ARROW FINANCIAL CORPORATION
250 Glen Street, Glens Falls, New York 12801
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
To Shareholders of Arrow Financial Corporation:
Notice is hereby given that the Annual Meeting of
Shareholders of Arrow Financial Corporation, a
New York corporation (the "Company"), will be held at
the Queensbury Hotel, Maple Street and Ridge Street,
Glens Falls, New York, on Wednesday, April 14, 1999,
at 10:00 a.m. for considering and voting upon the
following matters:
1. The election of three directors to Class A for
a term of three years, or in each case until his or her
successor shall have been elected and qualified.
2. Any other business which may be properly
brought before the meeting or any adjournment thereof.
By Order of the Board of Directors
GERARD R. BILODEAU
Secretary
March 12, 1999
YOU ARE REQUESTED TO SIGN AND RETURN THE ENCLOSED PROXY AS
PROMPTLY AS POSSIBLE, WHETHER OR NOT YOU PLAN TO ATTEND THE
MEETING IN PERSON. YOU MAY REVOKE YOUR PROXY AT ANY TIME
PRIOR TO THE MEETING, OR IF YOU ATTEND THE MEETING, YOU MAY
REVOKE YOUR PROXY AT THAT TIME, IF YOU WISH.
ARROW FINANCIAL CORPORATION
250 Glen Street
Glens Falls, New York 12801
PROXY STATEMENT FOR ANNUAL MEETING OF SHAREHOLDERS
April 14, 1999
This proxy statement is furnished in connection with
the solicitation by the Board of Directors of Arrow Financial
Corporation, a New York corporation (the "Company"), of
proxies to be voted at the Annual Meeting of Shareholders
(the "Meeting") to be held on Wednesday, April 14, 1999,
at 10:00 a.m., at the Queensbury Hotel, Maple Street and
Ridge Street, Glens Falls, New York 12801, and at any
adjournment thereof. This proxy statement and the
accompanying form of proxy are first being sent to
shareholders on March 12, 1999. In addition, a copy of
Parts I and II of the Company's Annual Report on Form 10-K
for December 31, 1998, which includes the Company's
financial statements, is enclosed with this proxy
statement.
At the Meeting, three directors will be elected to
Class A of the Company's Board of Directors.
RECORD DATE AND VOTING RIGHTS
The Board of Directors of the Company has fixed
February 26, 1999, as the record date for determination
of the shareholders entitled to notice of, and to vote at
the Meeting. At the close of business on such date, there
were outstanding and entitled to vote 6,273,548 shares of
common stock, $1.00 par value, of the Company, which is the
Company's only class of stock outstanding. Holders of
record of common stock at the close of business on the
record date are entitled to one vote for each share held on
each matter submitted to a vote at the Meeting.
A majority of the outstanding shares present or
represented by proxy will constitute a quorum at the
Meeting. Consistent with applicable state law and the
Company's Certificate of Incorporation and Bylaws, the
Company will treat all shares represented by proxy or in
person at the Meeting as shares present or represented at
the Meeting for purposes of determining a quorum. Shares
represented by proxies or voted in person on ballots marked
"WITHHOLD" or "ABSTAIN" on any proposal will be treated as
shares present or represented at the Meeting for purposes
of determining a quorum but will not be treated as shares
voting on such proposal. Shares held in "street name" by
brokers which are present or represented at the Meeting but
are not voted by such brokers, for any reason, on a matter
presented at the Meeting (so-called "broker nonvotes") will
be treated as shares present in person or represented by
proxy at the Meeting for purposes of determining a quorum
but will not be treated as shares voting on such matter.
In the election of directors, which requires the
affirmative vote of a plurality of the shares voting on such
matter at the Meeting, neither shares voted "WITHHOLD" on
the election of one or more directors nor broker nonvotes
on such election will have the effect of a vote "against"
the election of one or more directors.
PROXIES
Any shareholder executing a form of proxy which is
solicited hereby has the power to revoke it prior to
exercise of the authority conferred thereby. Revocation
may be made effective by attending the Meeting and voting
the shares of stock in person, or by delivering to the
Secretary of the Company at the principal offices of the
Company prior to the Meeting a written notice of
revocation or a later-dated, properly executed proxy.
Proxies will be solicited by mail. They may also be
solicited by directors, officers and regular employees of
the Company and its subsidiaries personally or by telephone
or telegraph, but such persons will receive no additional
compensation for such services. The Company will bear all
costs of soliciting proxies. Should the Company, in order
to solicit proxies, utilize the services of other financial
institutions, brokerage houses or other custodians, nominees
or fiduciaries, the Company will reimburse such persons for
their out-of-pocket expenses.
PRINCIPAL SHAREHOLDERS OF THE COMPANY
To the knowledge of the Board of Directors, there was
no one person or group of persons acting in concert who
beneficially owned more than 5 percent of the outstanding
shares of the Company's Common Stock as of December 31, 1998.
The Company's subsidiary, Glens Falls National Bank
and Trust Company, in its capacity as trustee of numerous
trust accounts, including as trustee of the Company's
Employee Stock Ownership Plan ("ESOP"), held on such date
1,037,766 shares of Common Stock, or 16.5 percent of the
total number of such shares then outstanding. The Bank was
not the beneficial owner of a substantial number of these
shares, including a majority of the shares then held by it
as trustee of the ESOP, because other persons (e.g., the
ESOP participants) held both voting and investment power
over such shares. Thus, the Bank did not beneficially own
more than 5 percent of the outstanding Common Stock on the
reporting date.
SHAREHOLDER PROPOSALS
Under the Bylaws of the Company, any shareholder who
wishes to nominate a person for election to the Board of
Directors or who wishes to bring a matter before the annual
meeting for consideration by the shareholders must deliver a
written notice to the Secretary of the Company not less than
120 days before the anniversary date of the prior year's
annual meeting of shareholders (except in cases where the
date of the annual meeting is more than 30 days before or
after the anniversary date of the prior year's meeting).
The written notice must contain the name and record address
of the submitting shareholder, a brief description of the
proposed nominee for director or the other matter sought to
be raised at the meeting, the number of shares of Common
Stock beneficially owned by the submitting shareholder (who
must be a record holder both on the day the written notice
is given to the Secretary and on the record date for the
meeting) and certain other information specified in the
Bylaws of the Company. Failure to comply with this advance
notice requirement will preclude the shareholder from
nominating the person or bringing the matter before the
meeting. For the annual meeting of shareholders in the Year
2000, this written notice must be given not later than
December 16, 1999 (assuming such annual meeting is held
within 30 days before or after April 14, 2000).
If a shareholder wishes to have a proposal considered
by the Board of Directors for inclusion in the Company's
proxy statement for a forthcoming meeting of
shareholders, the shareholder must submit the proposal on
a timely basis and the shareholder and proposal otherwise
must meet the requirements established by the Securities
and Exchange Commission in Rule 14a-8 governing shareholder
proposals. Any proposals that shareholders wish to be
considered for inclusion in the Company's proxy statement
for next year's annual shareholders' meeting (in the Year
2000) will not be deemed to be timely submitted unless they
are received by the Company at its principal executive
offices no later than November 14, 1999. Such proposals,
together with any supporting statements, should be directed
to the Secretary of the Company.
ITEM 1. ELECTION OF DIRECTORS AND
INFORMATION WITH RESPECT TO DIRECTORS AND OFFICERS
The first item to be acted upon at the Meeting is the
election of three directors to Class A of the Board of
Directors each to hold office for three years, or in each
case until his or her successor shall have been elected and
qualified. Directors will be elected by a plurality of the
shares voting at the Meeting.
Under the Company's Certificate of Incorporation and
Bylaws, the Board of Directors is divided into three
classes,
one class to be elected each year for a term of three years.
The total number of directors is fixed from time to time by
the Board of Directors. As of the Meeting, the number of
directors will be nine.
All proxies which are timely received by the
Secretary in proper form prior to the election of directors
at the Meeting, and which have not been revoked, will be
voted "FOR" the Board's three nominees for Class A listed
below (unless any nominee is unable to serve or for good
cause will not serve), subject to any specific voting
instructions received with any proxy, including the
withholding of authority to vote for any or all nominees.
Each of the Board's nominees has consented to being
named in this proxy statement and to serve if elected, and
the Board knows of no reason to believe that any nominee
will decline or be unable to serve if elected. Each of the
three nominees is presently serving on the Board of Directors.
Also listed below are the current directors whose terms do
not expire at the Meeting and who are expected to continue
to serve on the Board after the Meeting and until their
respective terms expire.
The following information is provided with respect to
each nominee for director to be elected at the Meeting and
each continuing director of the Company whose term of office
extends beyond the date of the Meeting:
<TABLE>
<CAPTION>
NOMINEES FOR DIRECTOR AND DIRECTORS CONTINUING IN OFFICE
Shares of Common
Stock of the Company
Beneficially Owned
Name and Principal Director of the as of December 31, 1998(d)
Occupation(a)(b)(c) Age Company Since Number Percent
Nominees for Director:
Class A (Terms Expiring in 2002):
<S> <C> <C> <C> <C>
Michael B. Clarke..................... 52 1988 9,791 -
President & CEO, Glens Falls
Cement Co., Inc. (cement
production)
Kenneth C. Hopper, M.D........... 60 1983 38,040 (1) -
Chairman & CEO, Northeastern
Clinical and Toxicology
Laboratory, Inc. (medical
laboratory)
Michael F. Massiano................. 64 1983 93,926 (2) 1.49
Chairman of the Board of the
Company and Glens Falls
National Bank and Trust Company
Directors Continuing in Office:
Class B (Terms Expiring in 2000):
John J. Carusone, Jr................ 57 1996 46 -
Attorney, Carusone & Carusone
(law firm)
David G. Kruczlnicki................. 46 1989 14,688 (3) -
President & CEO, Glens Falls
Hospital (health care facility)
David L. Moynehan.................. 53 1987 14,325 (4) -
President, Riverside Gas & Oil
Co. (petroleum products
distributor)
Class C (Terms Expiring in 2001):
Thomas L. Hoy ...................... 50 1996 72,024 (5) 1.14
President & CEO of the
Company and Glens Falls
National Bank and Trust
Company
Dr. Edward F. Huntington......... 68 1983 12,338 (6) -
Adjunct Professor, SUNY
Albany & Plattsburgh-Retired
Doris E. Ornstein...................... 68 1987 8,416 -
President, Wharton Business
Brokers (real estate specialists)
Other Executive Officers:
John J. Murphy.................... 47 N/A 65,919 (7) 1.04
Executive Vice President,
Treasurer & CFO of the
Company and Glens Falls
National Bank and Trust
Company
John C. Van Leeuwen........... 55 N/A 15,711 (8) -
Senior Vice President & Chief
Credit Officer of the Company
and Glens Falls National Bank
and Trust Company
Shares Beneficially Owned By
All Director Nominees,
Continuing Directors and
Executive Officers as a Group: 375,073 (9) 5.85
</TABLE>
NOTES:
(a) All directors of the Company also serve as directors
of its principal subsidiary, Glens Falls National Bank and
Trust Company, except for Mr. Carusone, who also
serves as a director of Saratoga National Bank and Trust
Company. Of the nominees and directors continuing in office,
only Mr. Hoy is currently an officer or employee of the
Company or its subsidiaries.
(b) The business experience of each director during the
past five years was that typical to a person engaged
in the principal occupation or business listed for
each. Except as noted, each of the nominees and
directors continuing in office has held the same or
another executive position with the same employer
during the past five years.
(c) No family relationship exists between any two or more
of the nominees, directors or executive officers of
the Company or its subsidiaries, except that David L.
Moynehan, a director of the Company, is the
brother-in-law of John J. Murphy, the Executive Vice
President, Treasurer & Chief Financial Officer of the
Company.
(d) Beneficial ownership of shares, determined in
accordance with applicable Securities and Exchange
Commission rules, includes shares as to which a
person, directly or indirectly, has or shares voting
power and/or investment power, and all shares which
the person has a right to acquire within 60 days of
the reporting date. Unless otherwise noted below,
each individual has sole beneficial ownership of all
shares listed as beneficially owned by such
individual. Percentage of shares beneficially owned
is listed only for those with one percent or more
beneficial ownership.
(1) Includes 25 shares held by a company that Dr. Hopper
controls.
(2) Includes 4,076 shares held by his wife directly and
21,015 shares subject to exercisable options received
by Mr. Massiano under the Company's compensatory
stock option plans.
(3) Includes 509 shares held jointly by Mr. Kruczlnicki
with his wife.
(4) Includes 2,604 shares held jointly by Mr. Moynehan
with his wife.
(5) Includes 11,254 shares held in Mr. Hoy's account
under the Company's ESOP, 941 shares held by his wife
directly, 451 shares held by his son directly, 451
shares held by him as custodian for his daughter and
40,378 shares subject to exercisable options received
by Mr. Hoy under the Company's compensatory stock
option plans.
(6) Includes 10,511 shares held jointly by Dr. Huntington
with his wife and 674 shares held in a Simplified
Employee Pension Plan.
(7) Includes 10,664 shares held in Mr. Murphy's account
under the Company's ESOP, 8,102 shares held jointly
with his wife and 45,801 shares subject to
exercisable options received by Mr. Murphy under the
Company's compensatory stock option plans.
(8) Includes 5,360 shares held in Mr. Van Leeuwen's
account under the Company's ESOP, 702 shares held
jointly with his wife, 206 shares held by him as
custodian for his sons and 8,278 shares subject to
exercisable options received by Mr. Van Leeuwen under
the Company's compensatory stock option plans.
(9) Includes 125,620 shares subject to exercisable
options received by such persons under the Company's
compensatory stock option plans. Also includes 9,135
shares beneficially owned on such date by Daniel L.
Robertson, a director of the Company who is retiring
at this year's Annual Meeting. Mr. Robertson's
shareholdings include 1,003 shares held by his wife
directly.
In 1998, the Board of Directors of the Company met 4
times. During the year, each of the directors attended at
least 75 percent of the total number of the meetings of both
the Board and all the committees of which the director was a
member.
BOARD COMMITTEES
The Board of Directors of the Company has the
following three committees: an Executive Committee, an Audit
Committee and a Personnel Committee. The Personnel Committee
also functions as a nomination and a compensation committee.
As President and Chief Executive Officer of the Company, Mr.
Hoy serves as an ex-officio member of each of these
committees and, as such, is expected to attend meetings and
to provide information requested by the committee members.
The Executive Committee met once during the last
fiscal year. Members of the Executive Committee are
Directors Clarke, Hopper, Kruczlnicki and Massiano. The
Executive Committee has the authority to act for the Board,
except it may not submit matters to shareholders, fill Board
vacancies, fix Board or Committee compensation, amend or
adopt Bylaws, or amend or repeal any resolution of the
Board.
The Audit Committee met twice during 1998. Members
of the Audit Committee are Directors Carusone, Clarke,
Huntington, Kruczlnicki and Massiano. The Audit Committee
examines the soundness and solvency of the Company and its
subsidiaries, causes suitable audits and examinations to be
made, ensures that adequate fiscal controls and procedures
are maintained, and makes recommendations and reports to the
full Board of Directors.
The Personnel Committee met three times during the
last fiscal year. Members of the Personnel Committee are
Directors Clarke, Huntington, Kruczlnicki and Massiano. In
addition to making recommendations to the full Board on
nominations of candidates for director of the Company, the
Personnel Committee reviews, not less often than annually,
all compensation arrangements and benefit plans covering
officers and employees of the Company and its subsidiaries
and makes various recommendations and determinations on such
matters. The Personnel Committee also makes final
determinations on all awards under the Company's compensatory
stock plans, including grants of stock options to executives
and other key employees. See "Report of Personnel Committee
on Executive Compensation" beginning on page 10 of this proxy
statement. Any shareholder who wishes to submit to the
Personnel Committee a possible candidate for the Committee's
consideration in making its recommendation on nominees for
director to the full Board should submit the name of such
candidate to the Personnel Committee, care of the Company at
its corporate headquarters. Names of candidates received by
the Committee before December 16, 1999, will be considered by
the Committee at its regular meeting in January of the
following year, before the Committee makes its
recommendations to the full Board and the latter selects its
nominees. For procedures and deadlines applicable to any
shareholder who wishes to make a direct nomination of one or
more persons for director at the annual meeting of
shareholders, see "Shareholder Proposals" on page 2 of this
proxy statement.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
During 1998, the directors and executive officers of
the Company made timely filings of all securities transaction
reports required to be filed by them with the Securities and
Exchange Commission under Section 16(a) of the Securities
Exchange Act of 1934 except for one late filing of a report
relating to one transaction by director Moynehan.
COMPENSATION COMMITTEE INTERLOCKS
AND INSIDER PARTICIPATION
No member of the Personnel Committee during 1998 was
an officer or employee of the Company or any of its
subsidiaries during that year or a former officer of the
Company or any of its subsidiaries, except for Mr. Massiano,
who is Chairman of the Board of the Company and Glens Falls
National Bank and Trust Company and formerly served as CEO of
the Company until his retirement on December 31, 1996. Mr.
Hoy, who is President & CEO of the Company and Glens Falls
National Bank and Trust Company, is an ex-officio member of
the Committee. Ex-officio members have certain duties
relating to the Committee, as described above under "Board
Committees", but do not participate in Committee decisions.
EXECUTIVE COMPENSATION
The following table sets forth information concerning
total compensation and compensatory awards received in the
last three years by the Chief Executive Officer of the
Company and each other executive officer whose salary and
bonus exceeded $100,000 in 1998:
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
Annual Compensation
( a ) ( b ) ( c ) ( d ) ( e )
Other
Name/Principal Annual No. Of
Position Year Salary Bonus Compen- Options/ All Other
sation SARs Compensation
<S> <C> <C> <C> <C> <C> <C>
Thomas L. Hoy 1998 $200,000 $78,225 - 12,000 $21,648
President & 1997 180,000 85,050 - 13,200 16,754
Chief Executive Officer 1996 150,700 42,308 - 13,860 15,515
John J. Murphy 1998 146,000 32,305 - 7,000 13,398
Executive Vice President 1997 140,000 37,800 - 7,700 13,485
Treasurer & CFO 1996 126,500 52,600 - 8,085 13,615
John C. VanLeeuwen 1998 97,000 12,228 - 3,000 9,371
Senior Vice President & 1997 93,000 15,120 - 3,300 8,612
Chief Credit Officer 1996 84,154 25,631 - 4,620 8,581
</TABLE>
Notes to Summary Compensation Table (note references are to
columns):
(a) Salary: Includes base salary and any amounts that are
deferred at the election of the officer under a 401(K)
plan or otherwise.
(b) Bonus: Represents cash bonuses paid to executives for
such year under the Company's Short-Term Incentive
Award Plan whether such amounts are deferred or paid
immediately. Under the Plan, annual bonuses are paid
to key employees, including executive officers of the
Company, provided certain pre-established threshold
and/or target earnings levels have been attained.
Bonuses are compiled and approved by the Personnel
Committee and ratified by the Board of Directors.
Bonuses typically are paid in January of the ensuing
calendar year.
(c) Other Annual Compensation: Excludes perquisites and
other benefits, unless the aggregate amount of such
compensation exceeds the lesser of either $50,000 or
10 percent of the total of annual salary and bonus
reported for the named executive officer. No
executive officers received perquisites having a value
greater than such amount in any of the last 3 years.
(d) Options: Represents the number of shares subject to
options granted to the named executive officer (as
adjusted for subsequent stock dividends). For more
information on options, see the tables and notes under
"Stock Option Plans" below. The Company granted no
other form of long-term compensation to the named
executives in any of the past 3 years. Although the
Company's compensatory stock plans authorize awards of
restricted stock, no shares of restricted stock have
been awarded thereunder.
(e) All Other Compensation: Includes (i) the value of the
Company's contributions to the ESOP for the named
executive officer, and (ii) amounts paid for premiums
for term life insurance benefiting the named
executive officer. In 1998, the amounts indicated for
each of the named executive officers consisted of the
following: Mr. Hoy, $18,912 for ESOP and $2,736 for
term life insurance; Mr. Murphy, $12,117 for ESOP and
$1,281 for term life insurance; and Mr. Van Leeuwen,
$7,355 for ESOP and $2,016 for term life insurance.
STOCK OPTION PLANS
In past years, the Company has maintained compensatory
stock plans under which key employees have been granted stock
options, including both tax qualified (incentive) stock
options and non-qualified stock options. Information relative
to stock option activity for the named executive officers in
the Summary Compensation Table above for the year ending
December 31, 1998, is set forth in the following tables:
<TABLE>
<CAPTION>
OPTION/SAR GRANTS TABLE
Options/SAR Grants in Last Fiscal Year
Individual Grants
Name ( a ) ( b ) ( c ) ( d ) ( e )
No. Of % of Total Per Share Expiration Date Grant Date
Securities Options/SARs Exercise or Present Value
Underlying Granted to Base Price (dollars)
Options/ Employees in
SARs Fiscal Year
Granted
<S> <C> <C> <C> <C> <C>
Thomas L. Hoy 12,000 24.79% $26.25 11/17/2008 $ 66,960
John J. Murphy 7,000 14.46 26.25 11/17/2008 39,060
John C. Van Leeuwen 3,000 6.20 26.25 11/17/2008 16,740
</TABLE>
Notes to Stock Option Table (note references are to
columns):
(a) All options listed were granted on November 18, 1998,
without tandem stock appreciation rights (SARs).
Options awarded under the Company's compensatory stock
plans normally become exercisable in stages (e.g.,
options awarded in 1998 become exercisable in 25
percent increments on each of the first four
anniversaries of the date of the grant).
(c) Represents 100 percent of the market value of the
Company's Common Stock on the date of grant, based on
the average of the closing bid and asked prices per
share of Common Stock reported on the NASDAQ Stock
Market(sm) for such date.
(d) Options awarded under the Company's compensatory stock
plans normally have 10 year terms, subject to earlier
termination in the event of termination of employment
with the Company.
(e) The estimated grant date present value of the options
has been determined by using the Black-Scholes option
pricing model, a commonly used method of valuing
options on the date of grant. The assumptions
utilized in applying the Black-Scholes model were as
follows: (a) the useful life of the options was
estimated to be seven years from the date of the
grant; (b) the risk-free discount rate applied for
purposes of the valuation, consistent with the
seven-year estimated life of the options, was the
seven-year Treasury Rate as of the date of grant;
(c) the volatility factor utilized was the three-year
volatility of the company's Common Stock, or 22.4
percent (volatility is calculated based on
fluctuations of daily closing stock prices); (d) -0-
percent forfeiture rate prior to exercise; (e) the
dividend yield on the Common Stock was assumed to be
3.4 percent for purposes of the analysis only.
<TABLE>
<CAPTION>
OPTION/SAR EXERCISES AND YEAR-END VALUE TABLE
Aggregate Option/SAR Exercises in Last Fiscal Year and FY-End Option/SAR Values
(a) (b) ( c ) ( d )
Shares Value Realized Number of Unexercised Value of Unexercised
Name Acquired Options/SARs at FY-End In-the-Money Options/SARs
(Exercisable/Unexercisable) at FY-End
(Exercisable/Unexercisable)
<S> <C> <C> <C> <C>
Thomas L. Hoy 3,980 $ 61,848 E - 40,378 E - $483,090
U - 31,053 U - 64,654
John J. Murphy 3,980 61,350 E - 45,801 E - 710,784
U - 19,041 U - 49,062
John C.Van Leeuwen 715 12,291 E - 8,278 E - 81,152
U - 8,801 U - 24,923
</TABLE>
KEY: E = Exercisable, U= Unexercisable
Notes to Option/SAR Exercises and Year-End Value Table (note
references are to columns):
(b) Represents the difference between the market value of
shares of Common Stock received upon exercise of an
option, based on the average of the closing bid and
asked prices for the Company's Common Stock as
reported by NASDAQ on the date of exercise, and the
exercise price of such options.
(c) Includes options that were "out-of-the-money" at
year-end, that is, options having an exercise price
that exceeds the fair market value of the Common Stock.
(d) The dollar value of unexercised in-the-money options
at December 31, 1998, was calculated by determining
the difference between the market value of the shares
of Common Stock underlying the options at year-end,
based upon the average of the closing bid and asked
prices for the Company's Common Stock as reported on
NASDAQ as of December 31, 1998, and the exercise price
of the options.
Notwithstanding anything to the contrary set forth in any of
the Company's previous filings under the Securities Act of
1933, as amended, or the Securities Exchange Act of 1934, as
amended, including language that might be interpreted to
incorporate by reference future filings, including this proxy
statement, in whole or in part, in such previous filings, the
following Performance Graph and Report of Personnel Committee
on Executive Compensation shall not be incorporated by
reference into any such filings.
<TABLE>
<CAPTION>
COMPARISON OF FIVE YEAR-CUMULATIVE TOTAL RETURNS
AMONG ARROW FINANCIAL CORPORATION,
THE NASDAQ STOCK MARKET (U.S. Companies), AND
NASDAQ BANK STOCKS
12/31/93 12/30/94 12/29/95 12/31/96 12/31/97 12/31/98
<S> <C> <C> <C> <C> <C> <C>
Arrow Financial Corporation 100.0 131.9 165.7 240.8 371.4 326.6
NASDAQ Stock Market 100.0 97.8 138.3 170.0 208.6 293.2
NASDAQ Bank Stocks 100.0 99.6 148.4 195.9 328.0 324.9
</TABLE>
All data prepared by the Center for Research in Security
Prices. The level of each index was set at $100 on 12/31/93.
Amounts indicated on the graph represent monthly indices
levels derived from compounded daily returns that include all
dividends. The indices are reweighted daily, using the market
capitalization on the previous trading day. If the monthly
interval, based on the fiscal year-end, is not a trading day,
the preceding trading day is used.
REPORT OF PERSONNEL COMMITTEE
ON EXECUTIVE COMPENSATION
Introduction
The Personnel Committee of the Board of Directors (the
"Committee") is composed exclusively of nonemployee directors.
A principal task of the Committee is to act on compensation
matters related to the Chief Executive Officer (the "CEO") and
other executive officers of the Company. As part of that
process, the Committee reviews survey data regarding executive
compensation paid by peer banks plus additional input as may
be sought and received from compensation consultants. The
Committee then reviews compensation recommendations from
management and develops its own recommendations, which it
submits to the full Board for review and ratification. The
Committee also has the discretion to make final decisions on
incentive compensation awards to executive officers and other
key employees, including annual bonus awards under the
Company's short-term incentive plan and stock-based awards
under the Company's long-term compensatory stock plans.
The Committee is submitting this report summarizing
its compensation policy for 1998 and in particular its
compensation recommendations and decisions for President and
CEO Thomas L. Hoy and the other executive officers.
Compensation Philosophy
The Committee supports a three part approach to
executive compensation consisting of base salary, annual
incentives (bonus) and long-term incentives. Base salary is
reviewed and set annually within competitive ranges
established on the basis of survey data, with the specific
amounts to be determined based on prior period individual and
Company performance. The annual incentive or bonus component
is payable through the Company's Short-Term Incentive Award
Plan, with awards tied to the annual performance of the
relevant business unit and to the executive's individual
performance during the year. The long-term incentive
component of compensation is addressed through the
compensatory stock plans, which provide for grants of stock
options or restricted stock.
The Committee reviews each component of executive
compensation on an annual basis and makes recommendations to
the full Board on any adjustments among the component elements
that it believes are appropriate.
The executive compensation program is intended to
attract and retain key executives and to motivate them to help
the Company achieve increased profitability, strong credit
quality and enhanced shareholder value. The long-term
incentive feature also encourages significant share ownership
by key executives. For individual officers, types and amounts
of executive compensation are established based upon their
varying levels of responsibility, subjective and objective
evaluations of their performance and the financial performance
of their relevant business unit. Attention is also given to
the compensation being paid to various levels of executives by
other banking organizations in the Company's peer group,
particularly those organizations doing business in the
Company's geographic market.
At the level of CEO, overall compensation is based
both on corporate performance factors, which include earnings
per share, capital accumulation, strategic initiatives and new
products and markets, and upon individual performance factors,
such as leadership, commitment to the community and
professional standing. In making its recommendations on CEO
compensation, the Committee also takes into account CEO
compensation at peer group banks.
Compensation Administration
Base salaries for executive officers, including the
CEO, are reviewed on an annual basis. Any base salary
increases will reflect an executive's contributions to the
overall Company performance, the executive's position within
an appropriate salary range and median increases in both the
banking industry and industry in general. Committee
recommendations for executive base salaries are reviewed and
ratified by the full Board.
Annual incentive compensation is addressed through the
Company's Short-Term Incentive Award Plan, with the payment of
bonuses generally to depend upon whether certain
pre-established financial performance threshold levels for the
year are met. If the pre-established threshold levels are met,
the size of individual bonuses may then vary depending on
the extent to which those levels are exceeded and on certain
objective and subjective measures of performance. The
Committee works with management at the beginning of the fiscal
year to establish the threshold performance levels under the
Plan for that year plus any target levels beyond the
threshold. Typically, threshold and target performance levels
are based on budgeted operating earnings. Final decisions on
those key employees entitled to Plan bonuses and the amounts
of those bonuses are made by the Committee at the beginning of
the following fiscal year, after considering senior
management's recommendations. The full Board reviews and
ratifies the Committee's decisions.
Long-term incentive compensation for executives and
other employees is addressed through the Company's
compensatory stock plans. These plans provide for the grant
of stock-based compensatory awards, such as stock options, the
value of which is directly dependent on the market performance
of the Company's Common Stock over an extended period of time.
The principal stock plan utilized in recent years for the
grant of compensatory stock awards to executives has been the
Company's 1993 Long-Term Incentive Plan. At the 1998 annual
shareholders' meeting, shareholders approved the 1998
Long-Term Incentive Plan, which is essentially an extension
of the 1993 plan and, like the 1993 plan, authorizes the
grant of stock-based awards to executive officers and other
employees whose duties and job performance make them suitable
recipients. The 1998 plan authorizes the grant of awards for
up to 330,000 shares, as adjusted, of Common Stock in the
aggregate.
Under both the 1993 and the 1998 plans, the Committee
has the sole discretion to select which executives or other
employees are to receive awards, based on factors such as
attainment of Company financial goals and individual
performance, as well as the types and amounts of those awards.
Under both plans, awards may take the form of stock options or
shares of restricted stock. Stock options granted under the
plans must have an exercise price not less than the market
price of the Company's Common Stock on the date of grant and
may be exercised only after a designated vesting date and then
only if the optionee is still employed by the Company (or
within a short period of time following termination of
employment). Essentially, this means that executives who
receive options realize gain only if the Company's stock price
improves over the life of the option and only if the executive
continues with the Company. In years in which the Company's
stock price does not improve, for any reason, including
conditions affecting equity markets generally, the value of
compensatory stock options does not improve and may even
decrease. Heretofore, the Committee has not granted any form
of stock-based compensation other than stock options and
expects that stock options will continue in the future to be
the predominant if not the exclusive means of providing
long-term incentive compensation to executives.
In 1993, Congress adopted a new provision of the
Internal Revenue Code (the "Code"), Section 162(m), which
disallows a tax deduction to public companies for any
compensation exceeding $1 million paid to certain top
executives. The Committee does not believe the statutory
ceiling on deductible compensation will be relevant to the
Company in the foreseeable future.
Executive Compensation Decisions in 1998
A year ago, when the Committee reviewed executive
compensation at the end of 1997, it noted that the salary
being paid to President and CEO Thomas L. Hoy was
substantially lower than the median CEO salary at the
Company's peer group of banks. The Committee recommended that
the Company move to begin to correct this deficiency and the
full Board awarded Mr. Hoy a significant salary increase for
1998. At year-end 1998, with the Committee's support, the
Board determined to continue this process and further narrow
the gap between Mr. Hoy's salary and the peer group median by
awarding him a substantial salary increase. The other
executive officers also received salary increases for 1999.
In approving these salary increases, the Committee
noted that senior management had performed effectively in
leading the Company to another year of solid financial
performance, as the Company achieved record earnings. At the
same time, total loans showed impressive growth and asset
quality improved.
Mr. Hoy and his executive team also merited
significant awards, in the Committee's view, under the other
two components of executive compensation, annual incentive
compensation and long-term incentive compensation.
Operating earnings in 1998 exceeded both the threshold
and target levels previously established under the Short-Term
Incentive Award Plan. As a result, the Committee approved
annual bonuses for key employees, including the executive
officers as well as the other key employees covered under this
Plan. These bonuses were reviewed and ratified by the full
Board. The individual bonuses received by the executive
officers are listed in the Summary Compensation Table on page
6.
Because of significant improvement in all continuing
key performance areas, the Committee also determined at year-
end 1998 that grants of stock options would be awarded to the
executive officers. The number of options awarded to each
named executive in the Summary Compensation Table on page 6 is
included in column (d) of the table and the estimated present
value of those options is included in column (e) of the
Option/SAR Grants Table on page 7.
In reviewing executive compensation specifically, as
in prior years, the Committee used as a basis of comparison
the reported executive compensation of a peer group of
publicly held bank holding companies located in New York.
This year there were 10 companies in that peer group. This
peer group is different from, but contains some of the same
banks as, the group of companies whose stocks are included in
the NASDAQ Bank Stock Index represented on the Performance
Graph on page 9 of the proxy statement.
PERSONNEL COMMITTEE
Michael B. Clarke, Chairman
Dr. Edward F. Huntington
David G. Kruczlnicki
Michael F. Massiano
EMPLOYMENT CONTRACTS
Thomas L. Hoy, President and Chief Executive Officer
of the Company, and John J. Murphy, Executive Vice President,
Treasurer, and Chief Financial Officer of the Company, are
serving under employment contracts with the Company. Under
these contracts, each is guaranteed his current base annual
salary, and certain other benefits for the duration of his
contract. Mr. Hoy and Mr. Murphy first entered into
employment agreements with the Company on December 31, 1990.
Each of these contracts will continue until December 31 of
the second year after that year, if any, when the Board of
Directors of the Company elects not to grant a one year
extension of the contract. Each contract provides that, in
the event of a change-in-control of the Company, or if the
officer in question is assigned less important duties, the
officer may within 1 year after such occurrence, elect early
retirement and receive an amount payable in installments (or
in a lump sum, in the event of financial hardship) equal to
approximately three times his salary under the contract.
Also, Mr. Hoy's contract includes a death benefit under which,
in the event of his death during the term of the contract, his
beneficiary will receive a payment equal to his base salary at
the time. In 1998, the Company extended a change-in-control
arrangement to John C. Van Leeuwen, Senior Vice President and
Chief Credit Officer of the Company, similar to the
change-in-control features of the contracts for Messrs. Hoy
and Murphy. Under Mr. Van Leeuwen's arrangement, if there
is a change-in-control of the Company, he would be entitled to
receive a lump sum cash payment equal to two year's base
salary, plus certain continuing insurance coverage.
COMPENSATION OF DIRECTORS
Each director of the Company currently receives for
his or her services as a director a fee of $500 per quarterly
Board of Directors meeting attended, $400 per meeting attended
of committees of the Board of which he or she is a member, and
an annual retainer fee of $5,000. The Chairmen of the
Company's Audit and Personnel Committees receive an additional
annual retainer of $1,500. Directors of the subsidiary banks
receive a fee of $400 per Board meeting attended and also
receive a fee of $350 for each meeting of the bank board
committee attended and an annual retainer of $3,000.
Directors who are also Executive Officers receive no
director's fees, including retainer fees or fees for
attendance at Board or Committee meetings.
The Company maintains an unfunded Directors Deferred
Compensation Plan, in which outside directors of the Company
and its subsidiaries may participate. Under this plan, each
such director is able to make an irrevocable election to
defer, during his or her term of office, all or a portion of
the directors' fees due. The account of a participating
director is credited with the dollar amount of deferral and
with quarterly interest payments on the balance at a rate
equal to the best rate being paid from time to time by Glens
Falls National Bank and Trust Company on its Individual
Retirement Account certificates of deposit. Directors who
participate in the Directors Deferred Compensation Plan
receive payments from their accounts in cash, either in lump
sum or in annual installments, commencing at a preselected
deferral date. In 1998, 2 directors participated in the plan.
PENSION PLAN
The Company maintains a tax-qualified Defined Benefit
Retirement Plan (the "Retirement Plan") for eligible
employees. The Retirement Plan covers employees of the
Company and all subsidiaries who work 1,000 hours or more per
year, have attained the age of 21, and have completed one year
of service.
Annual retirement benefits under the Retirement Plan
are computed according to a formula based on the employee's
annual average earnings for the highest consecutive five of
the last ten years of service and his or her number of years
of service and are subject to certain limits under federal
law, specifically, the Employee Retirement Income Security Act
("ERISA"). Covered compensation under the Retirement Plan
includes salary, overtime, sick pay, bonuses, and certain
other cash and noncash benefits. Covered compensation under
the Plan during 1998 for the named executive officers in the
Summary Compensation Table on page 6 includes all of the
compensation listed in columns (a) and (b) of the Summary
Compensation Table plus certain term insurance premiums paid
on behalf of the executive officers (included in column (e) of
the Table) plus certain amounts not included in the Table
(i.e., the Company's matching contributions to the officers'
Employee Stock Purchase Plan accounts, the dollar value of
limited perquisites provided by the Company to the named
executive officer, and any compensation realized upon exercise
of nonqualified stock options).
The Company also maintains an unfunded Select
Executive Retirement Plan ("SERP"), which contains both a
pension supplement feature and a special early retirement
feature. The pension supplement feature is structured so as
to provide for a supplemental payment, upon retirement, to
those senior officers who are selected to participate in this
feature of the SERP, equal to any pension benefits which would
have been received by them under the Company's Retirement Plan
described above were it not for the maximum payment
limitations for such plans established under ERISA. Mr. Hoy
and Mr. Murphy have been selected to participate at such time
in the pension supplement feature of the SERP. Under the
special early retirement feature of the SERP, certain of the
senior officers who retire early may be approved by the Board
at such time to receive an additional retirement payment, in
a series of installments or, with the approval of the Board at
retirement, in a lump sum.
The table below represents estimated annual retirement
benefits payable under the Company's Retirement Plan and SERP
to persons having specified final average earnings and years
of service, assuming such persons have been selected to
participate in the SERP's pension supplement feature (but
excluding any amounts that might be receivable under the
SERP's special early retirement feature.)
<TABLE>
<CAPTION>
Estimated Annual Pension Based
on Years of Service Indicated
For Those Retiring at Age 65 in 1999
Average Annual Earnings
For Last 5 Years of
Service 15 20 25 30
<S> <C> <C> <C> <C>
$100,000 $23,771 $ 31,694 $ 39,617 $ 47,542
150,000 36,896 49,194 61,492 73,792
200,000 50,021 66,694 83,367 100,042
250,000 63,146 84,194 105,242 126,292
300,000 76,271 101,694 127,786 152,542
350,000 89,396 119,194 148,992 178,792
</TABLE>
The number of credited years of service under the
Retirement Plan as of December 31, 1998, for each of the named
executive officers in the Summary Compensation Table is as
follows: 24 years for Mr. Hoy, 25 years for Mr. Murphy and 13
years for Mr. Van Leeuwen.
Benefits under the Plan are computed as straight-life
annuity amounts although participants may make certain
alternative elections upon or before retirement. Amounts
payable to executives under the Retirement Plan and the SERP
are not subject to offset for Social Security benefits.
TRANSACTIONS WITH DIRECTORS, OFFICERS AND ASSOCIATES
Some of the nominees for director, continuing
directors, and executive officers of the Company (and members
of their immediate families and corporations, organizations,
trusts and estates with which these individuals are
associated) have, at some time since January 1, 1998, been
indebted to one or more of the Company's subsidiary banks in
amounts of $60,000 or more. All such loans were made in the
ordinary course of business, did not involve more than normal
risk of collectability or present other unfavorable features,
and were made on substantially the same terms, including
interest rates and collateral requirements, as those
prevailing at the same time for comparable loan transactions
by the lending bank with unaffiliated persons. No such loan
is classified by the lending bank at present as a non-accrual,
past due, restructured or potential problem loan.
Director John J. Carusone, Jr. is an attorney in the
firm of Carusone and Carusone, Saratoga Springs, New York.
During 1998, Mr. Carusone's firm rendered legal services to
the Company's subsidiary, Saratoga National Bank and Trust
Company, on a variety of matters, billed at regular firm
rates.
Outside of these and other normal customer
relationships, none of these persons (or members of their
immediate families) presently maintains or has maintained
since January 1, 1998, directly or indirectly, any significant
business or personal relationship with the Company other than
such as might arise by virtue of his/her position with, or
ownership interest in, the Company.
INDEPENDENT AUDITORS
KPMG LLP, Certified Public Accountants, were the
auditors for the Company for the year ended December 31, 1998.
The Audit Committee and Board are in the process of selecting
the auditors for 1999. Representatives of KPMG LLP are
expected to be present at the Meeting and will have an
opportunity to make a statement if they so desire, and it is
expected that they will be available to respond to appropriate
questions from shareholders.
OTHER MATTERS
The Board of Directors of the Company is not aware of
any other matters that may come before the Meeting. However,
the proxies may be voted with discretionary authority with
respect to any other matters that may properly come before the
Meeting.
By Order of the Board of Directors
GERARD R. BILODEAU
Secretary
March 12, 1999
PROXY
ARROW FINANCIAL CORPORATION
250 GLEN STREET
GLENS FALLS, NY 12801
ANNUAL MEETING OF SHAREHOLDERS - APRIL 14, 1999
THIS PROXY IS SOLICITED BY THE BOARD OF
DIRECTORS OF ARROW FINANCIAL CORPORATION
The undersigned shareholder(s) of Arrow Financial
Corporation, a New York corporation (the "Company") hereby
appoint(s) Robert G. Landry and Bernard F. McPhillips, or
either of them, with the full power to act alone, the
proxies of the undersigned, with full power of substitution
and revocation, to vote all the shares of Common Stock of
the Company, which the undersigned is entitled to vote, at
the Annual Meeting of Shareholders of the Company to be
held at the Queensbury Hotel, Maple and Ridge Streets, Glens
Falls, New York 12801, at 10:00 a.m. on Wednesday, April 14,
1999, and at any adjournment thereof, with all powers the
undersigned would possess if personally present as follows:
(To be Signed on Reverse Side.)
[ X ] Please mark your votes as in this example using dark
ink only.
1. Election of Directors
[ ] FOR all nominees listed at right (except as limited
below)
[ ] WITHHOLD authority to vote for all nominees listed at
right
Instruction: To withhold authority to vote for any
individual nominee(s), write the name(s) in the space
provided.
_________________________________
Nominees: Class A: Michael B. Clarke
Kenneth C. Hopper
Michael F. Massiano
You are requested to complete, date and sign this card and
return this Proxy promptly to:
American Stock Transfer & Trust Company
40 Wall Street, 46 Fl.
New York, NY 10269-0436
This Proxy will be voted as directed herein. IF NO DIRECTION
IS GIVEN, THIS PROXY WILL BE VOTED "FOR" PROPOSAL 1. If any
other business is properly presented at the Annual Meeting,
or any adjournments thereof, this Proxy will be voted at the
discretion of the proxies or in accordance with the
recommendation of Arrow's Board of Directors. The
undersigned hereby revoke(s) any proxies heretofore given by
the undersigned to vote at the Annual Meeting, or any
adjournments thereof.
__________________
DATE
_______________________________
SIGNATURE
_______________________________
SIGNATURE
IF HELD JOINTLY
Note: If the shares are registered in more than one name,
each joint owner or fiduciary should sign personally.
Persons signing as executors, adminstrators, trustees,
corporate officers, or in other representative capacities
should so indicate.
