SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.
FORM 10-Q
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended March 31, 1999
[ ] TRANSITION REPORT PURSUANT TO
SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number: 0-12507
ARROW FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
New York 22-2448962
(State or other jurisdiction of (IRS Employer Identification
incorporation or organization) Number)
250 GLEN STREET, GLENS FALLS, NEW YORK 12801
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (518) 745-1000
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for
shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past
90 days.
Yes X No
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Class Outstanding as of April 30, 1999
Common Stock, par value $1.00 per share 6,149,160
ARROW FINANCIAL CORPORATION
FORM 10-Q
MARCH 31, 1999
INDEX
PART I FINANCIAL INFORMATION
Item 1. Consolidated Balance Sheets as of March 31, 1999
and December 31, 1998
Consolidated Statements of Income for the
Three Months Ended March 31, 1999 and 1998
Consolidated Statements of Changes in
Shareholders' Equity for the
Three Months Ended March 31, 1999 and 1998
Consolidated Statements of Cash Flows for the
Three Months Ended March 31, 1999 and 1998
Notes to Consolidated Interim Financial
Statements
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
Cautionary Statement under Federal Securities
Laws
Year 2000 Readiness Disclosure
Item 3. Quantitative and Qualitative Disclosures About
Market Risk
PART II OTHER INFORMATION
SIGNATURES
<PAGE>
<TABLE>
<CAPTION>
ARROW FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)(Unaudited)
3/31/99 12/31/98
ASSETS
<S> <C> <C>
Cash and Due from Banks $ 18,968 $ 24,246
Federal Funds Sold 12,400 6,500
Cash and Cash Equivalents 31,368 30,746
Securities Available-for-Sale 252,108 267,731
Securities Held-to-Maturity (Approximate Fair Value of
$53,290 in 1999 and $65,055 in 1998) 52,023 63,016
Loans and Leases 573,918 546,126
Less: Allowance for Loan Losses (6,957) (6,742)
Net Loans and Leases 566,961 539,384
Premises and Equipment, Net 11,125 11,103
Other Real Estate and Repossessed Assets, Net 644 665
Other Assets 27,039 26,384
Total Assets $941,268 $939,029
LIABILITIES
Deposits:
Demand $ 94,620 $101,860
Regular Savings, N.O.W. & Money Market Deposit Accounts 343,929 355,002
Time Deposits of $100,000 or More 143,673 123,039
Other Time Deposits 196,055 195,696
Total Deposits 778,277 775,597
Short-Term Borrowings:
Securities Sold Under Agreements to Repurchase 23,549 22,275
Other Short-Term Borrowings 3,772 1,757
Federal Home Loan Bank Advances 45,000 45,000
Other Liabilities 13,568 17,254
Total Liabilities 864,166 861,883
Commitments and Contingent Liabilities
SHAREHOLDERS' EQUITY
Preferred Stock, $5 Par Value; 1,000,000 Shares Authorized --- ---
Common Stock, $1 Par Value; 20,000,000 Shares Authorized
(7,596,477 Shares Issued in 1999 and 1998) 7,596 7,596
Surplus 87,333 87,262
Undivided Profits 8,444 6,721
Accumulated Other Comprehensive Income 23 579
Unallocated ESOP Shares (62,131 Shares in 1999 and
56,795 Shares in 1998) (1,700) (1,555)
Treasury Stock, at Cost (1,345,929 Shares in 1999 and
1,311,518 Shares in 1998) (24,594) (23,457)
Total Shareholders' Equity 77,102 77,146
Total Liabilities and Shareholders' Equity $941,268 $939,029
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
Ended March 31,
1999 1998
<S> <C> <C>
INTEREST AND DIVIDEND INCOME
Interest and Fees on Loans and Leases $11,307 $ 10,627
Interest on Federal Funds Sold 183 125
Interest and Dividends on Securities Available-for-Sale 3,829 3,686
Interest on Securities Held-to-Maturity 849 716
Total Interest and Dividend Income 16,168 15,154
INTEREST EXPENSE
Interest on Deposits:
Time Deposits of $100,000 or More 1,498 1,380
Other Deposits 4,630 4,995
Interest on Short-Term Borrowings:
Federal Funds Purchased and Securities Sold
Under Agreements to Repurchase 249 254
Other Short-Term Borrowings 30 28
Federal Home Loan Bank Advances 548 45
Total Interest Expense 6,955 6,702
NET INTEREST INCOME 9,213 8,452
Provision for Loan Losses 364 342
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 8,849 8,110
OTHER INCOME
Income from Fiduciary Activities 799 761
Fees for Other Services to Customers 1,019 957
Net Gains on Securities Transactions --- 157
Other Operating Income 226 232
Total Other Income 2,044 2,107
OTHER EXPENSE
Salaries and Employee Benefits 3,688 3,259
Occupancy Expense of Premises, Net 469 419
Furniture and Equipment Expense 579 551
Other Operating Expense 1,729 1,560
Total Other Expense 6,465 5,789
INCOME BEFORE INCOME TAXES 4,428 4,428
Provision for Income Taxes 1,340 1,525
NET INCOME $ 3,088 $ 2,903
Average Basic Common Shares Outstanding 6,213 6,340
Average Diluted Common Shares Outstanding 6,298 6,443
Per Common Share:
Basic Earnings $ .50 $ .46
Diluted Earnings .49 .45
Dividends Declared .22 .19
Book Value 12.46 11.90
Tangible Book Value 10.42 9.75
Share and per share amounts have been adjusted for the 1998 ten 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
Other
Unallocated Compre-
Shares Common Undivided ESOP hensive Treasury
Issued Stock Surplus Profits Shares Income Stock Total
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1998 7,596,477 $7,596 $87,262 $6,721 $(1,555) $579 $(23,457) $77,146
Comprehensive Income, Net of Tax:
Net Income --- --- --- 3,088 --- --- --- 3,088
Net Unrealized Gain on Securities
Transfered from Held-to-Maturity
to Available-for-Sale Upon the
Adoption of SFAS No. 133
(Pre-tax $177) --- --- --- --- --- 105 --- 105
Net Unrealized Securities Holding
Losses Arising During the Period,
Net of Tax (Pre-tax $1,118) --- --- --- --- --- (661) --- (661)
Other Comprehensive Income (556)
Comprehensive Income 2,532
Cash Dividends Declared,
$.22 per Share --- --- --- (1,365) --- --- --- (1,365)
Stock Options Exercised
(11,007 Shares) --- --- 7 --- --- --- 106 113
Tax Benefit for Disposition of
Stock Options --- --- 64 --- --- --- --- 64
Purchase of Treasury Stock
(45,418 Shares) --- --- --- --- --- --- (1,243) (1,243)
Acquisition of Common Stock
By ESOP (9,000 Shares) --- --- --- --- (255) --- --- (255)
Allocation of ESOP Stock
(3,664 Shares) --- --- --- --- 110 --- --- 110
Balance at March 31, 1999 7,596,477 $7,596 $87,333 $8,444 $(1,700) $23 $(24,594) $77,102
Balance at December 31, 1997 6,905,888 $6,906 $65,277 $22,531 $--- $764 $(21,607) $73,871
Comprehensive Income, Net of Tax:
Net Income --- --- --- 2,903 --- --- --- 2,903
Net Unrealized Securities Holding
Losses Arising During the Period,
Net of Tax (Pre-tax $122) --- --- --- --- --- (72) --- (72)
Reclassification Adjustment for Net
Securities Gains Included in Net
Income, Net of Tax (Pre-tax $157) --- --- --- --- --- (93) --- (93)
Other Comprehensive Income (165)
Comprehensive Income 2,738
Cash Dividends Declared,
$.19 per Share --- --- --- (1,211) --- --- --- (1,211)
Stock Options Exercised
(4,400 Shares) --- --- 27 --- --- --- 33 60
Tax Benefit for Disposition of
Stock Options --- --- 31 --- --- --- --- 31
Balance at March 31, 1998 6,905,888 $6,906 $65,335 $24,223 $--- $599 $(21,574) $75,489
Share and per share amounts have been adjusted for the 1998 ten percent stock dividend.
See Notes to Consolidated Interim Financial Statements.
/TABLE
<PAGE>
<TABLE>
<CAPTION>
ARROW FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)(Unaudited)
Three Months
Ended March 31,
1999 1998
<S> <C> <C>
Operating Activities:
Net Income $ 3,088 $ 2,903
Adjustments to Reconcile Net Income to Net Cash
Provided by Operating Activities:
Provision for Loan Losses 364 342
Provision for Other Real Estate Owned Losses --- ---
Depreciation and Amortization 466 611
Compensation Expense for Allocated ESOP Shares 110 ---
Gains on the Sale of Securities Available-for-Sale --- (162)
Losses on the Sale of Securities Available-for-Sale --- 5
Proceeds from the Sale of Loans 530 2,981
Net Gains on the Sale of Loans, Fixed Assets and
Other Real Estate Owned (21) (24)
Decrease (Increase) in Deferred Tax Assets (109) (151)
Decrease (Increase) in Interest Receivable (107) 350
Increase (Decrease) in Interest Payable 60 (34)
Decrease (Increase) in Other Assets (337) (199)
Increase (Decrease) in Other Liabilities (3,746) 1,342
Net Cash Provided By Operating Activities 298 7,964
Investing Activities:
Proceeds from the Sale of Securities Available-for-Sale --- 31,151
Proceeds from the Maturities and Calls of Securities
Available-for-Sale 54,437 17,406
Purchases of Securities Available-for-Sale (20,733) (48,832)
Proceeds from the Maturities and Calls of Securities
Held-to-Maturity 1,724 1,111
Purchases of Securities Held-to-Maturity (9,666) (7,975)
Net Increase in Loans and Leases (28,527) (13,346)
Proceeds from the Sales of Fixed Assets and
Other Real Estate Owned 103 8
Purchase of Fixed Assets (297) (200)
Net Cash Used In Investing Activities (2,959) (20,677)
Financing Activities:
Net Increase (Decrease) in Deposits 2,680 (5,644)
Net Increase in Short-Term Borrowings 3,289 3,195
Federal Loan Home Bank Advances --- 15,000
Purchase of Treasury Stock (1,169) ---
Exercise of Stock Options 38 60
Disqualifying Disposition of Incentive Stock Options 65 31
Acquisition of Common Stock by ESOP (255) ---
Cash Dividends Paid (1,365) (1,211)
Net Cash Provided By Financing Activities 3,283 11,431
Net Increase (Decrease) in Cash and Cash Equivalents 622 (1,282)
Cash and Cash Equivalents at Beginning of Period 30,746 46,909
Cash and Cash Equivalents at End of Period $31,368 $45,627
Supplemental Cash Flow Information:
Interest Paid $ 6,895 $ 6,736
Income Taxes Paid 4,671 152
Transfer of Loans to Other Real Estate Owned and
Repossessed Assets 60 71
Transfer of Securities from Held-to-Maturity to
Available-for-Sale upon Adoption of SFAS No. 133
at Amortized Cost (Fair Value of $20,736) 20,559 ---
See Notes to Consolidated Interim Financial Statements.
</TABLE>
ARROW FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED INTERIM FINANCIAL
STATEMENTS
FORM 10-Q
MARCH 31, 1999
1. Financial Statement Presentation
In the opinion of the management of Arrow Financial Corporation
(the "Company"), the accompanying consolidated interim financial
statements contain all of the adjustments necessary to present fairly
the financial position as of March 31, 1999 and December 31, 1998;
the results of operations for the three month periods ended March
31, 1999 and March 31, 1998; the statements of changes in
shareholders' equity for the three month periods ended March 31,
1999 and 1998; and the statements of cash flows for the three
month periods ended March 31, 1999 and March 31, 1998. All such
adjustments are of a normal recurring nature. Certain items have
been reclassified to conform to the 1999 presentation. Share and
per share amounts have been restated to reflect the 1998 ten
percent stock dividend. The consolidated interim financial
statements should be read in conjunction with the annual
consolidated financial statements of the Company on Form 10-K for
the year ended December 31, 1998.
2. Accumulated Other Comprehensive Income (In Thousands)
The following table presents the components, net of tax, of
accumulated other comprehensive income as of March 31, 1999
and December 31, 1998:
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
Excess of Additional Pension Liability Over
Unrecognized Prior Service Cost $(44) $(44)
Net Unrealized Holding Gains on Securities Available-for-Sale 67 623
Total Accumulated Other Comprehensive Income $ 23 $579
</TABLE>
3. 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. The
Company chose to adopt SFAS No. 133 in the first quarter of 1999.
At the time of adoption, the Company elected to reclassify certain
securities previously classified as held-to-maturity as
available-for-sale, as allowed under SFAS No. 133. The net unrealized
holding gains on the securities transferred of $177 thousand (pre-tax) was
recorded as a transition adjustment in accumulated other
comprehensive income. The Company has no derivative
instruments or derivative instruments embedded in other contracts.
4. Earnings Per Common Share (In Thousands, Except Per Share
Amounts)
The following table presents a reconciliation of the numerator and
denominator used in the calculation of basic and diluted earnings
per common share (EPS) for the three month periods ended March
31, 1999 and 1998. Shares outstanding have been restated for the
1998 ten percent stock dividend.
<TABLE>
<CAPTION>
Income Shares Per Share
(Numerator) ( Denominator) Amount
<S> <C> <C> <C>
For the Three Months Ended March 31, 1999:
Basic EPS: Income Available to Common Shareholders $3,088 $6,213 $.50
Dilutive Effect of Stock Options --- 85
Diluted EPS: Income Available to Common Shareholders
and Assumed Conversions $3,088 6,298 $.49
For the Three Months Ended March 31, 1998:
Basic EPS: Income Available to Common Shareholders $2,903 6,340 $.46
Dilutive Effect of Stock Options --- 103
Diluted EPS: Income Available to Common Shareholders
and Assumed Conversions $2,903 6,443 $.45
/TABLE
<PAGE>
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
March 31, 1999, and the related consolidated statements of
income, changes in shareholders' equity and cash flows for the
three-month periods ended March 31, 1999 and 1998. 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, 1998, 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 22, 1999, 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, 1998, is fairly stated, in all material respects, in
relation to the consolidated balance sheet from which it has been
derived.
/s/ KPMG LLP
Albany, New York
April 16, 1999<PAGE>
Item 2.
ARROW FINANCIAL CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
MARCH 31, 1999
Cautionary Statement under Federal Securities Laws: The
information contained in this Quarterly Report on Form 10-Q
contains statements that are not historical in nature but rather are
based on management's beliefs, assumptions, expectations,
estimates and projections about the future. These statements are
"forward-looking statements" within the meaning of Section 21E of
the Securities Exchange Act of 1934, as amended, and involve a
degree of uncertainty and attendant risk. 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, are merely
presentations of what future performance may look like based on
hypothetical assumptions and on simulation models. Other
forward-looking statements, such as those dealing with the
Company's program to deal with the so-called "Year 2000
Problem," involve speculation about a broad range of factors, many
of which are beyond the Company's control or its ability to evaluate
with any degree of precision. These statements are not guarantees
of future performance and involve certain risks and uncertainties
that are difficult to quantify or, in some cases, to identify. In the
case of all forward-looking statements, actual outcomes and
results may differ materially from what the statements predict or
forecast. Factors that could cause or contribute to such differences
include, but are not limited to, changes in economic and market
conditions (including unanticipated fluctuations in interest rates),
effects of state and federal regulation, prevailing levels of
competition, emerging technologies and the Company's ability to
adapt thereto, 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. This
quarterly report should be read in conjunction with the Company's
Annual Report on Form 10-K for December 31, 1998.
Arrow Financial Corporation (the "Company") is a two bank holding
company headquartered in Glens Falls, New York. The banking
subsidiaries are Glens Falls National Bank and Trust Company
("GFNB") whose main office is located in Glens Falls, New York
and Saratoga National Bank and Trust Company whose main office
is located in Saratoga Springs, New York.
Peer Group Comparisons: At certain points in the ensuing
discussion and analysis, the Company's performance is compared
with that of its peer group of financial institutions. Peer data has
been obtained from the Federal Reserve Board's "Bank Holding
Company Performance Reports." The Company's peer group is
comprised of bank holding companies with $500 million to $1 billion
in total consolidated assets.
<TABLE>
<CAPTION>
OVERVIEW
Selected Quarterly Information:
(Dollars In Thousands, Except Per Share Amounts)
Mar 1999 Dec 1998 Sep 1998 Jun 1998 Mar 1998
<S> <C> <C> <C> <C> <C>
Net Income $3,088 $3,166 $2,906 $2,860 $2,903
Net Securities Gains, Net of Tax --- 143 --- 5 93
Diluted Earnings Per Share .49 .50 .45 .44 .45
Diluted Earnings Per Share, Based on Core Net Income 1 .49 .48 .45 .44 .44
Diluted Earnings Per Share, Cash Basis 2 .51 .52 .48 .47 .47
Return on Average Assets 1.34% 1.38% 1.31% 1.33% 1.42%
Return on Average Equity 16.17 16.23 15.02 15.09 15.71
Net Interest Margin 3 4.40 4.31 4.28 4.48 4.56
Efficiency Ratio 4 53.90 54.66 56.62 55.15 54.31
Total Average Assets $933,158 $912,301 $882,312 $865,983 $831,495
Tier 1 Leverage Ratio 6.95% 7.10% 7.23% 7.32% 7.51%
Book Value per Share $12.46 $12.39 $12.39 $12.09 $11.90
Tangible Book Value per Share 10.42 10.32 10.32 9.97 9.75
1 Core Net Income excludes one time material nonrecurring income, expenses and gains/losses on securities
transactions.
2 Cash Earnings Per Share adds back to Core Net Income the amortization, net of tax, of goodwill associated with
branch transactions.
3 Net Interest Margin is the ratio of tax-equivalent net interest income to average earning assets.
4 The Efficiency Ratio is the ratio of core noninterest expense to the sum of tax-equivalent core net interest
income and core noninterest income.
</TABLE>
The Company reported earnings of $3.1 million for the first quarter
of 1999, an $185 thousand increase, or 6.4%, over the first quarter
of 1998. Diluted earnings per share were $.49 and $.45 for the two
respective periods.
The returns on average assets were 1.34% and 1.42% for the first
quarter of 1999 and 1998, respectively. The returns on average
equity were 16.17% and 15.71% for the first quarter of 1999 and
1998, respectively.
Total assets were $941 million at March 31, 1999, which
represented an increase of $2.2 million, or 0.2%, from December
31, 1998, and an increase of $94.2 million, or 11.1%, above the level
at March 31, 1998. On the asset side of the balance sheet, the
Company experienced strong internal growth in the loan portfolio
from March 31, 1998 to March 31, 1999 as total loans increased
15.7%. The largest source of net new funds was internally
generated deposits which increased by $60 million during the twelve
month period. The Company also borrowed $30 million in long-term
advances from the Federal Loan Home Bank ("FHLB") during the
period.
Shareholders' equity decreased $44 thousand during the first three
months of 1999, as net income of $3.1 million was offset by cash
dividends of $1.4 million, common stock repurchases of $1.2 million
and net unrealized securities losses of $556 thousand. The
Company's risk-based capital ratios and Tier 1 leverage ratio
continued to exceed regulatory minimum requirements at period-end
and both Company banks qualified as "well-capitalized" under
federal bank guidelines.
<TABLE>
<CAPTION>
CHANGE IN FINANCIAL CONDITION
Summary of Consolidated Balance Sheets
(Dollars in Thousands)
$ Change $ Change % Change % Change
Mar 1999 Dec 1998 Mar 1998 From Dec From Mar From Dec From Mar
<S> <C> <C> <C> <C> <C> <C> <C>
Federal Funds Sold $ 12,400 $ 6,500 $ 18,700 $ 5,900 $(6,300) 47.6% (33.7)%
Securities Available for Sale 252,108 267,731 221,959 (15,623) 30,149 (6.2) 13.6
Securities Held to Maturity 52,023 63,016 50,848 (10,993) 1,175 (21.1) 2.3
Loans, Net of Unearned Income1 573,918 546,126 495,962 27,792 77,956 4.8 15.7
Allowance for Loan Losses 6,957 6,742 6,375 215 582 3.1 9.1
Earning Assets1 890,449 883,373 787,469 7,076 102,980 0.8 13.1
Total Assets 941,268 939,029 847,075 2,239 94,193 0.2 11.1
Demand Deposits $ 94,620 $101,860 $ 90,202 $ (7,240) $ 4,418 (7.7) 4.9
Regular, N.O.W. &
Money Market Savings Accounts 343,929 355,002 326,380 (11,073) 17,549 (3.2) 5.4
Time Deposits of $100,000 or More 143,673 123,039 105,425 20,634 38,248 14.4 36.3
Other Time Deposits 196,055 195,696 193,264 359 2,791 0.2 1.4
Total Deposits $778,277 $775,597 $715,271 $ 2,680 $ 63,006 0.3 8.8
Short-Term Borrowings $ 27,321 $ 24,032 $ 27,950 $3,289 $ (629) 12.0 2.3
Federal Home Loan Bank Advances 45,000 45,000 15,000 --- 30,000 --- ---
Shareholders' Equity 77,102 77,146 75,489 (44) 1,613 (0.1) 2.1
1 Includes Nonaccrual Loans
</TABLE>
Total assets were $941 million at March 31, 1999, which
represented an increase of $2.2 million, or 0.2%, from December
31, 1998, and an increase of $94.2 million, or 11.1%, above the level
at March 31, 1998.
Total loans at March 31, 1999 amounted to $574 million, an
increase of $28 million, or 4.8%, from December 31, 1998, and an
increase of $78 million, or 15.7%, from March 31, 1998. The
increase from March 31, 1998 was primarily attributable to the
growth within the indirect and residential real estate portfolios.
Indirect consumer loans are principally auto loans financed through
local dealerships where the Company acquires the dealer paper.
Total deposits of $778 million at March 31, 1999 were virtually
unchanged from the December 31, 1998 level. Total deposits at
March 31, 1999 represented an increase of $63 million, or 8.8%,
from March 31, 1998. While the Company experienced growth in
all types of deposit accounts from March 31, 1998 to March 31,
1999, over half of the year-to-year increase was attributable to time
deposits of $100,000 or more, primarily from municipalities in the
Company's market area.
Shareholders' equity decreased $44 thousand during the first three
months of 1999, as net income of $3.1 million was offset by cash
dividends of $1.4 million, common stock repurchases of $1.2 million
and net unrealized securities losses of $556 thousand.
Shareholders' equity was also influenced by the exercise of incentive
stock options by employees and the loan amounts borrowed and/or
repaid during the period by the Company's leveraged ESOP.
Current period changes in shareholders' equity are presented in the
Consolidated Statements of Changes in Shareholders' Equity. The
Company paid a $.22 cash dividend per share for the past two
quarters, which followed dividends of $.21 and $.19 for the prior two
quarters. The Company recently announced a $.22 dividend for the
second quarter of 1999.
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 balances by deposit type and the relative
proportion of each deposit type for each of the last five quarters.
<TABLE>
<CAPTION>
Quarterly Average Deposit Balances
(Dollars in Thousands)
Mar 1999 Dec 1998 Sep 1998 Jun 1998 Mar 1998
Amount % Amount % Amount % Amount % Amount %
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Demand Deposits $ 97,809 13 $ 98,254 13 $101,053 14 $ 92,590 13 $ 92,584 13
Interest-Bearing Demand Deposits 187,791 24 182,290 24 165,547 22 170,394 23 166,494 23
Regular and Money Market Savings 162,029 21 160,347 21 167,066 22 161,009 22 158,997 22
Time Deposits of $100,000 or More 122,342 16 116,394 16 116,375 16 113,672 15 102,263 14
Other Time Deposits 196,656 26 196,642 26 195,567 26 193,865 27 195,039 28
Total Deposits $766,627 100 $753,927 100 $745,608 100 $731,530 100 $715,377 100
</TABLE>
The Company typically experiences little net deposit growth in the first
quarter of the year due to seasonality factors. Over the periods
presented above, the Company experienced steady growth in virtually
all categories of deposits, with proportionately slightly faster growth
in time deposits of $100,000 or more, which was attributable to a
significant increase in municipal deposits. Other time deposits
remained virtually unchanged over the period, and in proportion to
other categories of deposits declined somewhat. The deposit growth
during the period was achieved through the Company's existing base
of branches. The Company has announced plans to open two new
branches later in the year, one each in the Glens Falls and Saratoga
Springs market areas.
<TABLE>
<CAPTION>
Quarterly Average Rate Paid on Deposits
Mar 1999 Dec 1998 Sep 1998 Jun 1998 Mar 1998
<S> <C> <C> <C> <C> <C>
Demand Deposits --- % --- % --- % --- % --- %
Interest-Bearing Demand Deposits 2.62 2.79 2.83 2.92 2.99
Regular and Money Market Savings 2.23 2.35 2.68 2.71 2.75
Time Deposits of $100,000 or More 4.96 5.26 5.45 5.49 5.47
Other Time Deposits 5.21 5.36 5.40 5.52 5.57
Total Deposits 3.24 3.38 3.52 3.59 3.61
</TABLE>
<TABLE>
<CAPTION>
Key Interest Rate Changes 1996 - 1999
Federal
Discount Funds Prime
Date Rate Rate Rate
<S> <C> <C> <C>
November 17, 1998 4.50% 4.75% 7.75%
October 8, 1998 4.75 5.00 8.00
September 29, 1998 4.75 5.25 8.25
March 26, 1997 4.75 5.50 8.50
January 31, 1996 5.00 5.25 8.00
</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.
In the last quarter of 1998, the Federal Reserve Board took actions
resulting in three 25 basis point decreases in the federal funds and
prime rates. Accordingly, the Company experienced a decrease in
the cost of all deposit types during the past two quarters.
In the recent past, other sources of short-term borrowings for the
Company have included repurchase agreements (essentially a
substitute deposit product) and tax deposit balances with the U.S.
Treasury. Incrementally during 1998, the Company borrowed $45
million from the FHLB in the form of "convertible advances." These
advances have a final maturity of 5 - 10 years and are callable by the
FHLB at certain dates beginning no earlier than one year from the
issuance date. If the advances are called, the Company may elect
to have the funds replaced by the FHLB at the then prevailing market
rate of interest.
The following table presents the quarterly average balances by loan
type and the relative proportion of each loan type for
each of the last five quarters.
<TABLE>
<CAPTION>
Quarterly Average Loan Balances
(Dollars in Thousands)
Mar 1999 Dec 1998 Sep 1998 Jun 1998 Mar 1998
Amount % Amount % Amount % Amount % Amount %
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial and Commercial Real Estate $105,353 19 $ 99,718 18 $ 98,177 19 103,805 21 $102,983 21
Residential Real Estate 189,293 34 181,211 34 173,598 33 162,071 32 151,417 31
Home Equity 31,787 5 32,782 6 33,474 7 35,331 7 36,593 7
Indirect Consumer Loans 183,792 33 172,921 32 161,508 31 151,603 30 143,495 29
Direct Consumer Loans 42,886 8 46,033 9 46,253 9 46,495 9 49,084 10
Credit Card Loans 6,691 1 6,841 1 6,855 1 7,138 1 7,413 2
Total Loans $559,802 100 $539,506 100 $519,865 100 $506,443 100 $490,985 100
</TABLE>
Total average loans increased at a steady pace over the five most
recent quarters. While all categories of loans, except for credit card
loans, experienced absolute increases, indirect consumer loans
demonstrated the most significant increase. 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 29% in the first
quarter of 1998 to 32% in the first quarter of 1999. The Company
also experienced strong demand for residential real estate loans,
which grew both in the total dollar amount outstanding and as a
percentage of the total loan portfolio.
Commercial and commercial real estate loans decreased as a
percentage of the total loan portfolio, from 21% in the first quarter of
1998 to 19% in the first quarter of 1999, and also decreased in
absolute terms over the last three quarters of 1998 before
rebounding in the first quarter of 1999 to a level slightly above the
year-earlier level. The Company believes this trend, away from
commercial and commercial real estate loans, is likely to continue
in forthcoming periods, although pronounced fluctuations in portfolio
emphasis are not anticipated.
<TABLE>
<CAPTION>
Quarterly Taxable Equivalent Yield on Loans
Mar 1999 Dec 1998 Sep 1998 Jun 1998 Mar 1998
<S> <C> <C> <C> <C> <C>
Commercial and Commercial Real Estate 8.94% 9.22% 9.50% 10.24% 9.60%
Residential Real Estate 7.70 7.77 7.86 8.13 8.34
Home Equity 8.45 8.78 9.00 9.10 9.07
Indirect Consumer Loans 7.88 8.11 8.13 8.16 8.17
Direct Consumer Loans 9.03 8.72 8.55 9.00 9.18
Credit Card Loans 15.70 15.02 15.51 16.34 16.41
Total Loans 8.23 8.38 8.51 8.83 8.82
</TABLE>
As reflected in the arverage rate paid on deposits analysis earlier, the
yield on the loan portfolio is affected by changes in market rates.
Many of the loans in the commercial portfolio have variable rates tied
to prime or U.S. treasury indices. Additionally, there is a significant
amount of cash flow from normal amortization and prepayments in
all loan categories, which reprices at current rates as new loans are
generated. The yield on residential real estate loans is impacted by
the high volume of new loans coming into the portfolio at lower rates
than the existing loans. As a result of the Federal Reserve Board's
actions in the fall of 1998, precipitating a 75 basis point decrease in
the federal funds and prime rates, the Company experienced a
general decrease in the yields on the loan portfolio, similar to the
general decrease in rates in the deposit portfolio. The increased yield
for commercial and commercial real estate loans for the second
quarter of 1998 (10.24%) was the result of a full payoff on a large
nonaccrual loan in that period, otherwise, the yield for that period
would have been 9.46%.<PAGE>
The following table presents information related to the Company's
allowance and provision for loan losses for the past five quarters.
The provision for loan losses and net charge-offs are reported on a
year-to-date basis, and are annualized for the purpose of calculating
the ratio of each to average loans for each of the periods presented.
<TABLE>
<CAPTION>
Summary of the Allowance and Provision for Loan Losses
(Dollars in Thousands)(Loans Stated Net of Unearned Income)
Mar 1999 Dec 1998 Sep 1998 Jun 1998 Mar 1998
<S> <C> <C> <C> <C> <C>
Loan Balances:
Period-End Loans $573,918 $546,126 $527,286 $512,984 $495,962
Average Loans, Year-to-Date 559,802 514,348 505,870 498,757 490,985
Allowance for Loan Losses:
Allowance for Loan Losses, Beginning of Period $ 6,742 $ 6,191 $ 6,191 $ 6,191 $ 6,191
Provision for Loan Losses, Y-T-D 364 1,386 1,026 684 342
Net Charge-offs, Y-T-D (149) (835) (569) (407) (158)
Allowance for Loan Losses, End of Period $ 6,957 $ 6,742 $ 6,648 $ 6,468 $ 6,375
Nonperforming Assets:
Nonaccrual Loans $2,512 $2,270 $2,196 $ 2,367 $ 3,615
Loans Past due 90 Days or More
and Still Accruing Interest 96 657 415 360 242
Loans Restructured and in
Compliance with Modified Terms --- --- --- --- ---
Total Nonperforming Loans 2,608 2,927 2,611 2,727 3,857
Repossessed Assets 38 38 12 31 64
Other Real Estate Owned 606 627 606 496 386
Total Nonperforming Assets $3,252 $3,592 $3,230 $ 3,254 $ 4,307
Performance Ratios:
Allowance to Nonperforming Loans 266.76% 230.32% 254.62% 237.18% 165.28%
Allowance to Period-End Loans 1.21 1.23 1.26 1.26 1.29
Provision to Average Loans (annualized) 0.26 0.27 0.27 0.28 0.28
Net Charge-offs to Average Loans (annualized) 0.11 0.16 0.15 0.16 0.13
Nonperforming Assets to Loans,
OREO & Repossessed Assets 0.57 0.66 0.61 0.63 0.87
</TABLE>
The Company's nonperforming assets at March 31, 1999 amounted
to $3.3 million, a decrease of $340 thousand, or 9.5%, from
December 31, 1998. At period-end, nonperforming assets
represented .57% of loans, other real estate owned and repossessed
assets, a decrease of 9 basis points from year-end 1998 and 30 basis
points from the year-earlier level. At December 31, 1998, this ratio
for the Company's peer group was .98%.
On an annualized basis, the ratio of the 1998 first quarter net
charge-offs to average loans was .11%, two basis points lower than the
annualized ratio of net charge-offs to average loans in the
comparable 1998 period of .13%. The provision for loan losses was
$364 thousand for the first quarter of 1999, compared to a provision
of $342 thousand for the first quarter of 1998. The provision as a
percentage of average loans was .26% for the first quarter of 1999,
or 15 basis points higher than net charge-offs for the period. The
increase in the provision for loan losses from $342 thousand in first
quarter of 1998 to $364 thousand for the first quarter of 1999 was
consistent with the general increase in the loan portfolio.
The allowance for loan losses at March 31, 1999 amounted to $7.0
million. The ratio of the allowance to outstanding loans at March 31,
1999, was 1.21%, slightly lower than the ratio at December 31, 1998.
<PAGE>
CAPITAL RESOURCES
Shareholders' equity decreased $44 thousand during the first three
months of 1999, as net income of $3.1 million was offset by cash
dividends of $1.4 million, common stock repurchases of $1.2 million
and net unrealized securities losses of $556 thousand. Shareholders'
equity was also influenced by the exercise of incentive stock options
by employees and the loan amounts borrowed and/or repaid during
the period by the Company's leveraged ESOP. Current period
changes in shareholders' equity are presented in the Consolidated
Statements of Changes in Shareholders' Equity.
The Company and its subsidiaries are currently subject to two sets of
regulatory capital measures, a leverage ratio test and risk-based
capital guidelines. The risk-based guidelines assign weightings to all
assets and certain off-balance sheet items and establish an 8%
minimum ratio of qualified total capital to risk-weighted assets. At
least half of total capital must consist of "Tier 1" capital, which
comprises common equity, retained earnings and a limited amount
of permanent preferred stock, less goodwill. Up to half of total capital
may consist of so-called "Tier 2" capital, comprising a limited amount
of subordinated debt, other preferred stock, certain other instruments
and a limited amount of the allowance for loan losses. The leverage
ratio test establishes minimum limits on the ratio of Tier 1 capital to
total tangible assets, without risk weighting. For top-rated companies,
the minimum leverage ratio is 3%, but lower-rated or rapidly
expanding companies may be required to meet substantially higher
minimum leverage ratios. The FDIC Improvement Act of 1991
("FDICIA") mandated actions to be taken by banking regulators for
financial institutions that are undercapitalized as measured by these
ratios. FDICIA established five levels of capitalization for financial
institutions ranging from "critically undercapitalized" to "well-capitalized."
As of March 31, 1999, 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 7.01% 11.40% 12.63%
Glens Falls National Bank & Trust Co. 7.17 12.31 13.56
Saratoga National Bank & Trust Co. 7.33 8.59 13.25
Regulatory Minimum 3.00 4.00 8.00
FDICIA's "Well-Capitalized" Standard 5.00 6.00 10.00
</TABLE>
All capital ratios for the Company and its subsidiary banks at March
31, 1999 were above minimum capital standards for financial
institutions. Additionally, all Company and subsidiary banks' capital
ratios at that date were above FDICIA's "well-capitalized" standard.
The Company's common stock is traded on The Nasdaq Stock
MarketSM under the symbol AROW. The high and low prices listed
below represent actual sales transactions, as reported by Nasdaq,
rounded to the nearest 1/8 point. Per share amounts and market
prices have been adjusted for the 1998 ten percent stock dividend.
On April 16, 1999, the Company announced the 1999 second
quarter dividend of $.22 payable on June 15, 1999.
<TABLE>
<CAPTION>
Quarterly Per Share Stock Prices and Dividends Cash
(Restated for Stock Dividends) Sales Price Dividends
High Low Declared
<S> <C> <C> <C>
1998 1st Quarter $31.250 $26.875 $.19
2nd Quarter 32.750 27.755 .19
3rd Quarter 32.750 24.000 .21
4th Quarter 29.125 24.500 .22
1999 1st Quarter $29.000 $25.750 $.22
2nd Quarter n/a n/a .22
</TABLE>
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
First Quarter Earnings Per Share, Based on Core Net Income $.49 $.44
Dividend Payout Ratio: (Second quarter dividends as
a percent of first quarter core diluted earnings per share) 44.90% 43.18%
Book Value Per Share $12.46 $11.90
Tangible Book Value Per Share 10.42 9.75
</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. 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.
Securities available-for-sale represent a primary source of on-balance sheet
cash flow. Certain securities are designated by the
Company at purchase as available-for-sale. Selection of such
securities is based on their ready marketability, ability to collateralize
borrowed funds, as well as their yield and maturity.
In addition to liquidity arising from on-balance sheet cash flows, the
Company has supplemented liquidity with additional off-balance
sheet sources, such as credit lines with the Federal Home Loan
Bank, and also has identified wholesale and retail repurchase
agreements and brokered certificates of deposit as appropriate
funding alternatives.
Other than the general concerns relating to the Year 2000 issue
discussed later in this report in the section entitled "Year 2000
Readiness Disclosures," the Company is not aware of any known
trends, events or uncertainties that will have or are reasonably likely
to have a material effect or make material demands on the
Company's liquidity in upcoming periods.
RESULTS OF OPERATIONS: Three Months Ended March 31, 1999 Compared With
Three Months Ended March 31, 1998
<TABLE>
<CAPTION>
Summary of Earnings Performance
(Dollars in Thousands)
Mar 1999 Mar 1998 Change % Change
<S> <C> <C> <C> <C>
Net Income $3,088 $2,903 $ 185 6.4 %
Diluted Earnings Per Share .49 .45 0.04 8.9
Return on Assets 1.34% 1.42% (0.07)% (5.2)
Return on Equity 16.17% 15.71% 0.46% 2.9
</TABLE>
The Company reported earnings of $3.1 million for the first quarter
of 1999, an increase of $185 thousand, or 6.4%, above the total for
the 1998 quarter. Diluted earnings per share of $.49 for 1999
represented 8.9% increase of 10.0% over the $.45 per share ($.44
on a core earnings basis) for the 1998 quarter. Earnings in the 1998
period included, on an after tax basis, $93 of net securities gains.
There were no securities sales in the 1999 period. On a core
earnings basis, diluted earnings per share increased 11.4% from
1998 to 1999.
Net Interest Income
<TABLE>
<CAPTION>
Summary of Net Interest Income
(Taxable Equivalent Basis)
(Dollars in Thousands)
Mar 1999 Mar 1998 Change % Change
<S> <C> <C> <C> <C>
Interest and Dividend Income $ 16,485 $ 15,411 $ 1,074 7.0%
Interest Expense 6,955 6,702 253 3.8
Net Interest Income $ 9,530 $ 8,709 $ 821 8.4
Taxable Equivalent Adjustment 317 257 60 23.3
Average Earning Assets 1 $878,722 $775,282 $103,440 13.3 %
Average Paying Liabilities 740,088 650,561 89,827 13.8
Yield on Earning Assets1 7.61% 8.06% (0.45)% (5.6)%
Cost of Paying Liabilities 3.81 4.18 (0.37) (8.8)
Net Interest Spread 3.80 3.88 (0.08) (2.2)
Net Interest Margin 4.40 4.56 (0.16) (3.4)
1Includes 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 16 basis points from the first quarter of 1998 to the
first quarter of 1999. With interest rates already at low levels in the
beginning of 1998, the Company, along with other financial
institutions, was not able to reduce its cost of funds during 1998 by
the same absolute amount by which its yield on earning assets
declined during the year, and this trend has continued in the first
quarter of 1999.
The provision for loan losses was $364 thousand and $342
thousand for the quarters ended March 31, 1999 and 1998,
respectively. The provision for loan losses was discussed previously
under the heading "Summary of the Allowance and Provision for
Loan Losses."
Other Income
<TABLE>
<CAPTION>
Summary of Other Income
(Dollars in Thousands)
Mar 1999 Mar 1998 $ Change % Change
<S> <C> <C> <C> <C>
Income From Fiduciary Activities $ 799 $ 761 $ 38 5.0%
Fees for Other Services to Customers 1,019 957 62 6.5
Net Gains on Securities Transactions --- 157 (157) ---
Other Operating Income 226 232 (6) (2.6)
Total Other Income $2,044 $2,107 $ (63) (3.0)
Total Other Income, Without Securities Transactions $2,044 $1,950 $ 94 4.8
</TABLE>
Other income for the first quarter of 1998 included $157 thousand of
net securities gains. There were no securities sales in the 1999
period. Without regard to securities transactions, total other income
for 1999 increased $94 thousand, or 4.8%, from 1998.
Trust income totaled $799 thousand for the first quarter of 1999, an
increase of $38 thousand, or 5.0%, from the first quarter of 1998.
Trust assets under administration at March 31, 1999 amounted to
$629 million, an increase of $39 million, or 6.6%, from March 31,
1998.
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 first quarter of 1999,
an increase of $62 thousand, or 6.5%, from the 1998 first quarter.
The increase was primarily attributable to growth in the number of
transaction deposit accounts and the related service charges on
those accounts.
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 $226 thousand, a decrease of $6 thousand, or
2.6%, from the first quarter of 1998. The period-to-period decrease
was attributable to normal fluctuations in this type of income.
During the first quarter of 1998, on the sale of $31.2 million of
securities from the available-for-sale portfolio, the Company
recognized $162 thousand in gains, offset in part by $5 thousand of
securities losses. The securities were sold for the primary purpose
of extending the average maturity on the portfolio.
Other Expense
<TABLE>
<CAPTION>
Summary of Other Expense
(Dollars in Thousands)
Mar 1999 Mar 1998 $ Change % Change
<S> <C> <C> <C> <C>
Salaries and Employee Benefits $3,688 $3,259 $ 429 13.2%
Occupancy Expense of Premises, Net 469 419 50 11.9
Furniture and Equipment Expense 579 551 28 5.1
Other Operating Expense 1,729 1,560 169 10.8
Total Other Expense $6,465 $5,789 $ 676 11.7
Efficiency Ratio 53.90% 52.10% 1.80% 3.5%
</TABLE>
Other expense for the first quarter of 1999 was $6.5 million, an
increase of $676 thousand, or 11.7%, over the expense for the first
quarter of 1998.
For the quarter ended March 31, 1999, the Company's efficiency ratio
was 53.90%. The efficiency ratio is calculated as the ratio of other
expense to tax-equivalent net interest income and other income
(excluding nonrecurring items and securities gains and losses), and
is a comparative measure of a financial institution's operating
efficiency. At December 31, 1998, the ratio for the Company's peer
group was 61.17%.
Salaries and employee benefits expense increased $429 thousand,
or 13.2%, from the first quarter of 1998 to the first quarter of 1999.
This increase was attributable to normal salary increases and the
addition of staff, primarily in sales positions. On an annualized basis,
total personnel expense to average assets was 1.60% for the first
quarter of 1999. At December 31, 1998, the ratio for the Company's
peer group was 1.70%.
Occupancy expense was $469 thousand for the first quarter of 1999,
a $50 thousand increase, or 11.9%, over the first quarter of 1998.
The increase was primarily attributable to increased depreciation
associated with branch renovations. Furniture and equipment
expense was $579 thousand for the first quarter of 1999, a $28
thousand increase, or 5.1%, over the first quarter of 1998, attributable
to the upgrading of computer equipment as part of the Year 2000
Readiness program.
Other operating expense was $1.7 million for the first quarter of 1999,
an increase of $169 thousand, or 10.8%, from the first quarter of
1998. The largest increase was attributable to marketing expenses,
primarily in the areas served by the six branches acquired from Fleet
Bank in June of 1997 in northeastern New York.
Income Taxes
<TABLE>
<CAPTION>
Summary of Income Taxes
(Dollars in Thousands)
Mar 1999 Mar 1998 Change
<S> <C> <C> <C>
Provision for Income Taxes $ 1,340 $1,525 $ (185)
Effective Tax Rate 30.26% 34.44% 4.18 %
</TABLE>
The provision for federal and state income taxes amounted to $1.3
million and $1.5 million for the first quarter of 1999 and 1998,
respectively. The Company experienced a decrease in the effective
tax rate which was attributable to the effects of certain tax planning
strategies implemented in prior years and the additional benefit from
the increase in tax exempt securities from 1998 to 1999.
YEAR 2000 READINESS DISCLOSURE
General
The advent of the year 2000 poses certain technological
challenges resulting from a reliance in computer technologies on
two digits rather than four digits to represent the calendar year (e.g.,
"99" for "1999"). Computer technologies programmed in this
manner, if not corrected, could produce inaccurate or unpredictable
results or system failures in connection with the transition from
1999 to 2000, when dates will begin to have a lower two-digit
number than dates in the prior century. This problem, the so-called
"Year 2000 Problem" or "Y2K Problem," may have a material
adverse effect on the Company's financial condition, results of
operations, business or business prospects because the Company,
like most financial institutions, relies extensively on computer
technology to manage its financial information and serve its
customers. The Company and its banking subsidiaries are
regulated by federal banking agencies, which are requiring
substantial efforts by banks and their affiliated companies to
prevent or mitigate disruptions relating to the year 2000.
The Company's State of Readiness
To deal with the Year 2000 Problem, the Company, beginning in
1997, formed a Year 2000 Project Team (the "Team"). The Team,
which includes members of senior management, has developed a
Year 2000 Action Plan (the "Plan"), specifying a range of tasks and
goals to be achieved at various dates before the year 2000. To
date, the Plan is on target and major deadlines have been met.
The Team has kept other senior officers and the board of directors
of the Company apprised of its progress, and has received input
and guidance from both.
The Company's Year 2000 Action Plan is divided into five phases
consistent with guidance issued by the federal bank regulators: 1)
Awareness; (2) Assessment; (3) Renovation; (4) Validation
(testing); and (5) Implementation.
As of March 31, 1999, the Company had completed the
Awareness, Assessment, Renovation and Validation phases. The
first two of these phases involved, among other things, identification
of those data systems, including information technology ("IT") and
non-information technology ("Non-IT") systems, that are deemed
critical to the continuing functioning of the Company's principal
business operations (so-called "mission critical systems").
The Renovation phase of the Plan consisted of replacing or
updating certain mission critical systems or components thereof
with a view to preventing or minimizing any Y2K related problems.
The Renovation phase for all internal mission critical systems was
completed prior to year-end 1998. As part of the Renovation
phase, the Company accelerated, and had completed, the
installation of a major upgrade to its central computer processing
system, which had originally been scheduled for implementation in
1999. Acceleration of the upgrade enabled the Company to
conduct certain Year 2000 testing in-house, which otherwise would
have to have been conducted by a third party provider at additional
expense to the Company.
As of March 31, 1999, the Company had completed the Validation
(testing) phase of the Plan with respect to those mission critical
systems that are operated by the Company internally. Moreover,
the Validation (testing) phase with respect to mission critical
systems furnished to the Company by third party providers was also
completed by March 31, 1999. The Implementation phase,
involving all modifications to systems indicated by the testing phase
as well as on-going monitoring of Y2K concerns generally, is
on-going and the Company anticipates it will continue throughout the
remainder of 1999.
During all phases of the Plan, the Year 2000 Project Team has
actively monitored the Y2K preparedness of its third party providers
and servicers, utilizing various methods for testing and verification.
The Company has requested certifications of Year 2000
preparedness from principal providers and has participated in user
groups.
The Company also has completed an assessment of major
borrowing accounts and has assigned a risk rating to each based
on information obtained from the borrower. Year 2000
preparedness assessment is now part of the Company's on-going
review of major loan accounts. The Company also has contacted
and reviewed the state of Y2K preparedness of the Company's
principal sources of liquidity. The Company believes that there is
no single credit account or source of funding that is sufficiently
critical to the Company's profitability or operations such that Y2K
preparedness or lack thereof represents a material exposure to the
Company (see "Year 2000 Risks Facing the Company and the
Company's Contingency Plans," below).
The Company has not yet engaged in discussions with its utility
providers (e.g., electricity, gas, telecommunications) regarding Y2K
concerns. As part of the Plan, however, the Company will continue
to monitor Y2K disclosures by all such providers to the businesses
and financial organizations, such as the Companies that rely on
them. The Company will also continue to monitor Y2K readiness
disclosures by the governmental agencies upon which the
Company relies for certain services (e.g., the Federal Reserve
System, the Federal Home Loan Bank of New York). In
accordance with its Plan, the Company will make particular
inquiries of such providers and agencies when circumstances
warrant, and will generally strive for a Y2K preparedness against
industry-wide and geographic Y2K systemic risks comparable to
that maintained by similarly situated organizations exercising
appropriate due care. Of course, any industry-wide or regional
disruptions arising out of the Y2K Problem may be expected to
affect the Company and its customers. The significance of any
such disruption will depend on its duration and its systemic and
geographic magnitude (see "Year 2000 Risks Facing the Company
and the Company's Contingency Plans").
The following table sets forth the Company's timetable for
completion of the various phases of its Year 2000 Action Plan,
showing the Company's estimate of percentages of each phase
completed as of March 31, 1999 and target dates for completion of
remaining phases.
<TABLE>
<CAPTION>
Internal System External Systems Third Parties
Not Not
Percent Mission Critical Mission Critical Mission Critical Mission Critical Loan Funds
Complete IT NonIT IT NonIT IT NonIT* IT NonIT* Customers Providers
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Awareness 100% 9/30/98 9/30/98 9/30/98 9/30/98 9/30/98 9/30/98 9/30/98 9/30/98 9/30/98 9/30/98
Assessment 100% 9/30/98 9/30/98 9/30/98 9/30/98 9/30/98 9/30/98 9/30/98 9/30/98 9/30/98 9/30/98
Renovation 100% 12/31/98 9/30/98 12/31/98 9/30/98 12/31/98 12/31/98 12/31/98 12/31/98 N/A N/A
Validation 100% 12/31/98 9/30/98 3/31/99 3/31/99 3/31/99 3/31/99 N/A N/A N/A N/A
Implementation 80% 6/30/99 6/30/99 12/31/99 12/31/99 6/30/99 6/30/99 12/31/99 12/31/99 12/31/99 12/31/99
* External Non-IT systems are generally described as product vendors.
</TABLE>
The Costs to Address the Company's Year 2000 Issues
The Company originally projected Y2K expenditures of between
$250 thousand and $500 thousand. Y2K expenditures through
March 31, 1999, were approximately $348 thousand, 59% of
which represented the expenditures related to upgrading the
Company's central computer processing systems , a project that
would have been required even without the Y2K problem, and that
had already been budgeted albeit for a later time period (i.e.
1999). The projection of the Company's Y2K costs does not
include internal personnel costs, which are not expected to be
significantly greater as a result of the Year 2000 Problem, or
external consulting or advisory fees, which have been and are
expected to be minimal. The Company's budget for Y2K
expenditures consists predominantly of expenditures for the
upgrading or replacement of hardware and software systems,
divided approximately 89% for hardware and 11% for software.
The Company has funded, and plans to fund, its Year 2000
related expenditures out of general operating resources.
The Company has postponed certain minor computer-related
projects that otherwise might have been completed during 1998
and 1999, due to the resources directed to the accelerated
upgrading of the central computer processing systems and other
Y2K related projects. The Company does not believe this
postponement will have any significant effect on its operations or
customer service.
Year 2000 Risks Facing the Company and the Company's
Contingency Plans
The failure of the Company to complete all material aspects of its
Plan or to complete them on time could result in an interruption in
or failure of certain normal business activities or operations. Such
failures could materially adversely affect the Company's results of
operations, liquidity and financial condition. Currently, the Plan is
on schedule and management believes that successful
completion of the Plan should significantly reduce the risks faced
by the Company with respect to the Year 2000 Problem.
There is no single credit account or group of related credits which,
in the Company's assessment, is or may be likely to present any
significant exposure due to the Year 2000 Problem. The
Company does not have any significant concentration of
borrowers from any particular industry (to the extent some
industries might be particularly susceptible to Y2K concerns), and
no individual borrower accounts for a significant portion of the
Company's assets. However, management anticipates some
negative impact on the performance of various loan accounts due
to failure of the borrowers to prepare adequately for the Year 2000
Problem. In a worst-case scenario, these borrower-related
difficulties might require the Company to downgrade the affected
credits in its internal loan classification system or to make one or
more special provisions to its loan loss allowance for resulting
anticipated losses in ensuing periods. In addition, although the
Company is adopting special measures to maintain necessary
liquidity to meet funding demands in the periods surrounding the
transition from 1999 to 2000, the Company also may face
increased funding costs or liquidity pressures if depositors are
motivated out of Y2K concerns to withdraw substantial amounts of
deposits or to shift their deposits from short-term to long-term
accounts. A significant portion of the Company's deposits are
so-called municipal deposits (i.e., provided by local municipalities,
school districts and other governmental bodies), but the Company
does not anticipate any increased Year 2000 related risk due to
this concentration of deposits. In summary, the Company does
not currently expect any material impact from Y2K related issues
on its costs of funds or liquidity, but in a worst-case scenario, if
funding costs do rise, net interest margins may be negatively
impacted over the relevant time frame.
The Company may face some risk from the possible failure of one
or more of its third party vendors to continue to provide
uninterrupted service through the changeover to the year 2000.
Critical providers include the Company's automated teller machine
switching networks, the Company's credit card vendors (Visa and
MasterCard), the Company's external provider of trust department
data processing, and the various credit bureaus upon which the
Company relies for information necessary to evaluate credit risk.
While an evaluation of the Year 2000 preparedness of its third
party vendors has been part of the Company's Plan, the
Company's ability to evaluate is limited to some extent by the
willingness of vendors to supply detailed information on their Y2K
readiness and the inability of some vendors to verify with any high
degree of reliability the Y2K preparedness of their own systems or
their sub-providers. However, the Company participates in user
groups that include some of its third party vendors, and receives
assessments of Y2K preparedness of vendors periodically from
federal banking agencies. The Company's Plan also includes
protocols for interface testing with third party vendor systems. In
summary, the Company does not currently anticipate that its
significant third party vendors will experience material failures in
their ability to provide continuing service to the Company due to
the Year 2000 Problem, but is unable to warrant this.
The Company, like similarly-situated enterprises, is subject to
certain risks as a result of possible industry-wide or area-wide
failures triggered by the Year 2000 Problem. For example, the
failure of certain utility providers (e.g., electricity, gas,
telecommunications) or governmental agencies (e.g., the Federal
Reserve System, the Federal Home Loan Bank of New York) to
avoid disruption of service in connection with the transition from
1999 to 2000 could materially adversely affect the Company's
results of operations, liquidity and financial condition. In
management's estimate, such a system-wide or area-wide failure,
although not a likely occurance, nevertheless presents a
significant risk to the Company in connection with the Year 2000
Problem because the resulting disruption may be entirely beyond
the ability of the Company to cure. The significance of any such
disruption would depend on its duration and systemic and
geographic magnitude. Of course, any such disruption would
likely impact businesses other than the Company.
In order to reduce the risks enumerated above, the Company's
Year 2000 Project Team has begun to develop contingency plans
in accordance with guidance issued by the federal bank
regulators. The Team has identified the Company's core business
processes (e.g., providing customers with access to funds and
information) and has reviewed the Company's existing business
continuity and contingency plans. The Team also has performed
a risk analysis of each core business process, defined and
documented Year 2000 failure scenarios, and determined the
minimum acceptable level of outputs and services. The Team is
in the process of finalizing an overall contingency strategy with
specific contingency plans for each core business process,
assigning responsibilities and trigger dates for each contingency
plan, and validating the plans. These activities were completed
during the first quarter of 1999. Certain catastrophic events (such
as the protracted loss of essential utilities or the failure of certain
governmental bodies to function) are outside the scope of the
Company's contingency plans, although the Company anticipates
that it would respond to any such catastrophe in a manner
designed to minimize disruptions in customer service and in full
cooperation with other local providers of financial services,
community leaders and service organizations.
Item 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK
In addition to the credit risk in the Company's loan portfolio and its
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 market risk is an
important component of the Company's asset/liability
management process which is governed by policies established
and reviewed annually by the Board of Directors. The Board of
Directors delegates responsibility for managing the asset/liability
profile on an ongoing basis to management's Asset/Liability
Committee ("ALCO"). In this capacity ALCO develops guidelines
and strategies impacting the Company's asset/liability
management related activities based upon estimated market risk
sensitivity, policy limits and overall market interest rate levels and
trends.
Interest rate risk is the most significant market risk affecting the
Company. Interest rate risk is the exposure of the Company's net
interest income to changes in interest rates. Interest rate risk is
directly related to the different maturities and repricing
characteristics of interest-bearing assets and liabilities, as well as
to prepayment risks for mortgage-related assets, early withdrawal
of time deposits, and the fact that the speed and magnitude of
responses to interest rate changes varies by product.
The ALCO utilizes the results of a detailed and dynamic simulation
model to quantify the estimated exposure of net interest income to
sustained interest rate changes. While ALCO routinely monitors
simulated net interest income sensitivity over a rolling two-year
horizon, it also utilizes additional tools to monitor potential
longer-term interest rate risk.
The simulation model attempts to capture the impact of changing
interest rates on the interest income received and interest expense
paid with respect to all interest-bearing assets and liabilities on the
Company's consolidated balance sheet. This sensitivity analysis
is compared to ALCO policy limits which specify a maximum
tolerance level for net interest income exposure over a one year
horizon, assuming no balance sheet growth and a 200 basis point
upward and downward shift in interest rates. A parallel and pro
rata shift in rates over a 12 month period is assumed. At March
31, 1999, the results of the sensitivity analyses were within the
parameters established by the Company's ALCO Policy.
The hypothetical estimates generated by the analysis are based
upon numerous assumptions including: the nature and timing of
interest rate levels including yield curve shape, prepayments on
loans and securities, deposit decay rates, pricing decisions on
loans and deposits, reinvestment/replacement of asset and liability
cashflows, and other speculative assumptions. While the
assumptions are developed based upon current economic and
local market conditions, the Company cannot make any
assurance as to the predictive nature of these assumptions
including how customer preferences or competitive influences
might change.
Also, as market conditions vary from those assumed in the
sensitivity analysis, actual results will differ due to:
prepayment/refinancing levels likely deviating from those
assumed, the varying impact of interest rate changes on caps or
floors on adjustable rate assets, the potential effect of changing
debt service levels on customers with adjustable rate loans,
depositor early withdrawals and product preference changes, and
other internal/external variables. Furthermore, the sensitivity
analysis does not reflect actions that the Company might take in
responding to or anticipating changes in interest rates.
<PAGE>
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 14, 1999,
shareholders elected the following
directors to serve terms expiring in 2002.
The voting results were as follows:
<TABLE>
<CAPTION>
Withhold Broker
Director For Authority Non-Votes
<S> <C> <C> <C>
Michael B. Clarke 4,773,612 17,913 ---
Kenneth C. Hopper, M.D. 4,766,734 24,791 ---
Michael F. Massiano 4,771,760 19,765 ---
</TABLE>
Item 5. Other Information - None
Item 6. Exhibits and Reports on Form 8-K
Exhibit 27 - Financial Data Schedule (Submitted with
electronic filing only)
No Current Reports were filed on Form 8-K during
the quarter ended March 31, 1999.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
ARROW FINANCIAL CORPORATION
Registrant
Date: May 13, 1999 s/Thomas L. Hoy
Thomas L. Hoy, President and
Chief Executive Officer
Date: May 13, 1999 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 1998 EPS DATA
RESTATED FOR AUGUST 1998
10% STOCK DIVIDEND
</LEGEND>
<RESTATED>
<MULTIPLIER> 1000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 3-MOS
<FISCAL-YEAR-END> DEC-31-1999 DEC-31-1998
<PERIOD-END> MAR-31-1999 MAR-31-1998
<CASH> 18968 26927
<INT-BEARING-DEPOSITS> 0 0
<FED-FUNDS-SOLD> 12400 18700
<TRADING-ASSETS> 0 0
<INVESTMENTS-HELD-FOR-SALE> 252108 251959
<INVESTMENTS-CARRYING> 52023 50848
<INVESTMENTS-MARKET> 53290 52182
<LOANS> 573918 495962
<ALLOWANCE> 6957 6375
<TOTAL-ASSETS> 941268 847075
<DEPOSITS> 778277 715271
<SHORT-TERM> 27321 27950
<LIABILITIES-OTHER> 13568 13365
<LONG-TERM> 45000 15000
<COMMON> 7596 6906
0 0
0 0
<OTHER-SE> 69506 68583
<TOTAL-LIABILITIES-AND-EQUITY> 941268 847075
<INTEREST-LOAN> 11307 10627
<INTEREST-INVEST> 4678 4402
<INTEREST-OTHER> 183 125
<INTEREST-TOTAL> 16168 15154
<INTEREST-DEPOSIT> 6128 6375
<INTEREST-EXPENSE> 6955 6702
<INTEREST-INCOME-NET> 9213 8452
<LOAN-LOSSES> 364 342
<SECURITIES-GAINS> 0 157
<EXPENSE-OTHER> 6465 5789
<INCOME-PRETAX> 4428 4428
<INCOME-PRE-EXTRAORDINARY> 4428 4428
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 3088 2903
<EPS-PRIMARY> .50 .46
<EPS-DILUTED> .49 .45
<YIELD-ACTUAL> 4.40 4.56
<LOANS-NON> 2512 3615
<LOANS-PAST> 96 242
<LOANS-TROUBLED> 0 0
<LOANS-PROBLEM> 0 0
<ALLOWANCE-OPEN> 6742 6161
<CHARGE-OFFS> 229 232
<RECOVERIES> 80 74
<ALLOWANCE-CLOSE> 6957 6375
<ALLOWANCE-DOMESTIC> 6957 6375
<ALLOWANCE-FOREIGN> 0 0
<ALLOWANCE-UNALLOCATED> 0 0
</TABLE>
