second
quarter of 1997.
The following table presents the quarterly average balance by deposit
type and the percentage of total deposits represented by each deposit
type for each of the most recent five quarters for the continuously
operated New York bank offices.
<TABLE>
<CAPTION>
Quarterly Average Deposit Balances
(Continuously Operated New York Offices Only)
(Dollars in Thousands)
Jun 1997 Mar 1997 Dec 1996 Sep 1996 Jun 1996
Amount % Amount % Amount % Amount % Amount %
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Demand Deposits $ 65,976 12 $ 63,147 12 $ 67,240 12 $ 69,216 13 $ 66,299 13
N.O.W. and Super N.O.W. 128,067 23 122,318 22 125,559 23 111,052 21 104,768 20
Savings and M.M.D.A 128,350 23 129,791 24 133,974 25 137,768 26 142,916 28
Time Deposits of $100,000
or More 87,350 16 88,704 16 80,462 15 84,708 16 78,063 15
Other Time Deposits 147,910 26 139,261 26 133,041 25 127,934 24 120,397 24
Total Deposits $557,653 100 $543,221 100 $540,276 100 $530,678 100 $512,443 100
</TABLE>
Average deposits for these banking offices increased $45.2 million,
or 8.8%, from the second quarter of 1996 to the second quarter of
1997. Over the five quarters charted in the table above, the offices
experienced a shift in the mix of deposits, with the proportionately
less expensive savings and money market accounts decreasing as
a percentage of total deposits and the relatively more expensive
N.O.W. accounts and time deposits increasing in proportion to total
deposits.
<TABLE>
<CAPTION>
Quarterly Cost of Deposits
(Continuously Operated New York Offices Only)
Jun 1997 Mar 1997 Dec 1996 Sep 1996 Jun 1996
<S> <C> <C> <C> <C> <C>
Demand Deposits --- % --- % --- % --- % --- %
N.O.W. and Super N.O.W. 3.21 3.05 3.04 2.86 2.69
Savings and M.M.D.A 2.83 2.94 2.93 2.92 2.92
Time Deposits of $100,000 or More 5.37 5.25 5.21 5.25 5.15
Other Time Deposits 5.54 5.38 5.34 5.23 5.23
Total Deposits 3.70 3.63 3.52 3.45 3.38
</TABLE>
<TABLE>
<CAPTION>
Federal Reserve Bank's Discount Rate Changes 1992 - 1996
Date New Rate Old Rate
<S> <C> <C>
January 31, 1996 5.00% 5.25%
February 1, 1995 5.25 4.75
November 15, 1994 4.75 4.00
August 16, 1994 4.00 3.50
May 17, 1994 3.50 3.00
July 2, 1992 3.00 3.50
</TABLE>
The Federal Reserve Board attempts to influence the prevailing
federal funds rate and prime interest rates by changing the Federal
Reserve Bank discount rate and/or through open market operations.
In the first quarter of 1997, the prevailing Federal Funds rate
increased by twenty five basis points even though the discount rate
remain unchanged. The Company experienced an increase in the
total cost of deposits resulting from competitive pricing in the
marketplace as well as a shift in the mix of deposits discussed
above.
The Company does not expect that its average cost of funds will
change significantly due to the acquisition of the Fleet branches.
Total deposits assumed at the closing of the transaction (at June 27,
1997) were approximately $140 million. Of that amount, variable
rate deposit accounts (including NOW, Super NOW, Money Market
Savings and regular savings) constituted approximately $66.3
million, and another $56 million constituted time deposits. After
closing, the Company began paying its own rates on the variable
rate deposit accounts assumed (its rate being slightly higher than
Fleet's rates, on average) and continued paying the previously
agree-upon rates on time deposits assumed (Fleets rates for such
products being similar to the Company's prevailing rates for time
deposits). Accordingly, the Company expects to lose few, if any of
the variable rate or time deposits assumed in the Fleet transaction
due to interest rate sensitivity. The Company did not acquire any
time deposits of $100,000 or more.
The following table presents the quarterly average balance by loan
type and the percentage of total loans represented by each loan
type for each of the most recent five quarters for the Company's
continuously operated New York banking offices.
<TABLE>
<CAPTION>
Quarterly Average Loan Balances
(Continuously Operated New York Offices Only)
(Dollars in Thousands)
Jun 1997 Mar 1997 Dec 1996 Sep 1996 Jun 1996
Amount % Amount % Amount % Amount % Amount %
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial and Commercial
Real Estate $ 92,874 23 $ 89,673 23 $ 84,059 22 $ 87,789 23 $ 87,304 23
Residential Real Estate 129,289 32 127,032 32 125,897 33 123,884 33 122,858 33
Home Equity 30,399 7 30,012 8 29,863 8 29,109 8 28,804 8
Indirect Consumer Loans 114,141 28 107,371 27 105,227 27 99,059 26 92,757 25
Direct Consumer Loans 34,212 8 33,300 8 32,013 8 30,634 8 31,627 8
Credit Card Loans 7,769 2 8,153 2 8,514 2 8,733 2 8,967 3
Total Loans 408,684 100 $395,541 100 $385,573 100 $376,208 100 $372,317 100
</TABLE>
Average loan balances of these offices increased at a steady pace
over the five most recent quarters. Average loans for the second
quarter of 1997 increased by $36.4 million, or 9.8%, from the
second quarter of 1996. Except for credit card loans, all categories
of loans increased over the comparative period, with indirect
consumer loans and commercial loans demonstrating the most
significant changes. Indirect consumer loans are primarily auto
loans financed through local dealerships where the Company
acquires the dealer paper. As a percentage of the overall loan
portfolio of the New York offices, these loans increased from 25% to
28% from the second quarter of 1996 to the second quarter of 1997.
<TABLE>
<CAPTION>
Quarterly Taxable Equivalent Yield on Loans
(Continuously Operated New York Offices Only)
Jun 1997 Mar 1997 Dec 1996 Sep 1996 Jun 1996
<S> <C> <C> <C> <C> <C>
Commercial and Commercial
Real Estate 9.73% 9.61% 9.36% 9.76% 9.84%
Residential Real Estate 8.40 8.47 8.30 8.26 8.42
Home Equity 9.23 9.10 9.08 9.10 9.23
Indirect Consumer Loans 8.35 8.29 8.35 8.43 8.52
Direct Consumer Loans 9.09 9.16 9.33 9.45 9.44
Credit Card Loans 16.84 16.76 16.46 16.66 16.55
Total Loans 8.97 8.96 8.99 9.00 9.12
</TABLE>
Yields on the Company's loan portfolio for its continuously operated
New York banking offices remained quite constant over the past four
quarters reflecting the period of general interest rate stability.
The following table presents information related to the Company's
allowance and provision for loan losses for each of the past five
quarters. The provision for loan losses and net charge-offs are
reported on a year-to-date basis, and are annualized when
expressed as a percentage of average loans.
<TABLE>
<CAPTION>
Summary of the Allowance and Provision for Loan Losses
(Dollars in Thousands)(Loans Stated Net of Unearned Income)
Jun 1997 Mar 1997 Dec 1996 Sep 1996 Jun 1996
Loan Balances:
<S> <C> <C> <C> <C> <C>
Period-End Loans $462,396 $398,581 $393,511 $381,683 $487,291
Average Loans, Year-to-Date 402,149 395,541 459,946 484,872 484,473
Allowance for Loan Losses:
Allowance for Loan Losses,
Beginning of Period $5,581 $5,581 $12,106 $12,106 $12,106
Transfer Pursuant to Branch
Acquisition (Sale) 700 --- (6,841) (6,841) (596)
Provision for Loan Losses, Year-to-Date 472 236 896 672 448
Net Charge-offs, Year-to-Date (344) (192) (580) (388) (418)
Allowance for Loan Losses, End of Period $6,409 $5,625 $ 5,581 $ 5,549 $11,540
Nonperforming Assets:
Nonaccrual Loans $2,232 $2,070 $2,297 $2,477 $2,962
Loans Past due 90 or More Days
and Still Accruing Interest 764 292 321 39 806
Loans Restructured and in
Compliance with Modified Terms --- --- --- --- ---
Total Nonperforming Loans 2,996 2,362 2,618 2,516 3,768
Other Real Estate Owned 370 340 136 225 540
Total Nonperforming Assets $3,366 $2,702 $2,754 $2,741 $4,308
Performance Ratios:
Allowance to Nonperforming Loans 213.92% 238.15% 213.18% 220.54% 306.26%
Allowance to Period-End Loans 1.39 1.41 1.42 1.45 2.37
Provision to Average Loans (annualized) 0.24 0.24 0.19 0.18 0.19
Net Charge-offs to Average
Loans (annualized) 0.17 0.20 0.13 0.11 0.17
Nonperforming Assets to Loans & OREO 0.73 0.68 0.70 0.72 0.88
</TABLE>
The Company's nonperforming assets at June 30, 1997 amounted
to $3.4 million, an increase of $612 thousand, or 22.2%, from
December 31, 1996 and a decrease of $942 thousand, or 21.9%,
from June 30, 1996. The increase from year-end was primarily
attributable to an increase of residential real estate loans delinquent
90 or more days, but still accruing interest. At period-end, the
Company's nonperforming asset totals did not include any assets
acquired from Fleet Bank in the branch acquisition completed on
June 27, 1997. Based on a review of the loan portfolio acquired, the
Company increased the allowance for loan losses by $700 thousand
as a purchase acquisition adjustment to goodwill. This amount
represents the allowance for loan losses established for inherent risk
of loss in the loans acquired in an amount the Company believes is
materially consistent with the general loss reserve on the books of
Fleet applicable to these loans. Of the $4.3 million in nonperforming
assets at June 30, 1996, $3.0 million was attributable to the New
York banks, and the remaining $1.3 million represented loans or
OREO held in the Company's Vermont banking operation,
substantially all of which were sold or liquidated in connection with
the winding up of such operation in the ensuing periods.
The provision for loan losses for the first two quarters of 1997 was
$472 thousand, compared to a provision of $448 thousand for the
first two quarters of 1996. On an annualized basis, the ratio of the
provision to average loans for the first six months of 1997 was .24%,
seven basis points in excess of the annualized ratio for the period's
net charge-offs to average loans of .17% and five basis points higher
than the ratio of the provision to average loans for the 1996 period.
The provision for the six months ended June 30, 1997 was deemed
adequate. The coverage ratio, defined as the ratio of the
allowance for loan losses to nonperforming loans, was 213.92% at
June 30, 1997.
CAPITAL RESOURCES
Shareholders' equity was $71.5 million at June 30, 1997, a decrease
of $2.8 million or 3.8% from December 31, 1996. The decrease in
shareholders' equity was primarily attributable to the repurchase
during the period of 235,441 shares of the Company's common
stock at an aggregate cost of $5.8 million, cash dividends of $2.3
million and a decrease of $158 thousand in net unrealized gains on
securities available-for-sale, offset by net earnings for the period.
The Company and its subsidiaries are currently subject to two capital
guidelines, a leverage ratio test and a risk-based capital measure.
The risk-based capital guidelines assign weightings to all assets and
certain off-balance sheet items and establish an 8% minimum ratio
of qualified total capital to risk-weighted assets. At least half of total
capital must consist of "Tier 1" capital, which comprises common
equity, retained earnings and a limited amount of permanent
preferred stock, less goodwill. Up to half of total capital may consist
of so-called "Tier 2" capital, comprising a limited amount of
subordinated debt, other preferred stock, certain other instruments
and a limited amount of loan loss reserves. The leverage ratio
guideline establishes minimum limits on the ratio of Tier 1 capital to
total tangible assets. For top-rated companies, the minimum
leverage ratio is 3%, but lower-rated or rapidly expanding companies
may be required to meet substantially greater minimum ratios. The
FDIC Improvement Act ("FDICIA") of 1991 mandated actions to be
taken by banking regulators with respect to banking institutions
suffering from various levels of undercapitalization as measured by
these capital ratios. FDICIA established five levels of capitalization
ranging from "critically undercapitalized" to "well-capitalized." As of
June 30, 1997, all capital ratios for the Company and its subsidiary
banks not only exceeded the minimum capital standards for financial
institutions established by these guidelines, but also exceeded the
FDICIA's "well-capitalized" standard.
On June 30, 1997 the Tier 1 leverage and risk-based capital ratios
for the Company and its subsidiaries were as follows:
<TABLE>
<CAPTION>
Summary of Capital Ratios
Tier 1 Total
Risk-Based Risk-Based
Leverage Capital Capital
Ratio Ratio Ratio
<S> <C> <C> <C>
Arrow Financial Corporation 8.74% 12.31% 13.57%
Glens Falls National Bank & Trust Company 8.75 12.43 13.68
Saratoga National Bank & Trust Company 7.21 9.14 10.29
Regulatory Minimum 3.00 4.00 8.00
FDICIA's "Well-Capitalized" Standard 5.00 6.00 10.00
</TABLE>
The following table presents the cash dividends paid in 1997 and
1996, restated for the November 1996 ten percent stock dividend.
On July 23, 1997, the Company declared a dividend of $.20 payable
on September 15, 1997.
<PAGE>
<TABLE>
<CAPTION>
Quarterly Stock Prices and Dividends Market Price Cash
(Restated for Stock Dividends) (Bid) Dividends
High Low Declared
<S> <C> <C> <C>
1996 1st Quarter $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
1997 1st Quarter $24.500 $23.250 $.200
2nd Quarter 27.750 24.500 .200
3rd Quarter n/a n/a .200
</TABLE>
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Second Quarter Earnings Per Share, as Reported $.45 $.44
Second Quarter Recurring Earnings Per Share $.41 $.44
Dividend Payout Ratio: (Third quarter dividends as
a percent of second quarter core earnings per share) 48.8% 35.2%
Book Value Per Share $12.89 $11.49
Tangible Book Value Per Share $10.30 $11.10
</TABLE>
The Company is not aware of any know trends, event or
uncertainties that will have or that are reasonably likely to have a
material adverse effect on the Company's capital resources.
LIQUIDITY
The objective of liquidity management is to satisfy cash flow
requirements, principally the needs of depositors and borrowers to
access funds. Liquidity is provided on an ongoing basis through
assumption or "purchase" of liabilities, the maturity of asset balances
and the sale of assets. Liability liquidity arises primarily from the
significant base of "core" and other deposits gathered through a
branch network operating over a dispersed geographical area.
These "core" balances consist of demand deposits, savings, N.O.W.
and money market account balances and small denomination time
deposits. Core deposits are considered to be less volatile in their
movement into and out of financial institutions, as compared to large
denomination time deposits, brokered time deposits and repurchase
agreements, which are perceived as more sensitive to changes in
interest rates than core deposits. Historically, the Company has
maintained high levels of core deposits. At June 30, 1997, core
deposits represented more than 78% of the Company's total assets.
Additionally, stockholders' equity at a level of 9.0% of total assets
represented another substantial source of funds. Large
denomination time deposits, repurchase agreements and other
borrowed funds represented 11.3% of total assets at June 30, 1997.
Federal funds sold are overnight sales of the Company's surplus
funds to correspondent banks, while federal funds purchased
represent overnight borrowings. Federal funds purchased are thus
a source of short-term liquidity. The Company's practice is to be a
net seller of federal funds under normal circumstances, and to avoid
becoming a net purchaser for any extended periods of time. During
the second quarter of 1997, average federal funds sold amounted
to $8.4 million and average federal funds purchased were $3.2
million. At June 30, 1997, federal funds sold was an unusually high
$48.5 million, due to temporary excess liquidity resulting from the
Fleet branch acquisition in which the deposit liabilities assumed were
greater than the loan balances and other branch-related assets
acquired.
Apart from federal funds purchased, securities available-for-sale
represent the Company's other significant source of meeting short-
term liquidity needs. This liquidity arises both from an ability to sell
the securities quickly without significant impact on Company
earnings, as well as from the ability to use the securities as collateral
for borrowing. At June 30, 1997, securities available-for-sale
amounted to $177.2 million and averaged $163.0 million for the
quarter then ended.
Other short-term sources of funds include a borrowing arrangement
with the Federal Home Loan Bank.
The Company is not aware of any known trends, events or
uncertainties that will have or that are reasonably likely to have a
materially adverse effect or make material demands on the
Company's liquidity.
INTEREST RATE RISK
While managing liquidity, the Company must monitor and control
interest rate risk. Interest rate risk is the exposure of the Company's
net interest income to changes in interest rates. Interest rate risk is
directly related to the different maturities and repricing
characteristics of interest-bearing assets and liabilities, as well as to
prepayment risks for mortgage-backed assets, possible early
withdrawal of time deposits, and the fact that the speed and
magnitude of responses to interest rate changes varies by product.
While many of the Company's loan products are indexed to
independent rates, such as prime rates or treasury notes, the rates
on most deposit products are set by management pricing
committees.
The Company's primary short-term measure of interest rate risk
projects net interest income for the ensuing twelve-month period
based on the maturity, prepayment assumption and repricing
characteristics of each individual interest-bearing asset and liability
under a variety of interest rate projections. To make interest rate
projections, the Company obtains information from third party
providers of economic data. The rate projections are applied to
existing interest sensitive assets and liabilities and to expected new
and rollover amounts. The Company estimates net interest income
for the ensuing twelve months using the most likely rate projection
and then using a no-change scenario. Exposure to rising or falling
rates are calculated to cover a distribution of perceived probable
interest rate scenarios.
At June 30, 1997, the Company was operating within established
internal policy limits for both the short-term and long-term measures
of interest rate risk. Based upon a review of the repricing
characteristics of the deposits and loan portfolio acquired by the
Company in the Fleet branch transaction, management believes the
transaction will not significantly affect the Company's interest rate
risk position.
The Company is able to reduce interest rate risk by adjusting the mix
of loan products as well as the balance of fixed and variable rate
products within the various loan categories. To a lesser extent, the
Company manages interest rate risk through selection of
investments for the securities portfolios. The Company does not,
and in the foreseeable future will not, use derivative financial
instruments to manage interest rate risk.
RESULTS OF OPERATIONS: Three Months Ended June 30, 1997 Compared With
Three Months Ended June 30, 1996
<TABLE>
<CAPTION>
Summary of Earnings Performance
(Dollars in Thousands, Except Per Share Amounts)
As Reported: Jun 1997 Jun 1996 Change % Change
<S> <C> <C> <C> <C>
Net Income $2,518 $2,581 $(63) (2.4)%
Earnings Per Share .45 .44 .01 2.3
Return on Assets 1.51% 1.44% .07% 4.9
Return on Equity 14.13% 15.44% (1.31)% (8.5)
Recurring Earnings:
Net Income $2,313 $2,631 $(318) (12.1)%
Earnings Per Share .41 .44 (.03) (6.8)
Return on Assets 1.39% 1.47% (.08)% (5.4)
Return on Equity 13.12% 16.81% (3.69)% (22.0)
</TABLE>
The Company's net income for the three month period ended June
30, 1997 was $2.5 million, which compared to earnings of $2.6
million for the second quarter of 1996. Earnings per share for the
1997 period was slightly higher, however, at $.45, compared to $.44
for the 1996 period. The $63 thousand decrease in earnings, was
primarily attributable to a decrease in earning assets following the
various sales of the Company's Vermont banking operations in
1996, offset in-part by the receipt of an unexpected payment by the
Company during the 1997 period in connection with the restructure
of a fully charged-off loan.
As adjusted for nonrecurring items, net income decreased $318
thousand, or 12.1% from the second quarter of 1996 to the second
quarter of 1997, again reflective of a decrease in earning assets.
Net interest income and other income for the second quarter of
1997, as adjusted for nonrecurring items, were 15.4% and 7.0%,
respectively, below the totals for the 1996 period. These decreases
were offset, however, by a favorable 22.7% reduction in
noninterest (other) expense between the two periods. These and
other changes are reviewed in the following sections on net interest
income, other income, other expense and income taxes.
Net Interest Income
<TABLE>
<CAPTION>
Summary of Net Interest Income
(Taxable Equivalent Basis)
(Dollars in Thousands)
Jun 1997 Jun 1996 Change % Change
<S> <C> <C> <C> <C>
Interest Income $12,797 $14,169 $(1,372) (9.7)%
Interest Expense 5,438 5,475 (37) (0.7)
Net Interest Income $ 7,359 $ 8,694 $(1,335) (15.4)
Average Earning Assets (1) $623,364 $675,480 $(52,116) (7.7)%
Average Paying Liabilities 514,243 557,017 (42,774) (7.7)
Taxable Equivalent Adjustment 201 154 47 30.5
Yield on Earning Assets (1) 8.23% 8.44% (0.21)% (2.5)%
Cost of Paying Liabilities 4.24 3.96 0.28 7.1
Net Interest Spread 3.99 4.48 (0.49) (10.9)
Net Interest Margin 4.74 5.18 (0.44) (8.5)
(1) Includes Nonaccrual Loans
</TABLE>
On a taxable equivalent basis, net interest income for the second
quarter of 1997 decreased $1.3 million, or 15.4%, from net interest
income in the second quarter of 1996. The change from the 1996
period was primarily attributable to a $52.1 million or a 7.7%
decrease in average earning assets, principally resulting from the
Company's sale in September 1996 of substantially all of its
remaining Vermont operations to ALBANK.
Net interest income for the second quarter of 1997 as compared to
the second quarter of 1996 was also adversely impacted by a
decrease in the yield on average earning assets compared to an
increase in the cost of average paying liabilities. The decrease in
the yield on the loan portfolio was attributable to a shift in the mix of
loan products favoring lower yielding indirect loans. The change in
the mix of deposits was also unfavorable as relatively more
expensive time deposits and NOW accounts increased in proportion
to savings and money market accounts.
The provision for loan losses was $236 thousand for the quarter
ended June 30, 1997, compared to a provision of $224 thousand
for the 1996 period. The provision for loan losses was discussed
previously under the "Summary of the Allowance and Provision for
Loan Losses" section of this report.
Other Income
<TABLE>
<CAPTION>
Summary of Other Income
(Dollars in Thousands)
Jun 1997 Jun 1996 $ Change % Change
<S> <C> <C> <C> <C>
Income From Fiduciary Activities $ 663 $ 989 $(326) (33.0)%
Fees for Other Services to Customers 834 1,024 (190) (18.5)
Net Gains (Losses) on Securities Transactions 65 (30) 95 ---
Other Operating Income 486 218 268 122.9
Total Other Income $2,048 $2,201 $(153) (7.0)
Without Regard to Nonrecurring Items:
Other Operating Income $ 230 $ 218 $ 12 5.5 %
Total Other Income 1,792 2,201 (409) (18.6)
</TABLE>
Other income decreased $153 thousand or 7.0% in the second
quarter of 1997 from the second quarter of 1996. Income from
fiduciary services decreased $326 thousand or 33.0% from the 1996
level. The decrease was directly attributable to the sale of the
Vermont trust business to Vermont National Bank in August of 1996,
part of the disposition of the Company's Vermont operations. At that
time, the Vermont trust business represented approximately 50% of
the Company's trust business. Subsequently, the Company has
experienced growth in the New York trust business. Income for
other services to customers (primarily service charges on deposit
accounts, credit card fee income and servicing income on sold
loans) decreased $189 thousand, or 18.5%, again due to the
disposition of the Vermont operations in the third quarter of 1996.
Other operating income (primarily credit card processing income
and gains on the sale of other real estate owned, loans and other
assets) increased $268 thousand between the two periods. The
increase was fully attributable to the receipt in the 1997 period of an
unexpected payment in connection with the former Vermont
operations. During the second quarter of 1997 the Company
recognized a net gain of $65 thousand on the sale of $13.0 million
of securities from the portfolio of securities classified as available-
for-sale. The sales were effected for the primary purpose of
reinvestment at a higher yield, and secondarily to extend the average
maturity of the available-for-sale portfolio.
Other Expense
<TABLE>
<CAPTION>
Summary of Other Expense
(Dollars in Thousands)
Jun 1997 Jun 1996 $ Change % Change
<S> <C> <C> <C> <C>
Salaries and Employee Benefits $2,969 $3,840 $ (871) (22.7)%
Occupancy Expense of Premises, Net 363 453 (90) (19.9)
Furniture and Equipment Expense 474 413 61 14.8
Other Operating Expense 1,218 1,797 (579) (32.2)
Total Other Expense $5,024 $6,503 $(1,479) (22.7)
</TABLE>
Other (i.e. noninterest) expense decreased $1.5 million, or 22.7%,
from the second quarter of 1996 to the second quarter of 1997.
While the Company experienced decreases in all major categories
of other expense, except for furniture and equipment expense, the
major reductions occurred in the areas of salaries and employee
benefits and other operating expense. The principal reason for
decreases in these areas was the sale of the remaining Vermont
banking operations in August and September of 1996.
These decreases were offset, only in part, by a $61 thousand
increase in furniture and equipment expense. This increase was
primarily attributable to increased depreciation expense associated
with the Company's investment, in late 1996, in data processing
equipment for the production of imaged checking account
statements. The Company expects that decreases in statement
processing expenses, which are primarily reported in other operating
expense and salaries and benefits expense, will fully offset
equipment acquisition costs in future periods, while providing the
Company's customers with enhanced statements and at the same
time streamlining the Company's operations.
Income Taxes
<TABLE>
<CAPTION>
Summary of Income Taxes
(Dollars in Thousands, Except Per Share Amounts)
Jun 1997 Jun 1996 Change % Change
<S> <C> <C> <C> <C>
Provision for Income Taxes $1,428 $1,433 $(5) .3%
Effective Tax Rate 36.19% 35.70% 0.49% 1.4
</TABLE>
The provision for federal and state income taxes amounted to $1.4
million for the second quarter of 1997, virtually unchanged from the
amount for the 1996 period. The effective tax rate increased by 49
basis points from the 1996 period to the 1997 period. The increase
was attributable to the fact that, in the 1997 period, a greater portion
of the Company's taxable income was subject to New York State
income taxes. (Vermont has no income-based tax for banks.)
RESULTS OF OPERATIONS: Six Months Ended June 30, 1997 Compared With
Six Months Ended June 30, 1996
<TABLE>
<CAPTION>
Summary of Earnings Performance
(Dollars in Thousands)
As Reported: Jun 1997 Jun 1996 Change % Change
<S> <C> <C> <C> <C>
Net Income $5,419 $10,054 $(4,635) (46.1)%
Earnings Per Share .95 1.66 (.71) (42.8)
Return on Assets 1.66% 2.80% (1.14)% (40.7)
Return on Equity 15.04% 28.97% (13.93)% (48.1)
Recurring Earnings:
Net Income $4,604 $5,110 $(506) (9.9)%
Earnings Per Share .81 .84 (.03) (3.6)
Return on Assets 1.41% 1.43% (.02)% (1.4)
Return on Equity 12.86% 15.82% (2.96)% (18.7)
</TABLE>
The Company's net income was $5.4 million for the first six months
of 1997, compared to earnings of $10.1 million for the first six
months of 1996. Earnings per share were $.95 and $1.66 for the
two respective periods. As noted in the "Analysis of Recurring
Income" table in the Overview section of this Management's
Discussion and Analysis, there were several nonrecurring items in
both years, most notably the gain in the 1996 period from the
Company's sale of eight branches in eastern Vermont to Mascoma
Savings Bank.
Adjusting for the nonrecurring events in both periods, as further
discussed in the following analysis, net income for the first half of
1997 decreased $506 thousand or 9.9% from the first half of 1996.
The period-to-period change for the first half of 1997 as compared
to the first half of 1996 is reviewed in the following sections on net
interest income, other income, other expense and income taxes.
Net Interest Income
<TABLE>
<CAPTION>
Summary of Net Interest Income
(Taxable Equivalent Basis)
(Dollars in Thousands)
Jun 1997 Jun 1996 Change % Change
<S> <C> <C> <C> <C>
Interest Income $25,146 $28,871 $(3,725) (12.9)%
Interest Expense 10,533 1,051 (518) (4.7)
Net Interest Income $14,613 $17,820 $(3,207) (18.0)
Average Earning Assets (1) $616,349 $677,776 $(61,427) (9.1)%
Average Paying Liabilities 507,269 556,799 (49,530) (8.9)
Taxable Equivalent Adjustment 382 307 75 24.4
Yield on Earning Assets (1) 8.23% 8.57% (0.34)% (4.0)%
Cost of Paying Liabilities 4.19 3.99 0.20 5.0
Net Interest Spread 4.04 4.58 (0.53) (11.6)
Net Interest Margin 4.78 5.29 (0.51) (9.6)
Recurring Net Interest Margin 4.78 5.14 (0.36) (7.0)
(1) Includes Nonaccrual Loans
</TABLE>
On a taxable equivalent basis, net interest income for the first half of
1997 decreased $3.2 million, or 18.0%, from the first half of 1996.
The decrease in net interest income in the 1997 period was primarily
attributable to a 9.1% decrease in average earning assets resulting
from the sale of the remaining Vermont banking operations in
September 1996. Net interest income for the second quarter of
1997 as compared to the second quarter of 1996 was also adversely
impacted from a decrease in the yield on earning assets and an
increase in the cost of paying liabilities. The decrease in the yield on
the loan portfolio was attributable to a shift in the mix of loan
products favoring lower yielding indirect loans. The change in the
mix of deposits was also unfavorable as more expensive time
deposits and NOW accounts increased in proportion to savings and
money market accounts.
Net interest income for the first two quarters of 1996 also received
a benefit from unexpected repayments received on two major loans
in the Vermont operation that had been restructured in earlier
periods. The effect of these payments increased net interest margin
for the 1996 period by 15 basis points over the level that would
otherwise have been attained.
Average earning assets amounted to $616.3 million for the first half
of 1997, a $61.4 million, or 9.1%, decrease from the first half of
1996. There was a similar decrease of 8.9% in average paying
liabilities. The decrease between the two periods in both earning
assets and paying liabilities was primarily attributable to the sale of
the remaining six branches in Vermont to ALBANK in September of
1996, offset in part, by growth in the New York loan and deposits
balances. The acquisition of the Fleet branches had only a minimal
impact on average balances for the 1997 period since they were
acquired near the end of the period.
The provision for loan losses was $472 thousand for the six month
period ended June 30, 1997, compared to a provision of $448
thousand for the 1996 period. The provision for loan losses was
discussed previously under the "Summary of the Allowance and
Provision for Loan Losses" section of this report.
Other Income
<TABLE>
<CAPTION>
Summary of Other Income
(Dollars in Thousands)
Jun 1997 Jun 1996 $ Change % Change
<S> <C> <C> <C> <C>
Income From Fiduciary Activities $1,321 $ 1,959 $ (638) (32.6)%
Fees for Other Services to Customers 1,589 2,038 (449) (22.0)
Net Gains on Securities Transactions 37 82 (45) (54.9)
Gain on the Disposition of Branches --- 7,091 (7,091) ---
Other Operating Income 1,011 499 512 102.6
Total Other Income $3,958 $11,669 $(7,711) (66.1)
Without Regard to the Nonrecurring Items:
Other Operating Income $ 480 $ 499 $ (19) (3.8)
Total Other Income 3,427 4,578 (1,151) (25.1)
</TABLE>
Other income (i.e. noninterest income) for the first two quarters of
1996 reflected the $7.1 million pre-tax gain on the sale of eight
Vermont branches to Mascoma Savings Bank in January 1996,
while other income for the 1997 period reflected $256 thousand
from an unexpected payment in connection with the former Vermont
operations.
Without regard to these items, other income decreased $1.2 million,
or 25.1%, for the first half of 1997 compared with the first half of
1996. Income from fiduciary services decreased $638 thousand or
32.6% from the first half of 1996. Fees for other services to
customers (primarily service charges on deposit accounts, credit
card fee income and servicing income on sold loans) decreased
$449 thousand, or 22.0%, between the periods. Both of these
decreases were primarily attributable to the sale of the Vermont trust
business in August of 1996 and the sale of the remaining six
Vermont branches in September of 1996. Other operating income
(primarily credit card processing income and gains on the sale of
loans and other assets), as adjusted for nonrecurring items, was
only $19 thousand or 3.8% below the 1996 amount.
During the first six months of 1997, the Company recognized net
securities gains of $37 thousand on the sale of $24.0 million of
securities available-for-sale. The sales were effected for the primary
purpose of reinvestment at a higher yield, and secondarily to extend
the average maturity of the available-for-sale portfolio.
Other Expense
<TABLE>
<CAPTION>
Summary of Other Expense
(Dollars in Thousands)
Jun 1997 Jun 1996 $ Change % Change
<S> <C> <C> <C> <C>
Salaries and Employee Benefits $5,903 $ 7,740 $(1,837) (23.7)%
Occupancy Expense of Premises, Net 741 978 (237) (24.2)
Furniture and Equipment Expense 953 870 83 9.5
Other Operating Expense 2,363 3,696 (1,333) (36.1)
Total Other Expense $9,960 $13,284 $(3,324) (25.0)
</TABLE>
Other (i.e. noninterest) expense decreased $3.3 million, or 25.0%,
between the first half of 1997 and the first half of 1996. While the
Company experienced decreases in all major categories of other
expense, except furniture and equipment expense, the major
reductions occurred in the areas of salaries and employee benefits
and other operating expense. The principal reason for these
decreases was the completion of the disposition of the Vermont
banking business in August and September of 1996.
As in the quarter-to-quarter comparison, these decreases were
offset, only in part, by an $83 thousand increase in furniture and
equipment expense. This increase was primarily attributable to
increased depreciation expense associated with the Company's
investment in data processing equipment, late in 1996, principally for
the production of imaged checking account statements.
Income Taxes
<TABLE>
<CAPTION>
Summary of Income Taxes
(Dollars in Thousands)
Jun 1997 Jun 1996 $ Change % Change
<S> <C> <C> <C> <C>
Provision for Income Taxes $2,338 $5,396 $(3,058) (56.7)%
Effective Tax Rate 30.14% 34.93% ( 4.79)% (13.7)
</TABLE>
The provisions for federal and state income taxes amounted to $2.3
million and $5.4 million for the first six months of 1997 and 1996,
respectively. During the first quarter of 1997, the Company
reached a favorable settlement with the New York Department of
Taxation and Finance over a combined reporting issue. The effects
of the settlement resulted in a $464 thousand decrease in the
Company's provision for income taxes for the first quarter of 1997.
As adjusted for this settlement, the effective tax rates for the first half
of 1997 and 1996 were 36.12% and 34.93%, respectively. As thus
adjusted, the effective tax rate increased by 119 basis points from
the 1996 period to the 1997 period. The increase was attributable
to the fact that a greater portion of the Company's taxable income in
the 1997 period was subject to New York State income taxes.
(Vermont has no income-based tax for banks.)
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
The Company is not involved in any material pending
legal proceedings, other than ordinary routine litigation
occurring in the normal course of its business.
The Company's subsidiary banks are parties to various
legal claims which arise in the normal course of their
business, for example, lender liability claims that
normally take the form of counterclaims to lawsuits filed
by the banks for collection of past due loans. The
various pending legal claims against the subsidiary
banks will not, in the current opinion of management,
likely result in any material liability to the subsidiary
banks or the Company.
Item 2. Changes in Securities - None
See the discussion in Item 6(b), below, regarding the
Company's adoption of a shareholder rights plan in the second
quarter of 1997.
Item 3. Defaults Upon Senior Securities - None
Item 4. Submission of Matters to a Vote of Security Holders
<TABLE>
<CAPTION>
At the Company's Annual Meeting of Shareholders held April 30, 1997, shareholders elected the
following directors to serve terms expiring in 2000:
Withhold Broker
Director For Authority Non-Votes
<S> <C> <C> <C>
John J. Carusone, Jr. 4,440,034 29,725 ---
Thomas L. Hoy 4,449,083 20,677 ---
David G. Kruczlnicki 4,449,020 20,740 ---
David L. Moynehan 4,448,949 20,811 ---
Daniel L. Robertson 4,448,827 20,932 ---
Directors continuing in office were: Michael B. Clarke, George C. Frost, Kenneth C. Hopper,
M.D., Dr. Edward F. Huntington, Michael F. Massiano and Daniel L. Robertson
</TABLE>
Item 5. Other Information - None
Item 6. Exhibits and Reports Filed on Form 8-K
(a) Exhibits
Exhibit 27 Financial Data Schedule
(with electronic filing only)
(b) Current Reports Filed on Form 8-K
On May 16, 1997 the Company filed a Form 8-K
dated May 1, 1997 related to a shareholder rights
plan. On April 30, 1997, the Board of Directors of
the Company declared a dividend payable May 12,
1997 of one right (a "Right") for each outstanding
share of Common Stock of the Company held of
record at the close of business on May 12, 1997 (the
"Record Time"), or issued thereafter and prior to
termination of the plan. The Rights are issuable
pursuant to and governed by a Shareholder
Protection Rights Agreement, dated as of May 1,
1997 (the "Rights Agreement"), between the
Company and Glens Falls National Bank and Trust
Company, as Rights Agent. Each Right, when
exercisable, entitles its registered holder to purchase
one one-hundredth of a share of a new series of non
voting preferred stock of the Company, designated
as Series I Junior Participating Preferred Stock (the
"Preferred Stock"), or under certain circumstances,
shares of Common Stock or other securities having
a market value of $150.00, at a purchase price of
$75.00 per Right, subject to adjustment. The Rights
become exercisable only under those circumstances
described in the Rights Agreement. The description
and terms of the Rights are set forth in the Rights
Agreement.
On July 8, 1997, the Company filed a Form 8-K
dated June 27, 1997 related to the consummation of
the acquisition of six banking branches in
northeastern New York, from Fleet Bank.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
ARROW FINANCIAL CORPORATION
Registrant
Date: August 12, 1997 s/Thomas L. Hoy
Thomas L. Hoy, President and
Chief Executive Officer
Date: August 12, 1997 s/John J. Murphy
John J. Murphy, Executive Vice
President and Treasurer/CFO
(Principal Financial Officer and
Principal Accounting Officer)
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> JUN-30-1997
<CASH> 25320
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 48500
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 177243
<INVESTMENTS-CARRYING> 43720
<INVESTMENTS-MARKET> 44289
<LOANS> 462396
<ALLOWANCE> 6409
<TOTAL-ASSETS> 792372
<DEPOSITS> 686589
<SHORT-TERM> 22223
<LIABILITIES-OTHER> 12084
<LONG-TERM> 0
<COMMON> 6577
0
0
<OTHER-SE> 64899
<TOTAL-LIABILITIES-AND-EQUITY> 792372
<INTEREST-LOAN> 17794
<INTEREST-INVEST> 6784
<INTEREST-OTHER> 186
<INTEREST-TOTAL> 24764
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<EXPENSE-OTHER> 9960
<INCOME-PRETAX> 7757
<INCOME-PRE-EXTRAORDINARY> 7757
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5419
<EPS-PRIMARY> .95
<EPS-DILUTED> .95
<YIELD-ACTUAL> 4.78
<LOANS-NON> 2232
<LOANS-PAST> 764
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 5581
<CHARGE-OFFS> 446
<RECOVERIES> 102
<ALLOWANCE-CLOSE> 6409
<ALLOWANCE-DOMESTIC> 6409
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
