SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.
FORM 10-Q
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended June 30, 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
(State or other jurisdiction of
incorporation or organization)
22-2448962
(IRS Employer Identification 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
Common Stock, par value $1.00 per share
Outstanding as of July 31, 1998
6,314,062
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ARROW FINANCIAL CORPORATION
FORM 10-Q
JUNE 30, 1998
INDEX
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PART I FINANCIAL INFORMATION Page No.
Item 1. Consolidated Balance Sheets as of June 30, 1998
and December 31, 1997 3
Consolidated Statements of Income for the
Three and Six Months Ended June 30, 1998 and 1997 4
Consolidated Statements of Changes in Shareholders' Equity for
the Six Months Ended June 30, 1998 and 1997 5
Consolidated Statements of Cash Flows for the
Six Months Ended June 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
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<PAGE>
Item 1.
<TABLE>
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ARROW FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)(Unaudited)
6/30/98 12/31/97
ASSETS
<S> <C> <C>
Cash and Due from Banks $ 23,987 $ 23,909
Federal Funds Sold --- 23,000
Cash and Cash Equivalents 23,987 46,909
Securities Available-for-Sale 233,293 221,837
Securities Held-to-Maturity: (Approximate Fair Value of
$56,283 in 1998 and $45,562 in 1997) 54,938 44,082
Loans and Leases 512,984 485,810
Less: Allowance for Credit Losses (6,468) (6,191)
Net Loans and Leases 506,516 479,619
Premises and Equipment, Net 10,841 10,760
Other Real Estate Owned, Net 496 315
Other Assets 27,596 28,077
Total Assets $857,667 $831,599
LIABILITIES
Deposits:
Demand Deposits $ 97,158 $ 96,482
Interest-Bearing Demand Deposits 161,615 162,016
Regular and Money Market Savings 164,612 158,690
Time Deposits of $100,000 or More 105,969 106,620
Other Time Deposits 194,156 197,107
Total Deposits 723,510 720,915
Short-Term Borrowings:
Federal Funds Sold and
Securities Sold Under Agreements to Repurchase 23,157 20,918
Other Short-Term Borrowings 5,042 3,837
Federal Home Loan Bank Advances 15,000 ---
Other Liabilities 14,538 12,058
Total Liabilities 781,247 757,728
Commitments and Contingent Liabilities
<PAGE>
SHAREHOLDERS' EQUITY
Preferred Stock, $5 Par Value; 1,000,000 Shares Authorized --- ---
Common Stock, $1 Par Value; 20,000,000 Shares Authorized
(6,905,888 Shares Issued in 1998 and 1997) 6,906 6,906
Surplus 65,345 65,277
Undivided Profits 25,875 22,531
Accumulated Other Comprehensive Income:
Net Unrealized Gain on Securities Available-for-Sale,
Net of Tax 762 764
Reserve for Unearned ESOP Shares (300) ---
Treasury Stock, at Cost (1,156,741 Shares in 1998 and
1,143,553 in 1997) (22,168) (21,607)
Total Shareholders' Equity 76,420 73,871
Total Liabilities and Shareholders' Equity $857,667 $831,599
See Notes to Consolidated Interim Financial Statements.
/TABLE
<PAGE>
<TABLE>
<CAPTION>
ARROW FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In Thousands, Except Per Share Amounts)(Unaudited)
Three Months Six Months
Ended June 30, Ended June 30,
1998 1997 1998 1997
INTEREST AND DIVIDEND INCOME
<S> <C> <C> <C> <C>
Interest and Fees on Loans and Leases $11,108 $ 9,094 $21,735 $17,794
Interest on Federal Funds Sold 238 115 363 186
Interest and Dividends on Securities
Available-for-Sale 3,764 2,719 7,450 5,480
Interest and Dividends on Securities
Held-to-Maturity 766 668 1,482 1,304
Total Interest and Dividend Income 15,876 12,596 31,030 24,764
INTEREST EXPENSE
Interest on Deposits:
Time Deposits of $100,000 or More 1,556 1,169 2,936 2,318
Other Deposits 4,996 3,973 9,991 7,681
Interest on Short-Term Borrowings:
Federal Funds Purchased and Securities Sold
Under Agreements to Repurchase 306 204 558 372
Other Short-Term Borrowings 37 92 66 162
Federal Home Loan Bank Advances 197 --- 243 ---
Total Interest Expense 7,092 5,438 13,794 10,533
NET INTEREST INCOME 8,784 7,158 17,236 14,231
Provision for Credit Losses 342 236 684 472
NET INTEREST INCOME AFTER PROVISION
FOR CREDIT LOSSES 8,442 6,922 16,552 13,759
OTHER INCOME
Income from Fiduciary Activities 795 663 1,557 1,321
Fees for Other Services to Customers 1,030 834 1,986 1,589
Net Gains on Securities Transactions 9 65 166 37
Other Operating Income 169 486 401 1,011
Total Other Income 2,003 2,048 4,110 3,958
OTHER EXPENSE
Salaries and Employee Benefits 3,455 2,969 6,714 5,903
Occupancy Expense of Premises, Net 434 363 853 741
Furniture and Equipment Expense 542 474 1,094 953
Other Operating Expense 1,657 1,218 3,216 2,363
Total Other Expense 6,088 5,024 11,877 9,960
INCOME BEFORE PROVISION FOR INCOME TAXES 4,357 3,946 8,785 7,757
Provision for Income Taxes 1,497 1,428 3,022 2,338
NET INCOME $ 2,860 $ 2,518 $ 5,763 $ 5,419
Average Shares Outstanding:
Basic 6,335 6,451 6,338 6,522
Diluted 6,442 6,528 6,443 6,597
Per Common Share:
Basic Earnings $ .45 $ .39 $ .91 $ .83
Diluted Earnings $ .44 $ .38 $ .89 $ .82
Dividends Declared .19 .17 .38 .35
Book Value 12.08 11.16 12.08 11.16
Tangible Book Value 9.97 8.91 9.97 8.91
Per share amounts have been adjusted for the August 1998 ten percent and the November 1997
five percent stock dividend.
See Notes to Consolidated Interim Financial Statements.
</TABLE>
<PAGE>
<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, 1997 6,905,888 $6,906 $65,277 $22,531 $764 $--- $(21,607) $73,871
Comprehensive Income,
Net of Tax:
Net Income --- --- --- 5,763 --- --- --- 5,763
Net Unrealized Securities
Holding Gains Arising During
the Period,
Net of Tax (Pre-tax $163) --- --- --- --- 97 --- --- 97
Reclassification Adjustment
for Net Securities Gains
Included in Net Income,
Net of Tax (Pre-tax $166) --- --- --- --- (99) --- --- (99)
Other Comprehensive
Income (Loss) (2)
Comprehensive Income 5,761
Cash Dividends Declared,
$.38 per Share --- --- --- (2,419) --- --- --- (2,419)
Acquisition of Common Stock
by ESOP --- --- --- --- --- (300) --- (300)
Stock Options Exercised
(5,312 Shares) --- --- 36 --- --- --- 38 74
Purchase of Treasury Stock
(18,500 Shares) --- --- --- --- --- --- (599) (599)
Tax Benefit for Disposition of
Stock Options --- --- 32 --- --- --- --- 32
Balance at June 30, 1998 6,905,888 $6,906 $65,345 $25,875 $762 $(300) (22,168) $76,420
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 --- --- --- 5,419 --- --- --- 5,419
Net Unrealized Securities
Holding Losses Arising
During the Period,
Net of Tax (Pre-tax $229) --- --- --- --- (136) --- --- (136)
Reclassification Adjustment
for Net Securities Gains
Included in Net
Income, Net of Tax
(Pre-tax $37) --- --- --- --- (22) --- --- (22)
Other Comprehensive
Income (Loss) (158)
Comprehensive Income 5,261
Cash Dividends Declared,
$.35 per Share --- --- --- (2,258) --- --- --- (2,258)
Stock Options Exercised
(43,335 Shares) --- --- 89 --- --- --- 388 477
Purchase of Treasury Stock
(267,685 Shares) --- --- --- --- --- --- (6,300) (6,300)
Balance at June 30, 1997 6,577,036 $6,577 $54,658 $30,153 $(50) $ --- $(19,962) $71,476
Per share amounts have been adjusted for the August 1998 ten percent and the November 1997 five 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)
Six Months
Ended June 30,
1998 1997
Operating Activities:
<S> <C> <C>
Net Income $ 5,763 $ 5,419
Adjustments to Reconcile Net Income to Net Cash
Provided by Operating Activities:
Provision for Credit Losses 684 472
Provision for Other Real Estate Owned Losses --- 60
Depreciation and Amortization 913 598
Gains on the Sale of Securities Available-for-Sale (174) (101)
Losses on the Sale of Securities Available-for-Sale 8 63
Proceeds from the Sale of Loans 3,275 1,155
Net Gains on the Sale of Loans, Fixed Assets and
Other Real Estate Owned (47) (28)
Decrease (Increase) in Deferred Tax Assets 45 (21)
Decrease (Increase) in Interest Receivable 203 (571)
Increase (Decrease) in Interest Payable (69) (32)
Decrease (Increase) in Other Assets (242) (2,706)
Increase (Decrease) in Other Liabilities 2,548 (1,738)
Net Cash Provided By Operating Activities 12,907 2,570
Investing Activities:
Proceeds from the Sale of Securities Available-for-Sale 23,121 23,996
Proceeds from the Maturities of Securities
Available-for-Sale 58,885 20,175
Purchases of Securities Available-for-Sale (93,229) (49,961)
Proceeds from the Maturities of Securities Held-to-Maturity 2,932 1,073
Purchases of Securities Held-to-Maturity (13,804) (13,978)
Loans Purchased in Branch Transactions --- (44,190)
Net Increase in Loans and Leases (31,320) (25,824)
Fixed Assets Purchased in Branch Transactions --- (1,338)
Proceeds from the Sales of Fixed Assets and
Other Real Estate Owned 54 93
Purchase of Fixed Assets (595) (486)
Net Cash (Used In) Provided By Investing Activities (53,956) (90,440)
Financing Activities:
Deposits Assumed in Branch Transactions, Net of Premium --- 127,708
Net Increase in Deposits, Excluding Branch Transactions 2,595 5,048
Net (Decrease) Increase in Short-Term Borrowings 3,444 (483)
Advance on FHLB Borrowings 15,000 ---
Purchase of Treasury Stock (599) (5,822)
Sale of Treasury Stock for Exercise of Stock Options 74 ---
Disqualifying Disposition of ISO Shares 32 ---
Cash Dividends Paid (2,419) (2,258)
Net Cash Provided By (Used In) Financing Activities 18,127 124,193
Net Increase (Decrease) in Cash and Cash Equivalents (22,922) 36,323
Cash and Cash Equivalents at Beginning of Period 46,909 37,497
Total Cash and Cash Equivalents $23,987 $73,820
Supplemental Cash Flow Information:
Interest Paid $13,863 $10,565
Income Taxes Paid 152 3,596
Transfer of Loans to Other Real Estate Owned 182 343
Acquisition of Common Stock by ESOP 300 ---
</TABLE>
See Notes to Consolidated Interim Financial Statements.<PAGE>
ARROW FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED INTERIM FINANCIAL
STATEMENTS
FORM 10-Q
JUNE 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 June 30, 1998 and December 31, 1997;
the results of operations for the three and six month periods ended
June 30, 1998 and 1997; the statements of changes in
shareholders' equity for the six month periods ended June 30, 1998
and 1997; and the statements of cash flows for the six month
periods ended June 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
and the November 1997 five percent stock dividends. 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 six month periods ended
June 30, 1998 and 1997. Average shares outstanding have been
restated for the August 1998 ten percent and the November 1997
five percent stock dividends.
<TABLE>
<CAPTION>
Income Shares Per Share
(Numerator) (Denominator) Amount
For the Three Months Ended June 30, 1998:
<S> <C> <C> <C.
Basic EPS: Income Available to Common Shareholders $2,860 6,335 $.45
Dilutive Effect of Stock Options --- 107
Diluted EPS: Income Available to Common Shareholders
and Assumed Conversions $2,860 6,442 $.44
For the Three Months Ended June 30, 1997:
Basic EPS: Income Available to Common Shareholders $2,518 6,451 $.39
Dilutive Effect of Stock Options --- 77
Diluted EPS: Income Available to Common Shareholders
and Assumed Conversions $2,518 6,528 $.38
For the Six Months Ended June 30, 1998:
Basic EPS: Income Available to Common Shareholders $5,763 6,338 $ .91
Dilutive Effect of Stock Options --- 105
Diluted EPS: Income Available to Common Shareholders
and Assumed Conversions $5,763 6,443 $.89
For the Six Months Ended June 30, 1997:
Basic EPS: Income Available to Common Shareholders $5,419 6,522 $.83
Dilutive Effect of Stock Options --- 75
Diluted EPS: Income Available to Common Shareholders
and Assumed Conversions $5,419 6,597 $.82
</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 June
30, 1998 and the related consolidated statements of income for the
three-month and six-month periods ended June 30, 1998 and 1997,
and the consolidated statements of changes in shareholders' equity
and cash flows for the six-month periods ended June 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
July 23, 1998
Item 2.
ARROW FINANCIAL CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
JUNE 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 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. These statements are not guarantees of future
performance and involve certain risks and uncertainties that are
difficult to quantify or, in some cases, to identify. Therefore, actual
outcomes and results may differ materially from what is expected or
forecasted in such forward-looking statements. Factors that could
cause or contribute to such differences include, but are not limited
to, changes in economic and market conditions, including
unanticipated fluctuations in interest rates, effects of state and
federal regulation and risks inherent in banking operations. Readers
are cautioned not to place undue reliance on these forward-looking
statements, which speak only as of the date hereof. The Company
undertakes no obligation to revise or update these forward-looking
statements to reflect the occurrence of unanticipated events.
Peer Ratios: Certain ratios are compared with the Company's peer
group. Peer data was taken from the Federal Reserve Board's
"December 1997 Bank Holding Company Performance Report."
The Company's peer group is comprised of bank holding companies
with $500 million to $1 billion in total consolidated assets.
Acquisition of Six Fleet Branches
On June 27, 1997, the Company completed the acquisition of six
branches in upstate New York from Fleet Bank 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 twelve 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 during
the period through a stock repurchase program. Other positive
impacts 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 source of period-to-period changes in
the consolidated statements of income as noted in the following
discussion.
Share and per share amounts have been restated for the August 1998
10% and the November 1997 5% stock dividends.
OVERVIEW
The Company reported earnings of $2.9 million for the second
quarter of 1998 as compared to $2.5 million for the second quarter
of 1997. Diluted earnings per share were $.45 and $.39 for the two
respective periods. On a year-to-date basis, net income was $5.8
million for the first six months of 1998, as compared to earnings of
$5.4 million for the 1997 period. Diluted earnings per share for the
six month periods were $.91 and $.83, 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 these nonrecurring items and securities transactions,
diluted earnings per share for the first six months of 1998 and 1997
were $.88 and $.70, respectively, representing a 25.7%
improvement between the respective periods.
<PAGE>
<TABLE>
<CPATION>
Analysis of Recurring Net Income
(In Thousands, Except Per Share Amounts)
Three Months Ended Six Months Ended
Jun 1998 Jun 1997 Jun 1998 Jun 1997
<S> <C> <C> <C> <C>
Net Income, as Reported $2,860 $2,518 $5,763 $5,419
Adjustments, net of Tax:
Net Securities Transactions (5) (39) (98) (22)
Restructured Loan Transactions --- (166) --- (166)
Insurance Settlement --- --- --- (163)
State Income Tax Benefit --- --- ---
(464)
Recurring Income $2,855 $2,313 $5,665 $4,604
Diluted Earnings Per Share, as Reported $ .44 $ .38 $ .89 $ .82
Diluted Earnings Per Share, Recurring .44 .35 .88 .70
"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 $ .44 $ .38 $ .89 $ .82
Cash Diluted Earnings Per Share $ .47 $ .38 $ .94 $ .82
</TABLE>
The returns on average assets were 1.33% and 1.51% for the
second quarter of 1998 and 1997, respectively. The returns on
average equity were 15.09% and 14.13% for the second quarter of
1998 and 1997, respectively. Excluding the nonrecurring items, the
returns on average assets were 1.33% and 1.39%, and the returns
on average equity were 15.07% and 13.12%, for the respective
quarters. On a year-to-date basis, the returns on average assets
were 1.37% and 1.66% for the first six months of 1998 and 1997,
respectively. The returns on average equity were 15.39% and
15.04% for the first six months of 1998 and 1997, respectively.
Excluding the nonrecurring items, the returns on average assets
were 1.35% and 1.41%, and the returns on average equity were
15.13% and 12.78%, for the respective periods.
Total assets were $857.7 million at June 30, 1998, which
represented an increase of $26.1 million, or 3.1%, from December
31, 1997, and an increase of $65.3 million, or 8.2%, above the level
at June 30, 1997, immediately after completion of the Branch
Acquisition. (The acquisition increased total assets by approximately
$140 million) Since the acquisition, the Company has experienced
deposit growth of approximately $2.6 million, or 1.9%, at the
acquired branches. The Company has experienced
more significant growth over the period, in both loans and deposits,
at is pre-existing branches.
Shareholders' equity increased $2.5 million to $76.4 million during
the first six months of 1998, as net income of $5.8 million was
partially offset by cash dividends of $2.4 million and $599 thousand
used to reacquire the Company's common stock. 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.
CHANGE IN FINANCIAL CONDITION
<TABLE>
<CAPTION>
Summary of Consolidated Balance Sheets
(Dollars in Thousands) $ Change $ Change % Change % Change
Jun 1998 Dec 1997 Jun 1997 From Dec From Jun From Dec From Jun
<S> <C> <C> <C> <C> <C> <C> <C>
Federal Funds Sold $ --- $ 23,000 $ 48,500 $(23,000) $(48,500) (100.0)% (100.0)%
Securities Available for Sale 233,293 221,837 177,243 11,456 56,050 5.2 31.6
Securities Held to Maturity 54,938 44,082 43,720 10,856 11,218 24.6 25.7
Loans, Net of Unearned Income (1) 512,984 485,810 462,396 27,174 50,588 5.6 10.9
Allowance for Loan Losses 6,468 6,191 6,409 277 59 4.5 0.9
Earning Assets (1) 801,215 774,729 731,859 26,486 69,356 3.4 9.5
Total Assets 857,667 831,599 792,372 26,068 65,295 3.1 8.2
Demand Deposits $ 97,158 $ 96,482 $ 91,583 $ 676 $ 5,575 0.7 6.1
Interest-Bearing Demand Deposits 161,615 162,016 152,965 (401) 8,650 (0.2) 5.7
Regular and Money Market Savings 164,612 158,690 169,294 5,922 (4,682) 3.7 (2.8)
Time Deposits of $100,000 or More 105,969 106,620 67,274 (651) 38,695 (0.6) 57.5
Other Time Deposits 194,156 197,107 205,473 (2,951) (11,317) (1.5) (5.5)
Total Deposits $723,510 $720,915 $686,589 $ 2,595 $ 36,921 0.4 5.4
Short-Term Borrowings $ 28,199 $ 24,755 $ 22,223 $ 3,444 $ 5,976 13.9 26.9
Federal Home Loan Bank Advances 15,000 --- --- 15,000 15,000 --- ---
Shareholders' Equity 76,420 73,871 71,476 2,549 4,944 3.5 6.9
(1) Includes Nonaccrual Loans
</TABLE>
Total resources at June 30, 1998 amounted to $857.7 million, an
increase of $26.1 million, or 3.1%, from year-end 1997 and an
increase of $65.3 million, or 8.2%, from June 30, 1997.
Total loans at June 30, 1998 amounted to $513.0 million, an increase
of $27.2 million, or 5.6%, from December 31, 1997, and an increase
of $50.6 million, or 10.9%, from June 30, 1997. The increase from
June 30, 1997 was primarily attributable 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 $723.5 million at June 30, 1998 increased $2.6
million, or 0.4%, from the December 31, 1997 level. The amount of
deposits at June 30, 1998, represented an increase of $36.9 million,
or 5.4%, from June 30, 1997. The primary area of deposit growth
was municipal time deposits of $100,000 or more.
Shareholders' equity increased $2.5 million to $76.4 million during the
first six months of 1998. Net income of $5.8 million was partially
offset by cash dividends of $2.4 million, the reacquisition of $599
thousand of the Company's common stock, and an additional
acquisition of $300 thousand of common stock in the Company's
leveraged ESOP. The Company paid a $.191 cash dividend (as
restated) for each of the first two quarters of 1998. The Company
recently announced a $.21 cash dividend for the third quarter of 1998
to be paid after distribution of the 10% stock dividend.
Deposit and Loan Trends
The following table provides information on trends in the balance and
mix of the Company's deposit portfolio by presenting the quarterly
average balance by deposit type and the relative proportion of each
deposit type for each of the last five quarters. The Branch
Acquisition, completed on June 27, 1997, had very little impact on the
average balances for the second quarter of 1997, while fully
impacting each of the last four quarters.
<TABLE>
<CAPTION>
Quarterly Average Deposit Balances
(Dollars in Thousands)
Jun 1998 Mar 1998 Dec 1997 Sep 1997 Jun 1997
Amount % Amount % Amount % Amount % Amount %
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Demand Deposits $ 92,590 13 $ 92,584 13 $ 91,309 13 $ 93,907 14 $ 65,976 12
Interest-Bearing Demand Deposits 170,394 23 166,494 23 170,321 24 155,461 22 128,067 23
Regular and Money Market Savings 161,009 22 158,997 22 159,591 22 167,821 24 128,350 23
Time Deposits of $100,000 or More 113,672 15 102,263 14 96,851 13 78,927 11 87,350 16
Other Time Deposits 193,866 27 195,039 28 191,018 28 201,125 29 147,910 26
Total Deposits $731,530 100 $715,377 100 $716,090 100 $697,241 100 $557,653 100
</TABLE>
The growth in average deposits from the first quarter of 1998 to the
second quarter primarily reflects seasonal placement of municipal
deposits in NOW accounts and time deposits of $100,000 or more.
The increase in the average balance from the second quarter of
1997 to the third quarter of 1997 is primarily attributable to the
Branch Acquisition which added approximately $140 million in
deposit balances.
<TABLE>
<CAPTION>
Quarterly Cost of Deposits
Jun 1998 Mar 1998 Dec 1997 Sep 1997Jun 1997
<S> <C> <C> <C> <C> <C>
Demand Deposits --- % --- % --- % --- % --- %
Interest-Bearing Demand Deposits 2.92 2.99 3.16 2.98 3.21
Regular and Money Market Savings 2.71 2.78 2.79 2.87 2.83
Time Deposits of $100,000 or More 5.49 5.47 5.45 5.45 5.37
Other Time Deposits 5.52 5.57 5.50 5.45 5.54
Total Deposits 3.59 3.61 3.63 3.54 3.70
</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.
The Fed has 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. The Company's cost of deposits increased
accordingly. Since that time, both the prevailing federal funds rate
and the Company's cost of deposits have remained quite stable.
The Company's average cost of funds did not change significantly
after the acquisition of the Fleet branches. Total deposits assumed
at the closing of the transaction (at June 27, 1997) were
approximately $140 million. Of that amount, interest-bearing
demand and savings accounts (including NOW, Super NOW, Money
Market Savings and regular savings) constituted approximately
$66.3 million, with another $56 million in time deposits. After
closing, the Company began paying its own rates on the variable
rate demand and savings accounts assumed (its rates being slightly
higher than Fleet's rates, on average) and continued paying contract
rates on time deposits assumed (Fleet's rates for such products
being similar to the Company's prevailing rates for time deposits).
In the recent past, other sources of short-term borrowings for the
Company included repurchase agreements (essentially a substitute
deposit product) and tax deposit balances with the U.S. Treasury.
During the first quarter of 1998, the Company borrowed $15 million
from the Federal Home Loan Bank of New York ("FHLB") in the
form of a "convertible advance." These advances (extended in three
$5 million increments) have a final maturity of 10 years and are
callable by the FHLB at certain dates beginning no earlier than one
year from the issuance date. If the advances are called, the
Company may elect to have the funds replaced by the FHLB at the
then prevailing market rate of interest.
The following table presents the Company's quarterly average
balance by loan type and the relative proportion of each loan type for
each of the last five quarters.
<TABLE>
<CAPTION>
Quarterly Average Loan Balances
(Dollars in Thousands)
Jun 1998 Mar 1998 Dec 1997 Sep 1997 Jun 1997
Amount % Amount % Amount % Amount %
Amount %
<S> <C> <C> <C> <C> <C> <C> C> <C> <C> <C>
Commercial and Commercial Real Estate $ 103,805 21 $ 102,983 21 $ 100,604 21 $102,211 22 $ 92,874 23
Residential Real Estate 162,071 32 151,417 31 147,928 31 142,863 31 129,289 32
Home Equity 35,331 7 36,593 7 36,601 7 37,100 7 30,399 7
Indirect Consumer Loans 151,603 30 143,495 29 139,401 29 128,086 27 114,141 28
Direct Consumer Loans 46,495 9 49,047 10 49,747 10 51,185 11 34,212 8
Credit Card Loans 7,138 1 7,413 2 7,602 2 7,582 2 7,769 2
Total Loans $506,444 100 $490,985 100 $481,883 100 $469,027 100 $408,684 100
</TABLE>
On June 27, 1997, the Company acquired approximately $44 million
in loan balances in the Branch Acquisition (commercial loans - $10.4
million, direct consumer loans - $16.6 million, home equity loans -
$7.1 million and residential real estate loans - $10.1 million).
Since the Branch Acquisition, average loans have increased at a
steady pace. Indirect consumer loans and residential real estate
loans demonstrated the most significant changes. Indirect
consumer loans are primarily auto loans financed through local
dealerships where the Company acquires the dealer paper. As a
percentage of the overall loan portfolio, these loans increased from
28% in the second quarter of 1997 to 30% in the second quarter of
1998. The Company also experienced significant activity in
residential real estate lending, which is expected to continue into the
third quarter of 1998.
<TABLE>
<CAPTION>
Quarterly Taxable Equivalent Yield on Loans
Jun 1998 Mar 1998 Dec 1997 Sep 1997 Jun 1997
<S> <C> <C> <C> <C> <C>
Commercial and Commercial Real Estate 10.24% 9.60% 9.62% 9.56% 9.73%
Residential Real Estate 8.13 8.34 8.23 8.33 8.40
Home Equity 9.10 9.07 9.10 9.20 9.23
Indirect Consumer Loans 8.16 8.17 8.24 8.39 8.35
Direct Consumer Loans 9.00 9.18 9.18 9.00 9.09
Credit Card Loans 16.34 16.41 16.07 16.46 16.84
Total Loans 8.83 8.82 8.81 8.86 8.97
</TABLE>
The taxable equivalent yield on the Company's loan portfolio was
essentially unchanged in each of the past two quarters. However,
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%. Thus, the long-term trend on yields in the Company's loan
portfolio, taken as a whole, continues to be downward. Although
short-term interest rate trends have been quite stable, there has
been a general flattening of the yield curve which has had a
negative impact on fixed rate residential real estate loans. Moreover,
the Company has experienced (and continues to experience)
significant competitive pricing for loan products in its market area.
<PAGE>
The following table presents information related to the Company's
allowance and provision for credit losses for the past five quarters.
The provision for credit losses and net charge-offs are reported on
a year-to-date basis, and are annualized for the purpose of
calculating the ratio to average loans for each of the periods
presented.
<TABLE>
<CAPTION>
Summary of the Allowance and Provision for Credit Losses
(Dollars in Thousands)(Loans Stated Net of Unearned Income)
Jun 1998 Mar 1998 Dec 1997 ep 1997 Jun 1997
Loan Balances:
<S> <C> <C> <C> <C> <C>
Period-End Loans $512,984 $495,962 $485,810 $476,863 $462,396
Average Loans, Year-to-Date 498,757 490,985 439,103 424,686 402,149
Allowance for Credit Losses:
Allowance for Credit Losses,
Beginning of Period $6,191 $ 6,191 $ 5,581 $ 5,581 $ 5,581
Allowance Acquired, YTD --- --- 700 700 700
Provision for Credit Losses, Y-T-D 684 342 1,303 972 472
Net Charge-offs, Y-T-D (407) (158) (1,393) (1,024) (344)
Allowance for Credit Losses, End of Period $6,468 $ 6,375 $ 6,191 $ 6,229 $ 6,409
Nonperforming Assets (Period-end):
Nonaccrual Loans $2,367 $3,615 $3,321 $3,034 $ 2,232
Loans Past due 90 or More Days
and Still Accruing Interest 360 242 363 296 764
Loans Restructured and in
Compliance with Modified Terms --- --- --- --- ---
Total Nonperforming Loans 2,727 3,857 3,684 3,330 2,996
Repossessed Assets 31 64 --- --- ---
Other Real Estate Owned 496 386 315 322 370
Total Nonperforming Assets $3,254 $4,307 $3,999 $3,652 $ 3,366
Performance Ratios:
Allowance to Nonperforming Loans 237.18% 165.28% 168.05% 187.06% 213.92%
Allowance to Period-End Loans 1.26 1.29 1.27 1.31 1.39
Provision to Average Loans (annualized) 0.28 0.28 0.30 0.31 0.24
Net Charge-offs to Average Loans (annualized) 0.16 0.13 0.32 0.32 0.17
Nonperforming Assets to Loans,
OREO & Repossessed Assets 0.63 0.87 0.82 0.77 0.73
</TABLE>
The Company's nonperforming assets at June 30, 1998 amounted
to $3.3 million, a decrease of $1.1 million, or 24.5%, from March 31,
1998. The decrease was primarily attributable to the cash pay-off
from one commercial borrower on a loan that had been on
nonaccrual status for the prior three quarters. At period-end,
nonperforming assets represented .63% of loans, other real estate
and repossessed assets, a decrease of 19 basis points from year-end 1997.
At December 31, 1997, this ratio for the Company's peer
group was 1.04%.
On an annualized basis, the ratio of the 1998 second quarter net
charge-offs to average loans was .20%, and .16% for the annualized
six month period. This compares favorably to the .32% ratio for the
1997 year. The provision for credit losses was $342 thousand and
$236 thousand for the second quarter of 1998 and 1997,
respectively. The year-to-date provisions were $684 thousand and
$472 thousand for the respective periods. The increase in the
provisions for both the quarterly and year-to-date comparison relates
to the increased size of the loan portfolio between the comparative
periods. The provision as a percentage of average loans was .28%
for the first six months of 1998, or 12 basis points higher than net
charge-offs for the period.
The allowance for credit losses at June 30, 1998 amounted to $6.5
million. The ratio of the allowance to outstanding loans at June 30,
1998, was 1.26%, essentially unchanged from the ratio at December
31, 1997.
<PAGE>
CAPITAL RESOURCES
Shareholders' equity was $76.4 million at June 30, 1998, an
increase of $2.5 million, or 3.5%, from December 31, 1997. Net
income of $5.8 million was partially offset by cash dividends of $2.4
million, the reacquisition of $599 thousand of the Company's
common stock, and an additional acquisition of $300 thousand of
common stock in the Company's leveraged ESOP.
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. The
FDIC Improvement Act of 1991 ("FDICIA") mandated actions to be
taken by banking regulators for financial institutions that are
undercapitalized as measured by these ratios. FDICIA established
five levels of capitalization for financial institutions ranging from
"critically undercapitalized" to "well-capitalized." As of June 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
Risk-Based Risk-Based
Leverage Capital Capital
Ratio Ratio Ratio
<S> <C> <C> <C>
Arrow Financial Corporation 7.32% 11.89% 13.13%
Glens Falls National Bank & Trust Co. 7.20 12.27 13.52
Saratoga National Bank & Trust Co. 7.69 9.39 10.52
Regulatory Minimum 3.00 4.00 8.00
FDICIA's "Well-Capitalized" Standard 5.00 6.00 10.00
</TABLE>
All capital ratios for the Company and its subsidiary banks at June
30, 1998 were above minimum capital standards for financial
institutions. Additionally, all Company and subsidiary banks' capital
ratios at that date were above FDICIA's "well-capitalized" standard.
On July 22, 1998, the Company declared a 10% stock dividend
payable on August 24, 1998 and also declared the 1998 third
quarter cash dividend of $.21 payable on September 15, 1998 for
shares currently held as well as on new shares received as a result
of the stock dividend.
The common stock of Arrow Financial Corporation is traded on The
Nasdaq Stock MarketSM under the symbol AROW. The price ranges
below represent actual transactions rounded to the nearest 1/8
point. (There may have been sales outside the parameters shown,
but management believes that the price ranges fairly represent the
trends.) Per share amounts and market prices have been adjusted
for the August 1998 ten percent and the November 1997 five
percent stock 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
</TABLE>
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Second Quarter Core Diluted Earnings Per Share $.44 $.35
Dividend Payout Ratio: (Third quarter dividends as
a percent of second quarter core diluted earnings per share) 43.41% 49.43%
Book Value Per Share $12.08 $11.16
Tangible Book Value Per Share 9.97 8.91
</TABLE>
LIQUIDITY
Liquidity is measured by the ability of the Company to raise cash
when it needs it at a reasonable cost. The Company must be
capable of meeting expected and unexpected obligations to its
customers at any time. Given the uncertain nature of customer
demands as well as the desire to maximize earnings, the Company
must have available sources of funds, on- and off-balance sheet,
that can be acquired in time of need.
Securities available-for-sale represent a primary source of on-
balance sheet cash flow. Securities are designated at purchase as
available-for-sale. Selection of securities are 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. At June 30, 1998,
the Company still exceeded the upper limit of this range due to the
excess liquidity resulting from the Fleet branch acquisition twelve
months earlier. Since that acquisition, the Company has been
steadily reinvesting this excess liquidity in market-area loans as
opportunities arise.
The Company is not aware of any known trends, events or
uncertainties that will have or are reasonably likely to have a
material effect or make material demands on the Company's
liquidity, capital resources or results of operations.
<TABLE>
<CAPTION>
RESULTS OF OPERATIONS: Three Months Ended June 30, 1998 Compared With
Three Months Ended June 30, 1997
Summary of Earnings Performance
(Dollars in Thousands, Except Per Share Amounts)
As Reported: Jun 1998 Jun 1997 Change % Change
<S> <C> <C> <C> <C>
Net Income $2,860 $2,518 $342 13.6%
Diluted Earnings Per Share .44 .38 .06 15.8
Return on Assets 1.33% 1.51% (.18)% (11.9)
Return on Equity 15.09% 14.13% .95% 6.7
Recurring Earnings:
Net Income $2,855 $2,313 $542 23.4%
Diluted Earnings Per Share .44 .35 .09 25.7
Return on Assets 1.33% 1.39% (.06)% (4.2)
Return on Equity 15.07% 13.12% 1.95% 14.8
</TABLE>
The Company reported earnings of $2.9 million for the second
quarter of 1998, an increase of $342 thousand, or 13.6%, over the
second quarter of 1997.
As adjusted for nonrecurring items, discussed above in the
"Overview" section of this discussion, net income was $2.9 million
and $2.3 million for the second quarters of 1998 and 1997,
respectively. As thus adjusted, diluted earnings per share were $.44
and $.35 for each respective period. The Branch Acquisition at the
end of the second quarter of 1997 had the most significant impact
on the period-to-period earnings growth.
<PAGE>
Net Interest Income
<TABLE>
<CAPTION>
Summary of Net Interest Income
(Taxable Equivalent Basis)
(Dollars in Thousands)
Jun 1998 Jun 199 Change % Change
<S> <C> <C> <C> <C>
Interest Income $16,135 $12,797 $ 3,338 26.1 %
Interest Expense 7,092 5,438 1,654 30.4
Net Interest Income $ 9,043 $ 7,359 $ 1,684 22.9
Average Earning Assets (1) $810,249 $623,364 $186,885 30.0%
Average Paying Liabilities 682,499 514,243 168,256 32.7
Taxable Equivalent Adjustment 259 201 58 28.9
Yield on Earning Assets (1) 7.99% 8.23% (0.25)% (3.0)%
Cost of Paying Liabilities 4.17 4.24 (0.07) (1.7)
Net Interest Spread 3.82 3.99 (0.17) (4.3)
Net Interest Margin 4.48 4.74 (0.26) (5.5)
(1) Includes Nonaccrual Loans
</TABLE>
The Company's net interest margin (net interest income on a
tax-equivalent basis divided by average earning assets, annualized)
decreased by 26 basis points from the second quarter of 1997 to the
second quarter of 1998.
Net interest income for the second quarter of 1997 did not reflect the
operations acquired in the Branch Acquisition completed on June
27, 1997, whereas net income from the 1998 period did. As
previously mentioned, the Company acquired approximately $140
million of deposits in the Branch Acquisition, 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 June 30, 1998, the loan to deposit ratio had risen to 71%.
Although the Branch Acquisition has had a negative impact
on the Company's net interest margin, due to the increase in average
earning assets between the two periods (an increase of $187 million)
net interest income increased $1.7 million from the second quarter of
1997 to the second quarter of 1998.
The provision for credit losses was $342 thousand and $236
thousand for the quarters ended June 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)
Jun 1998 Jun 1997 $ Change % Change
<S> <C> <C> <C> <C>
Income From Fiduciary Activities $ 795 $ 663 $ 132 19.9%
Fees for Other Services to Customers 1,030 834 196 23.5
Net Gains (Losses) on Securities Transactions 9 65 (56) (86.2)
Other Operating Income 169 486 (317) (65.2)
Total Other Income $2,003 $2,048 $(153) (2.2)
Without Regard to Nonrecurring Items:
Other Operating Income $ 169 $ 230 $ (61) (26.5)
Total Other Income 1,994 1,727 267 15.5
</TABLE>
Other (i.e. noninterest) income for the second quarter of 1997
included $256 thousand of nonrecurring other operating income
relating to the former Vermont operations. Other income, on a
recurring basis, increased $211 thousand, or 11.8%, from the
second quarter of 1997 to the second quarter of 1998.
Trust income increased $132 thousand, or 19.9%, 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 $1.0 million for the second quarter of
1998, an increase of $196 thousand, or 23.5%, from the 1997
quarter. The increase was primarily attributable to service charges
on the deposits assumed in the Branch Acquisition.
Other operating income, on a recurring basis (primarily third party
credit card servicing income and gains on the sale of loans and
other assets), amounted to $169 thousand, a decrease of $61
thousand, or 26.5%, from the second quarter of 1997. This area of
other income was not significantly impacted by the Branch
Acquisition, and the period-to-period decrease was attributable to
normal fluctuations in this type of income.
During the second quarter of 1998, the Company recognized $9
thousand in net gains on the sale of $8.0 million of securities from
the available-for-sale portfolio. The securities were sold mainly to
extend the average maturity on the portfolio. During the second
quarter of 1997 the Company recognized a net gain of $65 thousand
on the sale of $13.0 million of securities from its available-for-sale
portfolio.
Other Expense
<TABLE>
<CAPTION>
Summary of Other Expense
(Dollars in Thousands)
Jun 1998 Jun 1997 $ Change % Change
<S> <C> <C> <C> <C>
Salaries and Employee Benefits $3,455 $2,969 $ 486 16.4%
Occupancy Expense of Premises, Net 434 363 71 19.6
Furniture and Equipment Expense 542 474 68 14.3
Other Operating Expense 1,657 1,218 439 36.0
Total Other Expense $6,088 $5,024 $1,064 21.2
Efficiency Ratio 55.15% 55.29% (.14)% (.3)%
</TABLE>
Other (i.e. noninterest) expense increased $1.1 million, or 21.2%,
from the second quarter of 1997 to the second quarter of 1998. 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 improved slightly (a ratio where smaller is better)
between the two periods. 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.
Salaries and employee benefits expense increased $486 thousand,
or 16.4%, from the second quarter of 1997 to the second quarter of
1998. The Company retained all 34 former Fleet employees
associated with the Branch Acquisition. The increase also reflects
normal salary increases.
Increases in occupancy expense of premises and furniture and
fixture expense (19.3% and 14.3%, respectively) were primarily
attributable to the Branch Acquisition.
Other operating expense increased $439 thousand, or 36.0%, from
the second quarter of 1997 to the second quarter of 1998. An
increase in the amortization of goodwill of $226 thousand
represented 51.4% of the total increase. Otherwise, the increase in
other operating expense would have been 17.7%, similar to, but
somewhat higher than, the other cost increases triggered by the
Branch Acquisition, but still well below the 21.4% increase in total
assets.
<PAGE>
Income Taxes
<TABLE>
<CAPTION>
Summary of Income Taxes
(Dollars in Thousands)
Jun 1998 Jun 1997 Change % Change
<S> <C> <C> <C> <C>
Provision for Income Taxes $1,497 $1,428 $69 4.8%
Effective Tax Rate 34.37% 36.19% (1.81)% (5.0)
</TABLE>
The provision for federal and state income taxes amounted to $1.5
million and $1.4 million for the second 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.
<TABLE>
<CAPTION>
RESULTS OF OPERATIONS: Six Months Ended June 30, 1998 Compared With
Six Months Ended June 30, 1997
Summary of Earnings Performance
(Dollars in Thousands, Except Per Share Amounts)
As Reported: Jun 1998 Jun 1997 Change % Change
<S> <C> <C> <C> <C>
Net Income $5,763 $5,419 $ 344 6.3%
Diluted Earnings Per Share .89 .82 .07 8.5
Return on Assets 1.37% 1.66% (.29)% (17.3)
Return on Equity 15.39% 15.04% .35% 2.3
Recurring Earnings:
Net Income $5,665 $4,604 $1,061 23.0%
Diluted Earnings Per Share .88 .70 .18 25.7
Return on Assets 1.35% 1.41% (.06)% (4.4)
Return on Equity 15.13% 12.78% 2.35% 18.4
</TABLE>
The Company's net income was $5.8 million for the first six months
of 1998, compared to earnings of $5.4 million for the first six months
of 1997. Diluted earnings per share were $.89 and $.82 for the two
respective periods. Adjusting for the nonrecurring events in both
periods, as discussed above in the "Overview" section, net income
for the first half of 1998 increased $1.1 million, or 23.0%, from the
first half of 1997. 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 six months of 1998 as
compared to the first six months of 1997 is reviewed in the following
sections on net interest income, other income, other expense and
income taxes.
<PAGE>
Net Interest Income
<TABLE>
<CAPTION>
Summary of Net Interest Income
(Taxable Equivalent Basis)
(Dollars in Thousands)
Jun 1998 Jun 1997 Change % Change
<S> <C> <C> <C> <C>
Interest Income $31,546 $25,146 $ 6,400 25.5%
Interest Expense 13,794 10,533 3,261 31.0
Net Interest Income $17,752 $14,613 $ 3,139 21.5
Average Earning Assets (1) $792,896 $616,349 $176,547 28.6%
Average Paying Liabilities 666,618 507,269 159,349 31.4
Taxable Equivalent Adjustment 516 382 134 35.1
Yield on Earning Assets (1) 8.02% 8.23% (0.20)% (2.5)%
Cost of Paying Liabilities 4.17 4.19 (0.02) (0.3)
Net Interest Spread 3.85 4.04 (0.19) (4.7)
Net Interest Margin 4.51 4.78 (0.27) (5.6)
(1) Includes Nonaccrual Loans
</TABLE>
The Company's net interest margin (net interest income on a tax-
equivalent basis divided by average earning assets, annualized)
decreased by 27 basis points from the first six months of 1997 to the
first six months of 1998.
Net interest income for the 1997 period does not include the effects
of the Branch Acquisition on June 27, 1997. As previously
mentioned, the Company acquired approximately $140 million in
deposits in the Branch Acquisition, 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 June 30, 1998, the loan to deposit ratio had risen to 71%.
The temporary consequence of placing a greater portion of the
newly-acquired earning assets in lower yielding federal funds and
securities (the short-term consequence of the Branch Acquisition)
was a decrease in the Company's net interest margin, which
decreased 27 basis points from June 30, 1997 to June 30, 1998.
However, due to the increase in average earning assets between
the two periods (an increase of $177 million) net interest income
increased $3.1 million from the six month period in 1997 to the 1998
period.
The provision for credit losses was $684 thousand and $472
thousand for the respective 1998 and 1997 six month periods. 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)
Jun 1998 Jun 1997 $ Change % Change
<S> <C> <C> <C> <C>
Income From Fiduciary Activities $1,557 $ 1,321 $ 236 17.9%
Fees for Other Services to Customers 1,986 1,589 397 25.0
Net Gains on Securities Transactions 166 37 129 348.6
Other Operating Income 401 1,011 (610) (60.3)
Total Other Income $4,110 $3,958 $ 152 3.8
Without Regard to the Nonrecurring Items:
Other Operating Income $ 401 $ 480 $ (79) (16.5)
Total Other Income 3,944 3,390 554 19.9
</TABLE>
<PAGE>
Other (i.e. noninterest) income for the first six months of 1997
included $531 thousand of nonrecurring other operating income
relating to the former Vermont operations. Other income, on a
recurring basis, increased $554 thousand, or 19.9%, from the first six
months of 1997 to the first six months of 1998.
Trust income increased $236 thousand, or 17.9%, 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 $2.0 million for the first half of 1998, an
increase of $397 thousand, or 25.0%, 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 $401 thousand for the first six months of
1998, a decrease of $79 thousand, or 16.5%, from the first six
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 six 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.
Other Expense
<TABLE>
<CAPTION>
Summary of Other Expense
(Dollars in Thousands)
Jun 1998 Jun 1997 $ Change % Change
<S> <C> <C> <C> <C>
Salaries and Employee Benefits $ 6,714 $5,903 $ 811 13.7%
Occupancy Expense of Premises, Net 853 741 112 15.1
Furniture and Equipment Expense 1,094 953 141 14.8
Other Operating Expense 3,216 2,363 853 36.1
Total Other Expense $11,877 $9,960 $ 1,917 19.2
Efficiency Ratio 54.74% 55.32% (.58)% (1.1)%
</TABLE>
Other (i.e. noninterest) expense increased $1.9 million, or 19.2%, for
the first six months of 1998 compared with the first six 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 improved (a ratio where smaller is better)
between the two periods. 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 $811 thousand,
or 13.7%, from the 1997 year-to-date 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.
Increases in occupancy expense of premises and furniture and
fixture expense (15.1% and 14.8%, respectively) were primarily
attributable to the Branch Acquisition.
Other operating expense increased $853 thousand, or 36.1%, from
the first six months of 1997 to the first six months of 1998. An
increase in the amortization of goodwill of $452 thousand
represented 52.9% of the total increase. Excluding the additional
goodwill charge, the increase in other operating expense would have
been 17.2%, similar to, but somewhat higher than, the other cost
increases triggered by the Branch Acquisition, but still well below the
21.4% increase in total assets.
<PAGE>
Income Taxes
<TABLE>
<CAPTION>
Summary of Income Taxes
(Dollars in Thousands)
Jun 1998 Jun 1997 $ Change % Change
<S> <C> <C> <C> <C>
Provision for Income Taxes $3,022 $2,338 $684 29.3%
Effective Tax Rate 34.40% 30.14% 4.26% 14.1
Effective Tax Rate, without NYS Settlement 34.40% 36.12% (1.72)% (4.8)
</TABLE>
The provisions for federal and state income taxes amounted to $3.0
million and $2.3 million for the first six 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 six months of
1997. As adjusted for this settlement, the effective tax rates for the
first half of 1998 and 1997 were 34.40% and 36.12%, 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 by its Board of Directors
that are reviewed and approved annually. The Board of Directors
delegates responsibility for managing the asset/liability profile to
management's Asset/Liability Committee ("ALCO"). In this capacity
ALCO develops guidelines and strategies impacting the Company's
asset/liability management related activities based upon estimated
market risk sensitivity, policy limits and overall market interest rate
levels and trends.
Interest rate risk is the most significant market risk affecting the
Company. Interest rate risk is the exposure of the Company's net
interest income to changes in interest rates. Interest rate risk is
directly related to the different maturities and repricing
characteristics of interest-bearing assets and liabilities, as well as to
prepayment risks for mortgage-related assets, early withdrawal of
time deposits, and the fact that the speed and magnitude of
responses to interest rate changes varies by product.
The ALCO utilizes the results of a detailed and dynamic simulation
model to quantify the estimated exposure of net interest income to
sustained interest rate changes. While ALCO routinely monitors
simulated net interest income sensitivity over a rolling two-year
horizon, it also utilizes additional tools to monitor potential longer-
term interest rate risk.
The simulation model 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.
The hypothetical estimates generated by the anlaysis 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
At the Company's Annual Meeting of
Shareholders held April 29, 1998,
shareholders elected the following
directors to serve terms expiring in 2001.
Shareholders also approved the
Company's Long-Term Incentive Plan,
authorizing the issuance of up to 300,000
shares of the Company's Common Stock
in the form of stock options and restricted
shares. The voting results were as follows:
<TABLE>
<CAPTION>
Withhold Broker
Director For Authority Non-Votes
<S> <C> <C> <C>
Thomas L. Hoy 4,622,715 28,938 ---
Dr. Edward F. Huntington 4,637,083 14,570 ---
Doris E. Ornstein 4,606,643 45,010 ---
</TABLE>
<TABLE>
<CAPTION>
Broker
For Against Abstain Non-Votes
<S> <C> <C> <C> <C>
Long-Term Incentive Plan 3,430,623 432,603 123,036 ---
</TABLE>
Item 5. Other Information - None
Item 6. Exhibits and Reports on Form 8-K
- Exhibit 27 Selected Financial Data
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
ARROW FINANCIAL CORPORATION
Registrant
Date: August 7, 1998 s/Thomas L. Hoy
Thomas L. Hoy, President and
Chief Executive Officer
Date: August 7, 1998 s/John J. Murphy
John J. Murphy, Executive Vice
President, Treasurer and CFO
(Principal Financial Officer and
Principal Accounting Officer)
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND> PREVIOUSLY FILED 1997 EPS DATA
RESTATED FOR ADOPTION OF FAS 128
AND FOR AUGUST 1998 10% AND NOVEMBER 1997
5% STOCK DIVIDENDS
</LEGEND>
<RESTATED>
<MULTIPLIER> 1000
<S> <C> <C>
<PERIOD-TYPE> 6-MOS 6-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1997
<PERIOD-END> JUN-30-1998 JUN-30-1997
<CASH> 23987 25320
<INT-BEARING-DEPOSITS> 0 0
<FED-FUNDS-SOLD> 0 48500
<TRADING-ASSETS> 0 0
<INVESTMENTS-HELD-FOR-SALE> 233293 177243
<INVESTMENTS-CARRYING> 54938 43720
<INVESTMENTS-MARKET> 56283 44289
<LOANS> 512984 462396
<ALLOWANCE> 6468 6409
<TOTAL-ASSETS> 857667 792372
<DEPOSITS> 723510 686589
<SHORT-TERM> 28199 22223
<LIABILITIES-OTHER> 14538 12084
<LONG-TERM> 15000 0
<COMMON> 6906 6577
0 0
0 0
<OTHER-SE> 69514 64899
<TOTAL-LIABILITIES-AND-EQUITY> 857667 792372
<INTEREST-LOAN> 21735 17794
<INTEREST-INVEST> 8932 6784
<INTEREST-OTHER> 363 186
<INTEREST-TOTAL> 31030 24764
<INTEREST-DEPOSIT> 12927 9999
<INTEREST-EXPENSE> 13794 10533
<INTEREST-INCOME-NET> 17236 14231
<LOAN-LOSSES> 684 472
<SECURITIES-GAINS> 166 37
<EXPENSE-OTHER> 11877 9960
<INCOME-PRETAX> 8785 7757
<INCOME-PRE-EXTRAORDINARY> 8785 7757
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 5763 5419
<EPS-PRIMARY> .91 .83
<EPS-DILUTED> .89 .82
<YIELD-ACTUAL> 4.51 4.78
<LOANS-NON> 2367 2232
<LOANS-PAST> 360 764
<LOANS-TROUBLED> 0 0
<LOANS-PROBLEM> 0 0
<ALLOWANCE-OPEN> 6191 5581
<CHARGE-OFFS> 571 446
<RECOVERIES> 164 102
<ALLOWANCE-CLOSE> 6468 6409
<ALLOWANCE-DOMESTIC> 6468 6409
<ALLOWANCE-FOREIGN> 0 0
<ALLOWANCE-UNALLOCATED> 0 0
</TABLE>
