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SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d) of
The Securities Exchange Act of 1934
For the fiscal year ended December 31, 1995
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 (I.R.S. Employer
Incorporation or Organization) Identification No.)
250 GLEN STREET, GLENS FALLS, NEW YORK 12801
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (518) 745-1000
___________________________
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT - NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT
Common stock, Par Value $1.00
(Title of Class)
Indicate by checkmark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will
not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference
in Part III of this Form 10-K or any amendment to this Form 10-K.
Indicate by checkmark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter
period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past
90 days.
Yes X No
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practicable date.
Class Outstanding at March 4, 1996
Common stock, Par Value $1.00 Per Share 5,587,735
State the aggregate market value of the voting stock held by non-affiliates
of registrant.
Aggregate market value Based upon the average of the closing bid
of voting stock and closing asked prices on the NASDAQ Exchange
$108,961,000 March 4, 1996
DOCUMENTS INCORPORATED BY REFERENCE
Portions of Registrant's Proxy Statement for the Annual Meeting of
Shareholders to be held April 24, 1996 (Part III) and
the Annual Report to Shareholders (Part II, Item 8)
ARROW FINANCIAL CORPORATION
FORM 10-K
INDEX
PART I
Item 1. Business
A. General
B. Lending Activities
C. Supervision and Regulation
D. Competition
E. Statistical Disclosure (Guide 3)
F. Legislative Developments
G. Executive Officers of the Registrant
Item 2. Properties
Item 3. Legal Proceedings
Item 4. Submission of Matters to a Vote of Security Holders
PART II
Item 5. Market for the Registrant's Common Equity and
Related Stockholder Matters
Item 6. Selected Financial Data
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations
A. Overview
B. Results of Operations
I. Net Interest Income
II. Provision for Loan Losses and
Allowance for Loan Losses
III. Other Income
IV. Other Expense
V. Income Taxes
C. Financial Condition
I. Investment Portfolio
II. Loan Portfolio
a. Distribution of Loans and Leases
b. Risk Elements
III. Summary of Loan Loss Experience
IV. Deposits
V. Time Certificates of $100,000 or More
D. Liquidity
E. Interest Rate Risk
F. Capital Resources and Dividends
G. Fourth Quarter Results
Item 8. Financial Statements and Supplementary Data
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure
PART III
Item 10. Directors and Executive Officers of the Registrant
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial
Owners and Management
Item 13. Certain Relationships and Related Transactions
PART IV
Item 14. Exhibits, Financial Statement Schedules and
Reports on Form 8-K
Signatures
Exhibits Index
PART I
Item 1: Business
A. GENERAL
Arrow Financial Corporation (the "Company"), a New York corporation,
was incorporated on March 21, 1983 and is registered as a bank
holding company within the meaning of the Bank Holding Company Act
of 1956. The Company owns two national banks in New York and one
state-chartered bank in Vermont. The Company owns directly or
indirectly all of the common stock of its subsidiaries.
The business of the Company consists primarily of the ownership,
supervision and control of its bank subsidiaries. The Company
provides its subsidiaries with various advisory and administrative
services and coordinates the general policies and operation of the
subsidiary banks. There were 421 full-time equivalent employees of
the Company and the subsidiary banks at December 31, 1995.
SUBSIDIARY BANKS: GLENS
(Dollars in Thousands) FALLS SARATOGA
NATIONAL NATIONAL GREEN
BANK & BANK & MOUNTAIN
TRUST CO. TRUST CO. BANK
("GFNB") ("SNB") ("GMB")
Total Assets at Year-End $513,150 $60,890 $234,486
(a) 155,000
Trust Assets Under Management at
Year-End (Not Included
in Total Assets) $397,176 $ 2,082 $258,960
Date Organized 1851 1988 1891
Employees 161 21 109
(a) 76
State of Headquarters New York New York Vermont
Offices 14 2 14
(a) 6
Counties of Operation Warren Saratoga Rutland
Washington Addison
Saratoga Bennington
Essex (b) Orange
(b) Windsor
137 So.
Main Office 250 Glen St. Broadway 80 West St.
Glens Falls, Saratoga, Rutland,
New York New York Vermont
(a) After branch sale on January 15, 1996.
(b) Counties of sold branches.
Each subsidiary bank offers a full range of commercial and consumer
financial products. The banks' deposit base consists of core
deposits derived principally from the communities which the banks
serve. The banks target their lending activities to consumers and
small and mid-sized companies in the banks' immediate geographic
areas. In addition to traditional banking services, the Company
offers credit card processing services for other financial
institutions and, through its banks' trust departments, provides
retirement planning, trust and estate administration services for
individuals and pension, profit-sharing and employee benefit plan
administration for corporations.
B. LENDING ACTIVITIES
The Company's subsidiary banks engage in a wide range of lending
activities, including commercial and industrial lending primarily to
small and mid-sized companies; mortgage lending for the purchase of
residential and commercial properties; and consumer installment,
credit card and home equity financing. Although the Company's
Vermont bank previously held a substantial amount of construction
and land development loans in its portfolio, this segment of the
portfolio has been steadily reduced in recent years and only a small
number of new loans of this type have been extended. Historically,
the Company has sold a portion of its residential real estate loan
originations into the secondary market, primarily to Freddie Mac and
state housing agencies, while retaining servicing rights. Loan
sales, have diminished in the past three years, however, as the
banks have sought to increase their own portfolios. In addition to
interest earned on loans, the banks receive facility fees for
various types of commercial and industrial credits, and commitment
fees for extension of letters of credit and certain types of loans.
Generally, the Company continues to implement conservative lending
strategies, policies and procedures which are intended to protect
the quality of the loan portfolio. These include stringent
underwriting and collateral control procedures and credit review
systems through which intensive reviews are conducted. It is the
Company's policy to discontinue the accrual of interest on loans
when the payment of interest and/or principal is due and unpaid for
a designated period (generally 90 days) or when the likelihood of
repayment is, in the opinion of management, uncertain. Income on
such loans is thereafter recognized only upon receipt (see Item
7.C.II.b. "Risk Elements").
The banks lend primarily to borrowers within the geographic areas
served by the banks. The banks' combined loan portfolios do not
include any foreign loans or any significant industry concentrations
except as described in Note 21 to the Consolidated Financial
Statements in Part II Item 8 of this report. The portfolios are
substantially secured, and many commercial loans are further secured
by personal guarantees.
C. SUPERVISION AND REGULATION
The following generally describes the regulation to which the
Company and its banks are subject. Bank holding companies and banks
are extensively regulated under both federal and state law. To the
extent that the following information describes statutory or
regulatory provisions, it is qualified in its entirety by reference
to the particular law or regulation. Any change in applicable law
or regulation may have a material effect on the business and
prospects of the Company and the banks.
The Company is a legal entity separate and distinct from its
subsidiaries. Most of the Company's revenues result from management
fees, dividends and undistributed earnings from the subsidiary
banks. The right of the Company, and consequently the right of
creditors and shareholders of the Company, to participate in any
distribution of the assets or earnings of the banks through the
payment of such dividends or otherwise is necessarily subject to the
prior claims of creditors of the banks, except to the extent that
claims of the Company in its capacity as a creditor may be
recognized. Moreover, there are various legal and regulatory
limitations applicable to the payment of dividends to the Company by
its subsidiaries as well as the payment of dividends by the Company
to its shareholders. The ability of the Company and the banks to
pay dividends in the future is, and is expected to continue to be,
influenced by regulatory policies and capital guidelines.
The Company is a registered bank holding company within the meaning
of the Bank Holding Company Act of 1956 (BHC Act) and is subject to
regulation by the Board of Governors of the Federal Reserve System
(Federal Reserve Board). Additionally, the Company is subject to
regulation by the New York State Banking Department. The New York
banks are nationally chartered banks and are subject to the
supervision of and examination by the Office of the Comptroller of
the Currency ("OCC"). The Vermont bank is chartered by the State of
Vermont and is supervised at the state level by the Vermont
Department of Banking, Insurance and Securities and at the federal
level by the Federal Deposit Insurance Corporation ("FDIC"). The
New York banks are members of the Federal Reserve System and the
deposits of each subsidiary bank are insured by the FDIC. The BHC
Act prohibits the Company, with certain exceptions, from engaging,
directly or indirectly, in non-bank activities and restricts loans
by the banks to the Company or other affiliates. Under the BHC Act,
a bank holding company must obtain Federal Reserve Board approval
before acquiring, directly or indirectly, 5% or more of the voting
shares of another bank or bank holding company (unless it already
owns a majority of such shares) or acquiring all or substantially
all of the assets of another bank or bank holding company.
Under the 1994 Riegle-Neal Act, bank holding companies are now able
to acquire banks located in all 50 states (see Item 1.F.
"Legislative Developments".)
The Federal Reserve Board has adopted various "capital adequacy
guidelines" for use in the examination and supervision of bank
holding companies. One set of guidelines are the risk-based capital
guidelines, which assign risk weightings to all assets and certain
off-balance sheet items and establish an 8% minimum ratio of
qualified total capital to 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 loan loss reserves. The Reserve
Board's other capital guideline is the leverage ratio standard,
which establishes minimum limits on the ratio of a bank holding
company's "Tier 1" capital to total tangible assets. For top-rated
holding companies, the minimum leverage ratio is 3%, but lower-rated
companies may be required to meet substantially greater minimum
ratios. Each subsidiary bank is subject to similar capital
requirements adopted by its primary federal regulator. The year-end
1995 capital ratios of the Company and the banks are set forth in
Part II, Item 7.F. "Capital Resources and Dividends." A holding
company's ability to pay dividends and expand its business through
acquisitions of new subsidiaries can be restricted if capital falls
below these capital adequacy guidelines.
Neither the Company nor any of its subsidiaries is now, or has been
within the past year, subject to any formal or informal regulatory
enforcement order.
D. COMPETITION
The Company and its subsidiaries face intense competition in all
markets that they serve. Traditional competitors are other local
commercial banks, savings banks, savings and loan institutions and
credit unions, as well as local offices of major regional and money
center banks. Also, non-banking organizations, such as consumer
finance companies, insurance companies, securities firms, money
market and mutual funds and credit card companies, which are not
subject to the same array of regulatory restrictions and capital
requirements as the Company and the subsidiary banks, offer
substantive equivalents of transaction accounts, credit cards and
various other loan and financial products.
E. STATISTICAL DISCLOSURE
Statistical disclosure required by Securities Act Guide 3 to be set
forth herein is found in Item 7 "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and Item
8 "Financial Statements and Supplementary Data."
INDEX TO SECURITIES ACT GUIDE 3, STATISTICAL DISCLOSURE BY BANK
HOLDING COMPANIES
Required Information Location
Distribution of Assets, Liabilities
and Stockholders' Equity; Interest
Rates and Interest Differential Part II, Item 7.B.I.
Investment Portfolio Part II, Item 7.C.I.
Loan Portfolio Part II, Item 7.C.II.
Summary of Loan Loss Experience Part II, Item 7.C.III.
Deposits Part II, Item 7.C.IV.
Return on Equity and Assets Part II, Item 6.
Short-Term Borrowings Part II, Item 8. Note 9.
F. LEGISLATIVE DEVELOPMENTS
In 1994, the Riegle-Neal Interstate Banking and Branching Efficiency
Act was enacted. Under the Act, as of September 29, 1995, bank
holding companies were authorized as a matter of federal law to
acquire banks located in any of the 50 states, notwithstanding any
state laws to the contrary, provided all required regulatory and
other approvals have been obtained. Also, under the Act, effective
June 1, 1997, banks headquartered in any state will be permitted to
branch into any other state, except for those states which may enact
legislation prior to June 1, 1997 "opting out" of interstate
branching. States may "opt in" to interstate branching prior to
June 1, 1997, by affirmatively adopting legislation to that effect.
The Act also permits commonly-controlled banks to act as agents for
one another, effective September 29, 1995, by accepting deposits or
loan payments or closing or servicing loans for one another,
regardless of any branching laws to the contrary.
In 1991, the Federal Deposit Insurance Corporation Improvement Act
of 1991 ("FDICIA") was enacted. Among other things, FDICIA requires
the federal banking regulators to take prompt corrective action with
respect to depository institutions that do not meet minimum capital
requirements. FDICIA establishes five capital classifications for
banking institutions, the highest of which is "well-capitalized."
Under regulations adopted by the federal regulators, a banking
institution is considered "well-capitalized" if it has a total
risk-adjusted capital ratio of 10% or greater, a Tier 1
risk-adjusted capital ratio of 6% or greater and a leverage ratio of
5% or greater and is not subject to any regulatory order or written
directive regarding capital maintenance. The Company and its
subsidiary banks are all well-capitalized.
FDICIA also imposed expanded accounting and audit reporting
requirements for depository institutions whose total assets exceed
$500 million.
The FDIC levies assessments on various deposit obligations of the
Company's banking subsidiaries. In 1993, the FDIC implemented a new
risk-based system of assessing deposit insurance premiums to bring
the level of the Bank Insurance Fund (BIF) to a FDICIA required
level of 1.25% of insured deposits. During 1995, the FDIC reduced
the premium paid by the best-rated banks (including all the
Company's subsidiary banks) from $.23 per $100 of insured deposits
to $.04, upon the recapitalization of the BIF. In 1996, the FDIC
insurance premium was further reduced to a flat charge of $2
thousand per year for the highest-rated banks, including all the
Company's subsidiary banks.
Legislation is currently under consideration that would recapitalize
the Savings Association Insurance Fund (SAIF) and merge the SAIF
with the BIF. It is not anticipated that this legislation would
have an immediate impact on the assessment rate for BIF insured
institutions or otherwise would have any negative impact on the
Company or its subsidiary banks.
Banks and bank holding companies are also significantly affected by
the Financial Institutions Reform, Recovery and Enforcement Act of
1989 ("FIRREA"). Although FIRREA dealt primarily with the thrift
industry, it also impacted commercial banking organizations. FIRREA
mandates public disclosure by commercial banks of their Community
Reinvestment Act ratings and mortgage lending records and imposed
cross-liability on any insured financial institutions which are
affiliated with any other insured institution to which the FDIC
gives financial assistance.
Various other banking legislation, including proposals to permit
banks to affiliate with full-service securities underwriting firms
or non-financial organizations (Glass-Steagall Reform) have been
introduced in Congress from time to time. The Company cannot
determine the ultimate effect that any such potential legislation,
if enacted, would have upon its financial condition or operations.
In 1995, the federal bank regulatory authorities promulgated a set
of revised regulations addressing the responsibilities of banking
organizations under the Community Reinvestment Act ("CRA"). The
revised regulations place additional emphasis on the actual
experience of a bank in making loans in low- and moderate-income
areas within its service area as a key determinant in evaluation of
the bank's compliance with the statute. As in the prior
regulations, bank regulators are authorized to bring enforcement
actions against banks under the CRA only in the context of bank
expansion or acquisition affiliations.
G. EXECUTIVE OFFICERS OF THE REGISTRANT
The names and ages of the principal executive officers of the
Company and positions held are presented in the following table.
The officers are elected annually by the Board of Directors.
Name Age Positions Held and Years
from Which Held
Michael F. Massiano 61 Chairman, President and
CEO. Mr. Massiano has
been Chairman and CEO
since 1990 and was
President and CEO of the
Company prior to 1990.
Mr. Massiano is also CEO
of Glens Falls National
Bank.
John J. Murphy 44 Executive Vice President,
Treasurer and CFO. Mr.
Murphy has served as
Treasurer and Chief
Financial Officer of the
Company since 1983.
Thomas L. Hoy 47 President and COO of
Glens Falls National
Bank. Mr. Hoy was
Executive Vice President
of Glens Falls National
Bank prior to 1995.
Gerard R. Bilodeau 48 Senior Vice President and
Secretary since 1994.
Mr. Bilodeau was Vice
President and Secretary
from 1993 to 1994 and was
Director of Personnel
prior to 1993.
Item 2: Properties
The Company is headquartered at 250 Glen Street, Glens Falls, New
York. The building is owned by Glens Falls National Bank and serves
as its main office. Glens Falls National Bank owns thirteen
additional offices. Saratoga National Bank owns both of its
offices. Green Mountain Bank owns its main office and nine other
offices and leases four offices. Of the eight branches sold on
January 15, 1996, six were owned and two were leased. Offices
leased from unrelated third parties are at market rates. Rental
costs of premises did not exceed 5% of operating costs in 1995.
In the opinion of management of the Company, the physical properties
of the Company and the Banks are suitable and adequate.
Item 3: Legal Proceedings
The Company is not the subject of any material pending legal
proceedings, other than ordinary routine litigation occurring in the
normal course of its business.
The Company's subsidiary banks are the subjects of or parties to
various legal claims which arise in the normal course of their
business. For example, the banks, especially Green Mountain Bank,
have in recent periods encountered claims against them grounded in
lender liability, of the sort often asserted against financial
institutions. These lender liability claims normally take the form
of counterclaims to lawsuits filed by the banks for collection of
past due loans. The various pending legal claims against the
subsidiary banks, including such lender liability claims, will not,
in the opinion of management, result in any material liability to
the banks or the Company.
Item 4: Submission of Matters to a Vote of Security Holders
None in the fourth quarter of 1995.
PART II
Item 5: Market for the Registrant's Common Equity and Related
Stockholder Matters
The common stock of Arrow Financial Corporation is traded
over-the-counter. It is registered with and its price is quoted by the
National Association of Securities Dealers, Inc., through its
national quotation system (NASDAQ).
The price ranges below represent actual transactions rounded to the
nearest 1/8 point. Although there may have been isolated sales at
prices outside the parameters shown, the
Company believes that the price ranges fairly represent the trading
ranges.
Per share amounts and market prices have been adjusted for the 1995
four percent stock dividend and the 1994 four percent stock
dividend.
Market Price Cash
(Bid) Dividends
High Low Declared
1994 1st Quarter $11.375 $10.625 $.065
2nd Quarter 14.750 10.250 .074
3rd Quarter 16.625 14.250 .102
4th Quarter 15.375 13.500 .115
1995 1st Quarter $15.875 $14.875 $.125
2nd Quarter 15.375 14.000 .135
3rd Quarter 17.125 14.375 .144
4th Quarter 19.000 16.875 .160
The payment of dividends by the Company is at the discretion of the
Board of Directors and is dependent upon, among other things, the
Company's earnings, financial condition and other factors, including
applicable governmental regulations and restrictions. See "Capital
Resources and Dividends" in Part II, Item 7.F. of this report.
There were approximately 2,505 holders of record of common stock
at December 31, 1995.
Item 6: Selected Financial Data
FIVE YEAR SUMMARY OF SELECTED DATA
Arrow Financial Corporation and Subsidiaries
(Dollars In Thousands, except per share data)
1995 1994 1993 1992 1991
Consolidated Statements of Income Data:
Interest Income $60,718 $52,514 $51,836 $57,829 $ 73,755
Less: Interest Expense 24,865 18,202 19,583 28,399 43,556
Net Interest Income 35,853 34,312 32,253 29,430 30,199
Less: Provision for Loan Losses 1,170 (950) 690 1,677 46,185
Net Interest Income (Loss) After Provision
for Loan Losses 34,683 35,262 31,563 27,753 (15,986)
Other Income 14,473 9,049 9,086 8,606 8,934
Net Gains (Losses) on Securities
Transactions 23 (481) 26 15 684
Less: Other Expense 29,769 31,374 32,118 32,153 31,879
Income (Loss) Before Income Taxes, Extra-
ordinary Item and Cumulative Effect
of Accounting Change 19,410 12,456 8,557 4,221 (38,247)
Provision for (Benefit from) Income Taxes 6,986 1,131 381 1,331 (4,865)
Income (Loss) Before Extraordinary Item &
Cumulative Effect of Accounting Change 12,424 11,325 8,176 2,890 (33,382)
Extraordinary Item: Utilization of Net
Operating Loss Carryforward --- --- --- 811 ---
Cumulative Effect of a Change in
Accounting for Income Taxes --- --- 1,457 --- ---
Net Income (Loss) $12,424 $11,325 $ 9,633 $ 3,701 $(33,382)
Primary Earnings (Loss) Per Share:
Income (Loss) Before Extraordinary Item
and Accounting Change $ 2.17 $ 1.97 $ 1.44 $ .53 $(6.13)
Extraordinary Item and Accounting Change --- --- .25 .13 ---
Net Income (Loss) $ 2.17 $ 1.97 $ 1.69 $ .66 $(6.13)
Fully Diluted Earnings (Loss) Per Share:
Income (Loss) Before Extraordinary Item
and Accounting Change $ 2.17 $ 1.90 $ 1.44 $ .53 $(6.13)
Extraordinary Item and Accounting Change --- --- .25 .13 ---
Net Income (Loss) $ 2.17 $ 1.90 $ 1.69 $ .66 $(6.13)
Cash Dividends $ .56 $ .36 $ .10 $ --- $ .23
Book Value 12.00 10.20 8.74 7.07 6.40
Consolidated Balance Sheet Data:
Total Assets $789,790 $746,431 $733,442 $722,415 $769,942
Securities Held-to-Maturity 13,921 129,735 125,832 97,305 145,250
Securities Available-for-Sale 178,645 53,868 55,892 55,598 ---
Loans and Leases, Net of Unearned Income 517,787 507,553 502,784 492,916 547,419
Nonperforming Assets 6,765 7,825 20,136 29,669 43,890
Deposits 694,453 650,485 659,427 657,875 696,402
Other Borrowed Funds 15,297 24,865 12,487 15,162 25,141
Long-Term Debt --- 5,007 5,289 5,371 7,048
Shareholders' Equity 67,504 58,405 50,069 39,735 34,900
Selected Key Ratios:
Return on Average Assets 1.60% 1.52% 1.33% .50% (4.07)%
Return on Average Equity 19.45 20.79 21.03 10.10 (64.54)
Dividend Payout 25.81 18.05 5.93 --- ---
Average Equity to Average Assets 8.22 7.34 6.32 4.97 6.30
Per share amounts have been adjusted for the 1995, 1994, 1993 and 1992 four percent stock
dividends.
Item 7: Management's Discussion and Analysis of Financial
Condition and Results of Operations
The following discussion presents an analysis of the Company's
results of operations for each of the years in the three-year period
ended December 31, 1995 and the financial condition of the Company
as of December 31, 1995 and 1994. Per share amounts have been
restated to reflect the four percent stock dividend paid in November
1995 and the four percent stock dividend paid in November 1994. The
discussion below should be read in conjunction with the consolidated
financial statements and other financial data presented elsewhere
herein.
A. OVERVIEW
The Company reported net income of $12.4 million for 1995, which
compared to net income of $11.3 million for 1994. Primary earnings
per share were $2.17 and $1.97 for 1995 and 1994, respectively.
The following analysis adjusts net income for unusual and
nonrecurring items to arrive at a comparative presentation of the
Company's core earnings:
SUMMARY OF CORE EARNINGS
(In Thousands)
1995 1994
Net Income, as Reported $12,424 $11,325
Net Operating Loss Benefits --- (3,560)
Other Items, Net of Tax:
Insurance Settlement (3,250) ---
OREO Transactions 136 1,133
Credit to the Provision for Loan Losses --- (990)
Severance Benefits 388 ---
Net Securities Transactions (12) 285
Other (218) ---
Recurring Net Income $ 9,468 $ 8,193
Recurring Primary Earnings per Share $ 1.66 $ 1.43
In May of 1995, the Company received a $5.0 million pre-tax
settlement from the Company's financial institution bond company on
a claim for losses suffered in earlier periods.
During 1994, the Company fully utilized the tax benefits resulting
from net operating losses sustained in 1991. In the second quarter
of 1994, the Company adjusted its reserve for loan losses by means
of a $1.5 million credit to the provision for loan losses, reflected
as income. This adjustment was offset by a similar amount of losses
in the same period on the sale of real estate acquired through
foreclosures (OREO), which was reflected as other operating expense.
The increase in core earnings from 1994 to 1995 is attributable to
an increase in net interest income, increases in all areas of
noninterest income and a decrease in operating expenses.
Nonperforming assets, which include nonaccrual loans, loans past due
90 days or more and still accruing interest, restructured loans in
compliance with modified terms and OREO, amounted to $6.8 million at
December 31, 1995, down from $7.8 million at December 31, 1994. The
reduction was primarily attributable to sales of OREO. The allowance
for loan losses was $12.1 million at December 31, 1995, which
represented 278% of the amount of nonperforming loans at that date.
This position was substantially unchanged from the prior year-end.
Sale of Vermont Operations
On January 15, 1996, the Company completed its sale of eight branches
of Green Mountain Bank in eastern Vermont to Mascoma Savings Bank of
Lebanon, New Hampshire. The following table presents unaudited
consolidated balance sheet information at January 15, 1996 in
comparison to December 31, 1995 and 1994.
SELECTED BALANCE SHEET INFORMATION
(In Thousands)
January 15, December 31, December 31,
1996 1995 1994
Liquid Assets (1) $204,505 $237,151 $ 88,492
Investments 13,851 13,921 129,735
Loans 474,463 517,787 507,553
Total Assets 712,493 789,790 746,431
Deposits 592,633 694,453 650,485
Shareholders' Equity 72,728 67,504 58,405
(1) Cash and Due From Banks, Federal Funds Sold and Securities Available-for-Sale.
On February 27, 1996, the Company announced that it had entered into
a definitive agreement with ALBANK FSB, an Albany, New York based
savings bank with Vermont operations, to sell to ALBANK the
remaining six Green Mountain Bank branches including substantially
all remaining loans and deposits of Green Mountain Bank ($112
million and $110 million, respectively, at the date of signing). On
February 27, 1996, the Company entered into a definitive agreement
with Vermont National Bank, Brattleboro, Vermont, to sell to Vermont
National the Green Mountain Bank trust business. After the
completion of these sales, the Company effectively will have no
remaining operations in Vermont.
These and other changes are more fully described in the following
analysis of the results of operations and changes in financial
condition.
B. RESULTS OF OPERATIONS
The following analysis of net interest income, the provision and
allowance for loan losses, noninterest income, other expense and
income taxes, presents the factors that are primarily responsible
for the Company's results of operations for 1995 and the prior two
years.
I. NET INTEREST INCOME (Fully Taxable Basis)
Net interest income represents the difference between interest
earned on loans and investments and interest paid on deposits and
other sources of funds. Changes in net interest income result from
(I) changes in the level and mix of earning assets and sources of
funds (volume) (II) changes in the yields earned and costs paid
(rate), and (III) the relative volume of nonperforming assets. Net
interest margin is the ratio of net interest income to average
earning assets. Net interest income may also be described as the
product of earning assets and net interest margin.
COMPARISON OF NET INTEREST INCOME
(Dollars In Thousands) (Fully Taxable Basis)
Years Ended December 31, Change From Prior Year
1995 1994 1993 1995 1994
Amount Percent Amount Percent
Interest Income $61,411 $52,985 $52,415 $ 8,426 15.9 % $ 570 1.1 %
Interest Expense 24,865 18,202 19,583 6,663 36.6 (1,381) (7.1)
Net Interest Income $36,546 $34,783 $32,832 $ 1,763 5.1 $ 1,951 5.9
On a tax-equivalent basis, net interest income was $36.5 million in
1995, an increase of $1.8 million or 5.1% from $34.8 million in
1994. Net interest income, for both 1995 and 1994, was favorably
impacted by both the changing interest rate environment and an
increase in average earning assets. In addition to general changes
in rates and volume, net interest income was enhanced by the
reduction of nonaccrual loans, both in absolute amounts and as a
ratio to earning assets. The Company also benefitted from retained
earnings as a source of funds and from the investment of the
proceeds from OREO sales into earning assets. In 1989, under the
influence of the Federal Reserve Board, interest rates began a
steady decline, and for a two year period beginning in the spring of
1992, the prime rate was unchanged. During that period, the Company
experienced a benefit from a change in the mix of deposits from
higher cost time deposits to lower cost N.O.W. and money market
deposit accounts. During 1994, the prolonged period of falling
interest rates came to an end as the Federal Reserve Board began a
series of interest rate increases which extended into 1995. As a
result, the mix of average deposits in 1994 was virtually the same
as for 1993, but in 1995, depositors began to move a portion of
their deposits back to higher cost time deposits.
ANALYSIS OF CHANGES IN NET INTEREST INCOME
The following table presents net interest income components on a
tax-equivalent basis and reflects changes between periods
attributable to movement in either the average daily balance or
average rates for both earning assets and interest-bearing
liabilities. Changes attributable to both volume and rate have been
allocated proportionately between the categories.
CHANGE IN NET INTEREST INCOME
(In Thousands) (Fully Taxable Basis)
1995 to 1994 1994 to 1993
Change in Net Interest Income Change in Net Interest Income
Due to: Due to:
Volume Rate Total Volume Rate Total
Interest Income:
Interest-Bearing
Deposits With Banks $ --- $ --- $ --- $ (34) $ (34) $ (68)
Federal Funds Sold 521 285 806 (1,051) 934 (117)
Securities Available-
for-Sale 334 823 1,157 525 (626) (101)
Securities Held-to-Maturity:
U.S. Treasury and Other
Governmental Agencies (372) 75 (297) (776) (469) (1,245)
State and Municipal
Obligations 548 45 593 218 (321) (103)
Mortgage-Backed Securities 233 87 320 1,044 10 1,054
Other Securities 282 11 293 42 71 113
Total Securities Held-
to-Maturity 691 218 909 528 (709) (181)
Loans 956 4,598 5,554 1,097 (60) 1,037
Total Interest Income 2,502 5,924 8,426 1,065 (495) 570
Interest Expense:
Deposits:
N.O.W./Super N.O.W. 202 1,279 1,481 65 (430) (365)
Regular Savings
and M.M.D.A. (1,917) 847 (1,070) 25 (555) (530)
Time Certificates of
$100,000 or More 2,158 442 2,600 507 (54) 453
Other Time Deposits 1,121 2,319 3,440 (516) (469) (985)
Total Deposits 1,564 4,887 6,451 81 (1,508) (1,427)
Short-Term Borrowings 288 137 425 29 29 58
Long-Term Debt (230) 17 (213) (11) (1) (12)
Total Interest Expense 1,622 5,041 6,663 99 (1,480) (1,381)
Net Interest Income $ 880 $ 883 $1,763 $ 966 $ 985 $1,951
The following table reflects the components of the Company's net
interest income, setting forth, for years ended December 31, 1995,
1994 and 1993 (I) average assets, liabilities and shareholders'
equity, (II) interest income earned on earning assets and interest
expense incurred on interest-bearing liabilities, (III) average
yields earned on earning assets and average rates paid on
interest-bearing liabilities, (IV) the net interest spread (average
yield less average cost) and (V) the net interest margin (yield) on
earning assets. Rates are computed on a tax-equivalent basis.
Nonaccrual loans are included in average loans and leases, while
unearned income has been eliminated.
AVERAGE CONSOLIDATED BALANCE SHEETS AND NET INTEREST INCOME ANALYSIS
Arrow Financial Corporation and Subsidiaries
(Fully Taxable Basis using a marginal tax rate of 35% for 1995 and 34% for 1994 and 1993)
(Dollars In Thousands) (Unaudited)
Years Ended December 31, 1995
Interest Rate
Average Income/ Earned/
Balance Expense Paid
Interest-Bearing
Deposits With Banks $ --- $ --- ---%
Federal Funds Sold 22,596 1,307 5.78
Securities Available-
for-Sale 66,075 4,024 6.09
Securities Held-to-Maturity:
U.S. Treasury and
Governmental Agencies 57,993 3,108 5.36
State and Municipal 13,271 1,124 8.47
Mortgage-Backed
Securities 48,933 3,100 6.34
Other Securities 6,573 486 7.39
Total Securities Held-
to-Maturity 126,770 7,818 6.17
Loans & Leases (Net of
Unearned Income) 513,266 48,262 9.40
Total Earning Assets 728,707 61,411 8.43
Allowance for Loan
Losses (12,288)
Cash and Due From Banks 28,081
Other Assets 32,929
Total Assets $777,429
Deposits:
N.O.W./Super N.O.W. $139,879 3,975 2.84
Savings/M.M.D.A. 201,932 6,187 3.06
Time Certificates of
$100,000 or More 67,029 3,761 5.61
Other Time Deposits 185,166 9,893 5.34
Total Interest-Bearing
Deposits 594,006 23,816 4.01
Short-Term Borrowings 15,855 819 5.17
Long-Term Debt. 2,619 230 8.78
Total Interest-
Bearing Funds 612,480 24,865 4.06
Demand Deposits 88,961
Other Liabilities 12,097
Total Liabilities 713,538
Shareholders' Equity 63,891
Total Liabilities and
Shareholders' Equity $777,429
Net Interest Income
(Fully Taxable Basis) 36,546
Reversal of Tax Equivalent
Adjustment (693)
Net Interest Income $35,853
Net Interest Spread 4.37%
Net Interest Margin 5.02%
AVERAGE CONSOLIDATED BALANCE SHEETS AND NET INTEREST INCOME ANALYSIS
Arrow Financial Corporation and Subsidiaries
(Fully Taxable Basis using a marginal tax rate of 35% for 1995 and 34% for 1994 and 1993)
(Dollars In Thousands) (Unaudited)
Years Ended December 31, 1994
Interest Rate
Average Income/ Earned/
Balance Expense Paid
Interest-Bearing
Deposits With Banks $ --- $ --- ---%
Federal Funds Sold 12,490 501 4.01
Securities Available-
for-Sale 60,591 2,867 4.73
Securities Held-to-Maturity
U.S. Treasury and
Governmental Agencies 64,908 3,405 5.25
State and Municipal 6,761 531 7.85
Mortgage-Backed
Securities 45,221 2,780 6.15
Other Securities 2,751 193 7.02
Total Securities Held-
to-Maturity 119,641 6,909 5.77
Loans & Leases (Net of
Unearned Income) 502,224 42,708 8.50
Total Earning Assets 694,946 52,985 7.62
Allowance for Loan
Losses (16,954)
Cash and Due From Banks 27,009
Other Assets 37,635
Total Assets $742,636
Deposits:
N.O.W./Super N.O.W. $129,999 2,494 1.92
Savings/M.M.D.A. 260,336 7,257 2.79
Time Certificates of
$100,000 or More 26,980 1,161 4.30
Other Time Deposits 160,035 6,453 4.03
Total Interest-Bearing
Deposits 577,350 17,365 3.01
Short-Term Borrowings 9,838 394 4.00
Long-Term Debt. 5,226 443 8.48
Total Interest-
Bearing Funds 592,414 18,202 3.07
Demand Deposits 87,715
Other Liabilities 8,028
Total Liabilities 688,157
Shareholders' Equity 54,479
Total Liabilities and
Shareholders' Equity $742,636
Net Interest Income
(Fully Taxable Basis) 34,783
Reversal of Tax Equivalent
Adjustment (471)
Net Interest Income $34,312
Net Interest Spread 4.55%
Net Interest Margin 5.01%
AVERAGE CONSOLIDATED BALANCE SHEETS AND NET INTEREST INCOME ANALYSIS
Arrow Financial Corporation and Subsidiaries
(Fully Taxable Basis using a marginal tax rate of 35% for 1995 and 34% for 1994 and 1993)
(Dollars In Thousands) (Unaudited)
Years Ended December 31, 1993
Interest Rate
Average Income/ Earned/
Balance Expense Paid
Interest-Bearing
Deposits With Banks $ 2,151 $ 68 3.16%
Federal Funds Sold 20,927 618 2.95
Securities Available-
for-Sale 49,489 2,968 6.00
Securities Held-to-Maturity:
U.S. Treasury and
Governmental Agencies 79,060 4,651 5.88
State and Municipal 5,595 634 11.33
Mortgage-Backed
Securities 28,235 1,726 6.11
Other Securities 1,935 79 4.08
Total Securities Held-
to-Maturity 114,825 7,090 6.17
Loans & Leases (Net of
Unearned Income) 489,326 41,671 8.52
Total Earning Assets 676,718 52,415 7.75
Allowance For Loan
Losses (16,954)
Cash and Due From Banks 26,963
Other Assets 37,998
Total Assets $724,725
Deposits:
N.O.W./Super N.O.W. $127,163 2,859 2.25
Savings/M.M.D.A. 259,519 7,787 3.00
Time Certificates of
$100,000 or More 15,077 708 4.70
Other Time Deposits 172,422 7,438 4.31
Total Interest-Bearing
Deposits 574,181 18,792 3.27
Short-Term Borrowings 9,083 336 3.70
Long-Term Debt. 5,359 455 8.49
Total Interest-
Bearing Funds 588,623 19,583 3.33
Demand Deposits 83,971
Other Liabilities 6,317
Total Liabilities 678,911
Shareholders' Equity 45,814
Total Liabilities and
Shareholders' Equity $724,725
Net Interest Income
(Fully Taxable Basis) 32,832
Reversal of Tax Equivalent
Adjustment (579)
Net Interest Income $32,253
Net Interest Spread 4.42%
Net Interest Margin 4.85%
CHANGES IN NET INTEREST INCOME DUE TO RATE
YIELD ANALYSIS December 31,
1995 1994 1993
Yield on Earning Assets 8.43% 7.62% 7.75%
Cost of Interest-Bearing Liabilities 4.06 3.07 3.33
Net Interest Spread 4.37% 4.55% 4.42%
Net Interest Margin 5.02% 5.01% 4.85%
The following items have a major impact on changes in net interest
income due to rate: general interest rate changes, the ratio of the
Company's rate sensitive assets to rate sensitive liabilities
(interest rate sensitive gap) during periods of interest rate
changes and the relative level of nonaccrual loans.
In 1995, the change in net interest income attributable to changes
in interest rates had an $883 thousand positive impact on net
interest income. During the first half of the year, the Company was
still experiencing the effect from rising interest rates which had
begun in the second half of 1994. Various loan and deposit products
react to interest rate changes with different speeds and for some
products not to the full extent of changes in the prime rate.
During 1994, assets in general repriced more quickly than time
deposits. Repricing of short-term deposit products also tended to
lag behind prime rate changes and did not change to the full extent
of prime rate changes. Consequently, the spread between the yield
on earning assets and the cost of interest paying liabilities
increased from 1993 to 1994 by 13 basis points, while decreasing by
18 basis points from 1994 to 1995. Notwithstanding the decrease in
the net interest spread, the Company experienced a beneficial impact
from generally rising interest rates due to the fact that the
increase in average interest bearing assets exceeded the increase in
interest paying liabilities as discussed more fully in the following
section on changes in net interest income due to volume. As a
result, the net interest margin increased from 1994 to 1995, albeit
by only one basis point.
In 1994, the change in net interest income attributable to changes
in interest rates had a $985 thousand positive impact on net
interest income. During the first half of the year, the Company was
still experiencing the effect from falling interest rates in prior
periods, as higher yielding fixed rate loan and time deposit
maturities repriced at current rates. During the second half of the
year the Federal Reserve Board began a series of interest rate
increases and the Company, as well as many financial institutions,
benefitted from a more rapid repricing of earning assets than paying
liabilities. The effect of the downward repricing of fixed rate
loan and time deposit maturities in the first half of the year was
more pronounced than the effect of rising interest rates at the end
of the year, as both the yield on earnings assets and the cost of
paying liabilities fell from 1993 to 1994. The Company also
experienced the benefit of reduced levels of nonaccrual loans, both
in absolute amounts and as a ratio to earning assets, and was able
to apply the proceeds from OREO sales to earning assets. Nonaccrual
loans amounted to $3.6 million and $9.9 million at December 31, 1994
and 1993, respectively, and the proceeds from OREO sales amounted to
$4.8 million in 1994.
CHANGES IN NET INTEREST INCOME DUE TO VOLUME
AVERAGE BALANCES
(Dollars in Thousands)
$ Change % Change
1995 1994 1993 1995 1994 1995 1994
Earning Assets $728,707 $694,946 $676,718 $33,761 $18,228 4.9% 2.7%
Interest-Bearing
Liabilities 612,480 592,414 588,623 20,066 3,791 3.4 .6
Demand Deposits 88,961 87,715 83,971 1,246 3,744 1.4 4.5
Total Assets 777,429 742,636 724,725 34,793 17,911 4.7 2.5
Earning Assets to
Total Assets 93.73% 93.58% 93.38% .15% .20% .2 .2
In general, changes in volume will result in corresponding changes
in net interest income. However, changes due to volume can be
enhanced or restricted by shifts in the relative mix between
instruments of different rates. In 1995, the change in volume had
an $880 thousand positive impact on net interest income. Of the
$33.8 million increase in average earning assets from 1994 to 1995,
average loan balances accounted for $11.0 million. The Company used
the remaining funds to increase its liquid assets. Only $20.1
million of the $33.8 million increase in average earning assets was
funded by paying liabilities. The primary sources of funds for the
remainder came from retained earnings ($9.4 million) and proceeds
from the sale of OREO ($1.5 million).
In 1994, the change in volume had a $966 thousand positive impact on
net interest income. Of the $18.2 million increase in average
earning assets from 1993 to 1994, average loan balances accounted
for $12.9 million. The Company used the remaining funds as well as
$8.4 million from decreased average federal funds balances to
increase both the held-to-maturity and available-for-sale securities
portfolios. Only $3.8 million of the $18.2 million increase in
average earning assets was funded by paying liabilities. The
primary sources of funds for the remainder came from retained
earnings ($8.7 million) and proceeds from the sale of OREO ($4.8
million).
II. PROVISION FOR LOAN LOSSES AND ALLOWANCE FOR LOAN LOSSES
Through the provision for loan losses, an allowance (reserve) is
established for estimated future loan losses. Actual loan losses
are charged against this allowance when they occur. In evaluating
the adequacy of the allowance for loan losses, management considers
various risk factors influencing asset quality. This analysis is
based on judgments and estimates and may change in response to
economic developments or other conditions that may influence
borrowers' economic outlook.
On January 1, 1995, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 114, "Accounting by Creditors for
Impairment of a Loan." SFAS No. 114, as amended, requires that
impaired loans, except for large groups of smaller-balance
homogeneous loans, be measured based on (i) the present value of
expected future cash flows discounted at the loan's effective
interest rate, (ii) the loan's observable market price or (iii) the
fair value of the collateral if the loan is collateral dependent.
The Company applies the provisions of SFAS No. 114 to all impaired
commercial and commercial real estate loans over $250,000, and to
all loans restructured subsequent to adoption. Reserves for losses
for the remaining smaller-balance loans are evaluated under SFAS No.
5. Under the provisions of SFAS No. 114, the Company determines
impairment for collateralized loans based on fair value of the
collateral less estimated cost to sell. For other loans, impairment
is determined by comparing the recorded value of the loan to the
present value of the expected cash flows, discounted at the loan's
effective interest rate. The Company determines the interest income
recognition method on a loan by loan basis. Based upon the
borrowers' payment histories and cash flow projections, interest
recognition methods include full accrual, cash basis and cost
recovery.
During 1995, nonperforming assets continued the steady decline begun
in 1991. The primary portion of the decrease in nonperforming
assets in 1995 came from the sale of OREO. Nonaccrual loans
increased $626 thousand or 17.3% from the year-end 1994 balance.
The increase in nonaccrual loans represents the aggregate borrowing
of one large commercial borrower, which was placed on nonaccrual
status in 1995. That loan was accounted for under SFAS No. 114 and
was being carried at its estimated fair value. Loans reported as
troubled debt restructures at December 31, 1994, were classified as
performing in 1995.
Net charge-offs for 1995 of $1.4 million, or .27% of average loans
for the year, was typical of the Company's historical experience
with the exception of 1991 and 1992. The provision for loan losses
of $1.2 million, or .23% of average loans, remained below the
Company's historical average. The 1995 provision, however, was
deemed adequate in consideration of the ratio of the allowance for
loan losses to nonperforming loans, which amounted to 278% at
December 31, 1995.
The provision for loan losses in 1994 was actually a credit to the
provision and a reduction in the allowance for loan losses. During
the second quarter of 1994, with nonperforming assets at
significantly reduced levels and a substantial sale of OREO having
been completed, the Company reduced the unallocated portion of the
allowance for loan losses by $1.5 million. This reduction was
effected by means of a credit to the provision for loan losses. As
a result, for the twelve month period ended December 31, 1994, the
Company's net provision for loan losses was a negative $950
thousand, compared to a provision of $690 thousand in 1993 and $1.7
million in 1992. As a ratio of average loans, the provisions were
(.19)% in 1994 and .14% and .32% for 1993 and 1992, respectively.
While the absolute balance of the allowance for loan losses has
decreased in each of the past four years, the ratio of the allowance
to nonperforming loans has increased or remained steady, with the
ratio at the end of 1995 virtually unchanged from the year-end 1994
level. The balance of the allowance for loan losses was $12.1
million, $12.3 million, $16.1 million and $17.3 million at December
31, 1995, 1994, 1993 and 1992, respectively. The ratio of the
allowance to nonperforming loans was 278%, 279%, 127% and 72% at the
end of the same respective periods.
Net loan losses for 1995 were $1.4 million. These losses compare to
net loan losses of $2.8 million, $1.9 million and $4.7 million for
the years ended December 31, 1994, 1993 and 1992, respectively. As
a ratio to average loans, the net loan losses were .27%, .56%, .40%
and .92% for the same respective periods.
SUMMARY OF THE ALLOWANCE AND PROVISION FOR LOAN LOSSES
(Dollars In Thousands) (Loans and Leases, Net of Unearned Income)
Years-Ended December 31, 1995 1994 1993 1992 1991
Loans and Leases at End of Period $517,787 $507,553 $502,784 $492,916 $547,419
Average Loans and Leases 513,266 502,224 489,326 516,711 607,601
Total Assets at End of Period 789,790 746,431 733,442 722,415 769,942
Nonperforming Assets:
Nonaccrual Loans:
Construction and Land Development $ 104 $ 327 $ 2,534 $ 6,149 $ 13,163
Commercial Real Estate 1,299 1,050 2,649 7,986 9,133
Commercial Loans 1,979 1,017 2,596 4,168 7,393
Other 862 1,224 2,082 3,171 3,764
Total Nonaccrual Loans 4,244 3,618 9,861 21,474 33,453
Loans Past Due 90 or More Days and
Still Accruing Interest 111 231 364 1,486 329
Restructured Loans in Compliance with
Modified Terms --- 580 2,405 1,161 3,963
Total Nonperforming Loans 4,355 4,429 12,630 24,121 37,745
Other Real Estate Owned 2,410 3,396 7,506 5,548 6,145
Total Nonperforming Assets $ 6,765 $ 7,825 $ 20,136 $ 29,669 $ 43,890
Allowance for Loan Losses:
Balance at Beginning of Period $ 12,338 $ 16,078 $ 17,328 $ 20,387 $ 11,656
Loans Charged-off:
Commercial, Financial
and Agricultural (579) (997) (973) (2,283) (7,804)
Real Estate - Commercial (369) (689) (1,106) (645) (6,804)
Real Estate - Construction (101) (1,181) (377) (2,015) (20,941)
Real Estate - Residential (160) (143) (151) (323) (335)
Installment Loans to Individuals (562) (476) (480) (820) (2,128)
Lease Financing Receivables --- --- --- (9) (8)
Total Loans Charged-off (1,771) (3,486) (3,087) (6,095) (38,020)
Recoveries of Loans Previously Charged-off:
Commercial, Financial
and Agricultural 76 260 694 724 56
Real Estate - Commercial 104 35 75 48 ---
Real Estate - Construction 10 68 55 327 138
Real Estate - Residential 8 143 37 22 81
Installment Loans to Individuals 171 188 285 232 291
Lease Financing Receivables --- 2 1 6 ---
Total Recoveries of Loans
Previously Charged-off 369 696 1,147 1,359 566
Net Loans Charged-off (1,402) (2,790) (1,940) (4,736) (37,454)
Provision for Loan Losses
Charged to Expense 1,170 (950) 690 1,677 46,185
Balance at End of Period $ 12,106 $ 12,338 $ 16,078 $ 17,328 $ 20,387
Nonperforming Asset Ratio Analysis:
Net Loans Charged-off as a Percentage
of Average Loans .27% .56 % .40% .92% 6.16%
Provision for Loan Losses as a Percentage
of Average Loans .23 (.19) .14 .32 7.60
Allowance for Loan Losses as a Percentage
of Period-end Loans 2.34 2.43 3.20 3.52 3.72
Allowance for Loan Losses as a Percentage
of Nonperforming Loans 277.98 278.57 127.30 71.84 54.01
Nonperforming Loans as a Percentage
of Period-end Loans .84 .87 2.51 4.89 6.90
Nonperforming Assets as a Percentage
of Period-end Total Assets .86 1.05 2.75 4.11 5.70
III. OTHER INCOME
The majority of other (i.e., noninterest) income is derived from
fees and commissions from fiduciary services, deposit account
service charges, computer processing fees to correspondents and
other "core" or recurring sources. Additionally, other income is
influenced by transactions involving the sale of investment
securities.
ANALYSIS OF OTHER INCOME
(Dollars In Thousands) Change
December 31, Amount Percent
1995 1994 1993 1995 1994 1995 1994
Income from Fiduciary
Activities $ 3,752 $3,657 $3,661 $ 95 $ (4) 2.6% (.1)%
Fees for Other Services 4,669 4,345 4,459 324 (114) 7.5 (2.6)
Net Securities
Gains (Losses) 23 (481) 26 504 (507) -- --
Other Operating Income 6,052 1,047 966 5,005 81 478.0 8.4
Total Other Income $14,496 $8,568 $9,112 $5,928 $(544) 69.2 (6.0)
Total other income for 1995 amounted to $14.5 million. The $5.9
million increase from 1994 was primarily attributable to a $5.0
million payment received from the Company's financial institution
bond company, in settlement of a lawsuit filed by the Company in
1994 for losses suffered in earlier periods and covered under the
Company's $7.0 million financial institution bond.
Exclusive of the bond recovery and securities transactions, other
income increased $424 thousand in 1995 or 4.7% above the amount
earned in 1994. As adjusted, other income to average assets was
1.22% for both years.
While all areas of other (noninterest) income increased, including
income from fiduciary activities and other operating income, the
largest increase was in fees for other services to customers. These
fees include deposit account service charges, safe deposit box fees,
merchant credit card processing fees and servicing fees on loans
sold with servicing retained by the Company. These fees amounted to
$4.7 million in 1995, compared to $4.3 million in 1994, a 7.5%
increase. The increase was primarily attributable to increases in
service charges on deposit accounts and merchant credit card
processing income.
Other operating income includes, as a primary component, fees earned
on servicing credit card portfolios for correspondent banks. This
category of noninterest income also includes gains on the sale of
loans, other real estate owned and other assets. Without regard to
the bond recovery, other operating income in 1995 was virtually
unchanged from 1994.
Total other income for 1994, was $8.6 million, or 6.0% less than the
$9.1 million recorded in 1993. Exclusive of securities
transactions, other income for 1994 was essentially unchanged from
the prior year, with a small shift from fees for other services to
customers to other operating income. As a percentage of average
assets, noninterest income was 1.15% and 1.26% for 1994 and 1993,
respectively. Without regard to securities transactions the ratios
were 1.22% and 1.25% for the same respective periods.
Income from fiduciary activities in 1994 was virtually unchanged
from the prior year, as was the average dollar amount of assets
under administration. Fees for other services to customers amounted
to $4.3 million in 1994, a decrease of 2.6% from the prior year.
The decrease was primarily attributable to a slight reduction in the
average balance of the serviced loan portfolio and the corresponding
reduction in related servicing fees. Other operating income for
1994 was $1.0 million, an increase of $81 thousand or 8.4% over
1993. The increase was primarily attributable to increased fees
from credit card servicing operations.
IV. OTHER EXPENSE
Other (i.e., noninterest) expense is a means of measuring the
delivery cost of services, products and business activities of the
Company. The key components of other expense are presented in the
following table.
ANALYSIS OF OTHER EXPENSE
(Dollars In Thousands)
Change
December 31, Amount Percent
1995 1994 1993 1995 1994 1995 1994
Salaries and Benefits $16,710 $16,204 $16,101 $ 506 $ 103 3.1 % .6 %
Net Occupancy Expense 2,040 2,168 2,418 (128) (250) (5.9) (10.3)
Equipment and Furniture 1,930 2,076 2,254 (146) (178) (7.0) (7.9)
Other Operating Expense 9,089 10,926 11,345 (1,837) (419) (16.8) (3.7)
Total Other Expense $29,769 $31,374 $32,118 $(1,605) $ (744) (5.1) (2.3)
Other expense amounted to $29.8 million for 1995, which compared to
$31.4 million for 1994, a decrease of $1.6 million or 5.1%. An
increase in salaries and benefits was offset by reduced expenses for
occupancy, equipment and other operating expenses.
Total salaries of $11.1 million for 1995 decreased $284 thousand from
the 1994 level. As in the prior year analysis, the effect of fewer
employees was only partially offset by general salary increases. Of
the $790 thousand increase in employee benefits from 1994 to 1995,
severance benefits of $652 thousand paid in 1995 accounted for most
of the increase. Otherwise, slight decreases in payroll taxes and
profit sharing expenses were offset by increased expenses for pension
plans and health insurance.
Occupancy and equipment expenses both decreased from 1994 to 1995
by $128 thousand and $146 thousand, respectively. Both decreases
were primarily attributable to reduced depreciation expenses.
Other operating expense was $9.1 million for 1995, a decrease of $1.8
million or 16.8% from 1994. The decrease was primarily attributable
to a reduction in FDIC deposit insurance premiums and other
insurance, as well as to a large reduction in losses on the sale of
OREO. In mid-1995, the FDIC reduced the deposit insurance rate for
well-capitalized banks from 23 cents per hundred dollars of insured
deposits to 4 cents (and the premium has been further reduced in
1996). All of the Company's banks are well-capitalized.
Other expense amounted to $31.4 million for 1994, a decrease of $744
thousand or 2.3% from the $32.1 million reported for 1993. Except
for a slight increase in salaries and benefits, all areas in 1994
were below 1993 levels.
Total salaries of $11.4 million for 1994 decreased $235 thousand or
2.0% from 1993, with the effect of fewer employees being only
partially offset by selective salary increases. A $338 thousand
increase in employee benefits was attributable to nearly all areas
of employee benefits, including pension, postretirement, profit
sharing and health insurance costs.
Occupancy expenses and furniture and equipment expenses for 1994
decreased by 10.3% and 7.9%, respectively from 1993. The decreases
were attributable to the closing of four small branches in Vermont
in the last two quarters of 1993 and also to general decreases in
depreciation expenses.
Other operating expense of $10.9 million in 1994 decreased $419
thousand or 2.3% from $11.3 million in 1993. Included in other
operating expense in the 1994 period was a loss of $1.5 million on
the sale of OREO, while the 1993 period included a charge of $497
thousand relating to closed branches. The Company experienced a
significant decrease in the costs to carry and dispose of OREO and
other loan workout expenses, which decreased 56.2% or $865 thousand
from 1993 to 1994.
V. INCOME TAXES
The following table sets forth the Company's income tax expense and
effective tax rates for the periods presented herein.
INCOME TAXES AND EFFECTIVE RATES
(Dollars in Thousands) Years Ended December 31,
1995 1994 1993
Provision for Income Taxes $6,986 $1,131 $ 381
Effective Tax Rate 36.0% 9.1% 4.5%
The provisions for income taxes amounted to $7.0 million, $1.1
million and $381 thousand for 1995, 1994 and 1993, respectively.
For all of 1993 and into the fourth quarter of 1994, the provision
for income taxes was reduced by a net operating loss carryforward
and changes in the valuation allowance for deferred tax assets.
Without consideration of the net operating loss carryforward and
changes in the valuation allowance, the effective rates for 1995,
1994 and 1993 were 36%, 38% and 37%, respectively. The decrease in
the effective rate from 1994 to 1995 reflects the relative increase
in the Company's tax exempt loan and securities portfolios.
In 1993 the Company recognized a $1.5 million benefit resulting from
the January 1, 1993 adoption of Statement of Financial Accounting
Standards (SFAS) No. 109, "Accounting for Income Taxes." The
benefit was recorded as a cumulative effect of accounting change.
C. FINANCIAL CONDITION
I. INVESTMENT PORTFOLIO
The Company adopted SFAS No. 115 "Accounting for Certain Investments
in Debt and Equity Securities" at December 31, 1993. Under SFAS No.
115, securities held-to-maturity are debt securities which the
Company has both the positive intent and ability to hold to
maturity; such securities are stated at amortized cost. Debt and
equity securities that are bought and held principally for the
purpose of selling them in the near term are classified as trading
securities and are reported at fair value with unrealized gains and
losses included in earnings. Debt and equity securities not
classified as either held-to-maturity or trading securities are
classified as available-for-sale and are reported at fair value with
unrealized gains and losses excluded from earnings and reported net
of taxes in a separate component of shareholders' equity. At
December 31, 1995, the Company held no trading securities.
In November 1995, the FASB issued "A Guide to Implementation of
Statement 115 on Accounting for Certain Investments in Debt and
Equity Securities." The Guide allowed a one-time reclassification
of held-to-maturity securities before December 31, 1995.
Acting under this provision of the Guide, the Company reclassified
$118.2 million of held-to-maturity securities to available-for-sale
in December of 1995. The Company took advantage of this one-time
provision as a means to improve liquidity and to gain some flexibility
in the management of the Company's interest rate risk. See the following
sections D. on liquidity and E. on interest rate risk.
Securities Available-for-Sale:
The following table sets forth the book value of the Company's
securities available-for-sale portfolio, at year-end 1995, 1994 and
1993.
SECURITIES AVAILABLE-FOR-SALE
(In Thousands)
December 31,
1995 1994 1993
U.S. Treasury and Agency Obligations $114,502 $49,063 $53,694
State and Municipal Obligations 338 2,180 --
Mortgage-Backed Securities 54,651 475 --
Corporate and Other Debt Securities 7,300 -- --
Mutual Funds and Equity Securities 1,854 2,150 2,198
Total $178,645 $53,868 $55,892
Included in mortgage-backed securities were agency mortgage pass-
through securities and agency collateralized mortgage obligations.
Pass-through securities provide to the investor monthly portions
of principal and interest pursuant to the contractual obligations
of the underlying mortgages. Collateralized mortgage obligations
("CMO's") separate the repayments into two or more components
(tranches), where each tranche has a separate estimated life and
yield. The Company's practice is to purchase pass-through
securities guaranteed by federal agencies and tranches of CMO's
with the shorter maturities.
Regulatory agencies have devised a high-risk test for mortgage-
backed securities. The test evaluates the following: (I) Average
Life Test - the product has an average life of less than 10 years;
(II) Average Life Sensitivity Test - an immediate and sustained
change in interest rates of 300 basis points will not extend the
expected life by more than four years; and (III) Price Sensitivity
Test - an immediate and sustained change in interest rates of 300
basis points will not change the price by more than 17%. The
Company evaluates each mortgage-backed security at the time of
purchase and quarterly thereafter. Although none of the Company's
investments have failed to pass the high-risk test subsequent to
acquisition, it is the Company's policy to analyze the
appropriateness of divesting high-risk securities.
Included in corporate and other debt securities are highly rated
corporate bonds.
The following table sets forth the maturities of the Company's
securities available-for-sale portfolio as of December 31, 1995.
MATURITIES OF SECURITIES AVAILABLE-FOR-SALE
(In Thousands)
After After
Within 1 But 5 But After
One Within Within 10
Year 5 Years 10 Years Years Total
U.S. Treasury and
Agency Obligations $49,983 $ 64,519 $ -- $ -- $114,502
State and Municipal Obligations 192 64 82 -- 338
Mortgage-Backed Securities 3,311 36,562 8,085 6,693 54,651
Corporate and
Other Debt Securities -- 7,300 --- -- 7,300
Mutual Funds and
Equity Securities -- -- -- 1,854 1,854
Total $53,486 $108,445 $8,167 $8,547 $178,645
The following table sets forth the tax-equivalent yields of the
Company's securities available-for-sale portfolio at December 31,
1995.
YIELDS ON SECURITIES AVAILABLE-FOR-SALE
(Fully Tax-Equivalent Basis)
After After
Within 1 But 5 But After
One Within Within 10
Year 5 Years 10 Years Years Total
U.S. Treasury and
Agency Obligations 5.05% 6.63% --% --% 5.93%
State and Municipal Obligations 6.68 10.15 8.78 -- 7.85
Mortgage-Backed Securities 8.88 6.42 7.39 6.81 6.76
Corporate and
Other Debt Securities -- 7.28 -- -- 7.28
Mutual Funds and
Equity Securities -- -- -- 6.72 6.72
Total 5.29 6.60 7.41 6.79 6.25
The yields for debt securities shown in the table above are
calculated by dividing annual interest, including accretion of
discounts and amortization of premiums, by the carrying value of the
securities at December 31, 1995. Yields on obligations of states
and municipalities were computed on a fully tax-equivalent basis
using a marginal tax rate of 35%. Dividend earnings derived from
equity securities were adjusted to reflect applicable federal income
tax exclusions.
During the last quarter of 1995, the Company recognized net gains of
$23 thousand on sales of $4.2 million from the available-for-sale
portfolio. The proceeds were used to fund the sale of eight
branches of Green Mountain Bank to Mascoma Savings Bank in January
1996.
At December 31, 1995, the weighted average maturity was 2.03 years
for debt securities in the available-for-sale portfolio.
During the last quarter of 1994, the Company recognized net losses
of $481 thousand on sales of $16.6 million from the available-for-
sale portfolio. The proceeds were reinvested in higher yielding
securities.
Net securities gains of $26 thousand were recognized in 1993 on
sales of $23.9 million from the available-for-sale portfolio.
At December 31, 1995, unrealized gains on securities available-
for-sale amounted to $1.2 million, net of tax. Unrealized gains or
losses are reflected as a separate component of shareholders'
equity. These securities, to a great extent, match fixed rate time
deposits of similar maturities. Consequently, the Company did not
recognize the gains during 1995.
Securities Held-to-Maturity:
The following table sets forth the book value of the Company's
portfolio of securities held-to-maturity for each of the last three
years. Year-end amounts and data in the following tables do not
include the securities available-for-sale portfolio discussed
previously.
SECURITIES HELD-TO-MATURITY
(In Thousands)
December 31,
1995 1994 1993
U.S. Treasury and Agency Obligations $ --- $ 61,390 $ 76,311
State and Municipal Obligations 13,921 10,409 5,006
Mortgage-Backed Securities --- 51,904 43,350
Other Securities --- 6,032 1,165
Total $13,921 $129,735 $125,832
For information regarding the market value of the Company's portfolio
of securities held-to-maturity, see Note 3 to the Consolidated
Financial Statements in Part II, Item 8 of this report.
The following table sets forth the maturities of the Company's
portfolio of securities held-to-maturity, as of December 31, 1995.
MATURITIES OF SECURITIES HELD-TO-MATURITY
(In Thousands)
After After
Within 1 But 5 But After
One Within Within 10
Year 5 Years 10 Years Years Total
State and Municipal Obligations $1,984 $1,591 $5,492 $4,854 $13,921
The following table sets forth the tax-equivalent yields of the
Company's portfolio of securities held-to-maturity at December 31,
1995.
YIELDS ON SECURITIES HELD-TO-MATURITY
(Fully Tax-Equivalent Basis)
After After
Within 1 But 5 But After
One Within Within 10
Year 5 Years 10 Years Years Total
State and Municipal Obligations 7.48% 8.97% 8.44% 8.58% 8.41%
The yields for debt securities shown in the tables above are
calculated by dividing annual interest, including accretion of
discounts and amortization of premiums, by the carrying value of the
securities at December 31, 1995. Yields on obligations of states
and municipalities were computed on a fully tax-equivalent basis
using a marginal tax rate of 35%.
During 1995 and 1994, the Company sold no securities from the held-
to-maturity portfolio. The weighted-average maturity of the held-
to-maturity portfolio is 8.8 years.
II. LOAN PORTFOLIO
The amounts and respective percentages of loans and leases
outstanding represented by each principal category on the dates
indicated were as follows:
a. DISTRIBUTION OF LOANS AND LEASES
(Dollars In Thousands)
December 31,
1995 1994 1993
Amount % Amount % Amount %
Commercial, Financial
and Agricultural $ 79,993 15 $ 74,455 15 $ 82,317 16
Real Estate - Commercial 71,622 14 81,704 16 95,981 19
Real Estate - Construction 2,051 1 5,136 1 8,702 2
Real Estate - Residential 238,298 46 230,943 45 221,066 44
Installment Loans to
Individuals 125,762 24 115,291 23 94,656 19
Lease Financing Receivables 61 -- 24 -- 62 --
Total Loans and Leases 517,787 100 507,553 100 502,784 100
Allowance for Loan Losses (12,106) (12,338) (16,078)
Total Loans and Leases, Net $505,681 $495,215 $486,706
DISTRIBUTION OF LOANS AND LEASES
(Dollars In Thousands)
December 31,
1992 1991
Amount % Amount %
Commercial, Financial
and Agricultural $ 85,428 17 $ 97,237 18
Real Estate - Commercial 110,702 22 134,379 25
Real Estate - Construction 12,167 2 24,290 4
Real Estate - Residential 198,165 40 200,112 37
Installment Loans to
Individuals 86,323 19 91,224 16
Lease Financing Receivables 131 -- 177 --
Total Loans and Leases 492,916 100 547,419 100
Allowance for Loan Losses (17,328) (20,387)
Total Loans and Leases, Net $475,588 $527,032
During 1995 and 1994, the Company concentrated its lending efforts
in the area of residential real estate loans and installment loans
to individuals (primarily automobile loans). Since 1990, the Company
has de-emphasized commercial, commercial real estate and construction
and land development loans. Consequently, balances for these three
classifications continued to decrease, while the overall portfolio
increased $10.2 million, or 2.0%, from 1994 to 1995 and $4.8 million
or 1.0% from 1993 to 1994.
Within the installment loan portfolio, the Company has focused on
growth in its indirect lending program. Indirect loans are loans to
consumers financed through local dealerships where, by prior
arrangement, the Company acquires the dealer paper. At year-end
1992, indirect loans amounted to $42.1 million or 49% of installment
loans. By December 31, 1995, indirect loans amounted to $91.0
million, or 72% of installment loans.
The following table indicates the changing mix in the loan portfolio
by presenting the quarterly average balance for the Company's
significant loan products for the past five quarters. In addition,
the table presents the percentage of total loans represented by each
category as well as the annualized tax-equivalent yield.
LOAN PORTFOLIO
Quarterly Average Loan Balances
(Dollars In Thousands)
Quarter Ending the Last Day of
Dec 1995 Sep 1995 Jun 1995 Mar 1995 Dec 1994
Commercial and
Commercial Real Estate $160,348 $160,268 $166,378 $168,386 $166,528
Residential Real Estate 176,481 175,462 174,927 174,947 176,120
Home Equity 45,993 45,292 44,539 43,282 42,023
Indirect Consumer Loans 89,721 86,799 83,289 80,279 76,827
Direct Consumer Loans 33,529 36,534 35,964 34,091 34,233
Credit Card Loans 9,425 9,349 8,815 8,902 8,939
Total Loans $515,497 $513,704 $513,912 $509,887 $504,670
Percentage of Total
Quarterly Average Loans
Commercial and
Commercial Real Estate 31.1% 31.2% 32.4% 33.0% 33.0%
Residential Real Estate 34.2 34.2 34.0 34.3 34.9
Home Equity 8.9 8.8 8.7 8.5 8.3
Indirect Consumer Loans 17.5 16.9 16.2 15.6 15.2
Direct Consumer Loans 6.6 7.1 7.0 7.8 6.8
Credit Card Loans 1.8 1.8 1.7 1.7 1.8
Total Loans 100.0% 100.0% 100.0% 100.0% 100.0%
Quarterly Taxable
Equivalent Yield on Loans
Commercial and
Commercial Real Estate 10.21% 10.30% 10.35% 10.29% 9.87%
Residential Real Estate 8.42 8.38 8.35 8.22 7.90
Home Equity 9.44 9.59 9.67 9.38 8.80
Indirect Consumer Loans 8.47 8.42 8.27 8.08 7.98
Direct Consumer Loans 9.88 9.91 9.93 9.96 9.81
Credit Card Loans 15.62 13.91 14.66 12.36 12.27
Total Loans 9.31 9.35 9.37 9.32 8.85
During 1995, the Company received certain payments on restructured
loans that had not been factored into the effective rate on those
loans. The payments, which were recorded as interest income, have
not been included in the yields in the table above. While the yields
on the consumer portfolios are less than on the commercial
portfolios, the Company has historically experienced fewer loan
losses in consumer loans than commercial loans.
During 1993, the loan portfolio increased $9.9 million, or 2.0%, from
the prior year-end balance. The balances in all categories of
commercial loans, including commercial real estate and construction
and land development loans, decreased during the year, while balances
of loans to consumers and residential real estate loans increased
during the year.
During 1992, the loan portfolio decreased $54.5 million or 10.0%.
In part, this reflected the Company's exercise of prudent lending
standards as well as a decision to reduce total assets and improve
capital ratios. During this period, the various loan categories
maintained the same relative proportions, vis-a-vis one another.
During 1991, certain commercial loans were reclassified as commercial
real estate loans on a prospective basis. Had the reclassification
been made on a retroactive basis, the balances of commercial,
financial and agricultural loan balances and real estate - commercial
loan balances as a percent of total loans and leases for 1990 would
have approximated the respective proportions of these categories in
1991. The 1991 decrease in real estate - construction loans was due
to loan charge-offs and transfers to OREO. The decrease in 1991 of
installment loans to individuals came as a result of a slow-down in
consumer credit demand, particularly automobile financing.
The following table indicates the respective maturities and repricing
structure of the Company's commercial, financial and agricultural
loans and its real estate - construction loans at December 31, 1995.
Scheduled repayments are reported in the maturity category, based
upon the contractual terms, in which the payment is due. Demand
loans and overdrafts are reported as due in one year or less.
MATURITY AND REPRICING OF COMMERCIAL LOANS
(In Thousands)
After 1 After
Within But Within Five
1 Year 5 Years Years Total
Commercial, Financial and Agricultural $54,822 $7,534 $17,637 $79,993
Real Estate - Construction 1,070 --- 981 2,051
Total $55,892 $7,534 $18,618 $82,044
Fixed Interest Rates $ 5,841 $1,596 $18,618 $26,055
Variable Interest Rates 50,051 5,938 --- 55,989
Total $55,892 $7,534 $18,618 $82,044
COMMITMENTS AND LINES OF CREDIT
Letters of credit represent extensions of credit granted in the
normal course of business which are not reflected in the
accompanying financial statements. As of December 31, 1995, the
total contingent liability for standby letters of credit amounted to
$3.4 million. In addition to these instruments, the Banks have
issued lines of credit to customers, including home equity lines of
credit, credit card lines of credit, commitments for residential and
commercial construction and other personal and commercial lines of
credit. Commercial lines, generally issued for a period of one
year, are usually extended to provide for the working capital
requirements of the borrower. At December 31, 1995, the Banks had
outstanding loan commitments in the aggregate amount of
approximately $75.9 million.
b. RISK ELEMENTS
NONACCRUAL, PAST DUE AND RESTRUCTURED LOANS
The Company designates loans as nonaccrual when the payment of
interest and/or principal is due and unpaid for a designated period
(generally 90 days) or when the likelihood of repayment is, in the
opinion of management, uncertain. There were no material
commitments to lend additional funds on outstanding nonaccrual loans
at December 31, 1995.
Loans and leases past due 90 days or more and still accruing
interest, as identified in the table below, are those loans and
leases which were contractually past due 90 days or more but because
of expected repayments were still accruing interest.
For years prior to 1995, loans were classified as "restructured" in
accordance with SFAS No. 15, "Accounting by Debtors and Creditors
for Troubled Debt Restructurings."
On January 1, 1995, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 114, "Accounting by Creditors for
Impairment of a Loan." SFAS No. 114, as amended, requires that
impaired loans, except for large groups of smaller-balance
homogeneous loans, be measured based on (I) the present value of
expected future cash flows discounted at the loan's effective
interest rate, (ii) the loan's observable market price or (iii) the
fair value of the collateral if the loan is collateral dependent.
The Company applies the provisions of SFAS No. 114 to all impaired
commercial and commercial real estate loans over $250,000, and to
all loans restructured subsequent to adoption. Reserves for
possible losses for the remaining smaller-balance loans are
evaluated under SFAS No. 5. Under the provisions of SFAS No. 114,
the Company determines impairment for collateralized loans based on
fair value of the collateral less estimated cost to sell. For other
loans, impairment is determined by comparing the recorded value of
the loan to the present value of the expected cash flows, discounted
at the loan's effective interest rate. The Company determines the
interest income recognition method on a loan by loan basis. Based
upon the borrowers' payment histories and cash flow projections,
interest recognition methods include full accrual, cash basis and
cost recovery.
Loans accounted for under SFAS No. 114 may be reported as either
nonaccrual, restructured or performing. Those loans recognizing
interest income on a cash or cost recovery basis are reported as
nonaccrual. Loans restructured under SFAS No. 15 are reported as
restructured if the loan is in compliance with the modified terms.
Under SFAS No. 15, as amended, loans bearing a market rate and in
compliance with modified terms are not subject to the disclosure
requirements of SFAS No. 114 in years subsequent to restructure, and
thus would be included in performing loans. At December 31, 1995,
$2.1 million of nonaccrual loans were accounted for under SFAS No.
114. There were no performing loans at December 31, 1995 for which
the provisions of SFAS No. 114 were first applied in 1995.
The Company's nonaccrual, past due and restructured loans and
leases were as follows:
SCHEDULE OF NONPERFORMING LOANS
(Dollars In Thousands)
December 31,
1995 1994 1993 1992 1991
Nonaccrual Loans:
Construction and Land Development $ 104 $ 327 $ 2,534 $ 6,149 $13,163
Commercial Real Estate 1,299 1,050 2,649 7,986 9,133
Commercial Loans 1,979 1,017 2,596 4,168 7,393
Other 862 1,224 2,082 3,171 3,764
Total Nonaccrual Loans 4,244 3,618 9,861 21,474 33,453
Loans Past Due 90 Days or More
and Still Accruing Interest 111 231 364 1,486 329
Restructured Loans in Compliance
with Modified Terms --- 580 2,405 1,161 3,963
Total Nonperforming Loans $4,355 $4,429 $12,630 $24,121 $37,745
Total Nonperforming Loans
as a Percentage of Total Loans .84% .87% 2.51% 4.89% 6.90%
Nonperforming loans amounted to $4.4 million at December 31, 1995,
$74 thousand below the balance at year-end 1994. The increase in
nonaccrual commercial loans from 1994 to 1995 is primarily
attributable to the aggregate borrowing of one commercial borrower,
which was placed on nonaccrual status during 1995. Otherwise,
nonaccrual loans at December 31, 1995 would have decreased from the
prior year-end balance. Loans reported as restructured and in
compliance with modified terms at December 31, 1994 were classified
as performing in 1995.
During 1995, income recognized on year-end balances of nonaccrual
loans was $116 thousand. Income that would have been recognized
during that period on nonaccrual loans if such had been current in
accordance with their original terms and had been outstanding
throughout the period (or since origination if held for part of the
period) was $435 thousand.
Nonperforming loans amounted to $4.4 million at December 31, 1994,
a decrease of $8.2 million or 64.9% from the prior year-end. Of the
$12.6 million in nonperforming loans at December 31, 1993, $2.5
million was transferred to OREO, $2.4 million of loans restructured
in 1993 was returned to performing status in accordance with SFAS
No. 15, and another $3.5 million was charged against the allowance
for loan losses. The small remaining difference represents the
improvement in nonaccrual loans, net of loans newly classified as
nonperforming.
Nonperforming loans decreased $11.5 million or 47.6% during 1993.
During the year $7.8 million of nonaccrual loans and leases was
acquired through foreclosure and transferred to OREO. Much of the
$3.1 million of loan charge-offs during the year was also
attributable to prior year-end nonaccrual loans. The remaining
difference represented a net improvement in the amount of nonaccrual
loans and included the return to performing status of certain
nonaccrual loans. The balance of $2.4 million of restructured loans
in compliance with modified terms as of December 31, 1993
represented three commercial loans restructured during the year.
POTENTIAL PROBLEM LOANS
While levels of nonperforming loans and delinquency trends have
fallen since 1991, the Company expects that there will be continued
exposure in the commercial real estate portfolio in forthcoming
periods and until the regional economy shows substantial
strengthening.
FOREIGN OUTSTANDINGS - None
LOAN CONCENTRATIONS
The loan portfolio is well diversified. There are no concentrations
of credit that exceed 10% of the portfolio, other than the general
categories reported in the previous section of this report. For a
further discussion, see Note 21 to the Consolidated Financial
Statements in Part II, Item 8 of this report.
OTHER REAL ESTATE OWNED
Other real estate owned (OREO) consists of real property acquired in
foreclosure. OREO is carried at the lower of fair value less
estimated cost to sell or cost in accordance with Statement of
Position (SOP) 92-3 "Accounting for Foreclosed Assets." Also, in
compliance with SOP 92-3, the Company's subsidiary banks have
established allowances for OREO losses. The allowances are
established and monitored on a property by property basis and
reflect management's ongoing estimate of the difference between the
property's carrying amount and cost, when the carrying amount is
less than cost. For all periods, all OREO was held for sale.
DISTRIBUTION OF OTHER REAL ESTATE OWNED
(Net of Allowance) (In Thousands)
December 31,
1995 1994 1993 1992 1991
Single Family 1 - 4 Units $ 82 $1,073 $1,189 $ 892 $ 910
Commercial Real Estate 2,328 2,128 3,418 1,536 3,476
Construction & Land Development --- 195 2,899 3,120
1,759
Other Real Estate Owned, Net $2,410 $3,396 $7,506 $5,548 $6,145
The following table summarizes changes in the net carrying amount of other
real estate owned at December 31,:
SCHEDULE OF CHANGES IN OTHER REAL ESTATE OWNED
(Net of Allowance) (In Thousands)
1995 1994 1993 1992 1991
Balance at Beginning of Year $ 3,396 $ 7,506 $ 5,548 $ 6,145 $ 2,552
Properties Acquired 642 2,493 7,804 6,446 7,498
Provision for Estimated Losses (161) (398) (638) (1,160) (612)
Sale of Properties (1,467) (6,205) (5,208) (5,883) (3,293)
Balance at End of Year $ 2,410 $ 3,396 $ 7,506 $ 5,548 $ 6,145
The following summarizes the changes in the allowance for OREO losses:
ALLOWANCE FOR OTHER REAL ESTATE OWNED LOSSES
(In Thousands)
1995 1994 1993 1992
Balance at Beginning of Year $ 369 $ 1,150 $1,120 $ --
Additions 161 398 638 1,160
Charge-Offs (160) (1,179) (608) (40)
Balance at End of Year $ 370 $ 369 $1,150 $1,120
During 1995, the Company acquired $642 thousand of OREO through
foreclosure. The Company recognized losses of $48 thousand on the
sale of OREO properties carried on the books at $1.5 million.
During 1994, the Company acquired $2.5 million of OREO through
foreclosure. The Company recognized losses of $1.4 million on the
sale of OREO properties carried on the books at $6.2 million.
Approximately 65% of the sales took place at an auction of OREO
properties held during the second quarter of 1994.
During 1993, the Company acquired $7.8 million in OREO through
foreclosure, of which $3.6 million was formerly classified as
in-substance foreclosed property. The $2.0 million increase in OREO
during 1993 was primarily attributable to commercial real estate
properties, whereas construction and land development properties
held in OREO decreased $221 thousand during 1993. For the year, the
Company recognized net gains of $366 thousand on the sale of $5.2
million of OREO properties. These net gains partially offset the
$638 thousand provision for estimated OREO losses taken during the
year.
During 1992, the Company acquired an additional $6.4 million in OREO
through foreclosure. The provision for estimated OREO losses of
$1.2 million in 1992 reflects the SOP 92-3 adjustment for estimated
selling costs as well as adjustments for declines in fair value.
The Company disposed of $5.9 million through sales of OREO
properties, upon which the Company recognized net gains of $257
thousand.
During 1991, the Company acquired over $7.5 million in OREO through
foreclosure. The primary OREO acquisitions were in the area of
construction and land development loans. During 1991, the Company
recognized $25 thousand in net gains on sales of $3.3 million of
OREO properties.
III. SUMMARY OF LOAN LOSS EXPERIENCE
The Company monitors credit quality through a continuous review of
the entire loan portfolio. All significant loans (primarily
commercial and commercial real estate) and leases are reviewed at
least semi-annually, and those under special supervision are
reviewed at least quarterly. The boards of directors of the
Company's individual subsidiary banks, upon recommendations from
management, determine the extent of charge-offs and have the final
decision-making responsibility in authorizing charge-offs.
Additionally, regulatory examiners perform periodic examinations of
the banks' loan and lease portfolios and report on these
examinations to the boards of directors.
Provisions for loan losses are determined by the managements of the
subsidiary banks, in consultation with the Company's management, and
are based upon an overall evaluation of the appropriate levels of
the allowances for loan losses. Factors incorporated in such
determination include the existing risk characteristics of the
portfolio, prevailing national and local economic conditions,
historical loss experience and expected performance within a range
of anticipated future economic conditions. The Company's management
believes that the banks' allowances for loan losses are adequate to
absorb reasonably foreseeable loan losses.
The table in Part II, Item 7.B.II. "Provision for Loan Losses and
Allowance for Loan Losses" presents a summary of the activity in the
Company's allowance for loan losses.
ALLOCATION OF THE ALLOWANCE FOR LOAN AND LEASE LOSSES
The allowance for loan losses is a general allowance applicable to
estimated future losses. For internal operating purposes, the
allowance is not allocated among loan categories.
In the following table, the allowance has been distributed for
purposes of complying with disclosure requirements of the Securities
and Exchange Commission. However, this allocation should not be
interpreted as a projection of (I) likely sources of future losses,
(II) likely proportional distribution of future losses among loan
categories or (III) likely amounts of future losses. Since
management regards the allowance as a general balance and has
assigned an unallocated value to the schedule, the amounts presented
do not represent the total balance available to absorb future losses
that might occur within the principal categories.
Subject to the qualifications noted above, an allocation of the
allowance for loan losses by principal classification and the
proportion of the related loan balance is presented below as of
December 31 for each of the years indicated.
ALLOCATION OF THE ALLOWANCE FOR LOAN AND LEASE LOSSES
(Dollars in Thousands)
1995 1994 1993 1992 1991
Commercial, Financial
and Agricultural $ 2,913 $ 2,329 $ 3,908 $ 5,518 $ 4,596
Real Estate-Commercial 1,755 1,841 3,324 3,626 4,558
Real Estate-Construction 305 1,994 2,027 2,525 6,917
Real Estate-Residential
Mortgage 1,616 2,098 1,893 1,803 1,268
Installment Loans to
Individuals 2,365 1,363 2,032 1,770 1,343
Lease Financing Receivables -- -- -- 15 7
Unallocated 3,152 2,713 2,894 2,071 1,698
Total Loans and Leases $12,106 $12,338 $16,078 $17,328 $20,387
PERCENT OF LOANS IN EACH
CATEGORY TO TOTAL LOANS
Commercial, Financial
and Agricultural 15% 15% 16% 17% 18%
Real Estate-Commercial 14 16 19 22 25
Real Estate-Construction 1 1 2 2 4
Real Estate-Residential
Mortgage 46 45 44 40 37
Installment Loans to
Individuals 24 23 19 19 16
Lease Financing Receivables -- -- -- -- --
Total Loans and Leases 100% 100% 100% 100% 100%
At December 31, 1995, the allocated reserve for each indicated
classification of loans exceeded 100% of the dollar amount of loans
in such classification that were then reported as nonperforming.
IV. DEPOSITS
The following table sets forth the average balances of and average
rates paid on deposits for the periods indicated.
AVERAGE DEPOSIT BALANCES
Years Ended December 31,
(Dollars In Thousands)
1995 1994 1993
Average Average Average
Balance Rate Balance Rate Balance Rate
Demand Deposits $ 88,961 --% $ 87,715 --% $ 83,971 --%
N.O.W./Super N.O.W. 139,879 2.84 129,999 1.92 127,163 2.25
Savings/M.M.D.A. 201,932 3.06 260,336 2.79 259,519 3.00
Time Certificates
of $100,000 or More 67,029 5.61 26,980 4.30 15,077 4.70
Other Time Deposits 185,166 5.34 160,035 4.03 172,422 4.31
Total Deposits $682,967 3.49 $665,065 2.61 $658,152 2.86
During the last half of 1994 and into the first part of 1995, rates
on deposit accounts increased, mirroring, although with some time
lag, the rise in the prime rate that took place over this period.
Changing interest rates also have an impact on the mix of deposits
within the deposit portfolio for the Company, as well as financial
institutions in general. Beginning in the late 1980's until the
middle of 1992, rates declined in small but steady increments, and
then remained stable for the next two years. During that period, as
the price differential between time deposits and short-term
interest-bearing deposits narrowed, depositors transferred a
significant portion of maturing time deposits to savings, N.O.W. and
money market accounts, and some funds left the Company entirely for
competing investment products not offered by financial institutions.
During the recent period of rising interest rates, the Company
experienced a shift in the mix of deposits from short-term back to
time deposits. As interest rates leveled-off and even fell during
the latter part of 1995, the increase in the percentage of time
deposits to total deposits also stabilized. For the third and
fourth quarters of 1995, time deposits averaged 27% of total
deposits.
V. TIME CERTIFICATES OF $100,000 OR MORE
The maturities of time certificates of $100,000 or more at December
31, 1995 are presented below. (In Thousands)
Maturing in: Under 3 3 to 6 6 to 12 Over 12
Months Months Months Months Total
$34,287 $14,438 $5,566 $3,266 $57,557
D. LIQUIDITY
The objective of liquidity management is to satisfy cash flow
requirements, principally the needs of depositors and borrowers to
access funds. Liquidity is provided through assumption or
"purchase" of liabilities, the maturity of asset balances and the
sale of assets. Liability liquidity arises primarily from the
significant base of "core" and other deposits gathered through a
branch network operating over a dispersed geographical area. These
"core" balances consist of demand deposits, savings, N.O.W. and
money market account balances and small denomination time deposits.
Core deposits are considered to be less volatile in their movement
into and out of financial institutions, as compared to large
denomination time deposits, brokered time deposits and repurchase
agreements, which are perceived as more sensitive to changes in
interest rates than core deposits. Core deposits represented a
substantial proportion of the Company's total assets. At year-end
1995, core deposits represented more than 80% of the Company's total
assets and stockholders' equity contributed 8.5% as a source of
funds. Large denomination time deposits, repurchase agreements and
other borrowed funds represented 9.2% of total assets at December
31, 1995.
Federal funds sold are overnight sales of the Company's surplus
funds to correspondent banks, while federal funds purchased
represent overnight borrowings. The Company's practice is to be a
net seller of federal funds on average, and to avoid extended
periods of purchasing federal funds. During 1995, average federal
funds sold amounted to $22.6 million and average federal funds
purchased amounted to $480 thousand.
On December 31, 1993, the Company, upon adoption of SFAS No. 115,
segregated its investment portfolio into securities available-for
- -sale and those held-to-maturity. In November 1995, the FASB issued
"A Guide to Implementation of Statement 115 on Accounting for
Certain Investments in Debt and Equity Securities." The Guide
allowed a one-time reclassification of held-to-maturity securities
before December 31, 1995. Acting under those provisions, in
December 1995 the Company reclassified $118.2 million of held-to
- -maturity securities into its available-for-sale portfolio.
Apart from federal funds, securities available-for-sale represent
the Company's primary source of liquidity. This liquidity arises
both from an ability to quickly sell the securities, as well as from
the ability to use the securities as collateral for borrowing.
After completion of the Company's sale of eight branches of Green
Mountain Bank to Mascoma Savings Bank on January 15, 1996, the
Company had $173.4 million of securities in its available-for-sale
portfolio.
Other sources of funds include term federal funds arrangements with
correspondent banks and a borrowing arrangement with the Federal
Home Loan Bank.
The Company is not aware of any known trends, events or
uncertainties that will have or that are reasonably likely to have
a material effect or make material demands on the Company's
liquidity, capital resources or results of operations.
E. INTEREST RATE RISK
While managing liquidity, the Company must monitor and control
interest rate risk. 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-backed
assets, early withdrawal of time deposits, and the fact that the
speed and magnitude of responses to interest rate changes varies by
product. While many of the Company's loan products are indexed to
independent rates, such as prime or treasury notes, the rates on
most deposit products are set by management pricing committees.
The Company's primary short-term measure of interest rate risk
projects net interest income for the ensuing twelve-month period
based on the maturity, prepayment assumption and repricing
characteristic of each individual interest-bearing asset and
liability under a variety of interest rate projections. The Company
obtains interest rate projections from a third party provider of
economic data. These projections are applied to existing interest
sensitive assets and liabilities and to expected new and rollover
amounts. As a base, the Company projects net interest income for
the ensuing twelve months for the most likely projection and for a
no-change scenario. Exposure to rising or falling rates are
calculated to cover a high distribution of the perceived probable
interest rate scenarios. At December 31, 1995, the Company expected
interest rates to fall early in 1996 and then again later in the
year.
For a long-term measure of interest rate risk, the Company measures
the economic value of equity for immediate and sustained changes in
interest rates. At December 31, 1995, the Company was operating
within established internal policy limits for both the short-term
and long-term measures of interest rate risk..
The Company is able to reduce interest rate risk by adjusting the
mix of loan products as well as the balance of fixed and variable
rate products within the various loan categories. To a lesser
extent, the Company manages interest rate risk through selection of
investments for the securities portfolios. The Company does not,
and in the foreseeable future, will not use derivative financial
instruments to manage interest rate risk.
The Company prepares an interest rate gap analysis to identify the
repricing pattern of interest-bearing assets and liabilities. The
interest rate sensitive gap is the difference between interest rate
sensitive assets and interest rate sensitive liabilities. The
interest rate sensitive gap ratio is the ratio of interest rate
sensitive assets to interest rate sensitive liabilities. When the
interest rate sensitive gap ratio exceeds the balanced position of
1.0, the Company is susceptible to falling interest rates over the
time horizon indicated, as assets may reprice downward more rapidly
than liabilities. Conversely, the Company is susceptible to rising
rates when the gap ratio for a particular time horizon falls below
the balanced position of 1.0.
While the static gap analysis will reveal mismatches in the
repricing patterns of assets and liabilities, the dynamic modeling
of projected net interest income, as described above, provides a
much more reliable tool for assessing the Company's net interest
income exposure to changes in interest rates.
The following table "Interest Rate Sensitive Gap Analysis" presents
the Company's interest rate sensitive position at December 31, 1995.
For purposes of the table, an asset or liability is considered rate
sensitive within a specified period when it matures or could be
repriced within such period in accordance with its contractual terms
except for certain deposit balances without specific maturities.
These deposit balances have been allocated to various time horizons
to reflect the fact that these deposits do not reprice to the full
extent of prime rate changes, and tend to lag behind changes to the
prime rate. Certain other assets and liabilities lacking specific
maturities are classified in the "Over Five Years" category.
Nonaccrual loans are excluded. Securities available-for-sale are
presented at amortized cost.
Various assets and liabilities that reprice before maturity
demonstrate different repricing patterns. Nearly three-fourths of
the Company's commercial loans are prime based, and consequently,
reprice immediately, or in some cases monthly, upon changes in the
prime rate. The greater portion of variable rate residential real
estate loans reprice annually and are often tied to an average
short-term treasury rate, with the repricing date lagging behind
changes in the indexed rate. Rates on credit card lines are largely
variable at management's discretion and in general reprice more
slowly than prime based loans.
The cumulative gap ratio at December 31, 1995 was 1.06 and 1.21 for
the ensuing six month and twelve month repricing periods,
respectively. These ratios are within the range of ratios the
Company seeks to maintain, although the twelve month ratio is at the
upper threshold of the established range. Since the Company has
more interest-bearing assets than liabilities, the twelve month
ratio of 1.21 should be considered vis-a-vis the total ratio of
1.20, which is what the ratio would have been for each period if
all interest-bearing assets and liabilities were spread evenly
throughout the time periods.
Nearly all of the Company's time deposits are fixed rate, and
therefore, reprice upon maturity. Money market deposit accounts are
immediately repriceable and often fluctuate with the frequency of
prime rate changes, but rarely to the magnitude of changes in the
prime rate. N.O.W. accounts are also subject to immediate rate
changes, but again, rates tend to move more slowly than prime rate
changes and to a smaller degree. Savings accounts, which remained
stable for an extended period of time after deregulation, have been
the least sensitive of deposit balances to interest rate changes.
In response to the FDIC Improvement Act of 1991, regulators have
proposed an interest rate risk analysis that distributes savings,
N.O.W. and money market accounts among the earlier repricing
periods. Such a distribution of the Company's savings, N.O.W. and
money market accounts could have a material impact on the Company's
gap analysis at year-end 1995 if distribution of these deposits are
limited to the first three repricing periods, as presented in the
table below.
INTEREST RATE SENSITIVE GAP ANALYSIS
(Dollars In Thousands)
Within Three Six to One to Over
Three to Six Twelve Five Five
Months Months Months Years Years Total
Earning Assets:
Securities Held-to-Maturity:
State and Municipal
Obligations $ 843 $ 350 $ 961 $ 1,598 $ 10,169 $ 13,921
Securities Available-for-Sale:
U.S. Treasury and Agency
Obligations 13,998 8,000 30,014 61,237 -- 113,249
State and Municipal
Obligations 163 172 2 1 -- 338
Mortgage-Backed Securities 1,555 787 4,084 42,626 5,237 54,289
Corporate Bonds -- -- -- 3,016 4,008 7,024
Equity Securities -- -- -- -- 1,798 1,798
Federal Funds Sold 35,100 -- -- -- -- 35,100
Loans and Leases,
Net of Unearned
Income & Nonaccrual Loans 168,762 29,126 73,898 156,227 85,530 513,543
Total Interest Rate
Sensitive Assets 220,421 38,435 108,959 264,705 106,742 739,262
Interest Paying Liabilities:
Regular Savings Accounts 22,484 --- --- 111,038 -- 133,522
N.O.W. Accounts 38,560 --- --- 124,861 -- 163,421
Money Market Deposit Accounts 13,634 --- --- 41,725 -- 55,359
Time Deposits of
$100,000 or More 34,287 14,438 5,566 3,266 -- 57,557
Other Time Deposits 59,615 46,043 52,979 31,244 --- 189,881
Short-Term Borrowings 15,297 -- -- --- -- 15,297
Long-Term Debt -- -- --- --- -- ---
Total Interest Rate
Sensitive Liabilities 183,877 60,481 58,545 312,134 --- 615,037
Interest Rate Sensitive Gap $ 36,544 $(22,046) $ 50,414 $(47,429) $106,742 $124,225
Cumulative Interest Rate
Sensitive Gap $ 36,544 $ 14,498 $ 64,912 $ 17,483 $124,225
Interest Rate Sensitive
Gap Ratio 1.20 .64 1.86 .85 -- 1.20
Cumulative Interest Rate
Sensitive Gap Ratio 1.20 1.06 1.21 1.03 1.20 N/A
F. CAPITAL RESOURCES AND DIVIDENDS
Shareholders' equity was $67.5 million at December 31, 1995, as
compared to $58.4 million at December 31, 1994. The increase was
primarily attributable to retained earnings.
During 1995, in accordance with a program previously approved by the
board of directors, the Company repurchased at market prices 110,687
shares of common stock, at an aggregate purchase price of $1.9
million. At year-end the total treasury stock was 309,833 shares
with a cost basis of $4.2 million. On February 27, 1996, the Company
announced that the board of directors had approved an expanded stock
repurchase program. Under the program, the Company's management is
authorized to repurchase from time to time during the next two years,
at its discretion, up to $10 million of the Company's outstanding
common stock in the open market or privately negotiated transactions.
Based upon the average of the closing bid and asked prices for the
Company's common stock as reported by NASDAQ on March 4, 1996,
completion of this repurchase program would represent over 512,000
shares, or 9.3% of the total number of shares then outstanding.
The maintenance of appropriate capital levels is a management
priority. Overall capital adequacy is monitored on an ongoing basis
by management and reviewed regularly by the Board of Directors. The
Company's principal capital planning goals are to provide an adequate
return to shareholders while retaining a sufficient base to provide
for future expansion and compliance with all regulatory standards.
Under regulatory capital guidelines, the Company and the subsidiary
banks are required to satisfy certain risk-based capital measures.
The minimum ratio of "Tier 1" capital to risk-weighted assets is 4.0%
and the minimum ratio of total capital to risk-weighted assets is
8.0%. For the Company, Tier 1 capital is comprised of shareholders'
equity less intangible assets. Total capital includes a portion of
the allowance for loan losses.
In addition to the risk-based capital measures, the federal bank
regulatory agencies require banks and bank holding companies to
satisfy another capital guideline, the Tier 1 leverage ratio (Tier
1 capital to total assets less goodwill). The minimum Tier 1
leverage ratio is 3.0% for the most highly rated institutions. The
guidelines provide that other institutions should maintain a Tier 1
leverage ratio that is at least 1.0% to 2.0% higher than the 3.0%
minimum level for top-rated institutions.
The table below sets forth the capital ratios of the Company and its
subsidiary banks as of December 31, 1995:
Risk-Based Capital Ratios:
Arrow GFNB GMB SNB
Tier 1 13.48% 13.71% 14.93% 11.90%
Total Capital 14.75 14.96 16.22 13.15
Tier 1 Leverage Ratio 8.09 7.61 9.73 8.42
At December 31, 1995, all subsidiary banks and the Company exceeded
the minimum capital ratios established by these guidelines, as well
as the "well-capitalized" thresholds set by federal bank regulatory
agencies pursuant to FDICIA (see the disclosure under "Legislative
Developments" in Part I, Item 1.F. of this report). After the
January 15, 1996 sale of Green Mountain Bank branches to Mascoma
Savings Bank, the Company's consolidated Tier 1 leverage ratio
increased to 9.91% from 8.09% at December 31, 1995.
The principal source of funds for the payment of shareholder
dividends by the Company has been dividends declared and paid to the
Company by its bank subsidiaries. As of December 31, 1995, only the
Company's principal bank subsidiary, the Glens Falls National Bank
and Trust Company ("GFNB") was in a position to pay any material
amount of dividends without prior regulatory approval. At that
time, the maximum amount that could have been paid by GFNB to the
Company was approximately $8.7 million. Payments of dividends by
Green Mountain Bank ("GMB") to the Company were restricted during
1995 as a matter of law by the negative undivided profits account of
GMB, despite the very high capital ratios maintained by GMB (which
became even higher after the sale by GMB of eight branches to
Mascoma Savings Bank on January 15, 1996). In 1995, however, with
regulatory approval, GMB did repurchase a portion of its common
stock from its holding company, Arrow Vermont Corporation, for $3.15
million, thereby achieving the equivalent of a dividend.
See Part II, Item 5 "Market for the Registrant's Common Equity and
Related Stockholder Matters" for a recent history of the Company's
cash dividend payments.
G. FOURTH QUARTER RESULTS
The Company reported earnings of $2.6 million for the fourth quarter
of 1995, an increase of $256 thousand or 10.9% from the fourth
quarter of 1994. During the 1991 - 1994 period, the provision for
income taxes was reduced to low levels because of the availability
of a significant net operating loss carryforward. During the fourth
quarter of 1994 the net operating loss carryforward was fully
utilized. As a result, for the fourth quarter of 1994 the provision
for income taxes was reduced by $415 thousand, while income for the
1995 quarter was fully tax effected.
Net interest income of $9.3 million in 1995 increased $290 thousand
or 3.2% from the fourth quarter of 1994. The increase was primarily
attributable to an increase in average earning assets. Average
earning assets amounted to $747.7 million and $699.1 million for the
fourth quarter of 1995 and 1994, respectively.
Noninterest income of $2.3 million in the fourth quarter of 1995
increased $595 thousand from the respective period in 1994. The
increase was primarily attributable to net securities losses of $471
thousand in the fourth quarter of 1994, while the Company recognized
$23 thousand of net securities gains in the fourth quarter of 1995.
Noninterest expenses decreased $453 thousand or 6.1% in the same
comparative time frame. As discussed above in the year-to-year
analysis, the decrease in noninterest expense between the quarterly
periods was primarily attributable to lower FDIC insurance premiums
and decreased expenses for salaries, offset only partially by
increases in legal and professional fees.
SELECTED FOURTH QUARTER FINANCIAL INFORMATION
(Dollars In Thousands)
For the Quarter Ended
December 31,
1995 1994
Interest Income $15,846 $13,813
Interest Expense 6,577 4,834
Net Interest Income 9,269 8,979
Provision for Loan Losses 530 67
Net Interest Income after Provision for Loan Losses 8,739 8,912
Other Income 2,342 1,747
Other Expense 7,009 7,462
Income Before Income Taxes 4,072 3,197
Provision for Income Taxes 1,462 843
Net Income $ 2,610 $ 2,354
Weighted Average Number of Shares and
Equivalents Outstanding
Primary 5,672 5,750
Fully Diluted 5,677 6,079
Primary Earnings Per Share $ .46 $ .41
Fully Diluted Earnings Per Share .46 .40
SELECTED RATIOS:
Return on Average Assets 1.30% 1.25%
Return on Average Equity 15.58% 16.44%
Per share amounts have been adjusted for the 1995 four percent stock dividend.
Item 8: Financial Statements and Supplementary Data
The following audited financial statements and supplementary data
are incorporated herein by reference to the Company's Annual Report
to Shareholders for December 31, 1995, which financial statements
and supplementary data are also filed as Exhibit 13 to this report:
Independent Auditors' Report
Financial Statements:
Consolidated Balance Sheets as of
December 31, 1995 and 1994
Consolidated Statements of Income for the Years Ended
December 31, 1995, 1994 and 1993
Consolidated Statements of Changes in Shareholders' Equity
for the Years Ended December 31, 1995, 1994 and 1993
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1995, 1994 and 1993
Notes to Consolidated Financial Statements
Supplementary Data: (Unaudited)
Quarterly Financial Data for the Years Ended December 31, 1995
and 1994
Item 9: Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure. - None.
PART III
Item 10: Directors and Executive Officers of the Registrant
Item 1, "Election of Directors and Information with Respect to
Directors and Officers" of the Company's Proxy Statement for its
Annual Meeting of Shareholders to be held April 24, 1996 is
incorporated herein by reference. Required information regarding
the Company's Executive Officers is contained in Part I, Item 1.E.,
"Executive Officers of the Registrant."
Item 11: Executive Compensation
Item 1, "Election of Directors and Information with Respect to
Directors and Officers" of the Company's Proxy Statement for its
Annual Meeting of Shareholders to be held April 24, 1996 is
incorporated herein by reference.
Item 12: Security Ownership of Certain Beneficial Owners and
Management
Item 1, "Election of Directors and Information with Respect to
Directors and Officers" of the Company's Proxy Statement for its
Annual Meeting of Shareholders to be held April 24, 1996 is
incorporated herein by reference.
Item 13: Certain Relationships and Related Transactions
Item 1, "Election of Directors and Information with Respect to
Directors and Officers" of the Company's Proxy Statement for its
Annual Meeting of Shareholders to be held April 24, 1996 is
incorporated herein by reference.
PART IV
Item 14: Exhibits, Financial Statement Schedules and Reports on
Form 8-K
A) Documents filed as part of this report:
I Financial Statements:
The following financial statements, the notes thereto, and the
independent auditors' reports thereon are filed as part of
this report. See the index to such financial statements in
Part II, Item 8 of this report.
Independent Auditors' Report
Consolidated Balance Sheets as of December 31, 1995 and
1994
Consolidated Statements of Income for the Years Ended
December 31, 1995, 1994 and 1993
Consolidated Statements of Changes in Shareholders'
Equity for the Years Ended December 31, 1995,
1994 and 1993
Consolidated Statements of Cash Flows for the Years
Ended December 31, 1995, 1994 and 1993
Notes to Consolidated Financial Statements
II Schedules:
All schedules are omitted since the required information is
either not applicable or not required or is contained in the
respective financial statements or in the notes thereto.
III. Exhibits:
The following exhibits are incorporated by reference herein.
Exhibit
Number Exhibit
2.1 Purchase and Assumption Agreement among Arrow Financial
Corporation, Arrow Vermont Corporation, Green Mountain Bank
and Mascoma Savings Bank, dated June 1, 1995 incorporated
herein by reference to Form 8-K dated June 1, 1995 filed as
exhibit 2.1.
2.2 Supplement to Purchase and Assumption Agreement among Arrow
Financial Corporation, Arrow Vermont Corporation, Green
Mountain Bank and Mascoma Savings Bank, dated January 12, 1996
incorporated herein by reference to Form 8-K dated January 15,
1996 filed as exhibit 2.2.
2.3 Purchase and Assumption Agreement among Arrow Financial
Corporation, Arrow Vermont Corporation, Green Mountain Bank
and ALBANK, FSB, dated February 26, 1996 incorporated herein
by reference to Form 8-K dated February 26, 1995 filed as
exhibit 2.1.
2.4 Service Purchasing Agreement among Arrow Financial
Corporation, Arrow Vermont Corporation, Green Mountain Bank
and ALBANK, FSB, dated February 26, 1996 incorporated herein
by reference to Form 8-K dated February 26, 1995 filed as
exhibit 2.2.
2.5 Stock Purchase Agreement among Arrow Financial Corporation,
Arrow Vermont Corporation, Green Mountain Bank and Vermont
National Bank, dated February 27, 1996 incorporated herein by
reference to Form 8-K dated February 26, 1995 filed as exhibit
2.3.
3.(i) Certificate of Incorporation of the Registrant, as amended,
incorporated by reference herein from Registrant's Annual
Report for the year ended December 31, 1990 filed on Form 10-K.
4.1 Indenture and Form of Debenture, incorporated herein by
reference from Registrant's 1933 Act Registration Statement on
Form S-2 (file number 33-10109; effective December 16, 1986).
4.2 Equity Contract Agency Agreement and Form of Equity Contract,
incorporated herein by reference from Registrant's 1933 Act
Registration Statement on Form S-2 (file number 33-10109;
effective December 16, 1986).
10.1 1985 Incentive Stock Option Plan of the Registrant,
incorporated herein by reference from Registrant's 1933 Act
Registration Statement on Form S-8 (file number 2-98736; filed
on July 1, 1985).*
10.2 1985 Non-Qualified Stock Option Plan of the Registrant,
incorporated herein by reference from Registrant's 1933 Act
Registration Statement on Form S-8 (file number 2-98735; filed
July 1, 1985).*
10.3 Executive Incentive Plan of Glens Falls National Bank and
Trust Company, incorporated herein by reference from
Registrant's 1933 Act Registration Statement on Form S-2 (file
number 33-10109; filed December 16, 1986).*
10.4 Employment Agreement between the Registrant and Michael F.
Massiano dated December 31, 1990, incorporated by reference
herein from Registrant's Annual Report for the year ended
December 31, 1990 filed on Form 10-K.*
10.5 Employment Agreement between the Registrant and John J. Murphy
dated December 31, 1990, incorporated by reference herein from
Registrant's Annual Reports for the years ended December 31,
1990 and 1992 filed on Form 10-K.*
10.6 Employment Agreement between the Registrant, its subsidiary
bank, Glens Falls National Bank & Trust Company, and Thomas
L. Hoy dated December 31, 1990, incorporated by reference
herein from Registrant's Annual Reports for the years ended
December 31, 1990 and 1992 filed on Form 10-K.*
10.7 Select Executive Retirement Plan of the Registrant effective
January 1, 1992 incorporated by reference herein from
Registrant's Annual Report for December 31, 1992 on Form 10-K.*
10.8 Long Term Incentive Plan of the Registrant, incorporated by
reference herein from Registrant's 1933 Act Registration
Statement on Form S-8 (File number 33-66192; filed July 19,
1993).*
10.9 Directors Deferred Compensation Plan of Registrant,
incorporated by reference herein from Registrant's Annual
Report for December 31, 1993 filed on Form 10-K.*
10.10 Senior Officers Deferred Compensation Plan of the Registrant,
incorporated by reference herein from Registrant's Annual
Report for December 31, 1993 filed on Form 10-K.*
* Management contracts or compensation plans required to be
filed as an exhibit.
The following exhibits are submitted herewith:
Exhibit
Number Exhibit
3.(ii) By-Laws of the Registrant
10.11 Automatic Dividend Reinvestment Plan of the Registrant
11 Computation of Earnings per Share
13 Annual Report to Shareholders
21 Subsidiaries of the Company
23 Consent of Independent Certified Public Accountants
27 Financial Data Schedule (submitted with electronic filing
only)
(B) No reports on Form 8-K have been filed for the 3 months
ended December 31, 1995.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Registrant has duly caused this
report to be signed on its behalf by the undersigned, thereunto duly
authorized.
ARROW FINANCIAL CORPORATION
Date: March 27, 1996 By: /s/ Michael F. Massiano
Michael F. Massiano
Chairman and President
(Chief Executive Officer)
Date: March 27, 1996 By: /s/ John J. Murphy
John J. Murphy
Executive Vice President,
Treasurer and
Chief Financial Officer
(Principal Financial and
Accounting Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below on March 27, 1996 by the following
persons in the capacities indicated.
/s/ Richard J. Bartlett /s/ David L. Moynehan
Richard J. Bartlett David L. Moynehan
Director Director
/s/ Michael B. Clark
Michael B. Clark Doris E. Ornstein
Director Director
/s/ George C. Frost
George C. Frost Edward C. Pike
Director Director
/s/ Herbert A. Heineman, Jr. /s/ Daniel L. Robertson
Herbert A. Heineman, Jr. Daniel L. Robertson
Director Director
/s/ Kenneth C. Hopper, M.D. /s/ Preston Leete Smith
Kenneth C. Hopper, M.D. Preston Leete Smith
Director Director
/s/ Edward F. Huntington
Edward F. Huntington Thomas C. Webb
Director Director
/s/ David G. Kruczlnicki /s/ Michael F. Massiano
David G. Kruczlnicki Michael F. Massiano
Director Director & Chairman
EXHIBIT INDEX
Exhibit
Number Exhibit
3.(ii) By-Laws of the Registrant
10.11 Automatic Dividend Reinvestment Plan of the Registrant
11 Computation of Earnings per Share
13 Annual Report to Shareholders
21 Subsidiaries of the Company
23 Consent of Independent Certified Public Accountants
27 Financial Data Schedule (submitted with electronic
filing only)