SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.
FORM 10-Q
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended September 30, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number: 0-12507
ARROW FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
New York 22-2448962
(State or other jurisdiction of (IRS Employer Identification
incorporation or organization) Number)
250 GLEN STREET, GLENS FALLS, NEW YORK 12801
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code:
(518)745-1000
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Class Outstanding as of October 31, 1998
Common Stock, par value
$1.00 per share 6,242,984
<TABLE>
<CAPTION>
INDEX
PART I FINANCIAL INFORMATION Page No.
<S> <C>
Item 1. Consolidated Balance Sheets as of September 30, 1998
and December 31, 1997 3
Consolidated Statements of Income for the
Three and Nine Months Ended September 30, 1998 and 1997 4
Consolidated Statements of Changes in Shareholders' Equity for the
Nine Months Ended September 30, 1998 and 1997 5
Consolidated Statements of Cash Flows for the
Nine Months Ended September 30, 1998 and 1997 6
Notes to Consolidated Interim Financial Statements 7
Independent Auditors' Review Report 8
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 9
Item 3. Quantitative and Qualitative Disclosures About Market Risk 21
PART II OTHER INFORMATION 22
SIGNATURES 22
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
PART I - FINANCIAL CONDITION
ARROW FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)(Unaudited)
9/30/98 12/31/97
ASSETS
<S> <C> <C>
Cash and Due from Banks $ 23,593 $ 23,909
Federal Funds Sold --- 23,000
Cash and Cash Equivalents 23,593 46,909
Securities Available-for-Sale 224,331 221,837
Securities Held-to-Maturity: (Approximate Fair Value of
$64,712 in 1998 and $45,562 in 1997) 62,338 44,802
Loans and Leases 527,286 485,810
Less: Allowance for Credit Losses (6,648) (6,191)
Net Loans and Leases 520,638 479,619
Premises and Equipment, Net 10,973 10,760
Other Real Estate Owned 619 315
Other Assets 26,507 28,077
Total Assets $868,999 $831,599
LIABILITIES
Deposits:
Demand $ 95,599 $ 96,482
Interest-Bearing Demand Deposits 178,043 162,016
Regular and Money Market Savings 163,749 158,690
Time Deposits of $100,000 or More 96,193 106,620
Other Time Deposits 197,240 197,107
Total Deposits 730,824 720,915
Short-Term Borrowings:
Federal Funds Purchased and Securities Sold Under
Agreements to Repurchase 26,216 20,918
Other Short-Term Borrowings 3,496 3,837
Federal Home Loan Bank Advances 15,000 ---
Other Liabilities 15,906 12,058
Total Liabilities 791,442 757,728
<PAGE>
SHAREHOLDERS' EQUITY
Preferred Stock, $5 Par Value; 1,000,000 Shares Authorized --- ---
Common Stock, $1 Par Value; 20,000,000 Shares Authorized
(7,596,477 Shares Issued in 1998 and 6,905,888 in 1997) 7,596 6,906
Surplus 87,221 65,277
Undivided Profits 4,929 22,531
Accumulated Other Comprehensive Income:
Net Unrealized Gain on Securities Available-for-Sale,
Net of Tax 1,899 764
Reserve for Unearned ESOP Shares (52,100 Shares in 1998) (1,500) ---
Treasury Stock, at Cost (1,286,393 Shares in 1998 and
1,143,553 in 1997) (22,588) (21,607)
Total Shareholders' Equity 77,557 73,871
Total Liabilities and Shareholders' Equity $868,999 $831,599
See notes to consolidated interim financial statements.
</TABLE>
<TABLE>
<CAPTION>
ARROW FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in Thousands, Except Per Share Amounts)(Unaudited)
Three Months Nine Months
Ended Sept 30, Ended Sept 30,
1998 1997 1998 1997
INTEREST AND DIVIDEND INCOME
<S> <C> <C> <C> <C>
Interest and Fees on Loans and Leases $11,112 $10,473 $32,847 $28,267
Interest on Federal Funds Sold 128 411 491 597
Interest and Dividends on Securities
Available-for-Sale 3,702 3,267 11,152 8,748
Interest and Dividends on Securities
Held-to-Maturity 854 680 2,336 1,983
Total Interest and Dividend Income 15,796 14,831 46,826 39,595
INTEREST EXPENSE
Interest on Deposits:
Time Deposits of $100,000 or More 1,596 1,084 4,532 3,402
Other Deposits 5,024 5,129 15,015 12,810
Interest on Short-Term Borrowings:
Federal Funds Purchased and Securities Sold
Under Agreements to Repurchase 308 210 868 582
Other Short-Term Borrowings 37 81 103 243
Federal Home Loan Bank Advances 199 --- 442 ---
Total Interest Expense 7,164 6,504 20,958 17,037
NET INTEREST INCOME 8,632 8,327 25,868 22,558
Provision for Credit Losses 342 500 1,026 972
<PAGE>
NET INTEREST INCOME AFTER PROVISION
FOR CREDIT LOSSES 8,290 7,827 24,842 21,586
OTHER INCOME
Income from Fiduciary Activities 748 686 2,305 2,007
Fees for Other Services to Customers 1,195 1,122 3,181 2,712
Net Gains on Securities Transactions --- --- 166 37
Other Operating Income 263 413 661 1,422
Total Other Income 2,206 2,221 6,313 6,178
OTHER EXPENSE
Salaries and Employee Benefits 3,607 3,309 10,322 9,212
Occupancy Expense of Premises, Net 424 432 1,276 1,173
Furniture and Equipment Expense 542 461 1,636 1,414
Other Operating Expense 1,729 1,627 4,942 3,989
Total Other Expense 6,302 5,829 18,176 15,788
INCOME BEFORE PROVISION FOR INCOME TAXES 4,194 4,219 12,979 11,976
Provision for Income Taxes 1,288 1,451 4,310 3,789
NET INCOME $ 2,906 $ 2,768 $ 8,669 $ 8,187
Average Shares Outstanding
Basic 6,295 6,346 6,323 6,463
Diluted 6,397 6,427 6,428 6,540
Per Common Share:
Basic Earnings $ .46 $ .44 $ 1.37 $ 1.27
Diluted Earnings $ .45 $ .43 $ 1.35 $ 1.25
Dividends Declared .21 .17 .59 .52
Book Value 12.39 11.40 12.39 11.40
Tangible Book Value 10.28 9.21 10.28 9.21
Per share amounts have been restated for the August 1998 ten percent stock dividend.
See notes to consolidated interim financial statements.
</TABLE>
<TABLE>
<CAPTION>
ARROW FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(In Thousands, Except Share and Per Share Amounts) (Unaudited)
Accumulated Unallocated
Other Employee
Compre- Stock
Shares Common Undivided hensive Ownership Treasury
Issued Stock Surplus Profits Income Plan Stock Total
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1996 6,577,036 $6,577 $54,569 $26,992 $208 $--- $(14,050) $74,296
Comprehensive Income, Net of Tax:
Net Income --- --- --- 8,187 --- --- --- 8,187
Net Unrealized Securities Holding
Losses Arising During the Period,
Net of Tax (Pre-tax $917) --- --- --- --- 550 --- --- 550
Reclassification Adjustment for Net
Securities Gains Included in Net
Income, Net of Tax (Pre-tax $37) --- --- --- --- (22) --- --- (22)
Other Comprehensive Income (Loss) 528
Comprehensive Income 8,715
Cash Dividends Declared,
$.52 per Share --- --- --- (3,356) --- --- --- (3,356)
Stock Options Exercised
(44,668 Shares) --- --- 89 --- --- --- 388 477
Purchase of Treasury Stock
(367,218 Shares) --- --- --- --- --- --- (7,957) (7,957)
Balance at September 30, 1997 6,577,036 $6,577 $54,658 $31,823 $736 $ --- $(21,619) $72,175
Balance at December 31, 1997 6,905,888 $6,906 $65,277 $22,531 $764 $--- $(21,607) $73,871
Comprehensive Income, Net of Tax:
Net Income --- --- --- 8,669 --- --- --- 8,669
Net Unrealized Securities Holding
Gains Arising During the Period,
Net of Tax (Pre-tax $2,057) --- --- --- --- 1,234 --- --- 1,234
Reclassification Adjustment for Net
Securities Gains Included in Net
Income, Net of Tax (Pre-tax $166) --- --- --- --- (99) --- --- (99)
Other Comprehensive Income (Loss) 1,135
Comprehensive Income 9,804
10% Stock Dividend 690,589 690 21,840 (22,530) --- --- --- ---
Cash Dividends Declared,
$.59 per Share --- --- --- (3,741) --- --- --- (3,741)
Acquisition of Common Stock by ESOP,
(52,100 Shares) --- --- --- --- --- (1,500) --- (1,500)
Stock Options Exercised
(8,865 Shares) --- --- 62 --- --- --- 58 120
Purchase of Treasury Stock
(37,350 Shares) --- --- --- --- --- --- (1,039) (1,039)
Tax Benefit for Disposition of
Stock Options --- --- 42 --- --- --- --- 42
Balance at September 30, 1998 7,596,477 $7,596 $87,221 $4,929 $1,899 $(1,500) $(22,588) $77,557
Per share amounts have been adjusted for the August 1998 ten percent stock dividend.
See notes to consolidated interim financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
ARROW FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)(Unaudited)
Nine Months
Ended Sept 30,
1998 1997
Operating Activities:
<S> <C> <C>
Net Income $ 8,669 $ 8,187
Adjustments to Reconcile Net Income to Net Cash
Provided by Operating Activities:
Provision for Credit Losses 1,026 972
Depreciation and Amortization 1,068 958
Gains on the Sale of Securities Available-for-Sale (174) (101)
Losses on the Sale of Securities Available-for-Sale 8 64
Proceeds from the Sale of Loans 3,489 1,897
Net Gains on the Sale of Loans, Fixed Assets and
Other Real Estate Owned (52) (129)
Decrease (Increase) in Deferred Tax Assets 1,460 797
Decrease (Increase) in Interest Receivable 126 (354)
Increase (Decrease) in Interest Payable 262 353
Decrease (Increase) in Other Assets (1,530) (2,210)
Increase (Decrease) in Other Liabilities 3,586 (2,153)
Net Cash Provided By Operating Activities 17,938 8,281
Investing Activities:
Proceeds from the Sale of Securities Available-for-Sale 23,121 23,996
Proceeds from the Maturities of Securities
Available-for-Sale 124,603 22,180
Purchases of Securities Available-for-Sale (147,723) (75,661)
Proceeds from the Maturities of Securities Held-to-Maturity 4,311 1,766
Purchases of Securities Held-to-Maturity (22,594) (14,801)
Loans Purchased in Branch Transactions --- (44,190)
Net Increase in Loans and Leases (47,500) (41,645)
Fixed Assets Purchased in Branch Transactions --- (1,338)
Proceeds from the Sales of Fixed Assets and
Other Real Estate Owned 302 243
Purchase of Fixed Assets (1,023) (795)
Net Cash Used In Investing Activities (66,503) (130,245)
Financing Activities:
Deposits Assumed in Branch Transactions, Net of Premium --- 127,708
Net Increase in Deposits, Excluding Branch Transactions 9,909 24,637
Net Increase in Short-Term Borrowings 4,957 6,874
Advances on FHLB Borrowings 15,000 ---
Purchase of Treasury Stock (1,039) (7,479)
Sale of Treasury Stock for Exercise of Stock Options 121 ---
Disqualifying Disposition of ISO Shares 42 ---
Cash Dividends Paid (3,741) (3,356)
Net Cash Provided By Financing Activities 25,249 148,384
Net (Decrease) Increase in Cash and Cash Equivalents (23,316) 26,420
Cash and Cash Equivalents at Beginning of Period 46,909 37,497
Total Cash and Cash Equivalents $ 23,593 $ 63,917
Supplemental Cash Flow Information:
Interest Paid $20,697 $16,684
Income Taxes Paid 152 5,146
Transfer of Loans to Other Real Estate Owned 484 283
Acquisition of Common Stock by ESOP 1,500 ---
See notes to consolidated interim financial statements.
</TABLE>
ARROW FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED INTERIM FINANCIAL
STATEMENTS
FORM 10-Q
SEPTEMBER 30, 1998
1. Financial Statement Presentation
In the opinion of the management of Arrow Financial Corporation
(the "Company"), the accompanying consolidated interim financial
statements contain all of the adjustments necessary to present
fairly the financial position as of September 30, 1998 and
December 31, 1997; the results of operations for the three and
nine month periods ended September 30, 1998 and 1997; the
statements of changes in shareholders' equity for the nine month
periods ended September 30, 1998 and 1997; and the statements
of cash flows for the nine month periods ended September 30,
1998 and 1997. All such adjustments are of a normal recurring
nature. Certain items have been reclassified to conform to the
1998 presentation. Share and per share amounts have been
restated to reflect the August 1998 ten percent stock dividend.
The consolidated interim financial statements should be read in
conjunction with the annual consolidated financial statements of
the Company for the year ended December 31, 1997.
2. Reporting Comprehensive Income
In June 1997, the FASB issued SFAS No. 130, "Reporting
Comprehensive Income." SFAS No. 130 establishes standards
for reporting and displaying of comprehensive income and its
components in a full set of general-purpose financial statements.
Comprehensive income is defined as "the change in equity of a
business enterprise during a period from transactions and other
events and circumstances from nonowner sources. It includes all
changes in equity during a period except those resulting from
investments by owners and distributions to owners." For the
Company, the statement was effective for interim financial
statements beginning with the first quarter of 1998. SFAS No. 130
accepts a variety of presentations of comprehensive income within
the income statement or the statement of changes in shareholders'
equity. The Company has elected to present the components of
comprehensive income in the Consolidated Statements of
Changes in Shareholders' Equity.
3. Disclosures about Operating Segments
In June 1997, the FASB issued SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information." SFAS No.
131 establishes standards for the way that public business
enterprises report information about operating segments. For the
Company, the statement will be effective for annual financial
statements issued for the year ended December 31, 1998.
However, the Company does not have operating segments within
the meaning of SFAS No. 131.
4. Pensions and Other Postretirement Benefits
In February 1998, the FASB issued SFAS No. 132, "Employers'
Disclosures about Pensions and Other Postretirement Benefits,"
which amends the disclosure requirements of SFAS No. 87,
"Employers' Accounting for Pensions," SFAS No. 88, "Employers'
Accounting for Settlements and Curtailments of Defined Benefit
Pension Plans and for Termination Benefits," and SFAS No. 106,
"Employers' Accounting for Postretirement Benefits Other Than
Pensions." Statement No. 132 standardizes the disclosure
requirements of Statements No. 87 and No. 106 to the extent
practicable and recommends a parallel format for presenting
information about pensions and other postretirement benefits. This
Statement is applicable to all entities and addresses disclosure
only. The Statement does not change any of the measurement or
recognition provisions provided for in Statements No. 87, No. 88,
or No. 106. The Statement is effective for fiscal years beginning
after December 15, 1997. Management anticipates providing the
required disclosures in the December 31, 1998 consolidated
financial statements.
5. Derivative Instruments and Hedging Activities
In June 1998, the FASB issued SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities," which establishes
accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other
contracts, and for hedging activities. This Statement is effective
for all fiscal quarters of fiscal years beginning after June 15, 1999.
Management is currently evaluating the impact of this Statement
on the Company's consolidated financial statements.<PAGE>
6. Earnings Per Common
Share (In Thousands, Except Per Share
Amounts)
The following table presents a reconciliation of the numerator and
denominator used in the calculation of basic and diluted earnings
per common share (EPS) for the three and nine month periods
ended September 30, 1998 and 1997. Average shares outstanding
have been restated for the August 1998 ten percent stock
dividend.
<TABLE>
<CAPTION>
Income Shares Per Share
(Numerator) (Denominator) Amount
<S> <C> <C> <C>
For the Three Months Ended September 30, 1998:
Basic EPS: Income Available to Common Shareholders $2,906 6,295 $ .46
Dilutive Effect of Stock Options --- 102
Diluted EPS: Income Available to Common Shareholders
and Assumed Conversions $2,906 6,397 $ .45
For the Three Months Ended September 30, 1997:
Basic EPS: Income Available to Common Shareholders $2,768 6,346 $ .44
Dilutive Effect of Stock Options --- 81
Diluted EPS: Income Available to Common Shareholders
and Assumed Conversions $2,768 6,427 $ .43
For the Nine Months Ended September 30, 1998:
Basic EPS: Income Available to Common Shareholders $8,669 6,323 $1.37
Dilutive Effect of Stock Options --- 105
Diluted EPS: Income Available to Common Shareholders
and Assumed Conversions $8,669 6,428 $1.35
For the Nine Months Ended September 30, 1997:
Basic EPS: Income Available to Common Shareholders $8,187 6,463 $1.27
Dilutive Effect of Stock Options --- 77
Diluted EPS: Income Available to Common Shareholders
and Assumed Conversions $8,187 6,540 $1.25
</TABLE>
Independent Auditors' Review Report
The Board of Directors and Shareholders
Arrow Financial Corporation:
We have reviewed the consolidated balance sheet of Arrow
Financial Corporation and subsidiaries (the "Company") as of
September 30, 1998, the related consolidated statements of
income for the three-month and nine-month periods ended
September 30, 1998 and 1997, and the consolidated statements
of changes in shareholders' equity and cash flows for the
nine-month periods ended September 30, 1998 and 1997. These
consolidated financial statements are the responsibility of the
Company's management.
We conducted our review in accordance with standards
established by the American Institute of Certified Public
Accountants. A review of interim financial information consists
principally of applying analytical procedures to financial data and
making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit
conducted in accordance with generally accepted auditing
standards, the objective of which is the expression of an opinion
regarding the financial statements taken as a whole. Accordingly,
we do not express such an opinion.
Based on our review, we are not aware of any material
modifications that should be made to the consolidated financial
statements referred to above for them to be in conformity with
generally accepted accounting principles.
We have previously audited, in accordance with generally
accepted auditing standards, the consolidated balance sheet of
Arrow Financial Corporation and subsidiaries as of December 31,
1997, and the related consolidated statements of income,
changes in shareholders' equity and cash flows for the year then
ended (not presented herein); and in our report dated January 23,
1998, we expressed an unqualified opinion on those consolidated
financial statements. In our opinion, the information set forth in the
accompanying consolidated balance sheet as of December 31,
1997, is fairly stated, in all material respects, in relation to the
consolidated balance sheet from which it has been derived.
/s/ KPMG Peat Marwick LLP
Albany, New York
October 21, 1998
ARROW FINANCIAL CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
SEPTEMBER 30, 1998
Arrow Financial Corporation (the "Company") is a two bank holding
company headquartered in Glens Falls, New York. The banking
subsidiaries are Glens Falls National Bank and Trust Company
("GFNB") whose main office is located in Glens Falls, New York
and Saratoga National Bank and Trust Company whose main
office is located in Saratoga Springs, New York.
Cautionary Statement under Federal Securities Laws: The
information contained in this Quarterly Report on Form 10-Q
contains forward-looking statements that are based on
management's beliefs, certain assumptions made by management
and current expectations, estimates and projections about the
Company's future financial condition and results of operations.
Words such as "expects," "believes," "should," "plans," "will,"
"estimates," and variations of such words and similar expressions
are intended to identify such forward-looking statements. Some of
these statements, such as those included in the interest rate
sensitivity analysis in the section entitled "Quantitative and
Qualitative Disclosures About Market Risk" are merely hypothetical
estimates of future performance or changes in future performance
based on simulation models. Other forward-looking statements,
such as those in the section below dealing with the Company's
program to deal with the so-called "Year 2000" problem, involve
speculation about a broad range of factors many of which are
beyond the Company's control or its ability to evaluate with any
degree of precision. 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. In the case
of all forward-looking statements, actual outcomes and results may
differ materially from what the statements predict or forecast.
Factors that could cause or contribute to such differences include,
but are not limited to, changes in economic and market conditions,
including unanticipated fluctuations in interest rates, effects of
state and federal regulation and risks inherent in banking
operations. Readers are cautioned not to place undue reliance on
these forward-looking statements, which speak only as of the date
hereof. The Company undertakes no obligation to revise or update
these forward-looking statements to reflect the occurrence of
unanticipated events.
Peer Ratios: Certain ratios are compared with the Company's peer
group. Peer data was taken from the Federal Reserve Board's
"December 1997 Bank Holding Company Performance Report."
The Company's peer group is comprised of bank holding
companies with $500 million to $1 billion in total consolidated
assets.
This Quarterly Report should be read in conjunction with the
Company's Annual Report filed on Form 10-K for December 31,
1997. Per share amounts have been restated for the August 24,
1998 ten percent stock dividend declared July 23, 1998.
Acquisition of Six Fleet Branches
On June 27, 1997, the Company completed the acquisition of six
branches in upstate New York from Fleet Bank of New York
("Branch Acquisition"). The branches are located in the towns of
Plattsburgh (2), Lake Luzerne, Port Henry, Ticonderoga and
Warrensburg and became branches of GFNB. GFNB acquired
substantially all deposits at the branches and most of the loans
held by Fleet Bank related to the branches. Total deposit liabilities
at the branches assumed by GFNB were approximately $140
million and the total amount of the branch-related loans acquired
was approximately $34 million. Under the acquisition agreement,
GFNB also acquired from Fleet an additional $10 million of
residential real estate loans not related to the branches.
The Company has experienced several benefits from the Branch
Acquisition in the past fifteen month period. Most significant was
the positive impact on earnings per share, because the acquisition
was completed without external borrowing or raising additional
capital. The Company further improved its earnings per share
record in 1997 and 1998 through a stock repurchase program.
Other positive results of the Branch Acquisition include an
improvement in the Company's efficiency ratio (noninterest
expense to net interest income and noninterest income), and an
increase in the ratio of net income per full time-equivalent
employee. The Branch Acquisition was the principal cause of the
differences between the consolidated statements of income for the
1997 and 1998 none-month periods, as noted in the following
discussion.
Stock Repurchase Program
During 1998, the Company continued to repurchase shares of the
Company's common stock under a $20 million repurchase program
authorized by the board of directors in 1996. As of September 30,
1998, approximately $2.2 million was available for future
repurchases.
<PAGE>
OVERVIEW
The Company reported earnings of $2.9 million for the third quarter
of 1998 as compared to $2.8 million for the third quarter of 1997.
Diluted earnings per share were $.45 and $.43 for the two
respective periods. On a year-to-date basis, net income was $8.7
million for the first nine months of 1998, as compared to earnings
of $8.2 million for the 1997 period. Diluted earnings per share for
the nine month periods were $1.35 and $1.25, respectively.
Earnings in the 1997 period, however, reflected the favorable
settlement of a combined reporting issue with the New York State
Department of Taxation and Finance, resulting in a significant
reduction in the provision for income taxes for that period, as well
as the receipt of an insurance settlement. On a comparable basis,
excluding nonrecurring items and securities transactions for both
periods, diluted earnings per share for the first nine months of
1998 and 1997 were $1.33 and $1.12, respectively, representing
a 18.8% improvement between the respective periods.
The following table presents the adjustments necessary to arrive
at the recurring net income of the Company.
<TABLE>
<CAPTION>
Analysis of Recurring Net Income
(In Thousands, Except Per Share Amounts)
Three Months Ended Nine Months Ended
Sep 1998 Sep 1997 Sep 1998 Sep 1997
<S> <C> <C> <C> <C>
Net Income, as Reported $2,906 $2,768 $8,669 $ 8,187
Adjustments, net of Tax:
OREO Transactions --- (67) --- (70)
Net Securities Transactions --- --- (98) (22)
Restructured Loan Transactions --- --- --- (166)
Insurance Settlement --- --- --- (163)
State Income Tax Benefit --- --- --- (464)
Recurring Income $2,906 $2,701 $ 8,571 $7,302
Diluted Earnings Per Share, as Reported $ .45 $ .43 $ 1.35 $ 1.25
Diluted Earnings Per Share, Recurring .45 .42 1.33 1.12
"Cash" earnings per share excludes
from net income the amortization,
net of tax, of goodwill associated
with branch acquisitions:
Diluted Earnings Per Share, as Reported $ .45 $ .43 $ 1.35 $ 1.25
Cash Diluted Earnings Per Share $ .48 $ .45 $ 1.41 $ 1.27
</TABLE>
The returns on average assets were 1.31% and 1.36% for the third
quarter of 1998 and 1997, respectively. The returns on average
equity were 15.02% and 15.38% for the third quarter of 1998 and
1997, respectively. Excluding the nonrecurring items, the returns
on average assets were 1.31% and 1.36%, and the returns on
average equity were 15.02% and 15.20%, for the respective
quarters. On a year-to-date basis, the returns on average assets
were 1.35% and 1.54% for the first nine months of 1998 and 1997,
respectively. The returns on average equity were 15.30% and
15.15% for the first nine months of 1998 and 1997, respectively.
Excluding the nonrecurring items, the returns on average assets
were 1.33% and 1.22%, and the returns on average equity were
15.10% and 13.63%, for the respective periods.
Total assets were $869.0 million at September 30, 1998, which
represented an increase of $37.4 million, or 4.5%, from December
31, 1997, and an increase of $49.0 million, or 6.0%, above the
level at September 30, 1997. In the fifteen month period following
the Branch Acquisition, the Company experienced deposit growth
of approximately $6.3 million, or 4.5%, at the acquired branches.
Although the Company experienced even greater growth over the
period, in both loans and deposits, at pre-existing branches.
Shareholders' equity increased $3.7 million to $77.6 million during
the first nine months of 1998, as net income of $8.7 million and
unrealized net securities gains were partially offset by cash
dividends of $3.7 million, $1.0 million used to reacquire the
Company's common stock and a $1.5 million loan to the
Company's ESOP for purchase of the Company's stock. Shares
purchased by the ESOP are treated as treasury stock until
allocated to individual participants in the plan. The Company's
risk-based capital ratios and Tier 1 leverage ratio continued to
exceed regulatory minimum requirements at period-end and both
Company banks qualified as "well-capitalized" under federal bank
guidelines.
<PAGE>
CHANGE IN FINANCIAL CONDITION
<TABLE>
<CAPTION>
Summary of Consolidated Balance Sheets
(Dollars in Thousands)
$ Change $ Change % Change % Change
Selected Period-End Balances: Sep 1998 Dec 1997 Sep 1997 From Dec From Sep From Dec From Sep
<S> <C> <C> <C> <C> <C> <C> <C>
Federal Funds Sold $ --- $ 23,000 $ 34,000 $ (23,000) $(34,000) (100.0)% (100.0)%
Securities Available for Sale 224,331 221,837 202,089 2,494 22,242 1.1 11.0
Securities Held to Maturity 62,338 44,082 43,990 18,256 18,348 41.4 41.7
Loans, Net of Unearned Income (1) 527,286 485,810 476,863 41,476 50,422 8.5 10.6
Allowance for Loan Losses 6,648 6,191 6,299 457 419 7.4 6.7
Earning Assets (1) 812,955 774,729 756,943 38,226 57,012 5.1 7.5
Total Assets 868,999 831,599 819,988 37,400 49,011 4.5 6.0
Demand Deposits $ 95,599 $ 96,482 $ 90,103 $ (883) $ 5,496 (0.9) 6.1
Interest-Bearing Demand Deposits 178,043 162,016 172,958 16,027 5,085 9.9 2.9
Regular and Money Market Savings 163,749 158,690 166,519 5,059 (2,770) 3.2 (1.7)
Time Deposits of $100,000 or More 96,193 106,620 78,945 (10,427) 17,248 (9.8) 21.8
Other Time Deposits 197,240 197,107 197,653 133 (413) 0.1 (0.2)
Total Deposits $730,824 $720,915 $706,178 $ 9,909 $ 24,646 1.4 3.5
Short-Term Borrowings $ 29,712 $ 24,755 $ 29,580 $ 4,957 $ 3,132 20.0 11.8
Federal Home Loan Bank Advances 15,000 --- --- 15,000 15,000 --- ---
Shareholders' Equity 77,557 73,871 72,175 3,686 5,382 5.0 7.5
(1) Includes Nonaccrual Loans
</TABLE>
Total resources at September 30, 1998 amounted to $869.0
million, an increase of $37.4 million, or 4.5%, from year-end 1997
and an increase of $49.0 million, or 6.0%, from September 30,
1997.
Total loans at September 30, 1998 amounted to $527.3 million, an
increase of $41.5 million, or 8.5%, from December 31, 1997, and
an increase of $50.4 million, or 10.6%, from September 30, 1997.
The increase from September 30, 1997 was primarily attributable
to growth within the indirect consumer and residential real estate
loan portfolios. Indirect consumer loans are principally auto loans
financed through local dealerships where the Company acquires
the dealer paper.
Total deposits of $730.8 million at September 30, 1998 increased
$9.9 million, or 1.4%, from the December 31, 1997 level. The
amount of deposits at September 30, 1998, represented an
increase of $24.6 million, or 3.5%, from September 30, 1997. The
primary area of deposit growth, in the year-to-year comparison,
was municipal time deposits of $100,000 or more, with additional
significant growth in demand deposits and interest-bearing demand
deposits.
Shareholders' equity increased $3.7 million to $77.6 million during
the first nine months of 1998, as net income of $8.7 million and
unrealized net securities gains were partially offset by cash
dividends of $3.7 million, $1.0 million used to reacquire the
Company's common stock and a $1.5 million loan to the
Company's ESOP for purchase of the Company's stock. Shares
purchased by the ESOP are treated as treasury stock until
allocated to individual participants in the plan. The Company paid
a $.191 cash dividend (as restated) for each of the first two
quarters of 1998, and $.21 for the third quarter of 1998. The
Company recently announced a $.22 cash dividend for the fourth
quarter of 1998, payable on December 15, 1998.
The following discussion focuses more closely on the trend of
balances and yields of the Company's deposit and loan portfolios.
Deposit and Loan Trends
The following table provides information on trends in the balance
and mix of the Company's deposit portfolio by presenting the
quarterly average balance by deposit type and the relative
proportion of each deposit type for each of the last five quarters.
The Branch Acquisition, completed on June 27, 1997, is fully
reflected in each of the five periods presented.
<PAGE>
<TABLE>
<CAPTION>
Quarterly Average Deposit Balances
(Dollars in Thousands)
Sep 1998 Jun 1998 Mar 1998 Dec 1997 Sep 1997
Amount % Amount % Amount % Amount % Amount %
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Demand Deposits $101,053 14 $ 92,590 13 $ 92,584 13 $ 91,309 13 $ 93,907 14
Interest-Bearing
Demand Deposits 165,547 22 170,394 23 166,494 23 170,321 24 155,461 22
Regular and Money
Market Savings 167,066 22 161,009 22 158,997 22 159,591 22 167,821 24
Time Deposits of
$100,000 or More 116,375 16 113,672 15 102,263 14 96,851 13 78,927 11
Other Time Deposits 195,567 26 193,866 27 195,039 28 191,018 28 201,125 29
Total Deposits $745,608 100 $731,530 100 $715,377 100 $716,090 100 $697,241 100
</TABLE>
Deposit growth over the five periods presented, occurred primarily
in the area of demand deposits, interest-bearing demand deposits
and time deposits of $100,000 or more.
<TABLE>
<CAPTION>
Quarterly Cost of Deposits
Sep 1998 Jun 1998 Mar 1998 Dec 1997 Sep 1997
<S> <C> <C> <C> <C> <C>
Demand Deposits ---% ---% --- % --- % --- %
Interest-Bearing Demand Deposits 2.83 2.92 2.99 3.16 2.98
Regular and Money Market Savings 2.68 2.71 2.78 2.79 2.87
Time Deposits of $100,000 or More 5.45 5.49 5.47 5.45 5.45
Other Time Deposits 5.40 5.52 5.57 5.50 5.45
Total Deposits 3.52 3.59 3.61 3.63 3.54
</TABLE>
The Federal Reserve Board attempts to influence the prevailing
federal funds rate and prime interest rates by changing the Federal
Reserve Bank discount rate and/or through open market
operations. Until mid-October 1998, the Fed had not changed its
discount rate since January 1996. Partly as a result of the Fed's
open market operations, however, the prevailing federal funds rate
increased in the first quarter of 1997 by 25 basis points and
decreased in late September 1998 by 25 basis points. Like the
federal funds rate, the Company's cost of deposits has been fairly
stable over the past five quarters.
Following the September 29, 1998 decrease in the prevailing
federal funds rate, commercial banks reduced their prime lending
rate by 25 basis points. In mid-October 1998, the federal reserve
discount rate, the prevailing federal funds rate and the prime rate
all decreased 25 basis points. The Company expects that the
twelve month impact of these recent trends will have a slightly
positive impact on net interest margin, since a greater portion of its
interest-bearing liabilities will reprice more quickly than interest-
earning assets.
In the recent past, other sources of short-term borrowings for the
Company included repurchase agreements (essentially a substitute
deposit product) and tax deposit balances with the U.S. Treasury.
During the first quarter of 1998, the Company borrowed $15 million
from the Federal Home Loan Bank of New York ("FHLB") in the
form of a "convertible advance." These advances (extended in
three $5 million increments) have a final maturity of 10 years and
are callable by the FHLB at certain dates beginning no earlier than
one year from the issuance date. If the advances are called, the
Company may elect to have the funds replaced by the FHLB at the
then prevailing market rate of interest.
<TABLE>
<CAPTION>
Quarterly Average Loan Balances
(Dollars in Thousands)
Sep 1998 Jun 1998 Mar 1998 Dec 1997 Sep 1997
Amount % Amount % Amount % Amount % Amount %
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial and Commercial
Real Estate $ 98,177 19 $ 103,805 21 $ 102,983 21 $ 100,604 21 $102,211 22
Residential Real Estate 173,598 33 162,071 32 151,417 31 147,928 31 142,863 31
Home Equity 33,474 7 35,331 7 36,593 7 36,601 7 37,100 7
Indirect Consumer Loans 161,508 31 151,603 30 143,495 29 139,401 29 128,086 27
Direct Consumer Loans 46,253 9 46,495 9 49,047 10 49,747 10 51,185 11
Credit Card Loans 6,855 1 7,138 1 7,413 2 7,602 2 7,582 2
Total Loans $519,865 100 $506,444 100 $490,985 100 $481,883 100 $469,027 100
</TABLE>
Average total loans have increased at a steady pace over the past
five quarters. Indirect consumer loans and residential real estate
loans demonstrated the most significant growth. Indirect consumer
loans are primarily auto loans financed through local dealerships
where the Company acquires the dealer paper. As a percentage of
the overall loan portfolio, these loans increased from 27% in the
third quarter of 1997 to 31% in the third quarter of 1998. The
Company also experienced significant activity in residential real
estate lending, which is expected to continue into the fourth quarter
of 1998.
<TABLE>
<CAPTION>
Quarterly Taxable Equivalent Yield on Loans
Sep 1998 Jun 1998 Mar 1998 Dec 1997 Sep 1997
<S> <C> <C> <C> <C> <C>
Commercial and Commercial
Real Estate 9.50% 10.24% 9.60% 9.62% 9.56%
Residential Real Estate 7.86 8.13 8.34 8.23 8.33
Home Equity 9.00 9.10 9.07 9.10 9.20
Indirect Consumer Loans 8.13 8.16 8.17 8.24 8.39
Direct Consumer Loans 8.85 9.00 9.18 9.18 9.00
Credit Card Loans 15.51 16.34 16.41 16.07 16.46
Total Loans 8.51 8.83 8.82 8.81 8.86
</TABLE>
Yields on the Company's loan portfolio segments were quite
constant over the four quarters ending June 30, 1998, reflecting a
period of general interest rate stability. In the third quarter of 1998,
however, yields decreased generally and in certain sectors,
particularly residential real estate loans, the drop-off was
noteworthy. The declining yields reflected increasingly competitive
pricing on loans in the Company's market area, which as been
underway for some time, as well as widespread consumer
expectation of a softening interest rate economy.
During the second quarter of 1998 the Company received full
payment on a large commercial loan on nonaccrual status. Without
that payment, the yield on the commercial portfolio for the second
quarter would have been 9.52% instead of 10.24%, and the yield
on the entire loan portfolio would have been 8.68%, as opposed to
8.83%.
The following table presents information related to the Company's
allowance and provision for credit losses for each of the past five
quarters. The provision for credit losses and net charge-offs are
reported on a year-to-date basis, and are annualized when
expressed as a percentage of average loans.
<PAGE>
<TABLE>
<CAPTION>
Summary of the Allowance and Provision for Credit Losses
(Dollars in Thousands)(Loans Stated Net of Unearned Income)
Sep 1998 Jun 1998 Mar 1998 Dec 1997 Sep 1997
Loan Balances:
<S> <C> <C> <C> <C> <C>
Period-End Loans $527,286 $512,984 $495,962 $485,810 $476,863
Average Loans, Year-to-Date 505,870 498,757 490,985 439,103 424,686
Allowance for Credit Losses:
Allowance for Credit Losses,
Beginning of Period $6,191 $6,191 $ 6,191 $ 5,581 $ 5,581
Allowance Acquired, YTD --- --- --- 700 700
Provision for Credit Losses, Y-T-D 1,026 684 342 1,303 972
Net Charge-offs, Y-T-D (569) (407) (158) (1,393) (1,024)
Allowance for Credit Losses,
End of Period $6,648 $6,468 $ 6,375 $ 6,191 $ 6,229
Nonperforming Assets (Period-end):
Nonaccrual Loans $2,196 $2,367 $3,615 $3,321 $3,034
Loans Past due 90 or More Days
and Still Accruing Interest 415 360 242 363 296
Loans Restructured and in
Compliance with Modified Terms --- --- --- --- ---
Total Nonperforming Loans 2,611 2,727 3,857 3,684 3,330
Repossessed Assets 12 31 64 --- ---
Other Real Estate Owned 606 496 386 315 322
Total Nonperforming Assets $3,230 3,254 $4,307 $3,999 $3,652
Performance Ratios:
Allowance to Nonperforming Loans 254.62% 237.18% 165.28% 168.05% 187.06%
Allowance to Period-End Loans 1.26 1.26 1.29 1.27 1.31
Provision to Average Loans (annualized) 0.27 0.28 0.28 0.30 0.31
Net Charge-offs to
Average Loans (annualized) 0.15 0.16 0.13 0.32 0.32
Nonperforming Assets to Loans,
OREO & Repossessed Assets 0.61 0.63 0.87 0.82 0.77
</TABLE>
The Company's nonperforming assets at September 30, 1998
amounted to $3.2 million, a decrease of $769 thousand, or 19.2%,
from December 31, 1997. The decrease was primarily attributable
to a cash pay-off by one commercial borrower of a loan that had
been on nonaccrual status. At period-end, nonperforming assets
represented .61% of loans, other real estate and repossessed
assets, a decrease of 21 basis points from year-end 1997. At
December 31, 1997, this ratio for the Company's peer group was
1.04%.
On an annualized basis, the ratio of net charge-offs to average
loans was .15% for the 1998 nine month period. This compares
favorably to the .32% ratio for the 1997 year. The provision for
credit losses was $342 thousand and $500 thousand for the third
quarter of 1998 and 1997, respectively. The year-to-date
provisions were $1.0 million for 1998 and $972 thousand for 1997,
such increase being attributable to the higher level of average
loans in the 1998 period and a change in the mix of loans favoring
automotive installment loans. The provision as a percentage of
average loans was .27% for the first nine months of 1998, over
twice the ratio of net charge-offs to average loans.
The allowance for credit losses at September 30, 1998 amounted
to $6.6 million. The ratio of the allowance to outstanding loans at
September 30, 1998, was 1.26%, essentially unchanged from the
ratio at December 31, 1997.
CAPITAL RESOURCES
Shareholders' equity increased $3.7 million to $77.6 million during
the first nine months of 1998, as net income of $8.7 million and
unrealized net securities gains were partially offset by cash
dividends of $3.7 million, $1.0 million used to reacquire the
Company's common stock and a $1.5 million loan to the
Company's ESOP for purchase of the Company's stock. Shares
purchased by the ESOP are treated as treasury stock until
allocated to individual participants in the plan.
<PAGE>
The Company and its subsidiaries are currently subject to two sets
of regulatory capital measures, a leverage ratio test and risk-based
capital guidelines. The risk-based guidelines assign weightings to
all assets and certain off-balance sheet items and establish an 8%
minimum ratio of qualified total capital to risk-weighted assets. At
least half of total capital must consist of "Tier 1" capital, which
comprises common equity, retained earnings and a limited amount
of permanent preferred stock, less goodwill. Up to half of total
capital may consist of so-called "Tier 2" capital, comprising a
limited amount of subordinated debt, other preferred stock, certain
other instruments and a limited amount of the allowance for credit
losses. The leverage ratio test establishes minimum limits on the
ratio of Tier 1 capital to total quarterly average tangible assets
without risk weighting. For top-rated companies, the minimum
leverage ratio is 3%, but lower-rated or rapidly expanding
companies may be required to meet substantially higher minimum
leverage ratios. As of September 30, 1998, the Tier 1 leverage
and risk-based capital ratios for the Company and its subsidiaries
were as follows:
<TABLE>
<CAPTION>
Summary of Capital Ratios
Tier 1 Total
Tier 1 Risk-Based Risk-Based
Leverage Capital Capital
Ratio Ratio Ratio
<S> <C> <C> <C>
Arrow Financial Corporation 7.23% 11.67% 12.92%
Glens Falls National Bank & Trust Company 7.28 12.22 13.48
Saratoga National Bank & Trust Company 7.55 9.65 10.76
Regulatory Minimum 3.00 4.00 8.00
FDICIA's "Well-Capitalized" Standard 5.00 6.00 10.00
</TABLE>
The FDIC Improvement Act of 1991 ("FDICIA") mandated actions
to be taken by banking regulators for financial institutions that are
undercapitalized as measured by these ratios. FDICIA established
a capital-grading system for financial institutions resulting in five
levels of capitalization ranging from "critically undercapitalized" to
"well-capitalized." At September 30, 1998 all Company and
subsidiary banks' capital ratios were above FDICIA's "well-
capitalized" standard.
The common stock of Arrow Financial Corporation is traded on
The Nasdaq Stock MarketSM under the symbol AROW. The price
ranges below represent actual transactions rounded to the nearest
1/8 point. (There may have been unreported sales outside the
parameters shown, but management believes that the price ranges
fairly represent the trends.) Per share amounts and market prices
have been adjusted for the August 1998 ten percent.
On October 29, 1998 the Company's board of directors declared
a cash dividend of $.22 payable December 15, 1998 to
shareholders of record on December 1, 1998. The dividend
represents an increase of 4.8% from the third quarter cash
dividend.
<TABLE>
<CAPTION>
Quarterly Stock Prices and Dividends Market Price Cash
(Restated for Stock Dividends) (Bid) Dividends
High Low Declared
<S> <C> <C> <C>
1997 1st Quarter $21.250 $20.125 $.173
2nd Quarter 24.000 21.250 .173
3rd Quarter 26.000 22.250 .173
4th Quarter 30.625 26.875 .191
1998 1st Quarter $30.250 $27.000 $.191
2nd Quarter 31.250 27.625 .191
3rd Quarter 31.250 24.000 .210
4th Quarter (payable December 15, 1998) .220
</TABLE>
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Third Quarter Diluted Earnings Per Share,
as Reported $.45 $.43
Third Quarter Core Diluted Earnings Per Share $.45 $.42
Dividend Payout Ratio: (Fourth quarter dividends as
a percent of third quarter
core diluted earnings per share) 48.89% 45.48%
Book Value Per Share $12.39 $11.40
Tangible Book Value Per Share 10.28 9.21
</TABLE>
One of the principal uncertainties affecting future capital levels of
the Company, as well as future earnings and liquidity concerns , is
the so-called "Year 2000"problem. Banking regulators have
required all financial institutions to prepare and implement detailed
plans to prepare for and address this issue. See the following
section for a full discussion of this issue. Otherwise, the Company
is not aware of any known trends, events or uncertainties that will
have or that are reasonably likely to have a materially adverse
effect on the Company's capital resources in forthcoming periods.
Year 2000 Preparedness
General
The advent of the year 2000 poses certain technological
challenges resulting from a reliance in computer technologies on
two digits rather than four digits to represent the calendar year
(e.g., "98" for "1998"). Computer technologies programmed in
this manner, if not corrected, could produce inaccurate or
unpredictable results or system failures in connection with the
transition from 1999 to 2000, when dates will begin to have a
lower two-digit number than dates in the prior century. This
problem, the so-called "Year 2000 Problem" or "Y2K Problem,"
may have a material adverse effect on the Company's financial
condition, results of operations, business or business prospects
because the Company, like most financial institutions, relies
extensively on computer technology to manage its financial
information and serve its customers. The Company and its
banking subsidiaries are regulated by federal banking agencies,
which are requiring substantial efforts by banks and their affiliated
companies to prevent or mitigate disruptions relating to the year
2000.
The Company's State of Readiness
To deal with the Year 2000 Problem, the Company, beginning
in 1997, formed a Year 2000 Project Team (the "Team"). The
Team has developed a Year 2000 Action Plan (the "Plan"),
specifying a range of tasks and goals to be achieved at various
dates before the year 2000. To date, the Plan is on target and
major deadlines have been met. The Team has kept senior
management and the board of directors of the Company apprised
of its progress, and has received input and guidance from both.
The Company's Year 2000 Action Plan is divided into five
phases consistent with guidance issued by the federal bank
regulators: 1) Awareness; (2) Assessment; (3) Renovation; (4)
Validation (testing); and (5) Implementation.
As of September 30, 1998, the Company had completed the
Awareness and Assessment phases of the Plan. These phases
involved, among other things, identification of those data
systems, including information technology ("IT") and non-
information technology ("Non-IT") systems, that are deemed
critical to the continuing functioning of the Company's principal
business operations (so-called "mission critical systems").
The Renovation phase of the Plan consists of replacing or
updating certain mission critical systems or components thereof
with a view to preventing or minimizing any Y2K related
problems. This phase for mission critical systems was
substantially completed as of September 30, 1998. The
Renovation phase for all systems is scheduled to be completed
prior to year-end 1998. As part of the Renovation phase, the
Company accelerated, and has now completed, the installation of
a major upgrade to its central computer processing systems,
which had originally been scheduled for implementation in 1999.
Acceleration of the upgrade has enabled the Company to conduct
certain Year 2000 testing in-house, which otherwise would have
to have been conducted by a third party provider at additional
expense to the Company.
As of September 30, 1998, the Company had begun the
Validation (testing) phase of the Plan with respect to those
mission critical systems that are operated by the Company
internally. Testing of internal mission critical systems is
scheduled to be substantially completed prior to year-end 1998.
The Validation (testing) phase with respect to mission critical
systems furnished to the Company by third party providers also
had begun as of September 30, 1998, and is scheduled to be
completed prior to March 31, 1999. The Implementation phase,
involving all modifications to systems indicated by the testing
phase as well as on-going monitoring of Y2K concerns generally,
is on-going and the Company anticipates it will continue
throughout 1999.
During all phases of the Plan, the Year 2000 Project Team has
actively monitored the Y2K preparedness of its third party
providers and servicers, utilizing various methods for testing and
verification. The Company has requested certifications of Year
2000 preparedness from principal providers and has participated
in user groups.
The Company also has completed an assessment of major
borrowing accounts and has assigned a risk rating to each based
on information obtained from the borrower. Year 2000
preparedness assessment is now a part of on-going loan account
review. The Company also has contacted and reviewed the state
of preparedness of the Company's principal sources of liquidity.
The Company believes that there is no single credit account or
source of funding that is sufficiently critical to the Company's
profitability or operations such that that Y2K preparedness or lack
thereof represents a material exposure to the Company (see
"Year 2000 Risks Facing the Company and the Company's
Contingency Plans," below).
The Company has not yet engaged in discussions with its utility
providers (e.g., electricity, gas, telecommunications) regarding
Y2K concerns. As part of the Plan, however, the Company will
continue to monitor Y2K disclosures by all such providers to the
businesses and financial organizations that rely on them. The
Company will also continue to monitor such disclosures by the
governmental agencies upon which the Company relies for
certain services (e.g., the Federal Reserve System, the Federal
Home Loan Bank of New York). In accordance with its Plan, the
Company will make particular inquiries of such providers and
agencies when circumstances warrant, and will generally strive for
a Y2K preparedness against industry-wide and geographic Y2K
systemic risks comparable to that maintained by similarly situated
organizations exercising appropriate due care. Of course, any
industry-wide or regional disruptions arising out of the Y2K
Problem may be expected to affect the Company and its
customers. The significance of any such disruption will depend
on its duration and its systemic and geographic magnitude (see
"Year 2000 Risks Facing the Company and the Company's
Contingency Plans").
The following table sets forth the Company's time-table for
completion of the various phases of its Year 2000 Action Plan,
showing the Company's estimate of percentages of each phase
completed as of September 30, 1998.
<PAGE>
<TABLE>
<CAPTION>
Internal Systems
Percent Mission Critical Not Mission Critical
Complete IT Non IT IT Non IT
<S> <C> <C> <C> <C> <C>
Awareness 100% 9/30/98 9/30/98 9/30/98 9/30/98
Assessment 100% 9/30/98 9/30/98 9/30/98 9/30/98
Renovation 90% 12/31/98 9/30/98 12/31/98 9/30/98
Validation 65% 12/31/98 9/30/98 3/31/99 3/31/99
Implementation 65% 6/30/98 6/30/99 12/31/99 12/31/99
</TABLE>
<TABLE>
<CAPTION>
External Systems
Percent Mission Critical Not Mission Critical
Complete IT Non IT* IT Non IT*
<S> <C> <C> <C> <C> <C>
Awareness 100% 9/30/98 9/30/98 9/30/98 9/30/98
Assessment 100% 9/30/98 9/30/98 9/30/98 9/30/98
Renovation 90% 12/31/98 12/31/98 12/31/98 12/31/98
Validation 65% 3/31/99 3/31/99 N/A N/A
Implementation 65% 6/30/99 6/30/99 12/31/99 12/31/99
*External Non-IT systems are generally described as product vendors.
</TABLE>
<TABLE>
<CAPTION>
Third Parties
Percent Loan Funds
Complete Customers Providers
<S> <C> <C> <C>
Awareness 100% 9/30/98 9/30/98
Assessment 100% 9/30/98 9/30/98
Renovation 90% N/A N/A
Validation 65% N/A N/A
Implementation 65% 12/31/99 12/31/99
</TABLE>
The Costs to Address the Company's Year 2000 Issues
The Company originally projected Y2K expenditures of
between $250 thousand and $500 thousand. Y2K expenditures
through September 30, 1998, were approximately $282 thousand,
67% of which represented the cost of the accelerated upgrading
of the Company's central computer processing systems which
was substantially complete as of that date. The projection of the
Company's Y2K costs does not include internal personnel costs,
which are not expected to be significantly greater as a result of
the Year 2000 Problem, or external consulting or advisory fees,
which have been and are expected to be minimal. The
Company's budget for Y2K expenditures consists predominantly
of expenditures for the upgrading or replacement of hardware and
software systems, divided approximately 83% for hardware and
17% for software. The Company has funded, and plans to fund,
its Year 2000 related expenditures out of general operating
resources.
The Company has postponed certain minor computer-related
projects that otherwise might have been completed during 1998
and 1999, due to the resources directed to the accelerated
upgrading of the central computer processing systems and other
Y2K related projects. The Company does not believe this
postponement will have any significant effect on its operations or
customer service.
Year 2000 Risks Facing the Company and the Company's
Contingency Plans
The failure of the Company to substantially complete its Plan
could result in an interruption in or failure of certain normal
business activities or operations. Such failures could materially
adversely affect the Company's results of operations, liquidity and
financial condition. Currently, the Plan is on schedule and
management believes that successful completion of the Plan
should significantly reduce the risks faced by the Company with
respect to the Year 2000 Problem.
There is no single credit account or group of related credits
which, in the Company's assessment, is or may be likely to
present any significant exposure due to the Year 2000 Problem.
The Company does not have any significant concentration of
borrowers from any particular industry (to the extent some
industries might be particularly susceptible to Y2K concerns), and
no individual borrower accounts for a significant portion of the
Company's assets. However, management anticipates some
negative impact on the performance of various loan accounts due
to failure of the borrowers to prepare adequately for the Year
2000 Problem. In a worst-case scenario, these borrower-related
difficulties might require the Company to downgrade the affected
credits in its internal loan classification system or to make one or
more special provisions to its loan loss allowance for resulting
anticipated losses in ensuing periods. In addition, although the
Company is adopting special measures to maintain necessary
liquidity to meet funding demands in the periods surrounding the
transition from 1999 to 2000, the Company also could face
increased funding costs or liquidity pressures if depositors are
motivated out of Y2K concerns to withdraw substantial amounts
of deposits or to shift their deposits from short-term to long-term
accounts. A significant portion of the Company's deposits are so-
called municipal deposits (i.e., provided by local municipalities,
school districts and other governmental bodies), but the Company
does not anticipate any increased Year 2000 related risk due to
this concentration of deposits. The Company does not currently
expect any material impact from Y2K related issues on its costs
of funds or liquidity, but in a worst-case scenario, if funding costs
do rise, net interest margins may be negatively impacted over the
relevant timeframe.
The Company could face some risk from the possible failure of
one or more of its third party vendors to continue to provide
uninterrupted service through the changeover to the year 2000.
Critical providers include the Company's automated teller
machine switching networks, the Company's credit card vendors
(Visa and Mastercard), the Company's provider of trust
department data processing, and the various credit bureaus upon
which the Company relies for information necessary to evaluate
credit risk. While an evaluation of the Year 2000 preparedness
of its third party vendors has been part of the Company's Plan,
the Company's ability to evaluate is limited to some extent by the
willingness of vendors to supply information and the ability of
vendors to verify the Y2K preparedness of their own systems or
their sub-providers. However, the Company participates in user
groups, receives assessments of Y2K preparedness of vendors
periodically from federal banking agencies, and the Company's
Plan includes third-party vendor system interface testing;
accordingly the Company does not currently anticipate that any
of its significant third party vendors will fail to provide continuing
service due to the Year 2000 Problem.
The Company, like similarly-situated enterprises, is subject to
certain risks as a result of possible industry-wide or area-wide
failures triggered by the Year 2000 Problem. For example, the
failure of certain utility providers (e.g., electricity, gas,
telecommunications) or governmental agencies (e.g., the Federal
Reserve System, the Federal Home Loan Bank of New York) to
avoid disruption of service in connection with the transition from
1999 to 2000 could materially adversely affect the Company's
results of operations, liquidity and financial condition. In
management's estimate, such a system-wide or area-wide failure
presents a significant risk to the Company in connection with the
Year 2000 Problem because the resulting disruption may be
entirely beyond the ability of the Company to cure. The
significance of any such disruption would depend on its duration
and systemic and geographic magnitude. Of course, any such
disruption would likely impact businesses other than the
Company.
In order to reduce the risks enumerated above, the Company's
Year 2000 Project Team has begun to develop contingency plans
in accordance with guidance issued by the federal bank
regulators. The Team has identified the Company's core
business processes (e.g., providing customers with access to
funds and information) and has reviewed the Company's existing
business continuity and contingency plans. The Team also has
performed a risk analysis of each core business process, defined
and documented Year 2000 failure scenarios, and determined the
minimum acceptable level of outputs and services. The Team is
in the process of evaluating options, selecting a contingency
strategy, assigning responsibilities and trigger dates for such
contingency plans, and validating such contingency plans. These
activities are anticipated to be completed during the first quarter
of 1999. Certain catastrophic events (such as the loss of utilities
or the failure of certain governmental bodies to function) are
outside the scope of the Company's contingency plans, although
the Company anticipates that it would respond to any such
catastrophe in a manner designed to minimize disruptions in
customer service, and in full cooperation with its peer providers,
community leaders and service organizations.
Forward-Looking Statement Warnings
The foregoing discussion of the Company's Year 2000
Preparedness contains a substantial number of forward-looking
statements, indicated by such words as "expects," "believes,"
"estimates," "anticipates," "plans," "assessment," "should," "will,"
and similar words. These forward-looking statements are based
on the Company's and management's beliefs, assumptions,
expectations, estimates and projections any or all of which are
subject to future change, depending on unknown developments
and facts. These forward-looking statements should be read in
conjunction with the Company's disclosures under the heading:
"Cautionary Statement under Federal Securities Laws," located
at the beginning of Management's Discussion and Analysis.
LIQUIDITY
Liquidity is measured by the ability of the Company to raise cash
when it needs it at a reasonable cost. The Company must be
capable of meeting expected and unexpected obligations to its
customers at any time. Given the uncertain nature of customer
demands as well as the desire to maximize earnings, the
Company must have available sources of funds, on- and off-
balance sheet, that can be acquired in time of need.
Securities available-for-sale represent a primary source of on-
balance sheet cash flow. Certain securities are designated by the
Company at purchase as available-for-sale. Selection of such
securities is based on their ready marketability, ability to
collateralize borrowed funds, as well as their yield and maturity.
In addition to liquidity arising from on-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 also has identified wholesale and retail
repurchase agreements and brokered certificates of deposit as
appropriate funding alternatives.
The Company measures its basic liquidity as a ratio of liquid
assets to short-term liabilities, both with and without the
availability of borrowing arrangements. Because excess liquidity
has a negative impact on earnings, the Company establishes both
a high end and a low end on its target range for liquidity ratios.
Other than the general concerns relating to the Year 2000 issue
discussed above, the Company is not aware of any known trends,
events or uncertainties that will have or are reasonably likely to
have a material effect or make material demands on the
Company's liquidity in upcoming periods.
RESULTS OF OPERATIONS: Three Months Ended
September 30, 1998 Compared With
Three Months Ended September 30, 1997
Summary of Earnings Performance
(Dollars in Thousands, Except Per Share Amounts)
<TABLE>
<CAPTION>
As Reported: Sep 1998 Sep 1997 Change % Change
<S> <C> <C> <C> <C>
Net Income $2,906 $2,768 $138 5.0%
Diluted Earnings Per Share .45 .43 .02 4.7
Return on Assets 1.31% 1.36% (.05)% (3.7)
Return on Equity 15.02% 15.38% (.36)% (2.3)
Recurring Earnings:
Net Income $2,906 $2,701 $205 7.6%
Diluted Earnings Per Share .45 .42 .03 7.1
Return on Assets 1.31% 1.33% (.02)% (1.5)
Return on Equity 15.02% 15.20% (.18)% (1.2)
</TABLE>
The Company reported earnings of $2.9 million for the third
quarter of 1998, an increase of $138 thousand, or 5.0%, over the
third quarter of 1997.
Adjusted to eliminate nonrecurring items and securities
transactions, as reviewed above in the "Overview" section of this
discussion, net income was $2.9 million and $2.7 million for the
third quarters of 1998 and 1997, respectively. As thus adjusted,
diluted earnings per share were $.45 and $.42 for each respective
period.
Net Interest Income
<TABLE>
<CAPTION>
Summary of Net Interest Income
(Taxable Equivalent Basis)
(Dollars in Thousands)
Sep 1998 Sep 1997 Change % Change
<S> <C> <C> <C> <C>
Interest Income $16,088 $15,047 $1,041 6.9%
Interest Expense 7,164 6,504 660 10.1
Net Interest Income $ 8,924 $ 8,543 $ 381 4.5
Average Earning Assets (1) $826,772 738,713 $88,059 11.9%
Average Paying Liabilities 688,009 626,336 61,674 9.8
Taxable Equivalent Adjustment 292 216 76 35.3
Yield on Earning Assets (1) 7.72% 8.08% (0.36)% (4.5)%
Cost of Paying Liabilities 4.13 4.12 0.01 0.3
Net Interest Spread 3.59 3.96 (0.37) (9.4)
Net Interest Margin 4.28 4.59 (0.31) (6.7)
(1) Includes Nonaccrual Loans
</TABLE>
Net interest income increased $381 thousand from the third
quarter of 1997 to the third quarter of 1998. This increase was
principally the result of the increased size of the Company
between the two periods, i.e., an 11.9% increase in average
earning assets and a 9.8% increase in average paying liabilities.
The increase in net interest income between the two periods
(4.5%) was less than the percentage increase in assets and
liabilities, reflecting the pressure in recent quarters on net interest
margin. Net interest margin (net interest income on a tax-
equivalent basis divided by average earning assets, annualized)
decreased by 31 basis points from the third quarter of 1997 to the
third quarter of 1998.
The decrease in net interest margin between the comparative
periods was, for the most part, attributable to competitive pricing
for loans in the Company's marketplace, a flattening of the yield
curve, and an average cost of deposits that at least through the
third quarter, was resistant to downward pressure. There was
virtually no change in the cost of paying liabilities for the
Company from the third quarter of 1997 to the third quarter of
1998. This reflects the fact that there were no changes among
the federal reserve discount rate, the federal funds rate or the
prime rate during the fifteen month period beginning July 1, 1997.
However, the flattening of the yield curve (while short-term rates
remained virtually unchanged, long-term rates decreased) had a
significant negative impact on the Company's loan portfolio. Most
of the period-to-period loan growth occurred within the residential
real estate and automobile installment loan portfolios, and it was
in these two areas that the Company experience the most
significant yield erosion.
While the Company experienced some real estate loan
refinancing from its own customer base, most of the activity in
this segment of the portfolio came from refinancings of mortgages
previously held by other financial institutions. Nearly all refinance
customers in recent periods have selected fixed rate mortgages,
since the flat yield curve has made that product more attractive.
While the commercial and commercial real estate loan portfolio
experienced no period-to-period growth, many of the Company's
commercial customers took advantage of the interest rate
environment to refinance existing loans.
The provision for credit losses was $342 thousand and $500
thousand for the quarters ended September 30, 1998 and 1997,
respectively. The provision for credit losses was discussed
previously under the heading "Summary of the Allowance and
Provision for Credit Losses."
Other Income
<TABLE>
<CAPTION>
Summary of Other Income
(Dollars in Thousands)
Sep 1998 Sep 1997 $ Change % Change
<S> <C> <C> <C> <C>
Income From Fiduciary Activities $ 748 $ 686 $ 62 9.0%
Fees for Other Services to Customers 1,195 1,122 73 6.5
Other Operating Income 263 413 (150) (36.3)
Total Other Income $2,206 $2,221 $ (15) (0.7)
</TABLE>
Other (i.e. noninterest) income for the third quarter of 1998
decreased $15 thousand, or 0.7%, from the third quarter of 1997,
with all of the decrease being attributable to other operating
income.
Trust income increased $62 thousand, or 9.0%, between the two
comparative quarters. The Company did not acquire any trust
business in the Branch Acquisition, but the newly-acquired
branches did expand the market area for the Company's trust and
investment division.
Fees for other services to customers (primarily service charges
on deposit accounts, credit card merchant fee income and
servicing income on sold loans) was $1.2 million for the third
quarter of 1998, an increase of $73 thousand, or 6.5%, from the
1997 quarter. The increase was primarily attributable an
increase in the level of demand deposits, the primary source of
service charge income.
Other operating income, (primarily third party credit card servicing
income and gains on the sale of loans and other assets)
amounted to $263 thousand, a decrease of $150 thousand, or
36.3%, from the third quarter of 1997. The decrease was
primarily attributable to gains on the sale of other real estate
owned in the 1997 period.
Other Expense
<TABLE>
<CAPTION>
Summary of Other Expense
(Dollars in Thousands)
Sep 1998 Sep 1997 $ Change % Change
<S> <C> <C> <C> <C>
Salaries and Employee Benefits $3,607 $3,309 $ 298 9.0%
Occupancy Expense of Premises, Net 424 432 (8) (1.9)
Furniture and Equipment Expense 542 461 81 17.6
Other Operating Expense 1,729 1,627 102 6.3
Total Other Expense $6,302 $5,829 $ 473 8.1
Efficiency Ratio 56.62% 54.55% 2.07% 3.8%
</TABLE>
The efficiency ratio, which is the ratio of other expense to tax-
equivalent net interest income and other income (excluding
nonrecurring items and securities gains and losses), is a standard
measure of a financial institution's operating efficiency. For the
year ended December 31, 1997, the ratio for the Company's peer
group was 61.63%, approximately 6.4% higher than the
Company's ratio for the year.
Other (i.e. noninterest) expense increased $473 thousand, or
8.1% from the third quarter of 1997 to the third quarter of 1998.
Salaries and employee benefits expense increased $298
thousand, or 9.0%, from the third quarter of 1997 to the third
quarter of 1998. The increase reflects a 7.7% increase in salaries
in the comparative period, and a related 12.4% increase in
benefits. Full-time equivalent employees at the end of
September 30, 1998 and 1997 were 367.3 and 351.8,
respectively, representing a period-to-period increase of 4.4%.
Occupancy expense of premises, net of rental income, remain
virtually unchanged in the quarter-to-quarter comparison.
However, furniture and equipment expense increased $81
thousand, or 17.6%, from the third quarter of 1997 to the third
quarter of 1998. The increase was primarily attributable to
increased costs to service and maintain the Company's main
computer applications including costs to and test and upgrade
computer applications in preparation for the so-called Year 2000
problem. See the preceding discussion on "Year 2000
Preparedness."
Other operating expense increased $102 thousand, or 6.3%, from
the third quarter of 1997 to the third quarter of 1998. The
increase is primarily attributable to one large charitable
contribution during the third quarter of 1998. The Company
donated land, adjacent to one of its branches, to the Glens Falls
Youth Center.
Income Taxes
<TABLE>
<CAPTION>
Summary of Income Taxes
(Dollars in Thousands)
Sep 1998 Sep 1997 Change % Change
<S> <C> <C> <C> <C>
Provision for Income Taxes $1,288 $1,451 $(163) (11.2)%
Effective Tax Rate 30.71% 34.39% (3.68)% (10.7)
</TABLE>
The provision for federal and state income taxes amounted to
$1.3 million and $1.5 million for the third quarter of 1998 and
1997, respectively. The decrease in the effective tax rate from
the 1997 period to the 1998 period is primarily attributable to a
reduction in state income taxes and an increase in tax exempt
income.
RESULTS OF OPERATIONS: Nine Months Ended September
30, 1998 Compared With
Nine Months Ended September 30, 1997
<TABLE>
<CAPTION>
Summary of Earnings Performance
(Dollars in Thousands)
As Reported: Sep 1998 Sep 1997 Change % Change
<S> <C> <C> <C> <C>
Net Income $8,669 $ 8,187 $482 5.9%
Diluted Earnings Per Share 1.35 1.25 --- ---
Return on Assets 1.35% 1.54% (.19)% (12.3)
Return on Equity 15.30% 15.15% .15 % (1.0)
Recurring Earnings:
Net Income $8,571 $7,302 $1,269 17.4%
Diluted Earnings Per Share 1.33 1.12 .21 18.8
Return on Assets 1.33% 1.38% (.05)% (3.3)
Return on Equity 15.10% 13.63% 1.47% 10.8
</TABLE>
The Company's net income was $8.7 million for the first nine
months of 1998, compared to earnings of $8.2 million for the first
nine months of 1997. Diluted earnings per share were $1.35 and
$1.25 for the respective periods. However, adjusting for the
nonrecurring events in both periods, as discussed above in the
"Overview" section, net income for the first nine months of 1998
increased $1.3 million, or 17.4%, from the first nine months of
1997. As adjusted, diluted earnings per share were $1.33 and
$1.12 for the respective 1998 and 1997 nine month periods. The
increase in average earning assets and paying liabilities resulting
from the Branch Acquisition was the most significant factor in the
period-to-period increase in recurring net income.
The period-to-period change for the first nine months of 1998 as
compared to the first nine months of 1997 is reviewed in the
following sections on net interest income, other income, other
expense and income taxes.
Net Interest Income
<TABLE>
<CAPTION>
Summary of Net Interest Income
(Taxable Equivalent Basis)
(Dollars in Thousands)
Sep 1998 Sep 1997 Change % Change
<S> <C> <C> <C> <C>
Interest Income $47,635 $40,193 $ 7,442 18.5 %
Interest Expense 20,958 17,037 3,921 23.0
Net Interest Income $26,677 $23,156 $ 3,521 15.2
Average Earning Assets (1) $804,312 $657,585 $146,726 22.3 %
Average Paying Liabilities 673,827 547,394 126,433 23.1
Taxable Equivalent Adjustment 809 598 211 35.2
Yield on Earning Assets (1) 7.92% 8.17% (0.25)% (3.1)%
Cost of Paying Liabilities 4.16 4.16 --- ---
Net Interest Spread 3.76 4.01 (0.25) (6.3)
Net Interest Margin 4.43 4.71 (0.27) (5.8)
(1) Includes Nonaccrual Loans
</TABLE>
Net interest income increased $3.5 million from the first nine
months of 1997 to the first nine months of 1998. While the
increase in net interest income reflected a 22.3% increase in
average earning assets and a 23.1% increase in average paying
liabilities, the increase in net interest income was limited to
15.2%, reflecting the pressure in recent quarters on net interest
margin. Net interest margin (net interest income on a tax-
equivalent basis divided by average earning assets, annualized)
decreased by 27 basis points from the first nine months of 1997
to the first nine months of 1998. The increase in average earning
assets and paying liabilities was primarily attributable to the
Branch Acquisition.
The decrease in net interest margin between the comparative
periods was attributable to a variety of factors, including the
inability of the Company to immediately place liquid funds
received from the June 1997 Branch Acquisition in higher yielding
assets, competitive pricing for loans in the Company's
marketplace, a flattening of the yield curve and downward
inelasticity in the Company's cost of funds.
Unlike the 1998 period results, net income from the 1997 nine-
month period only partially reflects the effect of the Company's
expansion from the Branch Acquisition which was completed at
the end of the second quarter of 1997. In that transaction the
Company acquired approximately $140 million in deposits, but
only $44 million in loans. The Company received cash from the
seller, Fleet Bank, equal to the difference, less an agreed-upon
premium on the deposits and the value of other assets acquired
(e.g., real and personal property at the branches).
Initially, the Company invested the surplus cash received in
securities and federal funds, with a view to reinvesting these
amounts in higher-yielding market area loans as opportunities
allowed. At March 31, 1997, prior to the Branch Acquisition, the
Company's loan to deposit ratio was approximately 73%. At
June 30, 1997, shortly after the acquisition, the loan to deposit
ratio was 67%. By September 30, 1998, the loan to deposit ratio
had risen to 72%.
The return of the loan to deposit ratio to pre-Branch Acquisition
levels was not enough to offset the impact of competitive loan
pricing and the flattening of the yield curve. The flattening of the
yield curve (while short-term rates remained virtually unchanged,
long-term rates decreased) had a significant negative impact on
the Company's loan portfolio. Most of the period-to-period loan
growth occurred within the residential real estate and automobile
installment loan portfolios, and it was in these two areas that the
Company experience the most significant yield erosion.
Moreover, there was no change in the cost of paying liabilities
for the Company from the first nine months of 1997 to the first
nine months of 1998.
The provision for credit losses was $1.0 million and $972
thousand for the respective 1998 and 1997 nine month periods.
The provision for credit losses was discussed previously under the
heading "Summary of the Allowance and Provision for Credit
Losses."
<PAGE>
Other Income
<TABLE>
<CAPTION>
Summary of Other Income
(Dollars in Thousands)
Sep 1998 Sep 1997 $ Change % Change
<S> <C> <C> <C> <C>
Income From Fiduciary Activities $2,305 $ 2,007 $ 289 14.8 %
Fees for Other Services to Customers 3,181 2,712 469 17.3
Net Gains on Securities Transactions 166 37 129 348.6)
Other Operating Income 661 1,422 (761) (53.5)
Total Other Income $6,313 $ 6,178 $ 135 2.2
</TABLE>
Other (i.e. noninterest) income for the first nine months of 1997
included $531 thousand of nonrecurring other operating income
relating to the former Vermont operations. Adjusting to eliminate
nonrecurring items and securities transactions, other income
increased $645 thousand, or 11.7%, from the first nine months of
1997 to the first nine months of 1998.
Trust income increased $289 thousand, or 14.8%, between the
two comparative periods. The Company did not acquire any trust
business in the Branch Acquisition, but the newly-acquired
branches did provide the Company with an expanded customer
base for its offerings of trust and investment services.
Fees for other services to customers (primarily service charges
on deposit accounts, credit card merchant fee income and
servicing income on sold loans) was $3.2 million for the first nine
months of 1998, an increase of $469 thousand, or 17.3%, from
the 1997 period. The increase was primarily attributable to
service charges on the deposits assumed in the Branch
Acquisition.
Other operating income, on a recurring basis (primarily third party
credit card servicing income and gains on the sale of loans and
other assets), amounted to $661 thousand for the first nine
months of 1998, a decrease of $122 thousand, or 15.6%, from the
first nine months of 1997. This area of other income was not
significantly impacted by the Branch Acquisition, and the period-
to-period decrease was attributable to the fluctuating nature of
this type of income.
During the first nine months 1998, the Company recognized $166
thousand in net gains on the sale of $23.1 million of securities
from the available-for-sale portfolio. The securities were sold for
the main purpose of extending the average maturity on the
portfolio. During the 1997 period, the Company recognized a net
gain of $37 thousand on the sale of $24.0 million of securities
from the portfolio of securities classified as available-for-sale.
<PAGE>
Other Expense
<TABLE>
<CAPTION>
Summary of Other Expense
(Dollars in Thousands)
Sep 1998 Sep 1997 $ Change % Change
<S> <C> <C> <C> <C>
Salaries and Employee Benefits $10,322 $ 9,212 $ 1,110 12.0 %
Occupancy Expense of Premises, Net 1,276 1,173 103 8.8
Furniture and Equipment Expense 1,636 1,414 222 15.7
Other Operating Expense 4,942 3,989 953 23.9
Total Other Expense $18,176 $15,788 $ 2,388 15.1
Efficiency Ratio 55.37% 55.10% (.27)% (0.5)%
</TABLE>
Other (i.e. noninterest) expense increased $2.4 million, or 15.1%,
for the first nine months of 1998 compared with the first nine
months of 1997. The increase was almost entirely attributable to
the Branch Acquisition, which, measured by total assets,
increased the size of the Company by 21.4% at the closing of the
transaction, June 27, 1997. In spite of the increased operating
expenses, including amortization of goodwill associated with the
Branch Acquisition, the Company's efficiency ratio (a ratio where
smaller is better) remained virtually unchanged between the two
periods, at approximately 55%. The efficiency ratio, which is the
ratio of other expense to tax-equivalent net interest income and
other income (excluding nonrecurring items and securities gains
and losses), and is a standard measure of a financial institution's
operating efficiency. For the year ended December 31, 1997, the
ratio for the Company's peer group was 61.63%, approximately
6.4% higher than the Company's ratio for that year.
Salaries and employee benefits expense increased $1.1 million,
or 12.0%, from the 1997 nine month period to the 1998 period
primarily because of the increase salary expense associated with
the Branch Acquisition. The Company retained all 34 former
Fleet Bank employees working at the acquired branches. The
increase also reflects normal salary increases and an increase of
15.5 full-time equivalent employees since the Branch Acquisition.
Increases in occupancy expense of premises and furniture and
equipment expense (8.8% and 15.7%, respectively) were
primarily attributable to the Branch Acquisition. The increase in
furniture and fixtures is also attributable to increased cost to
service and maintain the Company's main computer applications,
including costs related to Year 2000 resting and upgrading.
Other operating expense increased $953 thousand, or 23.9%,
from the first nine months of 1997 to the first nine months of
1998. An increase in the amortization of goodwill of $452
thousand represented 47.4% of the total increase. Other
increases were also attributable to the Branch Acquisition.
Income Taxes
<TABLE>
<CAPTION>
Summary of Income Taxes
(Dollars in Thousands)
Sep 1998 Sep 1997 $ Change % Change
<S> <C> <C> <C> <C>
Provision for Income Taxes $4,310 $3,789 $ 521 13.8 %
Effective Tax Rate 33.21% 31.64% 1.57 % 5.0
</TABLE>
The provisions for federal and state income taxes amounted to
$4.3 million and $3.8 million for the first nine months of 1998 and
1997, respectively. During the first quarter of 1997, the
Company reached a favorable settlement with the New York
Department of Taxation and Finance over a combined reporting
issue. The effects of the settlement resulted in a $464 thousand
decrease in the Company's provision for income taxes for the first
nine months of 1997. As adjusted for this settlement, the
effective tax rates for the first half of 1998 and 1997 were 33.21%
and 35.51%, respectively. The decrease in the effective tax rate
from the 1997 period to the 1998 period is primarily attributable
to a reduction in state income taxes and an increase in tax
exempt income.
Item 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK
In addition to credit risk in the Company's loan portfolio and
liquidity risk, discussed earlier, the Company's business activities
also generate market risk. Market risk is the possibility that
changes in future market rates or prices will make the Company's
position less valuable.
The ongoing monitoring and management of risk is an important
component of the Company's asset/liability management process
which is governed by policies established and reviewed annually
by the Board of Directors. The Board of Directors delegates
responsibility for managing the asset/liability profile on an ongoing
basis 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 attempts to capture the impact of changing
interest rates on the interest income received and interest
expense paid with respect to all interest-bearing assets and
liabilities on the Company's consolidated balance sheet. This
sensitivity analysis is compared to ALCO policy limits which
specify a maximum tolerance level for net interest income
exposure over a one year horizon, assuming no balance sheet
growth and a 200 basis point upward and downward shift in
interest rates. A parallel and pro rata shift in rates over a 12
month period is assumed.
<PAGE>
The hypothetical estimates generated by the analysis 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 other speculative assumptions. While the
assumptions are developed based upon current economic and
local market conditions, the Company cannot make any
assurance as to the predictive nature of these assumptions
including how customer preferences or competitive influences
might change.
Also, as market conditions vary from those assumed in the
sensitivity analysis, actual results will differ due to:
prepayment/refinancing levels likely deviating from those
assumed, the varying impact of interest rate changes on caps or
floors on adjustable rate assets, the potential effect of changing
debt service levels on customers with adjustable rate loans,
depositor early withdrawals and product preference changes, and
other internal/external variables. Furthermore, the sensitivity
analysis does not reflect actions that the Company might take in
responding to or anticipating changes in interest rates.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
The Company is not involved in any material pending
legal proceedings, other than ordinary routine
litigation occurring in the normal course of its
business.
The Company's subsidiary banks are parties to
various legal claims which arise in the normal course
of their business, for example, lender liability claims
that normally take the form of counterclaims to
lawsuits filed by the banks for collection of past due
loans. The various pending legal claims against the
subsidiary banks will not, in the current opinion of
management, likely result in any material liability to
the subsidiary banks or the Company.
Item 2. Changes in Securities - None
Item 3. Defaults Upon Senior Securities - None
Item 4. Submission of Matters to a Vote of Security Holders -
None
Item 5. Other Information
Subsequent to the end of the quarter, at its regular
meeting on October 28, 1998, the Board of Directors
of the Registrant amended the By-laws to adopt a
provision requiring advance notice by shareholders of
any matters intended to be submitted by them for
consideration at an annual meeting of shareholders.
Under the new provision, added to Section 2.2 of the
By-laws, any shareholder who wishes to bring a
matter before an upcoming annual meeting of
shareholders must deliver a written notice to the
Secretary of the Company not less than 120 days
prior to the anniversary date of the annual meeting of
shareholders in the immediately preceding year,
provided the actual date of the upcoming annual
meeting is within 30 days of such anniversary date.
The written notice must contain the name and record
address of the shareholder submitting the proposal,
a brief description of the proposal sought to be raised
at the meeting, the number of shares of common
stock of the Registrant beneficially owned by the
proposing shareholder (who must be a record holder
both on the day the notice is given and on the record
date for the meeting) and certain other information
specified in the new By-law provision. Failure to
comply with this advance notice requirement will
preclude the shareholder from submitting the
proposal at the meeting.
For the 1999 annual meeting of shareholders, the
advance notice deadline for any matter sought to be
raised by any shareholder at the meeting would be
December 30, 1998, assuming the annual meeting is
held within 30 days before or after April 28, 1999 (as
is anticipated).
Item 6. Exhibits and Reports Filed on Form 8-K
(a) Exhibits
Exhibit 3 Amended By-law Section 2.2
Exhibit 27 Financial Data Schedule
(with electronic filing only)
(b) Current Reports Filed on Form 8-K - None
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
ARROW FINANCIAL CORPORATION
Registrant
Date: November 12, 1998 s/Thomas L. Hoy
Thomas L. Hoy, President and
Chief Executive Officer
Date: November 12, 1998 s/John J. Murphy
John J. Murphy, Executive Vice
President and Treasurer/CFO
(Principal Financial Officer and
Principal Accounting Officer)
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
10/28/98 - Section 2.2 <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.
No business may be transacted at an annual meeting of shareholders,
other than business that is either (a) specified in the notice of
meeting (or any supplement thereto) given by or at the direction of
the Board, (b) otherwise properly brought before the annual meeting by
or at the direction of the Board, or (c) otherwise properly brought
before the annual meeting by any shareholder of the Company (i) who is
a shareholder of record on the date of the giving of the notice
provided for in Section 2.6 of these By-laws and on the record date
for the determination of shareholders entitled to vote at such annual
meeting and (ii) who complies with the notice procedures set forth in
this Section 2.2.
In addition to any other applicable requirements, for business to be
properly brought before an annual meeting by a shareholder, such
shareholder must have given timely notice thereof in proper written
form to the Secretary of the Company. To be timely, a shareholder's
notice to the Secretary must be delivered to or mailed and received at
the principal executive offices of the Company not less than one
hundred twenty (120) days prior to the anniversary date of the
immediately preceding annual meeting of shareholders; provided,
however, that in the event that the annual meeting is called for a
date that is not within thirty (30) days before or after the
anniversary date of the prior year's annual meeting, notice by the
shareholder in order to be timely must be so received not later than
the close of business on the tenth (10th) day following the day on
which notice of the date of the annual meeting is first mailed or
public disclosure of the date of the annual meeting is first made,
whichever first occurs.
To be in proper written form, a shareholder's notice to the Secretary
must set forth as to each matter such shareholder proposes to bring
before the annual meeting (i) a brief description of the business
desired to be brought before the annual meeting and the reasons for
conducting such business at the annual meeting, (ii) the name and
record address of such shareholder, (iii) the class or series and
number of shares of capital stock of the Company that are owned
beneficially or of record by such shareholder, (iv) a description of
all arrangements or understandings between such shareholder and any
other person or persons (including their names) in connection with the
proposal of such business by such shareholder and any material
interest of such shareholder in such business and (v) a representation
that such shareholder intends to appear in person or by proxy at the
annual meeting to bring such business before the meeting.
No business shall be conducted at the annual meeting of shareholders
except business brought before the annual meeting in accordance with
the procedures set forth in this Section 2.2 and Section 2.6 of these
By-laws; provided, however, that, once business has been properly
brought before the annual meeting in accordance with such procedures,
nothing in this Section 2.2 shall be deemed to preclude discussion by
any shareholder of any such business. If the Chairman of an annual
meeting determines that business was not properly brought before the
annual meeting in accordnace with the foregoing procedures of this
Section 2.2 and Section 2.6 of these By-laws, the Chairman shall
declare to the meeting that the business was not properly brought
before the meeting and such business shall not be transacted or
discussed.
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.
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND> PREVIOUSLY FILED 1997 EPS DATA
RESTATED FOR ADOPTION OF FAS 128
AND FOR AUGUST 1998 10%
</LEGEND>
<RESTATED>
<MULTIPLIER> 1000
<S> <C> <C>
<PERIOD-TYPE> 9-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1997
<PERIOD-END> SEP-30-1998 SEP-30-1997
<CASH> 23593 29917
<INT-BEARING-DEPOSITS> 0 0
<FED-FUNDS-SOLD> 0 34000
<TRADING-ASSETS> 0 0
<INVESTMENTS-HELD-FOR-SALE> 224331 202089
<INVESTMENTS-CARRYING> 62338 43990
<INVESTMENTS-MARKET> 64712 45164
<LOANS> 527286 476863
<ALLOWANCE> 6648 6229
<TOTAL-ASSETS> 868999 819988
<DEPOSITS> 730824 706178
<SHORT-TERM> 29712 29580
<LIABILITIES-OTHER> 15906 12055
<LONG-TERM> 15000 0
<COMMON> 7596 6577
0 0
0 0
<OTHER-SE> 69961 65598
<TOTAL-LIABILITIES-AND-EQUITY> 868999 819988
<INTEREST-LOAN> 32847 28267
<INTEREST-INVEST> 13488 10731
<INTEREST-OTHER> 491 597
<INTEREST-TOTAL> 31030 39595
<INTEREST-DEPOSIT> 19547 16212
<INTEREST-EXPENSE> 20958 17037
<INTEREST-INCOME-NET> 25868 22558
<LOAN-LOSSES> 1026 972
<SECURITIES-GAINS> 166 37
<EXPENSE-OTHER> 18176 15788
<INCOME-PRETAX> 12979 11976
<INCOME-PRE-EXTRAORDINARY> 12979 11976
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 8669 8187
<EPS-PRIMARY> 1.37 1.27
<EPS-DILUTED> 1.35 1.25
<YIELD-ACTUAL> 4.43 4.71
<LOANS-NON> 2196 3034
<LOANS-PAST> 415 296
<LOANS-TROUBLED> 0 0
<LOANS-PROBLEM> 0 0
<ALLOWANCE-OPEN> 6191 5581
<CHARGE-OFFS> 816 1174
<RECOVERIES> 247 150
<ALLOWANCE-CLOSE> 6648 6229
<ALLOWANCE-DOMESTIC> 6648 6229
<ALLOWANCE-FOREIGN> 0 0
<ALLOWANCE-UNALLOCATED> 0 0
</TABLE>
