SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d) of
The Securities Exchange Act of 1934
For the fiscal year ended December 31, 1997
Commission file number 0-12507
ARROW FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
NEW YORK
(State or Other Jurisdiction of
Incorporation or Organization)
22-2448962
(I.R.S. Employer
Identification No.)
250 GLEN STREET, GLENS FALLS, NEW YORK 12801
(Address of principal executive offices) (Zip Code)
Registrant's telephone number,
including area code: (518) 745-1000
SECURITIES REGISTERED PURSUANT TO
SECTION 12(b) OF THE ACT - NONE
SECURITIES REGISTERED PURSUANT
TO SECTION 12(g) OF THE ACT
Common stock, Par Value $1.00
(Title of Class)
Indicate by checkmark if disclosure of delinquent
filers pursuant to Item 405 of Regulation S-K
is not contained herein, and will
not be contained, to the best of registrant's
knowledge, in definitive proxy or information
statements incorporated by reference
in Part III of this Form 10-K or any
amendment to this Form 10-K.
X
Indicate by checkmark whether the registrant (1)
has filed all reports required to be filed by
Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was
required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes X No
Indicate the number of shares outstanding of each
of the registrant's classes of common stock, as of
the latest practicable date.
Class
Common stock, Par Value $1.00 Per Share
Outstanding at March 11, 1998
5,764,335
State the aggregate market value of the voting
stock held by non-affiliates of registrant.
Aggregate market value
of voting stock
$180,135,000
Based upon the average of the closing bid
and closing asked prices on the NASDAQ Exchange
March 11, 1998
DOCUMENTS INCORPORATED BY REFERENCE
Portions of Registrant's Proxy Statement for the
Annual Meeting of Shareholders to be held
April 29, 1998 (Part III) and the Annual Report
to Shareholders (Part II, Item 8)<PAGE>
ARROW FINANCIAL CORPORATION
FORM 10-K
INDEX
Cautionary Statement under Federal Securities Laws
PART I
Item 1. Business
A. General
B. Lending Activities
C. Supervision and Regulation
D. Competition
E. Statistical Disclosure (Guide 3)
F. Legislative Developments
G. Executive Officers of the Registrant
Item 2. Properties
Item 3. Legal Proceedings
Item 4. Submission of Matters to a Vote of Security Holders
PART II
Item 5. Market for the Registrant's Common Equity and
Related Stockholder Matters
Item 6. Selected Financial Data
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations
A. Overview
B. Results of Operations
I. Net Interest Income
II. Provision for Loan Losses and
Allowance for Loan Losses
III. Other Income
IV. Other Expense
V. Income Taxes
C. Financial Condition
I. Investment Portfolio
II. Loan Portfolio
a. Distribution of Loans and Leases
b. Risk Elements
III. Summary of Loan Loss Experience
IV. Deposits
V. Time Certificates of $100,000 or More
D. Liquidity
E. Capital Resources and Dividends
F. Fourth Quarter Results
G. Year 2000 Preparedness
Item 7A. Quantitative and Qualitative Disclosures
About Market Risk
Item 8. Financial Statements and Supplementary Data
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure
PART III
Item 10. Directors and Executive Officers of the Registrant
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial
Owners and Management
Item 13. Certain Relationships and Related Transactions
PART IV
Item 14. Exhibits, Financial Statement Schedules and
Reports on Form 8-K
Signatures
Exhibits Index
Cautionary Statement under Federal Securities
Laws: The information contained in this Annual
Report on Form 10-K contains forward-looking
statements that are based on management's
beliefs, certain assumptions made by management
and current expectations, estimates and
projections about the Company's financial
condition and results of operations. Words such
as "expects," "anticipates," "believes,"
"should," "plans," "will," "estimates," and
variations of such words and similar expressions
are intended to identify such forward-looking
statements (e.g., the adequacy of the allowance
for loan losses to cover future losses and the
risk of so-called "Year 2000" problems). These
statements are not guarantees of future
performance and involve certain risks and
uncertainties that are difficult to quantify or,
in some cases, to identify. Therefore, actual
outcomes and results may differ materially from
what is expected or forecasted in such forward-
looking statements. Factors that could cause or
contribute to such differences include, but are
not limited to, changes in economic and market
conditions, including unanticipated fluctuations
in interest rates, effects of state and federal
regulation and risks inherent in banking
operations. Readers are cautioned not to place
undue reliance on these forward-looking
statements, which speak only as of the date
hereof. The Company undertakes no obligation to
revise or update these forward-looking statements
to reflect the occurrence of unanticipated
events.
PART I
Item 1: Business
A. GENERAL
Arrow Financial Corporation (the "Company"), a
New York corporation, was incorporated on March
21, 1983 and is registered as a bank holding
company within the meaning of the Bank Holding
Company Act of 1956. The Company owns two
nationally chartered banks in New York, Glens
Falls National Bank and Trust Company, Glens
Falls New York ("GFNB") and Saratoga National
Bank and Trust Company, Saratoga Springs, New
York ("SNB"), as well as several non-bank
subsidiaries, the operations of which are not
significant. The Company previously owned a bank
in Vermont but sold all of its Vermont operations
in 1996 in three separate transactions and
liquidated its Vermont bank charter in 1997. The
Company owns directly or indirectly all voting
stock of all its subsidiaries.
The business of the Company consists primarily of
the ownership, supervision and control of its
bank subsidiaries. The Company provides its
subsidiaries with various advisory and
administrative services and coordinates the
general policies and operation of the subsidiary
banks. There were 350 full-time equivalent
employees of the Company and the subsidiary banks
at December 31, 1997.
<PAGE>
<TABLE>
<CAPTION>
SUBSIDIARY BANKS: GLENS
(Dollars in Thousands) FALLS SARATOGA
NATIONAL NATIONAL
BANK & BANK &
TRUST CO. TRUST CO.
("GFNB") ("SNB")
<S> <C> <C>
Total Assets at Year-End $750,017 $82,070
Trust Assets Under Management at
Year-End (Not Included in Total Assets) $522,591 $ 4,335
Date Organized 1851 1988
Employees 344 22
State of Headquarters New York New York
Offices 21 2
Counties of Operation Warren Saratoga
Washington
Saratoga
Essex
Clinton
Main Office 250 Glen St. 137 So. Broadway
Glens Falls, Saratoga,
New York New York
</TABLE>
Each subsidiary bank offers a full range of
commercial and consumer financial products. The
banks' deposit base consists of core deposits
derived principally from the communities which
the banks serve. The banks target their lending
activities to consumers and small and mid-sized
companies in the banks' immediate geographic
areas. In addition to traditional banking
services, the Company offers credit card
processing services for other financial
institutions and, through its banks' trust
departments, provides retirement planning, trust
and estate administration services for
individuals and pension, profit-sharing and
employee benefit plan administration for
corporations.
B. LENDING ACTIVITIES
The Company's subsidiary banks engage in a wide
range of lending activities, including commercial
and industrial lending primarily to small and
mid-sized companies; mortgage lending for the
purchase of residential and commercial
properties; and consumer installment, credit card
and home equity financing. The Company also
maintains an active indirect lending program
through its sponsorship of dealer programs, under
which it purchases dealer paper from automobile
and other dealers meeting pre-established
specifications. Historically, the Company has
sold a portion of its residential real estate
loan originations into the secondary market,
primarily to Freddie Mac and state housing
agencies, while retaining the servicing rights.
Loan sales into the secondary market, have
diminished in the past three years, however, as
the banks have sought to increase their own
portfolios. In addition to interest earned on
loans, the banks receive facility fees for
various types of commercial and industrial
credits, and commitment fees for extension of
letters of credit and certain types of loans.
Generally, the Company continues to implement
conservative lending strategies, policies and
procedures which are intended to protect the
quality of the loan portfolio. These include
stringent underwriting and collateral control
procedures and credit review systems through
which intensive reviews are conducted. It is the
Company's policy to discontinue the accrual of
interest on loans when the payment of interest
and/or principal is due and unpaid for a
designated period (generally 90 days) or when the
likelihood of repayment is, in the opinion of
management, uncertain. Income on such loans is
thereafter recognized only upon receipt (see Part
II, Item 7.C.II.b., "Risk Elements").
The banks lend primarily to borrowers within the
geographic areas served by the banks. The banks'
combined loan portfolios do not include any
foreign loans or any significant industry
concentrations except as described in Note 22 to
the Consolidated Financial Statements in Part II,
Item 8 of this report. Except for credit card
loans, the portfolios are substantially secured,
and many commercial loans are further secured by
personal guarantees.
C. SUPERVISION AND REGULATION
The following generally describes the regulation
to which the Company and its banks are subject.
Bank holding companies and banks are extensively
regulated under both federal and state law. To
the extent that the following information
summarizes statutory or regulatory provisions, it
is qualified in its entirety by reference to the
particular law or regulation. Any change in
applicable law or regulation may have a material
effect on the business and prospects of the
Company and the banks.
The Company is a legal entity separate and
distinct from its subsidiaries. Most of the
Company's revenues, on a parent company only
basis, result from management fees, dividends and
undistributed earnings from the subsidiary banks.
The right of the Company, and consequently the
right of creditors and shareholders of the
Company, to participate in any distribution of
the assets or earnings of the banks through the
payment of such dividends or otherwise is
necessarily subject to the prior claims of
creditors of the banks, except to the extent that
claims of the Company in its capacity as a
creditor of the banks also may be recognized.
Moreover, there are various legal and regulatory
limitations applicable to the payment of
dividends to the Company by its subsidiaries as
well as the payment of dividends by the Company
to its shareholders. (See "Capital Resources and
Dividends" in Part II, Item 7.E of this report)
The ability of the Company and the banks to pay
dividends in the future is, and is expected to
continue to be, influenced by regulatory policies
and capital guidelines.
The Company is a registered bank holding company
within the meaning of the Bank Holding Company
Act of 1956 (BHC Act) and is subject to
regulation by the Board of Governors of the
Federal Reserve System (Federal Reserve Board).
Additionally, as a "bank holding company" under
New York State Law, the Company is subject to
regulation by the New York State Banking
Department. The subsidiary banks are nationally
chartered banks and are subject to the
supervision of and examination by the Office of
the Comptroller of the Currency ("OCC"). The
banks are members of the Federal Reserve System
and the deposits of each subsidiary bank are
insured by the Bank Insurance Fund of the Federal
Deposit Insurance Corporation ("FDIC"). The BHC
Act prohibits the Company, with certain
exceptions, from engaging, directly or
indirectly, in non-bank activities and restricts
loans by the banks to the Company or other non-
bank affiliates. Under the BHC Act, a bank
holding company must obtain Federal Reserve Board
approval before acquiring, directly or
indirectly, 5% or more of the voting shares of
another bank or bank holding company (unless it
already owns a majority of such shares) or
acquiring all or substantially all of the assets
of another bank or bank holding company.
Under the 1994 Riegle-Neal Act, bank holding
companies are now able to acquire banks or other
bank holding companies located in all 50 states
(see Item 1.F. "Legislative Developments".)
The Federal Reserve Board has adopted various
"capital adequacy guidelines" for use in the
examination and supervision of bank holding
companies. One set of guidelines is the
risk-based capital guidelines, which assign risk
weightings to all assets and certain off-balance
sheet items and establish an 8% minimum ratio of
qualified total capital to the aggregate dollar
amount of risk-weighted assets (which is almost
always less than the dollar amount of such assets
without risk weighting). At least half of total
capital must consist of "Tier 1" capital, which
comprises common equity, retained earnings and a
limited amount of permanent preferred stock, less
goodwill. Up to half of total capital may
consist of so-called "Tier 2" capital, comprising
a limited amount of subordinated debt, other
preferred stock, certain other instruments and a
limited amount of the allowance for loan losses.
The Federal Reserve Board's other capital
guideline is the leverage ratio standard, which
establishes minimum limits on the ratio of a bank
holding company's "Tier 1" capital to total
tangible assets (not risk-weighted). For
top-rated holding companies, the minimum leverage
ratio is 3%, but lower-rated companies may be
required to meet substantially greater minimum
ratios. Each subsidiary bank is subject to
similar capital requirements adopted by its
primary federal regulator. The year-end 1997
capital ratios of the Company and the banks are
set forth in Part II, Item 7.F. "Capital
Resources and Dividends." A holding company's
ability to pay dividends, repurchase its
outstanding stock or expand its business through
acquisitions of new subsidiaries can be
restricted if capital falls below these capital
adequacy guidelines or other informal capital
guidelines or ratios that bank regulators may
apply from time to time to specific banking
organizations.
In cases where banking regulators have
significant concerns regarding the financial
condition, assets or operations of a bank or bank
holding company, the regulators may take
enforcement action or impose enforcement orders,
formal or informal, against the organization.
Neither the Company nor any of its subsidiaries
is now, or has been within the past year, subject
to any formal or informal regulatory enforcement
action or order.
D. COMPETITION
The Company and its subsidiaries face intense
competition in all markets that they serve.
Traditional competitors are other local
commercial banks, savings banks, savings and loan
institutions and credit unions, as well as local
offices of major regional and money center banks.
Also, non-banking organizations, such as consumer
finance companies, insurance companies,
securities firms, money market and mutual funds
and credit card companies, which are not subject
to the same array of regulatory restrictions and
capital requirements as the Company and its
subsidiary banks, offer substantive equivalents
of transaction accounts, credit cards and various
other loan and financial products.
E. STATISTICAL DISCLOSURE
Statistical disclosure required by Securities Act
Guide 3 to be set forth herein is found in Part
II, Item 7 of this report, "Management's
Discussion and Analysis of Financial Condition
and Results of Operations," and in Part II, Item
8, "Financial Statements and Supplementary Data."
<TABLE>
<CAPTION>
INDEX TO SECURITIES ACT GUIDE 3, STATISTICAL
DISCLOSURE BY BANK HOLDING COMPANIES
Required Information Location
<S> <C>
Distribution of Assets, Liabilities
and Stockholders' Equity; Interest
Rates and Interest Differential Part II, Item 7.B.I.
Investment Portfolio Part II, Item 7.C.I.
Loan Portfolio Part II, Item 7.C.II.
Summary of Loan Loss Experience Part II, Item 7.C.III.
Deposits Part II, Item 7.C.IV.
Return on Equity and Assets Part II, Item 6.
Short-Term Borrowings Part II, Item 8. Note 9.
</TABLE>
F. LEGISLATIVE DEVELOPMENTS
In 1994, Congress enacted the Riegle-Neal
Interstate Banking and Branching Efficiency Act.
Under the Act, as of September 29, 1995, bank
holding companies were authorized as a matter of
federal law to acquire banks located in any of
the 50 states, notwithstanding any state laws to
the contrary, provided all required regulatory
and other approvals are obtained. Also, under
the Act, effective June 1, 1997, banks
headquartered in any state were permitted to
branch into any other state, except for those
states which enacted legislation prior to June 1,
1997 "opting out" of interstate branching. Only
Colorado and Montana elected to "opt out" of
interstate branching; thus, the Company's banks
may branch into all other states, including all
states adjacent to New York, upon receipt of all
required approvals and subject to certain
conditions of state law.
In 1995, the federal bank regulatory authorities
promulgated a set of revised regulations
addressing the responsibilities of banking
organizations under the Community Reinvestment
Act ("CRA"). The revised regulations place
additional emphasis on the actual experience of a
bank in making loans in low- and moderate-income
areas within its service area as a key
determinant in evaluation of the bank's
compliance with the statute. As in the prior
regulations, bank regulators are authorized to
bring enforcement actions against banks under the
CRA only in the context of bank expansion or
acquisition transactions.
In 1991, the Federal Deposit Insurance
Corporation Improvement Act of 1991 ("FDICIA")
was enacted. Among other things, FDICIA requires
the federal banking regulators to take prompt
corrective action with respect to depository
institutions that do not meet minimum capital
requirements. FDICIA established five capital
classifications for banking institutions, the
highest being "well capitalized." Under
regulations adopted by the federal bank
regulators, a banking institution is considered
"well capitalized" if it has a total
risk-adjusted capital ratio of 10% or greater, a
Tier 1 risk-adjusted capital ratio of 6% or
greater and a leverage ratio of 5% or greater and
is not subject to any regulatory order or written
directive regarding capital maintenance. The
Company and its subsidiary banks are all
classified as "well capitalized."
FDICIA also imposed expanded accounting and audit
reporting requirements for depository
institutions whose total assets exceed $500
million. For the Company, these requirements
became effective for Glens Falls National Bank
and Trust Company beginning in 1996.
The FDIC levies assessments on various deposit
obligations of the Company's banking
subsidiaries. During 1995, the FDIC reduced the
premium paid by the best-rated banks (including
the Company's subsidiary banks) from $.23 per
$100 of insured deposits to $.04. In 1996, the
FDIC insurance premium was further reduced to a
flat charge of $2 thousand per year for the
highest-rated banks, including the Company's
subsidiary banks. In 1996, Congress enacted the
Deposit Insurance Funds Act, under which deposits
insured by the Bank Insurance Fund ("BIF") are
subject to assessment for payment on the
Financing Corporation ("FICO") bond obligation at
1/5 the rate of the Savings Association Insurance
Fund ("SAIF") assessable deposits. Accordingly,
in 1997, BIF-assessable deposits (like the
Company's banks) were assessed an additional 1.3
cents per $100 of insured deposits.
Banks and bank holding companies were also
significantly affected by the Financial
Institutions Reform, Recovery and Enforcement Act
of 1989 ("FIRREA"). FIRREA mandated public
disclosure by commercial banks of their Community
Reinvestment Act ratings and mortgage lending
records and imposed cross-liability on any
insured financial institution which is affiliated
with any other insured institution to which the
FDIC gives financial assistance.
Various other federal bills affecting banks,
including proposals to permit banks to affiliate
with full-service securities underwriting firms
or non-financial organizations (Glass-Steagall
Reform) have been introduced in Congress from
time to time. The Company cannot determine the
ultimate effect that any such potential
legislation, if enacted, would have upon its
financial condition or operations.
<TABLE>
<CAPTION>
G. EXECUTIVE OFFICERS OF THE REGISTRANT
The names and ages of the principal executive
officers of the Company and positions held are
presented in the following table. The officers
are elected annually by the Board of Directors.
Name Age Positions Held and Years from Which Held
<S> <C> <C>
Thomas L. Hoy 49 President and CEO since January 1, 1997 and
President and COO of Glens Falls National Bank
since 1995. Mr. Hoy was Executive Vice President
of Glens Falls National Bank prior to 1995. Mr.
Hoy has been with the Company since 1974.
John J. Murphy 46 Executive Vice President, Treasurer and CFO since
1993. Mr. Murphy has served as Senior Vice
President, Treasurer and CFO of the Company since
1983. Mr. Murphy has been with the Company since
1973.
John C. Van Leeuwen 54 Senior Vice President and Chief Credit Officer
since 1995. Prior to 1995, Mr. Van Leeuwen
served as Vice President and Loan Review Officer.
Mr. Van Leeuwen has been with the Company since 1985.
Gerard R. Bilodeau 50 Senior Vice President and Secretary since 1994.
Mr. Bilodeau was Vice President and Secretary from
1993 to 1994 and was Director of Personnel prior
to 1993. Mr. Bilodeau has been with the Company
since 1969.
</TABLE>
Item 2: Properties
The Company is headquartered at 250 Glen Street,
Glens Falls, New York. The building is owned by
Glens Falls National Bank and serves as its main
office. Glens Falls National Bank owns eighteen
additional offices and leases two, at market
rates. Saratoga National Bank owns both of its
offices. The Company continues to own the
building in Rutland, Vermont, that served as
headquarters for the Company's Vermont bank prior
to the divestiture of those operations in 1996.
The building was held for sale at December 31,
1997. Rental costs of premises did not exceed 5%
of operating costs in 1997.
In the opinion of management of the Company, the
physical properties of the Company and the
subsidiary banks are suitable and adequate.
Item 3: Legal Proceedings
The Company is not the subject of any material
pending legal proceedings, other than ordinary
routine litigation occurring in the normal course
of its business.
The Company's subsidiary banks are the subjects
of or parties to various legal claims which arise
in the normal course of their business. For
example, from time to time, the banks encounter
claims against them grounded in lender liability,
of the sort often asserted against financial
institutions. These lender liability claims
normally take the form of counterclaims to
lawsuits filed by the banks for collection of
past due loans. The various pending legal claims
against the subsidiary banks, including lender
liability claims, will not, in the opinion of
management, result in any material liability to
the banks or the Company.
Item 4: Submission of Matters to a Vote of
Security Holders
None in the fourth quarter of 1997.
PART II
Item 5: Market for the Registrant's Common
Equity and Related Stockholder Matters
The common stock of Arrow Financial Corporation
is traded on The Nasdaq Stock MarketSM under the
symbol AROW.
The price ranges listed below represent actual
transactions rounded to the nearest 1/8 point.
Although there may have been isolated sales at
prices outside the parameters shown, the
Company believes that the price ranges fairly
represent the trading ranges.
Per share amounts and market prices have been
adjusted for the November 1997 five percent stock
dividend and the November 1996 ten percent stock
dividend.
<TABLE>
<CAPTION>
Market Price Cash
(Bid) Dividends
High Low Declared
<S> <C> <C> <C>
1996 1st Quarter $17.500 $14.250 $.148
2nd Quarter 20.000 17.750 .148
3rd Quarter 19.750 16.875 .148
4th Quarter 22.625 19.750 .190
1997 1st Quarter $23.375 $22.125 $.190
2nd Quarter 26.375 23.375 .190
3rd Quarter 28.625 24.500 .190
4th Quarter 33.625 29.500 .210
</TABLE>
The payment of dividends by the Company is at the
discretion of the Board of Directors and is
dependent upon, among other things, the Company's
earnings, financial condition and other factors,
including applicable governmental regulations and
restrictions. See "Capital Resources and
Dividends" in Part II, Item 7.E. of this report.
There were approximately 2,696 holders of record
of common stock at December 31, 1997.<PAGE>
<TABLE>
<CAPTION>
Item 6: Selected Financial Data
FIVE YEAR SUMMARY OF SELECTED DATA
Arrow Financial Corporation and Subsidiaries
(Dollars In Thousands, Except Per Share Data)
1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C>
Consolidated Statements of Income Data:
Interest and Dividend Income $54,861 $54,875 $60,718 $52,514 $51,836
Less: Interest Expense 23,887 21,826 24,865 18,202 19,583
Net Interest Income 30,974 33,049 35,853 34,312 32,253
Less: Provision for Loan Losses 1,303 896 1,170 (950) 690
Net Interest Income After Provision
for Loan Losses 29,671 32,153 34,683 35,262 31,563
Other Income 8,109 23,804 14,473 9,049 9,086
Net Gains (Losses) on Securities
Transactions 74 (101) 23 (481) 26
Less: Other Expense 21,702 24,774 29,769 31,374 32,118
Income Before Income Taxes, Extra-
ordinary Item and Cumulative Effect
of Accounting Change 16,152 31,082 19,410 12,456 8,557
Provision for Income Taxes 5,155 10,822 6,986 1,131 381
Income Before Accounting Change 10,997 20,260 12,424 11,325 8,176
Cumulative Effect of a Change in
Accounting for Income Taxes --- --- --- --- 1,457
Net Income $10,997 $20,260 $12,424 $11,325 $ 9,633
Basic Earnings Per Common Share:
Income Before Accounting Change $ 1.88 $ 3.28 $ 1.89 $ 1.71 $ 1.25
Accounting Change --- --- --- --- .22
Net Income $ 1.88 $ 3.28 $ 1.89 $ 1.71 $ 1.47
Diluted Earnings Per Common Share:
Income Before Accounting Change $ 1.86 $ 3.24 $ 1.88 $ 1.65 $ 1.25
Accounting Change --- --- --- --- .22
Net Income $ 1.86 $ 3.24 $ 1.88 $ 1.65 $ 1.47
Per Common Share:
Cash Dividends $ .78 $ .63 $ .49 $ .31 $ .09
Book Value 12.82 12.29 10.39 8.83 7.56
Tangible Book Value 10.41 11.98 10.06 8.57 7.29
Consolidated Year-End Balance Sheet Data:
Total Assets $831,559 $652,603 $789,790 $746,431 $733,442
Securities Available-for-Sale 221,837 171,743 178,645 53,868 55,892
Securities Held-to-Maturity 44,082 30,876 13,921 129,735 125,832
Loans and Leases, Net of Unearned Income 485,810 393,511 517,787 507,553 502,784
Nonperforming Assets 3,999 2,754 6,765 7,825 20,136
Deposits 720,915 541,747 694,453 650,485 659,427
Other Borrowed Funds 24,755 22,706 15,297 24,865 12,487
Long-Term Debt --- --- --- 5,007 5,289
Shareholders' Equity 73,871 74,296 67,504 58,405 50,069
Selected Key Ratios:
Return on Average Assets 1.49% 2.86% 1.60% 1.52% 1.33%
Return on Average Equity 15.19 28.78 19.45 20.79 21.03
Dividend Payout 41.49 19.47 25.89 19.08 5.84
Average Equity to Average Assets 9.80 9.95 8.22 7.34 6.32
Per share amounts have been adjusted for the 1997 five
percent, the 1996 ten percent and the 1995 and 1994
four percent stock dividends.
</TABLE>
<PAGE>
Item 7: Management's Discussion and Analysis of
Financial Condition and Results of
Operations
The following discussion and analysis focuses on
and reviews the Company's results of operations
for each of the years in the three-year period
ended December 31, 1997 and the financial
condition of the Company as of December 31, 1997
and 1996. Per share amounts have been restated
to reflect the five percent stock dividend paid
in November 1997 and the ten percent stock
dividend paid in November 1996. The discussion
below should be read in conjunction with the
consolidated financial statements and other
financial data presented elsewhere herein.
A. OVERVIEW
The Company reported net income of $11.0 million
for 1997 compared to net income of $20.3 million
for 1996 and $12.4 million for 1995. As
indicated in the following table "Summary of Core
Earnings," net income from each year included
nonrecurring items. For 1997, the principal
nonrecurring item was a favorable tax settlement
with New York State over a combined reporting
issue. For 1996 the major item was the $10.3
million in net after-tax gains from the sale of
the Company's Vermont bank, and for 1995 the
major item was a settlement the Company received
from its financial institution bond carrier for
losses suffered in earlier periods. Net income
on a recurring basis, increased $157 thousand, or
1.6% from 1996 to 1997 and basic earnings per
share increased $.12, or 7.5%, from $1.60 in 1996
to $1.72 in 1997. The earnings per share
increase was bolstered by the repurchase of 335
thousand shares of the Company's common stock
during 1997, at an average cost of $23.87.
The following analysis adjusts net income for
nonrecurring items to arrive at a comparative
presentation of the Company's "core" earnings:
<TABLE>
<CAPTION>
SUMMARY OF CORE EARNINGS
(In Thousands, Except Per Share Data)
1997 1996 1995
<S> <C> <C> <C>
Net Income, as Reported $10,997 $20,260 $12,424
Nonrecurring Items, Net of Tax:
State Tax Settlement (464) --- ---
Divestiture of Vermont Banking Operations --- (10,267) ---
Bond Settlement --- --- (3,250)
OREO Transactions (70) 174 136
Severance Benefits --- --- 388
Net Securities Transactions (44) 57 (12)
Other (361) (323) (218)
Recurring Net Income $10,058 $ 9,901 $ 9,468
Recurring Basic Earnings Per Share $ 1.72 $ 1.60 $ 1.44
</TABLE>
At the end of the second quarter of 1997, the
Company completed the acquisition of six branches
from Fleet Bank, extending the Company's market
area northward to Plattsburgh, New York. Effects
of the acquisition are discussed throughout the
following narrative and in Note 23 to the
Consolidated Financial Statements.
At December 31, 1997, the Company's tangible book
value per share (shareholders' equity reduced by
intangible assets including goodwill, mortgage
servicing rights and intangible pension plan
assets) amounted to $10.41, a decrease of $1.57
from the prior year-end. The decrease was
attributable to goodwill acquired in the Fleet
transaction and treasury stock purchases, offset
in part by retained current year earnings. At
year-end, the average of the Company's bid and
asked stock price was $33.75, resulting in a
trading multiple of 3.24 to tangible book value.
During the fourth quarter of 1997, the Company
increased its quarterly cash dividend to $.21
and for the year, cash dividends of $.78
represented an increase of $.15 from $.63 in
1996. The combined 1997 return on the Company's
December 31, 1996 stock price was 52.7%, based on
the average of the bid and asked prices.
Nonperforming assets amounted to $4.0 million at
December 31, 1997, an increase of $1.2 million
from the prior year-end. The increase was
primarily attributable to one large commercial
loan placed on nonaccrual status during the year.
At year-end, the allowance for loan losses, at
$6.2 million, represented 168% of nonperforming
loans.
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, located in
the towns of Plattsburgh (2), Lake Luzerne, Port
Henry, Ticonderoga and Warrensburg became
branches of Glens Falls National Bank. Glens
Falls National Bank 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 Glens Falls National Bank were approximately
$140 million and the total amount of branch-
related loans acquired was approximately $34
million. Under the purchase agreement, Glens
Falls National Bank also acquired from Fleet an
additional $10 million of residential real estate
loans not related to the branches.
Divestiture of Vermont Operations
During 1996, in three separate transactions, the
Company completed the divestiture of its Vermont
subsidiary, Green Mountain Bank ("GMB"). In
January, the Company sold eight branches of GMB,
with related deposits and loans, to Mascoma
Savings Bank, Lebanon, NH. In August, the
Company sold GMB's trust business to Vermont
National Bank, Brattleboro, VT. In September, the
Company sold the remaining branches of GMB, with
related deposits and loans, to ALBANK, FSB,
Albany, NY. The charter of GMB was liquidated in
1997 and remaining net assets distributed to the
Company. All significant assets relating to the
business or operations of GMB have been sold,
except for the building which served as GMB's
main office in Rutland, Vermont, which was being
held for sale at December 31, 1997 and 1996.
Total loans and deposits transferred in the three
Vermont sale transactions amounted to
approximately $148 million and $208 million,
respectively. These and other changes are more
fully described in the following analysis of the
results of operations and changes in financial
condition.
B. RESULTS OF OPERATIONS
The following analysis of net interest income,
the provision for loan losses, noninterest
income, noninterest expense and income taxes,
presents the factors that are primarily
responsible for the Company's results of
operations for 1997 and the prior two years.
I. NET INTEREST INCOME (Fully Taxable Basis)
Net interest income represents the difference
between interest earned on loans, securities and
other earning assets and interest paid on
deposits and other sources of funds. Changes in
net interest income result from changes in the
level and mix of earning assets and sources of
funds (volume) and changes in the yields earned
and costs paid (rate). Net interest margin is
the ratio of net interest income to average
earning assets. Net interest income may also be
described as the product of earning assets and
the net interest margin.
<TABLE>
<CAPTION>
COMPARISON OF NET INTEREST INCOME
(Dollars In Thousands) (Fully Taxable Basis)
Years Ended December 31, Change From Prior Year
1997 1996 1995 1997 1996
Amount Percent Amount Percent
<S> <C> <C> <C> <C> <C> <C> <C>
Interest Income $55,705 $55,517 $61,411 $ 188 .3% $(5,894) (9.6)%
Interest Expense 23,887 21,826 24,865 2,061 9.4 (3,039) (12.2)
Net Interest Income $31,818 $33,691 $36,546 $(1,873) (5.6) $(2,855) (7.8)
</TABLE>
On a tax-equivalent basis, net interest income
was $31.8 million in 1997, a decrease of $1.9
million or, 5.6% from $33.7 million in 1996.
Factors contributing to the $1.9 million decrease
in net interest income are discussed in the
following section.
ANALYSIS OF CHANGES IN NET INTEREST INCOME
The following table presents net interest income
components on a tax-equivalent basis and reflects
changes between periods attributable to movement
in either the average daily balances or average
rates for both earning assets and
interest-bearing liabilities. Changes
attributable to both volume and rate have been
allocated proportionately between the categories.
<PAGE>
<TABLE>
<CAPTION>
CHANGE IN NET INTEREST INCOME
(In Thousands) (Fully Taxable Basis)
1997 to 1996 1996 to 1995
Change in Net Interest Income Change in Net Interest Income
Due to: Due to:
Volume Rate Total Volume Rate Total
<S> <C> <C> <C> <C> <C> <C>
Interest and Dividend Income:
Federal Funds Sold $ 363 $ 30 $ 393 $ (560) $ (105) $ (665)
Securities Available-for-Sale
Taxable 626 493 1,119 6,962 198 7,160
Non-Taxable 60 --- 60 (79) --- (79)
Securities Held-to-Maturity:
Taxable 1,394 9 1,403 (7,197) 527 (6,670)
Non-Taxable 517 (27) 490 251 6 257
Loans and Leases (1,882) (1,395) (3,277) (4,928) (969) (5,897)
Total Interest and Dividend Income 1,078 (890) 188 (5,551) (343) (5,894)
Interest Expense:
Deposits:
Interest-Bearing Demand Deposits 383 297 680 (244) 56 (188)
Regular and Money Market Savings (326) (108) (434) (1,298) (272) (1,570)
Time Deposits of $100,000 or More 426 110 536 657 (220) 437
Other Time Deposits 848 204 1,052 (1,543) (17) (1,560)
Total Deposits 1,331 503 1,834 (2,428) (453) (2,881)
Short-Term Borrowings 196 31 227 122 (50) 72
Long-Term Debt --- --- --- (230) --- (230)
Total Interest Expense 1,527 534 2,061 (2,536) (503) (3,039)
Net Interest Income $ (449) $(1,424) $(1,873) $(3,015) $ 160 $(2,855)
</TABLE>
The following table reflects the components of
the Company's net interest income, setting forth,
for years ended December 31, 1997, 1996 and 1995
(I) average balances of assets, liabilities and
shareholders' equity, (II) interest and dividend
income earned on earning assets and interest
expense incurred on interest-bearing liabilities,
(III) average yields earned on earning assets and
average rates paid on interest-bearing
liabilities, (IV) the net interest spread
(average yield less average cost) and (V) the net
interest margin (yield) on earning assets. Rates
are computed on a tax-equivalent basis. The
yield on securities available-for-sale is based
on the amortized cost of the securities.
Nonaccrual loans are included in average loans
and leases, while unearned income has been
eliminated.
AVERAGE CONSOLIDATED BALANCE SHEETS AND NET INTEREST INCOME ANALYSIS
<TABLE>
<CAPTION>
Arrow Financial Corporation and Subsidiaries
(Fully Taxable Basis using a marginal tax rate of 35%)
(Dollars In Thousands)
Years Ended December 31, 1997 1996
Interest Rate Interest Rate
Average Income/ Earned/ Average Income/ Earned/
Balance Expense Paid Balance Expense Paid
<S> <C> <C> <C> <C> <C> <C>
Federal Funds Sold $ 18,752 $ 1,035 5.52% $ 12,150 $ 642 5.28%
Securities Available-
for-Sale: (1)
Taxable 183,261 12,219 6.67 173,703 11,100 6.39
Non-Taxable 1,142 65 5.73 80 5 5.75
Securities Held-to-Maturity:
Taxable 20,413 1,464 7.17 959 61 6.36
Non-Taxable 22,713 1,834 8.08 16,316 1,344 8.24
Loans & Leases 439,103 39,088 8.90 459,946 42,365 9.21
Total Earning Assets 685,384 55,705 8.13 663,154 55,517 8.37
Allowance For Loan
Losses (6,021) (10,102)
Cash and Due From Banks 26,341 25,303
Other Assets 32,732 28,975
Total Assets $738,436 $707,330
Deposits:
Interest-Bearing
Demand Deposits $144,204 4,467 3.10 $131,438 3,787 2.88
Regular and Money
Market Savings 146,529 4,183 2.85 157,892 4,617 2.92
Time Deposits of
$100,000 or More 87,956 4,734 5.38 79,996 4,198 5.25
Other Time Deposits 171,820 9,385 5.46 156,236 8,333 5.33
Total Interest-Bearing
Deposits 550,509 22,769 4.14 525,562 20,935 3.98
Short-Term Borrowings 22,491 1,118 4.97 18,524 891 .81
Long-Term Debt. --- --- --- --- --- ---
Total Interest-
Bearing Funds 573,000 23,887 4.17 544,086 21,826 4.01
Demand Deposits 78,704 77,479
Other Liabilities 14,339 15,374
Total Liabilities 666,043 636,939
Shareholders' Equity 72,393 70,391
Total Liabilities and
Shareholders' Equity $738,436 $707,330
Net Interest Income
(Fully Taxable Basis) 31,818 33,691
Reversal of Tax Equivalent
Adjustment (844) (642)
Net Interest Income $30,974 33,049
Net Interest Spread 3.96% 4.36%
Net Interest Margin 4.64% 5.08%
(1) Yields do not give effect to changes in fair
value that are reflected as a component of shareholders' equity.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Years Ended December 31, 1995
Interest Rate
Average Income/ Earned/
Balance Expense Paid
<S> <C> <C> <C>
Federal Funds Sold $ 22,596 $ 1,307 5.78%
Securities Available-
for-Sale: (1)
Taxable 64,621 3,940 6.10
Non-Taxable 1,454 84 5.78
Securities Held-to-Maturity:
Taxable 113,499 6,731 5.93
Non-Taxable 13,271 1,087 8.19
Loans & Leases 513,266 48,262 9.40
Total Earning Assets 728,707 61,411 8.43
Allowance For Loan
Losses (12,288)
Cash and Due From Banks 28,081
Other Assets 32,929
Total Assets $777,429
Deposits:
Interest-Bearing
Demand Deposits $139,879 3,975 2.84
Regular and Money
Market Savings 201,932 6,187 3.06
Time Deposits of
$100,000 or More 67,029 3,761 5.61
Other Time Deposits 185,166 9,893 5.34
Total Interest-Bearing
Deposits 594,006 23,816 4.01
Short-Term Borrowings 15,855 819 5.17
Long-Term Debt. 2,619 230 8.78
Total Interest-
Bearing Funds 612,480 24,865 4.06
Demand Deposits 88,961
Other Liabilities 12,097
Total Liabilities 713,538
Shareholders' Equity 63,891
Total Liabilities and
Shareholders' Equity $777,429
Net Interest Income
(Fully Taxable Basis) 36,546
Reversal of Tax Equivalent
Adjustment (693)
Net Interest Income $35,853
Net Interest Spread 4.37%
Net Interest Margin 5.02%
(1) Yields do not give effect to changes in fair
value that are reflected as a component of shareholders' equity.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
CHANGES IN NET INTEREST INCOME DUE TO RATE
YIELD ANALYSIS December 31,
1997 1996 1995
<S> <C> <C> <C>
Yield on Earning Assets 8.13% 8.37% 8.43%
Cost of Interest-Bearing Liabilities 4.17 4.01 4.06
Net Interest Spread 3.96% 4.36% 4.37%
Net Interest Margin 4.64% 5.08% 5.02%
</TABLE>
The following items have a major impact on changes
in net interest income due to rate: general
interest rate changes, the ratio of the Company's
rate sensitive assets to rate sensitive
liabilities (interest rate sensitive gap) during
periods of interest rate changes and the level of
nonperforming loans.
The Federal Reserve Board attempts to influence
prevailing federal funds and prime interest rates
by changing the Federal Reserve Bank discount
rate. The following chart presents recent changes
to the discount rate:
<TABLE>
<CAPTION>
Federal Reserve Board's Discount Rate Changes 1994 - 1997
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
</TABLE>
Although the Federal Reserve Board did not raise
the discount rate during 1997, its open market
operations early in 1997 led directly to a 25
basis point increase in the federal funds
overnight rate. This increase in the cost of
federal funds was mirrored in an overall increase
in the cost of funds to the Company, while at the
same time its yield on earning assets decreased.
The net interest margin for 1997, at 4.64%,
represented a 44 basis point decrease from the
net interest margin of 5.08% in 1996. This
reflects a 24 basis point decrease in the yield
on earning assets and a 16 basis point increase
in the cost of paying liabilities from 1996 to
1997. A significant shift in the mix of earning
assets between the two periods accounted for most
of the decrease in the yield on earning assets.
After the sale of the remaining Vermont branches
at the end of September 1996, and particularly
after the June 1997 acquisition of the six Fleet
branches, the Company maintained a significantly
larger portion of its earning assets in
securities and federal funds sold, which were at
lower yields than the Company's loan portfolio.
This was due to the fact that the Vermont banking
operations maintained a high loan to deposit
ratio during the 1996 period whereas the loan to
deposit ratio of the Fleet branches acquired was
much lower; the lower-yielding liquid assets
received from Fleet are only gradually being
reinvested in securities and loans. Moreover, in
the 1996 period, the yield on loans in the
Vermont portfolio was temporarily boosted as a
result of unexpected payments on certain
restructured loans reported in that period as
interest income. Moreover, the New York based
loan portfolio experienced a shift in the mix of
loan products favoring lower yielding indirect
loans. The shrinking net interest margin between
1996 and 1997 was the primary factor contributing
to the $2.1 million decrease in net interest
income between the periods. As indicated in the
table "Change in Net Interest Income," presented
earlier in this discussion on net interest
income, the decrease in net interest income
attributable to rate from 1996 to 1997 was $1.4
million.
In the 1995 to 1996 analysis, the Company
experienced minimal impact on net interest income
resulting from changes in interest rates.
Throughout 1996, interest rates, on both the
asset and liability side, remained quite stable,
largely due to the influence of the Federal
Reserve Board's control of the federal discount
rate, which changed only once at the beginning of
the year. At that time the discount rate
decreased 25 basis points to 5.00%.
A discussion of the impact on net interest income
resulting from changes in interest rates vis a
vis the repricing patterns of the Company's
earning assets and interest-bearing liabilities
is included later in this report under Item 7.E.
"Interest Rate Risk."
<TABLE>
<CAPTION>
CHANGES IN NET INTEREST INCOME DUE TO VOLUME
AVERAGE BALANCES
(Dollars in Thousands)
Change % Change
1997 1996 1995 1997 1996 1997 1996
<S> <C> <C> <C> <C> <C> <C> <C>
Earning Assets $685,384 $663,154 $728,707 $ 22,230 $(65,553) 3.4 % (9.0)%
Interest-Bearing
Liabilities 573,000 544,086 612,480 28,914 (68,394) 5.3 (11.2)
Demand Deposits 78,704 77,479 88,961 1,225 (11,482) 1.6 (12.9)
Total Assets 738,436 707,330 777,429 31,106 (70,099) 4.4 (9.0)
Earning Assets to
Total Assets 92.82% 93.75% 93.73% .94% .02% (1.0) 0.0
</TABLE>
In general, changes in the volume of earning
assets and paying liabilities will result in
corresponding changes in net interest income.
However, changes due to volume can be enhanced or
restricted by shifts within the relative mix of
earning assets or interest-bearing liabilities
between instruments of different rates.
Average earning assets increased by $22.2
million, or 3.4%, between 1996 and 1997.
However, average interest bearing liabilities
increased even more, by 5.3%, between the two
years. The negative impact of faster growth in
interest-bearing liabilities than in earning
assets was exacerbated by shifts within average
earning assets between the two years. The
disposition of the Vermont bank in 1996 involved
the sale of an operation with a relatively high
loan-to-deposit ratio. The acquisition of six
branches from Fleet Bank in June 1997, on the
other hand, involved the acquisition of a
relatively small percentage of loans
(approximately $44 million) and a relatively high
level of lower yielding-liquid assets
(approximately $80 million in cash) with the
latter initially being invested in federal funds
and only gradually being reinvested in higher-
yielding securities and loans.
Between 1995 and 1996, nearly all of the $2.9
million decrease in net interest income was
attributable to the change in volume. The
decrease was attributable to the divestiture of
the Vermont banking operations during 1996.
Increases in the volume of loans and deposits, as
well as yields and costs by type, for the
continuing New York operations are discussed
later in this report under Item 7.C. "Financial
Condition." In general, the New York banks
experienced significant growth during 1997 and
1996, with some shifting of emphasis in the loan
portfolio from commercial to consumer loans.
There was relatively little change in the mix of
deposit products from 1995 to 1996.
II. PROVISION FOR LOAN LOSSES AND ALLOWANCE FOR
LOAN LOSSES
Through the provision for loan losses, an
allowance (reserve) is maintained for estimated
loan losses. Actual loan losses are charged
against this allowance when they are identified.
In evaluating the adequacy of the allowance for
loan losses, management considers various risk
factors influencing asset quality. The analysis
is performed on a loan by loan basis for impaired
and large balance loans, and by portfolio type
for smaller balance homogeneous loans. This
analysis is based on judgments and estimates and
may change in response to economic developments
or other conditions that may influence borrowers'
economic outlook.
The provision for loan losses is largely
influenced by the level of nonperforming loans,
the expected future levels of nonperforming loans
and by the level of loans actually charged-off
against the allowance for loan losses during the
year.
At December 31, 1997, nonperforming loans
amounted to $3.7 million, an increase of 40.7%
from the balance at December 31, 1996. The
increase is primarily attributable to one large
commercial loan placed on nonaccrual status
during 1997.
During 1997, loan losses charged against the
allowance, net of recoveries, were $1.4 million,
or .32% of average loans for the period. The
provision for loan losses charged to expense for
1997 was $1.3 million, or .30% of average loans
for the period.
A purchase acquisition adjustment to the
allowance of $700 thousand for loans acquired in
the Fleet branch transaction represented the
allowance for inherent risk of loss in the loans
acquired. The Company believes the amount is
materially consistent with the general loss
reserve on the books of Fleet applicable to these
loans.
At December 31, 1997 the allowance for loan
losses was $6.2 million. The allowance for loan
losses was 168% of the amount of nonperforming
loans at that date.
During 1996, loan losses charged against the
allowance, net of recoveries, were $581 thousand,
or .13% of average loans for the period.
However, the allowance for loan losses was
significantly reduced during the year by $6.8
million. This was the amount of the
reserve attributable to loans transferred in the
divestiture of the Vermont banking operations.
These reductions in the allowance for loan losses
were offset in part by a provision for loan losses
of $896 thousand, or .19% of average loans for
the year.
At December 31, 1996 the allowance for loan
losses was $5.6 million. The allowance for loan
losses was 213% of the amount of nonperforming
loans at that date.
During 1995, nonperforming assets continued the
steady decline begun in 1991. The primary
portion of the decrease in nonperforming assets
in 1995 came from the sale of OREO. Nonaccrual
loans increased $626 thousand or 17.3% from the
year-end 1994 balance. The increase in
nonaccrual loans was due primarily to the
aggregate borrowing of one large commercial
borrower, which was placed on nonaccrual status
in 1995. That loan was accounted for under SFAS
No. 114 and was being carried at its estimated
fair value. Loans reported as troubled debt
restructures at December 31, 1994, were
classified as performing in 1995.
Net loan losses for 1995 were $1.4 million.
These losses compare to net loan losses of $2.8
million, $1.9 million and $4.7 million for the
years ended December 31, 1994, 1993 and 1992,
respectively. As a ratio to average loans, the
net loan losses were .27%, .56% and .40% for the
same respective periods.
The provision for loan losses in 1994 was
actually a credit to the consolidated statement
of income resulting in a reduction in the
allowance for loan losses. During the second
quarter of 1994, with nonperforming assets at
significantly reduced levels and a substantial
sale of OREO having been completed, the Company
reduced the allowance for loan losses by $1.5
million. This reduction was effected by means of
a credit to the provision for loan losses. As a
result, for the twelve month period ended
December 31, 1994, the Company's net provision
for loan losses was a net credit of $950
thousand, compared to a provision of $690
thousand in 1993. As a ratio of average loans,
the provisions were (.19)% in 1994 and .14% for
1993.
<PAGE>
<TABLE>
<CAPTION>
SUMMARY OF THE ALLOWANCE AND PROVISION FOR LOAN LOSSES
(Dollars In Thousands) (Loans and Leases, Net of Unearned Income)
Years-Ended December 31, 1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C>
Loans and Leases at End of Period $485,810 $393,511 $517,787 $507,553 $502,784
Average Loans and Leases 439,103 459,946 513,266 502,224 89,326
Total Assets at End of Period 831,599 652,603 789,790 746,431 733,442
Nonperforming Assets:
Nonaccrual Loans:
Construction and Land Development $ --- $ --- $ 104 $ 327 $ 2,534
Commercial Real Estate 119 83 1,299 1,050 2,649
Commercial Loans 1,951 1,487 1,979 1,017 2,596
Other 1,251 727 862 1,224 2,082
Total Nonaccrual Loans 3,321 2,297 4,244 3,618 9,861
Loans Past Due 90 or More Days and
Still Accruing Interest 363 321 111 231 364
Restructured Loans in Compliance with
Modified Terms --- --- --- 580 2,405
Total Nonperforming Loans 3,684 2,618 4,355 4,429 12,630
Other Real Estate Owned 315 136 2,410 3,396 7,506
Total Nonperforming Assets $ 3,999 $ 2,754 $ 6,765 $ 7,825 $ 20,136
Allowance for Loan Losses:
Balance at Beginning of Period $ 5,581 $ 12,106 $ 12,338 $ 16,078 $ 17,328
Allowance Acquired (Transferred) 700 (6,841) --- --- ---
Loans Charged-off:
Commercial, Financial
and Agricultural (596) (185) (579) (997) (973)
Real Estate - Commercial --- (104) (369) (689) (106)
Real Estate - Construction --- (2) (101) (1,181) (377)
Real Estate - Residential (121) (57) (160) (143) (151)
Installment Loans to Individuals (881) (598) (562) (476) (480)
Lease Financing Receivables --- --- --- --- ---
Total Loans Charged-off (1,598) (946) (1,771) (3,486) (3,087)
Recoveries of Loans Previously Charged-off:
Commercial, Financial
and Agricultural 27 84 76 260 694
Real Estate - Commercial 2 48 104 35 75
Real Estate - Construction --- --- 10 68 55
Real Estate - Residential 3 12 8 143 37
Installment Loans to Individuals 173 222 171 188 285
Lease Financing Receivables --- --- --- 2 1
Total Recoveries of Loans
Previously Charged-off 205 366 369 696 1,147
Net Loans Charged-off (1,393) (580) (1,402) (2,790) (1,940)
Provision for Loan Losses
Charged to Expense 1,303 896 1,170 (950) 690
Balance at End of Period $ 6,191 $ 5,581 $ 12,106 $ 12,338 $ 16,078
Nonperforming Asset Ratio Analysis:
Net Loans Charged-off as a Percentage
of Average Loans .32% .13% .27% .56% .40%
Provision for Loan Losses as a Percentage
of Average Loans .30 19 .23 (.19) .14
Allowance for Loan Losses as a Percentage
of Period-end Loans 1.27 1.42 2.34 2.43 3.20
Allowance for Loan Losses as a Percentage
of Nonperforming Loans 168.05 213.18 277.98 278.57 127.30
Nonperforming Loans as a Percentage
of Period-end Loans .76 .67 .84 .87 2.51
Nonperforming Assets as a Percentage
of Period-end Total Assets .48 .42 .86 1.05 2.75
</TABLE>
III. OTHER INCOME
The majority of other (i.e., noninterest) income
is derived from fees and commissions from
fiduciary services, deposit account service
charges, computer processing fees to
correspondents and other "core" or recurring
sources. Additionally, other income is
influenced by transactions involving the sale of
securities available-for-sale.
<TABLE>
<CAPTION>
ANALYSIS OF OTHER INCOME
(Dollars In Thousands) Change
December 31, Amount Percent
1997 1996 1995 1997 1996 1997 1996
<S> <C> <C> <C> <C> <C> <C> <C>
Income from Fiduciary
Activities $ 2,672 $ 3,458 $ 3,752 $ (786) $ (294) (22.7)% (7.8)%
Fees for Other Services 3,723 3,959 4,669 (236) (710) (6.0) (15.2)
Net Securities
Gains (Losses) 74 (101) 23 175 (124) --- ---
Net Gain on Divestiture of
Vermont Operations --- 15,330 --- (15,330) 15,330 --- ---
Other Operating Income 1,714 1,057 6,052 657 (4,995) 62.2 (82.5)
Total Other Income $ 8,183 $23,703 $14,496 $(15,520) $ 9,207 (65.5) 63.5
</TABLE>
Without regard to the $15.3 million net pre-tax
gain on the divestiture of the Vermont operations
in 1996 and the impact of net securities
transactions in both years, other income for 1997
decreased $365 thousand, or 4.3%, from the 1996
period. Income from fiduciary activities
decreased $786 thousand, or 22.7%, from 1996 to
1997. The Vermont trust business, which was sold
in August 1996, had represented approximately one
half of the Company's income from fiduciary
activities. The Company did not acquire any
trust business from Fleet in the June 1997 branch
acquisition. Income from the New York based
trust business increased by $249 thousand, or
10.3% from 1996 to 1997, but this was not enough
to offset the decrease in trust income resulting
from the Vermont sale. Trust assets under
management were $526.9 million at December 31,
1997, an increase of $92.3 million, or 21.2%,
from December 31, 1996.
Fees for other services include deposit service
charges, credit card merchant processing fees,
safe deposit box fees and loan servicing fees.
These fees amounted to $3.7 million in 1997, a
decrease of $236 thousand, or 6.0%, from 1996.
The decrease was primarily attributable to loan
servicing fees related to serviced loans
transferred in the disposition of Vermont
operations in September 1996. To a lesser
extent, the decrease was attributable to the fact
that the Company sold deposit balances in 1996 of
$108 million, which contributed fee income for
nine months in that period, and purchased $140
million of deposit balances from Fleet in June
1997, which contributed service fee income for
only six months in that year.
Other operating income includes, as a primary
component, fees earned on servicing credit card
portfolios for correspondent banks. This category
of noninterest income also includes gains on the
sale of loans and other real estate owned. Other
operating income for 1997 amounted to $1.7
million, an increase of $657 thousand, or 62.2%,
from 1996. The increase was primarily
attributable to one-time receipts in 1996
relating to an insurance settlement and
unexpected payments related to the former Vermont
operations. Without regard to these two items,
the period-to-period change would have been an
increase of $126 thousand, or 11.9%, from 1996,
and was attributable to an increase in
miscellaneous other revenues.
During 1997, the Company realized net gains of
$74 thousand on the sale of securities classified
as available-for-sale. Proceeds from these sales
amounted to $37.0 million with gross gains of
$137 thousand, offset in part by gross losses of
$63 thousand. The primary purpose of the sales
was to extend the average maturity of the
portfolio.
In the prior year comparison, total other income
for 1996 was $23.7 million as compared to $14.5
million for 1995. Without regard to nonrecurring
items included in other income for the two years,
specifically the divestiture of Vermont
operations in 1996, the financial institution
bond recovery in 1995 and securities transactions
for both years, other income was $8.5 million for
1996, compared to $9.5 million in 1995, a
decrease of 10.5%. As thus adjusted, other
income as a percentage of average assets was
1.20% in 1996, virtually the same as in 1995.
During 1996, the Company completed the
divestiture of its Vermont banking operations.
The pre-tax gain of $15.3 million is net of
recording the remaining assets and liabilities at
fair value less estimated costs to sell. The
major remaining asset, which at December 31, 1997
and 1996, was held for sale, was the building in
Rutland, Vermont, which was the former main
office of GMB. Principal remaining liabilities
included pension and post-retirement obligations
relating to the Vermont operations and amounts
reserved for liquidation-related costs and
expenses.
In 1995, the Company received a $5.0 million
payment from the Company's financial institution
bond carrier, in settlement of a lawsuit filed in
1994 for losses suffered in earlier periods,
covered under the Company's policy.
During 1996, the Company recognized net losses of
$101 thousand on the sale of $51.1 million of
securities classified as available-for-sale.
Most of the sales were made for the purpose of
extending the term of the securities at higher
yields. During 1995, the Company recognized net
gains of $23 thousand on the sale of $4.2 million
of available-for-sale securities.
Income from fiduciary activities for 1996 was
$3.5 million, a decrease of $294 thousand, or
7.8% from 1995. On August 31, 1996, the Company
sold its Vermont trust business as part of the
divestiture of Vermont operations. In 1995, the
Vermont trust business represented approximately
49% of the Company's fiduciary income for the
year of $3.8 million. During 1996, the New York
based trust business generated $2.4 million in
income, an increase of $232 thousand, or 10.6%,
from 1995. The increase was attributable to a
$35.3 million increase in assets under
management, which were $434.6 million at December
31, 1996.
Fees for other services amounted to $4.0 million
for 1996, a decrease of $710 thousand, or 15.2%
from 1995, again reflecting the disposition of
the Vermont operations during 1996. For the New
York based operations, these fees amounted to
$3.4 million for both years.
Other operating income amounted to $1.1 million
for both 1996 and 1995.
IV. OTHER EXPENSE
Other (i.e., noninterest) expense is a means of
measuring the delivery cost of services, products
and business activities of the Company. The key
components of other expense are presented in the
following table.
<TABLE>
<CAPTION>
ANALYSIS OF OTHER EXPENSE
(Dollars In Thousands)
Change
December 31, Amount Percent
1997 1996 1995 1997 1996 1997 1996
<S> <C> <C> <C> <C> <C> <C> <C>
Salaries and Benefits $12,726 $14,971 $16,710 $(2,245) $(1,739) (15.0)% (10.4)%
Net Occupancy Expense 1,561 1,790 2,040 (229) (250) (12.8) (12.3)
Furniture and Equipment 1,792 1,677 1,930 115 (253) 6.9 (13.1)
Other Operating Expense 5,623 6,336 9,089 (713) (2,753) (11.3) (30.3)
Total Other Expense $21,702 $24,774 $29,769$ 3,072) $(4,995) (12.4) (16.8)
</TABLE>
Other expense for 1997 amounted to $21.7 million,
a decrease of $3.1 million, or 12.4%, from 1996.
Most of the decrease was in the area of employee
salaries and benefits. With the sale of the
Vermont operations in 1996, the Company reduced
the number of its employees by 83 (71 full time
equivalent), most of whom continued as employees
of the purchasers. Upon acquisition of the Fleet
branches in June 1997, the Company retained all
34 employees (32 full time equivalent). The net
reduction in staff was primarily responsible for
the $2.2 million decrease in salaries and
benefits, offset in part by normal salary
increases.
Occupancy expenses and other operating expenses
decreased by 12.8% and 11.3%, respectively, from
1996 to 1997. The decreases are, again,
primarily attributable to the fact that the
decrease in expenses resulting from the sale of
the Vermont operations in 1996 outweighed the
increase in expenses resulting from the
acquisition of six Fleet branches in June 1997.
Furniture and equipment expense increased by $115
thousand, or 6.9%, from 1996 to 1997, primarily
due to an investment in data processing equipment
at the end of 1996.
In the prior year comparison, other expense for
1996 was $24.8 million, a decrease of $5.0
million, or 16.8%, from 1995. All four major
categories of other expense decreased as a result
of the divestiture of the Vermont banking
operations.
Salaries and benefits for 1996 was $15.0 million,
a decrease of $1.7 million, or 10.4%, from 1995.
Net occupancy expense and furniture and equipment
expense both decreased approximately $250
thousand from 1995, or 12.3% and 13.1%,
respectively.
`
Other operating expense for 1996 was $6.3
million, a decrease of $2.8 million, or 30.3%,
from 1995. In addition to the savings resulting
from the divestiture of the Vermont operations,
the Company experienced decreased costs for FDIC
insurance premiums, legal expenses, expenses
related to problem loans and in costs to maintain
and dispose of OREO. In mid-1995, the FDIC
reduced the insurance premiums for well-
capitalized banks, such as the Company's
subsidiary banks, from 23 cents per $100 of
insured deposits to a flat fee of two thousand
dollars per year.
V. INCOME TAXES
The following table sets forth the Company's
provision for income taxes and effective tax
rates for the periods presented.
<TABLE>
<CAPTION>
INCOME TAXES AND EFFECTIVE RATES
(Dollars in Thousands) Years Ended December 31,
1997 1996 1995
<S> <C> <C> <C>
Provision for Income Taxes $5,155 $10,822 $6,986
Effective Tax Rate 31.9% 34.8% 36.0%
</TABLE>
The provisions for federal and state income taxes
amounted to $5.2 million, $10.8 million and $7.0
million for 1997, 1996 and 1995, respectively.
The effective income tax rates for 1997, 1996 and
1995 were 31.9%, 34.8% and 36.0%, respectively.
The decrease in the effective income tax rate
from 1996 to 1997 was primarily attributable to a
favorable settlement with the New York Department
of Taxation and Finance over a combined reporting
issue in the first quarter of 1997. The decrease
in the effective income tax rate from 1995 to
1996 was primarily attributable to increases in
the Company's tax exempt loan and securities
portfolios.
<PAGE>
C. FINANCIAL CONDITION
I. INVESTMENT PORTFOLIO
Investment securities are classified as held-to-
maturity, trading, or available-for-sale,
depending on the purposes for which such
securities were acquired or are being held.
Securities held-to-maturity are debt securities
that the Company has both the positive intent and
ability to hold to maturity; such securities are
stated at amortized cost. Debt and equity
securities that are bought and held principally
for the purpose of sale in the near term are
classified as trading securities and are reported
at fair value with unrealized gains and losses
included in earnings. Debt and equity securities
not classified as either held-to-maturity or
trading securities are classified as available-for-
sale and are reported at fair value with
unrealized gains and losses excluded from
earnings and reported net of taxes in a separate
component of shareholders' equity. At December
31, 1997, the Company held no trading securities.
Securities Available-for-Sale:
The following table sets forth the carrying value
of the Company's securities available-for-sale
portfolio, at year-end 1997, 1996 and 1995.
<TABLE>
<CAPTION>
SECURITIES AVAILABLE-FOR-SALE
(In Thousands) December 31,
1997 1996 1995
<S> <C> <C> <C>
U.S. Treasury and Agency Obligations $ 76,006 $ 95,733 $114,502
State and Municipal Obligations 2,999 --- 338
Collateralized Mortgage Obligations 67,207 42,894 44,173
Other Mortgage-Backed Securities 64,057 21,732 10,478
Corporate and Other Debt Securities 9,145 9,184 7,300
Mutual Funds and Equity Securities 2,423 2,200 1,854
Total $221,837 $171,743 $178,645
</TABLE>
Other mortgage-backed securities principally
included agency mortgage pass-through
securities. Pass-through securities provide to
the investor monthly portions of principal and
interest pursuant to the contractual obligations
of the underlying mortgages. Collateralized
mortgage obligations ("CMOs") separate the
repayments into two or more components
(tranches), where each tranche has a separate
estimated life and yield. The Company's
practice is to purchase pass-through securities
guaranteed by federal agencies and tranches of
CMOs with shorter maturities.
Regulatory agencies have devised a high-risk
test for mortgage-backed securities, including
CMO's. Under the test a mortgage-backed
product will not be considered high risk if the
following conditions are met: (I) Average Life
Test - if the product has an average life of
less than 10 years; (II) Average Life
Sensitivity Test - if an immediate and sustained
change in interest rates of 300 basis points
will not extend the expected life by more than
four years; and (III) Price Sensitivity Test -
if an immediate and sustained change in interest
rates of 300 basis points will not change the
price by more than 17%. The Company evaluates
each mortgage-backed security at the time of
purchase and quarterly thereafter. Although
none of the Company's securities have failed to
pass the high-risk test subsequent to
acquisition, it is the Company's policy to
analyze the appropriateness of divesting high-
risk securities.
Included in corporate and other debt securities
are highly rated corporate bonds.
<PAGE>
The following table sets forth the maturities of
the Company's securities available-for-sale
portfolio as of December 31, 1997. CMO's are
included in the table based on their expected
average life and other mortgage-backed securities
by final maturity date.
<TABLE>
<CAPTION>
MATURITIES OF SECURITIES AVAILABLE-FOR-SALE
(In Thousands) After After
Within 1 But 5 But After
One Within Within 10
Year 5 Years 10 Years Years Total
<S> <C> <C> <C> <C> <C>
U.S. Treasury and
Agency Obligations $19,033 $ 40,794 $16,179 $ -- $ 76,006
State and Municipal
Obligations 2,999 --- --- --- 2,999
Collateralized Mortgage
Obligations 965 51,594 13,645 1,003 67,207
Other Mortgage-Backed
Securities 455 8,130 7,412 48,060 64,057
Corporate and
Other Debt Securities 1,014 7,131 1,000 -- 9,145
Mutual Funds and
Equity Securities --- --- --- 2,423 2,423
Total $24,466 $107,649 $38,236 $51,486 $221,837
</TABLE>
The following table sets forth the tax-equivalent
yields of the Company's securities available-for-
sale portfolio at December 31, 1997.
<TABLE>
<CAPTION>
YIELDS ON SECURITIES AVAILABLE-FOR-SALE
(Fully Tax-Equivalent Basis) After After
Within 1 But 5 But After
One Within Within 10
Year 5 Years 10 Years Years Total
<S> <C> <C> <C> <C> <C>
U.S. Treasury and
Agency Obligations 6.14% 6.34% 6.89% ---% 6.41%
State and Municipal
Obligations 6.14 --- --- --- 6.14
Collateralized Mortgage
Obligations 7.02 6.66 6.90 6.98 6.72
Other Mortgage-Backed
Securities 6.00 7.23 7.30 6.96 7.03
Corporate and
Other Debt Securities 7.59 7.30 7.10 --- 6.52
Mutual Funds and
Equity Securities --- --- --- 6.93 6.93
Total 6.23 6.62 6.79 6.96 6.69
</TABLE>
The yields for debt securities shown in the table
above are calculated by dividing annual interest,
including accretion of discounts and amortization
of premiums, by the carrying value of the
securities at December 31, 1997. Yields on
obligations of states and municipalities were
computed on a fully tax-equivalent basis using a
marginal tax rate of 35%. Dividend earnings
derived from equity securities were adjusted to
reflect applicable federal income tax exclusions.
During 1997, the Company realized net gains of
$74 thousand on the sale of securities available-
for-sale. Proceeds from these sales amounted to
$37.0 million with gross gains of $137 thousand,
offset in part by gross losses of $63 thousand.
Proceeds were reinvested in available-for-sale
securities. The primary purpose of the sales was
to extend the average maturity of the available-
for-sale portfolio.
During 1996, the Company realized net losses of
$101 thousand on the sale of $51.1 million of
securities from the available-for-sale portfolio.
Proceeds from sales early in the year were used
to provide funds in completing the sale of eight
branches of the Vermont bank to Mascoma Savings
Bank, a transaction in which the deposit
liabilities assumed by the purchaser
substantially exceeded the loans and other
branch-related assets acquired including the
deposit premium. Other sales of securities from
the available-for-sale portfolio were used to
extend the maturity dates and increase the yield
on the portfolio.
At December 31, 1997 and 1996, the weighted
average maturity was 2.40 and 2.71 years,
respectively, for debt securities in the
available-for-sale portfolio.
At December 31, 1997 the net unrealized gain on
securities available-for-sale amounted to $1.3
million. The net unrealized gain or loss, net of
tax, is reflected as a separate component of
shareholders' equity.
Securities Held-to-Maturity:
The following table sets forth the book value of
the Company's portfolio of securities held-to-
maturity for each of the last three years.
<TABLE>
<CAPTION>
SECURITIES HELD-TO-MATURITY
(In Thousands) December 31,
1997 1996 1995
<S> <C> <C> <C>
State and Municipal Obligations $24,800 $19,765 $13,921
Other Mortgage-Backed Securities 19,282 11,111 ---
Total $44,082 $30,876 $13,921
</TABLE>
For information regarding the fair value of the
Company's portfolio of securities held-to-maturity,
see Note 3 to the Consolidated
Financial Statements in Part II, Item 8 of this
report.
The following table sets forth the maturities of
the Company's portfolio of securities held-to-maturity,
as of December 31, 1997. Other
mortgage-backed securities are allocated to
maturity periods based on final maturity date.
<PAGE>
<TABLE>
<CAPTION>
MATURITIES OF SECURITIES HELD-TO-MATURITY
(In Thousands)
After After
Within 1 But 5 But After
One Within Within 10
Year 5 Years 10 Years Years Total
<S> <C> <C> <C> <C> <C>
State and Municipal Obligations $2,667 $3,125 $11,185 $ 7,823 $24,800
Other Mortgage-Backed Securities --- --- --- 19,282 19,282
Total Securities Held-to-
Maturity $2,667 $3,125 $11,185 $27,105 $44,082
</TABLE>
The following table sets forth the tax-equivalent
yields of the Company's portfolio of securities
held-to-maturity at December 31, 1997.
<TABLE>
<CAPTION>
YIELDS ON SECURITIES HELD-TO-MATURITY
(Fully Tax-Equivalent Basis)
After After
Within 1 But 5 But After
One Within Within 10
Year 5 Years 10 Years Years Total
<S> <C> <C> <C> <C> <C>
State and Municipal Obligations 6.71% 8.77% 8.30 8.06% 8.11%
Other Mortgage-Backed Securities --- --- --- 7.22 7.22
Total Securities Held-to-
Maturity 6.71 8.77 8.30 7.46 7.72
</TABLE>
The yields for debt securities shown in the
tables above are calculated by dividing annual
interest, including accretion of discounts and
amortization of premiums, by the carrying value
of the securities at December 31, 1997. Yields
on obligations of states and municipalities were
computed on a fully tax-equivalent basis using a
marginal tax rate of 35%.
During 1997, 1996 and 1995, the Company sold no
securities from the held-to-maturity portfolio.
The weighted-average maturity of the held-to-
maturity portfolio was 5.7 years and 7.5 years at
December 31, 1997 and 1996, respectively.
II. LOAN PORTFOLIO
The amounts and respective percentages of loans
and leases outstanding represented by each
principal category on the dates indicated were as
follows:
<PAGE>
<TABLE>
<CAPTION>
a. DISTRIBUTION OF LOANS AND LEASES
(Dollars In Thousands) December 31,
1997 1996 1995 1994 1993
Amount % Amount % Amount % Amount % Amount %
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial, Financial
and Agricultural $ 46,124 9 $ 48,372 12 $ 79,993 15 $ 74,455 15 $ 82,317 16
Real Estate - Commercial 50,680 10 36,302 9 71,622 14 81,704 16 95,981 19
Real Estate - Construction 2,072 1 971 1 2,051 1 5,136 1 8,702 2
Real Estate - Residential 208,258 43 168,429 43 238,298 46 230,943 45 221,066 44
Installment Loans to
Individuals 178,642 37 139,395 35 125,762 24 115,291 23 94,656 19
Lease Financing Receivables 34 -- 42 -- 61 -- 24 -- 62 --
Total Loans and Leases 485,810 100 393,511 100 517,787 100 507,553 100 502,784 100
Allowance for Loan Losses (6,191) (5,581) (12,106) (12,338) (16,078)
Total Loans and Leases, Net $479,619 $387,930 $505,681 $495,215 $486,706
</TABLE>
On June 27, 1997, the Company acquired $44.2
million of loans from Fleet Bank in connection
with its acquisition of six Fleet branches
(consumer loans - $16.6 million, home equity
loans - $7.1 million, commercial loans - $5.6
million, commercial real estate loans - $4.8
million, and residential real estate loans -
$10.1 million). The remaining increase in loans
and leases from 1996 to 1997 was $48.1 million,
or 12.2%, and represented loan growth from the
continuing New York operations.
Within the installment loan portfolio, the
Company has focused on growth in its indirect
lending program. Indirect loans are vehicle
acquisition loans to consumers financed through
local dealerships where, by prior arrangement,
the Company acquires the dealer paper. At year-
end 1993, indirect loans amounted to $57.3
million or 61% of installment loans. By
December 31, 1997, indirect loans amounted to
$141.7 million, or 79% of installment loans.
While the yields on the consumer portfolios
(other than credit card loans) typically are
lower than on the commercial portfolios, the
Company has historically experienced fewer loan
losses in consumer loans than commercial loans,
in proportion to outstanding average loan
balances.
Accordingly, the shift in the mix of the loan
portfolio from 1996 to 1997 continued a trend
where the increased balance of consumer loans as
a percentage of total loans was offset by
decreases in the commercial loan portfolio.
During 1996, the Company transferred
substantially all of the loans in its Vermont
banking operation in two branch sale
transactions, to Mascoma Savings Bank in January
1996 and to ALBANK in September 1996. The
Vermont loan portfolio had a higher percentage of
commercial loans than the loan portfolios of the
Company's New York banks. Consequently, the
divestiture of the Vermont banking operations is
largely responsible for the shift in the mix of
the loan portfolio from commercial to consumer
loans between year-end 1995 and year-end 1996.
Also, the Company concentrated its lending
efforts in 1996 in the area of residential real
estate loans and installment loans to individuals
(primarily automobile loans).
The following table indicates the changing mix in
the Company's New York loan portfolio by
presenting the quarterly average balance for the
Company's significant loan products for the past
five quarters. In addition, the table presents
the percentage of total loans represented by each
category as well as the annualized tax-equivalent
yield. Since the final disposition of the
Vermont operations occurred in September 1996,
prior to the earliest period presented, there
are no Vermont loans reflected in the table and
the effect of loans acquired in the Fleet
transaction, at the end of June 1997, are
reflected only in the third and fourth quarters
of 1997.
<TABLE>
<CAPTION>
LOAN PORTFOLIO
Quarterly Average Loan Balances
(Dollars In Thousands)
Quarter Ending
Dec 1997 Sep 1997 Jun 1997 Mar 1997 Dec 1996
<S> <C> <C> <C> <C> <C>
Commercial and
Commercial Real Estate $100,604 $102,211 $ 92,874 $ 89,673 $ 84,059
Residential Real Estate 147,928 142,863 129,289 127,032 125,897
Home Equity 36,601 37,100 30,399 30,012 29,863
Indirect Consumer Loans 139,401 128,086 114,141 107,371 105,227
Direct Consumer Loans 49,747 51,185 34,212 33,300 32,013
Credit Card Loans 7,602 7,582 7,769 8,153 8,514
Total Loans $481,883 $469,027 $408,684 $395,541 $385,573
Percentage of Total
Quarterly Average Loans
Commercial and
Commercial Real Estate 20.9% 21.8% 22.7% 22.7% 21.8%
Residential Real Estate 30.7 30.5 31.6 32.1 32.7
Home Equity 7.6 7.9 7.4 7.6 7.7
Indirect Consumer Loans 28.9 27.3 27.9 27.1 27.3
Direct Consumer Loans 10.3 10.9 8.5 8.4 8.3
Credit Card Loans 1.6 1.6 1.9 2.1 2.2
Total Loans 100.0% 100.0% 100.0% 100.0% 100.0%
Quarterly Tax-Equivalent
Yield on Loans
Commercial and
Commercial Real Estate 9.62% 9.56% 9.73% 9.61% 9.36%
Residential Real Estate 8.23 8.33 8.40 8.47 8.30
Home Equity 9.10 9.20 9.23 9.10 9.08
Indirect Consumer Loans 8.24 8.39 8.35 8.29 8.35
Direct Consumer Loans 9.18 9.00 9.09 9.16 9.33
Credit Card Loans 16.07 16.46 16.84 16.76 16.46
Total Loans 8.81 8.86 8.97 8.96 8.99
</TABLE>
The following table indicates the respective
maturities and repricing structure of the
Company's commercial, financial and agricultural
loans and its real estate - construction loans at
December 31, 1997. For purposes of determining
relevant maturities, loans are assumed to mature
at (but not before) their scheduled repayment
dates as required by contractual terms. Demand
loans and overdrafts are included in the "Within
1 Year" maturity category.
<TABLE>
<CAPTION>
MATURITY AND REPRICING OF COMMERCIAL LOANS
(In Thousands) After 1 After
Within But Within Five
1 Year 5 Years Years Total
<S> <C> <C> <C> <C>
Commercial, Financial and Agricultural $24,528 $16,035 $ 5,561 $46,124
Real Estate - Construction 129 65 1,878 2,072
Total $24,657 $16,100 $ 7,439 $48,196
Fixed Interest Rates $ 4,611 $ 9,545 $ 7,439 $21,595
Variable Interest Rates 20,046 6,555 --- 26,601
Total $24,657 $16,100 $ 7,439 $48,196
</TABLE>
COMMITMENTS AND LINES OF CREDIT
Letters of credit represent extensions of credit
granted in the normal course of business which
are not reflected in the financial statements
because they were not yet funded. As of December
31, 1997, the total contingent liability for
standby letters of credit amounted to $653
thousand. In addition to these instruments, the
Company has issued lines of credit to customers,
including home equity lines of credit, credit
card lines of credit, commitments for residential
and commercial construction and other personal
and commercial lines of credit, which also may be
unfunded or only partially funded from time to
time. Commercial lines, generally issued for a
period of one year, are usually extended to
provide for the working capital requirements of
the borrower. At December 31, 1997, the Company
had outstanding unfunded loan commitments in the
aggregate amount of approximately $77.3 million.
b. RISK ELEMENTS
NONACCRUAL, PAST DUE AND RESTRUCTURED LOANS
The Company designates loans as impaired when the
payment of interest and/or principal is due and
unpaid for a designated period (generally 90
days) or when the likelihood of the full
repayment of principal and interest is, in the
opinion of management, uncertain. Loans are
charged-off against the allowance for loan losses
for amounts in excess of the fair value of
collateral less estimated costs to sell upon
reaching 120 days delinquent. There were no
material commitments to lend additional funds on
outstanding impaired loans at December 31, 1997.
Loans and leases past due 90 days or more and
still accruing interest, as identified in the
following table, are those loans and leases which
were contractually past due 90 days or more but
because of expected repayments were still
accruing interest.
For years prior to 1995, loans were classified as
"restructured" in accordance with SFAS No. 15,
"Accounting by Debtors and Creditors for Troubled
Debt Restructurings."
On January 1, 1995, the Company adopted Statement
of Financial Accounting Standards (SFAS) No. 114,
"Accounting by Creditors for Impairment of a
Loan." SFAS No. 114, as amended, requires that
impaired loans, except for large groups of
smaller-balance homogeneous loans, be measured
based on (I) the present value of expected future
cash flows discounted at the loan's effective
interest rate, (II) the loan's observable market
price or (III) the fair value of the collateral
if the loan is collateral dependent. The Company
applies the provisions of SFAS No. 114 to all
impaired commercial and commercial real estate
loans over $250,000, and to all loans
restructured subsequent to adoption. Reserves
for losses for the remaining smaller-balance
loans are evaluated under SFAS No. 5. Under the
provisions of SFAS No. 114, the Company
determines impairment for collateralized loans
based on fair value of the collateral less
estimated cost to sell. For other loans,
impairment is determined by comparing the
recorded value of the loan to the present value
of the expected cash flows, discounted at the
loan's effective interest rate. The Company
determines the interest income recognition method
on a loan by loan basis. Based upon the
borrowers' payment histories and cash flow
projections, interest recognition methods include
full accrual, cash basis and cost recovery.
The Company's nonaccrual, past due and
restructured loans and leases were as follows:
<TABLE>
<CAPTION>
SCHEDULE OF NONPERFORMING LOANS
(Dollars In Thousands) December 31,
1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C>
Nonaccrual Loans:
Construction and Land Development $ --- $ --- $ 104 $ 327 $ 2,534
Commercial Real Estate 119 83 1,299 1,050 2,649
Commercial Loans 1,951 1,487 1,979 1,017 2,596
Other 1,251 727 862 1,224 2,082
Total Nonaccrual Loans 3,321 2,297 4,244 3,618 9,861
Loans Past Due 90 Days or More
and Still Accruing Interest 363 321 111 231 364
Restructured Loans in Compliance
with Modified Terms --- --- --- 580 2,405
Total Nonperforming Loans $3,684 $2,618 $4,355 $4,429 $12,630
Total Nonperforming Loans
as a Percentage of Period-End Loans .76% .67% .84% .87% 2.51%
</TABLE>
The following table presents additional
disclosures required by SFAS No. 114 relating to
impaired loans accounted for under SFAS No. 114.
All loans reported in the schedule below are
included in nonaccrual loans in the schedule of
nonperforming loans above. The reserves for
loans accounted for under SFAS No. 114 in the
schedule below are a component of the allowance
for loan losses discussed earlier in this report
under Item 7.B.II., "Provision for Loan Losses
and Allowance for Loan Losses."
<PAGE>
<TABLE>
<CAPTION>
SCHEDULE OF IMPAIRED LOANS ACCOUNTED FOR UNDER SFAS NO. 114
(In Thousands)
December 31, 1997
Recorded Allowance for Carrying
Investment Loan Losses Amount
Measured at the Present Value
of Expected Cash Flows:
<S> <C> <C> <C>
Commercial Loans $1,935 $ 225 $1,710
</TABLE
</TABLE>
<TABLE>
<CAPTION>
December 31, 1996
Recorded Allowance for Carrying
Investment Loan Losses Amount
Measured at the Present Value
of Expected Cash Flows:
<S> <C> <C> <C>
Commercial Loans $1,301 $ 195 $1,106
</TABLE>
At December 31, 1997, nonaccrual loans amounted
to $3.3 million, an increase of $1.0 million from
December 31, 1996. The increase was primarily
attributable to one large commercial loan placed
on nonaccrual status during 1997. Loans past due
90 or more days and still accruing interest
amounted to $363 thousand at December 31, 1997,
an increase of $42 thousand from December 31,
1996. Total nonperforming loans, at year-end
1997, represented .76% of period- end loans, an
increase from .67% at year-end 1996.
During 1997 income recognized on year-end
balances of nonaccrual loans was $90 thousand.
Income that would have been recognized during
that period on nonaccrual loans if such had been
current in accordance with their original terms
and had been outstanding throughout the period
(or since origination if held for part of the
period) was $246 thousand.
At December 31, 1996, nonaccrual loans amounted
to $2.3 million. Nearly all of the nonaccrual
loans in the Vermont portfolio were transferred
in the 1996 branch sales. The New York based
nonaccrual loans at December 31, 1996 were
virtually unchanged from the level at the prior
year-end. Over one-half of the nonaccrual
balance at December 31, 1996 was attributable to
one borrower whose loan was restructured in 1996.
Payments on that loan were current in accordance
with the restructured terms as of December 31,
1996 and all payments in 1996 were used to reduce
the carrying amount of the loan.
During 1996 income recognized on year-end
balances of nonaccrual loans was $48 thousand.
Income that would have been recognized during
that period on nonaccrual loans if such had been
current in accordance with their original terms
and had been outstanding throughout the period
(or since origination if held for part of the
period) was $232 thousand.
Nonperforming loans amounted to $4.4 million at
December 31, 1995, $74 thousand below the
balance at year-end 1994. The increase in
nonaccrual commercial loans between year-end 1994
and 1995 was primarily attributable to the
aggregate borrowing of one commercial borrower,
which was placed on nonaccrual status during
1995. Otherwise, nonaccrual loans at December
31, 1995 would have decreased from the prior
year-end balance. All loans reported as
restructured and in compliance with modified
terms at December 31, 1994 were still in
compliance with modified terms at year-end 1995
and thus classified as performing at that date.
During 1995, income recognized on year-end
balances of nonaccrual loans was $116 thousand.
Income that would have been recognized during
that period on nonaccrual loans if such had been
current in accordance with their original terms
and had been outstanding throughout the period
(or since origination if held for part of the
period) was $435 thousand.
Nonperforming loans amounted to $4.4 million at
December 31, 1994, a decrease of $8.2 million or
64.9% from the prior year-end. Of the $12.6
million in nonperforming loans at December 31,
1993, $2.5 million was transferred to OREO in
1994, $2.4 million of loans reported as
restructured at year-end 1993 was returned to
performing status in 1994 in accordance with SFAS
No. 15, and another $3.5 million was charged,
during 1994, against the allowance for loan
losses. The small remaining difference
represented the improvement in nonaccrual loans,
net of loans newly classified as nonperforming.
POTENTIAL PROBLEM LOANS
On at least a quarterly basis, the Company
applies an internal credit quality rating system
to past due commercial loans. Loans are placed
on nonaccrual status when the likely amount of
future principal and interest payments are
expected to be less than the contractual amounts.
Because of its aggressive approach toward placing
loans on nonaccrual status, the Company has not
separately identified any potential problem loans
in this report not included in the
classifications discussed above. The level of
problem loans is for the most part dependent on
economic conditions in northeastern New York
State. In general, the economy in the Company's
geographic market area is quite strong. In the
"capital district" in an around Albany,
unemployment is significantly below the national
average, and north of the capital district, the
total number of jobs has held steady over recent
periods with nominal growth in the job rate.
However, unemployment remains above the national
average in the Glens Falls and Plattsburgh areas.
FOREIGN OUTSTANDINGS - None
LOAN CONCENTRATIONS
The loan portfolio is well diversified. There
are no concentrations of credit that exceed 10%
of the portfolio, other than the general
categories reported in the preceding Section
II.a.of this report. For a further discussion,
see Note 21 to the Consolidated Financial
Statements in Part II, Item 8 of this report.
OTHER REAL ESTATE OWNED
Other real estate owned (OREO) consists of real
property acquired in foreclosure. OREO is
carried at the lower of fair value less estimated
cost to sell or cost in accordance with Statement
of Position (SOP) 92-3 "Accounting for Foreclosed
Assets." Also, in compliance with SOP 92-3, the
Company's subsidiary banks have established
allowances for OREO losses. The allowances are
established and monitored on a property by
property basis and reflect management's ongoing
estimate of the difference between the property's
carrying amount and cost, when the carrying
amount is less than cost. For all periods, all
OREO was held for sale.
<TABLE>
<CAPTION>
DISTRIBUTION OF OTHER REAL ESTATE OWNED
(Net of Allowance) (In Thousands) December 31,
1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C>
Single Family 1 - 4 Units $ 227 $ --- $ 82 $1,073 $1,189
Commercial Real Estate 86 86 2,328 2,128 3,418
Construction & Land Development 2 50 --- 195 2,899
Other Real Estate Owned, Net $ 315 $ 136 $2,410 $3,396 $7,506
</TABLE>
The following table summarizes changes in the
net carrying amount of other real estate owned
at December 31 for each of the periods
presented.
<TABLE>
<CAPTION>
SCHEDULE OF CHANGES IN OTHER REAL ESTATE OWNED
(Net of Allowance) (In Thousands)
1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C>
Balance at Beginning of Year $ 136 $2,410 $ 3,396 $ 7,506 $ 5,548
Properties Acquired Through Foreclosure 307 302 642 2,493 7,804
Adjustment for Change in Fair Value --- (85) (161) (398) (638)
Sale (128) (2,491) (1,467) (6,205) (5,208)
Balance at End of Year $ 315 $ 136 $ 2,410 $ 3,396 $ 7,506
</TABLE>
The following is a summary of changes
in the allowance for OREO losses:
<TABLE>
<CAPTION>
ALLOWANCE FOR OTHER REAL ESTATE OWNED LOSSES
(In Thousands) 1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C>
Balance at Beginning of Year $ 108 $ 370 $ 369 $ 1,150 $1,120
Additions --- 85 161 398 638
Charge-Offs (43) (347) (160) (1,179) (608)
Balance at End of Year $ 65 $ 108 $ 370 $ 369 $1,150
</TABLE>
During 1997, the Company acquired six properties
totaling $307 thousand through foreclosure. Also
during the year, the Company sold properties with
a carrying amount of $128 thousand for net gains
of $110 thousand.
During 1996, the Company acquired five properties
totaling $302 thousand through foreclosure. Also
during the year, the Company recognized losses of
$330 thousand on the sale of OREO properties with
a carrying amount of $2.5 million (including OREO
disposed of in the Vermont branch sale
transactions) and further reduced the carrying
amount of the two properties remaining in OREO at
December 31, 1996 by $85 thousand.
During 1995, the Company acquired $642 thousand
of OREO through foreclosure. The Company
recognized losses of $48 thousand on the sale of
OREO properties carried on the books at $1.5
million.
During 1994, the Company acquired $2.5 million of
OREO through foreclosure. The Company recognized
losses of $1.4 million on the sale of OREO
properties carried on the books at $6.2 million.
Approximately 65% of the sales took place at an
auction of OREO properties held during the second
quarter of 1994.
<PAGE>
During 1993, the Company acquired $7.8 million in
OREO through foreclosure. For the year, the
Company recognized net gains of $366 thousand on
the sale of $5.2 million of OREO properties.
These net gains partially offset the $638
thousand provision for estimated OREO losses
taken during the year.
III. SUMMARY OF LOAN LOSS EXPERIENCE
The Company monitors credit quality through a
continuous review of the entire loan portfolio.
All significant loans (primarily commercial and
commercial real estate) are reviewed at least
semi-annually, and those under special
supervision are reviewed at least quarterly. The
boards of directors of the Company's subsidiary
banks, upon recommendations from management,
determine the extent of charge-offs and have the
final decision-making responsibility in
authorizing charge-offs. Additionally,
regulatory examiners perform periodic
examinations of the banks' loan and lease
portfolios and report on these examinations to
the boards of directors.
Provisions for loan losses are determined by the
managements of the subsidiary banks, and are
based upon an overall evaluation of the
appropriate levels of the allowances for loan
losses. Factors incorporated in such
determination include the existing risk
characteristics of the portfolio, prevailing
national and local economic conditions,
historical loss experience and expected
performance within a range of anticipated future
economic conditions. The Company's management
believes that the banks' allowances for loan
losses are adequate to absorb losses inherent in
the loan portfolio.
The table in Part II, Item 7.B.II. "Provision for
Loan Losses and Allowance for Loan Losses"
presents a summary of the activity in the
Company's allowance for loan losses.
<PAGE>
ALLOCATION OF THE ALLOWANCE FOR LOAN AND LEASE
LOSSES
The allowance for loan losses is a general
allowance applicable to losses inherent in the
loan portfolio. For internal operating purposes,
the allowance is not allocated among loan
categories.
In the following table, the allowance has been
allocated solely for purposes of complying with
disclosure requirements of the Securities and
Exchange Commission. However, this allocation
should not be interpreted as a projection of (I)
likely sources of future charge-offs, (II) likely
proportional distribution of future charge-offs
among loan categories or (III) likely amounts of
future charge-offs. Since management regards the
allowance as a general balance and has assigned
an unallocated value to the schedule, the amounts
presented do not represent the total balance
available to absorb future charge-offs that might
occur within the principal categories.
Subject to the qualifications noted above, an
allocation of the allowance for loan losses by
principal classification and the proportion of
the related loan balance is presented below as of
December 31 for each of the years indicated.
<TABLE>
<CAPTION>
ALLOCATION OF THE ALLOWANCE FOR LOAN AND LEASE LOSSES
(Dollars in Thousands)
1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C>
Commercial, Financial
and Agricultural $1,972 $1,946 $ 2,913 $ 2,329 $ 3,908
Real Estate-Commercial 219 353 1,755 1,841 3,324
Real Estate-Construction 17 49 305 1,994 2,027
Real Estate-Residential
Mortgage 902 890 1,616 2,098 1,893
Installment Loans to
Individuals 2,882 1,959 2,365 1,363 2,032
Lease Financing Receivables -- -- -- -- --
Unallocated 199 384 3,152 2,713 2,894
Total Loans and Leases $6,191 $5,581 $12,106 $12,338 $16,078
PERCENT OF LOANS IN EACH
CATEGORY TO TOTAL LOANS
Commercial, Financial
and Agricultural 9% 12% 15% 15% 16%
Real Estate-Commercial 10 9 14 16 19
Real Estate-Construction 1 1 1 1 2
Real Estate-Residential
Mortgage 43 43 46 45 44
Installment Loans to
Individuals 37 35 24 23 19
Lease Financing Receivables -- -- -- -- --
Total Loans and Leases 100% 100% 100% 100% 100%
</TABLE>
IV. DEPOSITS
The following table sets forth the average
balances of and average rates paid on deposits for
the periods indicated.
<TABLE>
<CAPTION>
AVERAGE DEPOSIT BALANCES
Years Ended December 31,
(Dollars In Thousands)
1997 1996 1995
Average Average Average
Balance Rate Balance Rate Balance Rate
<S> <C> <C> <C> <C> <C> <C>
Demand Deposits $ 78,704 --% $ 77,479 --% $ 88,961 --%
Interest-Bearing Demand Deposits 144,204 3.10 131,438 2.88 139,879 2.84
Regular and Money Market Savings 146,529 2.85 157,892 2.92 201,932 3.06
Time Deposits
of $100,000 or More 87,956 5.38 79,996 5.25 67,029 5.61
Other Time Deposits 171,820 5.46 156,236 5.33 185,166 5.34
Total Deposits $629,213 3.62 $603,041 3.47 $682,967 3.49
</TABLE>
On June 27, 1997, the Company assumed $140
million of deposit balances in the Fleet branch
acquisition (demand - $17.3 million, interest-
bearing demand deposits - $23.6 million, regular
and money market savings - $42.7 million, and
other time deposits - $56.2 million). These
balances, accordingly, had a six month impact on
average deposits for 1997. The deposit balances
in the Vermont branches that were sold in
September 1996 impacted average deposit balances
for nine months in that year. During 1996,
average deposits of $85.4 million were
attributable to the Vermont banking operations.
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. Consequently, there are no Vermont
balances in the table, and the effect of the
Fleet branch acquisition is reflected only in the
last two quarters of 1997.
<PAGE>
<TABLE>
<CAPTION>
DEPOSIT PORTFOLIO
Quarterly Average Deposit Balances
(Dollars In Thousands)
Quarter Ending
Dec 1997 Sep 1997 Jun 1997 Mar 1997 Dec 1996
<S> <C> <C> <C> <C> <C>
Demand Deposits $ 91,309 $ 93,907 $ 65,976 $ 63,147 $ 67,240
Interest-Bearing
Demand Deposits 170,321 155,461 128,067 122,318 125,559
Regular and Money Market
Savings 159,591 167,821 128,350 129,791 133,974
Time Deposits of $100,000
or More 96,851 78,927 87,350 88,704 80,462
Other Time Deposits 198,018 201,125 147,910 139,261 133,041
Total Deposits $716,090 $697,241 $557,653 $543,221 $540,276
Percentage of Total
Quarterly Average Deposits
Demand Deposits 12.8% 13.5% 11.8% 11.6% 12.4%
Interest-Bearing
Demand Deposits 23.8 22.3 23.0 22.5 23.3
Regular and Money Market
Savings 22.3 24.1 23.0 23.9 24.7
Time Deposits of $100,000
or More 13.5 11.3 15.7 16.3 14.9
Other Time Deposits 27.6 28.8 26.5 25.7 24.7
Total Deposits 100.0% 100.0% 100.0% 100.0% 100.0%
Quarterly Cost of Deposits
Interest-Bearing
Demand Deposits 3.16% 2.98% 3.21% 3.05% 3.04%
Regular and Money Market
Savings 2.79 2.87 2.83 2.94 2.93
Time Deposits of $100,000
or More 5.45 5.45 5.37 5.25 5.21
Other Time Deposits 5.50 5.42 5.54 5.38 5.34
Total Deposits 3.63 3.54 3.70 3.63 3.52
</TABLE>
<TABLE>
<CAPTION>
Federal Reserve Bank Discount Rate Changes 1994 - 1997
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
</TABLE>
Although the last change by the Federal Reserve
Board did not raise the discount rate during
1997, its open market operations early in the
year led directly to a 25 basis point increase
in the federal funds overnight rate. The 11
basis point increase in the cost of deposits from
the fourth quarter of 1996 to the fourth quarter
of 1997 was primarily attributable to these
actions.
V. TIME DEPOSITS OF $100,000 OR MORE
<TABLE>
<CAPTION>
The maturities of time deposits of $100,000
or more at December 31, 1997 are presented below.
(In Thousands)
Maturing in:
<S> <C>
Under Three Months $ 78,772
Three to Six Months 11,230
Six to Twelve Months 7,900
1999 5,523
2000 2,069
2001 726
2002 and Beyond 400
Total $106,620
</TABLE>
D. 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 need 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 balance sheet cash flow. At purchase,
selection of these securities is based on their
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. Understanding that
excess liquidity will have a negative impact on
earnings, the Company establishes a target range
for its liquidity ratios. At year-end 1997, 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.
E. CAPITAL RESOURCES AND DIVIDENDS
Shareholders' equity was $73.9 million at
December 31, 1997, a decrease of $425 thousand,
or 0.6%, from the prior year-end.
The decrease in shareholders' equity during 1997
primarily resulted from $7.5 million of stock
repurchases during the year, which together with
$4.6 million of cash dividends more than offset
1997 net income of $11.0 million and a $556
thousand increase in the net unrealized gain on
securities available-for-sale, net of tax. In
1996, the Board of Directors authorized
repurchase programs under which management was
given the authority to repurchase at its
discretion from time to time, in market or
privately negotiated transactions, up to $20
million of the Company's outstanding common
stock. Pursuant to these programs, the Company
repurchased nearly $17 million of outstanding
stock in the past two years. Such repurchases
have been substantially reduced since the
acquisition of six branches from Fleet Bank on
June 27, 1997.
The maintenance of appropriate capital levels is
a management priority. Overall capital adequacy
is monitored on an ongoing basis by management
and reviewed regularly by the Board of Directors.
The Company's principal capital planning goal is
to provide an adequate return to shareholders
while retaining a sufficient base to provide for
future expansion and comply with all regulatory
standards.
Under regulatory capital guidelines, the Company
and the subsidiary banks are required to satisfy
certain risk-based capital measures. The minimum
ratio of "Tier 1" capital to risk-weighted assets
is 4.0% and the minimum ratio of total capital to
risk-weighted assets is 8.0%. For the Company,
Tier 1 capital is comprised of shareholders'
equity less intangible assets. Total capital
includes a portion of the allowance for loan
losses.
In addition to the risk-based capital measures,
the federal bank regulatory agencies require
banks and bank holding companies to satisfy
another capital guideline, the Tier 1 leverage
ratio (Tier 1 capital to quarterly average assets
less intangible assets). The minimum Tier 1
leverage ratio is 3.0% for the most highly rated
institutions. The guidelines provide that other
institutions should maintain a Tier 1 leverage
ratio that is at least 1.0% to 2.0% higher than
the 3.0% minimum level for top-rated
institutions.
<PAGE>
The table below sets forth the capital ratios of
the Company and its subsidiary banks as of
December 31, 1997:
<TABLE>
<CAPTION>
Risk-Based Capital Ratios: Arrow GFNB SNB
<S> <C> <C> <C>
Tier 1 12.2% 12.6% 9.7%
Total Capital 13.5 13.9 10.8
Tier 1 Leverage Ratio 7.3 7.2 7.6
</TABLE>
At December 31, 1997, all subsidiary banks and
the Company exceeded the minimum capital ratios
established by these guidelines, and qualified as
"well-capitalized", the highest category, in the
capital classification scheme set by federal bank
regulatory agencies pursuant to FDICIA (see the
disclosure under "Legislative Developments" in
Part I, Item 1.F. of this report).
The principal source of funds for the payment of
shareholder dividends by the Company has been
dividends declared and paid to the Company by its
bank subsidiaries. As of December 31, 1997, the
maximum amount that could have been paid by GFNB
to the Company was approximately $13.2 million.
See Part II, Item 5 "Market for the Registrant's
Common Equity and Related Stockholder Matters"
for a recent history of the Company's cash
dividend payments.
<PAGE>
F. FOURTH QUARTER RESULTS
The Company reported earnings of $2.8 million for
the fourth quarter of 1997, an increase of $376
thousand, or 15.4%, from the fourth quarter of
1996. Basic earnings per common share for the
respective quarters was $.49 and $.40,
respectively. The increase in earnings was
primarily attributable to the fact the fourth
quarter of 1997 fully reflects the increase in
earning assets from the acquisition of six
branches from Fleet Bank in June 1997. The
average number of shares outstanding decreased
from period to period as a result of the
repurchase program discussed earlier.
The Fleet branch purchase is also the primary
factor in changes to other income and expense, as
well as explaining changes to net interest income
and the provision for loan losses.
<TABLE>
<CAPTION>
SELECTED FOURTH QUARTER FINANCIAL INFORMATION
(Dollars In Thousands, Except Per Share Amounts)
For the Quarter Ended
December 31,
1997 1996
<S> <C> <C>
Interest and Dividend Income $15,266 $12,153
Interest Expense 6,850 5,025
Net Interest Income 8,416 7,128
Provision for Loan Losses 331 224
Net Interest Income after Provision for Loan Losses 8,085 6,904
Other Income 2,005 2,155
Other Expense 5,914 5,255
Income Before Income Taxes 4,176 3,804
Provision for Income Taxes 1,366 1,370
Net Income $ 2,810 $ 2,434
Weighted Average Number of Shares
and Equivalents Outstanding
Basic 5,759 6,057
Diluted 5,859 6,139
Basic Earnings Per Common Share $ .49 $ .40
Diluted Earnings Per Common Share .48 .40
Diluted "Core" Earnings Per Common Share .47 .36
Cash Dividends Per Common Share .21 .19
AVERAGE BALANCES:
Assets $826,281 $648,944
Earning Assets 767,873 606,396
Loans 481,883 385,573
Deposits 716,090 540,276
Shareholders' Equity 72,878 74,027
SELECTED RATIOS (Annualized):
Return on Average Assets 1.35% 1.49%
Return on Average Equity 15.30% 13.04%
Net Interest Margin (Tax-Equivalent Basis) 4.48% 4.77%
Net Charge-offs to Average Loans .30% .20%
</TABLE>
Per share amounts have been adjusted for
the 1997 five percent stock dividend.
<PAGE>
G. YEAR 2000 PREPAREDNESS
The Company's regulators have adopted regulations
and examination procedures relating to Year 2000
preparedness. The Year 2000 presents potential
financial risk to companies which have data
processing systems that, because of date formats,
are unable to distinguish the Year 2000. Banking
regulators have required financial institutions
to evaluate all application software which is
date dependent pursuant to a plan that is fully
implemented and tested by the end of 1998. The
Company has developed such a plan, which follows
the regulatory model. Financial institutions have
an additional risk, inasmuch as they may
have loans to businesses with Year 2000
compliance issues. The Company is working
closely with its commercial borrowers in this
respect. Nearly all of the software used by the
Company was acquired from and is maintained by
third parties. The Company estimates that total
expenditures related to its Year 2000 Plan will
be in the range of $250-500 thousand. The most
significant expense relates to testing software
at offsite locations. Currently, no substantial
risk to the Company's operations or capital is
anticipated. Management continues to monitor
the adequacy of the Company's preparations.
Item 7A: 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 carrying out the
asset/liability management 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 on all
interest-bearing assets and liabilities reflected
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 December 31, 1997, under this analysis, a 200
basis point increase in interest rates resulted
in a 3.4% decrease in net interest income and a
200 basis point decrease in interest rates
resulted in a 3.2% increase in net interest
income. These amount 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. 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
competitor 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.
<PAGE>
Item 8: Financial Statements and Supplementary
Data
The following audited financial statements and
supplementary data are incorporated herein by
reference to the Company's Annual Report to
Shareholders for December 31, 1997, which Annual
Report is attached as Exhibit 13 to this Report:
Independent Auditors' Report
Financial Statements:
Consolidated Balance Sheets as of
December 31, 1997 and 1996
Consolidated Statements of Income for the
Years Ended December 31, 1997, 1996 and 1995
Consolidated Statements of Changes in
Shareholders' Equity for the Years
Ended December 31, 1997, 1996 and 1995
Consolidated Statements of Cash Flows for the
Years Ended December 31, 1997,
1996 and 1995
Notes to Consolidated Financial Statements
Supplementary Data: (Unaudited)
Summary of Quarterly Financial Data for the
Years Ended December 31, 1997 and 1996
Item 9: Changes in and Disagreements with
Accountants on Accounting and Financial
Disclosure. - None.
PART III
Item 10: Directors and Executive Officers of
the Registrant
Item 1, "Election of Directors and Information
with Respect to Directors and Officers" of the
Company's Proxy Statement for its Annual Meeting
of Shareholders to be held April 29, 1998 is
incorporated herein by reference. Required
information regarding the Company's Executive
Officers is contained in Part I, Item 1.E.,
"Executive Officers of the Registrant."
Item 11: Executive Compensation
Item 1, "Election of Directors and Information
with Respect to Directors and Officers" of the
Company's Proxy Statement for its Annual Meeting
of Shareholders to be held April 29, 1998 is
incorporated herein by reference.
Item 12: Security Ownership of Certain
Beneficial Owners and Management
Item 1, "Election of Directors and Information
with Respect to Directors and Officers" of the
Company's Proxy Statement for its Annual Meeting
of Shareholders to be held April 29, 1998 is
incorporated herein by reference.
Item 13: Certain Relationships and Related
Transactions
Item 1, "Election of Directors and Information
with Respect to Directors and Officers" of the
Company's Proxy Statement for its Annual Meeting
of Shareholders to be held April 29, 1998 is
incorporated herein by reference.
PART IV
Item 14: Exhibits, Financial Statement
Schedules and Reports on Form 8-K
(a) List of Documents filed as part of this
report:
1. Financial Statements
The following financial statements, the
notes thereto, and the independent
auditors' report thereon are filed as part
of this report, incorporated by reference
from Exhibit 13 to this Report, the 1997
Annual Report to Shareholders. See the
index to such financial statements in Part
II, Item 8 of this report.
Independent Auditors' Report
Consolidated Balance Sheets as of
December 31, 1997 and 1996
Consolidated Statements of Income for
the Years Ended December 31, 1997,
1996 and 1995
Consolidated Statements of Changes in
Shareholders' Equity for the Years
Ended December 31, 1997, 1996 and
1995
Consolidated Statements of Cash Flows
for the Years Ended December 31,
1997, 1996 and 1995
Notes to Consolidated Financial
Statements
2. Schedules
All schedules are omitted since the
required information is either not
applicable or not required or is contained
in the respective financial statements or
in the notes thereto.
<PAGE>
III. Exhibits:
The following exhibits are incorporated by
reference herein.
Exhibit
Number Exhibit
2.1 Purchase and Assumption Agreement among
Arrow Financial Corporation, Arrow Vermont
Corporation, Green Mountain Bank and
Mascoma Savings Bank, dated June 1, 1995
incorporated herein by reference from the
Registrant's Current Report on Form 8-K,
filed on August 4, 1995, Exhibit 2.1.
2.2 Supplement to Purchase and Assumption
Agreement among Arrow Financial
Corporation, Arrow Vermont Corporation,
Green Mountain Bank and Mascoma Savings
Bank, dated January 12, 1996 incorporated
herein by reference from the Registrant's
Current Report on Form 8-K, filed January
30, 1996, Exhibit 2.2.
2.3 Purchase and Assumption Agreement among
Arrow Financial Corporation, Arrow Vermont
Corporation, Green Mountain Bank and
ALBANK, FSB, dated February 26, 1996
incorporated herein by reference from the
Registrant's Current Report on Form 8-K,
filed March 14, 1996, Exhibit 2.1.
2.4 Amendment to Purchase and Assumption
Agreement among Arrow Financial
Corporation, Arrow Vermont Corporation,
Green Mountain Bank and ALBANK, FSB, dated
September 26, 1996 incorporated herein by
reference from the Registrant's Current
Report on Form 8-K filed October 11, 1996,
Exhibit 2.3.
2.5 Service Purchasing Agreement among Arrow
Financial Corporation, Arrow Vermont
Corporation, Green Mountain Bank and
ALBANK, FSB, dated February 26, 1996
incorporated herein by reference from the
Registrant's Current Report on Form 8-K
filed March 14, 1996, Exhibit 2.2.
2.6 Amendment to Service Purchasing Agreement
among Arrow Financial Corporation, Arrow
Vermont Corporation, Green Mountain Bank
and ALBANK, FSB, dated September 26, 1996
incorporated herein by reference from the
Registrant's Current Report on Form 8-K,
filed October 11, 1996, Exhibit 2.4.
2.7 Stock Purchase Agreement among Arrow
Financial Corporation, Arrow Vermont
Corporation, Green Mountain Bank and
Vermont National Bank, dated February 27,
1996 incorporated herein by reference from
the Registrant's Current Report on Form 8-K
filed March 14, 1996, Exhibit 2.3.
2.8 Purchase and Assumption Agreement between
Fleet Bank and Glens Falls National Bank
and Trust Company, dated March 21, 1997,
incorporated herein by reference from the
Registrant's Current Report on Form 8-K
dated June 27, 1997, Exhibit 2.1.
3.(I) Certificate of Incorporation of the
Registrant, as amended, incorporated herein
by reference from the Registrant's Annual
Report on Form 10-K for the year ended
December 31, 1990, Exhibit 3.(a).
4.1 Shareholder Protections Rights Agreement
dated as of May 1, 1997, between Arrow
Financial Corporation and Glens Falls
National Bank and Trust Company, as Rights
Agent, incorporated herein by reference
from the Registrant's Statement on Form 8-A,
dated May 16, 1997, Exhibit 4.
10.1 1985 Incentive Stock Option Plan of the
Registrant, incorporated herein by
reference from Registrant's 1933 Act
Registration Statement on Form S-8 (file
number 2-98736; filed on July 1, 1985). *
10.2 1985 Non-Qualified Stock Option Plan of the
Registrant, incorporated herein by
reference from Registrant's 1933 Act
Registration Statement on Form S-8 (file
number 2-98735; filed July 1, 1985). *
<PAGE>
10.3 Short-term Incentive Award Plan of Glens
Falls National Bank and Trust Company,
incorporated herein by reference from
Registrant's 1933 Act Registration
Statement on Form S-2 (file number 33-10109;
filed December 16, 1986). *
10.4 Employment Agreement between the Registrant
and Michael F. Massiano dated December 31,
1990, incorporated herein by reference from
Registrant's Annual Report on Form 10-K for
the year ended December 31, 1990, Exhibit
10.(k). *
10.7 Select Executive Retirement Plan of the
Registrant effective January 1, 1992
incorporated herein by reference from
Registrant's Annual Report on Form 10-K for
December 31, 1992, Exhibit 10(m). *
10.8 Employee Stock Purchase Plan of the
Registrant, incorporated herein by
reference from Registrant's 1933 Act
Registration Statement on Form S-8 (File
number 33-48225; filed May 15, 1992). *
10.9 Long Term Incentive Plan of the Registrant,
incorporated herein by reference from
Registrant's 1933 Act Registration
Statement on Form S-8 (File number 33-66192;
filed July 19, 1993). *
10.10 Directors Deferred Compensation Plan of
Registrant, incorporated herein by
reference from Registrant's Annual Report
on Form 10-K for December 31, 1993, Exhibit
10(n). *
10.11 Senior Officers Deferred Compensation Plan
of the Registrant, incorporated herein by
reference from Registrant's Annual Report
on Form 10-K for December 31, 1993, Exhibit
10(o).*
10.12 Automatic Dividend Reinvestment Plan of the
Registrant incorporated herein by reference
from Registrant's Annual Report on Form 10-K
for December 31, 1995, Exhibit 10.11.*
* Management contracts or compensation
plans required to be filed as an exhibit.
<PAGE>
The following exhibits are submitted herewith:
Exhibit
Number Exhibit
3.(ii) By-Laws of the Registrant
10.5 Employment Agreement among the
Registrant, its subsidiary bank, Glens
Falls National Bank & Trust Company, and
Thomas L. Hoy dated November 26, 1997. *
10.6 Employment Agreement among the
Registrant, its subsidiary bank, Glens
Falls National Bank and Trust Company
and John J. Murphy dated November 26,
1997. *
11 Computation of Earnings per Share
13 Annual Report to Shareholders
21 Subsidiaries of the Company
23 Consent of Independent Certified Public
Accountants
27 Financial Data Schedule (submitted with
electronic filing only)
* Management contracts or compensation
plans required to be filed as an exhibit.
(B) Current Reports on Form 8-K filed during
the fourth quarter of 1997:
None
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or
15(d) of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be
signed on its behalf by the undersigned,
thereunto duly authorized.
ARROW FINANCIAL CORPORATION
Date: March 25, 1998
By:
/s/ Thomas L. Hoy
Thomas L. Hoy
President and
Chief Executive Officer
Date: March 25, 1998
By:
/s/ John J. Murphy
John J. Murphy
Executive Vice President, Treasurer and
Chief Financial Officer
(Principal Financial and Accounting Officer)
Pursuant to the requirements of the Securities
Exchange Act of 1934, this report has been signed
below on March 25, 1998 by the following persons
in the capacities indicated.
/s/ John J. Carusone, Jr.
John J. Carusone
Director
/s/ Michael B. Clarke
Michael B. Clarke
Director
/s/ Kenneth C. Hopper, M.D.
Kenneth C. Hopper, M.D.
Director
/s/ Thomas L. Hoy
Thomas L. Hoy
Director and
President
/s/ Dr. Edward F. Huntington
Dr. Edward F. Huntington
Director
/s/ David G. Kruczlnicki
David G. Kruczlnicki
Director
/s/ Michael F. Massiano
Michael F. Massiano
Director & Chairman
/s/ David L. Moynehan
David L. Moynehan
Director
/s/ Doris E. Ornstein
Doris E. Ornstein
Director
/s/ Daniel L. Robertson
Daniel L. Robertson
Director
EXHIBITS INDEX
Exhibit
Number Exhibit
3.(ii) By-Laws of the Registrant
10.5 Employment Agreement among the
Registrant, its subsidiary bank, Glens
Falls National Bank & Trust Company,
and Thomas L. Hoy dated November 26,
1997. *
10.6 Employment Agreement among the
Registrant, its subsidiary bank, Glens
Falls National Bank and Trust Company
and John J. Murphy dated November 26,
1997. *
11 Computation of Earnings per Share
13 Annual Report to Shareholders
21 Subsidiaries of the Company
23 Consent of Independent Certified Public
Accountants
27 Financial Data Schedule (submitted with
electronic filing only)
* Management contracts or compensation
plans required to be filed as an exhibit.
ARROW
FINANCIAL CORPORATION
(A New York Corporation)
BY-LAWS
(Effective 7/2/90)
Revisions:
1/23/91 - Section 3.2
4/24/91 - Section 3.2
7/24/91 - Section 3.2
9/25/91 - Section 3.2
2/26/92 - Section 3.2
2/26/92 - Section 4.1
12/16/92 - Section 3.2
4/20/94 - Section 3.2
4/20/94 - Section 3.20
7/01/95 - Section 3.2
10/25/95 - Section 3.4
4/26/96 - Section 3.2
12/18/96 - Section 3.2
2/26/97 - Section 3.17
2/26/97 - Article XIII
3/26/97 - Section 3.2
<PAGE>
BY-LAWS
ARROW FINANCIAL CORPORATION
(A New York Corporation)
(As amended to 12/18/96)
ARTICLE I
Definitions
As used in these By-laws, unless the context otherwise requires, the term:
1.1 "Assistant Secretary" means an Assistant Secretary of the
Corporation.
1.2 "Assistant Treasurer" means an Assistant Treasurer of the
Corporation.
1.3 "Board" means the Board of Directors of the Corporation.
1.4 "Business Corporation Law" means the Business Corporation Law of
the State of New York, as amended from time to time.
1.5 "By-laws" means the initial By-laws of the Corporation, as amended
from time to time.
1.6 "Certificate of Incorporation" means the initial certificate of
incorporation of the Corporation, as amended, supplemented or
restated from time to time.
1.7 "Corporation" means Arrow Financial Corporation
1.8 "Directors" means directors of the Corporation
1.9 "Entire Board" means the total number of directors which the
Corporation would have if there were no vacancies.
1.10 "Office of the Corporation" means the executive office of the
Corporation, anything in Section 102(10) of the Business Corporation
Law to the contrary notwithstanding.
1.11 "Chairman of the Board" means the Chairman of the Board of the
Corporation.
1.12 "President" means the President of the Corporation.
1.13 "Secretary" means the Secretary of the Corporation.
1.14 "Shareholders" means shareholders of the Corporation.
1.15 "Treasurer" means the Treasurer of the Corporation.
1.16 "Vice President" means a Vice President of the Corporation.
<PAGE>
ARTICLE II
Shareholders
2.1 Place of Meetings. Every meeting of shareholders shall be held at
the office of the Corporation or at such other place within or without
the State of New York as shall be designated in the notice of such
meeting or in the waiver of notice
2.2 Annual Meeting. A meeting of shareholders shall be held annually for
the election of directors and the transaction of other business at such
hour and on such business day in April, May or June as may be
determined by the Board and designated in the notice of meeting.
2.3 Special Meeting for Election of Directors, Etc. If the annual meeting
of shareholders for the election of directors and the transaction of
other business is not held within the months specified in Section 2.2,
the Board may call a special meeting of shareholders for the election
of directors and the transaction of other business at any time
thereafter.
2.4 Special Meetings. A special meeting of shareholders, (other than a
special meeting for the election of directors), unless otherwise
prescribed by statute, may be called at any time by the Board or by
the Chairman of the Board or by the Secretary. At any special
meeting of shareholders, only such business may be transacted as
is related to the purpose or purposes of such meeting set forth in the
notice thereof given pursuant to Section 2.6 of the By-laws or in any
waiver of notice thereof given pursuant to Section 2.7 of the By-laws.
2.5 Fixing Record Date. For the purpose of determining the shareholders
entitled to notice of or to vote at any meeting of shareholders or any
adjournment thereof, or to express consent to or dissent from any
proposal without a meeting, or for the purpose of determining
shareholders entitled to receive payment of any dividend or the
allotment of any rights, or for the purpose of any other action, the
Board may fix, in advance, a date as the record date for any such
determination of shareholders. Such date shall not be more than fifty
nor less than ten days before the date of such meeting, nor more than
fifty days prior to any other action. If no such record date is fixed:
2.5.1 The record date for the determination of shareholders entitled to
notice of or to vote at a meeting of shareholders shall be at the
close of business on the day next preceding the day on which notice is
given, or, if no notice is given, the day on which the meeting is
held;
2.5.2 The record date for determining shareholders for any purpose other
than that specified in Section 2.5.1 shall be at the close of business
on the day on which the resolution of the Board relating thereto is
adopted. When a determination of shareholders entitled to notice of
or to vote at any meeting of shareholders has been made as provided
in this Section 2.5, such determination shall apply to any adjournment
thereof, unless the Board fixes a new record date for the adjourned
meeting.
2.6 Notice of Meetings of Shareholders. Except as otherwise provided in
Section 2.5 and Section 2.7 of the By-laws, whenever under the
Business Corporation Law or the Certificate of Incorporation or the
By-laws, shareholders are required or permitted to take any action at
a meeting, written notice shall be given stating the place, date and
hour of the meeting and, unless it is the annual meeting, indicating
that it is being issued by or at the direction of the person or persons
calling the meeting. Notice of a special meeting shall also state the
purpose or purposes for which the meeting is called. If, at any
meeting, action is proposed to be taken which would, if taken entitle
shareholders fulfilling the requirements of Section 623 of the
Business Corporation Law to receive payment for their shares, the
notice of such meeting shall include a statement of that purpose and
to that effect. A copy of the notice of any meeting shall be given,
personally or by mail, not less than ten nor more than fifty days before
the date of the meeting, to each shareholder entitled to notice of or to
vote at such meeting. If mailed, such notice shall be deemed to be
given when deposited in the United States mail, with postage thereon
prepaid, directed to the shareholder at his/her address as it appears
on the record of shareholders, or if he/she shall have filed with the
Secretary of the Corporation a written request that notices to him/her
be mailed to some other address, then directed to him/her at such
other address. An affidavit of the Secretary or other person giving the
notice or of the transfer agent of the Corporation that the notice
required by this section has been given shall, in the absence of fraud,
be prima facie evidence of the facts therein stated. When a meeting
is adjourned to another time or place, it shall not be necessary to give
any notice of the adjourned meeting if the time and place to which the
meeting is adjourned are announced at the meeting at which the
adjournment is taken, and at the adjourned meeting any business
may be transacted that might have been transacted at the
meeting as originally called. However, if after the adjournment the
Board fixes a new record date for the adjourned meeting, a notice of
the adjourned meeting shall be given to each shareholder of record
on the new record date who is entitled to notice.
2.7 Waivers of Notice. Notice of meeting need not be given to any
shareholder who submits a signed waiver of notice in person or by
proxy, whether before or after the meeting. The attendance of any
shareholder at a meeting, in person or by proxy, without protesting
prior to the conclusion of the meeting the lack of notice of such
meeting, shall constitute a waiver of notice by him/her.
2.8 List of Shareholders at Meeting. A list of shareholders as of the
record date, certified by the officer of the Corporation responsible for
its preparation, or by a transfer agent, shall be produced at any
meeting of shareholders upon the request thereat or prior thereto of
any shareholder. If the right to vote at any meeting is challenged, the
inspectors of election, or person presiding thereat, shall require such
list of shareholders to be produced as evidence of the right of the
persons challenged to vote at such meeting, and all persons who
appear from such list to be shareholders entitled to vote thereat
may vote at such meeting.
2.9 Quorum of Shareholders; Adjournment. The holders of one-third of
the shares entitled to vote at any meeting of shareholders, present
in person or represented by proxy, shall constitute a quorum for the
transaction of any business at any such meeting, provided that when
a specified item of business is required to be voted on by a class or
series (if the Corporation shall then have outstanding shares of more
than one class or series), voting as a class, the holders of one-third
of the shares of such class or series shall constitute a quorum (as to
such class or series) for the transaction of such item of business.
When a quorum is once present to organize a meeting of
shareholders, it is not broken by the subsequent withdrawal of any
shareholders or their proxies. The holders of a majority of shares
present in person or represented by proxy at any meeting of
shareholders, including an adjourned meeting, whether or not a
quorum is present, may adjourn such meeting to another time and
place.
2.10 Voting; Proxies. Unless otherwise provided in the Certificate of
Incorporation, every shareholder of record shall be entitled to
vote at every meeting of hareholders determined in accordance with
Section 2.5 of the By-laws. Theprovisions of Section 612 of the
Business Corporation Law shall apply in determining whether any
shares may be voted and the persons, if any, entitled to vote such
shares; but the Corporation shall be protected in treating the persons
in whose names such shares stand on the record of shareholders as
owners thereof for all purposes. At any meeting of shareholders (at
which a quorum was once present to organize the meeting), all
matters, except as otherwise provided by law or by the Certificate of
Incorporation or by the By-laws, shall be decided by a majority of the
votes cast at such meeting by the holders of shares present in person
or represented by proxy and entitled to vote thereon, whether or not
a quorum is present when the vote is taken. In voting on any
questions on which a vote by ballot is required by law or is demanded
by any shareholder entitled to vote, the voting shall be by ballot.
Each ballot shall be signed by the shareholder voting or by his proxy,
and shall state the number of shares voted. On all other questions,
the voting may be viva voce. Every shareholder entitled to vote at a
meeting of shareholders or to express consent or dissent without a
meeting may authorize another person or persons to act for him by
proxy. The validity and enforceability of any proxy shall be
determined in accordance with Section 609 of the Business
Corporation Law.
2.11 Selection and Duties of Inspectors at Meetings of Shareholders. The
Board, in advance of any meeting of shareholders, may appoint
one or more inspectors to act at the meeting or any adjournment
thereof. If inspectors are not so appointed, the person presiding at
such meeting may, and on the request of any shareholder entitled to
vote thereat shall, appoint one or more inspectors. In case any
person appointed fails to appear or act, the vacancy may be filled by
appointment made by the Board in advance of the meeting or at the
meeting by the person presiding thereat. Each inspector, before
entering upon the discharge of his/her duties, shall take and sign an
oath faithfully to execute the duties of inspector at such meeting with
strict impartiality and according to the best of his/her ability. The
inspector or inspectors represented at the meeting, shall determine
the number of shares outstanding and the voting power of each, the
shares represented at the meeting, the existence of a quorum, the
validity and effect of proxies, and shall receive votes, ballots or
consents, hear and determine all challenges and questions arising in
connection with the right to vote, count and tabulate all votes, ballots
or consents, determine the result, and shall do such acts as are
proper to conduct the election or vote with fairness to all
shareholders. On request of the person presiding at the meeting or
any shareholder entitled to vote thereat, the inspector or inspectors
shall make a report in writing of any challenge, question or matter
determined by his/her or them and execute a certificate of any act
found by him/her or them. Any report or certificate made by the
inspector or inspectors shall be prima facie evidence of the facts
stated and of the vote as certified by him/her or them.
2.12 Organization. At every meeting of shareholders, the Chairman of the
Board, or in his/her absence the President, shall act as Chairman
of the meeting. The Secretary, or in his/her absence one of the
Assistant Secretaries, shall act as Secretary of the meeting. In case
none of the officers above designated to act as Chairman or
Secretary of the meeting, respectively, shall be present, a Chairman
or a Secretary of the meeting, as the case may be, shall be chosen
by a majority of the votes cast at such meeting by the holders of
shares present in person or represented by proxy and entitled to vote
at the meeting.
2.13 Order of Business. The order of business at all meetings of
shareholders shall be as determined by the Chairman of the
meeting, but the order of business to be followed at any meeting at
which a quorum is present may be changed by a majority of the votes
cast at such meeting by the holders of shares present in person or
represented by proxy and entitled to vote at the meeting.
2.14 Written Consent of Shareholders Without a Meeting. Whenever the
shareholders are required or permitted to take any action by
vote, such action may be taken without a meeting on written
consent, setting forth the action so taken or to be taken, signed
by the holders of all outstanding shares entitled to vote
thereon. Such consent shall have the same effect as a unanimous
vote of shareholders.
<PAGE>
ARTICLE III
Directors
3.1 General Powers. Except as otherwise provided in the Certificate of
Incorporation, the business of the Corporation shall be managed
under the direction of its Board. The Board may adopt such rules and
regulations, not inconsistent with the Certificate of Incorporation or
the By-Laws or applicable laws, as it may deem proper for the
conduct of its meetings and the management of the Corporation. In
addition to the powers expressly conferred by the By-laws, the Board
may exercise all powers and perform all acts which are not required,
by the By-laws or the Certificate of Incorporation or by law, to be
exercised and performed by the shareholders.
3.2 Number and Qualification. The number of directors constituting the
Entire Board is fixed at ten (10).
3.3 Qualifications. Each director shall, at the time of his election, be at
least eighteen (18) years of age, but not more than seventy (70)
years of age.
3.4 Election and Classification. The entire Board of Directors shall be
divided into three (3) classes of not less than three (3) members
each, which classes are designated as Class A, Class B and Class
C. The number of directors of Class A shall equal one-third (1/3) of
the total number of directors as determined in the manner provided
in the By-laws (with any fractional remainder to count as one); the
number of directors of Class B shall equal one-third (1/3) of said total
number of directors (or the nearest whole number thereto); and the
number of directors of Class C shall equal said total number of
directors minus the aggregate number of directors of Classes A and
B. At the election of the first Board of Directors, the class of each of
the members then elected shall be designated. The term of office of
each member then designated as a Class A director shall expire at
the annual meeting of shareholders next ensuing, that of each
member then designated as a Class B director at the annual meeting
of shareholders one year thereafter, and that of each member then
designated as a Class C director at the annual meeting of
shareholders two years thereafter. At each annual meeting of
shareholders held after the election and classification of the first
Board of directors, directors to succeed those whose terms expire at
such annual meeting shall be elected to hold office for a term expiring
at the third succeeding annual meeting of shareholders and until their
respective successors are elected and have qualified or until their
respective earlierdisplacement from office by resignation, removal or
otherwise. Directors shall, except as otherwise required by law or by
the Certificate of Incorporation, be elected by a plurality of the votes
cast at a meeting of shareholders by the holders of shares entitled to
vote in the election. Only persons who have been nominated in
accordance with the following procedures shall be eligible for election
as directors of the Corporation. Nominations of persons for election
to the Board of Directors may be made at any annual meeting of
shareholders or special meeting of shareholders called and held for
such express purpose (a) by or at the direction of the Board of
Directors (or any duly authorized committee thereof) or (b) by any
shareholder of the Corporation who (i) is a shareholder of record both
on the date of the giving of the notice provided for in this Section 3.4
and on the record date for the determination of shareholders entitled
to vote at such annual or special meeting and (ii) complies with the
notice procedures set forth in this Section 3.4. In addition to any
other applicable requirements, for a nomination to be made by a
shareholder, such shareholder must have given a timely notice of
nomination in proper written form to the Secretary of the Corporation.
To be timely given in the case of an annual meeting, a shareholder's
notice of nomination to the Secretary must be delivered to or mailed
and received at the principal executive offices of the Corporation not
less than one hundred twenty (120) days prior to the anniversary date
of the immediately preceding annual meeting of shareholders. To be
timely given in the case of a special meeting called and held for such
express purpose, a shareholder's notice of nomination to the
Secretary must be delivered to or mailed and received at the principal
executive offices of the Corporation not later than close of business
on the tenth (10th) day following the date on which the notice of the
special meeting was first mailed to shareholders. To be in proper
written form, a shareholder's notice of nomination to the Secretary
must set forth (a) as to each person whom the shareholder proposes
to nominate for election as a director (i) the name, age, business
address and residence address of such person, (ii) the principal
occupation or employment of such person, (iii) the class or series and
number of shares of capital stock of the Corporation which are owned
beneficially or of record by such person and (iv) any other information
relating to such person that may be required to be disclosed by the
Corporation in connection with its solicitations of proxies for election
of directors pursuant to Section 14 of the Securities Exchange Act of
1934, as amended (the "Exchange Act"), and the rules and
regulations promulgated thereunder, or as may be required in order
to ascertain that the person meets any prerequisites contained in
applicable law, the Corporation's Certificate of Incorporation or these
Bylaws for serving as a director of the Corporation; and (b) as to the
shareholder giving such notice (i) the name and record address of
such shareholder, (ii) the class or series and number of shares of
capital stock of the Corporation which are owned beneficially or of
record by such shareholder, (iii) a description of all arrangements or
understandings between such shareholder and each proposed
nominee and any other person or persons (including their names)
pursuant to which the nomination(s) are to be made by such
shareholder, (iv) a representation that such shareholder intends to
appear in person or by proxy at the annual meeting to nominate the
person or persons named in the notice of nomination, and (v) any
other information relating to such shareholder that would be required
to be disclosed by the Corporation in connection with its solicitations
of proxies for election of directors pursuant to Section 14 of the
Exchange Act and the rules and regulations promulgated thereunder.
Such notice of nomination must be accompanied by a written consent
of each proposed nominee to being named as a nominee and to
serve as a director if elected. No person shall be eligible for election
as a director of the Corporation unless nominated in accordance with
the procedures set forth in this Section 3.4. If the Chairman of the
annual or special meeting determines that a nomination was not
made in accordance with the foregoing procedures, the Chairman
shall declare to the meeting that the nomination was defective and
such defective nomination shall be disregarded.
3.5 Newly Created Directorships and Vacancies. Newly created
directorships resulting from an increase in the number of directors
and vacancies occurring in the Board for any reason, including the
removal of directors without cause, may be filled by vote of a majority
of the directors then in office, although less than a quorum, at any
meeting of the Board, or may be elected by a plurality of the votes
cast by the holders of shares entitled to vote in the election at a
special meeting of shareholders called for that purpose. A director
elected to fill a vacancy shall hold office during the term to which
his/her predecessor had been elected and until his/her successor
shall have been elected and shall qualify, or until his/her earlier
death, resignation or removal.
3.6 Resignations. Any director may resign at any time by written notice
to the Chairman of the Board or the Secretary. Such resignation shall
take effect at the time therein specified, and unless otherwise
specified, the acceptance of such resignation shall not be necessary
to make it effective.
3.7 Removal of Directors. The Entire Board, or less than the Entire
Board, may be removed for cause by vote of the shareholders
or by action of the Board. The Entire Board, or less than the Entire
Board may be removed without cause only in the manner prescribed
in the Certificate of Incorporation.
3.8 Compensation. Each director, in consideration of his/his service as
such, shall be entitled to receive from the corporation such amount
per annum or such fees for attendance at directors' meetings, or both,
as the Board may from time to time determine, together with
reimbursement for the reasonable expenses incurred by him/her in
connection with the performance of his/her duties. Each director who
shall serve as a member of any committee of directors in
consideration of his/her serving as such shall be entitled to such
additional amount per annum or such fees for attendance at
committee meetings, or both, as the Board may from time to time
determine, together with reimbursement for the reasonable expenses
incurred by him/her in the performance of his/her duties. Nothing in
this section contained shall preclude any director from serving the
corporation or its subsidiaries in any other capacity and receiving
proper compensation therefor.
3.9 Place and Time of Meetings of the Board. Meetings of the Board,
regular or special, may be held at such times and places within or
without the State of New York as the Board will by vote determine at
its annual meeting, and may alter or amend from time to time. The
times and places for holding meetings may be fixed from time to time
by resolution of the Board or (unless contrary to resolution of the
Board) in the notice of the meeting.
3.10 Annual Meetings. On the day when and at the place where the
annual meeting of shareholders for the election of directors is held,
and as soon as practicable thereafter, the Board may hold its annual
meeting, without notice of such meeting, for the purposes of
organization, the election of officers and the transaction of other
business. The annual meeting of the Board may be held at any other
time and place specified in a notice given as provided in Section 3.12
of the By-laws for special meetings of the Board or in a waiver of
notice thereof.
3.11 Regular Meetings. Regular meetings of the Board may be held at
such times and places as may be fixed from time to time by the
Board. Unless otherwise required by the Board, regular meetings of
the Board may be held without notice. If any day fixed for a regular
meeting of the Board shall be a Saturday or Sunday or a legal holiday
at the place where such meeting is to be held, then such meeting
shall be held at the same hour at the same place on the first business
day thereafter which is not a Saturday, Sunday or legal holiday.
3.12 Special Meetings. Special meetings of the Board shall be held
whenever called by the Chairman of the Board or the Secretary or by
any three (3) or more directors. Notice of each special meeting of the
Board shall, if mailed, be addressed to each director at the address
designated by him/her for that purpose or, if none is designated, at
his/her last known address not later than 24 hours before the date on
which such meeting is to be held; or such notice shall be sent to each
director at such address by telegraph, Telex, TWX, cable,wireless, or
similar means of communication, or be delivered to him/he personally,
not later than the day before the date on which such meeting is to be
held. Every such notice shall state the time and place of the meeting
but need not state the purpose of the meeting, except to the extent
required by law. If mailed, each notice shall be deemed given when
deposited, with postage thereon prepaid, in the post office or official
depository under the exclusive care and custody of the United States
post office department. Such mailing shall be by first class mail.
3.13 Adjourned Meetings. A majority of the directors present at any
meeting of the Board, including an adjourned meeting, whether or not
a quorum is present, may adjourn such meeting to another time and
place. Notice of any adjourned meeting of the Board need not be
given to any director whether or not present at the time of the
adjournment. Any business may be transacted at any adjourned
meeting that might have been transacted at the meeting as originally
called.
3.14 Waivers of Notice. Anything in these By-laws or in any resolution
adopted by the Board to the contrary notwithstanding, notice of any
meeting of the Board need not be given to any director who submits
a signed waiver of such notice, whether before or after such meeting,
or who attends such meeting without protesting, prior thereto or at its
commencement, the lack of notice to him/her.
3.15 Organization. At each meeting of the Board, the Chairman of the
Board of the Corporation, or a chairman chosen by the majority of the
directors present, shall preside. The Secretary shall act as Secretary
at each meeting of the Board. In case the Secretary shall be absent
from any meeting of the Board, an Assistant Secretary shall perform
the duties of Secretary at such meeting; and in the absence from any
such meeting of the Secretary and Assistant Secretaries, the person
presiding at the meeting may appoint any person to act as Secretary
of the meeting.
3.16 Quorum of Directors. A majority of the directors shall constitute a
quorum at any meeting of the Board.
3.17 Action by the Board. Except as otherwise provided in Section 3.18 of
the By-laws, all corporate action taken by the board shall be
taken at a meeting of the Board. Except as otherwise provided herein
or by the Certificate of Incorporation or by law, the vote of a majority
of the directors present at the time of the vote, if a quorum is present
at such time, shall be the act of the Board.
3.18 Written Consent of Directors Without a Meeting. Any action required
or permitted to be taken by the Board may be taken without a meeting
if all members of the Board consent in writing to the adoption of a
resolution authorizing the action. The resolution and the written
consents thereto by the members of the Board shall be filed with the
minutes of the proceedings of the Board.
3.19 Participation in Meeting of Board by Means of Conference Telephone
or Similar Communications Equipment. Any one or more members of
the Board may participate in a meeting of the Board by means of a
conference telephone or similar communications equipment allowing
all persons participating in the meeting to hear each other at the
same time. Participation by such means shall constitute presence in
person at a meeting.
3.20 Retirement of Directors. Any director who shall have attained the age
of 70 during his/her term office shall retire from the Board at the first
annual meeting of shareholders held on or after his/her birthdate.
<PAGE>
ARTICLE IV
Executive Committee and Other Committees
4.1 How Constituted and Powers. The Board shall, by resolution adopted
by a majority of the Entire Board, designate from among its members
an Executive Committee of three (3) or more members which shall
have all the authority of the Board, except that it shall have no
authority as to the following matters:
4.1.1 The submission to shareholders of any matter that needs
shareholders' approval;
4.1.2 The filling of vacancies in the Board or in any committee;
4.1.3 The fixing of compensation of the directors for serving on the Board
or on any committee;
4.1.4 The amendment or repeal of the By-laws, or the adoption of new
By-laws;
4.1.5 The amendment or repeal of any resolution of the Board which
includes among its terms a provision that it is not so amendable or
repealable. The Board, by resolution adopted by a majority of the
Entire Board, may designate from among its members other
committees, each consisting of three or more directors, which shall
have the authority provided in such resolution. The Chairman of the
Executive Committee shall vote only in the case of a tie.
4.2 General. Any committee designated by the Board pursuant to
Section 4.1 of the By-laws, and each of the members and alternate
members thereof, shall serve at the pleasure of such committee, who
may replace any absent member or members at any meeting of such
committee. All corporate action taken by any committee designated
by the Board pursuant to Section 4.1 of the By-laws shall be taken at
a meeting of such committee except that any action required or
permitted to be taken by any committee may be taken without a
meeting if all members of the committee consent in writing to the
adoption of a resolution authorizing the action; in such event the
resolution and the written consents thereto by the members of the
committee shall be filed with the minutes of the proceedings of the
committee. Any one or more members of any committee may
participate in a meeting of such committee by means of conference
telephone or similar communications equipment allowing all persons
participating in the meeting to hear each other at the same time.
Participation by such means shall constitute presence in person at a
meeting. Any committee may adopt such rules and regulations, not
inconsistent with the Certificate of Incorporation or the By-laws or
applicable laws or resolution of the Board designating such
committee, as it may deem proper for the conduct of its meetings and
the exercise by it of the authority of the Board conferred upon such
committee by the resolution of the Board designating such committee.
ARTICLE V
Officers
5.1 Officers. The Board may elect or appoint a Chairman of the Board,
President, one or more Vice Presidents, a Secretary and a Treasurer,
and such other officers as it may determine. All officers shall be
elected or appointed to hold offices until the meeting of the Board
following the next annual meeting of shareholders. The Board may
designate one or more Vice Presidents as Executive Vice Presidents,
and may use descriptive words or phrases to designate the standing,
seniority or area of special competence of the Vice Presidents elected
or appointed by it. Each officer shall hold office for the term for which
he/she is elected or appointed, and until his/her successor shall have
been elected or appointed and qualified or until his/her death, his/her
resignation or his/her removal in the manner provided in Section 5.2
of the By-laws. Any two or more offices may be held by the same
person, except the offices of President and Secretary; provided,
however, that if all of the issued and outstanding shares of the
Corporation are owned by one person, such person may hold all or
any combination of offices. The Board may require any officers to
give a bond or other security for the faithful performance of his/her
duties, in such amount and with such sureties as the Board may
determine. All officers as between themselves and the Corporation
shall have such authority and perform such duties in the management
of the Corporation as may be provided in the By-laws or as the Board
may from time to time determine.
5.2 Removal of Officers. Any officer elected or appointed by the Board
may be removed by the Board with or without cause. The removal of
an officer without cause shall be without prejudice to his/her contract
rights, if any. The election or appointment of an officer shall not of
itself create contract rights.
5.3 Resignations. Any officer may resign at any time by notifying the
Board or the Chairman of the Board or the Secretary in writing. Such
resignation shall take effect at the date of receipt of such notice or at
such later time as is therein specified, and, unless otherwise
specified, the acceptance of such resignation shall not be necessary
to make it effective. The resignation of an officer shall be without
prejudice to the contract rights of the Corporation, if any.
5.4 Vacancies. A vacancy in any office because of death, resignation,
removal, disqualification or any other cause may be filled for the
unexpired portion of the term by the Board at any regular or special
meeting of the Board.
5.5 Compensation. Salaries or other compensation of the officers may be
fixed from time to time by the Board. No officer shall be prevented
from receiving a salary or other compensation by reason of the fact
that he/she is also a director.
5.6 Chairman of the Board. The Chairman of the Board of Directors shall
preside at all meetings of the stockholders and Directors, and shall
have such other duties as may be assigned to him from time to time
by the Board of Directors. Unless the Board of Directors otherwise
determines, the Chairman of the Board shall be the chief executive
officer and head of the Corporation. Under the supervision of the
Board of Directors and of the executive committee, the chief executive
officer shall have the general control and management of its business
and affairs, subject, however, to the right of the Board of Directors
and of the executive committee to confer any specific power, except
such as may be by statute exclusively conferred on the chief
executive officer, upon any other officer or officers of the Corporation.
The chief executive officer shall perform and do all acts and things
incident to the position of chief executive officer and such other duties
as may be lawfully assigned to him/her from time to time by the Board
of Directors or the executive committee.
5.7 President. The President shall perform such duties as may be
assigned to him/her from time to time by the Board of Directors, by
the executive committee or by the Chairman of the Board. Unless the
Board of Directors otherwise determines, the President shall be chief
operating officer of the Corporation. He/she shall have such
responsibilities as are assigned to him/her by the Board. In the event
the President is designated as chief executive officer by the Board of
Directors, the President shall have and possess all of the powers and
discharge all of the duties of the chief executive officer, subject to the
control of the Board and the executive committee.
5.8 Vice Presidents. At the request of the Chairman of the Board, or in
his/her absence, at the request of the President, or in his/her
absence, at the request of the Board, the Vice President shall (in
such order as may be designated by the Board) perform all of the
duties of the President and so acting shall have all the powers of and
be subject to all restrictions upon the President. Any Vice President
may also, with the Secretary or the Treasurer or an Assistant
Secretary or an Assistant Treasurer, sign certificates for shares of the
Corporation; may sign and execute, in the name of the Corporation,
deeds, mortgages, bonds, contracts or other instruments authorized
by the Board, except in cases where the signing and execution
thereof shall be expressly delegated by the Board or by the By-laws
to some other officer or agent of the Corporation, or shall be required
by law otherwise to be signed or executed; and shall perform such
other duties as from time to time may be assigned to him/her by the
Board or by the Chairman of the Board, or in his/her absence, by the
President.
5.9 Secretary. The Secretary, if present, shall act as Secretary of all
meetings of the shareholders and of the Board, and shall keep the
minutes thereof in the proper book or books to be provided for that
purpose; he/she shall see that all notices required to be given by the
Corporation are duly given and served; he/she may, with the
Chairman of the Board, the President or a Vice President, sign
certificates for shares of the Corporation; he/she shall be custodian
of the seal of the Corporation and may seal with the seal of the
Corporation or a facsimile thereof, all certificates for shares of the
Corporation and all documents the execution of which on behalf of
the Corporation under its corporate seal is authorized in accordance
with the provisions of the By-laws; he/she shall have charge of the
share records and also of the other books, records and papers of the
Corporation relating to its organization and management as a
Corporation, and shall see that the reports, statements and other
documents required by law are properly kept and filed; and shall, in
general perform all the duties incident to the office of Secretary and
such other duties as from time to time may be assigned to him/her by
the Board or by the Chairman of the Board, or in his/her absence, by
the President.
5.10 Treasurer. The Treasurer shall have charge and custody of, and be
responsible for, all funds, securities and notes of the Corporation;
receive and give receipts for moneys due and payable to the
Corporation from any sources whatsoever; deposit all such moneys
in the name of the Corporation in such banks, trust companies or
other depositories as shall be selected in accordance with these
By-laws; against proper vouchers, cause such funds to be disbursed
by checks or drafts on the authorized depositories of the Corporation
signed in such manner as shall be determined in accordance with any
provisions of the by-laws, and be responsible for the accuracy of the
amounts of all moneys so disbursed; regularly enter or cause to be
entered in books to be kept by him/her under his/her direction full and
adequate account of all moneys received or paid by him/her the
account of the Corporation; have the right to require, from time to
time, reports or statements giving such information as he/she may
desire with respect to any and all financial transactions of the
Corporation from the officers or agents transacting the same; render
to the Chairman of the Board or the Board, whenever the Chairman
of the Board or the Board, respectively, shall require him/her so to do,
an account of the financial condition of the Corporation and of all
his/her transactions as Treasurer; exhibit at all reasonable times
his/her books of account and other records to any of the directors
upon application at the office of the Corporation where such books
and records are kept; and, in general, perform all the duties incident
to the office of Treasurer and such other duties as from time to time
may be assigned to him/her by the Board or by the Chairman of the
Board, or in his/her absence, by the President; and he/she may sign
with the Chairman of the Board or the President or a Vice President
certificates for shares of the Corporation.
5.11 Assistant Secretaries and Assistant Treasurers. Assistant
Secretaries and Assistant Treasurers shall perform such duties as
shall be assigned to them by the Secretary or by the Treasurer,
respectively, or by the Board of by the Chairman of the Board or in
his/her absence, by the President. Assistant Secretaries and
Assistant Treasurers may, with the Chairman of the Board or
President or a Vice President, sign certificates for shares of the
Corporation.
ARTICLE VI
Contracts, Checks, Drafts, Bank Accounts, Etc.
6.1 Execution of Contracts. The Board may authorize any officer,
employee or agent, in the name and on behalf of the Corporation, to
enter into any contract or execute and satisfy any instrument, and any
such authority may be general or confined to specific instances, or
otherwise limited.
6.2 Loans. The Chairman of the Board or any other officer, employee or
agent authorized by the By-laws or by the Board may effect loans and
advances at any time for the Corporation from any bank, trust
company or other institution or from any firm, corporation or individual
and for such loans and advances may make, execute and deliver
promissory notes, bonds or other certificates or evidences of
indebtedness of the Corporation, and when authorized so to do may
pledge and hypothecate or transfer any securities or other property
of the Corporation as security for any such loans or advances. Such
authority conferred by the Board may be general or confined to
specific instances or otherwise limited.
6.3 Checks, Drafts, Etc. All checks, drafts and other orders for the
payment of money out of the funds of the Corporation and all notes
or other evidences of indebtedness of the Corporation shall be signed
on behalf of the Corporation in such manner as shall from time to time
be determined by resolution of the Board.
6.4 Deposits. The funds of the Corporation not otherwise employed shall
be deposited rom time to time to the order of the Corporation in such
banks, trust companies or other depositories as the Board may select
or as may be selected by an officer, employee or agent of the
Corporation to whom such power may from time to time be delegated
by the Board.
ARTICLE VII
Shares and Dividends
7.1 Certificates Representing Shares. The shares of the Corporation
shall be represented by certificates in such form (consistent with the
provisions of Section 508 of the Business Corporation Law) as shall
be approved by the Board. Such certificates shall be signed by the
Chairman of the Board or the President or a Vice President and by
the Secretary or an Assistant Secretary or the Treasurer or an
Assistant Treasurer, and may be sealed with the seal of the
Corporation or a facsimile thereof. The signatures of the officers
upon a certificate may be facsimiles, if the certificate is countersigned
by a transfer agent or registered by a registrar other than the
Corporation itself or its employee. In case any officer who has signed
or whose facsimile signature has been placed upon any certificate
shall have ceased to be such officer before such certificate is issued,
such certificate may, unless otherwise ordered by the Board, be
issued by the Corporation with the same effect as if such person were
such officer at the date of issue.
7.2 Transfer of Shares. Transfers of shares shall be made only on the
books of the Corporation by the holder thereof or by his/her duly
authorized attorney appointed by a power of attorney duly executed
and filed with the Secretary or a transfer agent of the Corporation,
and on surrender of the certificate or certificates representing such
shares properly endorsed for transfer and uponpayment of all
necessary transfer taxes. Every certificate exchanged, returned or
surrendered to the Corporation shall be marked "Canceled", with the
date of cancellation, by the Secretary or an Assistant Secretary or the
transfer agent of the Corporation. A person in whose name shares
shall stand on the books of the Corporation shall be deemed the
owner thereof to receive dividends, to vote as such owner and for all
other purposes as respects the Corporation. No transfer of shares
shall be valid as against the Corporation, its shareholders and
creditors for any purpose, except to render the transferee liable for
the debts of the Corporation to the extent provided by law, until such
transfer shall have been entered on the books of the Corporation by
an entry showing from and to whom transferred.
7.3 Transfer and Registry Agents. The Corporation may from time to time
maintain one or more transfer offices or agents and registry offices or
agents at such place or places as may be determined form time to
time by the Board.
7.4 Lost, Destroyed, Stolen and Mutilated Certificates. The holder of any
shares shall immediately notify the Corporation of any loss,
destruction, theft or mutilation of the certificate representing such
shares, and the Corporation mayissue a new certificate to replace the
certificate alleged to have been lost, destroyed, stolen or mutilated.
The Board may, in its discretion, as a condition to the issue of any
such new certificate, require the owner of the lost, destroyed, stolen
or mutilated certificate, or his/her legal representatives, to advertise
such fact in such manner as the Board may require, and to give the
Corporation and its transfer agents and registrars, or such of them as
the Board may require, a bond in such form, in such sums and with
such surety or sureties as the board may direct, to indemnify the
Corporation and its transfer agents and registrars against any claim
that may be made against any of them on account of the continued
existence of any such certificate so alleged to have been lost,
destroyed, stolen or mutilated and against any expense in connection
with such claim.
7.5 Regulations. The Board may make such rules and regulations as it
may deem expedient, not inconsistent with the By-laws or with the
Certificate of Incorporation, concerning the issue, transfer and
registration of certificates representing shares.
7.6 Limitation on Transfers. If any two or more shareholders or
subscribers for shares shall enter into any agreement whereby the
rights of any one or more of them to sell, assign, transfer, mortgage,
pledge, hypothecate, or transfer on the books of the Corporation, any
or all of such shares held by them shall be abridged, limited or
restricted, and if a copy of such agreement shall be filed with the
Corporation and shall contain a provision that the
certificatesrepresenting shares covered or affected by said
agreement shall have such reference thereto endorsed thereon; and
such shares shall not thereafter be transferred on the books of the
Corporation except in accordance with the terms and provisions of
such agreement.
7.7 Dividends, Surplus, Etc. Subject to the provisions of the Certificate
of Incorporation and of law, the Board:
7.7.1 May declare and pay dividends or make other distributions on the
outstanding shares in such amounts and at such time or times as, in
its discretion, the condition of the affairs of the Corporation shall
render advisable;
7.7.2 May use and apply, in its discretion, any of the surplus of the
Corporation in purchasing or acquiring any shares of the Corporation,
or purchase warrants therefor, in accordance with law, or any of its
bonds, debentures, notes, scrip or other securities or evidences of
indebtedness;
7.7.3 May set aside from time to time out of such surplus or net profits
such sum or sums as, in its discretion, it may think proper, as a
reserve fund to meet contingencies, or for equalizing dividends or for
the purpose of maintaining or increasing the property or business of
the Corporation, or for any other purpose it may think conducive to
the best interests of the Corporation.
ARTICLE VIII
Indemnification
8.1 Indemnification of Others. The Board in its discretion shall have
power on behalf of the Corporation to indemnify any person, other
than a director or officer, made a party to any action, suit or
proceeding by reason of the fact that he/she, his/her testator or
intestate, is or was an employee of the Corporation.
8.2 Insurance. The Board in its discretion shall have the power to
purchase and maintain insurance in accordance with, and subject to,
the provisions of Section 727 of the Business Corporation Law.
ARTICLE IX
Books and Records
9.1 Books and Records. The Corporation shall keep correct and
complete books and records of account and shall keep minutes of the
proceedings of the shareholders, Board and executive committee, if
any. The Corporation shall keep at the office designated in the
Certificate of Incorporation or at the office of the transfer agent or
registrar of the Corporation in New York State, a recordcontaining the
names and addresses of all shareholders, the number and classof
shares held by each and the dates when they respectively became
the owners of record thereof. Any of the foregoing books, minutes or
records may be in written form or in any other form capable of being
converted into written form within a reasonable time.
9.2 Inspection of Books and Records. Except as otherwise provided by
law, the Board shall determine from time to time whether, and, if
allowed, when and under what conditions and regulations, the
accounts, books, minutes and other records of the Corporation, or
any of them, shall be open to the inspection of the shareholders.
ARTICLE X
Seal
The Board may adopt a corporate seal which shall be in the form of
a circle and shall bear the full name of the Corporation and the year of its
incorporation.
ARTICLE XI
Fiscal Year
The fiscal year of the Corporation shall be determined, and may be
changed, by resolution of the Board.
ARTICLE XII
Voting of Shares Held
Unless otherwise provided in Section 3.17 hereof or by resolution of
the Board, the Chairman of the Board or in his/her absence the President
may, from time to time, appoint one or more attorneys or agents of the
Corporation, in the name and on behalf of the Corporation, to cast as a
shareholder or otherwise in any other corporation, any of whose shares or
securities may be held by the Corporation, at meetings of the holders of the
shares or other securities of such other corporation, and to consent in writing
to any action, by any such other corporation, and may instruct the person or
persons so appointed as to the manner of casting such votes or giving such
consent, and may execute or cause to be executed on behalf of the
Corporation and under its corporate seal, or otherwise, such written proxies,
consents, waivers or other instruments as he may deem necessary and
proper in the premises; or the Chairman of the Board or in his absence, the
President, may himself/herself attend any meeting of the holders of the
shares or other securities of any other such corporation and thereat vote or
exercise any or all other powers of the Corporation as the holder of such
shares or other securities of such other corporation.
ARTICLE XIII
Amendments
The By-laws may be altered, amended, supplemented or
repealed, or new By-laws may be adopted, by vote of the holders
of a majority of the shares of the Corporation entitled to vote
in the election of directors or by vote of a majority of the
Board; provided, however, that any alteration, amendment,
supplement or repeal of (1) Section 3.3 of Article III of the
By-laws or of this proviso to Article XIII of the By-laws,
shall require the vote of not less than eighty percent (80%) of
the shares entitled to vote in the election of directors, or
the vote of at least eighty percent (80%) of the Entire Board,
for approval and (2) Section 3.2 of Article III or Section 4.1
of Article IV of the By-laws shall require the vote of not less
than seventy percent (70%) of the Entire Board for approval.
If any By-law regulating an impending election of directors is
adopted, altered, amended, supplemented or repealed by the
Board, such By-law shall be set forth in the notice of the next
meeting of shareholders for election of directors, together
with a concise statement of the changes made. Any By-laws
adopted, altered, amended, or supplemented by the Board may be
altered, amended, supplemented or repealed by the shareholders
entitled to vote thereon.
EMPLOYMENT AGREEMENT
AGREEMENT made as of the 26th day of
November, 1997, among ARROW FINANCIAL
CORPORATION, a New York corporation with its
principal place of business at 250 Glen Street, Glens Falls,
New York 12801 ("Arrow"), its wholly-owned subsidiary,
GLENS FALLS NATIONAL BANK AND TRUST
COMPANY, a national banking association with its
principal place of business at 250 Glen Street, Glens Falls,
New York 12801 (the "Bank"), and THOMAS L. HOY,
residing at 25 Pershing Road, Queensbury, New York
12804 (the "Executive").
Recitals
WHEREAS, Arrow and the Bank, through their
respective Boards of Directors, consider the maintenance of
a competent and experienced executive management team
to be essential to the long-term success of Arrow and the
Bank; and
WHEREAS, in this regard, Arrow and the Bank
have determined that it is in the best interests of each that
the Executive continue to serve as President and Chief
Executive Officer of Arrow and the Bank, pursuant to a
written employment agreement; and
WHEREAS, Arrow and the Bank have determined
that the existing employment agreement between the
Executive and each of them should be renewed, with certain
modifications to reflect changed circumstances, and have
agreed with the Executive that the Employment Agreement
set forth hereinbelow shall replace said existing employment
agreement;
NOW, THEREFORE, in furtherance of the interests
described above and in consideration of the respective
covenants and agreements herein contained, the parties
hereto agree as follows:
1. Employment
Arrow and the Bank agree to employ the Executive
and the Executive agrees to continue to serve as President
and Chief Executive Officer of Arrow and the Bank during
the term of employment provided for in this Agreement.
2. Term of Employment
Employment of the Executive pursuant to this
Agreement shall commence on the date hereof and, unless
the Executive becomes a Retired Early Employee under
Paragraph 6 of this Agreement or such employment is
earlier terminated as provided in Paragraph 7 of this
Agreement, employment under this Employment Agreement
shall terminate on the earlier of (i) December 31 of the
second year after the year in which the Board of Directors
of Arrow (the "Arrow Board") first fails to approve the
extension of this Agreement pursuant to the following
sentence, or (ii) the last day of the month in which the
Executive attains retirement age (which shall be age 65,
unless the Executive shall have elected early retirement at
age 62 under any retirement plan of Arrow). At any
meeting of the Arrow Board in the fourth quarter of each
calendar year during which this Agreement is in effect
(except the year in which the Executive attains retirement
age and the two preceding years), the Arrow Board shall
vote upon a one (1) year extension of this Agreement, and
in the event such extension shall receive the affirmative vote
of a majority of the entire Arrow Board, this Agreement
shall remain in effect through December 31 of the third year
after the Arrow Board meeting, subject to earlier
termination of this Agreement under Paragraph 6 or 7. In
the event that, in the fourth quarter of any such calendar
year, a majority of the entire Arrow Board fails to vote in
favor of such a one (1) year extension of this Agreement,
employment of the Executive hereunder shall continue for
the period and only for the period specified in the first
sentence of this Paragraph, and, notwithstanding the
foregoing sentence, during such period the Arrow Board
shall not again consider extension of this Agreement.
3. Position and Duties
The Executive shall continue to serve as President
and Chief Executive Officer of Arrow and the Bank and
shall have duties, responsibilities, and authority as normally
attend such positions or as may reasonably be assigned to
the Executive from time to time by the Arrow Board or the
Board of Directors of the Bank (the "Bank Board"). The
Executive shall devote substantially all his working time and
efforts to the business and affairs of Arrow and the Bank,
provided however, that the Executive may, with the
approval of the Arrow Board, serve as a director or officer
of any non-competing business or engage in any other
activity, including but not limited to, charitable or
community activity, to the extent that they do not inhibit the
performance of his duties hereunder.
4. Place of Performance
In connection with the Executive's employment
hereunder, the Executive shall be based at the principal
executive offices of the Bank, except for required travel on
business. The Executive shall not be required to change his
residence from the area in which he now resides. The Bank
shall furnish the Executive with office space, stenographic
assistance, and such other facilities and services as shall be
suitable to the Executive's position and adequate for the
performance of his duties hereunder.
5. Compensation
(a) Salary. The Bank shall continue to
pay the Executive hereunder his current base annual
salary of $ 200,000.00, payable in equal bi-weekly
installments or at such other intervals as shall be
agreed upon by the parties, plus such annual bonus,
if any, as may be determined by the Arrow Board or
the committee of the Arrow Board charged with
reviewing executive compensation (the
"Committee"). The Executive's base annual salary
may be increased from time to time in accordance
with the normal business practices of Arrow and the
Bank as determined by the Arrow Board or the
Committee, and, if so increased, such base annual
salary shall not thereafter during the Executive's
employment under this Agreement be decreased and
the obligation of the Bank hereunder to pay the
Executive's base annual salary shall thereafter relate
to such increased base annual salary. Compensation
of the Executive by base annual salary payments
shall not prevent the Executive from participating in
any other compensation or benefit plan of Arrow or
the Bank in which he is entitled to participate and
participation in any such other compensation or
benefit plan shall not in any way limit or reduce the
obligation of the Bank to pay the Executive's base
annual salary hereunder.
(b) Other Benefits. In addition to the
compensation provided for in subparagraph (a)
above, the Executive shall be entitled during the
term of his employment under this Agreement (i) to
participate in any and all employee benefit programs
or stock purchase programs of Arrow or the Bank
now or hereafter in effect and open to participation
by qualifying employees of Arrow or the Bank
generally, including but not limited to the retirement
plan, supplemental retirement plan, employee stock
purchase plan and employee stock ownership plan of
Arrow or the Bank, and (ii) to enjoy certain personal
benefits provided by Arrow or the Bank, including
but not limited to:
(A) life insurance on the life of the
Executive, at no cost to the Executive, under
a group plan maintained by Arrow;
(B) disability insurance for the
Executive, at no cost to the Executive, under
a group plan maintained by Arrow;
(C) comprehensive medical and
dental insurance under a group plan provided
by Arrow, with the Executive to pay only
those amounts required to be paid
thereunder by covered employees generally
under the cost-sharing arrangements in effect
from time to time under such plan;
(D) reimbursement in full of all
business, travel and entertainment expenses
incurred by the Executive in performing his
duties hereunder; and
(E) fully paid vacation during
each calendar year in accordance with the
vacation policies of Arrow in effect from
time to time.
Arrow shall not make any material changes in any of
the personal benefits itemized above adversely
affecting the Executive unless such change occurs
pursuant to a program applicable to all executive
officers of Arrow and the adverse effect on the
Executive is not proportionately greater than the
adverse effect of the change on any other executive
officer of Arrow previously enjoying such benefit.
6. Change of Control or Change of
Authority
(a) Retired Early Employee. If a Change
of Control or Change of Authority (as such terms
are defined in subparagraph 6(f) below) occurs
during the term the Executive's employment under
this Employment Agreement, either the Executive,
on the one hand, or Arrow or the Bank, on the
other, may elect by written notice, given to the other
party or parties, at any time within twelve (12)
months after such Change of Control or Change of
Authority, to terminate the employment of the
Executive by Arrow and the Bank, whereupon the
Executive will become a "Retired Early Employee,"
and will be entitled to receive such payments as are
provided hereafter in this Section 6. Such election
and the termination of the Executive's employment
shall become effective on the first day of the second
calendar month commencing after delivery of the
notice or on such earlier date as the Executive in his
sole discretion may specify (the "Effective Date").
(b) Cash Payments. If the Executive
should become a Retired Early Employee hereunder,
the Bank shall, during the period commencing on the
Effective Date and ending two years thereafter (the
"Pay-Out Period"), make equal monthly payments to
the Executive (which shall not be deemed base
annual salary payments) in an amount such that the
present value of all such payments, determined as of
the Effective Date, equals two hundred ninety-nine
percent (299%) of the Base Amount, as such term is
defined in subparagraph 6(f) below. If at any time
during the Pay-Out Period the Arrow Board in its
sole discretion shall determine, upon application of
the Retired Early Employee supported by substantial
evidence, that the Retired Early Employee is then
under a severe financial hardship resulting from (i) a
sudden and unexpected illness or accident of the
Retired Early Employee or any of his dependents (as
defined in section 152(a) of the Internal Revenue
Code), (ii) loss of the Retired Early Employee's
property due to casualty, or (iii) other similar
extraordinary and unforeseeable circumstance
arising as a result of events beyond the control of the
Retired Early Employee, the Bank shall make
available to the Retired Early Employee, in one (1)
lump sum, an amount up to but not greater than the
present value of all monthly payments remaining to
be paid to him in the Pay-Out Period, calculated as
of the date of such determination by the Arrow
Board, for the purpose of relieving such severe
financial hardship to the extent the same has not
been or may not be relieved by (xi) reimbursement
or compensation by insurance or otherwise, (xii)
liquidation of the Retired Early Employee's assets
(to the extent such liquidation would not itself cause
severe financial hardship), or (xiii) distributions from
other benefit plans. If (a) the lump sum amount thus
made available is less than (b) the present value of
all such remaining monthly payments, the Bank shall
continue to pay to the Retired Early Employee
monthly payments for the duration of the Pay-Out
Period, but from such date forward such monthly
payments will be in a reduced amount such that the
present value of all such reduced payments will
equal the difference between (b) and (a), above.
The Retired Early Employee may elect to waive any
or all payments due him under this subparagraph.
(c) Death of Retired Early Employee. If
the Retired Early Employee dies before receiving all
monthly payments payable to him under
subparagraph 6(b), above, the Bank shall pay to the
Retired Early Employee's spouse, or if the Retired
Early Employee leaves no spouse, to the estate of
the Retired Early Employee, one (1) lump sum
payment in an amount equal to the present value of
all such remaining unpaid monthly payments,
determined as of the date of death of the Retired
Early Employee.
(d) Indemnification of Executive. In the
event a Change of Control or Change of Authority
occurs, Arrow and the Bank shall indemnify the
Executive for all legal fees and expenses
subsequently incurred by the Executive in seeking to
obtain or enforce any right or benefit provided under
this Employment Agreement, not limited to the
rights and benefits provided under this Section 6 and
whether or not the Executive has become a Retired
Early Employee hereunder, provided, however, that
such right to indemnification will not apply if and to
the extent that a court of competent jurisdiction shall
determine that any such fees and expenses have been
incurred as a result of the Executive's bad faith.
Indemnification payments payable hereunder by
Arrow or the Bank shall be made not later than
thirty (30) days after a request for payment has been
received from the Executive with such evidence of
indemnifiable fees and expenses as Arrow or the
Bank may reasonably request.
(e) No Duty to Seek Other Employment.
Amounts payable to any Retired Early Employee
under this Paragraph 6 shall not be reduced by the
amount of any compensation received by such
Retired Early Employee from any other employer or
source during the Pay-Out Period, and no Retired
Early Employee shall be under any obligation to
seek other employment or gainful pursuit during
such Pay-Out Period as a result of this Agreement.
(f) Definitions.
(i) The "Base Amount" for purpose
of this Paragraph 6 shall equal the average
annual compensation payable by the Bank to
the Executive and includable by the
Executive in gross income for the most
recent five (5) taxable years ending before
the date on which the Change of Control or
Change of Authority occurred.
(ii) A "Change of Control" shall be
deemed to have occurred if (A) any
individual corporation (other than Arrow),
partnership, trust, association, pool,
syndicate, or any other entity or any group of
persons acting in concert becomes the
beneficial owner, as that concept is defined
in Rule 13d-3 promulgated by the Securities
and Exchange Commission under the
Securities Exchange Act of 1934, as the
result of any one or more securities
transactions (including gifts and stock
repurchases but excluding transactions
described in subdivision (B), following), of
securities of Arrow possessing twenty-five
percent (25%) or more of the voting power
for the election of directors of such entity,
(B) there shall be consummated any
consolidation, merger or stock-for-stock
exchange involving Arrow or the securities
of Arrow in which the holders of voting
securities of Arrow immediately prior to
such consummation own, as a group,
immediately after such consummation, voting
securities of Arrow (or, if Arrow does not
survive such transaction voting securities of
the corporation surviving such transaction)
having less than fifty percent (50%) of the
total voting power in an election of directors
of Arrow (or such other surviving
corporation), excluding securities received
by any members of such group which
represent disproportionate percentage
increases in their shareholdings vis-a-vis the
other members of such group, (C) "approved
directors" shall constitute less than a majority
of the entire Arrow Board, with "approved
directors" defined to mean the members of
the Arrow Board as of the date of this
Agreement and any subsequently elected
members who shall be nominated or
approved by a majority of the approved
directors on the Arrow Board prior to such
election, or (D) there shall be consummated
any sale, lease, exchange or other transfer (in
one transaction or a series of related
transactions, excluding any transaction
described in subdivision (B), above), of all,
or substantially all, of the assets of Arrow to
a party which is not controlled by or under
common control with Arrow.
(iii) A "Change of Authority" shall
be deemed to have occurred if the Executive
is assigned duties by Arrow which, in the
reasonable opinion of the Executive have
materially less authority than those duties
currently being performed by him and
otherwise described herein.
7. Early Termination of Employment
The employment of the Executive hereunder by
Arrow and the Bank may be terminated or may terminate,
other than as provided in Paragraph 2 of this Agreement or
as permitted under Paragraph 6 of this Agreement, under
the circumstances set forth below.
(a) Termination for Cause. Arrow may
terminate the Executive's employment under this
Agreement prior to the normal expiration of its term
for cause. "Cause" shall mean:
(i) any willful misconduct by the
Executive which is materially injurious to
Arrow or the Bank, monetarily or otherwise;
(ii) any willful failure by the
Executive to follow the reasonable directions
of the Arrow Board or the Bank Board; or
(iii) any failure by the Executive
substantially to perform any reasonable
directions of the Arrow Board or the Bank
Board (other than failure resulting from
disability), within thirty (30) days after
delivery to the Executive by the respective
Board of a written demand for substantial
performance, which written demand shall
specifically identify the manner in which the
respective Board believes that the Executive
has not substantially performed.
Notwithstanding the foregoing, the employment of
the Executive hereunder shall not be deemed to have
been terminated for cause unless and until:
(A) reasonable notice is given to
the Executive setting forth the reasons
Arrow intends to terminate the Executive for
cause;
(B) an opportunity is provided for
the Executive to be heard before the Arrow
Board with counsel; and
(C) after such hearing or
opportunity to be heard, written notice of
final termination for cause is delivered to the
Executive, setting forth the specific reasons
therefor.
Termination for cause by Arrow shall require the
affirmative vote of at least two-thirds (2/3) of the
Arrow Board. The Executive will not be entitled to
any further compensation for any period subsequent
to the effective date of such termination, except for
severance pay, if any, in accordance with the then
existing severance policies of Arrow; provided,
however, that any such termination for cause
occurring after the Executive shall have elected to
become a Retired Early Employee under Paragraph
6 of this Agreement will not affect the right of the
Executive to receive all of the payments provided
for therein.
(b) Termination Without Cause. Arrow
may terminate the Executive's employment under
this Agreement prior to the normal expiration of its
term without cause upon thirty (30) days' written
notice. Termination without cause by Arrow shall
require the affirmative vote of at least two-thirds
(2/3) of the entire Arrow Board. In the event of
termination without cause, the Bank shall pay to the
Executive on the effective date of such termination
one (1) lump sum payment in an amount equal to the
total amount of base annual salary payments which
would have been payable to the Executive during the
remaining portion of the calendar year in which such
termination occurs and during the two (2) ensuing
calendar years had the Executive continued his
employment under this Agreement for the duration
of the period. For purposes of computing the
amount of the lump sum payment, it shall be
assumed that the Executive's current base salary on
the effective date of termination would not have
changed and no bonus would have been paid to him
during the period specified in the foregoing
sentence. Any such termination without cause
occurring after the Executive shall have elected to
become a Retired Early Employee under Paragraph
6 of this Agreement will not affect the right of the
Executive to receive all of the payments provided
for therein.
(c) Termination for Disability. If, as a
result of the Executive's incapacity due to physical
or mental illness, the Executive shall not have
performed his duties hereunder on a full time basis
for six (6) consecutive months, the Executive's
employment under this Agreement may be
terminated by Arrow upon thirty (30) days' written
notice. Such termination for disability shall require
the affirmative vote of a majority of the entire Arrow
Board. The Executive's compensation during any
period of disability prior to the effective date of such
termination shall be the amounts normally payable to
him in accordance with his then current base annual
salary, reduced by the sum of the amounts, if any,
paid to the Executive under disability benefit plans
maintained by Arrow. The Executive shall not be
entitled to any further compensation from the Bank
for any period subsequent to the effective date of
such termination, except for severance pay in
accordance with then existing severance policies of
Arrow; provided, however, that any such
termination for disability occurring after the
Executive shall have elected to become a Retired
Early Employee under Paragraph 6 of this
Agreement will not affect the right of the Executive
to receive all of the payments provided for therein.
(d) Termination for Breach by
Employer. In the event that Arrow or the Bank shall
have materially breached any provision of this
Agreement and such breach shall not have been
cured within ten (10) days after delivery of written
notice thereof to the breaching party by the
Executive, identifying the breach with reasonable
particularity, the Executive may cease to perform
and may terminate this Agreement and his
employment with Arrow and the Bank hereunder,
without thereby forfeiting any cause of action he
may have against the breaching party or parties as a
result of such breach or otherwise.
(e) Consensual Termination. All parties
hereto may agree at any time to terminate this
Agreement and the Executive's employment
hereunder upon such terms and conditions as the
parties may agree.
(f) Death. In the event of the death of
the Executive during the term of his employment
hereunder, the Bank shall pay to the beneficiary or
beneficiaries of the Executive listed on the
Executive's current beneficiary designation on file
with Arrow or the Bank, or in the absence of any
such designation, to the Executive's estate, a lump
sum amount equal to the base annual salary of the
Executive as of the date of death, and upon payment
of such amount and any other amounts due and
owing hereunder and unpaid as of the date of death,
this Employment Agreement shall thereupon
terminate and no further amounts shall be payable
hereunder.
8. Competition Restriction
In the event the Executive is terminated for cause
under Paragraph 7 or improperly terminates his own
employment hereunder, then during the period beginning on
the date of termination of the Executive's employment and
continuing for two (2) years after such date, the Executive
shall not, without the prior approval of the Arrow Board,
certified to him by the Secretary or Acting Secretary of
Arrow, become an officer, employee, agent, partner or
director of any other business in substantial competition
with the Bank, Arrow, or any other company or bank
affiliated with Arrow, including any branch or office of any
of the foregoing. Such restriction shall apply to any such
other business doing business in any county in the State of
New York in which Arrow, the Bank or any such other
affiliated company or bank is then conducting any material
business or into which, to the knowledge of the Executive at
the time of such termination, any such entity has immediate
plans to expand its activities in material respects. The
provisions of this Paragraph 8 shall not apply in the event
that the Executive becomes a Retired Early Employee under
Paragraph 6 or the Executive's employment terminates in
accordance with the first sentence of Paragraph 2.
It is the intention of the parties to restrict the
activities of the Executive under this Paragraph 9 only to
the extent necessary for the protection of the legitimate
business interests of Arrow, and the parties specifically
covenant and agree that should any of the clauses or
provisions of the competition restriction set forth herein,
under any set of circumstances, be held by a court of
competent jurisdiction to be illegal, invalid or unenforceable
under present or future laws effective during the term of this
Agreement, then and in that event, the court so holding may
reduce the business or territory to which such restriction
pertains and/or the period of time during which it operates,
or effect any other change to the extent necessary to render
such restriction enforceable by said court.
9. Confidential Information
The Executive specifically acknowledges that all
information pertaining to the Bank and Arrow received by
him during the course of his employment hereunder which
has been designated confidential or otherwise has not been
made publicly available, including, without limitation, plans,
strategies, projections, analyses, and information pertaining
to customers or potential customers, is the exclusive
property of Arrow and the Executive covenants and agrees
not to disclose any of such information, without the express
prior consent of the Arrow Board, during his employment
hereunder or after termination of such employment, to
anyone not employed or engaged by Arrow or a subsidiary
thereof to render services to it. The Executive further
covenants and agrees that he will not at any time use any
such information, without such express prior consent, for
his own benefit or the benefit of any party other than
Arrow. This Paragraph 9 shall survive termination of the
Agreement.
10. Successors and Assigns; Assumption by
Successors
This Agreement is a personal services contract
which may not be assigned by the Bank or Arrow to, or
assumed from the Bank or Arrow by, any other party
without the prior consent of the Executive. All rights
hereunder shall inure to the benefit of the parties hereto,
their personal or legal representatives, heirs, successors and
assigns. Arrow will require any successor (whether direct
or indirect, by purchase, assignment, merger, consolidation
or otherwise) to all or substantially all of the business and/or
assets of Arrow in any consensual transaction expressly to
assume this Agreement and to agree to perform hereunder
in the same manner and to the same extent that Arrow
would be required to perform if no such succession had
taken place. References herein to "Arrow" or the "Bank"
will be understood to refer to the successor or successors of
Arrow or the Bank, respectively.
11. Notices
Any notice required or desired to be given hereunder
shall be in writing and shall be deemed given when delivered
personally or sent by certified or registered mail, postage
prepaid, to the addresses of the other parties set forth in the
first Paragraph of this Agreement, provided that all notices
to Arrow or the Bank shall be directed in each case to the
Chief Financial Officer thereof.
12. Waiver of Breach
Waiver by any party of a breach of any provision
shall not operate as or be construed a waiver by such party
of any subsequent breach hereof.
13. Invalidity
The invalidity or unenforceability of any provision of
this Agreement shall not affect the validity or enforceability
of any other provisions, which shall remain in full force and
effect.
14. Entire Agreement; Written Modification;
Termination
This agreement contains the entire agreement among
the parties concerning the employment of the Executive by
Arrow and the Bank. No modification, amendment or
waiver of any provision hereof shall be effective unless in
writing specifically referring hereto and signed by the party
against whom such provision as modified or amended or
such waiver is sought to be enforced. This Agreement shall
terminate as of the time the Bank makes the final payment
which it may be obligated to pay hereunder or provides the
final benefit which it may be obligated to provide hereunder,
or, if later, as of the time the restriction on competition set
forth in Paragraph 8 expires.
15. Counterparts
This Agreement may be made and executed in
counterparts, in which case all counterparts shall be deemed
to constitute one original document for all purposes.
16. Governing Law
This Agreement is governed by and is to be
construed and enforced in accordance with the laws of the
State of New York.
17. Authorization
The Bank and Arrow represent and warrant that the
execution of this Employment Agreement has been duly
authorized by resolution of their respective Boards. This
Paragraph 17 shall survive termination of the Agreement.
<PAGE>
IN WITNESS WHEREOF, the parties have
executed or caused to be executed this Employment
Agreement as of the day and year first above written.
ARROW FINANCIAL CORPORATION
By: s/ Michael B. Clarke
Michael B. Clarke
Chairman, Personnel Committee
GLENS FALLS NATIONAL BANK ANDTRUST COMPANY
By: s/ Michael B. Clarke
Michael B. Clarke
Chairman, Personnel Committee
"EXECUTIVE"
s/ Thomas L. Hoy
Thomas L. Hoy
EMPLOYMENT AGREEMENT
AGREEMENT made as of the 26th day of
November, 1997, among ARROW FINANCIAL
CORPORATION, a New York corporation with its
principal place of business at 250 Glen Street, Glens Falls,
New York 12801 ("Arrow"), its wholly-owned subsidiary,
GLENS FALLS NATIONAL BANK AND TRUST
COMPANY, a national banking association with its
principal place of business at 250 Glen Street, Glens Falls,
New York 12801 (the "Bank"), and JOHN J. MURPHY,
residing at 33 Crownwood Lane, Queensbury, New York
12804 (the "Executive").
Recitals
WHEREAS, Arrow and the Bank, through their
respective Boards of Directors, consider the maintenance of
a competent and experienced executive management team
to be essential to the long-term success of Arrow and the
Bank; and
WHEREAS, in this regard, Arrow and the Bank
have determined that it is in the best interests of each that
the Executive continue to serve as Executive Vice
President, Treasurer and Chief Financial Officer of Arrow
and the Bank, pursuant to a written employment agreement;
and
WHEREAS, Arrow and the Bank have determined
that the existing employment agreement between the
Executive and each of them should be renewed, with certain
modifications to reflect changed circumstances, and have
agreed with the Executive that the Employment Agreement
set forth hereinbelow shall replace said existing employment
agreement;
NOW, THEREFORE, in furtherance of the interests
described above and in consideration of the respective
covenants and agreements herein contained, the parties
hereto agree as follows:
1. Employment
Arrow and the Bank agree to employ the Executive
and the Executive agrees to continue to serve as Executive
Vice President, Treasurer and Chief Financial Officer of
Arrow and the Bank during the term of employment
provided for in this Agreement.
2. Term of Employment
Employment of the Executive pursuant to this
Agreement shall commence on the date hereof and, unless
the Executive becomes a Retired Early Employee under
Paragraph 6 of this Agreement or such employment is
earlier terminated as provided in Paragraph 7 of this
Agreement, employment under this Employment Agreement
shall terminate on the earlier of (i) December 31 of the
second year after the year in which the Board of Directors
of Arrow (the "Arrow Board") first fails to approve the
extension of this Agreement pursuant to the following
sentence, or (ii) the last day of the month in which the
Executive attains retirement age (which shall be age 65,
unless the Executive shall have elected early retirement at
age 62 under any retirement plan of Arrow). At any
meeting of the Arrow Board in the fourth quarter of each
calendar year during which this Agreement is in effect
(except the year in which the Executive attains retirement
age and the two preceding years), the Arrow Board shall
vote upon a one (1) year extension of this Agreement, and
in the event such extension shall receive the affirmative vote
of a majority of the entire Arrow Board, this Agreement
shall remain in effect through December 31 of the third year
after the Arrow Board meeting, subject to earlier
termination of this Agreement under Paragraph 6 or 7. In
the event that, in the fourth quarter of any such calendar
year, a majority of the entire Arrow Board fails to vote in
favor of such a one (1) year extension of this Agreement,
employment of the Executive hereunder shall continue for
the period and only for the period specified in the first
sentence of this Paragraph, and, notwithstanding the
foregoing sentence, during such period the Arrow Board
shall not again consider extension of this Agreement.
3. Position and Duties
The Executive shall continue to serve as Executive
Vice President, Treasurer and Chief Financial Officer of
Arrow and the Bank and shall have duties, responsibilities,
and authority as normally attend such positions or as may
reasonably be assigned to the Executive from time to time
by the Arrow Board or the Board of Directors of the Bank
(the "Bank Board") or the Chief Executive Officer of Arrow
or the Bank. The Executive shall devote substantially all his
working time and efforts to the business and affairs of
Arrow and the Bank, provided however, that the Executive
may, with the approval of the Arrow Board or the Chief
Executive Officer of Arrow, serve as a director or officer of
any non-competing business or engage in any other activity,
including but not limited to, charitable or community
activity, to the extent that they do not inhibit the
performance of his duties hereunder.
4. Place of Performance
In connection with the Executive's employment
hereunder, the Executive shall be based at the principal
executive offices of the Bank, except for required travel on
business. The Executive shall not be required to change his
residence from the area in which he now resides. The Bank
shall furnish the Executive with office space, stenographic
assistance, and such other facilities and services as shall be
suitable to the Executive's position and adequate for the
performance of his duties hereunder.
5. Compensation
(a) Salary. The Bank shall continue to
pay the Executive hereunder his current base annual
salary of $ 146,000.00, payable in equal bi-weekly
installments or at such other intervals as shall be
agreed upon by the parties, plus such annual bonus,
if any, as may be determined by the Arrow Board or
the committee of the Arrow Board charged with
reviewing executive compensation (the
"Committee"). The Executive's base annual salary
may be increased from time to time in accordance
with the normal business practices of Arrow and the
Bank as determined by the Arrow Board or the
Committee, and, if so increased, such base annual
salary shall not thereafter during the Executive's
employment under this Agreement be decreased and
the obligation of the Bank hereunder to pay the
Executive's base annual salary shall thereafter relate
to such increased base annual salary. Compensation
of the Executive by base annual salary payments
shall not prevent the Executive from participating in
any other compensation or benefit plan of Arrow or
the Bank in which he is entitled to participate and
participation in any such other compensation or
benefit plan shall not in any way limit or reduce the
obligation of the Bank to pay the Executive's base
annual salary hereunder.
(b) Other Benefits. In addition to the
compensation provided for in subparagraph (a)
above, the Executive shall be entitled during the
term of his employment under this Agreement (i) to
participate in any and all employee benefit programs
or stock purchase programs of Arrow or the Bank
now or hereafter in effect and open to participation
by qualifying employees of Arrow or the Bank
generally, including but not limited to the retirement
plan, supplemental retirement plan, employee stock
purchase plan and employee stock ownership plan of
Arrow or the Bank, and (ii) to enjoy certain personal
benefits provided by Arrow or the Bank, including
but not limited to:
(A) life insurance on the life of the
Executive, at no cost to the Executive, under
a group plan maintained by Arrow;
(B) disability insurance for the
Executive, at no cost to the Executive, under
a group plan maintained by Arrow;
(C) comprehensive medical and
dental insurance under a group plan provided
by Arrow, with the Executive to pay only
those amounts required to be paid
thereunder by covered employees generally
under the cost-sharing arrangements in effect
from time to time under such plan;
(D) reimbursement in full of all
business, travel and entertainment expenses
incurred by the Executive in performing his
duties hereunder; and
(E) fully paid vacation during
each calendar year in accordance with the
vacation policies of Arrow in effect from
time to time.
Arrow shall not make any material changes in any of
the personal benefits itemized above adversely
affecting the Executive unless such change occurs
pursuant to a program applicable to all executive
officers of Arrow and the adverse effect on the
Executive is not proportionately greater than the
adverse effect of the change on any other executive
officer of Arrow previously enjoying such benefit.
6. Change of Control or Change of
Authority
(a) Retired Early Employee. If a Change
of Control or Change of Authority (as such terms
are defined in subparagraph 6(f) below) occurs
during the term the Executive's employment under
this Employment Agreement, either the Executive,
on the one hand, or Arrow or the Bank, on the
other, may elect by written notice, given to the other
party or parties, at any time within twelve (12)
months after such Change of Control or Change of
Authority, to terminate the employment of the
Executive by Arrow and the Bank, whereupon the
Executive will become a "Retired Early Employee,"
and will be entitled to receive such payments as are
provided hereafter in this Section 6. Such election
and the termination of the Executive's employment
shall become effective on the first day of the second
calendar month commencing after delivery of the
notice or on such earlier date as the Executive in his
sole discretion may specify (the "Effective Date").
(b) Cash Payments. If the Executive
should become a Retired Early Employee hereunder,
the Bank shall, during the period commencing on the
Effective Date and ending two years thereafter (the
"Pay-Out Period"), make equal monthly payments to
the Executive (which shall not be deemed base
annual salary payments) in an amount such that the
present value of all such payments, determined as of
the Effective Date, equals two hundred ninety-nine
percent (299%) of the Base Amount, as such term is
defined in subparagraph 6(f) below. If at any time
during the Pay-Out Period the Arrow Board in its
sole discretion shall determine, upon application of
the Retired Early Employee supported by substantial
evidence, that the Retired Early Employee is then
under a severe financial hardship resulting from (i) a
sudden and unexpected illness or accident of the
Retired Early Employee or any of his dependents (as
defined in section 152(a) of the Internal Revenue
Code), (ii) loss of the Retired Early Employee's
property due to casualty, or (iii) other similar
extraordinary and unforeseeable circumstance
arising as a result of events beyond the control of the
Retired Early Employee, the Bank shall make
available to the Retired Early Employee, in one (1)
lump sum, an amount up to but not greater than the
present value of all monthly payments remaining to
be paid to him in the Pay-Out Period, calculated as
of the date of such determination by the Arrow
Board, for the purpose of relieving such severe
financial hardship to the extent the same has not
been or may not be relieved by (xi) reimbursement
or compensation by insurance or otherwise, (xii)
liquidation of the Retired Early Employee's assets
(to the extent such liquidation would not itself cause
severe financial hardship), or (xiii) distributions from
other benefit plans. If (a) the lump sum amount thus
made available is less than (b) the present value of
all such remaining monthly payments, the Bank shall
continue to pay to the Retired Early Employee
monthly payments for the duration of the Pay-Out
Period, but from such date forward such monthly
payments will be in a reduced amount such that the
present value of all such reduced payments will
equal the difference between (b) and (a), above.
The Retired Early Employee may elect to waive any
or all payments due him under this subparagraph.
(c) Death of Retired Early Employee. If
the Retired Early Employee dies before receiving all
monthly payments payable to him under
subparagraph 6(b), above, the Bank shall pay to the
Retired Early Employee's spouse, or if the Retired
Early Employee leaves no spouse, to the estate of
the Retired Early Employee, one (1) lump sum
payment in an amount equal to the present value of
all such remaining unpaid monthly payments,
determined as of the date of death of the Retired
Early Employee.
(d) Indemnification of Executive. In the
event a Change of Control or Change of Authority
occurs, Arrow and the Bank shall indemnify the
Executive for all legal fees and expenses
subsequently incurred by the Executive in seeking to
obtain or enforce any right or benefit provided under
this Employment Agreement, not limited to the
rights and benefits provided under this Section 6 and
whether or not the Executive has become a Retired
Early Employee hereunder, provided, however, that
such right to indemnification will not apply if and to
the extent that a court of competent jurisdiction shall
determine that any such fees and expenses have been
incurred as a result of the Executive's bad faith.
Indemnification payments payable hereunder by
Arrow or the Bank shall be made not later than
thirty (30) days after a request for payment has been
received from the Executive with such evidence of
indemnifiable fees and expenses as Arrow or the
Bank may reasonably request.
(e) No Duty to Seek Other Employment.
Amounts payable to any Retired Early Employee
under this Paragraph 6 shall not be reduced by the
amount of any compensation received by such
Retired Early Employee from any other employer or
source during the Pay-Out Period, and no Retired
Early Employee shall be under any obligation to
seek other employment or gainful pursuit during
such Pay-Out Period as a result of this Agreement.
(f) Definitions.
(i) The "Base Amount" for purpose
of this Paragraph 6 shall equal the average
annual compensation payable by the Bank to
the Executive and includable by the
Executive in gross income for the most
recent five (5) taxable years ending before
the date on which the Change of Control or
Change of Authority occurred.
(ii) A "Change of Control" shall be
deemed to have occurred if (A) any
individual corporation (other than Arrow),
partnership, trust, association, pool,
syndicate, or any other entity or any group of
persons acting in concert becomes the
beneficial owner, as that concept is defined
in Rule 13d-3 promulgated by the Securities
and Exchange Commission under the
Securities Exchange Act of 1934, as the
result of any one or more securities
transactions (including gifts and stock
repurchases but excluding transactions
described in subdivision (B), following), of
securities of Arrow possessing twenty-five
percent (25%) or more of the voting power
for the election of directors of such entity,
(B) there shall be consummated any
consolidation, merger or stock-for-stock
exchange involving Arrow or the securities
of Arrow in which the holders of voting
securities of Arrow immediately prior to
such consummation own, as a group,
immediately after such consummation, voting
securities of Arrow (or, if Arrow does not
survive such transaction voting securities of
the corporation surviving such transaction)
having less than fifty percent (50%) of the
total voting power in an election of directors
of Arrow (or such other surviving
corporation), excluding securities received
by any members of such group which
represent disproportionate percentage
increases in their shareholdings vis-a-vis the
other members of such group, (C) "approved
directors" shall constitute less than a majority
of the entire Arrow Board, with "approved
directors" defined to mean the members of
the Arrow Board as of the date of this
Agreement and any subsequently elected
members who shall be nominated or
approved by a majority of the approved
directors on the Arrow Board prior to such
election, or (D) there shall be consummated
any sale, lease, exchange or other transfer (in
one transaction or a series of related
transactions, excluding any transaction
described in subdivision (B), above), of all,
or substantially all, of the assets of Arrow to
a party which is not controlled by or under
common control with Arrow.
(iii) A "Change of Authority" shall
be deemed to have occurred if the Executive
is assigned duties by Arrow which, in the
reasonable opinion of the Executive have
materially less authority than those duties
currently being performed by him and
otherwise described herein.
7. Early Termination of Employment
The employment of the Executive hereunder by
Arrow and the Bank may be terminated or may terminate,
other than as provided in Paragraph 2 of this Agreement or
as permitted under Paragraph 6 of this Agreement, under
the circumstances set forth below.
(a) Termination for Cause. Arrow may
terminate the Executive's employment under this
Agreement prior to the normal expiration of its term
for cause. "Cause" shall mean:
(i) any willful misconduct by the
Executive which is materially injurious to
Arrow or the Bank, monetarily or otherwise;
(ii) any willful failure by the
Executive to follow the reasonable directions
of the Arrow Board or the Bank Board or
the Chief Executive Officer of Arrow or the
Bank; or
(iii) any failure by the Executive
substantially to perform any reasonable
directions of the Arrow Board or the Bank
Board or the Chief Executive Officer of
Arrow or the Bank (other than failure
resulting from disability), within thirty (30)
days after delivery to the Executive by the
respective Board or Chief Executive Officer
of a written demand for substantial
performance, which written demand shall
specifically identify the manner in which the
respective Board or Chief Executive Officer
believes that the Executive has not
substantially performed.
Notwithstanding the foregoing, the employment of
the Executive hereunder shall not be deemed to have
been terminated for cause unless and until:
(A) reasonable notice is given to
the Executive setting forth the reasons
Arrow intends to terminate the Executive for
cause;
(B) an opportunity is provided for
the Executive to be heard before the Arrow
Board and the Chief Executive Officer of
Arrow, with counsel; and
(C) after such hearing or
opportunity to be heard, written notice of
final termination for cause is delivered to the
Executive, setting forth the specific reasons
therefor.
Termination for cause by Arrow shall require the
affirmative vote of at least two-thirds (2/3) of the
Arrow Board. The Executive will not be entitled to
any further compensation for any period subsequent
to the effective date of such termination, except for
severance pay, if any, in accordance with the then
existing severance policies of Arrow; provided,
however, that any such termination for cause
occurring after the Executive shall have elected to
become a Retired Early Employee under Paragraph
6 of this Agreement will not affect the right of the
Executive to receive all of the payments provided
for therein.
(b) Termination Without Cause. Arrow
may terminate the Executive's employment under
this Agreement prior to the normal expiration of its
term without cause upon thirty (30) days' written
notice. Termination without cause by Arrow shall
require the affirmative vote of at least two-thirds
(2/3) of the entire Arrow Board. In the event of
termination without cause, the Bank shall pay to the
Executive on the effective date of such termination
one (1) lump sum payment in an amount equal to the
total amount of base annual salary payments which
would have been payable to the Executive during the
remaining portion of the calendar year in which such
termination occurs and during the two (2) ensuing
calendar years had the Executive continued his
employment under this Agreement for the duration
of the period. For purposes of computing the
amount of the lump sum payment, it shall be
assumed that the Executive's current base salary on
the effective date of termination would not have
changed and no bonus would have been paid to him
during the period specified in the foregoing
sentence. Any such termination without cause
occurring after the Executive shall have elected to
become a Retired Early Employee under Paragraph
6 of this Agreement will not affect the right of the
Executive to receive all of the payments provided
for therein.
(c) Termination for Disability. If, as a
result of the Executive's incapacity due to physical
or mental illness, the Executive shall not have
performed his duties hereunder on a full time basis
for six (6) consecutive months, the Executive's
employment under this Agreement may be
terminated by Arrow upon thirty (30) days' written
notice. Such termination for disability shall require
the affirmative vote of a majority of the entire Arrow
Board. The Executive's compensation during any
period of disability prior to the effective date of such
termination shall be the amounts normally payable to
him in accordance with his then current base annual
salary, reduced by the sum of the amounts, if any,
paid to the Executive under disability benefit plans
maintained by Arrow. The Executive shall not be
entitled to any further compensation from the Bank
for any period subsequent to the effective date of
such termination, except for severance pay in
accordance with then existing severance policies of
Arrow; provided, however, that any such
termination for disability occurring after the
Executive shall have elected to become a Retired
Early Employee under Paragraph 6 of this
Agreement will not affect the right of the Executive
to receive all of the payments provided for therein.
(d) Termination for Breach by
Employer. In the event that Arrow or the Bank shall
have materially breached any provision of this
Agreement and such breach shall not have been
cured within ten (10) days after delivery of written
notice thereof to the breaching party by the
Executive, identifying the breach with reasonable
particularity, the Executive may cease to perform
and may terminate this Agreement and his
employment with Arrow and the Bank hereunder,
without thereby forfeiting any cause of action he
may have against the breaching party or parties as a
result of such breach or otherwise.
(e) Consensual Termination. All parties
hereto may agree at any time to terminate this
Agreement and the Executive's employment
hereunder upon such terms and conditions as the
parties may agree.
8. Competition Restriction
In the event the Executive is terminated for cause
under Paragraph 7 or improperly terminates his own
employment hereunder, then during the period beginning on
the date of termination of the Executive's employment and
continuing for two (2) years after such date, the Executive
shall not, without the prior approval of the Arrow Board,
certified to him by the Secretary or Acting Secretary of
Arrow, become an officer, employee, agent, partner or
director of any other business in substantial competition
with the Bank, Arrow, or any other company or bank
affiliated with Arrow, including any branch or office of any
of the foregoing. Such restriction shall apply to any such
other business doing business in any county in the State of
New York in which Arrow, the Bank or any such other
affiliated company or bank is then conducting any material
business or into which, to the knowledge of the Executive at
the time of such termination, any such entity has immediate
plans to expand its activities in material respects. The
provisions of this Paragraph 8 shall not apply in the event
that the Executive becomes a Retired Early Employee under
Paragraph 6 or the Executive's employment terminates in
accordance with the first sentence of Paragraph 2.
It is the intention of the parties to restrict the
activities of the Executive under this Paragraph 9 only to
the extent necessary for the protection of the legitimate
business interests of Arrow, and the parties specifically
covenant and agree that should any of the clauses or
provisions of the competition restriction set forth herein,
under any set of circumstances, be held by a court of
competent jurisdiction to be illegal, invalid or unenforceable
under present or future laws effective during the term of this
Agreement, then and in that event, the court so holding may
reduce the business or territory to which such restriction
pertains and/or the period of time during which it operates,
or effect any other change to the extent necessary to render
such restriction enforceable by said court.
9. Confidential Information
The Executive specifically acknowledges that all
information pertaining to the Bank and Arrow received by
him during the course of his employment hereunder which
has been designated confidential or otherwise has not been
made publicly available, including, without limitation, plans,
strategies, projections, analyses, and information pertaining
to customers or potential customers, is the exclusive
property of Arrow and the Executive covenants and agrees
not to disclose any of such information, without the express
prior consent of the Arrow Board or the Chief Executive
Officer of Arrow, during his employment hereunder or after
termination of such employment, to anyone not employed or
engaged by Arrow or a subsidiary thereof to render services
to it. The Executive further covenants and agrees that he
will not at any time use any such information, without such
express prior consent, for his own benefit or the benefit of
any party other than Arrow. This Paragraph 9 shall survive
termination of the Agreement.
10. Successors and Assigns; Assumption by
Successors
This Agreement is a personal services contract
which may not be assigned by the Bank or Arrow to, or
assumed from the Bank or Arrow by, any other party
without the prior consent of the Executive. All rights
hereunder shall inure to the benefit of the parties hereto,
their personal or legal representatives, heirs, successors and
assigns. Arrow will require any successor (whether direct
or indirect, by purchase, assignment, merger, consolidation
or otherwise) to all or substantially all of the business and/or
assets of Arrow in any consensual transaction expressly to
assume this Agreement and to agree to perform hereunder
in the same manner and to the same extent that Arrow
would be required to perform if no such succession had
taken place. References herein to "Arrow" or the "Bank"
will be understood to refer to the successor or successors of
Arrow or the Bank, respectively.
11. Notices
Any notice required or desired to be given hereunder
shall be in writing and shall be deemed given when delivered
personally or sent by certified or registered mail, postage
prepaid, to the addresses of the other parties set forth in the
first Paragraph of this Agreement, provided that all notices
to Arrow or the Bank shall be directed in each case to the
Chief Executive Officer thereof.
12. Waiver of Breach
Waiver by any party of a breach of any provision
shall not operate as or be construed a waiver by such party
of any subsequent breach hereof.
13. Invalidity
The invalidity or unenforceability of any provision of
this Agreement shall not affect the validity or enforceability
of any other provisions, which shall remain in full force and
effect.
14. Entire Agreement; Written Modification;
Termination
This agreement contains the entire agreement among
the parties concerning the employment of the Executive by
Arrow and the Bank. No modification, amendment or
waiver of any provision hereof shall be effective unless in
writing specifically referring hereto and signed by the party
against whom such provision as modified or amended or
such waiver is sought to be enforced. This Agreement shall
terminate as of the time the Bank makes the final payment
which it may be obligated to pay hereunder or provides the
final benefit which it may be obligated to provide hereunder,
or, if later, as of the time the restriction on competition set
forth in Paragraph 8 expires.
15. Counterparts
This Agreement may be made and executed in
counterparts, in which case all counterparts shall be deemed
to constitute one original document for all purposes.
16. Governing Law
This Agreement is governed by and is to be
construed and enforced in accordance with the laws of the
State of New York.
17. Authorization
The Bank and Arrow represent and warrant that the
execution of this Employment Agreement has been duly
authorized by resolution of their respective Boards. This
Paragraph 17 shall survive termination of the Agreement.
<PAGE>
IN WITNESS WHEREOF, the parties have
executed or caused to be executed this Employment
Agreement as of the day and year first above written.
ARROW FINANCIAL CORPORATION
By: s/Thomas L. Hoy
Thomas L. Hoy, President and Chief
Executive Officer
GLENS FALLS NATIONAL BANK AND TRUST COMPANY
By: s/ Thomas L. Hoy
Thomas L. Hoy, President and Chief
Executive Officer
"EXECUTIVE"
s/ John J. Murphy
John J. Murphy
Exhibit 11
<TABLE>
ARROW FINANCIAL CORPORATION AND SUBSIDIARIES
STATEMENT RE COMPUTATION OF PER SHARE EARNINGS
<CAPTION>
1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C>
Basic Earnings Per Share:
Net Income Before
Cumulative Effect of Accounting Change $10,997 $20,260 $12,424 $11,325 $8,176
Cumulative Effect of Accounting Change --- --- --- --- 1,457
Net Income $10,997 $20,260 $12,424 $11,325 $9,633
Weighted Shares Outstanding 5,846 6,184 6,564 6,620 6,559
Basic Eanrings Per Share Before
Cumulative Effect of Accounting Change $1.88 $3.28 $1.89 $1.71 $1.25
Basic Earnings Per Share,
Cumulative Effect of Accounting Change --- --- --- --- 0.22
Basic Earnings Per Share $1.88 $3.28 $1.89 $1.71 $1.47
Diluted Earnings Per Share:
Net Income Before
Cumulative Effect of Accounting Change $10,997 $12,260 $12,424 $11,325 $8,176
Debenture Interest Expense, net of tax --- --- --- 243 ---
Diluted Income 10,997 12,260 12,424 11,568 8,176
Extraordinary Item --- --- --- --- ---
Cumulative Effect of Accounting Change --- --- --- --- 1,457
Diluted Net Income $10,997 $12,260 $12,424 $11,568 $9,633
Weighted Shares Outstanding 5,846 6,184 6,564 6,620 6,559
Stock Options-
Equivalent Shares 79 64 55 26 ---
Debentures --- --- --- 374 ---
Total Equivalent Shares 5,925 6,248 6,619 7,020 6,559
Diluted Earnings Per Share Before
Cumulative Effect of Accounting Change $1.86 $3.24 $1.88 $1.65 $1.25
Diluted Earnings Per Share,
Cumulative Effect of Accounting Change --- --- --- --- 0.22
Diluted Earnings Per Share $1.86 $3.24 $1.88 $1.65 $1.47
</TABLE>
REPORT OF MANAGEMENT
The accompanying consolidated financial
statements of Arrow Financial Corporation and
Subsidiaries are the responsibility of
management, and have been prepared in conformity
with generally accepted accounting principles.
These statements necessarily include some
amounts that are based on best judgments and
estimates. Other financial information in the
annual report is consistent with that in the
consolidated financial statements.
Management is responsible for
maintaining a system of internal accounting
control. The purpose of the system is to
provide reasonable assurance that transactions
are recorded in accordance with management's
authorization, that assets are safeguarded
against loss or unauthorized use, and that
underlying financial records support the
preparation of financial statements. The system
includes written policies and procedures,
selection of qualified personnel, appropriate
segregation of responsibilities, and the ongoing
internal audit function.
The independent auditors conduct an
annual audit of the Company's consolidated
financial statements to enable them to express
an opinion as to the fair presentation of the
statements. In connection with the audit, the
independent auditors consider internal control,
to the extent they consider necessary to
determine the nature, timing and extent of their
auditing procedures. The independent auditors
may also prepare recommendations regarding
internal controls and other accounting and
financial related matters. The implementation
of these recommendations by management is
monitored directly by the Audit Committee of the
Board of Directors.
Thomas L. Hoy John J. Murphy
President and Executive Vice President,
Chief Executive Officer Treasurer and
Chief Financial Officer
INDEPENDENT AUDITORS' REPORT
THE BOARD OF DIRECTORS AND SHAREHOLDERS OF ARROW
FINANCIAL CORPORATION:
We have audited the accompanying
consolidated balance sheets of Arrow Financial
Corporation and subsidiaries as of December 31,
1997 and 1996, and the related consolidated
statements of income, changes in shareholders'
equity, and cash flows for each of the years in
the three-year period ended December 31, 1997.
Theses consolidated financial statements are the
responsibility of the Company's management. Our
responsibility is to express an opinion on these
consolidated financial statements based on our
audits.
We conducted our audits in accordance
with generally accepted auditing standards.
Those standards require that we plan and perform
the audit to obtain reasonable assurance about
whether the financial statements are free of
material misstatement. An audit includes
examining, on a test basis, evidence supporting
the amounts and disclosures in the financial
statements. An audit also includes assessing the
accounting principles used and significant
estimates made by management, as well as
evaluating the overall financial statement
presentation. We believe that our audits provide
a reasonable basis for our opinion.
In our opinion, the consolidated
financial statements referred to above present
fairly, in all material respects, the financial
position of Arrow Financial Corporation and
subsidiaries as of December 31, 1997 and 1996,
and the results of their operations and their
cash flows for each of the years in the three-
year period ended December 31, 1997, in
conformity with generally accepted accounting
principles.
KPMG Peat Marwick LLP
Certified Public Accountants
Albany, New York
January 23, 1998
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEETS
ARROW FINANCIAL CORPORATION AND SUBSIDIARIES
(Dollars in Thousands)
December 31,
1997 1996
ASSETS
<S> <C> <C>
Cash and Due from Banks $ 23,909 $ 19,572
Federal Funds Sold 23,000 17,925
Cash and Cash Equivalents 46,909 37,497
Securities Available-for-Sale 221,837 171,743
Securities Held-to-Maturity (Approximate Fair Value of
$45,562 in 1997 and $31,519 in 1996) 44,082 30,876
Loans and Leases 485,810 393,511
Less: Allowance for Loan Losses (6,191) (5,581)
Net Loans and Leases 479,619 387,930
Premises and Equipment, Net 10,760 9,414
Other Real Estate Owned, Net 315 136
Other Assets 28,077 15,007
Total Assets $831,599 $652,603
LIABILITIES
Deposits:
Demand $ 96,482 $ 67,877
Regular Savings, N.O.W. &
Money Market Deposit Accounts 320,706 254,312
Time Deposits of $100,000 or More 106,620 83,802
Other Time Deposits 197,107 135,756
Total Deposits 720,915 541,747
Short-Term Borrowings:
Securities Sold Under Agreements to Repurchase 20,918 16,597
Other Short-Term Borrowings 3,837 6,109
Other Liabilities 12,058 13,854
Total Liabilities 757,728 578,307
Commitments and Contingent Liabilities
(Notes 3, 12, 18, 19, 22 and 23)
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 1997 and 6,577,036 in 1996) 6,906 6,577
Surplus 65,277 54,569
Undivided Profits 22,531 26,992
Net Unrealized Gain on Securities
Available-for-Sale, Net of Tax 764 208
Treasury Stock, at Cost (1,143,553 Shares in 1997 and
817,743 Shares in 1996) (21,607) (14,050)
Total Shareholders' Equity 73,871 74,296
Total Liabilities and Shareholders' Equity $831,599 $652,603
See notes to consolidated financial statements.
</TABLE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF INCOME
ARROW FINANCIAL CORPORATION AND SUBSIDIARIES
(Dollars in Thousands, Except Per Share Data)
Years Ended December 31,
1997 1996 1995
INTEREST AND DIVIDEND INCOME
<S> <C> <C> <C>
Interest and Fees on Loans and Leases $38,917 $42,195 $47,988
Interest on Federal Funds Sold 1,035 642 1,307
Interest and Dividends on Securities Available-for-Sale 12,263 11,102 3,999
Interest and Dividends on Securities Held-to-Maturity 2,646 936 7,424
Total Interest and Dividend Income 54,861 54,875 60,718
INTEREST EXPENSE
Interest on Deposits:
Time Deposits of $100,000 or More 4,734 4,198 3,761
Other Deposits 18,035 16,737 20,055
Interest on Short-Term Borrowings:
Federal Funds Purchased and Securities
Sold Under Agreements to Repurchase 827 713 604
Other Short-Term Borrowings 291 178 215
Interest on Long-Term Debt --- --- 230
Total Interest Expense 23,887 21,826 24,865
NET INTEREST INCOME 30,974 33,049 35,853
Provision for Loan Losses 1,303 896 1,170
<PAGE>
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 29,671 32,153 34,683
OTHER INCOME
Income from Fiduciary Activities 2,672 3,458 3,752
Fees for Other Services to Customers 3,723 3,959 4,669
Net Gains (Losses) on Securities Transactions 74 (101) 23
Net Gain on Divestiture of Vermont Operations --- 15,330 ---
Other Operating Income 1,714 1,057 6,052
Total Other Income 8,183 23,703 14,496
OTHER EXPENSE
Salaries and Employee Benefits 12,726 14,971 16,710
Occupancy Expense of Premises, Net 1,561 1,790 2,040
Furniture and Equipment Expense 1,792 1,677 1,930
Other Operating Expense 5,623 6,336 9,089
Total Other Expense 21,702 24,774 29,769
INCOME BEFORE INCOME TAXES 16,152 31,082 19,410
Provision for Income Taxes 5,155 10,822 6,986
NET INCOME $10,997 $20,260 $12,424
Average Shares Outstanding:
Basic 5,846 6,184 6,564
Diluted 5,925 6,248 6,619
Earnings Per Common Share:
Basic $ 1.88 $ 3.28 $ 1.89
Diluted 1.86 3.24 1.88
Per share amounts have been adjusted for the 1997 five percent and the 1996 ten percent stock
dividends.
See notes to consolidated financial statements.
</TABLE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
ARROW FINANCIAL CORPORATION AND SUBSIDIARIES
(Dollars in Thousands, Except per Share Data)
Net
Unrealized
Unallocated Gain (Loss)
Employee on Securities
Stock Available-
Shares Common Undivided Ownership for-Sale, Treasury
Issued Stock Surplus Profits Plan Net of Tax Stock Total
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1994 5,725,765 $5,726 $36,102 $19,149 $ --- $(673) $(1,899) $58,405
Net Income --- --- --- 12,424 --- --- --- 12,424
Cash Dividends Declared,
$.489 per Share --- --- --- (3,196) --- --- --- (3,196)
4% Stock Dividend 229,966 230 3,851 (4,081) --- --- --- ---
Stock Purchase Contracts
Exercised 23,393 23 303 --- --- --- --- 326
Acquisition of Common Stock
By ESOP (69,500 Shares) --- --- --- --- (1,173) --- --- (1,173)
Allocation of ESOP Stock
(28,537 Shares) --- --- 24 --- 473 --- --- 497
Stock Options Exercised
(95,465 Shares) --- --- 630 --- --- --- 584 1,214
Tax Benefit for Disposition
of Stock Options --- --- 28 --- --- --- --- 28
Purchase of Treasury Stock
(175,346 Shares) --- --- --- --- --- --- (2,846) (2,846)
<PAGE>
Adjustment of Securities
Available-for-Sale to
Fair Value, Net of Tax --- --- --- --- --- 1,825 --- 1,825
Balance at December 31, 1995 5,979,124 5,979 40,938 24,296 (700) 1,152 (4,161) 67,504
Net Income --- --- --- 20,260 --- --- --- 20,260
Cash Dividends Declared,
$.632 per Share --- --- --- (3,886) --- --- --- (3,886)
10% Stock Dividend 597,912 598 13,080 (13,678) --- --- --- ---
Allocation of ESOP Stock
(44,424 Shares) --- --- 252 --- 700 --- --- 952
Stock Options Exercised
(46,601 Shares) --- --- 249 --- --- --- 287 536
Tax Benefit for Disposition
of Stock Options --- --- 50 --- --- --- --- 50
Purchase of Treasury Stock
(524,128 Shares) --- --- --- --- --- --- (10,176) (10,176)
Adjustment of Securities
Available-for-Sale to
Fair Value, Net of Tax --- --- --- --- --- (944) --- (944)
Balance at December 31, 1996 6,577,036 6,577 54,569 26,992 --- 208 (14,050) 74,296
Net Income --- --- --- 10,997 --- --- --- 10,997
Cash Dividends Declared,
$.781 per Share --- --- --- (4,565) --- --- --- (4,565)
5% Stock Dividend 328,852 329 10,564 (10,893) --- --- --- ---
Stock Options Exercised
(51,037 Shares) --- --- 111 --- --- --- 448 559
Tax Benefit for Disposition
of Stock Options --- --- 33 --- --- --- --- 33
Purchase of Treasury Stock
(335,329 Shares) --- --- --- --- --- --- (8,005) (8,005)
Adjustment of Securities
Available-for-Sale to
Fair Value, Net of Tax --- --- --- --- --- 556 --- 556
Balance at December 31, 1997 6,905,888 $6,906 $65,277 $22,531 $ --- $ 764 $(21,607) $73,871
Per share amounts have been adjusted for the 1997 five percent and the 1996 ten percent stock dividends.
Included in the shares issued for the stock dividends in 1997, 1996 and 1995 were treasury shares of 41,518,
30,383 and 8,843, respectively, and for 1996 and 1995, unallocated ESOP shares of 1,294 and 2,167, respectively.
See notes to consolidated financial statements.
</TABLE>
<TABLE>
ARROW FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands, Except per Share Amounts) Years Ended December 31,
1997 1996 1995
Operating Activities:
<S> <C> <C> <C>
Net Income $ 10,997 $ 20,260 $12,424
Adjustments to Reconcile Net Income to Net
Cash Provided by Operating Activities:
Provision for Loan Losses 1,303 896 1,170
Provision for Other Real Estate Owned Losses --- 85 161
Depreciation and Amortization 1,430 1,200 1,624
Compensation Expense for Allocated ESOP Shares --- 252 24
Net Gain on Divestiture of Vermont Operations --- (15,330) ---
Gains on the Sale of Securities Available-for-Sale (137) (243) (51)
Losses on the Sale of Securities Available-for-Sale 63 344 28
Proceeds from the Sale of Loans 2,158 4,882 12,397
(Gains) Losses on the Sale of Loans, Fixed Assets
and Other Real Estate Owned (144) 135 (120)
Deferred Income Tax Expense 410 97 272
Decrease (Increase) in Interest Receivable (772) 1,130 (725)
Increase (Decrease) in Interest Payable 539 (561) 1,196
Decrease (Increase) in Other Assets (1,501) 991 (2,904)
Increase (Decrease) in Other Liabilities (2,334) (1,251) 3,763
Net Cash Provided By Operating Activities 12,012 12,887 29,259
<PAGE>
Investing Activities:
Proceeds from the Sale of Securities Available-for-Sale 37,029 51,040 4,191
Proceeds from the Maturities of Securities
Available-for-Sale 29,208 36,454 26,407
Purchases of Securities Available-for-Sale (115,386) (82,398) (33,921)
Proceeds from the Maturities of
Securities Held-to-Maturity 2,752 848 6,604
Purchases of Securities Held-to-Maturity (15,989) (17,814) (9,157)
Loans (Purchased) Sold in Branch Transactions (44,190) 147,503 ---
Net Increase in Loans and Leases (51,249) (32,437) (25,206)
Fixed Assets (Purchased) Sold in Branch Transactions (1,338) 2,525 ---
Proceeds from Sales of Fixed Assets and
Other Real Estate Owned 303 2,513 1,473
Purchases of Fixed Assets (893) (2,099) (593)
Proceeds from the Sale of Vermont Trust Operations --- 3,000 ---
Net Cash (Used In) Provided By Investing Activities (159,753) 109,135 (30,202)
Financing Activities:
Deposits Assumed (Transferred) in
Branch Transactions, Net of Premium 127,708 (192,953) ---
Net Increase in Deposits 39,374 55,989 43,968
Net Increase (Decrease) in Short-Term Borrowings 2,049 7,409 (9,568)
Repayment of Long-Term Debt --- --- (4,690)
Exercise of Stock Options 33 412 164
Disqualifying Disposition of Incentive Stock Options 33 50 28
Purchase of Treasury Stock (7,479) (10,052) (1,881)
Cash Dividends Paid (4,565) (3,886) (3,196)
Net Cash Provided By (Used In) Financing Activities 157,153 (143,031) 24,825
Net Increase (Decrease) In Cash and Cash Equivalents 9,412 (21,009) 23,882
Cash and Cash Equivalents at Beginning of the Year 37,497 58,506 34,624
Cash and Cash Equivalents at End of the Year $ 46,909 $37,497 $58,506
Supplemental Cash Flow Information:
Interest Paid $23,352 $ 22,387 $23,670
Income Taxes Paid 6,571 11,235 6,908
Transfer of Loans to Other Real Estate Owned 307 302 642
Cancellation of Debentures by Exercise of Cancellable
Mandatory Stock Purchase Contracts --- --- 370
Transfer of Securities Held-to-Maturity to
Securities Available-for-Sale --- --- 118,200
See notes to consolidated financial statements.
</TABLE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
Arrow Financial Corporation
(the"Company") is a bank holding company
organized in 1983 under the laws of New York and
registered under the Bank Holding Company Act of
1956. The accounting and reporting policies of
Arrow Financial Corporation and its subsidiaries
conform to generally accepted accounting
principles and general practices within the
industry in all material aspects.
Principles of Consolidation - The
financial statements of the Company and its
wholly owned subsidiaries are consolidated and
all material intercompany transactions have been
eliminated. In the "Parent Company Only"
financial statements, the investment in wholly
owned subsidiaries is carried under the equity
method of accounting. When necessary, prior
years' consolidated financial statements have
been reclassified to conform with the current
financial statement presentations.
Cash and Cash Equivalents - Cash and cash
equivalents in the Consolidated Statements of
Cash Flows include the following items: cash at
branches, due from bank balances, cash items in
the process of collection and federal funds sold.
Securities -Securities reported as held-to
- -maturity are those securities which the
Company has both the positive intent and ability
to hold to maturity and are stated at amortized
cost. Securities available-for-sale are reported
at fair value, with unrealized gains and losses,
net of taxes, reported in a separate component of
shareholders' equity. Realized gains and losses
are based upon specific identification. The cost
of securities is adjusted for amortization of
premium and accretion of discount, which is
calculated on an effective interest rate method.
In November 1995, the Financial
Accounting Standards Board (FASB) issued "A Guide
to Implementation of Statement 115 on Accounting
for Certain Investments in Debt and Equity
Securities." The Guide allowed a one-time
reclassification of held-to-maturity securities
before December 31, 1995. Accordingly, the
Company reclassified $118.2 million of held-to-
maturity securities to available-for-sale in
December of 1995.
Loans, Leases and Allowance for Loan
Losses - Interest income on commercial loans,
mortgages, credit card and installment loans is
accrued and credited to income, based upon the
principal amount outstanding. The financing
method of accounting is used for direct lease
contract receivables. Loan fees and costs, where
material, are deferred and amortized as an
adjustment to yield over the lives of the loans
originated.
The allowance for loan losses is
maintained by charges to operations based upon
management's evaluation of the loan portfolio,
current economic conditions, past loan losses and
other factors. In management's opinion, the
balance is sufficient to provide for probable
loan losses. While management uses available
information to recognize losses on loans, future
additions to the allowance may be necessary based
on changes in economic conditions in the
Company's market area. In addition, various
Federal and State regulatory agencies, as an
integral part of their examination process,
review the Company's allowance for loan losses.
Such agencies may require the Company to
recognize additions to the allowance in future
periods, based on their judgments about
information available to them at the time of
their examination which may not be currently
available to management.
The Company accounts for impaired loans
under Statement of Financial Accounting Standards
(SFAS) No. 114, "Accounting by Creditors for
Impairment of a Loan." SFAS No. 114, as amended,
requires that impaired loans, except for large
groups of smaller-balance homogeneous loans, be
measured based on the present value of expected
future cash flows discounted at the loan's
effective interest rate, the loan's observable
market price or the fair value of the collateral
if the loan is collateral dependent. The Company
applies the provisions of SFAS No. 114 to all
impaired commercial and commercial real estate
loans over $250,000, and to all loans
restructured subsequent to adoption. Reserves
for loan losses for the remaining smaller-balance
loans are evaluated under SFAS No. 5. Under the
provisions of SFAS No. 114, the Company
determines impairment for collateralized loans
based on fair value of the collateral less
estimated cost to sell. For other loans,
impairment is determined by comparing the
recorded value for the loan to the present value
of the expected cash flows, discounted at the
loan's effective interest rate. The Company
determines the interest income recognition method
on a loan-by-loan basis. Based upon the
borrowers' payment histories and cash flow
projections, interest recognition methods include
full accrual, cash basis and cost recovery.
Transfers and Servicing of Financial
Assets and Extinguishments of Liabilities - In
June 1996, the FASB issued SFAS No. 125,
"Accounting for Transfers and Servicing of
Financial
Assets and Extinguishments of Liabilities". SFAS
No. 125 was 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 was
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 the 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.
SFAS No. 125 superseded SFAS No. 122,
"Accounting for Mortgage Servicing Rights". At
December 31, 1997 and 1996, the carrying amount
of the Company's mortgage servicing rights
measured under SFAS No. 125 amounted to $46
thousand and $57 thousand for each respective
period. At December 31, 1997 and 1996, the
magnitude of the servicing rights was not
considered so substantial as to require
stratification for purposes of evaluation for
impairment. There was no valuation reserve for
mortgage servicing rights at December 31, 1997
and 1996, as fair value approximated carrying
value.
Other Real Estate Owned - Real estate
acquired by foreclosure is recorded at the lower
of fair value less estimated costs to sell or
cost. Subsequent declines in fair value, after
transfer to other real estate owned, are
recognized through a valuation allowance. Such
declines in fair value along with related
operating expenses to administer such properties
are charged directly to operating expense.
Premises and Equipment - Premises and
equipment are stated at cost, less accumulated
depreciation and amortization. Depreciation and
amortization included in operating expenses are
stated largely on the straight-line method. The
provision is based on the estimated useful lives
of the assets and, in the case of leasehold
improvements, amortization is computed over the
terms of the respective leases or their estimated
useful lives, whichever is less. Gains or losses
on disposition are reflected in earnings.
Assets subject to finance leases are
capitalized and depreciated over the life of the
lease with appropriate charges to operating
expense for implicit interest amounts.
Income Taxes - The Company accounts for
income taxes under the asset and liability method
of accounting for income taxes under SFAS No.
109. Under the asset and liability method,
deferred tax assets and liabilities are
recognized for the future tax consequences
attributable to differences between the financial
statement carrying amounts of existing assets and
liabilities and their respective tax bases.
Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to
taxable income in the years in which those
temporary differences are expected to be
recovered or settled. The effect of deferred tax
assets and liabilities for a change in tax rates
is recognized in income in the period that
includes the enactment date. The Company's
policy is that deferred tax assets are reduced by
a valuation reserve if, based on the weight of
available evidence, it is more likely than not
that some or all of the deferred tax assets will
not be realized.
Intangible Assets - Intangible assets
related to the acquisition of branches, and the
related amortization, are included in other
assets and other noninterest expense,
respectively. Intangible assets, which are being
amortized, on a straight-line basis, over 15
years, amounted to $13,131,000 and $351,000 at
December 31, 1997 and 1996, respectively. The
related amortization expense totalled $493,000,
$86,000 and $161,000 in 1997, 1996 and 1995,
respectively. In June 1997, the purchase of six
Fleet branches resulted in additional goodwill of
approximately $13,263,000 (see Note 23). During
1996, a reduction of $489,000 in intangible
assets was attributable to the disposition of
Vermont operations (see Note 23). The amount of
loans serviced for others was $14,880,000 and
$21,396,000 at December 31, 1997 and 1996,
respectively.
Per Share Computations - In February
1997, the FASB issued SFAS No. 128, "Earnings Per
Share." SFAS No. 128 simplified the standards
for computing earnings per share ("EPS")
previously found in APB Opinion No. 15, and made
them comparable to international EPS standards.
It replaced the presentation of primary EPS with
a presentation of basic EPS. It also required
dual presentation of basic and diluted EPS on the
face of the income statement for all entities,
including the Company, with complex capital
structures and required a reconciliation of the
numerator and denominator of the basic and
diluted EPS computations. Basic EPS excludes
dilution and is computed by dividing income
available to common stockholders by the weighted
average number of common shares outstanding for
the period. Diluted EPS reflects the potential
dilution that could occur if securities or other
contracts to issue common stock were exercised or
converted into common stock or resulted in the
issuance of common stock that then shared in the
earnings of the entity (such as the Company's
stock options). The Statement was effective for
financial statements issued for periods ending
after December 15, 1997 and required restatement
of all prior-period EPS data presented.
Accordingly, all EPS information presented in the
Consolidated Statements of Income and in Note 10,
"Earnings Per Common Share", has been presented
in conformity with SFAS No. 128 and reflects the
five percent stock dividend in November 1997 and
the ten percent stock dividend in November 1996.
Financial Instruments - SFAS No. 107,
"Disclosures about Fair Value of Financial
Instruments," requires that the Company disclose
estimated fair values for its financial
instruments, both on- and off-balance sheet. The
Company is a party to certain financial
instruments with off-balance sheet risk, such as:
commercial lines of credit, construction lines of
credit, credit card lines of credit, overdraft
protection, home equity lines of credit, standby
letters of credit. The Company's policy is to
record such instruments when funded. Fair value
estimates are made at a specific point in time,
based on relevant market information and
information about the financial instrument.
These estimates do not reflect any premium or
discount that could result from offering for sale
at one time the Company's entire holdings of a
particular financial instrument. Because no
market exists for a significant portion of the
Company's financial instruments, fair value
estimates are based
on judgments regarding future expected loss
experience, current economic conditions, risk
characteristics of various financial instruments,
and other factors. These estimates are
subjective in nature and involve uncertainties
and matters of significant judgment and therefore
cannot be determined with precision. Changes in
assumptions could significantly affect the
estimates.
Fair value estimates are based on
existing on- and off-balance sheet financial
instruments without attempting to estimate the
value of anticipated future business and the
value of assets and liabilities that are not
considered financial instruments. For example,
the Company has a substantial trust department
that contributes net fee income annually. The
trust department is not considered a financial
instrument, and its value has not been
incorporated into the fair value estimates.
Other significant assets and liabilities that are
not considered financial assets or liabilities
include credit card servicing operations,
deferred taxes, premises and equipment, the value
of low-cost long-term core deposits and goodwill.
In addition, the tax ramifications related to the
realization of the unrealized gains and losses
can have a significant effect on fair value
estimates and have not been considered in any of
the estimates.
The carrying amount of certain short-term
assets and liabilities, namely: cash and due from
banks, federal funds sold, securities sold under
agreements to repurchase, demand deposits,
savings, N.O.W. and money market deposits, other
short-term borrowings, accrued interest
receivable and accrued interest payable is a
reasonable estimate of fair value. The fair
value estimates of other on- and off-balance
sheet financial instruments, as well as the
method of arriving at fair value estimates, are
included in the related footnotes and summarized
in Note 20.
Use of Estimates - Management of the
Company has made a number of estimates and
assumptions relating to the reporting of assets
and liabilities and the disclosure of contingent
assets and liabilities to prepare these
consolidated financial statements in conformity
with generally accepted accounting principles.
Actual results could differ from those estimates.
NOTE 2: CASH AND DUE FROM BANKS (In
Thousands)
The bank subsidiaries are required to
maintain a reserve balance with the Federal
Reserve Bank. The amount of the required balance
at December 31, 1997 and 1996 was approximately
$3,907 and $8,122, respectively.
NOTE 3: SECURITIES (In Thousands)
The fair value of securities, except
certain state and municipal securities, is
estimated based on published prices or bid
quotations received from securities dealers. The
fair value of certain state and municipal
securities is not readily available through
market sources, so fair value estimates are based
on the discounted contractual cash flows using
estimated market discount rates that reflect the
credit and interest rate risk inherent in the
instrument, or for short-term securities, the
carrying amount.
A summary of the amortized costs and the
approximate fair values of securities at December
31, 1997 and 1996 is presented below:
<TABLE>
<CAPTION>
Securities Available-for-Sale:
Gross Gross
Amortized FairUnrealizedUnrealized
Cost Value Gains Losses
December 31, 1997
<S> <C> <C> <C> <C>
U.S. Treasury and Agency Obligations $ 75,553 $ 76,006 $ 463 $ 10
State and Municipal Obligations 3,000 2,999 --- 1
Collateralized Mortgage Obligations 66,919 67,207 656 368
Other Mortgage-Backed Securities 63,763 64,057 341 47
Corporate and Other Debt Securities 8,998 9,145 153 6
Mutual Funds and Equity Securities 2,325 2,423 98 ---
Total Securities Available-for-Sale $220,558 $221,837 $1,711 $ 432
December 31, 1996
U.S. Treasury and Agency Obligations $ 95,553 $ 95,733 $ 422 $ 242
Collateralized Mortgage Obligations 42,791 42,894 454 351
Other Mortgage-Backed Securities 21,901 21,732 77 246
Corporate and Other Debt Securities 8,994 9,184 190 ---
Mutual Funds and Equity Securities 2,142 2,200 58 ---
Total Securities Available-for-Sale $171,381 $171,743 $1,201 $ 839
</TABLE>
<TABLE>
<CAPTION>
Securities Held-to-Maturity:
Gross Gross
Amortized FairUnrealizedUnrealized
Cost Value Gains Losses
December 31, 1997
<S> <C> <C> <C> <C>
State and Municipal Obligations $ 24,800 $ 26,106 $1,307 $ 1
Other Mortgage-Backed Securities 19,282 19,456 174 ---
Total Securities Held-to-Maturity $ 44,082 $ 45,562 $1,481 $ 1
December 31, 1996
State and Municipal Obligations $ 19,765 $ 20,423 $663 $ 5
Other Mortgage-Backed Securities 11,111 11,096 --- 15
Total Securities Held-to-Maturity $ 30,876 $ 31,519 $663 $ 20
</TABLE>
A summary of the maturities of
securities as of December 31, 1997 is presented
below. Collateralized mortgage obligations are
included in the schedule based on their expected
average lives and other mortgage-backed
securities by final contractual maturity. Actual
maturities may differ from the table below
because issuers may have the right to call or
prepay obligations with or without perpayment
penalties.
<TABLE>
<CAPTION>
Securities Available- Securities Held-
for-Sale to-Maturity
Amortized Fair Amortized Fair
Cost Value Cost Value
<S> <C> <C> <C> <C>
Within One Year:
U.S. Treasury and Agency Obligations $ 19,005 $ 19,033 $ --- $ ---
State and Municipal Obligations 3,000 2,999 2,667 2,668
Collateralized Mortgage Obligations 960 965 --- ---
Other Mortgage-Backed Securities 457 455 --- ---
Corporate and Other Debt Securities 1,004 1,014 --- ---
Total 24,426 24,466 2,667 2,668
<PAGE>
From 1 - 5 Years:
U.S. Treasury and Agency Obligations 40,496 40,794 --- ---
State and Municipal Obligations --- --- 3,125 3,262
Collateralized Mortgage Obligations 51,455 51,594 --- ---
Other Mortgage-Backed Securities 8,102 8,130 --- ---
Corporate and Other Debt Securities 6,988 7,131 --- ---
Total 107,041 107,649 3,125 3,262
From 5 - 10 Years:
U.S. Treasury and Agency Obligations 16,052 16,179 --- ---
State and Municipal Obligations --- --- 11,185 11,910
Collateralized Mortgage Obligations 13,501 13,645 --- ---
Other Mortgage-Backed Securities 7,343 7,412 --- ---
Corporate and Other Debt Securities 1,006 1,000 --- ---
Total 37,902 38,236 11,185 11,910
Over 10 Years:
U.S. Treasury and Agency Obligations --- --- --- ---
State and Municipal Obligations --- --- 7,823 8,266
Collateralized Mortgage Obligations 1,003 1,003 --- ---
Other Mortgage-Backed Securities 47,861 48,060 19,282 19,456
Corporate and Other Debt Securities --- --- --- ---
Mutual Funds and Equity Securities 2,325 2,423 --- ---
Total 51,189 51,486 27,105 27,722
Total Securities $220,558 $221,837 $ 44,082 $ 45,562
</TABLE>
The carrying amount of securities
pledged to secure public and trust deposits and
for other purposes totalled $179,232 and $144,367
at December 31, 1997 and 1996, respectively.
NOTE 4: LOANS AND LEASES (In Thousands)
Loans and leases at December 31, 1997 and
1996 consisted of the following:
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Commercial, Financial and Agricultural $ 46,124 $ 48,372
Real Estate - Commercial 50,680 36,302
Real Estate - Residential 208,258 168,429
Real Estate - Construction 2,072 971
Installment Loans to Individuals 178,642 139,395
Lease Financing, Net of Unearned Income 34 42
Total Loans and Leases $485,810 $393,511
</TABLE>
The carrying amount of net loans and
leases at December 31, 1997 and 1996 was $479,619
and $387,930, respectively. The fair value of
net loans and leases at December 31, 1997 and
1996 was $489,031 and $392,128, respectively.
Fair values are estimated for portfolios
of loans with similar financial characteristics.
Loans are segregated by type such as commercial,
commercial real estate, residential mortgage,
credit card and other consumer loans. Each loan
category is further segmented into fixed and
adjustable rate interest terms and by performing
and nonperforming categories.
The fair value of performing loans is
calculated by discounting scheduled cash flows
through the estimated maturity using estimated
market discount rates that reflect the credit and
interest rate risk inherent in the loan. The
estimate of maturity is based on historical
experience with repayments for each loan
classification, modified, as required, by an
estimate of the effect of current economic and
lending conditions.
Fair value for nonperforming loans is
based on recent external appraisals. If
appraisals are not available, estimated cash
flows are discounted using a rate commensurate
with the risk associated with the estimated cash
flows. Assumptions regarding credit risk, cash
flows and discount rates are judgmentally
determined using available market information and
specific borrower information.
Certain executive officers and directors,
including their immediate families and
organizations in which they are principals of the
company or affiliates, have various loan, deposit
and other transactions with the Company. Such
transactions are on substantially the same terms,
including interest rates and collateral, as those
prevailing at the time for comparable
transactions with others. The amount of such
related party loans was $4,514 at December 31,
1997 and $4,652 at December 31, 1996. During
1997 the amount of new loans and renewals
extended to such related parties was $2,555 and
the total of loan repayments was $2,693.
The Company designates certain loans as
nonaccrual when payment of interest and/or
principal is due and unpaid for a period of,
generally, ninety days or the likelihood of
repayment is uncertain in the opinion of
management. The following table presents the
balance of nonaccrual and restructured loans and
other information implicit to the interest income
accounts.
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Principal Amount at December 31 $3,321 $2,297 $4,244
Gross Interest That Would Have Been Earned
Under Original Terms 246 232 435
Interest Included in Net Income 90 48 116
</TABLE>
The Company has no material commitments
to make additional advances to borrowers with
nonaccrual or restructured loans.
<PAGE>
NOTE 5: ALLOWANCE FOR LOAN LOSSES (In
Thousands)
The following summarizes the changes in
the allowance for loan losses during the years
ended December 31:
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Balance at Beginning of Year $ 5,581 $12,106 $12,338
Provision for Loan Losses 1,303 896 1,170
Recoveries 205 366 369
Charge-Offs (1,598) (946) (1,771)
Allowance Acquired (Transferred) 700 (6,841) ---
Balance at End of Year $ 6,191 $ 5,581 $12,106
</TABLE>
At December 31, 1997 and 1996, the
recorded investment in impaired loans amounted to
$1,935 and $1,301, respectively. At December 31,
1997, the allowance for loan losses included
$225, which represented the amount of allowance
related to the impaired loans at that date. At
December 31, 1996, the allowance for loan losses
included $195, which represented the amount of
the allowance related to the impaired loans at
that date. The average recorded investment in
impaired loans for 1997, 1996 and 1995 was
$1,566, $1,465 and $1,327, respectively. During
1997, 1996 and 1995, no interest income was
recorded on such loans during the period of
impairment.
NOTE 6: PREMISES AND EQUIPMENT (In Thousands)
A summary of premises and equipment at
December 31, 1997 and 1996 is presented below:
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Bank Premises, Including Land $12,592 $11,202
Equipment, Furniture and Fixtures 9,539 8,992
Leasehold Improvements 169 20
Sub-Total 22,300 20,214
Accumulated Depreciation and Amortization (11,540) (10,800)
Net Premises and Equipment $10,760 $ 9,414
</TABLE>
Amounts charged to operations for
depreciation and amortization totalled $836, $879
and $1,240 in 1997, 1996 and 1995, respectively.
<PAGE>
NOTE 7: OTHER REAL ESTATE OWNED (In
Thousands)
Other real estate owned, net of an
allowance for estimated losses, at December 31,
1997 and 1996 consisted of the following:
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Single-Family 1 - 4 Units $227 $---
Commercial Real Estate 86 86
Construction and Land Development 2 50
Other Real Estate Owned, Net $315 $136
</TABLE>
The following table summarizes changes
in the net carrying amount of other real
estate owned at December 31, 1997 and 1996:
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Balance at Beginning of Year $ 136 $2,410
Properties Acquired Through Foreclosure 307 302
Adjustments for Change in Fair Value --- (85)
Sales (128) (2,491)
Balance at End of Year $ 315 $ 136
</TABLE>
The following summarizes the changes in the
allowance for other real estate owned losses:
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Balance at Beginning of Year $108 $370
Additions --- 85
Charge-Offs (43) (347)
Balance at End of Year $ 65 $108
</TABLE>
NOTE 8: TIME DEPOSITS (In Thousands)
The following summarizes the contractual
maturities of time deposits during years
subsequent to December 31, 1997:
<TABLE>
<CAPTION>
Time
Deposits Other
of $100,000 Time
or More Deposits
<S> <C> <C>
1998 $ 97,902 $129,605
1999 5,523 49,433
2000 2,069 7,430
2001 726 4,469
2002 and Beyond 400 6,170
Total $106,620 $197,107
</TABLE>
The carrying value of time deposits at
December 31, 1997 and 1996 was $303,727 and
$219,558, respectively. The estimated fair value of
time deposits at December 31, 1997 and 1996 was
$304,374 and $219,558, respectively. The fair
value of time deposits is based on the discounted
value of contractual cash flows, except that the
fair value is limited to the extent that the
customer could redeem the certificate after
imposition of a premature withdrawal penalty.
The discount rate is estimated using the rates
currently offered for deposits of similar
remaining maturities.
NOTE 9: SHORT-TERM BORROWINGS (In Thousands)
A summary of short-term borrowings is
presented below:
<TABLE>
<CAPTION>
Federal Funds Purchased and Securities Sold
Under Agreements to Repurchase: 1997 1996 1995
<S> <C> <C> <C>
Balance at December 31 $20,918 $16,597 $14,045
Maximum Month-End Balance 21,510 20,099 14,460
Average During the Year 17,450 15,094 12,166
Average Rate During the Year 4.74% 4.72% 4.97%
Rate at December 31 4.39% 4.39% 4.29%
Other Short-Term Borrowings:
Balance at December 31 $3,837 $6,109 $ 1,252
Maximum Month-End Balance 8,322 8,336 8,402
Average During the Year 5,041 3,430 3,689
Average Rate During the Year 5.77% 5.20% 5.81%
Rate at December 31 5.27% 5.50% 5.15%
Average Aggregate Borrowing Rates 4.97% 4.81% 5.16%
</TABLE>
Securities sold under agreements to
repurchase generally mature within ninety days.
The Company maintains control over the securities
underlying the agreements. Federal funds
purchased represent overnight transactions.
At December 31, 1997 other short-term
borrowings included demand notes issued to the
U.S. Treasury. The Company has established
overnight and term lines of credit with the
Federal Home Loan Bank (FHLB). If advanced, such
lines of credit will be collateralized by
mortgage-backed securities, loans and FHLB stock.
Participation in the FHLB program requires an
investment in FHLB stock. Investment in FHLB
stock, included in Securities Available-for-Sale
on the Consolidated Balance Sheets, amounted to
$1,903 and $1,791 at December 31, 1997 and 1996,
respectively.
NOTE 10: 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 each of the
three year periods ended December 31, 1997.
Shares outstanding have been restated for the
November 1997 five percent stock dividend and the
November 1996 ten percent stock dividend.
<TABLE>
<CAPTION>
Income Shares Per Share
(Numerator) (Denominator) Amount
For the Year Ended December 31, 1997:
<S> <C> <C> <C>
Basic EPS: Income Available to Common Shareholders $10,997 5,846 $1.88
Dilutive Effect of Stock Options --- 79
Diluted EPS: Income Available to Common Shareholders
and Assumed Conversions $10,997 5,925 $1.86
For the Year Ended December 31, 1996:
Basic EPS: Income Available to Common Shareholders $20,260 6,184 $3.28
Dilutive Effect of Stock Options --- 64
Diluted EPS: Income Available to Common Shareholders
and Assumed Conversions $20,260 6,248 $3.24
For the Year Ended December 31, 1995:
Basic EPS: Income Available to Common Shareholders $12,424 6,564 $1.89
Dilutive Effect of Stock Options --- 55
Diluted EPS: Income Available to Common Shareholders
and Assumed Conversions $12,424 6,619 $1.88
</TABLE>
Options to purchase 43,500 shares of common stock
at $32.81 per share were outstanding during the
last quarter of 1997 but were not included in the
computation of diluted EPS because the options'
exercise price was greater than the average
market price of the common shares. The options,
which expire on November 26, 2007, were still
outstanding at the end of 1997.
NOTE 11: REGULATORY MATTERS (In Thousands)
In the normal course of business, the
Company and its subsidiaries operate under
certain regulatory restrictions, such as the
extent and structure of covered intercompany
borrowings and maintenance of reserve requirement
balances.
The principal source of the funds for the
payment of shareholder dividends by the Company
has been from dividends declared and paid to the
Company by its bank subsidiaries. As of December
31, 1997, the maximum amount that could have
been paid by GFNB to the Company was
approximately $13.2 million.
Under current Federal Reserve regulations,
the Company is prohibited from borrowing from the
subsidiary banks unless such borrowings are
secured by specific obligations. Additionally,
the maximum of any such borrowing is limited to
10% of an affiliate's capital and surplus.
The Company and its subsidiary banks are
subject to various regulatory capital
requirements administered by the federal banking
agencies. Failure to meet minimum capital
requirements can initiate certain mandatory--and
possibly additional discretionary--actions by
regulators that, if undertaken, could have a
direct material effect on an institution's
financial statements. Under capital adequacy
guidelines and the regulatory framework for
prompt corrective action, the Company and its
subsidiary banks must meet specific capital
guidelines that involve quantitative measures of
assets, liabilities, and certain off-balance
sheet items as calculated under regulatory
accounting practices. Capital amounts and
classification are also subject to qualitative
judgments by the regulators about components,
risk weightings, and other factors.
Quantitative measures established by
regulation to ensure capital adequacy require the
Company and its subsidiary banks to maintain
minimum capital amounts and ratios (set forth in
the table below) of total and Tier I capital (as
defined in the regulations) to risk-weighted
assets (as defined), and of Tier I capital (as
defined) to average assets (as defined).
Management believes, as of December 31, 1997 and
1996, that the Company and all subsidiary banks
meet all capital adequacy requirements to which
they are subject.
As of December 31, 1997, the most recent
notification from the Federal Reserve Bank of New
York (the primary regulator of the Company) and
the Office of the Comptroller of the Currency
(the primary regulator of the subsidiary banks)
categorized each respective entity as well
capitalized under the regulatory framework for
prompt corrective action. To be categorized as
well capitalized the Company must maintain
minimum total risk-based, Tier I risk-based, and
Tier I leverage ratios as set forth in the table
below. There are no conditions or events since
that notification that management believes have
changed the Company's or its subsidiary banks'
categories.
The Company ("Arrow") and its subsidiary
banks, Glens Falls National Bank and Trust
Company ("Glens Falls National") and Saratoga
National Bank and Trust Company ("Saratoga
National") actual capital amounts and ratios are
presented in the table below as of December 31,
1997 and 1996:
<PAGE>
<TABLE>
<CAPTION>
Minimum Amounts Minimum Amounts
For Capital To Be
Actual Adequacy Purposes Well Capitalized
Amount Ratio Amount Ratio Amount Ratio
As of December 31, 1997:
<S> <C> <C> <C> <C> <C> <C>
Total Capital
(to Risk Weighted Assets):
Arrow $65,334 13.5% $38,803 8.0% $48,503 10.0%
Glens Falls National 57,762 13.9 33,340 8.0 41,675 10.0
Saratoga National 6,995 10.8 5,172 8.0 6,465 10.0
Tier I Capital
(to Risk Weighted Assets):
Arrow $59,267 12.2% $19,416 4.0% $29,124 6.0%
Glens Falls National 52,550 12.6 16,669 4.0 25,004 6.0
Saratoga National 6,258 9.7 2,586 4.0 3,879 6.0
Tier I Capital
(to Average Assets):
Arrow $59,267 7.3% $32,431 4.0% $32,431 4.0%
Glens Falls National 52,550 7.2 29,194 4.0 36,493 5.0
Saratoga National 6,258 7.6 3,307 4.0 4,133 5.0
As of December 31, 1996:
Total Capital
(to Risk Weighted Assets):
Arrow $76,885 20.6% $29,887 8.0% $37,359 10.0%
Glens Falls National 47,902 15.6 24,581 8.0 30,726 10.0
Saratoga National 6,353 10.7 4,741 8.0 5,926 10.0
Tier I Capital
(to Risk Weighted Assets):
Arrow $72,204 19.3% $14,941 4.0% $22,412 6.0%
Glens Falls National 44,050 14.3 12,287 4.0 18,431 6.0
Saratoga National 5,643 9.5 2,371 4.0 3,557 6.0
Tier I Capital
(to Average Assets):
Arrow $72,204 11.2% $25,856 4.0% $25,856 4.0%
Glens Falls National 44,050 7.9 22,360 4.0 27,951 5.0
Saratoga National 5,643 7.6 2,974 4.0 3,717 5.0
</TABLE>
NOTE 12: RETIREMENT PLANS (In Thousands)
The Company maintains a non-contributory
pension plan which covers substantially all
employees. Benefits are based on years of
service and the participants' final compensation
(as defined). The funding policy is to
contribute the maximum amount that can be
deducted for federal income tax purposes. The
Company also maintains a supplemental
nonqualified unfunded retirement plan to provide
eligible employees of the Company and its
subsidiaries with benefits in excess of qualified
plan limits imposed by federal tax law.
The following table sets forth the plans'
funded status and amounts recognized in the
Company's consolidated financial statements:
<PAGE>
<TABLE>
<CAPTION>
Qualified Plan Nonqualified Plan
1997 1996 1997 1996
<S> <C> <C> <C> <C>
Actuarial Present Value of Benefit Obligations:
Vested Benefit Obligation $ 9,345 $ 9,430 $ 2,630 $2,741
Nonvested Benefit Obligation 95 185 --- ---
Accumulated Benefit Obligation 9,440 9,615 2,630 2,741
Effect of Projected Future
Compensation Levels 2,994 2,742 196 419
Projected Benefit Obligation 12,434 12,357 2,826 3,160
Plan Assets at Fair Value 15,043 14,233 --- ---
Plan Assets in Excess of
(Less than) Projected Benefit Obligation 2,609 1,876 (2,826) (3,160)
Unrecognized Net (Gain) Loss from
Past Experience Different
from that Assumed and Effect
of Changes in Assumptions (426) 326 196 419
Unrecognized Prior Service (Gain) Cost (42) (48) 716 782
Unrecognized Net Asset at Transition
(being recognized over 15 years) (369) (500) --- ---
Adjustment Required to Recognize
Minimum Liability --- --- (716) (782)
Prepaid (Accrued) Pension Cost $ 1,772 $ 1,654 $(2,630) $(2,741)
</TABLE>
The following table sets forth the
components of the Company's net periodic pension
expense:
<TABLE>
<CAPTION>
Qualified Non-contributory Plan: 1997 1996 1995
<S> <C> <C> <C>
Service Cost - Benefits Earned During the Period $ 414 $ 588 $ 481
Interest Cost on Projected Benefit Obligation 910 918 830
Actual Return on Plan Assets (2,880) (2,133) (2,828)
Net Amortization and Deferral 1,528 835 1,759
Net Periodic Pension (Benefit) Expense $ (28) $ 208 $ 242
Supplemental Nonqualified Plan: 1997 1996 1995
Service Cost - Benefits Earned During the Period $ 11 $ 56 $ 53
Interest Cost on Projected Benefit Obligation 202 177 142
Net Amortization and Deferral 74 188 165
Net Periodic Pension Expense $ 287 $ 421 $360
</TABLE>
The actuarial assumptions used to
determine the projected benefit obligation at
December 31, 1997 and 1996 include a discount
rate of 7.00% and 7.25%, respectively, and an
assumed rate of increase in future compensation
of 4.0% and 4.5%, for the respective years. The
expected rate of return on investments was 9.0%
for 1997, 1996 and 1995. The plan's assets are
primarily comprised of short-term funds and U.S.
Treasury obligations, high grade corporate bonds
and marketable equity securities. At December
31, 1997 and 1996, plan assets included 74 and
102 shares, respectively, of Arrow Financial
Corporation common stock with a market value of
$2,502 and $2,397, respectively. During the
respective years, the Plan received $75 and $88
from cash dividends on the Company's common
stock.
During 1996, divestiture of the Company's
Vermont banking operations created one-time
financial accounting transactions for the defined
benefit pension plan and the supplemental
nonqualified plan, above, and for the nonpension
postretirement benefit plan, discussed below. At
December 31, 1996, the prepaid pension cost for
the defined benefit plan included a curtailment
gain amounting to $445; the accrued pension cost
for the supplemental nonqualifed plan reflected a
$523 reduction of unrecognized prior service
costs and recognition of $551 in additional
benefits provided by the plan; and the accrued
postretirement benefit cost for the nonpension
plan included a curtailment loss of $561. Net
expenses for these transactions were charged to
the net gain on the disposition of Vermont
operations (see Note 23) and, therefore, are not
included in the net periodic pension expense
above, or the net periodic postretirement benefit
expense.
The Company sponsors health and dental
care plans along with term life insurance that
provide postretirement benefits to eligible full
and part-time employees. The medical and life
plans are contributory, with retiree
contributions based on length of service. The
dental plan is fully contributory. The
accounting for the health plan provides for
automatic increases of Company contributions each
year based on the increase in inflation up to a
maximum of 5%. The Company's policy is to fund
the cost of postretirement benefits in amounts
determined at the discretion of management.
The following table presents the plan's
status reconciled with amounts recognized in the
Company's Consolidated Balance Sheets at December
31, 1997 and 1996:
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Accumulated Postretirement Benefit Obligation:
Retirees $3,083 $3,112
Fully Eligible Active Plan Participants 269 221
Other Active Plan Participants 1,356 1,338
Total Accumulated Postretirement Benefit Obligation 4,708 4,671
Unrecognized Transition Obligation
(Being Recognized Over 20 Years) (1,811) (1,939)
Unrecognized Prior Service Costs (61) (66)
Unrecognized Net Loss from Past Experience Different
from that Assumed and Effect of Changes in Assumptions (327) (449)
Accrued Postretirement Benefit Cost $2,509 $2,217
</TABLE>
<PAGE>
Net periodic postretirement benefit cost for
the years ended December 31, 1997, 1996
and 1995 included the following components:
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Service Cost $ 94 $121 $106
Interest Cost 312 326 305
Net Amortization and Deferral 131 176 172
Net Periodic Postretirement Benefit Expense $537 $623 $583
</TABLE>
The weighted-average discount rate used
in determining the accumulated postretirement
benefit obligation at December 31, 1997 and 1996
was 7.00% and 7.25%, respectively, and the
assumed rate of increase in future compensation
was 4.0% and 4.5% for the respective years. For
measurement purposes, the assumed annual rate of
increase in the per capita cost of covered health
care benefits for 1997 was 9.5% for medical
benefits and 7.75% for dental benefits; the rate
was assumed to decrease gradually to 5.5% by
2005, for both medical and dental benefits, and
remain at that level thereafter. The health care
cost trend rate assumption has a significant
effect on the amounts reported. To illustrate,
increasing the assumed health care cost trend
rates by 1 percentage point in each year would
increase the accumulated postretirement benefit
obligation as of December 31, 1997 by $92 and the
aggregate of the service and interest cost
components of net periodic postretirement benefit
cost for the year then ended by $10.
NOTE 13: OTHER EMPLOYEE BENEFIT PLANS (In
Thousands)
The Company maintains an employee stock
ownership plan (ESOP). Substantially all
employees of the Company, and its subsidiaries,
are eligible to participate upon satisfaction of
applicable service requirements. During 1995,
the ESOP borrowed $1.2 million from one of the
Company's subsidiary banks to purchase
outstanding shares of the Company's common stock.
The note required the Company to contribute the
amount necessary for the ESOP to discharge its
current obligations which included principal and
interest payments on the note. The Company's ESOP
provision amounted to $600, $840 and $740 in
1997, 1996 and 1995, respectively. As the debt
was repaid, shares were released from collateral
and allocated to active employees, based on the
proportion of debt and interest paid in the year.
The Company accounted for the ESOP under
SOP 93-6, and accordingly, the shares pledged as
collateral were reported as unallocated ESOP
shares in shareholders' equity. As shares were
released from collateral, the Company reported
compensation expense equal to the current average
market price of the shares, and the shares became
outstanding for earnings per share computations.
At December 31, 1996, the debt was fully repaid.
The Company also sponsors an Employee
Stock Purchase Plan (ESPP). Substantially all
employees of the Company and its subsidiaries are
eligible to participate upon satisfaction of
applicable service requirements. The aggregate
cost of the ESPP as reflected in the Company's
consolidated financial statements was $95, $100
and $81 in 1997, 1996 and 1995, respectively.
The Company also sponsors a Short-Term
Incentive Award Plan for senior management and a
Profit Sharing Plan for substantially all
employees. The cost of these plans was $318,
$393 and $478 for 1997, 1996 and 1995,
respectively. The Company's subsidiary banks
have a variety of performance based incentive
compensation plans for their employees.
NOTE 14: STOCK OPTION PLANS (Dollars In
Thousands, Except Per Share Amounts)
The Company has established fixed
Incentive Stock Option and Non-qualified Stock
Option Plans. As amended, these programs
reserved 612,546 shares of common stock (adjusted
for stock splits and dividends) for issuance to
key employees and provide for the granting of
stock appreciation rights to key employees. At
December 31, 1997, 81,429 shares remained
available for grant under these plans. Options
may be granted at a price no less than the
greater of the par value or fair market value of
such shares on the date on which such option is
granted, and generally expire ten years from the
date of grant. Number of shares and related
prices have been adjusted for the effect of the
five percent stock dividend declared in 1997 and
the ten percent stock dividend declared in 1996.
Stock Appreciation Rights, which were
granted in tandem with non-qualified options,
entitle the holder of an option to surrender the
unexercised option, or any part thereof and
receive in exchange a payment in cash
representing the difference between the base
value and the fair market value of the common
stock of the Company.
The Company applies APB Opinion No. 25
and related Interpretations in accounting for its
plans. Accordingly, no compensation cost has
been recognized for its stock option plans. In
October 1995, the FASB issued SFAS No. 123,
"Accounting for Stock-Based Compensation." SFAS
No. 123 requires companies not using a fair value
based method of accounting for employee stock
options or similar plans, to provide pro forma
disclosure of net income and earnings per share
as if that method of accounting had been applied.
The fair value of each option grant is estimated
on the date of grant using the Black-Scholes
option-pricing model with the following weighted-
average assumptions used for grants in 1997, 1996
and 1995 respectively: dividend yields of 2.50%,
3.25% and 3.25%; expected volatility of 20.5%,
21.3% and 24.0%; risk free interest rates of
5.76%, 6.05% and 5.68%; and expected lives of 7.0
years for each year. The effects of applying
SFAS No. 123 on the pro forma net income may not
be representative of the effects on pro forma net
income for future years. Pro forma disclosures
for the Company for the years ending December 31,
1997, 1996 and 1995 are as follows:
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Net Income:
As Reported $10,977 $20,260 $12,424
Pro Forma 10,854 20,191 12,419
Basic Earning Per Share:
As Reported $1.88 3.28 $1.89
Pro Forma 1.86 3.27 1.89
Diluted Earnings Per Share:
As Reported $1.86 3.24 $1.88
Pro Forma 1.83 3.23 1.88
</TABLE>
A summary of the status of the Company's
stock option plans as of December 31, 1997,
1996 and 1995 and changes during the years
ending on those dates is presented below:
<TABLE>
<CAPTION>
1997 1996 1995
Weighted- Weighted- Weighted-
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
<S> <C> <C> <C> <C> <C> <C>>
Options:
Outstanding at January 1 269,430 $14.30 302,576 $11.83 358,336 $10.35
Granted 43,500 32.81 53,500 22.80 70,340 15.26
Exercised (51,024) 10.97 (82,026) 10.66 (123,698) 9.52
Forfeited --- --- (4,620) 15.26 2,402) 12.28
Outstanding at Year-end 261,906 18.03 269,430 14.30 302,576 11.83
Exercisable at Year-end 132,367 126,180 155,627
Weighted-Average Fair Value
of Options Granted During
the Year $8.54 $5.53 $3.84
</TABLE>
The following table summarizes information
about the Company's stock options at
December 31, 1997:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
Weighted-
Average Weighted- Weighted-
Range of Number Remaining Average Number Average
Exercise Outstanding Contractual Exercise Exercisable Exercise
Prices At 12/31/97 Life Price at 12/31/97 Price
<S> <C> <C> <C> <C> <C>
$4.63-$9.43 29,106 5.0 years $ 7.50 29,106 $ 7.50
$11.92-$12.79 72,876 5.0 12.28 59,967 12.29
$15.26 62,874 6.1 15.26 29,903 15.26
$22.80 53,550 8.9 22.80 13,391 22.80
$32.81 43,500 9.9 32.81 --- ---
$4.63-$32.81 261,906 6.9 18.03 132,367 12.97
</TABLE>
NOTE 15: SHAREHOLDER RIGHTS PLAN
In 1997, the Board of Directors of the
Company adopted a shareholder rights plan. The
plan provides for the distribution of one
preferred stock purchase right for each
outstanding share of common stock of the Company.
Each right entitles the holder, following the
occurrence of certain events, to purchase a unit,
consisting of one-hundredth of a share of Series
1 Junior Participating Preferred Stock, at a
purchase price of $75 per unit, subject to
adjustment. The rights will not be exercisable
or transferable apart from the common stock
except under certain circumstances in which a
person or group of affiliated persons acquires,
or commences a tender offer to acquire, 20% or
more of the Company's common stock. Rights held
by such an acquiring person or persons may
thereafter become void. Under certain
circumstances a right may become a right to
purchase common stock or assets of the Company or
common stock of an acquiring corporation at a
substantial discount. Under certain
circumstances, the Company may redeem the rights
at $.01 per right. The rights will expire in
April 2007 unless earlier redeemed or exchanged
by the Company.
NOTE 16: OTHER OPERATING INCOME AND OTHER
OPERATING EXPENSE (In Thousands)
Other operating income included in
the consolidated statements of income is as
follows:
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Financial Institution Bond Recovery $ --- $ --- $5,000
All Other 1,714 1,057 1,052
Total Other Operating Income $1,714 $1,057 $6,052
</TABLE>
Other operating expenses included in
the consolidated statements of income are as
follows:
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Advertising and Promotion $ 558 $ 572 $ 694
Stationery and Printing 715 644 735
Telephone and Communications 546 681 707
Postage 811 909 989
Legal 663 838 805
Other Real Estate Owned Losses, Net --- 271 209
Other Real Estate Owned Expenses 74 84 215
FDIC and Other Insurance 218 258 1,147
All Other 2,038 2,079 3,588
Total Other Operating Expense $5,623 $6,336 $9,089
</TABLE>
<PAGE>
NOTE 17: INCOME TAXES (In Thousands)
The consolidated provision for income
taxes is summarized below:
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Current Tax Expense:
Federal $4,367 $ 9,378 $5,650
State 378 1,347 1,064
Total Current Tax Expense 4,745 10,725 6,714
Deferred Tax Expense (Benefit):
Federal 737 409 321
State (327) (312) (49)
Total Deferred Tax Expense (Benefit) 410 97 272
Total Consolidated Provision for Income Taxes $5,155 $10,822 $6,986
</TABLE>
The consolidated provisions for income taxes
differed from the amounts computed by applying
the U.S. Federal Income Tax Rate of 35% for 1997,
1996 and 1995 to pre-tax income from continuing
operations as a result of the following:
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Computed Tax Expense at Statutory Rates $5,653 $10,879 $6,793
Increase (Reduction) in Income Taxes Resulting From:
Tax-Exempt Income (563) (440) (492)
Nondeductible Interest Expense 65 53 74
State Taxes, Net of Federal Income Tax Benefit 497 673 659
State Taxes Settlement, Net of Federal
Income Tax Benefit (464) --- ---
Other Items, Net (33) (343) (48)
Total Consolidated Provision for Income Taxes $5,155 $10,822 $6,986
</TABLE>
The tax effects of temporary differences
that give rise to significant portions of the
deferred tax assets and deferred tax liabilities
at December 31, 1997 and 1996 are presented
below:
<TABLE>
<CAPTION> 1997 1996
Deferred Tax Assets:
<S> <C> <C>
Allowance for Loan Losses $2,555 $2,300
Pension and Deferred Compensation Plans 2,570 2,188
Deferred Expenses 1,115 1,699
Total Gross Deferred Tax Assets 6,240 6,187
Deferred Tax Liabilities:
Pension Plans 758 555
Depreciation 398 297
Deferred Income 466 447
Other 113 250
Total Gross Deferred Tax Liabilities 1,735 1,549
Net Deferred Tax Asset $4,505 $4,638
</TABLE>
Management believes that the realization
of the recognized net deferred tax asset of
$4,505 and $4,638 at December 31, 1997 and 1996,
respectively, is more likely than not, based on
existing carryback ability, available tax
planning strategies and expectations as to future
taxable income. Accordingly, there was no
valuation allowance for deferred tax assets as of
December 31, 1997 and 1996. Not included in net
deferred tax assets above are deferred tax
liabilities relating to unrealized gains on
securities available for sale of $553 at December
31, 1997 and $154 at December 31, 1996. During
1997, the increase in deferred net tax assets
relating to purchase acquistion transactions
amounted to $277.
NOTE 18: LEASE COMMITMENTS (In Thousands)
At December 31, 1997, the Company was
obligated under a number of noncancellable
operating leases for land, buildings and
equipment. Certain of these leases provide for
escalation clauses and contain renewal options
calling for increased rentals if the lease is
renewed.
Future minimum lease payments on
operating leases at December 31, 1997 were as
follows:
<TABLE>
<CAPTION>
Operating
Leases
<S> <C>
1998 $ 59
1999 49
2000 49
2001 49
2002 49
Later Years 683
Total Minimum Lease Payments $938
</TABLE>
NOTE 19: FINANCIAL INSTRUMENTS WITH
OFF-BALANCE SHEET RISK AND CONTINGENT LIABILITIES
(In Thousands)
The Company is party to financial
instruments with off-balance sheet risk in the
normal course of business to meet the financing
needs of its customers. These financial
instruments include commitments to extend credit,
standby letters of credit and loans sold with
recourse. Commitments to extend credit include
home equity lines of credit, credit card lines of
credit, commitments for residential and
commercial construction and other personal and
commercial lines of credit. Those instruments
involve, to varying degrees, elements of credit
and interest rate risk in excess of the amount
recognized in the consolidated balance sheets.
The contract or notional amounts of those
instruments reflect the extent of the involvement
the Company has in particular classes of
financial instruments.
The Company's exposure to credit loss in
the event of nonperformance by the other party to
the financial instrument for commitments to
extend credit and standby letters of
credit is represented by the contractual notional
amount of those instruments. The Company uses
the same credit policies in making commitments
and conditional obligations as it does for
on-balance sheet instruments.
Financial instruments whose contract
amounts represent credit risk as of December 31
are as follows:
<TABLE>
<CAPTION>
1997 1996
Fixed Variable Total Fixed Variable Total
<S> <C> <C> <C> <C> <C> <C>
Commitments to Extend Credit $ --- $77,307 $77,307 $ --- $60,919 $60,919
Standby Letters of Credit --- 653 653 --- 1,185 1,185
</TABLE>
Commitments to extend credit are
agreements to lend to a customer as long as there
is no violation of any condition established in
the contract. Commitments generally have fixed
expiration dates or other termination clauses and
may require payment of a fee. Since many of the
commitments are expected to expire without being
drawn upon, the total commitment amounts do not
necessarily represent future cash requirements.
The Company evaluates each customer's
creditworthiness on a case-by-case basis. Credit
card lines of credit are generally, unsecured.
Home equity lines of credit are secured by
residential real estate. Construction lines of
credit are secured by underlying real estate.
For other lines of credit, the amount of
collateral obtained, if deemed necessary by the
Company upon extension of credit, is based on
management's credit evaluation of the
counter-party. Collateral held varies, but may
include accounts receivable, inventory, property,
plant and equipment, and income-producing
commercial properties.
Standby letters of credit are
conditional commitments issued by the Company to
guarantee the performance of a customer to a
third party. The credit risk involved in issuing
standby letters of credit is essentially the same
as that involved in extending loan facilities to
customers.
Under SFAS No. 107 the fair value of
commitments to extend credit is determined by
estimating the fees to enter into similar
agreements, taking into account the remaining
terms and present creditworthiness of the
counterparties, and for fixed rate loan
commitments, the difference between the current
and committed interest rates. The fair value of
standby letters of credit is based on the fees
currently charged for similar agreements or the
cost to terminate the arrangement with the
counterparties. The Company provides several
types of commercial lines of credit and standby
letters of credit to its commercial customers.
The pricing of these services is not isolated as
the Company considers the customer's complete
deposit and borrowing relationship in pricing
individual products and services. The
commitments to extend credit also include
commitments under home equity lines of credit,
for which the Company charges no fee. Unadvanced
credit card lines comprise the other major
category of commitments to extend credit. The
bank charges a nominal annual fee to the
cardholders which covers both the cost to process
purchases made and settled before interest is
charged as well as cash advances and financings
of purchases. The carrying value and fair value
of commitments to extend credit are not material
and the Company does not expect to incur any
material loss as a result of these commitments.
In the normal course of business, the
Company and its subsidiary banks became involved
in a variety of routine legal proceedings
including so-called "lender liability" claims, in
which borrowers allege that they have suffered
loss as a result of inappropriate actions taken
by lending banks. At present, there are no legal
proceedings pending or threatened which, in the
opinion of management and counsel, would result
in a material loss to the Company.
NOTE 20: FAIR VALUE OF FINANCIAL INSTRUMENTS (In
Thousands)
The following table presents a summary
of the carrying amount and fair value of the
Company's financial instruments not carried at
fair value:
<TABLE>
<CAPTION>
1997 1996
Carrying Fair Carrying Fair
Amount Value Amount Value
<S> <C> <C> <C> <C>
Securities Held-to-Maturity (Notes 1 and 3) $ 44,082 $ 45,562 $ 30,876 $ 31,519
Net Loans and Leases (Notes 1 and 4) 479,619 489,031 387,930 392,128
Time Deposits (Notes 1 and 8) 303,727 304,374 219,558 219,558
</TABLE>
<PAGE>
NOTE 21: PARENT ONLY FINANCIAL INFORMATION (In
Thousands)
Condensed financial information for
Arrow Financial Corporation is as follows:
<TABLE>
<CAPTION>
BALANCE SHEETS December 31,
1997 1996
ASSETS
<S> <C> <C>
Interest-Bearing Deposits with Subsidiary Banks $ 156 $ 374
Cash and Cash Equivalents 156 374
Securities Available-for-Sale 1,129 50
Investment in Subsidiaries at Equity 73,418 83,588
Premises and Equipment, Net --- 19
Other Assets 4,469 3,136
Total Assets $79,172 $87,167
LIABILITIES
Short-Term Debt with Nonbank Subsidiary $ --- $ 6,375
Other Liabilities 5,301 6,496
Total Liabilities 5,301 12,871
SHAREHOLDERS' EQUITY
Common Stock 6,906 6,577
Surplus 65,277 54,569
Undivided Profits 22,531 26,992
Valuation Allowance for Securities Available-for-Sale 764 208
Treasury Stock, at Cost (21,607) (14,050)
Total Shareholders' Equity 73,871 74,296
Total Liabilities and Shareholders' Equity $79,172 $87,167
</TABLE>
<TABLE>
<CAPTION>
STATEMENTS OF INCOME Years Ended December 31,
Income: 1997 1996 1995
<S> <C> <C> <C>
Dividends from Bank Subsidiaries $ 2,300 $ 3,990 $ 3,155
Liquidating Dividends from Green Mountain Bank 33,060 --- ---
Dividends from Nonbank Subsidiaries 320 2,569 3,129
Interest and Dividends on Securities
Available-for-Sale 222 2 16
Other Income (Including Management Fees) 398 8,214 7,454
Net Gains on Securities Transactions --- --- 51
Total Income 36,300 14,775 13,805
Expense:
Interest Expense 128 421 244
Salaries and Benefits 476 5,666 5,727
Occupancy and Equipment 6 995 969
Other Expense 418 1,764 1,406
Total Expense 1,028 8,846 8,346
Income Before Income Tax Benefit and Equity
in Undistributed Net Income of Subsidiaries 35,272 5,929 5,459
Income Tax Benefit 351 244 270
Income Before Equity in Undistributed
Net Income of Subsidiaries 35,623 6,173 5,729
Equity in (Distributions in Excess of)
Undistributed Net Income of Subsidiaries (24,626) 14,087 6,695
Net Income $10,997 $20,260 $12,424
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
STATEMENTS OF CASH FLOWS Years Ended December 31,
1997 1996 1995
<S> <C> <C> <C>
Operating Activities:
Net Income $10,997 $20,260 $12,424
Adjustments to Reconcile Net Income to Net Cash
Provided by Operating Activities:
Distributions in Excess of
(Undistributed) Net Income of Subsidiaries 24,626 (14,087) (6,695)
Depreciation and Amortization 8 12 38
Compensation Expense for Allocated ESOP Shares --- 252 24
Gains on the Sale of Securities Available-for-Sale --- --- (51)
Changes in Other Assets and Other Liabilities (2,535) 882 457
Net Cash Provided by Operating Activities 33,096 7,319 6,197
Investing Activities:
Proceeds from the Sale of Securities Available-for-Sale 9,793 --- 469
Proceeds from the Maturities
of Securities Available-for-Sale 342 --- ---
Purchases of Securities Available-for-Sale (11,196) (1) ---
Capital Investment in Subsidiary Banks (13,917) (500) ---
Sale of Fixed Assets to Subsidiaries 17 --- 859
Net Cash (Used in) Provided by Investing Activities (14,961) (501) 1,328
Financing Activities:
Net (Decrease) Increase in Short-Term Borrowings (6,375) 6,375 ---
Repayment of Long-Term Debt --- --- (4,470)
Exercise of Stock Options 33 412 164
Disqualifying Disposition of Incentive Stock Options 33 50 28
Purchase of Treasury Stock (7,479) (10,052) (1,881)
Cash Dividends Paid (4,565) (3,886) (3,196)
Net Cash Used in Financing Activities (18,353) (7,101) (9,355)
Net Decrease in Cash and Cash Equivalents (218) ( 283) (1,830)
Cash and Cash Equivalents at Beginning of the Year 374 657 2,487
Cash and Cash Equivalents at End of the Year $ 156 $ 374 $ 657
Supplemental Cash Flow Information:
Interest Paid $ 262 $ 288 $ 277
Income Taxes Paid 6,571 11,235 6,908
Cancellation of Debentures by Exercise of Cancellable
Mandatory Stock Purchase Contracts --- --- 370
</TABLE>
NOTE 22: SIGNIFICANT GROUP CONCENTRATIONS OF
CREDIT RISK (In Thousands)
Most of the Company's loans are with customers
in northeastern New York. Although the loan
portfolios of the subsidiary banks are well
diversified, tourism has a substantial impact on
the northeastern New York economy. The
commitments to extend credit are fairly
consistent with the distribution of loans
presented in Note 4. Generally, the loans are
secured by assets and are expected to be repaid
from cash flow or the sale of selected assets of
the borrowers. The Company evaluates each
customer's creditworthiness on a case-by-case
basis. The amount of collateral obtained, if
deemed necessary by the Company upon extension of
credit, is based upon management's credit
evaluation of the counterparty. The nature of
the collateral varies with the type of loan and
may include: residential real estate, cash and
securities, inventory, accounts receivable,
property, plant and equipment, income producing
commercial properties and automobiles.
<PAGE>
NOTE 23: BRANCH ACQUISTIONS AND DIVESTITURE OF
VERMONT OPERATIONS (In Thousands)
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.
During 1996, the Company, in three
separate transactions, completed the divestiture
of its Vermont banking operations. This included
the transfer of approximately $208 million of
deposits, the sale of approximately $148 million
of loans and the sale of the Vermont trust
operation. The net gain on the divestiture was
$15.3 million.
Principal components of the net gain
included: premium on deposits transferred ($15.7
million), proceeds from the sale of the trust
operation ($3.0 million) and a gain on the loans
sold ($2.6 million), partially offset by
personnel costs relating to severance and the
costs of benefits related to the Company's
pension and postretirement plans, as described in
Note 12 ($1.7 million), the writedown of certain
fixed assets, principally the main office ($2.0
million) and other net costs ($2.3 million),
which included professional fees, reserves for
certain warranties provided to the purchasers,
losses on various other assets and miscellaneous
costs.
The Company did not transfer the main
office located in Rutland, Vermont. At December
31, 1997 and 1996, the Company was holding the
building for sale and it was carried at estimated
fair value less costs to sell and included in
other assets on the consolidated balance sheets.
Exhibit 21
Arrow Financial Corporation
Subsidiaries
% Common
Subsidiaries of the Registrant Stock Owned
Subsidiaries of Arrow Financial Corporation:
Glens Falls National Bank & Trust Co. 100
Saratoga National Bank & Trust Co. 100
GMB Asset Management Corporation 100
Subsidiaries of Glens Falls National:
Arrow Properties, Inc. 100
Exhibit 23
Consent of Independent Certified Public Accountants
The Board of Directors
Arrow Financial Corporation
We consent to incorporation by reference in the following
registration statements:
File No. 2-98735 on Form S-8,
File No. 2-98736 on Form S-8
File No. 33-48225 on Form S-8, and
File No. 33-66192 on Form S-8
of Arrow Financial Corporation of our report dated January
23, 1998, relating to the consolidated balance sheets of Arrow
Financial Corporation and subsidiaries as of December 31, 1997 and
1996, and the related consolidated statements of income, changes in
shareholders' equity, and cash flows for the three-year period
ended December 31, 1997, which report appears in the December 31,
1997 Annual Report on Form 10-K of Arrow Financial Corporation.
KPMG Peat Marwick
March 26, 1998
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND> PREVIOUSLY FILED 1996 AND 1995 EPS DATA
RESTATED FOR ADOPTION OF FAS 128
1996 AND 1995 EPS ALSO RESTATED FOR NOVEMBER 1997
5% STOCK DIVIDEND AND NOVEMBER 1996 10%
STOCK DIVIDEND
</LEGEND>
<RESTATED>
<MULTIPLIER> 1000
<S> <C> <C> <C>
<PERIOD-TYPE> YEAR YEAR YEAR
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1996 DEC-31-1995
<PERIOD-END> DEC-31-1997 DEC-31-1996 DEC-31-1995
<CASH> 23909 19572 23406
<INT-BEARING-DEPOSITS> 0 0 0
<FED-FUNDS-SOLD> 23000 17925 35100
<TRADING-ASSETS> 0 0 0
<INVESTMENTS-HELD-FOR-SALE> 221837 171743 178645
<INVESTMENTS-CARRYING> 44082 30876 13921
<INVESTMENTS-MARKET> 45562 31519 14508
<LOANS> 485810 393511 517787
<ALLOWANCE> 6191 5581 12106
<TOTAL-ASSETS> 831599 652603 789790
<DEPOSITS> 720915 541747 694453
<SHORT-TERM> 24755 22706 15297
<LIABILITIES-OTHER> 12058 13854 12536
<LONG-TERM> 0 0 0
<COMMON> 6906 6577 5979
0 0 0
0 0 0
<OTHER-SE> 66965 67719 61525
<TOTAL-LIABILITIES-AND-EQUITY> 831599 652603 789790
<INTEREST-LOAN> 38917 42195 47988
<INTEREST-INVEST> 2646 936 7424
<INTEREST-OTHER> 13298 11744 5306
<INTEREST-TOTAL> 54861 54875 60718
<INTEREST-DEPOSIT> 22769 20935 23816
<INTEREST-EXPENSE> 23887 21826 24865
<INTEREST-INCOME-NET> 30974 33049 35853
<LOAN-LOSSES> 1303 896 1170
<SECURITIES-GAINS> 74 (101) 23
<EXPENSE-OTHER> 21702 24774 29769
<INCOME-PRETAX> 16152 31082 19410
<INCOME-PRE-EXTRAORDINARY> 16152 31082 19410
<EXTRAORDINARY> 0 0 0
<CHANGES> 0 0 0
<NET-INCOME> 10997 20260 12424
<EPS-PRIMARY> 1.88 3.28 1.89
<EPS-DILUTED> 1.86 3.24 1.88
<YIELD-ACTUAL> 4.64 5.08 5.02
<LOANS-NON> 3321 2297 4244
<LOANS-PAST> 363 321 111
<LOANS-TROUBLED> 0 0 0
<LOANS-PROBLEM> 0 0 0
<ALLOWANCE-OPEN> 5581 12106 12338
<CHARGE-OFFS> 1598 946 1771
<RECOVERIES> 205 366 369
<ALLOWANCE-CLOSE> 6191 5581 12106
<ALLOWANCE-DOMESTIC> 6191 5581 12106
<ALLOWANCE-FOREIGN> 0 0 0
<ALLOWANCE-UNALLOCATED> 199 384 3152
</TABLE>
