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 March 31, 1998
[ ] 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 April 30, 1998
Common Stock, par value $1.00 per share 5,765,735
ARROW FINANCIAL CORPORATION
FORM 10-Q
MARCH 31, 1998
INDEX
PART I FINANCIAL INFORMATION
Item 1. Consolidated Balance Sheets as of March 31, 1998
and December 31, 1997
Consolidated Statements of Income for the
Three Months Ended March 31, 1998 and 1997
Consolidated Statements of Changes in Shareholders'
Equity for the Three Months Ended March 31, 1998
and 1997
Consolidated Statements of Cash Flows for the
Three Months Ended March 31, 1998 and 1997
Notes to Consolidated Interim Financial Statements
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About
Market Risk
PART II OTHER INFORMATION
SIGNATURES
<TABLE>
<CAPTION>
ARROW FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)(Unaudited)
3/31/98 12/31/97
ASSETS
<S> <C> <C>
Cash and Due from Banks $ 26,927 $ 23,909
Federal Funds Sold 18,700 23,000
Cash and Cash Equivalents 45,627 46,909
Securities Available-for-Sale 221,959 221,837
Securities Held-to-Maturity: (Approximate Fair Value of
$52,182 in 1998 and $45,562 in 1997) 50,848 44,082
Loans and Leases 495,962 485,810
Less: Allowance for Credit Losses (6,375) (6,191)
Net Loans and Leases 489,587 479,619
Premises and Equipment, Net 10,715 10,760
Other Real Estate Owned, Net 386 315
Other Assets 27,953 28,077
Total Assets $847,075 $831,599
LIABILITIES
Deposits:
Demand Deposits $ 90,202 $ 96,482
Interest-Bearing Demand Deposits 164,667 162,016
Regular and Money Market Savings 161,713 158,690
Time Deposits of $100,000 or More 105,425 106,620
Other Time Deposits 193,264 197,107
Total Deposits 715,271 720,915
Short-Term Borrowings:
Securities Sold Under Agreements to Repurchase 24,244 20,918
Other Short-Term Borrowings 3,706 3,837
Federal Home Loan Bank Advances 15,000 ---
Other Liabilities 13,365 12,058
Total Liabilities 771,586 757,728
Commitments and Contingent Liabilities
SHAREHOLDERS' EQUITY
Preferred Stock, $5 Par Value; 1,000,000 Shares Authorized --- ---
Common Stock, $1 Par Value; 20,000,000 Shares Authorized
(6,905,888 Shares Issued in 1998 and 1997) 6,906 6,906
Surplus 65,335 65,277
Undivided Profits 24,223 22,531
Accumulated Other Comprehensive Income:
Net Unrealized Gain on Securities Available-for-Sale,
Net of Tax 599 764
Treasury Stock, at Cost (1,139,153 Shares in 1998 and
1,143,553 in 1997) (21,574) (21,607)
Total Shareholders' Equity 75,489 73,871
Total Liabilities and Shareholders' Equity $847,075 $831,599
See Notes to Consolidated Interim Financial Statements.
</TABLE>
<TABLE>
<CAPTION>
ARROW FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In Thousands, Except Per Share Amounts)(Unaudited)
Three Months
Ended March 31,
1998 1997
<S> <C> <C>
INTEREST AND DIVIDEND INCOME
Interest and Fees on Loans and Leases $10,627 $ 8,700
Interest on Federal Funds Sold 125 71
Interest and Dividends on Securities Available-for-Sale 3,686 2,761
Interest and Dividends on Securities Held-to-Maturity 716 636
Total Interest and Dividend Income 15,154 12,168
INTEREST EXPENSE
Interest on Deposits:
Time Deposits of $100,000 or More 1,380 1,149
Other Deposits 4,995 3,708
Interest on Short-Term Borrowings:
Federal Funds Purchased and Securities Sold
Under Agreements to Repurchase 254 168
Other Short-Term Borrowings 28 70
Federal Home Loan Bank Advances 45 ---
Total Interest Expense 6,702 5,095
NET INTEREST INCOME 8,452 7,073
Provision for Credit Losses 342 236
NET INTEREST INCOME AFTER PROVISION FOR CREDIT LOSSES 8,110 6,837
OTHER INCOME
Income from Fiduciary Activities 761 658
Fees for Other Services to Customers 957 755
Net Gains (Losses) on Securities Transactions 157 (28)
Other Operating Income 232 525
Total Other Income 2,107 1,910
OTHER EXPENSE
Salaries and Employee Benefits 3,259 2,934
Occupancy Expense of Premises, Net 419 378
Furniture and Equipment Expense 551 479
Other Operating Expense 1,560 1,145
Total Other Expense 5,789 4,936
INCOME BEFORE PROVISION FOR INCOME TAXES 4,428 3,811
Provision for Income Taxes 1,525 910
NET INCOME $ 2,903 $ 2,901
Average Basic Common Shares Outstanding 5,764 5,995
Average Diluted Common Shares Outstanding 5,857 6,060
Per Common Share:
Basic Earnings $ .50 $ .49
Diluted Earnings .50 .48
Dividends Declared .21 .19
Book Value 13.09 12.09
Tangible Book Value 10.72 11.89
Share and per share amounts have been adjusted for the November 1997 five percent stock dividend.
See Notes to Consolidated Interim Financial Statements.
</TABLE>
<TABLE>
<CAPTION>
ARROW FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(In Thousands, Except Share and Per Share Amounts) (Unaudited)
Accumulated
Other
Compre-
Shares Common Undivided hensive Treasury
Issued Stock Surplus Profits Income Stock Total
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1997 6,905,888 $6,906 $65,277 $22,531 $764 $(21,607) $73,871
Comprehensive Income, Net of Tax:
Net Income --- --- --- 2,903 --- --- 2,903
Net Unrealized Securities Holding
Losses Arising During the Period,
Net of Tax (Pre-tax $122) --- --- --- --- (72) --- (72)
Reclassification Adjustment for Net
Securities Gains Included in Net
Income, Net of Tax (Pre-tax $157) --- --- --- --- (93) --- (93)
Other Comprehensive Income (165)
Comprehensive Income 2,738
Cash Dividends Declared,
$.21 per Share --- --- --- (1,211) --- --- (1,211)
Stock Options Exercised
(4,400 Shares) --- --- 27 --- --- 33 60
Tax Benefit for Disposition of
Stock Options --- --- 31 --- --- --- 31
Balance at March 31, 1998 6,905,888 $6,906 $65,335 $24,223 $599 $(21,574) $75,489
Balance at December 31, 1996 6,577,036 $6,577 $54,569 $26,992 $208 $(14,050) $74,296
Comprehensive Income, Net of Tax:
Net Income --- --- --- 2,901 --- --- 2,901
Net Unrealized Securities Holding
Losses Arising During the Period,
Net of Tax (Pre-tax $1,531) --- --- --- --- (907) --- (907)
Reclassification Adjustment for Net
Securities Losses Included in Net
Income, Net of Tax (Pre-tax $26) --- --- --- --- 17 --- 17
Other Comprehensive Income (890)
Comprehensive Income 2,011
Cash Dividends Declared,
$.19 per Share --- --- --- (1,143) --- --- (1,143)
Stock Options Exercised
(22,242 Shares) --- --- 84 --- --- (84) ---
Purchase of Treasury Stock
(161,701 Shares) --- --- --- --- --- (3,750) (3,750)
Balance at March 31, 1997 6,577,036 $6,577 $54,653 $28,750 $(682) $(17,884) $71,414
Share and per share amounts have been adjusted for the November 1997 five percent stock dividend.
See Notes to Consolidated Interim Financial Statements.
</TABLE>
<TABLE>
<CAPTION>
ARROW FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)(Unaudited)
Three Months
Ended March 31,
1998 1997
<S> <C> <C>
Operating Activities:
Net Income $ 2,903 $ 2,901
Adjustments to Reconcile Net Income to Net Cash
Provided by Operating Activities:
Provision for Credit Losses 342 236
Provision for Other Real Estate Owned Losses --- 60
Depreciation and Amortization 611 153
Gains on the Sale of Securities Available-for-Sale (162) (35)
Losses on the Sale of Securities Available-for-Sale 5 63
Proceeds from the Sale of Loans 2,981 527
Net Gains on the Sale of Loans, Fixed Assets and
Other Real Estate Owned (24) (6)
(Increase) Decrease in Deferred Tax Assets (151) 508
Decrease in Interest Receivable 350 158
Increase (Decrease) in Interest Payable (34) 76
Decrease (Increase) in Other Assets (199) (412)
Increase (Decrease) in Other Liabilities 1,342 (1,701)
Net Cash Provided By Operating Activities 7,964 2,528
Investing Activities:
Proceeds from the Sale of Securities Available-for-Sale 31,151 10,935
Proceeds from the Maturities and Calls
of Securities Available-for-Sale 17,406 13,895
Purchases of Securities Available-for-Sale (48,832) (14,088)
Proceeds from the Maturities and Calls of
Securities Held-to-Maturity 1,111 470
Purchases of Securities Held-to-Maturity (7,975) (12,395)
Net Increase in Loans and Leases (13,346) (6,046)
Proceeds from the Sales of Fixed Assets and
Other Real Estate Owned 8 14
Purchase of Fixed Assets (200) (196)
Net Cash Used In Investing Activities (20,677) (7,411)
Financing Activities:
Net (Decrease) Increase in Deposits (5,644) 7,919
Net Increase (Decrease) in Short-Term Borrowings 3,195 (1,652)
Increase in Federal Loan Home Bank Advances 15,000 ---
Purchase of Treasury Stock --- (3,750)
Exercise of Stock Options 60 ---
Disqualifying Disposition of Incentive Stock Options 31 ---
Cash Dividends Paid (1,211) (1,143)
Net Cash Provided By Financing Activities 11,431 1,374
Net Decrease in Cash and Cash Equivalents (1,282) (3,509)
Cash and Cash Equivalents at Beginning of Period 46,909 37,497
Cash and Cash Equivalents at End of Period $45,627 $33,988
Supplemental Cash Flow Information:
Interest Paid $ 6,736 $ 5,019
Income Taxes Paid 152 1,916
Transfer of Loans to Other Real Estate Owned 71 264
See Notes to Consolidated Interim Financial Statements.
</TABLE>
Item 2.
ARROW FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS
FORM 10-Q
MARCH 31, 1998
1. Financial Statement Presentation
In the opinion of the management of Arrow Financial Corporation (the
"Company"), the accompanying consolidated interim financial
statements contain all of the adjustments necessary to present fairly
the financial position as of March 31, 1998 and December 31, 1997;
the results of operations for the three month periods ended March 31,
1998 and March 31, 1997; the statements of changes in shareholders'
equity for the three month periods ended March 31, 1998 and 1997;
and the statements of cash flows for the three month periods ended
March 31, 1998 and March 31, 1997. All such adjustments are of a
normal recurring nature. Certain items have been reclassified to
conform to the 1998 presentation. Share and per share amounts
have been restated to reflect the November 1997 five percent stock
dividend. The consolidated interim financial statements should be
read in conjunction with the annual consolidated financial statements
of the Company for the year ended December 31, 1997.
2. Reporting Comprehensive Income
In June 1997, the FASB issued SFAS No. 130, "Reporting
Comprehensive Income." SFAS No. 130 establishes standards for
reporting and displaying of comprehensive income and its components
in a full set of general-purpose financial statements. Comprehensive
income is defined as "the change in equity of a business enterprise
during a period from transactions and other events and circumstances
from nonowner sources. It includes all changes in equity during a
period except those resulting from investments by owners and
distributions to owners." For the Company, the statement was effective
for interim financial statements beginning with the first quarter of 1998.
SFAS No. 130 accepts a variety of presentations of comprehensive
income within the income statement or the statement of changes in
shareholders' equity. The Company has elected to present the
components of comprehensive income in the Consolidated
Statements of Changes in Shareholders' Equity.
3. Disclosures about Operating Segments
In June 1997, the FASB issued SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information." SFAS No. 131
establishes standards for the way that public business enterprises
report information about operating segments. For the Company, the
statement will be effective for annual financial statements issued for
the year ended December 31, 1998, however, the Company does not
have operating segments within the meaning of SFAS No. 131.
4. Pensions and Other Postretirement Benefits
In February 1998, the FASB issued SFAS No. 132, "Employers'
Disclosures about Pensions and Other Postretirement Benefits," which
amends the disclosure requirements of SFAS No. 87, "Employers'
Accounting for Pensions," SFAS No. 88, "Employers' Accounting for
Settlements and Curtailments of Defined Benefit Pension Plans and
for Termination Benefits," and SFAS No. 106, "Employers' Accounting
for Postretirement Benefits Other Than Pensions." Statement No. 132
standardizes the disclosure requirements of Statements No. 87 and
No. 106 to the extent practicable and recommends a parallel format
for presenting information about pensions and other postretirement
benefits. This Statement is applicable to all entities and addresses
disclosure only. The Statement does not change any of the
measurement or recognition provisions provided for in Statements No.
87, No. 88, or No. 106. The Statement is effective for fiscal years
beginning after December 15, 1997. Management anticipates
providing the required disclosures in the December 31, 1998
consolidated financial statements.
<PAGE>
5. Earnings Per Common Share (In Thousands, Except Per Share
Amounts)
The following table presents a reconciliation of the numerator and
denominator used in the calculation of basic and diluted earnings per
common share (EPS) for the three month periods ended March 31,
1998 and 1997. Shares outstanding have been restated for the
November 1997 five percent stock dividend.
<TABLE>
<CAPTION>
Income Shares Per Share
(Numerator) (Denominator) Amount
<S> <C> <C> <C>
For the Three Months Ended March 31, 1998:
Basic EPS: Income Available to Common Shareholders $2,903 5,764 $.50
Dilutive Effect of Stock Options --- 93
Diluted EPS: Income Available to Common Shareholders
and Assumed Conversions $2,903 5,857 $.50
For the Three Months Ended March 31, 1997:
Basic EPS: Income Available to Common Shareholders $2,901 5,995 $.49
Dilutive Effect of Stock Options --- 65
Diluted EPS: Income Available to Common Shareholders
and Assumed Conversions $2,901 6,060 $.48
</TABLE>
ARROW FINANCIAL CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
MARCH 31, 1998
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.
Peer Ratios: Certain ratios are compared with the Company's peer
group. Peer data was taken from the Federal Reserve Board's
"December 1997 Bank Holding Company Performance Report." The
Company's peer group is comprised of bank holding companies with
$500 million to $1 billion in total consolidated assets.
Acquisition of Six Fleet Branches
On June 27, 1997, the Company completed the acquisition of six
branches in upstate New York from Fleet Bank ("Branch Acquisition"),
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 acquisition
agreement, GFNB also acquired from Fleet an additional $10 million
of residential real estate loans not related to the branches.
The Company has experienced several benefits from the Branch
Acquisition in the past nine months. Most significant was the positive
impact on earnings per share since the acquisition (which was funded
internally) leveraged the Company's capital position in tandem with
a stock repurchase program during 1997. Other positive impacts of
the Branch Acquisition Include: (i) an improvement in the Company's
efficiency ratio (noninterest expense to net interest income and
noninterest income), and (ii) an increase in the ratio of net income per
full time-equivalent employee, another measure of the Company's
ability to leverage fixed expenses. The Branch Acquisition was the
principal source of the first quarter period-to-period changes in both
the consolidated balance sheets and consolidated statements of
income as noted in the following discussion.
OVERVIEW
The Company reported earnings of $2.9 million for the first quarter of
both 1998 and 1997. Diluted earnings per share were $.50 and $.48
for the two respective periods. Earnings in the 1997 period, however,
reflected the favorable settlement of a combined reporting issue with
the New York State Department of Taxation and Finance, resulting in
a significant reduction in the provision for income taxes for that period,
as well as the settlement of claims against service providers. On a
comparable basis, excluding these nonrecurring items and securities
transactions, diluted earnings per share for the first quarter of 1998
and 1997 were $.48 and $.38, respectively.
The following table presents the adjustments necessary to arrive at
recurring net income of the Company.
<TABLE>
<CAPTION>
Analysis of Recurring Net Income
(In Thousands, Except Per Share Amounts)
Three Months Ended
Mar 1998 Mar 1997
<S> <C> <C>
Net Income, as Reported $2,903 $2,901
Adjustments, net of Tax:
Net Securities Transactions (93) 17
Settlement of Claims --- (163)
State Income Tax Benefit --- (464)
Recurring Income $2,810 $2,291
Diluted Earnings Per Share, as Reported $ .50 $ .48
Diluted Earnings Per Share, Recurring .48 .38
</TABLE>
The returns on average assets were 1.42% and 1.80% for the first
quarter of 1998 and 1997, respectively. The returns on average equity
were 15.71% and 15.94% for the first quarter of 1998 and 1997,
respectively. Excluding the nonrecurring items, the returns on average
assets were 1.37% and 1.42%, and the returns on average equity were
15.21% and 12.60%, for the respective quarters.
Total assets were $847.1 million at March 31, 1998, which represented
an increase of $15.5 million, or 1.9%, from December 31, 1997, and
an increase of $192.7 million, or 29.5%, above the level at March 31,
1997. The Branch Acquisition in June 1997, increased total assets by
approximately $140 million, and the company also experienced growth
of over $50 million at its continuously operated branches over the 12
month period. For the most part, the level of deposits at the acquired
branches have remained unchanged since the acquisition date.
Shareholders' equity increased $1.6 million to $75.5 million during the
first three months of 1998, as net income of $2.9 million was partially
offset by cash dividends of $1.2 million and $165 thousand of
unrealized losses on securities available-for-sale, net of tax. The
Company's risk-based capital ratios and Tier 1 leverage ratio
continued to exceed regulatory minimum requirements at period-end
and both Company banks qualified as "well-capitalized" under federal
bank guidelines.
<TABLE>
<CAPTION>
CHANGE IN FINANCIAL CONDITION
Summary of Consolidated Balance Sheets
(Dollars in Thousands)
$ Change $ Change % Change % Change
Mar 1998 Dec 1997 Mar 1997 From Dec From Mar From Dec From Mar
<S> <C> <C> <C> <C> <C> <C> <C>
Federal Funds Sold $ 18,700 $ 23,000 $ 12,500 $ (4,300) $ 6,200 (18.7)% 49.6%
Securities Available for Sale 221,959 221,837 159,456 122 62,503 0.1 39.2
Securities Held to Maturity 50,848 44,082 42,915 6,766 7,933 15.3 18.5
Loans, Net of Unearned Income (1) 495,962 485,810 398,581 10,152 97,381 2.1 24.4
Allowance for Loan Losses 6,375 6,191 5,625 184 750 3.0 13.3
Earning Assets (1) 787,469 774,729 613,452 12,740 174,017 1.6 28.4
Total Assets 847,075 831,599 654,363 15,476 192,712 1.9 29.5
Demand Deposits $ 90,202 $ 96,482 $ 65,995 $ (6,280) $ 24,207 (6.5) 36.7
Interest-Bearing Demand Deposits 164,667 162,016 118,700 2,651 45,967 1.6 38.7
Regular and Money Market Savings 161,713 158,690 129,641 3,023 32,072 1.9 24.7
Time Deposits of $100,000 or More 105,425 106,620 93,145 (1,195) 12,250 (1.1) 13.2
Other Time Deposits 193,264 197,107 142,185 (3,843) 51,079 (1.9) 35.9
Total Deposits $715,271 $720,915 $549,666 $(5,644) $165,605 (0.8) 30.1
Short-Term Borrowings $ 27,950 $ 24,755 $ 21,053 $ 3,195 $ 6,897 12.9 32.8
Federal Home Loan Bank Advances 15,000 --- --- 15,000 15,000 --- ---
Shareholders' Equity 75,489 73,871 71,414 1,618 4,075 2.2 5.7
(1) Includes Nonaccrual Loans
</TABLE>
Total resources at March 31, 1998 amounted to $847.1 million, an
increase of $15.5 million, or 1.9%, from year-end 1997 and an
increase of $192.7 million, or 29.5%, from March 31, 1997.
Total loans at March 31, 1998 amounted to $496.0 million, an
increase of $10.2 million, or 2.1%, from December 31, 1997, and an
increase of $97.4 million, or 24.4%, from March 31, 1997. The
increase from March 31, 1997 was primarily attributable to the Branch
Acquisition in June 1997, which increased total loans by
approximately $44 million. Apart from the Branch Acquisition, the
Company experienced internal loan growth primarily within the
indirect and residential real estate portfolios. Indirect consumer loans
are principally auto loans financed through local dealerships where
the Company acquires the dealer paper.
Total deposits of $715.3 million at March 31, 1998 decreased $5.6
million, or 0.8%, from the December 31, 1997 level. The decrease
was attributable to seasonal fluctuations in municipal deposits. The
amount of deposits at March 31, 1998, however, represents an
increase of $165.6 million, or 30.1%, from March 31, 1997. Again,
the increase from March 31, 1997 was primarily attributable to the
Branch Acquisition in June 1997, in which the Company assumed
approximately $140 million in deposits from Fleet Bank. The
remaining deposit increase of $25.6 million represented growth at the
Company's continuously operated branches.
Shareholders' equity increased $1.6 million to $75.5 million during the
first three months of 1998. Net income of $2.9 million was partially
offset by cash dividends of $1.2 million and a $165 thousand
unrealized loss on securities available-for-sale, net of tax, reflected
as a separate component of shareholders' equity. The Company
paid a $.21 cash dividend for the first quarter of 1998, which followed
a dividend of $.21 for the prior quarter and dividends of $.19 for the
four previous quarters.
Deposit and Loan Trends
The following table provides information on trends in the balance and
mix of the Company's deposit portfolio by presenting the quarterly
average balance by deposit type and the relative proportion of each
deposit type for each of the last five quarters. The Branch
Acquisition, completed on June 27, 1997, had very little impact on the
average balances for the second quarter of 1997, while fully
impacting each of the last three quarters.
<TABLE>
<CAPTION>
Quarterly Average Deposit Balances
(Dollars in Thousands)
Mar 1998 Dec 1997 Sep 1997 Jun 1997 Mar 1997
Amount % Amount % Amount % Amount % Amount %
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Demand Deposits $ 92,584 13 $ 91,309 13 $ 93,907 14 $ 65,976 12 $ 63,147 12
Interest-Bearing Demand Deposits 166,494 23 170,321 24 155,461 22 128,067 23 122,318 22
Regular and Money Market Savings 158,997 22 159,591 22 167,821 24 128,350 23 129,791 24
Time Deposits of $100,000 or More 102,263 14 96,851 13 78,927 11 87,350 16 88,704 16
Other Time Deposits 195,039 28 198,018 28 201,125 29 147,910 26 139,261 26
Total Deposits $715,377 100 $716,090 100 $697,241 100 $557,653 100 $543,221 100
</TABLE>
The Company typically experiences little net deposit growth in the first
two quarters of the year as seasonal runoff of municipal deposits is
only partially offset by normal deposit growth. The increase in the
average balance from the second quarter of 1997 to the third quarter
of 1997 is primarily attributable to the Branch Acquisition which added
approximately $140 million in deposit balances. The remaining growth
in the deposit portfolios during the third and fourth quarters of 1997
took place at the Company's continuously operated branches. Over
the course of the last five quarters the relative mix of deposit types
within the portfolio remained quite stable, not withstanding the Branch
Acquisition.
<PAGE>
<TABLE>
<CAPTION>
Quarterly Cost of Deposits
Mar 1998 Dec 1997 Sep 1997 Jun 1997 Mar 1997
<S> <C> <C> <C> <C> <C>
Demand Deposits --- % --- % --- % --- % --- %
Interest-Bearing Demand Deposits 2.99 3.16 2.98 3.21 3.05
Regular and Money Market Savings 2.78 2.79 2.87 2.83 2.94
Time Deposits of $100,000 or More 5.47 5.45 5.45 5.37 5.25
Other Time Deposits 5.57 5.50 5.42 5.54 5.38
Total Deposits 3.61 3.63 3.54 3.70 3.63
</TABLE>
Federal Reserve Bank's Discount Rate Changes 1995 - 1998:
Date New Rate Old Rate
January 31, 1996 5.00% 5.25%
February 1, 1995 5.25 4.75
The Federal Reserve Board attempts to influence the prevailing
federal funds rate and prime interest rates by changing the Federal
Reserve Bank discount rate and/or through open market operations.
In the first quarter of 1997, the prevailing Federal Funds rate
increased by twenty five basis points even though the discount rate
remained unchanged. Accordingly, the Company experienced an
increase in the total cost of deposits resulting from both this increase
in the federal funds rate, as well as from a highly competitive
marketplace for deposits during the first two quarters of 1997, which
moderated somewhat during the third quarter of 1997. The costs of
small denomination time deposits increased during the most recent
two quarters as maturing time deposits repriced to market rates.
The average cost of funds did not change significantly after 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, interest-bearing demand and savings
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 demand and savings
accounts assumed (its rates being slightly higher than Fleet's rates,
on average) and continued paying contract rates on time deposits
assumed (Fleet's rates for such products being similar to the
Company's prevailing rates for time deposits).
In the recent past, other sources of short-term borrowings for the
Company included repurchase agreements (essentially a substitute
deposit product) and tax deposit balances with the U.S. Treasury.
During the first quarter of 1998, the Company borrowed $15 million
from the Federal Home Loan Bank of New York ("FHLB") in the form of
a "convertible advance." These advances (extended in three $5 million
increments) have a final maturity of 10 years and are callable by the
FHLB at certain dates beginning no earlier than one year from the issuance
date. If the advances are called, the Company may elect to have the
funds replaced by the FHLB at the then prevailing market rate of interest.
The following table presents the quarterly average balance by loan
type and the relative proportion of each loan type for
each of the last five quarters.
<TABLE>
<CAPTION>
Quarterly Average Loan Balances
(Dollars in Thousands)
Mar 1998 Dec 1997 Sep 1997 Jun 1997 Mar 1997
Amount % Amount % Amount % Amount % Amount %
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial and
Commercial Real Estate $102,983 21 $100,604 21 $102,211 22 $ 92,874 23 $ 89,673 23
Residential Real Estate 151,417 31 147,928 31 142,863 31 129,289 32 127,032 32
Home Equity 36,593 7 36,601 7 37,100 7 30,399 7 30,012 8
Indirect Consumer Loans 143,495 29 139,401 29 128,086 27 114,141 28 107,371 27
Direct Consumer Loans 49,084 10 49,747 10 51,185 11 34,212 8 33,300 8
Credit Card Loans 7,413 2 7,602 2 7,582 2 7,769 2 8,153 2
Total Loans $490,985 100 $481,883 100 $469,027 100 $408,684 100 $395,541 100
</TABLE>
On June 27, 1997, the Company acquired approximately $44 million
in loan balances in the Branch Acquisition (commercial loans - $10.4
million, direct consumer loans - $16.6 million, home equity loans - $7.1
million and residential real estate loans - $10.1 million).
Apart from the Branch Acquisition, average loans increased at a
steady pace over the five most recent quarters. While all categories
of loans, except for credit card loans, experienced increases, indirect
consumer loans demonstrated the most significant change. 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, these loans increased from
27% in the first quarter of 1997 to 29% in the first quarter of 1998.
Otherwise, there was no significant change in the overall mix of loans
within the loan portfolio.
<TABLE>
<CAPTION>
Quarterly Taxable Equivalent Yield on Loans
Mar 1998 Dec 1997 Sep 1997 Jun 1997 Mar 1997
<S> <C> <C> <C> <C> <C>
Commercial and
Commercial Real Estate 9.60% 9.62% 9.56% 9.73% 9.61%
Residential Real Estate 8.34 8.23 8.33 8.40 8.47
Home Equity 9.07 9.10 9.20 9.23 9.10
Indirect Consumer Loans 8.17 8.24 8.39 8.35 8.29
Direct Consumer Loans 9.18 9.18 9.00 9.09 9.16
Credit Card Loans 16.41 16.07 16.46 16.84 16.76
Total Loans 8.82 8.81 8.86 8.97 8.96
</TABLE>
The yield on the loan portfolio in the first quarter was essentially
unchanged from the immediately preceding quarter. Over the prior
several quarters, however, yields on the Company's loan portfolio have
declined gradually. Although short-term interest rate trends have been
quite stable, there has been a general flattening of the yield curve
which has had a negative impact on fixed rate residential real estate
loans. The Company has experienced (and continues to experience)
significant competitive pricing for loan products in its market area.
The following table presents information related to the Company's
allowance and provision for credit losses for the past five quarters.
The provision for credit losses and net charge-offs are reported on a
year-to-date basis, and are annualized for the purpose of calculating
the ratio of each to average loans for each of the periods presented.
<TABLE>
<CAPTION>
Summary of the Allowance and Provision for Credit Losses
(Dollars in Thousands)(Loans Stated Net of Unearned Income)
Mar 1998 Dec 1997 Sep 1997 Jun 1997 Mar 1997
<S> <C> <C> <C> <C> <C>
Loan Balances:
Period-End Loans $495,962 $485,810 $476,863 $462,396 $398,581
Average Loans, Year-to-Date 490,985 439,103 424,686 402,149 395,541
Allowance for Credit Losses:
Allowance for Credit Losses,
Beginning of Period $6,191 $ 5,581 $ 5,581 $ 5,581 $ 5,581
Allowance Acquired --- 700 700 700 ---
Provision for Loan Losses, Y-T-D 342 1,303 972 472 236
Net Charge-offs, Y-T-D (158) (1,393) (1,024) (344) (192)
Allowance for Credit Losses, End of Period $6,375 $ 6,191 $ 6,229 $ 6,409 $ 5,625
Nonperforming Assets:
Nonaccrual Loans $3,615 $3,321 $3,034 $ 2,232 $ 2,070
Loans Past due 90 or More Days
and Still Accruing Interest 242 363 296 764 292
Loans Restructured and in
Compliance with Modified Terms --- --- --- --- ---
Total Nonperforming Loans 3,857 3,684 3,330 2,996 2,362
Repossessed Assets 64 --- --- --- ---
Other Real Estate Owned 386 315 322 370 340
Total Nonperforming Assets $4,307 $3,999 $3,652 $ 3,366 $ 2,702
Performance Ratios:
Allowance to Nonperforming Loans 165.28% 168.05% 187.06% 213.92% 238.15%
Allowance to Period-End Loans 1.29 1.27 1.31 1.39 1.41
Provision to Average Loans (annualized) 0.28 0.30 0.31 0.24 0.24
Net Charge-offs to Average Loans (annualized) 0.13 0.32 0.32 0.17 0.20
Nonperforming Assets to Loans,
OREO & Repossessed Assets 0.87 0.82 0.77 0.73 0.68
</TABLE>
The Company's nonperforming assets at March 31, 1998 amounted
to $4.3 million, an increase of $308 thousand, or 7.7%, from
December 31, 1997. At period-end, nonperforming assets
represented .87% of loans, other real estate and repossessed assets,
an increase of 5 basis points from year-end 1997. At December 31,
1997, this ratio for the Company's peer group was 1.04%.
On an annualized basis, the ratio of the 1998 first quarter net
charge-offs to average loans was .13%, seven basis points lower than the
annualized ratio of net charge-offs to average loans in the 1997 period
of .20%. The provision for credit losses was $342 thousand for the first
quarter of 1998, compared to a provision of $236 thousand for the first
quarter of 1997. The provision as a percentage of average loans was
.28% for the first quarter of 1998, or 15 basis points higher than net
charge-offs for the period.
The allowance for credit losses at March 31, 1998 amounted to $6.4
million. The ratio of the allowance to outstanding loans at March 31,
1998, was 1.29%, slightly higher than the ratio at December 31, 1997.
<PAGE>
CAPITAL RESOURCES
Shareholders' equity was $75.5 million at March 31, 1998, an increase
of $1.6 million, or 2.2%, from December 31, 1997. Net income of $2.9
million for the period was partially offset by cash dividends of $1.2
million and net unrealized losses of $165 thousand on securities
available-for-sale, net of tax (reflected as a separate component of
shareholders' equity).
The Company and its subsidiaries are currently subject to two sets of
regulatory capital measures, a leverage ratio test and risk-based
capital guidelines. The risk-based 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 the allowance for credit losses. The leverage ratio
test establishes minimum limits on the ratio of Tier 1 capital to total
tangible assets, without risk weighting. For top-rated companies, the
minimum leverage ratio is 3%, but lower-rated or rapidly expanding
companies may be required to meet substantially higher minimum
leverage ratios. The FDIC Improvement Act of 1991 ("FDICIA")
mandated actions to be taken by banking regulators for financial
institutions that are undercapitalized as measured by these ratios.
FDICIA established five levels of capitalization for financial institutions
ranging from "critically undercapitalized" to "well-capitalized." As of
March 31, 1998, 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 7.51% 12.23% 13.48%
Glens Falls National Bank & Trust Co. 7.38 12.60 13.85
Saratoga National Bank & Trust Co. 7.70 9.62 10.78
Regulatory Minimum 3.00 4.00 8.00
FDICIA's "Well-Capitalized" Standard 5.00 6.00 10.00
</TABLE>
All capital ratios for the Company and its subsidiary banks at March 31,
1998 were above minimum capital standards for financial institutions.
Additionally, all Company and subsidiary banks' capital ratios at that
date were above FDICIA's "well-capitalized" standard.
The common stock of Arrow Financial Corporation is traded on The
Nasdaq Stock MarketSM under the symbol AROW. The price ranges
below represent actual transactions rounded to the nearest 1/8 point.
(There may have been sales outside the parameters shown, but
management believes that the price ranges fairly represent the
trends.) Per share amounts and market prices have been adjusted for
the 1997 five percent stock dividend.
On April 29, 1998, the Company announced the 1998 second quarter
dividend of $.21 payable on June 15, 1998.
<TABLE>
<CAPTION>
Quarterly Stock Prices and Dividends Market Price Cash
(Restated for Stock Dividends) (Bid) Dividends
High Low Declared
<S> <C> <C> <C>
1997 1st Quarter 3.375 $22.125 $.19
2nd Quarter 6.375 23.375 .19
3rd Quarter 28.625 24.500 .19
4th Quarter 33.625 29.500 .21
1998 1st Quarter $33.250 $29.750 $.21
2nd Quarter n/a n/a .21
</TABLE>
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
First Quarter Core Diluted Earnings Per Share $.48 $.38
Dividend Payout Ratio: (Second quarter dividends
as a percent of first quarter core diluted
earnings per share) 43.75% 50.00%
Book Value Per Share $13.09 $12.09
Tangible Book Value Per Share $10.72 $11.89
</TABLE>
LIQUIDITY
Liquidity is measured by the ability of the Company to raise cash
when it needs it at a reasonable cost. The Company must be
capable of meeting expected and unexpected obligations to its
customers at any time. Given the uncertain nature of customer
demands as well as the desire to maximize earnings, the Company
must have available sources of funds, on- and off-balance sheet, that
can be acquired in time of need.
Securities available-for-sale represent a primary source of on-balance
sheet cash flow. At purchase, selection of these securities is based on
their ready marketability and collateral value, as well as their yield and
maturity.
In addition to liquidity arising from balance sheet cash flows, the
Company has supplemented liquidity with additional off-balance sheet
sources such as credit lines with the Federal Home Loan Bank and
has identified wholesale and retail repurchase agreements and
brokered certificates of deposit as appropriate funding alternatives.
The Company measures its basic liquidity as a ratio of liquid assets to
short-term liabilities, both with and without the availability of borrowing
arrangements. Because excess liquidity has a negative impact on
earnings, the Company establishes both a high end and a low end on
its target range for liquidity ratios. At March 31, 1998, the Company
still exceeded the upper limit of this range due to the liquidity resulting
from the Fleet branch acquisition. Since June 1997, the Company has
been reinvesting this excess liquidity in market-area loans as
opportunities arise.
The Company is not aware of any known trends, events or
uncertainties that will have or are reasonably likely to have a material
effect or make material demands on the Company's liquidity, capital
resources or results of operations.
RESULTS OF OPERATIONS: Three Months Ended March 31, 1998 Compared With
Three Months Ended March 31, 1997
<TABLE>
<CAPTION>
Summary of Earnings Performance
(Dollars in Thousands)
Mar 1998 Mar 1997 Change % Change
<S> <C> <C> <C> <C>
Net Income $2,903 $2,901 $ 2 0.1 %
Net Income, Recurring 2,810 2,291 519 22.7
Diluted Earnings Per Share .50 .48 0.02 4.2
Diluted Earnings Per Share, Recurring .48 .38 0.10 26.2
Return on Assets 1.42% 1.80% (0.39)% (21.1)
Return on Assets, Recurring 1.37% 1.42% (0.05)% (3.5)
Return on Equity 15.71% 15.94% (0.23)% (1.4)
Return on Equity, Recurring 15.21% 12.60% 2.61 % 20.7
</TABLE>
The Company reported earnings of $2.9 million for both the first
quarter of 1998 and 1997. However, for the first quarter of 1997,
earnings included a favorable settlement of a combined reporting
issue with the State of New York Department of Taxation and Finance,
as well as a favorable settlement of a claim against a service provider.
As adjusted for nonrecurring items, net income was $2.8 million and
$2.3 million for the first quarter of 1998 and 1997, respectively. As
thus adjusted, diluted earnings per share were $.48 and $.38 for each
respective period.
<PAGE>
Net Interest Income
<TABLE>
<CAPTION>
Summary of Net Interest Income
(Taxable Equivalent Basis)
(Dollars in Thousands)
Mar 1998 Mar 1997 Change % Change
<S> <C> <C> <C> <C>
Interest Income $ 15,411 $ 12,350 $ 3,061 24.8 %
Interest Expense 6,702 5,095 1,607 31.5
Net Interest Income $ 8,709 $ 7,255 $ 1,454 20.0
Average Earning Assets (1) $775,282 $609,257 $166,025 27.3 %
Average Paying Liabilities 650,561 500,218 150,343 30.1
Taxable Equivalent Adjustment 257 182 75 41.2
Yield on Earning Assets (1) 8.06% 8.22% (0.16)% (1.9)%
Cost of Paying Liabilities 4.18 4.13 0.05 1.1
Net Interest Spread 3.88 4.09 (0.21) (5.0)
Net Interest Margin 4.56 4.83 (0.27) (5.7)
(1) Includes Nonaccrual Loans
</TABLE>
The Company's net interest margin (net interest income on a tax-equivalent
basis divided by average earning assets, annualized)
decreased by 27 basis points from the first quarter of 1997 to the first
quarter of 1998.
Net interest income for the first quarter of 1997 does not include the
effects of the Branch Acquisition on June 27, 1997. As indicated in
the earlier discussion on balance sheet changes, the Company
acquired approximately $140 million in deposits in the Branch
Acquisition, but only $44 million in loans. The Company received
cash from Fleet equal to the difference, less an agreed-upon
premium on the deposits and the value of other assets acquired (e.g.,
real and personal property at the branches).
Initially, the Company invested the surplus cash received in securities
and federal funds, with a view to reinvesting these amounts in market
area loans as opportunities allowed. At March 31, 1997, prior to the
Branch Acquisition, the Company's loan to deposit ratio was
approximately 73%. At June 30, 1997, shortly after the acquisition,
the loan to deposit ratio was 67%. By March 31, 1998, the loan to
deposit ratio had risen to 69%.
The effect of placing a greater portion of earning assets in lower
yielding federal funds and securities (the short-term consequence of
the Branch Acquisition) was a decrease in the Company's net interest
margin, which decreased 27 basis points from March 31, 1997 to
March 31, 1998. However, due to the increase in average earning
assets between the two periods (an increase of $166 million) net
interest income increased $1.5 million from the first quarter of 1997
to the first quarter of 1998.
The provision for loan losses was $342 thousand and $236 thousand
for the quarters ended March 31, 1998 and 1997, respectively. The
provision for loan losses was discussed previously under the heading
"Summary of the Allowance and Provision for Loan Losses."
Other Income
<TABLE>
<CAPTION>
Summary of Other Income
(Dollars in Thousands)
Mar 1998 Mar 1997 $ Change % Change
<S> <C> <C> <C> <C>
Income From Fiduciary Activities $ 761 $ 658 $ 103 15.7 %
Fees for Other Services to Customers 957 755 202 26.8
Net Gains (Losses) on Securities Transactions 157 (28) 185 ---
Other Operating Income 232 525 (293) (55.8)
Total Other Income $ 2,107 $ 1,910 $ 197 10.3
Other Operating Income, Recurring $ 232 $ 250 $ (18) (7.2)%
Total Other Income, Recurring 1,950 1,663 287 17.3
</TABLE>
Other (i.e. noninterest) income for the first quarter of 1997 included
$275 thousand of nonrecurring other operating income relating to
settlements of various claims during the period. Other income, on a
recurring basis, increased $287 thousand, or 17.3%, from the first
quarter of 1997 to the first quarter of 1998.
Trust income increased $103 thousand, or 15.7%, between the two
comparative quarters. The Company did not acquire any trust
business in the Branch Acquisition, but the newly-acquired branches
did expand the market area for the Company's trust and investment
division.
Fees for other services to customers (primarily service charges on
deposit accounts, credit card merchant fee income and servicing
income on sold loans) was $957 thousand for the first quarter of
1998, an increase of $202 thousand, or 26.8%, from the 1997 first
quarter. The increase was primarily attributable to service charges
on the deposits assumed in the Branch Acquisition.
Other operating income, on a recurring basis (primarily third party
credit card servicing income and gains on the sale of loans and other
assets), amounted to $232 thousand, a decrease of $18 thousand,
or 7.2%, from the first quarter of 1997. This area of other income
was not significantly impacted by the Branch Acquisition, and the
period-to-period decrease was attributable to the fluctuating nature
of this type of income.
During the first quarter of 1998, the Company recognized $162
thousand in gains on the sale of $22.2 million of securities from the
available-for-sale portfolio, offset in part by $5 thousand of securities
losses. During the first quarter of 1997, the Company recognized net
securities losses of $28 thousand on the sale of $11.0 million of
securities available-for-sale. The securities were sold for the main
purpose of extending the average maturity on the portfolio.
Other Expense
<TABLE>
<CAPTION>
Summary of Other Expense
(Dollars in Thousands)
Mar 1998 Mar 1997 Change % Change
<S> <C> <C> <C> <C>
Salaries and Employee Benefits $3,259 $2,934 $ 325 11.1%
Occupancy Expense of Premises, Net 419 378 41 10.8
Furniture and Equipment Expense 551 479 72 15.0
Other Operating Expense 1,560 1,145 415 36.2
Total Other Expense $5,789 $4,936 $ 853 17.3
Efficiency Ratio 54.31% 55.35% (1.04)% 1.8%
</TABLE>
Other (i.e. noninterest) expense increased $853 thousand, or 17.3%,
for the first three months of 1998 compared with the first three
months of 1997. The increase was almost entirely attributable to the
Branch Acquisition, which, measured by total assets, increased the
size of the Company by 21.4% at the closing of the transaction, June
27, 1997. In spite of the increased operating expenses, including
amortization of goodwill associated with the Branch Acquisition, the
Company's efficiency ratio decreased (a ratio where smaller is better)
between the two periods. The efficiency ratio is calculated as the
ratio of other expense to tax-equivalent net interest income and other
income (excluding nonrecurring items and securities gains and
losses), and is a comparative measure of a financial institution's
operating efficiency. At December 31, 1997, the ratio for the
Company's peer group was 61.63%.
Salaries and employee benefits expense increased $325 thousand,
or 11.1%, from the first quarter of 1997 to the first quarter of 1998.
The Company retained all 34 former Fleet employees associated with
the Branch Acquisition. The increase also reflects normal salary
increases.
Increases in occupancy expense of premises and furniture and fixture
expense (10.8% and 15.0%, respectively) were primarily attributable
to the Branch Acquisition.
Other operating expense increased $415 thousand, or 36.2%, from
the first quarter of 1997 to the first quarter of 1998. An increase in the
amortization of goodwill of $226 thousand represented 54.5% of the
total increase. Otherwise, the increase in other operating expense
would have been 16.5%, similar to, but somewhat higher than, the
other cost increases triggered by the Branch Acquisition, but still well
below the 21.4% increase in total assets.
<PAGE>
Income Taxes
<TABLE>
<CAPTION>
Summary of Income Taxes
(Dollars in Thousands)
Mar 1998 Mar 1997 Change
<S> <C> <C> <C>
Provision for Income Taxes $ 1,525 $ 910 $ 615
Effective Federal Rate 34.44% 23.88% 10.56 %
Effective Federal Rate, without the 1997 state tax benefit 34.44% 36.05% (1.61)%
</TABLE>
The provision for federal and state income taxes amounted to $1.5
million and $910 thousand for the first quarter of 1998 and 1997,
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 quarter of 1998
and 1997 were 34.44% and 36.05%, respectively. The decrease is
primarily attributable to a reduction in state income taxes.
Item 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK
In addition to credit risk in the Company's loan portfolio and liquidity
risk, discussed earlier, the Company's business activities also
generate market risk. Market risk is the possibility that changes in
future market rates or prices will make the Company's position less
valuable.
The ongoing monitoring and management of risk is an important
component of the Company's asset/liability management process
which is governed by policies established by its Board of Directors
that are reviewed and approved annually. The Board of Directors
delegates responsibility for managing the asset/liability profile to
management's Asset/Liability Committee ("ALCO"). In this capacity
ALCO develops guidelines and strategies impacting the Company's
asset/liability management related activities based upon estimated
market risk sensitivity, policy limits and overall market interest rate
levels and trends.
Interest rate risk is the most significant market risk affecting the
Company. 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-related assets, early withdrawal of time deposits,
and the fact that the speed and magnitude of responses to interest
rate changes varies by product.
The ALCO utilizes the results of a detailed and dynamic simulation
model to quantify the estimated exposure of net interest income to
sustained interest rate changes. While ALCO routinely monitors
simulated net interest income sensitivity over a rolling two-year
horizon, it also utilizes additional tools to monitor potential
longer-term interest rate risk.
The simulation model captures the impact of changing interest rates
on the interest income received and interest expense paid with
respect to all interest-bearing assets and liabilities on the Company's
consolidated balance sheet. This sensitivity analysis is compared to
ALCO policy limits which specify a maximum tolerance level for net
interest income exposure over a one year horizon, assuming no
balance sheet growth and a 200 basis point upward and downward
shift in interest rates. A parallel and pro rata shift in rates over a 12
month period is assumed. As of March 31, 1998, under this analysis,
a 200 basis point increase in interest rates would result in a 3.9%
decrease in net interest income for the ensuing twelve months and a
200 basis point decrease in interest rates would result in a 4.0%
increase in net interest income. These amounts were well within the
Company's ALCO policy limits.
The preceding sensitivity analysis does not represent a Company
forecast and should not be relied upon as being indicative of expected
operating results in the event of comparable interest rate changes or
otherwise. These hypothetical estimates are based upon numerous
assumptions including: the nature and timing of interest rate levels
including yield curve shape, prepayments on loans and securities,
deposit decay rates, pricing decisions on loans and deposits,
reinvestment/replacement of asset and liability cashflows, and others.
While assumptions are developed based upon current economic and
local market conditions, the Company cannot make any assurance
as to the predictive nature of these assumptions including how
customer preferences or competitive influences might change.
Also, as market conditions vary from those assumed in the sensitivity
analysis, actual results will differ due to: prepayment/refinancing
levels likely deviating from those assumed, the varying impact of
interest rate changes on caps or floors on adjustable rate assets, the
potential effect of changing debt service levels on customers with
adjustable rate loans, depositor early withdrawals and product
preference changes, and other internal/external variables.
Furthermore, the sensitivity analysis does not reflect actions that
ALCO might take in responding to or anticipating changes in interest
rates.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
The Company is not involved in any material
pending legal proceedings, other than
ordinary routine litigation occurring in the
normal course of its business.
The Company's subsidiary banks are parties
to various legal claims which arise in the
normal course of their business, for
example, lender liability claims that normally
take the form of counterclaims to lawsuits
filed by the banks for collection of past due
loans. The various pending legal claims
against the subsidiary banks will not, in the
current opinion of management, likely result
in any material liability to the subsidiary
banks or the Company.
Item 2. Changes in Securities - None
Item 3. Defaults Upon Senior Securities - None
Item 4. Submission of Matters to a Vote of Security Holders
At the Company's Annual Meeting of
Shareholders held April 29, 1998,
shareholders elected the following directors
to serve terms expiring in 2001.
Shareholders also approved the Company's
Long-Term Incentive Plan, authorizing the
issuance of up to 300,000 shares of the
Company's Common Stock in the form of
stock options and restricted shares. The
voting results were as follows:
<TABLE>
<CAPTION>
Withhold Broker
Director For Authority Non-Votes
<S> <C> <C> <C>
Thomas L. Hoy 4,622,715 28,938 ---
Dr. Edward F. Huntington 4,637,083 14,570 ---
Doris E. Ornstein 4,606,643 45,010 ---
</TABLE>
<TABLE>
<CAPTION>
Broker
For Against Abstain Non-Votes
<S> <C> <C> <C> <C>
Long-Term Incentive Plan 3,430,623 432,603 123,036 ---
</TABLE>
Item 5. Other Information - None
Item 6. Exhibits and Reports on Form 8-K - None
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
ARROW FINANCIAL CORPORATION
Registrant
Date: May 14, 1998 s/Thomas L. Hoy
Thomas L. Hoy, President and
Chief Executive Officer
Date: May 14, 1998 s/John J. Murphy
John J. Murphy, Executive Vice
President, Treasurer and CFO
(Principal Financial Officer and
Principal Accounting Officer)
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND> PREVIOUSLY FILED 1997 EPS DATA
RESTATED FOR ADOPTION OF FAS 128
AND FOR NOVEMBER 1997
5% STOCK DIVIDEND
</LEGEND>
<RESTATED>
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