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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, 1998
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 February 26, 1999
Common stock, Par Value $1.00 Per Share 6,207,753
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
$171,489,000 February 26, 1999
DOCUMENTS INCORPORATED BY REFERENCE
Portions of Registrant's Proxy Statement for the Annual Meeting of
Shareholders to be held April 14, 1999 (Part III)
ARROW FINANCIAL CORPORATION
FORM 10-K
INDEX
Cautionary Statement under Federal Securities Laws
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. Capital Resources and Dividends
F. Fourth Quarter Results
G. Year 2000 Readiness Disclosure
Item 7A. Quantitative and Qualitative Disclosures
About Market Risk
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
Cautionary Statement under Federal Securities
Laws: The information contained in this Annual
Report on Form 10-K contains statements that are
not historical in nature but rather are based on
management's beliefs, assumptions, expectations,
estimates and projections about the future.
These statements are "forward-looking statements"
within the meaning of Section 21E of the
Securities Exchange Act of 1934, as amended, and
involve a degree of uncertainty and attendant
risk. Words such as "expects," "believes,"
"should," "plans," "will," "estimates," and
variations of such words and similar expressions
are intended to identify such forward-looking
statements. Some of these statements, such as
those included in the interest rate sensitivity
analysis in section 7A, below, entitled
"Quantitative and Qualitative Disclosures About
Market Risk," are merely presentations of what
future performance or changes in future
performance would look like based on hypothetical
assumptions and on simulation models. Other
forward-looking statements, such as those in
Section G of "Management's Discussion and
Analysis" below, dealing with the Company's
program to deal with the so-called "Year 2000
Readiness" problem, involve speculation about a
broad range of factors, many of which are beyond
the Company's control or its ability to evaluate
with any degree of precision. These statements
are not guarantees of future performance and
involve certain risks and uncertainties that are
difficult to quantify or, in some cases, to
identify. In the case of all forward-looking
statements, actual outcomes and results may
differ materially from what the statements
predict or forecast. Factors that could cause or
contribute to such differences include, but are
not limited to, changes in economic and market
conditions, including unanticipated fluctuations
in interest rates, effects of state and federal
regulation, prevailing levels of competition,
emerging technologies and the Company's ability
to adapt thereto, and risks inherent in banking
operations. Readers are cautioned not to place
undue reliance on these forward-looking
statements, which speak only as of the date
hereof. The Company undertakes no obligation to
revise or update these forward-looking statements
to reflect the occurrence of unanticipated
events.
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
nationally chartered banks in New York, Glens
Falls National Bank and Trust Company, Glens
Falls, New York ("GFNB") and Saratoga National
Bank and Trust Company, Saratoga Springs, New
York ("SNB"), as well as one non-bank subsidiary,
the operations of which are not significant. The
Company previously owned a bank in Vermont but
sold all of its Vermont operations in 1996 in
three separate transactions and liquidated its
Vermont bank charter in 1997. The Company owns
directly or indirectly all voting stock of all
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 366 full-time equivalent
employees of the Company and the subsidiary banks
at December 31, 1998.
SUBSIDIARY BANKS: GLENS
(Dollars in Thousands) FALLS SARATOGA
NATIONAL NATIONAL
BANK & BANK &
TRUST CO. TRUST CO.
("GFNB") ("SNB")
Total Assets at Year-End $850,481 $96,328
Trust Assets Under Management at
Year-End (Not Included in Total Assets) $593,164 $ 5,592
Date Organized 1851 1988
Employees 344 22
State of Headquarters New York New York
Offices 21 2
Counties of Operation Warren Saratoga
Washington
Saratoga
Essex
Clinton
Main Office 250 Glen St. 137 So. Broadway
Glens Falls, Saratoga Springs,
New York New York
The Company through its subsidiary banks 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. The Company also
maintains an active indirect lending program
through its sponsorship of dealer programs, under
which it purchases dealer paper from automobile
and other dealers meeting pre-established
specifications. 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 the servicing rights.
Loan sales into the secondary market 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 and policies that
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 Part II, 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 24 to
the Consolidated Financial Statements in Part II,
Item 8 of this report. Except for credit card
loans, the portfolios generally are fully
collateralized, 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
summarizes 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, on a parent company only
basis, 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 of the banks also 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. (See "Capital Resources and
Dividends" in Part II, Item 7.E of this report).
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, as a "bank holding company" under
New York State Law, the Company is subject to
regulation by the New York State Banking
Department. The subsidiary 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
banks are members of the Federal Reserve System
and the deposits of each subsidiary bank are
insured by the Bank Insurance Fund of the Federal
Deposit Insurance Corporation ("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 non-bank
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). Under
the 1994 Riegle-Neal Act, bank holding companies
are now able to acquire banks or other bank
holding companies located in all 50 states (see
Item 1.F. "Legislative Developments".)
During 1997 and 1998 banking regulators developed
guidelines that financial institutions follow to
ensure that their computer applications will
operate properly for all dates after December 31,
1999. Additionally, the SEC prescribed
disclosures for all publicly traded corporations,
such as the Company, related to year 2000
preparedness. Those disclosures are located in
section G of Item 7, "Management's Discussion and
Analysis of Financial Condition and Results of
Operations."
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 is 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 the aggregate dollar
amount of risk-weighted assets (which is almost
always less than the dollar amount of such assets
without risk weighting). At least half of total
capital must consist of "Tier 1" capital, which
comprises common equity, retained earnings and a
limited amount of permanent preferred stock, less
goodwill. Up to half of total capital may
consist of so-called "Tier 2" capital, comprising
a limited amount of subordinated debt, other
preferred stock, certain other instruments and a
limited amount of the allowance for loan losses.
The Federal Reserve Board's other important
guideline for measuring a bank holding company's
capital 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 (not risk-weighted). For
top-rated holding companies, the minimum leverage
ratio is 3%, but lower-rated companies may be
required to meet substantially greater minimum
ratios. The subsidiary banks are subject to
similar capital requirements adopted by their
primary federal regulators. The year-end 1998
capital ratios of the Company and its subsidiary
banks are set forth in Part II, Item 7.E.
"Capital Resources and Dividends." A holding
company's ability to pay dividends, repurchase
its outstanding stock or expand its business
through acquisitions of new subsidiaries can be
restricted if capital falls below these capital
adequacy guidelines or other informal capital
guidelines or ratios that bank regulators may
apply from time to time to specific banking
organizations.
In cases where banking regulators have
significant concerns regarding the financial
condition, assets or operations of a bank or bank
holding company, the regulators may take
enforcement action or impose enforcement orders,
formal or informal, against the organization.
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
action or 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 regulatory restrictions and capital
requirements that apply to the Company and its
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 Part
II, Item 7 of this report, "Management's
Discussion and Analysis of Financial Condition
and Results of Operations," and in Part II, 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, Congress enacted the Riegle-Neal
Interstate Banking and Branching Efficiency Act.
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 are obtained. Also, under
the Act, effective June 1, 1997, banks
headquartered in any state were permitted to
branch into any other state, except for those
states which enacted legislation prior to June 1,
1997 "opting out" of interstate branching. Only
Colorado and Montana elected to "opt out" of
interstate branching; thus, the Company's banks
may branch into all other states, including all
states adjacent to New York, upon receipt of all
required approvals and subject to certain
conditions of state law.
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 transactions.
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 established five capital
classifications for banking institutions, the
highest being "well capitalized." Under
regulations adopted by the federal bank
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 each of its subsidiary banks meet all
these conditions and thus are classified as "well
capitalized."
FDICIA also imposed expanded accounting and audit
reporting requirements for depository
institutions whose total assets exceed $500
million. These requirements became effective for
Glens Falls National Bank and Trust Company
beginning in 1996.
The FDIC levies assessments on various deposit
obligations of the Company's banking
subsidiaries. During 1995, the FDIC reduced the
premium paid by the best-rated banks (including
the Company's subsidiary banks) from $.23 per
$100 of insured deposits to $.04. In 1996, the
FDIC insurance premium was further reduced to a
flat charge of $2 thousand per year for the
highest-rated banks, including the Company's
subsidiary banks. In 1996, Congress enacted the
Deposit Insurance Funds Act, under which deposits
insured by the Bank Insurance Fund ("BIF") are
subject to assessment for payment on the
Financing Corporation ("FICO") bond obligation at
1/5 the rate of the Savings Association Insurance
Fund ("SAIF") assessable deposits. Accordingly,
BIF-assessable deposits (like the deposits of the
Company's banks) were assessed an additional
1.220 cents per $100 of insured deposits in 1998
and an additional 1.256 cents in 1997.
Various other federal bills that would
significantly affect banks, 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 estimate the likelihood of any
such bills being enacted into law, or the
ultimate effect that any such potential
legislation, if enacted, would have upon its
financial condition or operations.
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
Thomas L. Hoy 50 President and CEO since January 1, 1997 and
President and COO of Glens Falls National Bank
since 1995. Mr. Hoy was Executive Vice President
of Glens Falls National Bank prior to 1995. Mr.
Hoy has been with the Company since 1974.
John J. Murphy 47 Executive Vice President, Treasurer and CFO since
1993. Mr. Murphy has served as Senior Vice
President, Treasurer and CFO of the Company since
1983. Mr. Murphy has been with the Company since
1973.
Gerard R. Bilodeau 51 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. Mr. Bilodeau has been with the
Company since 1969.
John C. Van Leeuwen 55 Senior Vice President and Chief Credit Officer
since 1995. Prior to 1995, Mr. Van Leeuwen
served as Vice President and Loan Review Officer.
Mr. Van Leeuwen has been with the Company since
1985.
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 eighteen
additional offices and leases two, at market
rates. Saratoga National Bank owns both of its
offices. The Company continues to own the
building in Rutland, Vermont, that served as
headquarters for the Company's Vermont bank prior
to the divestiture of those operations in 1996.
The building was under contract for sale at
December 31, 1998. Rental costs of premises did
not exceed 5% of operating costs in 1998.
In the opinion of management of the Company, the
physical properties of the Company and the
subsidiary 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, from time to time, the banks have
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 Company's current or
former subsidiary banks, including lender
liability claims, will not, in the opinion of
management, result in any material liability.
Item 4: Submission of Matters to a Vote of
Security Holders
None in the fourth quarter of 1998.
PART II
Item 5: Market for the Registrant's Common
Equity and Related Stockholder Matters
The common stock of Arrow Financial Corporation
is traded on The Nasdaq Stock MarketSM under the
symbol AROW.
The high and low prices listed below represent
actual sales transactions, as reported by Nasdaq,
rounded to the nearest 1/8 point.
Per share amounts and market prices have been
adjusted for the August 1998 ten percent and the
November 1997 five percent stock dividends.
Cash
Sales Price Dividends
High Low Declared
1997 1st Quarter $21.875 $20.125 $.173
2nd Quarter 24.500 21.250 .173
3rd Quarter 26.125 22.150 .173
4th Quarter 31.755 26.255 .191
1998 1st Quarter $31.250 $26.875 $.191
2nd Quarter 32.750 27.755 .191
3rd Quarter 32.750 24.000 .210
4th Quarter 29.125 24.500 .220
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.E. of this report.
There were approximately 2,697 holders of record
of common stock at December 31, 1998.
Item 6: Selected Financial Data
FIVE YEAR SUMMARY OF SELECTED DATA
Arrow Financial Corporation and Subsidiaries
(Dollars In Thousands, Except Per Share Data)
1998 1997 1996 1995 1994
Consolidated Statements of Income Data:
Interest and Dividend Income $63,033 $54,861 $54,875 $60,718 $52,514
Less: Interest Expense 28,142 23,887 21,826 24,865 18,202
Net Interest Income 34,891 30,974 33,049 35,853 34,312
Less: Provision for Loan Losses 1,386 1,303 896 1,170 (950)
Net Interest Income After Provision
for Loan Losses 33,505 29,671 32,153 34,683 35,262
Other Income 8,172 8,109 23,804 14,473 9,049
Net Gains (Losses) on Securities
Transactions 408 74 (101) 23 (481)
Less: Other Expense 24,506 21,702 24,774 29,769 31,374
Income Before Income Taxes 17,579 16,152 31,082 19,410 12,456
Provision for Income Taxes 5,744 5,155 10,822 6,986 1,131
Net Income $11,835 $10,997 $20,260 $12,424 $11,325
Earnings Per Common Share1:
Basic $ 1.88 $ 1.71 $ 2.98 $ 1.72 $ 1.55
Diluted 1.85 1.69 2.95 1.71 1.50
Per Common Share1:
Cash Dividends $ .81 $ .71 $ .57 $ .45 $ .28
Book Value 12.39 11.65 11.17 9.45 8.03
Tangible Book Value2 10.32 9.46 10.89 9.15 7.79
Consolidated Year-End Balance
Sheet Data:
Total Assets $939,029 $831,559 $652,603 $789,790 $746,431
Securities Available-for-Sale 267,731 221,837 171,743 178,645 53,868
Securities Held-to-Maturity 63,016 44,082 30,876 13,921 129,735
Loans and Leases, Net of
Unearned Income 546,126 485,810 393,511 517,787 507,553
Nonperforming Assets 3,592 3,999 2,754 6,765 7,825
Deposits 775,597 720,915 541,747 694,453 650,485
Other Borrowed Funds 24,032 24,755 22,706 15,297 24,865
Long-Term Debt 45,000 --- --- --- 5,007
Shareholders' Equity 77,146 73,871 74,296 67,504 58,405
Selected Key Ratios:
Return on Average Assets 1.36% 1.49% 2.86% 1.60% 1.52%
Return on Average Equity 15.51 15.19 8.78 19.45 20.79
Dividend Payout 43.78 41.49 19.47 25.89 19.08
Average Equity to Average Assets 8.74 9.80 9.95 8.22 7.34
1 Per share amounts have been adjusted for the 1998
ten percent, the 1997 five percent, the 1996 ten
percent and the 1995 four percent stock dividends.
2 Tangible book value excludes from total equity
intangible assets, primarily goodwill associated with
branch purchases.
Item 7: Management's Discussion and Analysis of
Financial Condition and Results of Operations
The following discussion and analysis focuses on
and reviews the Company's results of operations
for each of the years in the three-year period
ended December 31, 1998 and the financial
condition of the Company as of December 31, 1998
and 1997. Per share amounts have been restated
to reflect the ten percent stock dividend paid in
August 1998 and the five percent stock dividend
paid in November 1997. 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 $11.8 million
for 1998 compared to net income of $11.0 million
for 1997 and $20.3 million for 1996. As
indicated in the following table "Summary of Core
Earnings," net income from each year included
nonrecurring items. For 1997, the principal
nonrecurring item was a favorable tax settlement
with New York State over a combined reporting
issue. For 1996 the major item was the $10.3
million in net after-tax gains from the sale of
the Company's Vermont bank. Net income, on a
recurring basis, increased $1.5 million, or 15.2%
from 1997 to 1998 after increasing by $157
thousand, or 1.6% from 1996 to 1997. Diluted
earnings per share (stated on a recurring basis)
increased $.27, or 17.5%, from 1997 to 1998, and
by $.10, or 6.9%, from 1996 to 1997.
The following analysis adjusts net income for
nonrecurring items to arrive at a comparative
presentation of the Company's "core" earnings.
Also presented are "cash" earnings per share,
which adds-back to recurring net income the
amortization of goodwill, net of tax, associated
with branch purchases.
SUMMARY OF CORE EARNINGS
(In Thousands, Except Per Share Data)
1998 1997 1996
Net Income, as Reported $11,835 $10,997 $20,260
Nonrecurring Items, Net of Tax:
Divestiture of Vermont Banking Operations --- --- (10,267)
State Tax Settlement --- (464) ---
OREO Transactions (10) (70) 174
Net Securities Transactions (241) (44) 57
Other --- (361) (323)
Recurring Net Income $11,584 $10,058 $ 9,901
Recurring Diluted Earnings Per Share $ 1.81 $ 1.54 $ 1.44
Recurring "Cash" Diluted Earnings Per Share 1.90 1.59 1.44
Diluted Earnings Per Share, as Reported 1.85 1.69 2.95
Return on Average Assets 1.36% 1.49% 2.86%
Return on Average Assets,
Based on Recurring Net Income 1.33 1.36 1.41
Return on Average Equity 15.51% 15.19% 28.78%
Return on Average Equity,
Based on Recurring Net Income 15.20 14.02 15.46
At the end of the second quarter of 1997, the
Company completed the acquisition of six branches
from Fleet Bank, extending the Company's market
area northward to Plattsburgh, New York. Effects
of the acquisition are discussed in various
sections of this "Management's Discussion and
Analysis" and in Note 25 to the Consolidated
Financial Statements.
At December 31, 1998, the Company's tangible book
value per share (shareholders' equity reduced by
intangible assets including goodwill, mortgage
servicing rights and intangible pension plan
assets) amounted to $10.32, an increase of $.86,
or 9.1%, from the prior year-end. The increase
was primarily attributable to retained current
year earnings. At year-end, the average of the
Company's bid and asked stock price was $26.125,
resulting in a trading multiple of 2.53 to
tangible book value.
The Company's cash dividend for the first two
quarters of 1998, as restated for the August 1998
10% stock dividend, was $.19. The Company
increased its quarterly cash dividend to $.21 for
the third quarter and again to $.22 for the
fourth quarter of 1998. On an annual basis, cash
dividends of $.81 for 1998 increased $.10, or
14.1%, from cash dividends of $.71 in 1997.
Nonperforming assets amounted to $3.6 million at
December 31, 1998, a decrease of $485 thousand
from the prior year-end. At year-end, the
allowance for loan losses, at $6.7 million,
represented 230% of nonperforming loans.
Acquisition of Six Fleet Branches
On June 27, 1997, the Company completed the
acquisition of six branches in upstate New York
from Fleet Bank, a subsidiary of Fleet Financial
Group, Hartford, CT. The branches, located in
the towns of Plattsburgh (2), Lake Luzerne, Port
Henry, Ticonderoga and Warrensburg, became
branches of Glens Falls National Bank. Glens
Falls National Bank acquired substantially all
deposits at the branches and most of the loans
held by Fleet Bank related to the branches.
Total deposit liabilities at the branches assumed
by Glens Falls National Bank were approximately
$140 million and the total amount of branch-related
loans acquired was approximately $34
million. Under the purchase agreement, Glens
Falls National Bank also acquired from Fleet an
additional $10 million of residential real estate
loans not related to the branches.
Divestiture of Vermont Operations
During 1996, in three separate transactions, the
Company completed the divestiture of its Vermont
subsidiary, Green Mountain Bank ("GMB"). In
January, the Company sold eight branches of GMB,
with related deposits and loans, to Mascoma
Savings Bank, Lebanon, NH. In August, the
Company sold GMB's trust business to Vermont
National Bank, Brattleboro, VT. In September, the
Company sold the remaining branches of GMB, with
related deposits and loans, to ALBANK, FSB,
Albany, NY. The charter of GMB was liquidated in
1997 and remaining net assets distributed to the
Company. All significant assets relating to the
business or operations of GMB have been sold,
except for the building which served as GMB's
main office in Rutland, VT, which was held for
sale at December 31, 1998.
Total loans and deposits transferred in the three
Vermont sale transactions amounted to
approximately $148 million and $208 million,
respectively. These and other changes are more
fully described in the following analysis of the
results of operations and changes in financial
condition. The net gain realized on these sale
transactions in 1996, net of tax, was
approximately $10.3 million.
B. RESULTS OF OPERATIONS
The following analysis of net interest income,
the provision for loan losses, noninterest
income, noninterest expense and income taxes,
presents the factors that are primarily
responsible for the Company's results of
operations for 1998 and the prior two years.
I. NET INTEREST INCOME (Fully Taxable Basis)
Net interest income represents the difference
between interest and dividends earned on loans,
securities and other earning assets and interest
paid on deposits and other sources of funds.
Changes in net interest income result from
changes in the level and mix of earning assets
and sources of funds (volume) and changes in the
yields earned and costs paid (rate). 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 the net interest margin.
COMPARISON OF NET INTEREST INCOME
(Dollars In Thousands) (Fully Taxable Basis)
Years Ended December 31, Change From Prior Year
1998 1997 1996 1998 1997
Amount Percent Amount Percent
Interest and
Dividend Income $64,131 $55,705 $55,517 $ 8,426 15.1% $ 188 .3%
Interest Expense 28,142 23,887 21,826 4,255 17.8 2,061 9.4
Net Interest Income $35,989 $31,818 $33,691$ 4,171 13.1 $(1,873) (5.6)
On a tax-equivalent basis, net interest income
was $36.0 million in 1998, an increase of $4.2
million, or 13.1% from $31.8 million in 1997.
Factors contributing to the $4.2 million increase
in net interest income are discussed in the
following section.
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 balances 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)
1998 Compared to 1997 1997 Compared to 1996
Change in Net Interest IncomeChange in Net Interest Income
Due to: Due to:
Volume Rate Total Volume Rate Total
Interest and Dividend Income:
Federal Funds Sold $ (404) $ (23) $ (427) $ 363 $ 30 $ 393
Securities Available-for-Sale
Taxable 2,788 (464) 2,324 626 493 1,119
Non-Taxable 529 3 532 60 --- 60
Securities Held-to-Maturity:
Taxable 167 (71) 96 1,394 9 1,403
Non-Taxable 772 (161) 611 517 (27) 490
Loans and Leases 6,524 (1,234) ,290 (1,882) (1,395) (3,277)
Total Interest and Dividend Income 10,376 (1,950) 8,426 1,078 (890) 188
Interest Expense:
Deposits:
Interest-Bearing Demand Deposits 794 (328) 466 383 297 680
Regular and Money Market Savings 418 (350) 68 (326) (108) (434)
Time Deposits of $100,000 or More 1,313 28 1,341 426 110 536
Other Time Deposits 1,287 43 1,330 848 204 1,052
Total Deposits 3,812 (607) 3,205 1,331 503 1,834
Short-Term Borrowings 262 (61) 201 196 31 227
Long-Term Debt 849 --- 849 --- --- ---
Total Interest Expense 4,923 (668) 4,255 1,527 534 2,061
Net Interest Income $ 5,453 $(1,282) $4,171 $ (449) $(1,424) $(1,873)
The following table reflects the components of
the Company's net interest income, setting forth,
for years ended December 31, 1998, 1997 and 1996
(I) average balances of assets, liabilities and
shareholders' equity, (II) interest and dividend
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. The
yield on securities available-for-sale is based
on the amortized cost of the securities.
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%)
(Dollars In Thousands)
Years Ended December 31, 1998 1997 1996
Interest Rate Interest Rate Interest Rate
Average Income/ Earned/ Average Income/ Earned/ Average Income/ Earned/
Balance Expense Paid Balance Expense Paid Balance Expense Paid
Federal Funds Sold $ 11,280 $ 609 5.40% $ 18,752 $ 1,035 5.52% $ 12,150 $ 642 5.28%
Securities Available-
for-Sale: (1)
Taxable 226,447 14,542 6.42 183,261 12,219 6.67 173,703 1,100 6.39
Non-Taxable 10,005 597 5.97 1,142 65 5.73 80 5 5.75
Securities Held-to-
Maturity:
Taxable 22,825 1,560 6.84 20,413 1,464 7.17 959 61 6.36
Non-Taxable 32,988 2,445 7.41 22,713 1,834 8.08 16,316 1,344 8.24
Loans & Leases 514,348 44,378 8.63 439,103 39,088 8.90 459,946 42,365 9.21
otal Earning Assets 817,893 64,131 7.84 685,384 55,705 8.13 663,154 55,517 8.37
Allowance For Loan
Losses (6,514) (6,021) (10,102)
Cash and Due
From Banks 22,891 26,341 25,303
Other Assets 39,101 32,732 28,975
Total Assets $873,371 $738,436 $707,330
Deposits:
Interest-Bearing
Demand Deposits $171,209 4,933 2.88 $144,204 4,467 3.10 $131,438 3,787 2.88
Regular and Money
Market Savings 161,874 4,251 2.63 146,529 4,183 2.85 157,892 4,617 2.92
Time Deposits of
$100,000 or More 112,226 6,075 5.41 87,956 4,734 5.38 79,996 4,198 5.25
Other Time Deposits 195,283 10,715 5.49 171,820 9,385 5.46 156,236 8,333 5.33
Total Interest-
Bearing Deposits 640,592 25,974 4.05 550,509 22,769 4.14 525,562 20,935 3.98
Short-Term Borrowings 28,001 1,319 4.71 22,491 1,118 4.97 18,524 891 4.81
Long-Term Debt. 16,548 849 5.13 --- --- --- --- --- ---
Total Interest-
Bearing Funds 685,141 28,142 4.11 573,000 23,887 4.17 544,086 21,826 4.01
Demand Deposits 96,149 78,704 77,479
Other Liabilities 15,752 14,339 15,374
Total Liabilities 797,042 666,043 636,939
Shareholders' Equity 76,329 72,393 70,391
Total Liabilities
and Shareholders'
Equity $873,371 $738,436 $707,330
Net Interest Income
(Fully Taxable Basis) 35,989 31,818 33,691
Reversal of Tax
Equivalent
Adjustment (1,098) (844) (642)
Net Interest Income $34,891 $30,974 $33,049
Net Interest Spread 3.73% 3.96% 4.36%
Net Interest Margin 4.40% 4.64% 5.08%
CHANGES IN NET INTEREST INCOME DUE TO RATE
YIELD ANALYSIS December 31,
1998 1997 1996
Yield on Earning Assets 7.84% 8.13% 8.37%
Cost of Interest-Bearing Liabilities 4.11 4.17 4.01
Net Interest Spread 3.73% 3.96% 4.36%
Net Interest Margin 4.40% 4.64% 5.08%
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 level of
nonperforming loans. The change in net interest
income due to changes in rate was a decrease of
$1.3 million in 1998 and a decrease of $1.4
million in 1997.
The Federal Reserve Board attempts to influence
prevailing federal funds and prime interest rates
and sets changes to the Federal Reserve Bank
discount rate. The following chart presents
recent changes:
Key Interest Rate Changes 1996 - 1998
Federal
Discount Funds Prime
Date Rate Rate Rate
November 17, 1998 4.50% 4.75% 7.75%
October 8, 1998 4.75 5.00 8.00
September 29, 1998 4.75 5.25 8.25
March 26, 1997 4.75 5.50 8.50
January 31, 1996 5.00 5.25 8.00
In the fall of 1998, after 18 months of relative
interest rate stability, the Federal Reserve
Board took steps in its open market operations
leading to three 25 basis point decreases in the
federal funds target rate, which led to parallel
changes in the prime rate.
Net interest margin for 1998, at 4.40%,
represented a 24 basis point decrease from the
net interest margin of 4.64% in 1997. This
reflects a 29 basis point decrease in the yield
on earning assets and a 6 basis point decrease in
the cost of paying liabilities from 1997 to 1998.
The decrease in net interest margin was primarily
attributable to three factors: (i) The lack of
any significant slope to the yield curve (the
normal slope of the yield curve is caused by
higher yields for instruments with longer
maturities) was the most significant factor
leading to the decrease in net interest margin
from 1997 to 1998, since the Company was unable
to obtain the same spread as in prior periods
between longer-term interest bearing liabilities
and earning assets as those items repriced. (ii)
The fact that the decrease in the yield on
earning assets was greater than the decrease in
the cost of paying liabilities from 1997 to 1998
reflected the competitive environment for loan
products in the Company's market area. (iii) The
Company took advantage of its borrowing
arrangement with the Federal Home Loan Bank
("FHLB") during 1998. These FHLB borrowings,
amounting to $45 million by year-end, were
primarily secured by 1-4 family residential real
estate loans. The spread that the Company was
able to earn on the difference between the rates
on the FHLB advances and in invested funds, was
less than the Company's total net interest
spread. However, there was a positive increase
to net interest income, even though there was a
negative impact on net interest margin.
In the 1996 to 1997 analysis, the negative impact
on net interest income attributable to rate
changes was $1.4 million.
Although the Federal Reserve Board did not raise
the discount rate during 1997, its open market
operations early in 1997 led directly to a 25
basis point increase in the federal funds
overnight rate. This increase in the cost of
federal funds was mirrored in an overall increase
in the cost of funds to the Company, while at the
same time its yield on earning assets decreased.
The net interest margin for 1997, at 4.64%,
represented a 44 basis point decrease from the
net interest margin of 5.08% in 1996. This
reflected a 24 basis point decrease in the yield
on earning assets and a 16 basis point increase
in the cost of paying liabilities from 1996 to
1997. A significant shift in the mix of earning
assets between the two periods accounted for most
of the decrease in the yield on earning assets.
After the sale of the remaining Vermont branches
at the end of September 1996, and particularly
after the June 1997 acquisition of the six Fleet
branches, the Company maintained a significantly
larger portion of its earning assets in
securities and federal funds sold, which were at
lower yields than the Company's loan portfolio.
This was due to the fact that the Vermont banking
operations maintained a high loan to deposit
ratio during the 1996 period whereas the loan to
deposit ratio of the Fleet branches acquired was
much lower; the lower-yielding liquid assets
received from Fleet were only gradually
reinvested in securities and loans. The 1996 to
1997 change was further exasperated by the fact
that, in the 1996 period, the yield on loans in
the Vermont portfolio was temporarily boosted as
a result of unexpected payments on certain
restructured loans reported in that period as
interest income. Also contributing to the 1996
to 1997 decline in net interest margin was a
shift in the New York based loan portfolio of
loan products between the years favoring lower
yielding indirect loans.
A discussion of the impact on net interest income
resulting from changes in interest rates vis a
vis the repricing patterns of the Company's
earning assets and interest-bearing liabilities
is included later in this report under Item 7A
"Quantitative and Qualitative Disclosures About
Market Risk."
CHANGES IN NET INTEREST INCOME DUE TO VOLUME
AVERAGE BALANCES
(Dollars in Thousands)
Change % Change
1998 1997 1996 1998 1997 1998 1997
Earning Assets $817,893 $685,384 $663,154 $132,509 $ 22,230 19.3% 3.4%
Interest-Bearing
Liabilities 685,141 573,000 544,086 112,141 28,914 19.6 5.3
Demand Deposits 96,149 78,704 77,479 17,445 1,225 22.2 1.6
Total Assets 873,371 738,436 707,330 134,935 31,106 18.3 4.4
Earning Assets to
Total Assets 93.65% 92.82% 93.75% .83% (.94)% 0.9 (1.0)
In general, changes in the volume of earning
assets and paying liabilities will result in
corresponding changes in net interest income.
However, changes due to volume can be enhanced or
restricted by shifts within the relative mix of
earning assets or interest-bearing liabilities
between instruments of different rates. The
change in net interest income due to changes in
volume was an increase of $5.5 million in 1998
and a decrease of $449 thousand in 1997.
Average earning assets increased by $132.5
million, or 19.3%, between 1997 and 1998.
Average interest-bearing liabilities increased
similarly, by 19.6%, between the two years. This
increase in volume led to a $5.5 million increase
in net interest income from 1997 to 1998. While
the Fleet branch acquisition had a significant
impact on the increase in average earning assets
between 1997 and 1998, due to the fact that the
average balances in 1997 only had a six month
impact on average earning assets in that year,
the chief factor was the internal asset growth in
1998 itself. From year-end 1997 to year-end 1998
earning assets increased $108.6 million. Of that
increase, $60.3 million occurred within the loan
portfolio, with nearly all of the increases
attributable to indirect automobile loans and
residential real estate loans. During 1998 the
Company took advantage of its borrowing agreement
with the FHLB accepting advances of $45 million
by year-end. The remaining increase in earning
assets was essentially funded primarily by
deposit growth.
Average earning assets increased by $22.2
million, or 3.4%, between 1996 and 1997.
However, average interest-bearing liabilities
increased even more, by 5.3%, between the two
years. The negative impact of faster growth in
interest-bearing liabilities than in earning
assets was exacerbated by shifts within average
earning assets between the two years. The
disposition of the Vermont bank in 1996 involved
the sale of an operation with a relatively high
loan-to-deposit ratio. The acquisition of six
branches from Fleet Bank in June 1997, on the
other hand, involved the acquisition of a
relatively small percentage of loans
(approximately $44 million) and a relatively high
level of lower-yielding liquid assets
(approximately $80 million in cash) with the
latter initially being invested in federal funds
and only gradually being reinvested in higher-yielding
securities and loans.
Increases in the volume of loans and deposits, as
well as yields and costs by type, for the
continuing New York operations are discussed
later in this report under Item 7.C. "Financial
Condition."
II. PROVISION FOR LOAN LOSSES AND ALLOWANCE FOR
LOAN LOSSES
Through the provision for loan losses, an
allowance (reserve) is maintained for estimated
loan losses. Actual loan losses are charged
against this allowance when they are identified.
In evaluating the adequacy of the allowance for
loan losses, management considers various risk
factors influencing asset quality. The analysis
is performed on a loan by loan basis for impaired
and large balance loans, and by portfolio type
for smaller balance homogeneous loans. 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.
The provision for loan losses was largely
influenced by the level of nonperforming loans,
the expected future levels of nonperforming
loans, by the level of loans actually charged-off
against the allowance for loan losses during the
year and by the change in the mix of loan
categories within the loan portfolio.
At December 31, 1998, nonperforming loans
amounted to $2.9 million, a decrease of 20.5%
from the balance at December 31, 1997. The
decrease was primarily attributable to one large
commercial loan, placed on nonaccrual status
during 1997, which fully paid-off in 1998.
At December 31, 1998 the allowance for loan
losses was $6.7 million. The allowance for loan
losses was 230% of the amount of nonperforming
loans at that date.
During 1998, loan losses charged against the
allowance, net of recoveries, were $835 thousand,
or .16% of average loans for the period. The
provision for loan losses charged to expense for
1998 was $1.4 million, or .27% of average loans
for the period.
At December 31, 1997, nonperforming loans
amounted to $3.7 million, an increase of 40.7%
from the balance at December 31, 1996. The
increase was primarily attributable to a large
commercial loan placed on nonaccrual status
during 1997, the same loan discussed above that
was fully paid off in 1998.
At December 31, 1997 the allowance for loan
losses was $6.2 million. The allowance for loan
losses was 168% of the amount of nonperforming
loans at that date.
During 1997, loan losses charged against the
allowance, net of recoveries, were $1.4 million,
or .32% of average loans for the period. The
provision for loan losses charged to expense for
1997 was $1.3 million, or .30% of average loans
for the period. In addition, in mid-1997, the
Company made a purchase acquisition adjustment to
the allowance of $700 thousand for loans acquired
in the Fleet branch transaction. This adjustment
represented the allowance for inherent risk of
loss in the loans acquired.
During 1996, loan losses charged against the
allowance, net of recoveries, were $580 thousand,
or .13% of average loans for the period.
However, the allowance for loan losses was
significantly reduced during the year by $6.8
million. This was the amount of the reserve
attributable to loans transferred in the
divestiture of the Vermont banking operations.
These reductions in the allowance for loan losses
were offset in part by a provision for loan
losses of $896 thousand, or .19% of average loans
for the year.
At December 31, 1996 the allowance for loan
losses was $5.6 million. The allowance for loan
losses was 213% of the amount of nonperforming
loans at that date.
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 out of the
Vermont banking operations. Nonaccrual loans
increased $626 thousand or 17.3% from the year-end
1994 balance. The increase in nonaccrual
loans was due primarily to 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 loan losses for 1995 were $1.4 million.
These losses compare to net loan losses of $2.8
million for the year ended December 31, 1994. As
a ratio to average loans, the net loan losses
were .27% and .56%, for the same respective
periods.
The provision for loan losses in 1994 was
actually a credit to the consolidated statement
of income resulting in 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 from the Company's Vermont
operations having been completed, the Company
reduced 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 net credit of $950 thousand
and as a ratio of average loans, the provision
was (.19)% in 1994.
SUMMARY OF THE ALLOWANCE AND PROVISION FOR LOAN LOSSES
(Dollars In Thousands) (Loans and Leases, Net of Unearned Income)
Years-Ended December 31, 1998 1997 1996 1995 1994
Loans and Leases at End of Period $546,126 $485,810 $393,511 $517,787 $507,553
Average Loans and Leases 514,348 439,103 459,946 513,266 502,224
Total Assets at End of Period 939,029 831,599 652,603 789,790 746,431
Nonperforming Assets:
Nonaccrual Loans:
Construction and Land Development $ --- $ --- $ --- $ 104 $ 327
Commercial Real Estate 191 119 83 1,299 1,050
Commercial Loans 671 1,951 1,487 1,979 1,017
Other 1,408 1,251 727 862 1,224
Total Nonaccrual Loans 2,270 3,321 2,297 4,244 3,618
Loans Past Due 90 or More Days and
Still Accruing Interest 657 363 321 111 231
Restructured Loans in Compliance with
Modified Terms --- --- --- --- 580
Total Nonperforming Loans 2,927 3,684 2,618 4,355 4,429
Repossessed Assets 38 78 45 25 1
Other Real Estate Owned 627 315 136 2,410 3,396
Total Nonperforming Assets $3,592 $ 4,077 $ 2,799 $ 6,790 $ 7,826
Allowance for Loan Losses:
Balance at Beginning of Period $6,191 $ 5,581 $12,106 $12,338 $16,078
Allowance Acquired (Transferred) --- 700 (6,841) --- ---
Loans Charged-off:
Commercial, Financial
and Agricultural (166) (596) (185) (579) (997)
Real Estate - Commercial (43) --- (104) (369) (689)
Real Estate - Construction --- --- (2) (101) (1,181)
Real Estate - Residential (133) (121) (57) (160) (143)
Installment Loans to Individuals (836) (881) (598) (562) (476)
Lease Financing Receivables --- --- --- --- ---
Total Loans Charged-off (1,178) (1,598) (946) (1,771) 3,486)
Recoveries of Loans Previously
Charged-off:
Commercial, Financial
and Agricultural 19 27 84 76 260
Real Estate - Commercial --- 2 48 104 35
Real Estate - Construction --- --- --- 10 68
Real Estate - Residential 23 3 12 8 143
Installment Loans to Individuals 301 173 222 171 188
Lease Financing Receivables --- --- --- --- 2
Total Recoveries of Loans
Previously Charged-off 343 205 366 369 696
Net Loans Charged-off (835) (1,393) (580) (1,402) (2,790)
Provision for Loan Losses
Charged to Expense 1,386 1,303 896 1,170 (950)
Balance at End of Period $6,742 $ 6,191 $ 5,581 $12,106 $12,338
Nonperforming Asset Ratio Analysis:
Net Loans Charged-off as a Percentage
of Average Loans .16% .32% .13% .27% .56%
Provision for Loan Losses
as a Percentageof Average Loans .27 .30 .19 .23 (.19)
Allowance for Loan Losses
as a Percentage of Period-end Loans 1.23 1.27 1.42 2.34 2.43
Allowance for Loan Losses
as a Percentage of
Nonperforming Loans 230.32 168.05 213.18 277.98 278.57
Nonperforming Loans as a Percentage
of Period-end Loans .54 .76 .67 .84 .87
Nonperforming Assets as a Percentage
of Period-end Total Assets .38 .49 .43 .86 1.05
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. Net gains or losses on the sale of
securities available-for-sale is another category
of other income.
ANALYSIS OF OTHER INCOME
(Dollars In Thousands) Change
December 31, Amount Percent
1998 1997 1996 1998 1997 1998 1997
Income from Fiduciary
Activities $ 3,025 $ 2,672 $ 3,458 $ 353 $ (786) 13.2% (22.7)%
Fees for Other Services 4,236 3,723 3,959 513 (236) 13.8 (6.0)
Net Securities
Gains (Losses) 408 74 (101) 334 175 51.4 ---
Net Gain on Divestiture of
Vermont Operations --- --- 15,330 --- (15,330) --- ---
Other Operating Income 911 1,714 1,057 (803) 657 (46.8) 62.2
Total Other Income $ 8,580 $ 8,183 $23,703 $ 397 $(15,520) 4.9 (65.5)
Total other income increased $397 thousand, or
4.9%, from 1997 to 1998. Without regard to net
securities transactions and one-time nonrecurring
items, total other income was $8.2 million for
1998 and $7.4 million for 1997, an increase of
$738 thousand, or 9.9%.
For 1998, income from fiduciary activities
increased $353 thousand, or 13.2%, from 1997.
The increase was in large part attributable to an
increase in fees from processing estates, a
source of fee income which is not consistent from
year to year. At year-end, trust assets under
management amounted to $598.8 million, an
increase of $71.9 million, or 13.6%, from year-end
1997, with a modest increase in the total
number of accounts under administration.
Fees for other services include deposit service
charges, credit card merchant processing fees,
safe deposit box fees and loan servicing fees.
These fees amounted to $4.2 million in 1998, an
increase of $513 thousand, or 13.8%, from 1997.
The increase in 1998 was primarily attributable
to increased deposit service charges (largely
traceable to the deposit accounts acquired in the
Fleet transaction which were only held for six
months in the 1997 period) and increased fee
income from processing merchant credit card
transactions.
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 net gains on
the sale of loans and other real estate owned, if
any, as well as other miscellaneous revenues.
For 1998, other operating income, on a recurring
basis, amounted to $895 thousand, a decrease of
$127 thousand, or 12.4%, from $1.022 million in
1997. The decrease was primarily attributable to
a decrease in fees from servicing credit card
portfolios for correspondent banks.
During 1998, the Company realized net securities
gains of $408 thousand on the sale of $41.0
million from its available-for-sale portfolio.
The primary purpose of these sales was to extend
the weighted average maturity of the investments
in that portfolio.
For the 1996 to 1997 comparison, without regard
to the $15.3 million net pre-tax gain on the
divestiture of the Vermont operations in 1996 and
the impact of net securities transactions in both
years, other income for 1997 decreased $365
thousand, or 4.3%, from the 1996 period.
Income from fiduciary activities decreased $786
thousand, or 22.7%, from 1996 to 1997. The
Vermont trust business, which was sold in August
1996, had represented approximately one half of
the Company's income from fiduciary activities.
The Company did not acquire any trust business
from Fleet in the June 1997 branch acquisition.
Income from the New York based trust business
increased by $249 thousand, or 10.3% from 1996 to
1997, but this was not enough to offset the
decrease in trust income resulting from the
Vermont sale. Trust assets under management were
$526.9 million at December 31, 1997, an increase
of $92.3 million, or 21.2%, from December 31,
1996.
Fees for other services amounted to $3.7 million
in 1997, a decrease of $236 thousand, or 6.0%,
from 1996. The decrease was primarily
attributable to loan servicing fees related to
serviced loans transferred in the disposition of
Vermont operations in September 1996. To a
lesser extent, the decrease was attributable to
the fact that the Company sold deposit balances
in 1996 of $108 million, which contributed fee
income for nine months in that period, and
purchased $140 million of deposit balances from
Fleet in June 1997, which contributed service fee
income for only six months in that year.
Other operating income for 1997 amounted to $1.7
million, an increase of $657 thousand, or 62.2%,
from 1996. The increase was primarily
attributable to one-time receipts in 1996
relating to an insurance settlement and
unexpected payments related to the former Vermont
operations. Without regard to these two items,
the period-to-period change would have been an
increase of $126 thousand, or 11.9%, from 1996,
and was attributable to an increase in
miscellaneous other revenues.
During 1997, the Company realized net gains of
$74 thousand on the sale of securities classified
as available-for-sale. Proceeds from these sales
amounted to $37.0 million with gross gains of
$137 thousand, offset in part by gross losses of
$63 thousand. The primary purpose of the sales
was to extend the average maturity of the
portfolio.
During 1996, the Company recognized net losses of
$101 thousand on the sale of $51.1 million of
securities classified as available-for-sale.
Most of the sales were made for the purpose of
extending the term of the securities at higher
yields.
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
1998 1997 1996 1998 1997 1998 1997
Salaries and Benefits $13,810 $12,726 $14,971 $1,084 $(2,245) 8.5% (15.0)%
Net Occupancy Expense 1,674 1,561 1,790 113 (229) 7.2 (12.8)
Furniture and Equipment 2,190 1,792 1,677 398 115 22.2 6.9
Other Operating Expense 6,832 5,623 6,336 1,209 (713) 21.5 (11.3)
Total Other Expense $24,506 $21,702 $24,774 $2,804 $(3,072) 12.9 (12.4)
Other expense for 1998 amounted to $24.5 million,
an increase of $2.8 million, or 12.9%, from 1997.
The most significant factor in the year-to-year
increase was the June 1997 Fleet branch
acquisition, which had a full twelve month impact
on 1998 but only a six month impact on 1997.
Upon acquisition of the Fleet branches in June
1997, the Company retained all 34 employees (32
full-time equivalent). Total full-time
equivalent staff at the end of 1998 was 366, an
increase of 16, or 4.6%, from year-end 1997. The
8.5% period-to-period increase in salary and
benefit expenses also included normal salary
raises.
Occupancy expense increased by 7.2% from 1997 to
1998. The increase, again, was primarily
attributable to the acquisition of six Fleet
branches in June 1997.
The increase in furniture and equipment expense
of $398 thousand, or 22.2%, from 1997 to 1998 was
affected by the branch acquisition and also by
the increased depreciation expense resulting from
a significant investment in software and hardware
for servicing the Company's and correspondent
banks' credit card portfolios.
Other operating expense increased $1.2 million,
or 21.5% from 1997 to 1998. This category of
expense includes the amortization of goodwill
associated with branch acquisitions. The 1997
period included only six months of expense for
the branches acquired from Fleet in mid-1997,
whereas the 1998 period included a full year.
Total goodwill amortization expense for 1998 was
$944, an increase of $451 thousand from 1997.
The Company also devoted significant resources
towards establishing a marketing presence in the
Plattsburgh, New York area. The Company's costs
to implement its year 2000 preparedness program
are reported in section G of "Management's
Discussion and Analysis of Financial Condition
and Results of Operations."
In the prior year comparison, other expense for
1997 amounted to $21.7 million, a decrease of
$3.1 million, or 12.4%, from 1996. Most of the
decrease was in the area of employee salaries and
benefits. With the sale of the Vermont
operations in 1996, the Company reduced the
number of its employees by 83 (71 full-time
equivalent), most of whom continued as employees
of the purchasers. Upon acquisition of the Fleet
branches in June 1997, the Company retained all
34 employees (32 full-time equivalent). The net
reduction in staff was primarily responsible for
the $2.2 million decrease in salaries and
benefits, offset in part by normal salary
increases.
Occupancy expenses and other operating expenses
decreased by 12.8% and 11.3%, respectively, from
1996 to 1997. The decreases, again, were
primarily attributable to the fact that the
decrease in expenses resulting from the sale of
the Vermont operations in 1996 outweighed the
increase in expenses resulting from the
acquisition of six Fleet branches in June 1997.
Furniture and equipment expense increased by $115
thousand, or 6.9%, from 1996 to 1997, primarily
due to an investment in data processing equipment
at the end of 1996.
V. INCOME TAXES
The following table sets forth the Company's
provision for income taxes and effective tax
rates for the periods presented.
INCOME TAXES AND EFFECTIVE RATES
(Dollars in Thousands) Years Ended December 31,
1998 1997 1996
Provision for Income Taxes $5,744 $5,155 $10,822
Effective Tax Rate 32.7% 31.9% 34.8%
The provisions for federal and state income taxes
amounted to $5.7 million, $5.2 million and $10.8
million for 1998, 1997 and 1996, respectively.
The effective income tax rates for 1998, 1997 and
1996 were 32.7%, 31.9% and 34.8%, respectively.
The increase in the effective income tax rate
from 1997 to 1998, as well as the decrease in the
effective income tax rate from 1996 to 1997 was
primarily attributable to a favorable settlement
with the New York State Department of Taxation
and Finance over a combined reporting issue in
the first quarter of 1997. Adjusting for the
effects of the 1997 settlement, the effective
rate for 1997 was 34.8%. As adjusted for 1997,
the decrease in the effective rate from 1997 to
1998 was primarily attributable to the
implementation of certain tax planning
strategies.
C. FINANCIAL CONDITION
I. INVESTMENT PORTFOLIO
Investment securities are classified as held-to-
maturity, trading, or available-for-sale,
depending on the purposes for which such
securities were acquired or are being held.
Securities held-to-maturity are debt securities
that 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 sale 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 accumulated
other comprehensive income. At December 31,
1998, the Company held no trading securities.
Securities Available-for-Sale:
The following table sets forth the carrying value
of the Company's securities available-for-sale
portfolio, at year-end 1998, 1997 and 1996.
SECURITIES AVAILABLE-FOR-SALE
(In Thousands) December 31,
1998 1997 1996
U.S. Treasury and Agency Obligations $ 30,134 $ 76,006 $ 95,733
State and Municipal Obligations 9,240 2,999 ---
Collateralized Mortgage Obligations 69,257 67,207 42,894
Other Mortgage-Backed Securities 120,104 64,057 21,732
Corporate and Other Debt Securities 34,953 9,145 9,184
Mutual Funds and Equity Securities 4,043 2,423 2,200
Total $267,731 $221,837 $171,743
Other mortgage-backed securities principally
consisted of agency mortgage pass-through
securities. 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 ("CMOs") 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
CMOs with shorter maturities. 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, 1998. CMO's and
other mortgage-backed securities are included in
the table based on their expected average lives.
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 $ 1,513 $ 13,317 $15,304 $ -- $ 30,134
State and Municipal
Obligations 7,240 --- --- 2,000 9,240
Collateralized Mortgage
Obligations 25,865 43,392 --- --- 69,257
Other Mortgage-Backed
Securities 728 114,332 5,044 --- 120,104
Corporate and
Other Debt Securities 30,869 3,084 --- 1,000 34,953
Mutual Funds and
Equity Securities --- --- --- 4,043 4,043
Total $66,215 $174,215 $20,348 $7,043 $267,731
The following table sets forth the tax-equivalent
yields of the Company's securities available-for-
sale portfolio at December 31, 1998.
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 6.66% 5.94% 6.46% ---% 6.24%
State and Municipal
Obligations 5.99 --- --- 8.65 6.56
Collateralized Mortgage
Obligations 6.52 6.32 --- --- 6.40
Other Mortgage-Backed
Securities 6.85 6.44 6.14 --- 6.43
Corporate and
Other Debt Securities 5.88 7.32 --- 9.90 6.12
Mutual Funds and
Equity Securities --- --- --- 6.88 6.88
Total 6.19 6.39 6.37 7.81 6.37
The yields on 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, 1998. Yields on
obligations of states and municipalities exempt
from federal taxation 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 1998, the Company realized net securities
gains of $408 thousand on the sale of $41.0
million from its available-for-sale portfolio.
The primary purpose of the sales was to extend
the weighted average maturity of investments in
the portfolio, by reinvesting in securities with
later expected maturities.
During 1997, the Company realized net gains of
$74 thousand on the sale of securities available-
for-sale. Proceeds from these sales amounted to
$37.0 million with gross gains of $137 thousand,
offset in part by gross losses of $63 thousand.
Proceeds were reinvested in available-for-sale
securities having later maturities than the
securities sold.
During 1996, the Company realized net losses of
$101 thousand on the sale of $51.1 million of
securities from the available-for-sale portfolio.
Proceeds from sales early in the year were used
to provide funds required in completing the sale
of eight branches of the Vermont bank to Mascoma
Savings Bank, a transaction in which the deposit
liabilities assumed by the purchaser
substantially exceeded the loans and other
branch-related assets acquired including the
deposit premium. Other sales of securities from
the available-for-sale portfolio were used to
extend the average maturity and increase the
yield on the portfolio.
At December 31, 1998 and 1997, the weighted
average maturity was 2.6 and 2.4 years,
respectively, for debt securities in the
available-for-sale portfolio.
At December 31, 1998 the net unrealized gain on
securities available-for-sale amounted to $1.1
million. The net unrealized gain or loss, net of
tax, is reflected in accumulated other
comprehensive income.
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.
SECURITIES HELD-TO-MATURITY
(In Thousands) December 31,
1998 1997 1996
U.S. Treasury and Agency Obligations $ 3,989 $ --- $ ---
State and Municipal Obligations 42,458 24,800 19,765
Other Mortgage-Backed Securities 16,569 19,282 11,111
Total $63,016 $44,082 $30,876
For information regarding the fair 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, 1998. Other
mortgage-backed securities are allocated to
maturity periods based on final maturity date.
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
U.S. Treasury and Agency Obligations $ --- $ --- $ 3,989 $ --- $ 3,989
State and Municipal Obligations. . 4,055 3,874 17,208 17,321 42,458
Other Mortgage-Backed Securities --- --- --- 16,569 16,569
Total Securities Held-to-
Maturity $4,055 $3,874 $21,197 $33,890 $63,016
The following table sets forth the tax-equivalent
yields of the Company's portfolio of securities
held-to-maturity at December 31, 1998.
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
U.S. Treasury & Agency Obligations ---% ---% 6.24% ---% 6.24%
State and Municipal Obligations 6.40 7.90 7.35 6.90 7.13
Other Mortgage-Backed Securities --- --- --- 6.77 6.77
Total Securities Held-to-
Maturity 6.40 7.90 7.35 6.84 7.03
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, 1998. Yields
on obligations of states and municipalities
exempt from federal taxation were computed on a
fully tax-equivalent basis using a marginal tax
rate of 35%.
During 1998, 1997 and 1996, the Company sold no
securities from the held-to-maturity portfolio.
The weighted-average maturity of the held-to-
maturity portfolio was 6.4 years and 5.7 years at
December 31, 1998 and 1997, respectively.
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,
1998 1997 1996 1995 1994
Amount % Amount % Amount % Amount % Amount %
Commercial, Financial
and Agricultural $ 35,961 6 $ 46,124 9 $ 48,372 12 $ 79,993 15 $ 74,455 15
Real Estate - Commercial 58,420 11 50,680 10 36,302 9 71,622 14 81,704 16
Real Estate - Construction 3,406 1 2,072 1 971 1 2,051 1 5,136 1
Real Estate - Residential 238,425 44 208,258 43 168,429 43 238,298 46 230,943 45
Installment Loans to
Individuals 209,914 38 178,676 37 139,437 35 125,823 24 115,315 23
Total Loans and Leases 546,126 100 485,810 100 393,511 100 17,787 100 507,553 100
Allowance for Loan Losses (6,742) (6,191) (5,581) (12,106) (12,338)
Total Loans and Leases,
Net $539,384 $479,619 $387,930 $505,681 $495,215
Compared to prior years, the Company experienced
a significant increase in originations for
residential real estate loans during 1998. The
majority of the residential loan originations
represented new-money mortgages, rather than the
refinancing of existing loans. The Company
closed nearly 700 residential loans during the
year, amounting to $59.0 million of loan
originations. Unlike 1998, the increase in
residential real estate loans in 1997 was
primarily attributable to the acquisition of such
loans incident to the purchase of the branches
from Fleet Bank.
In 1998, the Company also continued to expand its
indirect automobile lending program, which is the
primary factor in the $31.2 million increase in
installment loans to individuals from 1997 to
1998. Indirect loans are vehicle acquisition
loans to consumers financed through local
dealerships where, by prior arrangement, the
Company acquires the dealer paper. The Company
also experienced an increase in consumer
installment loans in 1997 with most of the
increase attributable to the Fleet Branch
acquisition and the remainder principally due to
steady growth of the indirect loan program.
Although the yields on the consumer portfolios
(other than credit card loans) typically are
lower than on the commercial portfolios, the
Company has historically experienced fewer loan
losses in consumer loans than commercial loans,
in proportion to outstanding average loan
balances.
Overall, the Company experienced a slight shift
during the year in the mix within the loan
categories above, with a small percentage
increase in residential real estate loans and
installment loans to individuals and a small
decrease in commercial loans.
In the Fleet branch acquisition completed on June
27, 1997, the Company acquired $44.2 million of
loans (consumer loans - $16.6 million, home
equity loans - $7.1 million, commercial loans -
$5.6 million, commercial real estate loans - $4.8
million, and residential real estate loans -
$10.1 million). The communities served by the
acquired branches have contributed to the
internal loan growth experienced by the Company
since the closing of the branch acquisition.
During 1996, the Company transferred
substantially all of the loans in its Vermont
banking operation in two branch sale
transactions, the sale of eight branches to
Mascoma Savings Bank in January 1996 and the sale
of the Company's remaining six Vermont branches
to ALBANK in September 1996. The Vermont loan
portfolio had a higher percentage of commercial
loans than the loan portfolios of the Company's
New York banks. Consequently, the divestiture of
the Vermont banking operations is largely
responsible for the shift in the mix of the loan
portfolio from commercial to consumer loans
between year-end 1995 and year-end 1996. This
shift was augmented by the Company's
concentration in its New York residential real
estate loans and installment loans to individuals
(primarily automobile loans).
The following table indicates the changing mix in
the Company's loan portfolio by presenting the
quarterly average balances for the Company's
significant loan products for the past five
quarters. The ensuing tables present 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
Dec 1998 Sep 1998 Jun 1998 Mar 1998 Dec 1997
Commercial and
Commercial Real Estate $ 99,718 $ 98,177 $103,805 $102,983 $100,604
Residential Real Estate 181,211 173,598 162,071 151,417 147,928
Home Equity 32,782 33,474 35,331 36,593 36,601
Indirect Consumer Loans 172,921 161,508 151,603 143,495 139,401
Direct Consumer Loans 46,033 46,253 46,495 49,047 49,747
Credit Card Loans 6,841 6,855 7,138 7,413 7,602
Total Loans $539,506 $519,865 $506,443 $490,948 $481,883
Percentage of Total
Quarterly Average Loans
Commercial and
Commercial Real Estate 18.5% 18.9% 20.5% 21.0% 20.9%
Residential Real Estate 33.6 33.4 32.0 30.8 30.7
Home Equity 6.1 6.4 7.0 7.5 7.6
Indirect Consumer Loans 32.0 31.1 29.9 29.2 28.9
Direct Consumer Loans 8.5 8.9 9.2 10.0 10.3
Credit Card Loans 1.3 1.3 1.4 1.5 1.6
Total Loans 100.0% 100.0% 100.0% 100.0% 100.0%
Quarterly Tax-Equivalent
Yield on Loans
Commercial and
Commercial Real Estate 9.22% 9.50% 10.24% 9.60% 9.62%
Residential Real Estate 7.77 7.86 8.13 8.34 8.23
Home Equity 8.78 9.00 9.10 9.07 9.10
Indirect Consumer Loans 8.11 8.13 8.16 8.17 8.24
Direct Consumer Loans 8.72 8.55 9.00 9.18 9.18
Credit Card Loans 15.02 15.51 16.34 16.41 16.07
Total Loans 8.38 8.51 8.83 8.82 8.81
During the quarter ending June 1998, the Company
received a payoff on a loan which had been on
nonaccrual status. Otherwise the yield on
commercial and commercial real estate would have
been 9.46% for that quarter, rather than 10.24%.
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, 1998. For purposes of determining
relevant maturities, loans are assumed to mature
at (but not before) their scheduled repayment
dates as required by contractual terms. Demand
loans and overdrafts are included in the "Within
1 Year" maturity category.
MATURITY AND REPRICING OF COMMERCIAL LOANS
(In Thousands) After 1 After
WithinBut Within Five
1 Year 5 Years Years Total
Commercial, Financial and Agricultural $17,552 $10,280 $ 8,129 $35,961
Real Estate - Construction 410 819 2,177 3,406
Total $17,962 $11,099 $10,306 $39,367
Fixed Interest Rates $ 2,656 $ 8,788 $ 9,635 $21,079
Variable Interest Rates 15,306 2,311 671 18,288
Total $17,962 $11,099 $10,306 $39,367
During 1998, the Company borrowed funds from the
FHLB. The borrowings, which equaled $45 million
at December 31, 1998, were used to finance
expansion in the Company's loan and investment
portfolios. The borrowings were collateralized
with approximately $152.6 million in 1-4 family
residential real estate loans.
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 financial statements
because they were not yet funded. As of December
31, 1998, the total contingent liability for
standby letters of credit amounted to $723
thousand. In addition to these instruments, the
Company has issued lines of credit to customers,
including home equity lines of credit, credit
card lines of credit, commitments for residential
and commercial construction loans and other
personal and commercial lines of credit, which
also may be unfunded or only partially funded
from time to time. 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,
1998, the Company had outstanding unfunded loan
commitments in the aggregate amount of
approximately $92.8 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 the full
repayment of principal and interest is, in the
opinion of management, uncertain. Upon reaching
120 days delinquent, loans are charged-off
against the allowance for loan losses in an
amount equal to unpaid principal and accrued
interest minus the fair value of collateral plus
estimated costs to sell. There were no material
commitments to lend additional funds on
outstanding nonaccrual loans at December 31,
1998.
Loans and leases past due 90 days or more and
still accruing interest, as identified in the
following table, are those loans and leases which
were contractually past due 90 days or more but
because of expected repayments, were still
accruing interest.
Loans classified as "restructured" are reported
in accordance with SFAS No. 15, "Accounting by
Debtors and Creditors for Troubled Debt
Restructurings," as amended by SFAS No. 114 and
118. The standard 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 restructured loans.
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.
The Company's nonaccrual, past due and
restructured loans and leases were as follows:
SCHEDULE OF NONPERFORMING LOANS
(Dollars In Thousands) December 31,
1998 1997 1996 1995 1994
Nonaccrual Loans:
Construction and Land Development $ --- $ --- $ --- $ 104 $ 327
Commercial Real Estate 191 119 83 1,299 1,050
Commercial Loans 671 1,951 1,487 1,979 1,017
Other 1,408 1,251 727 862 1,224
Total Nonaccrual Loans 2,270 3,321 2,297 4,244 3,618
Loans Past Due 90 Days or More
and Still Accruing Interest 657 363 321 111 231
Restructured Loans in Compliance
with Modified Terms --- --- --- --- 580
Total Nonperforming Loans $2,927 $3,684 $2,618 $4,355 $4,429
Total Nonperforming Loans
as a Percentage of Period-End Loans .54% .76% .67% .84% .87%
The following table presents additional
disclosures required by SFAS No. 114 relating to
impaired loans accounted for under SFAS No. 114.
All loans reported in the schedule below are
included in nonaccrual loans in the schedule of
nonperforming loans above. The reserves for
loans accounted for under SFAS No. 114 in the
schedule below are a component of the allowance
for loan losses discussed earlier in this report
under Item 7.B.II., "Provision for Loan Losses
and Allowance for Loan Losses."
SCHEDULE OF IMPAIRED LOANS ACCOUNTED FOR UNDER SFAS NO. 114
(In Thousands)
December 31, 1998
Recorded Allowance for Carrying
Investment Loan Losses Amount
Measured at the Present Value
of Expected Cash Flows:
Commercial Loans $ 671 $ 201 $ 470
December 31, 1997
Measured at the Present Value
of Expected Cash Flows:
Commercial Loans $1,935 $ 225 $1,710
At December 31, 1998, nonaccrual loans amounted
to $2.3 million, a decrease of $1.1 million from
December 31, 1997. The decrease was primarily
attributable to one large commercial loan placed
on nonaccrual status during 1997 which was fully
paid-off in 1998. Loans past due 90 or more days
and still accruing interest amounted to $657
thousand at December 31, 1998, an increase of
$294 thousand from December 31, 1997. Total
nonperforming loans, at year-end 1998,
represented .54% of period-end loans, a decrease
from .76% at year-end 1997.
During 1998 income recognized on year-end
balances of nonaccrual loans was $76 thousand.
Income that would have been recognized during
that period on nonaccrual loans if all 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 $208 thousand.
At December 31, 1997, nonaccrual loans amounted
to $3.3 million, an increase of $1.0 million from
December 31, 1996. The increase was primarily
attributable to one large commercial loan placed
on nonaccrual status during 1997, the same loan
referenced above that was paid off in 1998.
Loans past due 90 or more days and still accruing
interest amounted to $363 thousand at December
31, 1997, an increase of $42 thousand from
December 31, 1996. Total nonperforming loans, at
year-end 1997, represented .76% of period-end
loans, an increase from .67% at year-end 1996.
During 1997 income recognized on year-end
balances of nonaccrual loans was $90 thousand.
Income that would have been recognized during
that period on nonaccrual loans if all 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 $246 thousand.
At December 31, 1996, nonaccrual loans amounted
to $2.3 million, a decrease of $1.9 million from
the year-end 1995 total. During 1996, nearly all
of the nonaccrual loans in the Vermont portfolio
were transferred in connection with the sale of
the Vermont operations that year. The New York
based nonaccrual loans at December 31, 1996 were
virtually unchanged from the level at the prior
year-end. Over one-half of the nonaccrual
balance at December 31, 1996 was attributable to
one borrower whose loan was restructured in 1996.
Payments on that loan were current in accordance
with the restructured terms as of December 31,
1996 and all payments in 1996 were used to reduce
the carrying amount of the loan.
During 1996 income recognized on year-end
balances of nonaccrual loans was $48 thousand.
Income that would have been recognized during
that period on nonaccrual loans if all 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 $232 thousand.
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 between year-end 1994
and 1995 was 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. All loans reported as
restructured and in compliance with modified
terms at December 31, 1994 were still in
compliance with modified terms at year-end 1995
and thus classified as performing at that date.
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.
POTENTIAL PROBLEM LOANS
On at least a quarterly basis, the Company
applies an internal credit quality rating system
to past due commercial loans. Loans are placed
on nonaccrual status when the likely amount of
future principal and interest payments are
expected to be less than the contractual amounts.
Because of its aggressive approach toward placing
commercial loans on nonaccrual status, the
Company has not separately identified any
potential problem loans in this report not
included in the classifications discussed above.
The level of problem loans is for the most part
dependent on economic conditions in northeastern
New York State. In general, the economy in the
Company's geographic market area is quite strong.
In the "capital district" in and around Albany,
unemployment is significantly below the national
average, and north of the capital district, the
total number of jobs has held steady over recent
periods with nominal growth in the job rate.
However, unemployment remains above the national
average in the Glens Falls and Plattsburgh areas.
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 preceding Section
II.a. of this report. For a further discussion,
see Note 23 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,
1998 1997 1996 1995 1994
Single Family 1 - 4 Units $ 540 $ 227 $ --- $ 82 $1,073
Commercial Real Estate 86 86 86 2,328 2,128
Construction & Land Development 1 2 50 --- 195
Other Real Estate Owned, Net $ 627 $ 315 $ 136 $2,410 $3,396
The following table summarizes changes in the
net carrying amount of other real estate owned
at December 31 for each of the periods
presented.
SCHEDULE OF CHANGES IN OTHER REAL ESTATE OWNED
(Net of Allowance) (In Thousands)
1998 1997 1996 1995 1994
Balance at Beginning of Year $ 315 $ 136 $2,410 $ 3,396 $ 7,506
Properties Acquired Through Foreclosure 679 307 302 642 2,493
Adjustment for Change in Fair Value --- --- (85) (161) (398)
Sale (367) (128) (2,491) (1,467) (6,205)
Balance at End of Year $ 627 $ 315 $ 136 $ 2,410 $ 3,396
The following is a summary of changes in the
allowance for OREO losses:
ALLOWANCE FOR OTHER REAL ESTATE OWNED LOSSES
(In Thousands) 1998 1997 1996 1995 1994
Balance at Beginning of Year $ 65 $ 108 $ 370 $ 369 $ 1,150
Additions --- --- 85 161 398
Charge-Offs (6) (43) (347) (160) (1,179)
Balance at End of Year $ 59 $ 65 $ 108 $ 370 $ 369
During 1998, the Company acquired eleven
properties totaling $679 thousand through
foreclosure. Also during the year, the Company
sold ten properties with a carrying amount of
$367 thousand for net gains of $38 thousand.
During 1997, the Company acquired six properties
totaling $307 thousand through foreclosure. Also
during the year, the Company sold properties with
a carrying amount of $128 thousand for net gains
of $110 thousand.
During 1996, the Company acquired five properties
totaling $302 thousand through foreclosure. Also
during the year, the Company recognized losses of
$330 thousand on the sale of OREO properties with
a carrying amount of $2.5 million (including OREO
disposed of in the Vermont branch sale
transactions) and further reduced the carrying
amount of the two properties remaining in OREO at
December 31, 1996 by $85 thousand.
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.
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) are reviewed at least
semi-annually, and those under special
supervision are reviewed at least quarterly. The
boards of directors of the Company's 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 portfolios and
report on these examinations to the boards of
directors.
Through the provision for loan losses, an
allowance (reserve) is maintained for estimated
loan losses. Actual loan losses are charged
against this allowance when they are identified.
In evaluating the adequacy of the allowance for
loan losses, management considers various risk
factors influencing asset quality. The analysis
is performed on a loan by loan basis for impaired
and large balance loans, and by portfolio type
for smaller balance homogeneous loans. 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.
The provision for loan losses was largely
influenced by the level of nonperforming loans,
the expected future levels of nonperforming
loans, by the level of loans actually charged-off
against the allowance for loan losses during the
year and by the change in the mix of loan
categories within the loan portfolio.
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 LOSSES
The allowance for loan losses is a general
allowance applicable to losses inherent in the
loan portfolio. For internal operating purposes,
the allowance is not allocated among loan
categories.
In the following table, the allowance has been
allocated solely 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 charge-offs, (II) likely
proportional distribution of future charge-offs
among loan categories or (III) likely amounts of
future charge-offs. 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 charge-offs 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 LOSSES
(Dollars in Thousands)
1998 1997 1996 1995 1994
Commercial, Financial
and Agricultural $1,219 $1,972 $1,946 $ 2,913 $ 2,329
Real Estate-Commercial 505 219 353 1,755 1,841
Real Estate-Construction --- 17 49 305 1,994
Real Estate-Residential
Mortgage 1,529 902 890 1,616 2,098
Installment Loans to
Individuals 3,308 2,882 1,959 2,365 1,363
Unallocated 181 199 384 3,152 2,713
Total $6,742 $6,191 $5,581 $12,106 $12,338
PERCENT OF LOANS IN EACH
CATEGORY TO TOTAL LOANS
Commercial, Financial
and Agricultural 6% 9% 12% 15% 15%
Real Estate-Commercial 11 10 9 14 16
Real Estate-Construction 1 1 1 1 1
Real Estate-Residential
Mortgage 44 43 43 46 45
Installment Loans to
Individuals 38 37 35 24 23
Total 100% 100% 100% 100% 100%
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)
1998 1997 1996
Average Average Average
Balance Rate Balance Rate Balance Rate
Demand Deposits $ 96,149 --% $ 78,704 --% $ 77,479 --%
Interest-Bearing Demand Deposits 171,209 2.88 144,204 3.10 131,438 2.88
Regular and Money Market Savings 161,873 2.63 146,529 2.85 157,892 2.92
Time Deposits
of $100,000 or More 112,226 5.41 87,956 5.38 79,996 5.25
Other Time Deposits 195,283 5.49 171,820 5.46 156,236 5.33
Total Deposits $736,740 3.53 $629,213 3.62 $603,041 3.47
The year-to-year changes in average deposit
balances, reflected above, were impacted to some
degree by branch acquisitions and dispositions,
the acquisition being the purchase of six
branches from Fleet Bank in mid-1997 and the
dispositions being the sale of all 14 Vermont
branch offices in two separate transactions
completed in 1996. The deposit growth in the
past year, however, reflected above and in the
quarterly average deposit table below, was
entirely the result of internal deposit growth at
the Company's existing branches.
On June 27, 1997, the Company assumed $140
million of deposit balances in the Fleet branch
acquisition (demand - $17.3 million, interest-
bearing demand deposits - $23.6 million, regular
and money market savings - $42.7 million, and
other time deposits - $56.2 million). These
balances, accordingly, had a six month impact on
average deposits for 1997. The deposit balances
in the Vermont branches that were sold in 1996
impacted average deposit balances for only a
portion of that year. For the aggregated 1996
average deposit total, average deposits of $85.4
million were attributable to the Vermont banking
operations. The following table presents the
quarterly average balance by deposit type and the
percentage of total deposits represented by each
deposit type for each of the most recent five
quarters.
DEPOSIT PORTFOLIO
Quarterly Average Deposit Balances
(Dollars In Thousands)
Quarter Ending
Dec 1998 Sep 1998 Jun 1998 Mar 1998 Dec 1997
Demand Deposits $ 98,254 $101,053 $ 92,590 $ 92,584 $ 91,309
Interest-Bearing
Demand Deposits 182,290 165,547 170,394 166,494 170,321
Regular and Money Market
Savings 160,347 167,066 161,009 158,997 159,591
Time Deposits of $100,000
or More 116,394 116,375 113,672 102,263 96,851
Other Time Deposits 196,642 195,567 193,866 195,039 198,018
Total Deposits $753,927 $745,608 $731,531 $715,377 $716,090
Total average deposits for the fourth quarter of
1998 increased $37.8 million, or 5.3% from the
average for the fourth quarter of 1997. This
internal deposit growth was almost evenly split
between transaction account balances and time
deposits of $100,000 or more. The increase in
time deposits of $100,000 are primarily
attributable to municipal deposits.
Percentage of Total Quarterly Average Deposits
Quarter Ending
Dec 1998 Sep 1998 Jun 1998 Mar 1998 Dec 1997
Demand Deposits 13.0% 13.6% 12.7% 12.9% 12.8%
Interest-Bearing
Demand Deposits 24.2 22.2 23.3 23.3 23.8
Regular and Money Market
Savings 21.3 22.4 22.0 22.2 22.3
Time Deposits of $100,000
or More 15.4 15.6 15.5 14.3 13.5
Other Time Deposits 26.1 26.2 26.5 27.3 27.6
Total Deposits 100.0% 100.0% 100.0% 100.0% 100.0%
Quarterly Cost of Deposits
Interest-Bearing
Demand Deposits 2.79% 2.83% 2.92% 2.99% 3.16%
Regular and Money Market
Savings 2.35 2.68 2.71 2.78 2.79
Time Deposits of $100,000
or More 5.26 5.45 5.49 5.47 5.45
Other Time Deposits 5.36 5.40 5.52 5.57 5.50
Total Deposits 3.38 3.52 3.59 3.61 3.63
In general, prevailing interest rates as
reflected in the Company's cost of deposits were
quite steady from March 1997 until the fall of
1998 when the Federal Reserve Board took actions
resulting in three 25 basis point decreases in
the target federal funds rate. Although the
Company did lower interest rates on its deposit
products in the fourth quarter of 1998, most of
these reductions were much less than the total 75
basis point decrease in the federal funds rate.
Moreover, a significant amount of the Company's
pre-existing time deposits have yet to reprice at
the lower yields. The Company did not reduce
the rates paid on deposits by the full amount of
the 75 basis point decrease in the federal funds
rate both because of competitive pressures in the
Company's market area and because of potential
consumer resistance to further reduction in
already historically low rates being paid on
transaction and savings accounts.
V. TIME DEPOSITS OF $100,000 OR MORE
The maturities of time deposits of $100,000 or
more at December 31, 1998 are presented below.
(In Thousands)
Maturing in:
Under Three Months $ 88,195
Three to Six Months 20,489
Six to Twelve Months 7,053
2000 5,593
2001 967
2002 400
2003 and Beyond 342
Total $123,039
D. LIQUIDITY
Liquidity is measured by the ability of the
Company to raise cash when it needs it at a
reasonable cost. The Company must be capable of
meeting expected and unexpected obligations to
its customers at any time. Given the uncertain
nature of customer demands as well as the need to
maximize earnings, the Company must have
available reasonably priced sources of funds, on-
and off-balance sheet, that can be accessed
quickly in time of need.
Securities available-for-sale represent a primary
source of balance sheet cash flow. Certain
investment securities are selected at purchase as
available-for-sale based on their marketability
and collateral value, as well as their yield and
maturity.
In addition to liquidity arising from balance
sheet cash flows, the Company has supplemented
liquidity with additional off-balance sheet
sources such as credit lines with the Federal
Home Loan Bank. The Company also has identified
wholesale and retail repurchase agreements and
brokered certificates of deposit as appropriate
off-balance sheet sources of funding.
The Company measures its basic liquidity as a
ratio of liquid assets to short-term liabilities,
both with and without the availability of
borrowing arrangements. Understanding that
excess liquidity will have a negative impact on
earnings, the Company establishes a target range
for its liquidity ratios. At December 31, 1998,
the Company was operating within those
thresholds.
E. CAPITAL RESOURCES AND DIVIDENDS
Shareholders' equity was $77.1 million at
December 31, 1998, an increase of $3.3 million,
or 4.4%, from the prior year-end.
The increase in shareholders' equity during 1998
primarily reflected retained earnings offset by
the purchase of treasury shares throughout the
year. On January 27, 1999, the Board of
Directors announced that it had authorized
management to repurchase from time to time, in
market or privately negotiated transactions, up
to an additional $2 million of the Company's
common stock, representing approximately 1.2% of
its total market capitalization on that date.
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 goal is
to provide an adequate return to shareholders
while retaining a sufficient base to provide for
future expansion and comply with all regulatory
standards.
One set of regulatory capital guidelines
applicable to the Company and the subsidiary
banks are so-called risk-based capital measures.
Under these 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 Tier 1 capital plus a portion of the
Company's 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 quarterly average assets
less intangible assets). 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, 1998:
Risk-Based Capital Ratios: Arrow GFNB SNB
Tier 1 11.2% 11.9% 8.8%
Total Capital 12.4 13.1 13.6
Tier 1 Leverage Ratio 7.1 7.2 7.7
At December 31, 1998, both subsidiary banks and
the Company exceeded the minimum capital ratios
established by these guidelines, and qualified as
"well-capitalized", the highest category, in the
capital classification scheme set by federal bank
regulatory agencies pursuant to FDICIA (see the
disclosure under "Legislative Developments" in
Part I, Item 1.F. of this report).
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, 1998, the
maximum amount that could have been paid by the
bank subsidiaries to the Company was
approximately $12.6 million.
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.
F. FOURTH QUARTER RESULTS
The Company reported earnings of $3.2 million for
the fourth quarter of 1998, an increase of $356
thousand, or 12.7%, from the fourth quarter of
1997. Diluted earnings per common share for the
respective quarters was $.50 and $.44,
respectively. The increase in earnings was
primarily attributable to a $651 increase in tax-
equivalent net interest income. This increase,
in turn, was principally due to a $90.3 million
increase in average earning assets from the
fourth quarter of 1997 to the fourth quarter of
1998. Other income increased $263 thousand
between the respective periods. The increase was
only $46 thousand without securities transactions
and other nonrecurring items, while other
expense increased $417 thousand from the fourth
quarter of 1997 to the fourth quarter of 1998.
SELECTED FOURTH QUARTER FINANCIAL INFORMATION
(Dollars In Thousands, Except Per Share Amounts)
For the Quarter Ended
December 31,
1998 1997
Interest and Dividend Income $16,207 $15,266
Interest Expense 7,184 6,850
Net Interest Income 9,023 8,416
Provision for Loan Losses 360 331
Net Interest Income after Provision for Loan Losses 8,663 8,085
Other Income 2,268 2,005
Other Expense 6,331 5,914
Income Before Income Taxes 4,600 4,176
Provision for Income Taxes 1,434 1,366
Net Income $ 3,166 $ 2,810
SHARE AND PER SHARE DATA:1
Weighted Average Number of Shares and
Equivalents Outstanding:
Basic 6,241 6,335
Diluted 6,328 6,445
Basic Earnings Per Common Share $ .51 $ .44
Diluted Earnings Per Common Share .50 .44
Diluted Earnings Per Common Share, Based on Core Earnings2 .48 .43
Diluted Earnings Per Common Share, Based on Cash Earnings3 .50 .45
Cash Dividends Per Common Share .22 .19
AVERAGE BALANCES:
Assets $912,301 $826,281
Earning Assets 858,194 767,873
Loans 539,505 481,883
Deposits 753,928 716,090
Shareholders' Equity 77,404 72,878
SELECTED RATIOS (Annualized):
Return on Average Assets 1.38% 1.35%
Return on Average Assets, Based on Core Earnings2 1.31% 1.32%
Return on Average Equity 16.23% 15.30%
Return on Average Equity, Based on Core Earnings2 15.51% 15.20%
Efficiency Ratio4 54.66% 54.58%
Net Interest Margin5 4.31% 4.48%
Net Charge-offs to Average Loans .20% .30%
Provision to Average Loans .27% .27%
1 Per share amounts have been adjusted for the 1998 ten
percent stock dividend.
2 Core Net Income excludes one time material nonrecurring
income and expense items and gains/losses on
securities transactions.
3 Cash Earnings Per Share adds back to core net income
the amortization, net of tax, of goodwill
associated with branch purchases.
4 The Efficiency Ratio is the ratio of core noninterest
expense less goodwill amortization to the sum
of tax-equivalent net interest income and core
noninterest income.
5 Net Interest Margin is the ratio of tax-equivalent core net
interest income to average earning assets.
G. YEAR 2000 READINESS DISCLOSURE
Year 2000 Readiness
General
The advent of the year 2000 poses certain
technological challenges resulting from a
reliance in computer technologies on two digits
rather than four digits to represent the calendar
year (e.g., "98" for "1998"). Computer
technologies programmed in this manner, if not
corrected, could produce inaccurate or
unpredictable results or system failures in
connection with the transition from 1999 to 2000,
when dates will begin to have a lower two-digit
number than dates in the prior century. This
problem, the so-called "Year 2000 Problem" or
"Y2K Problem," may have a material adverse effect
on the Company's financial condition, results of
operations, business or business prospects
because the Company, like most financial
institutions, relies extensively on computer
technology to manage its financial information
and serve its customers. The Company and its
banking subsidiaries are regulated by federal
banking agencies, which are requiring substantial
efforts by banks and their affiliated companies
to prevent or mitigate disruptions relating to
the year 2000.
The Company's State of Readiness
To deal with the Year 2000 Problem, the Company,
beginning in 1997, formed a Year 2000 Project
Team (the "Team"). The Team, which includes
members of senior management, has developed a
Year 2000 Action Plan (the "Plan"), specifying a
range of tasks and goals to be achieved at
various dates before the year 2000. To date, the
Plan is on target and major deadlines have been
met. The Team has kept other senior officers and
the board of directors of the Company apprised of
its progress, and has received input and guidance
from both.
The Company's Year 2000 Action Plan is divided
into five phases consistent with guidance issued
by the federal bank regulators: 1) Awareness;
(2) Assessment; (3) Renovation; (4) Validation
(testing); and (5) Implementation.
As of December 31, 1998, the Company had
completed the Awareness, Assessment and
Renovation phases of the Plan, and had partially
completed the Validation phase. The first two of
these phases involved, among other things,
identification of those data systems, including
information technology ("IT") and non-information
technology ("Non-IT") systems, that are deemed
critical to the continuing functioning of the
Company's principal business operations (so-called
"mission critical systems").
The Renovation phase of the Plan consists of
replacing or updating certain mission critical
systems or components thereof with a view to
preventing or minimizing any Y2K related
problems. The Renovation phase for all internal
mission critical systems was completed prior to
year-end 1998. As part of the Renovation phase,
the Company accelerated, and has now completed,
the installation of a major upgrade to its
central computer processing system, which had
originally been scheduled for implementation in
1999. Acceleration of the upgrade has enabled
the Company to conduct certain Year 2000 testing
in-house, which otherwise would have to have been
conducted by a third party provider at additional
expense to the Company.
As of December 31, 1998, the Company had
completed the Validation (testing) phase of the
Plan with respect to those mission critical
systems that are operated by the Company
internally. Moreover, the Validation (testing)
phase with respect to mission critical systems
furnished to the Company by third party providers
was underway as of December 31, 1998, and is
scheduled to be completed prior to March 31,
1999. The Implementation phase, involving all
modifications to systems indicated by the testing
phase as well as on-going monitoring of Y2K
concerns generally, is on-going and the Company
anticipates it will continue throughout 1999.
During all phases of the Plan, the Year 2000
Project Team has actively monitored the Y2K
preparedness of its third party providers and
servicers, utilizing various methods for testing
and verification. The Company has requested
certifications of Year 2000 preparedness from
principal providers and has participated in user
groups.
The Company also has completed an assessment of
major borrowing accounts and has assigned a risk
rating to each based on information obtained from
the borrower. Year 2000 preparedness assessment
is now a part of on-going loan account review.
The Company also has contacted and reviewed the
state of Y2K preparedness of the Company's
principal sources of liquidity. The Company
believes that there is no single credit account
or source of funding that is sufficiently
critical to the Company's profitability or
operations such that Y2K preparedness or lack
thereof represents a material exposure to the
Company (see "Year 2000 Risks Facing the Company
and the Company's Contingency Plans," below).
The Company has not yet engaged in discussions
with its utility providers (e.g., electricity,
gas, telecommunications) regarding Y2K concerns.
As part of the Plan, however, the Company will
continue to monitor Y2K disclosures by all such
providers to the businesses and financial
organizations, such as the Company that rely on
them. The Company will also continue to monitor
such disclosures by the governmental agencies
upon which the Company relies for certain
services (e.g., the Federal Reserve System, the
Federal Home Loan Bank of New York). In
accordance with its Plan, the Company will make
particular inquiries of such providers and
agencies when circumstances warrant, and will
generally strive for a Y2K preparedness against
industry-wide and geographic Y2K systemic risks
comparable to that maintained by similarly
situated organizations exercising appropriate due
care. Of course, any industry-wide or regional
disruptions arising out of the Y2K Problem may be
expected to affect the Company and its customers.
The significance of any such disruption will
depend on its duration and its systemic and
geographic magnitude (see "Year 2000 Risks Facing
the Company and the Company's Contingency
Plans").
The following table sets forth the Company's
timetable for completion of the various phases of
its Year 2000 Action Plan, showing the Company's
estimate of percentages of each phase completed
as of December 31, 1998.
Internal System External Systems Third Parites
Not Not
Percent Mission Critical Mission Critical Mission Critical Mission Critical Loan Funds
Complete IT NonIT IT NonIT IT NonIT* IT NonIT* Customers Providers
Awareness 100% 9/30/98 9/30/98 9/30/98 9/30/98 9/30/98 9/30/98 9/30/98 9/30/98 9/30/98 9/30/98
Assessment 100% 9/30/98 9/30/98 9/30/98 9/30/98 9/30/98 9/30/98 9/30/98 9/30/98 9/30/98 9/30/98
Renovation 100% 12/31/98 9/30/98 12/31/98 9/30/98 12/31/98 12/31/98 12/31/98 12/31/98 N/A N/A
Validation 90% 12/31/98 9/30/98 3/31/99 3/31/99 3/31/99 3/31/99 N/A N/A N/A N/A
Implementation 80% 6/30/99 6/30/99 12/31/99 12/31/99 6/30/99 6/30/99 12/31/99 12/31/99 12/31/99 12/31/99
* External Non-IT systems are generally described
as product vendors.
The Costs to Address the Company's Year 2000
Issues
The Company originally projected Y2K expenditures
of between $250 thousand and $500 thousand. Y2K
expenditures through December 31, 1998, were
approximately $290 thousand, 64% of which
represented the cost of the accelerated upgrading
of the Company's central computer processing
systems which was substantially complete as of
that date. The projection of the Company's Y2K
costs does not include internal personnel costs,
which are not expected to be significantly
greater as a result of the Year 2000 Problem, or
external consulting or advisory fees, which have
been and are expected to be minimal. The
Company's budget for Y2K expenditures consists
predominantly of expenditures for the upgrading
or replacement of hardware and software systems,
divided approximately 83% for hardware and 17%
for software. The Company has funded, and plans
to fund, its Year 2000 related expenditures out
of general operating resources.
The Company has postponed certain minor computer-
related projects that otherwise might have been
completed during 1998 and 1999, due to the
resources directed to the accelerated upgrading
of the central computer processing systems and
other Y2K related projects. The Company does not
believe this postponement will have any
significant effect on its operations or customer
service.
Year 2000 Risks Facing the Company and the
Company's Contingency Plans
The failure of the Company to complete all
material aspects of its Plan or to complete them
on time could result in an interruption in or
failure of certain normal business activities or
operations. Such failures could materially
adversely affect the Company's results of
operations, liquidity and financial condition.
Currently, the Plan is on schedule and management
believes that successful completion of the Plan
should significantly reduce the risks faced by
the Company with respect to the Year 2000
Problem.
There is no single credit account or group of
related credits which, in the Company's
assessment, is or may be likely to present any
significant exposure due to the Year 2000
Problem. The Company does not have any
significant concentration of borrowers from any
particular industry (to the extent some
industries might be particularly susceptible to
Y2K concerns), and no individual borrower
accounts for a significant portion of the
Company's assets. However, management
anticipates some negative impact on the
performance of various loan accounts due to
failure of the borrowers to prepare adequately
for the Year 2000 Problem. In a worst-case
scenario, these borrower-related difficulties
might require the Company to downgrade the
affected credits in its internal loan
classification system or to make one or more
special provisions to its loan loss allowance for
resulting anticipated losses in ensuing periods.
In addition, although the Company is adopting
special measures to maintain necessary liquidity
to meet funding demands in the periods
surrounding the transition from 1999 to 2000, the
Company also could face increased funding costs
or liquidity pressures if depositors are
motivated out of Y2K concerns to withdraw
substantial amounts of deposits or to shift their
deposits from short-term to long-term accounts.
A significant portion of the Company's deposits
are so-called municipal deposits (i.e., provided
by local municipalities, school districts and
other governmental bodies), but the Company does
not anticipate any increased Year 2000 related
risk due to this concentration of deposits. The
Company does not currently expect any material
impact from Y2K related issues on its costs of
funds or liquidity, but in a worst-case scenario,
if funding costs do rise, net interest margins
may be negatively impacted over the relevant time
frame.
The Company could face some risk from the
possible failure of one or more of its third
party vendors to continue to provide
uninterrupted service through the changeover to
the year 2000. Critical providers include the
Company's automated teller machine switching
networks, the Company's credit card vendors (Visa
and MasterCard), the Company's provider of trust
department data processing, and the various
credit bureaus upon which the Company relies for
information necessary to evaluate credit risk.
While an evaluation of the Year 2000 preparedness
of its third party vendors has been part of the
Company's Plan, the Company's ability to evaluate
is limited to some extent by the willingness of
vendors to supply information and the inability
of some vendors to verify with any high degree of
reliability the Y2K preparedness of their own
systems or their sub-providers. However, the
Company participates in user groups that include
some of its third party vendors, and receives
assessments of Y2K preparedness of vendors
periodically from federal banking agencies. The
Company's Plan also includes protocols for
interface testing with third party vendors
systems. In summary, the Company does not
currently anticipate that its significant third
party vendors will experience material failures
in their ability to provide continuing service to
the Company due to the Year 2000 Problem.
The Company, like similarly-situated enterprises,
is subject to certain risks as a result of
possible industry-wide or area-wide failures
triggered by the Year 2000 Problem. For example,
the failure of certain utility providers (e.g.,
electricity, gas, telecommunications) or
governmental agencies (e.g., the Federal Reserve
System, the Federal Home Loan Bank of New York)
to avoid disruption of service in connection with
the transition from 1999 to 2000 could materially
adversely affect the Company's results of
operations, liquidity and financial condition.
In management's estimate, such a system-wide or
area-wide failure presents a significant risk to
the Company in connection with the Year 2000
Problem because the resulting disruption may be
entirely beyond the ability of the Company to
cure. The significance of any such disruption
would depend on its duration and systemic and
geographic magnitude. Of course, any such
disruption would likely impact businesses other
than the Company.
In order to reduce the risks enumerated above,
the Company's Year 2000 Project Team has begun to
develop contingency plans in accordance with
guidance issued by the federal bank regulators.
The Team has identified the Company's core
business processes (e.g., providing customers
with access to funds and information) and has
reviewed the Company's existing business
continuity and contingency plans. The Team also
has performed a risk analysis of each core
business process, defined and documented Year
2000 failure scenarios, and determined the
minimum acceptable level of outputs and services.
The Team is in the process of finalizing an
overall contingency strategy with specific
contingency plans for each core business process,
assigning responsibilities and trigger dates for
each contingency plan, and validating the plans.
These activities are anticipated to be completed
during the first quarter of 1999. Certain
catastrophic events (such as the protracted loss
of essential utilities or the failure of certain
governmental bodies to function) are outside the
scope of the Company's contingency plans,
although the Company anticipates that it would
respond to any such catastrophe in a manner
designed to minimize disruptions in customer
service and in full cooperation with its peer
providers, community leaders and service
organizations.
Forward-Looking Statement Warnings
As discussed in the lead-in paragraph to this
Annual Report under the "Cautionary Statement
under Federal Securities Laws," the above
analysis of the Company's Year 2000 Readiness
contains a substantial number of forward-looking
statements that are based on the Company's and
management's beliefs, assumptions, expectations,
estimates and projections. These statements are
indicated by such words as "expects," "believes,"
"estimates," "anticipates," "plans,"
"assessment," "should," "will," and similar
words. Any or all of these forward-looking
statements may prove to be inaccurate or
incomplete, are depending on unknown developments
and facts. These forward-looking statements
should be read in light of the various risks and
uncertainties cited in the lead-in paragraph in
this Report mentioned above.
Item 7A: Quantitative and Qualitative
Disclosures About Market Risk
In addition to credit risk in the Company's loan
portfolio and liquidity risk, discussed earlier,
the Company's business activities also generate
market risk. Market risk is the possibility that
changes in future market rates or prices will
make the Company's position less valuable.
The ongoing monitoring and management of risk is
an important component of the Company's
asset/liability management process which is
governed by policies established by its Board of
Directors that are reviewed and approved
annually. The Board of Directors delegates
responsibility for carrying out the
asset/liability management to management's
Asset/Liability Committee ("ALCO"). In this
capacity ALCO develops guidelines and strategies
impacting the Company's asset/liability
management related activities based upon
estimated market risk sensitivity, policy limits
and overall market interest rate levels and
trends.
Interest rate risk is the most significant market
risk affecting the Company. Interest rate risk
is the exposure of the Company's net interest
income to changes in interest rates. Interest
rate risk is directly related to the different
maturities and repricing characteristics of
interest-bearing assets and liabilities, as well
as to prepayment risks for mortgage-related
assets, early withdrawal of time deposits, and
the fact that the speed and magnitude of
responses to interest rate changes varies by
product.
The ALCO utilizes the results of a detailed and
dynamic simulation model to quantify the
estimated exposure of net interest income to
sustained interest rate changes. While ALCO
routinely monitors simulated net interest income
sensitivity over a rolling two-year horizon, it
also utilizes additional tools to monitor
potential longer-term interest rate risk.
The simulation model captures the impact of
changing interest rates on the interest income
received and interest expense paid on all
interest-bearing assets and liabilities reflected
on the Company's consolidated balance sheet.
This sensitivity analysis is compared to ALCO
policy limits which specify a maximum tolerance
level for net interest income exposure over a one
year horizon, assuming no balance sheet growth
and a 200 basis point upward and downward shift
in interest rates, where interest-bearing assets
and liabilities reprice at their earliest
possible repricing date. A parallel and pro rata
shift in rates over a 12 month period is assumed.
As of December 31, 1998 under this analysis, a
200 basis point increase in interest rates
resulted in a 4.1% decrease in net interest
income and a 200 basis point decrease in interest
rates resulted in a 3.2% increase in net interest
income. These amounts were well within the
Company's ALCO policy limits.
The preceding sensitivity analysis does not
represent a Company forecast and should not be
relied upon as being indicative of expected
operating results. These hypothetical estimates
are based upon numerous assumptions including:
the nature and timing of interest rate levels
including yield curve shape, prepayments on loans
and securities, deposit decay rates, pricing
decisions on loans and deposits,
reinvestment/replacement of asset and liability
cashflows, and others. While assumptions are
developed based upon current economic and local
market conditions, the Company cannot make any
assurance as to the predictive nature of these
assumptions including how customer preferences or
competitor influences might change.
Also, as market conditions vary from those
assumed in the sensitivity analysis, actual
results will differ due to:
prepayment/refinancing levels likely deviating
from those assumed, the varying impact of
interest rate changes on caps or floors on
adjustable rate assets, the potential effect of
changing debt service levels on customers with
adjustable rate loans, depositor early
withdrawals and product preference changes, and
other internal/external variables. Furthermore,
the sensitivity analysis does not reflect actions
that ALCO might take in responding to or
anticipating changes in interest rates.
Item 8: Financial Statements and Supplementary
Data
The following audited financial statements and
supplementary data are submitted herewith:
Report of Management
Independent Auditors' Report
Financial Statements:
Consolidated Balance Sheets as of
December 31, 1998 and 1997
Consolidated Statements of Income for the
Years Ended December 31, 1998, 1997 and 1996
Consolidated Statements of Changes in
Shareholders' Equity
for the Years Ended December 31, 1998, 1997
and 1996
Consolidated Statements of Cash Flows for the
Years Ended
December 31, 1998, 1997 and 1996
Notes to Consolidated Financial Statements
Supplementary Data: (Unaudited)
Summary of Quarterly Financial Data for the
Years Ended December 31, 1998 and 1997
REPORT OF MANAGEMENT
The accompanying consolidated financial
statements of Arrow Financial Corporation and
Subsidiaries are the responsibility of
management, and have been prepared in conformity
with generally accepted accounting principles.
These statements necessarily include some
amounts that are based on best judgments and
estimates. Other financial information in the
annual report is consistent with that in the
consolidated financial statements.
Management is responsible for
maintaining a system of internal accounting
control. The purpose of the system is to
provide reasonable assurance that transactions
are recorded in accordance with management's
authorization, that assets are safeguarded
against loss or unauthorized use, and that
underlying financial records support the
preparation of financial statements. The system
includes written policies and procedures,
selection of qualified personnel, appropriate
segregation of responsibilities, and the ongoing
internal audit function.
The independent auditors conduct an
annual audit of the Company's consolidated
financial statements to enable them to express
an opinion as to the fair presentation of the
statements. In connection with the audit, the
independent auditors consider internal control,
to the extent they consider necessary to
determine the nature, timing and extent of their
auditing procedures. The independent auditors
may also prepare recommendations regarding
internal controls and other accounting and
financial related matters. The implementation
of these recommendations by management is
monitored directly by the Audit Committee of the
Board of Directors.
/s/ Thomas L. Hoy /s/ John J. Murphy
Thomas L. Hoy John J. Murphy
President and Executive Vice President,
Chief Executive Officer Treasurer and
Chief Financial Officer
INDEPENDENT AUDITORS' REPORT
THE BOARD OF DIRECTORS AND SHAREHOLDERS OF ARROW
FINANCIAL CORPORATION:
We have audited the accompanying
consolidated balance sheets of Arrow Financial
Corporation and subsidiaries as of December 31,
1998 and 1997, and the related consolidated
statements of income, changes in shareholders'
equity, and cash flows for each of the years in
the three-year period ended December 31, 1998.
These consolidated financial statements are the
responsibility of the Company's management. Our
responsibility is to express an opinion on these
consolidated financial statements based on our
audits.
We conducted our audits in accordance
with generally accepted auditing standards. Those
standards require that we plan and perform the
audit to obtain reasonable assurance about whether
the financial statements are free of material
misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit
also includes assessing the accounting principles
used and significant estimates made by management,
as well as evaluating the overall financial
statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated
financial statements referred to above present
fairly, in all material respects, the financial
position of Arrow Financial Corporation and
subsidiaries as of December 31, 1998 and 1997, and
the results of their operations and their cash
flows for each of the years in the three-year
period ended December 31, 1998, in conformity with
generally accepted accounting principles.
/s/ KPMG LLP
Albany, New York
January 22, 1999
CONSOLIDATED BALANCE SHEETS
ARROW FINANCIAL CORPORATION AND SUBSIDIARIES
(Dollars in Thousands)
December 31,
1998 1997
ASSETS
Cash and Due from Banks $ 24,246 $ 23,909
Federal Funds Sold 6,500 23,000
Cash and Cash Equivalents 30,746 46,909
Securities Available-for-Sale 267,731 221,837
Securities Held-to-Maturity (Approximate Fair Value of
$65,055 in 1998 and $45,562 in 1997) 63,016 44,082
Loans and Leases 546,126 485,810
Less: Allowance for Loan Losses (6,742) (6,191)
Net Loans and Leases 539,384 479,619
Premises and Equipment, Net 11,103 10,760
Other Real Estate Owned and Repossessed Assets, Net 665 393
Other Assets 26,384 27,999
Total Assets $939,029 $831,599
LIABILITIES
Deposits:
Demand $101,860 $ 96,482
Regular Savings, N.O.W. & Money Market Deposit Accounts 355,002 320,706
Time Deposits of $100,000 or More 123,039 106,620
Other Time Deposits 195,696 197,107
Total Deposits 775,597 720,915
Short-Term Borrowings:
Securities Sold Under Agreements to Repurchase 22,275 20,918
Other Short-Term Borrowings 1,757 3,837
Federal Home Loan Bank Advances 45,000 ---
Other Liabilities 17,254 12,058
Total Liabilities 861,883 757,728
Commitments and Contingent Liabilities
(Notes 3, 14, 20, 21, 24 and 25)
SHAREHOLDERS' EQUITY
Preferred Stock, $5 Par Value; 1,000,000 Shares Authorized --- ---
Common Stock, $1 Par Value; 20,000,000 Shares Authorized
(7,596,477 Shares Issued in 1998 and 6,905,888 in 1997) 7,596 6,906
Surplus 87,262 65,277
Undivided Profits 6,721 22,531
Accumulated Other Comprehensive Income 579 764
Unearned ESOP Shares (56,795 Shares in 1998) (1,555) ---
Treasury Stock, at Cost (1,311,518 Shares in 1998 and
1,143,553 Shares in 1997) (23,457) (21,607)
Total Shareholders' Equity 77,146 73,871
Total Liabilities and Shareholders' Equity $939,029 $831,599
See notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF INCOME
ARROW FINANCIAL CORPORATION AND SUBSIDIARIES
(Dollars in Thousands, Except Per Share Data)
Years Ended December 31,
1998 1997 1996
INTEREST AND DIVIDEND INCOME
Interest and Fees on Loans and Leases $44,201 $38,917 $42,195
Interest on Federal Funds Sold 609 1,035 642
Interest and Dividends on Securities Available-for-Sale 15,019 12,263 11,102
Interest on Securities Held-to-Maturity 3,204 2,646 936
Total Interest and Dividend Income 63,033 54,861 54,875
INTEREST EXPENSE
Interest on Deposits:
Time Deposits of $100,000 or More 6,075 4,734 4,198
Other Deposits 19,899 18,035 16,737
Interest on Short-Term Borrowings:
Federal Funds Purchased and Securities
Sold Under Agreements to Repurchase 1,181 827 713
Other Short-Term Borrowings 138 291 178
Interest on Federal Home Loan Bank Advances 849 --- ---
Total Interest Expense 28,142 23,887 21,826
NET INTEREST INCOME 34,891 30,974 33,049
Provision for Loan Losses 1,386 1,303 896
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 33,505 29,671 32,153
OTHER INCOME
Income from Fiduciary Activities 3,025 2,672 3,458
Fees for Other Services to Customers 4,236 3,723 3,959
Net Gains (Losses) on Securities Transactions 408 74 (101)
Net Gain on Divestiture of Vermont Operations --- --- 15,330
Other Operating Income 911 1,714 1,057
Total Other Income 8,580 8,183 23,703
OTHER EXPENSE
Salaries and Employee Benefits 13,810 12,726 14,971
Occupancy Expense of Premises, Net 1,674 1,561 1,790
Furniture and Equipment Expense 2,190 1,792 1,677
Other Operating Expense 6,832 5,623 6,336
Total Other Expense 24,506 21,702 24,774
INCOME BEFORE INCOME TAXES 17,579 16,152 31,082
Provision for Income Taxes 5,744 5,155 10,822
NET INCOME $11,835 $10,997 $20,260
. . . . . . . . . . . . . . . . . . . . .
Average Shares Outstanding:
Basic 6,303 6,431 6,803
Diluted 6,39 6,518 6,873
Earnings Per Common Share:
Basic $ 1.88 $ 1.71 $ 2.98
Diluted 1.85 1.69 2.95
Share and per share amounts have been adjusted
for the 1998 ten percent and the 1997 five percent stock
dividends.
See notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
ARROW FINANCIAL CORPORATION AND SUBSIDIARIES
(Dollars in Thousands, Except per Share Data)
Unallocated Accumulated
Employee Other
Stock Compre-
Shares Common Undivided Ownership hensive Treasury
Issued Stock Surplus Profits Plan Income Stock Total
Balance at December 31, 1995 5,979,124 $5,979 $40,938 $24,296 $ (700) $1,152 $ (4,161) $67,504
Comprehensive Income,
Net of Tax:
Net Income --- --- --- 20,260 --- --- --- 20,260
Net Unrealized Securities
Holding Losses Arising
During the Period, Net
of Tax (Pretax $1,697) --- --- --- --- --- (1,004) --- (1,004)
Reclassification Adjust-
ment for Net Securities
Losses Included in Net
Income, Net of Tax
(Pretax $101) --- --- --- --- --- 60 --- 60
Other Comprehensive
Income (944)
Comprehensive Income 19,316
Cash Dividends Declared,
$.575 per Share --- --- --- (3,886) --- --- --- (3,886)
10% Stock Dividend 597,912 598 13,080 (13,678) --- --- --- ---
Allocation of ESOP Stock
(48,866 Shares) --- --- 252 --- 700 --- --- 952
Stock Options Exercised
(51,261 Shares) --- --- 249 --- --- --- 287 536
Tax Benefit for Disposition
of Stock Options --- --- 50 --- --- --- --- 50
Purchase of Treasury Stock
(576,541 Shares) --- --- --- --- --- --- (10,176) (10,176)
Balance at December 31, 1996 6,577,036 6,577 54,569 26,992 --- 208 (14,050) 74,296
Comprehensive Income,
Net of Tax:
Net Income --- --- --- 10,997 --- --- --- 10,997
Net Unrealized Securities
Holding Gains Arising
During the Period, Net
of Tax (Pretax $1,014) --- --- --- --- --- 600 --- 600
Reclassification Adjust-
ment for Net Securities
Gains Included in Net
Income, Net of Tax
(Pretax $74) --- --- --- --- --- (44) --- (44)
Other Comprehensive
Income 556
Comprehensive Income 11,553
Cash Dividends Declared,
$.710 per Share --- --- --- (4,565) --- --- --- (4,565)
5% Stock Dividend 328,852 329 10,564 (10,893) --- --- --- ---
Stock Options Exercised
(56,141 Shares) --- --- 111 --- --- --- 448 559
Tax Benefit for Disposition
of Stock Options --- --- 33 --- --- --- --- 33
Purchase of Treasury Stock
(368,862 Shares) --- --- --- --- --- --- (8,005) (8,005)
Balance at December 31, 1997 6,905,888 6,906 65,277 22,531 --- 764 (21,607) 73,871
Comprehensive Income,
Net of Tax:
Net Income --- --- --- 11,835 --- --- --- 11,835
Excess of Additional
Pension Liability Over
Unrecognized Prior Service
Cost (Pretax $74) --- --- --- --- --- (44) --- (44)
Net Unrealized Securities
Holding Gains Arising
During the Period, Net
of Tax (Pretax $169) --- --- --- --- --- 100 --- 100
Reclassification Adjust-
ment for Net Securities
Gains Included in Net
Income, Net of Tax
(Pretax $408) --- --- --- --- --- (241) --- (241)
Other Comprehensive
Income (185)
Comprehensive Income 11,650
Cash Dividends Declared,
$.812 per Share --- --- --- (5,115) --- --- --- (5,115)
10% Stock Dividend 690,589 690 21,840 (22,530) --- --- --- ---
Stock Options Exercised
(18,109 Shares) --- --- 101 --- --- --- 102 203
Tax Benefit for Disposition
of Stock Options --- --- 51 --- --- --- --- 51
Purchase of Treasury Stock
(70,500 Shares) --- --- --- --- --- --- (1,952) (1,952)
Acquisition of Common Stock
By ESOP (62,000 Shares) --- --- --- --- (1,728) --- --- (1,728)
Allocation of ESOP Stock
(6,305 Shares) --- --- (7) --- 173 --- --- 166
Balance at December 31, 1998 7,596,477 $7,596 $87,262 $ 6,721 $(1,555) $ 579 $(23,457) $77,146
Per share amounts have been adjusted for the 1998 ten percent
and the 1997 five percent stock dividends.
Included in the shares issued for the stock dividends in 1998,
1997 and 1996 were treasury shares of 115,574, 41,518 and
30,383 respectively, and for 1998 and 1996, unallocated ESOP
shares of 1,100 and 1,294, respectively.
See notes to consolidated financial statements.
ARROW FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands) Years Ended December 31,
1998 1997 1996
Operating Activities:
Net Income $ 11,835 $ 10,997 $ 20,260
Adjustments to Reconcile Net Income to Net
Cash Provided by Operating Activities:
Provision for Loan Losses 1,386 1,303 896
Provision for Other Real Estate Owned Losses --- --- 85
Depreciation and Amortization 1,412 1,430 1,200
Compensation Expense for Allocated ESOP Shares 166 --- 252
Net Gain on Divestiture of Vermont Operations --- --- (15,330)
Gains on the Sale of Securities Available-for-Sale (416) (137) (243)
Losses on the Sale of Securities Available-for-Sale 8 63 344
Proceeds from the Sale of Loans 3,598 2,158 4,882
(Gains) Losses on the Sale of Loans, Fixed Assets
and Other Real Estate Owned (66) (144) 135
Deferred Income Tax Expense 316 410 97
Decrease (Increase) in Interest Receivable 218 (772) 1,130
Increase (Decrease) in Interest Payable 296 539 (561)
Decrease (Increase) in Other Assets 60 (1,501) 991
Increase (Decrease) in Other Liabilities 4,900 (2,334) (1,251)
Net Cash Provided By Operating Activities 23,713 12,012 12,887
Investing Activities:
Proceeds from the Sale of Securities Available-for-Sale 41,391 37,029 51,040
Proceeds from the Maturities of Securities
Available-for-Sale 156,560 29,208 36,454
Purchases of Securities Available-for-Sale (242,999) (115,386) (82,398)
Proceeds from the Maturities of
Securities Held-to-Maturity 6,017 2,752 848
Purchases of Securities Held-to-Maturity (24,989) (15,989) (17,814)
Loans (Purchased) Sold in Branch Transactions --- (44,190) 147,503
Net Increase in Loans and Leases (65,408) (51,249) (32,437)
Fixed Assets (Purchased) Sold in Branch Transactions --- (1,338) 2,525
Proceeds from Sales of Fixed Assets and
Other Real Estate Owned 487 303 2,513
Purchases of Fixed Assets (1,353) (893) (2,099)
Proceeds from the Sale of Vermont Trust Operations --- --- 3,000
Net Cash (Used In) Provided By Investing Activities (130,294) (159,753) 109,135
Financing Activities:
Deposits Assumed (Transferred) in
Branch Transactions, Net of Premium --- 127,708 (192,953)
Net Increase in Deposits 54,682 39,374 55,989
Net (Decrease) Increase in Short-Term Borrowings (723) 2,049 7,409
Federal Home Loan Bank Advances 45,000 --- ---
Exercise of Stock Options 203 33 412
Disqualifying Disposition of Incentive Stock Options 51 33 50
Purchase of Treasury Stock (1,952) (7,479) (10,052)
Purchase of Common Stock by ESOP (1,728) --- ---
Cash Dividends Paid (5,115) (4,565) (3,886)
Net Cash Provided By (Used In) Financing Activities 90,418 157,153 (143,031)
Net (Decrease) Increase In Cash and Cash Equivalents (16,163) 9,412 (21,009)
Cash and Cash Equivalents at Beginning of the Year 46,909 37,497 58,506
Cash and Cash Equivalents at End of the Year $ 30,746 $ 46,909 $ 37,497
Supplemental Cash Flow Information:
Interest Paid $27,846 $23,352 $ 22,387
Income Taxes Paid 152 6,571 11,235
Transfer of Loans to Other Real Estate Owned 679 307 302
See notes to consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (In Thousands)
Arrow Financial Corporation (the
"Company") is a bank holding company organized in
1983 under the laws of New York and registered
under the Bank Holding Company Act of 1956. The
accounting and reporting policies of Arrow
Financial Corporation and its subsidiaries
conform to generally accepted accounting
principles and general practices within the
industry in all material aspects.
Principles of Consolidation - The
financial statements of the Company and its
wholly owned subsidiaries are consolidated and
all material intercompany transactions have been
eliminated. In the "Parent Company Only"
financial statements, the investment in wholly
owned subsidiaries is carried under the equity
method of accounting. When necessary, prior
years' consolidated financial statements have
been reclassified to conform with the current
financial statement presentations.
Cash and Cash Equivalents - Cash and cash
equivalents in the Consolidated Statements of
Cash Flows include the following items: cash at
branches, due from bank balances, cash items in
the process of collection and federal funds sold.
Securities - Securities reported as held
- -to-maturity are those debt securities which the
Company has both the positive intent and ability
to hold to maturity and are stated at amortized
cost. Securities available-for-sale are reported
at fair value, with unrealized gains and losses,
net of taxes, reported in accumulated other
comprehensive income. Realized gains and losses
are based upon specific identification. The cost
of securities is adjusted for amortization of
premium and accretion of discount, which is
calculated on an effective interest rate method.
Loans, Leases and Allowance for Loan
Losses - Interest income on commercial loans,
mortgages, credit card and installment loans is
accrued and credited to income, based upon the
principal amount outstanding. The financing
method of accounting is used for direct lease
contract receivables. Loan fees and costs, where
material, are deferred and amortized as an
adjustment to yield over the lives of the loans
originated.
The allowance for loan losses is
maintained by charges to operations based upon
management's evaluation of the loan portfolio,
current economic conditions, past loan losses and
other factors. In management's opinion, the
balance is sufficient to provide for probable
loan losses. While management uses available
information to recognize losses on loans, future
additions to the allowance may be necessary based
on changes in economic conditions in the
Company's market area. In addition, various
Federal and State regulatory agencies, as an
integral part of their examination process,
review the Company's allowance for loan losses.
Such agencies may require the Company to
recognize additions to the allowance in future
periods, based on their judgments about
information available to them at the time of
their examination which may not be currently
available to management.
The Company accounts for impaired loans
under 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 the present value of expected
future cash flows discounted at the loan's
effective interest rate, the loan's observable
market price or 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, and to all loans restructured
subsequent to adoption. Reserves for loan 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 for 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.
Transfers and Servicing of Financial
Assets and Extinguishments of Liabilities - In
June 1996, the FASB issued SFAS No. 125,
"Accounting for Transfers and Servicing of
Financial
Assets and Extinguishments of Liabilities". SFAS
No. 125 was effective for transfers and servicing
of financial assets and extinguishments of
liabilities occurring after December 31, 1996
(except for certain provisions which were
deferred for one year by SFAS No. 127) and was
applied prospectively. This Statement provides
accounting and reporting standards for transfers
and servicing of financial assets and
extinguishments of liabilities based on
consistent application of the financial-components
approach that focuses on control. It
distinguishes transfers of financial assets that
are sales from transfers that are secured
borrowings. The adoption of SFAS No. 125 did not
have a material impact on the Company's
consolidated financial position, results of
operations, or liquidity.
SFAS No. 125 superseded SFAS No. 122,
"Accounting for Mortgage Servicing Rights". At
December 31, 1998 and 1997, the carrying amount
of the Company's mortgage servicing rights
measured under SFAS No. 125 amounted to $34 and
$46 for each respective period. At December 31,
1998 and 1997, the magnitude of the servicing
rights was not considered so substantial as to
require stratification for purposes of evaluation
for impairment. There was no valuation reserve
for mortgage servicing rights at December 31,
1998 and 1997, as fair value approximated
carrying value. The amount of loans serviced for
others was $11,862 and $14,880 at December 31,
1998 and 1997, respectively.
Other Real Estate Owned - Real estate
acquired by foreclosure is recorded at the lower
of fair value less estimated costs to sell or
cost. Subsequent declines in fair value, after
transfer to other real estate owned, are
recognized through a valuation allowance. Such
declines in fair value along with related
operating expenses to administer such properties
are charged directly to operating expense.
Premises and Equipment - Premises and
equipment are stated at cost, less accumulated
depreciation and amortization. Depreciation and
amortization included in operating expenses are
stated largely on the straight-line method. The
provision is based on the estimated useful lives
of the assets and, in the case of leasehold
improvements, amortization is computed over the
terms of the respective leases or their estimated
useful lives, whichever is less. Gains or losses
on disposition are reflected in earnings.
Assets subject to finance leases are
capitalized and depreciated over the life of the
lease with appropriate charges to operating
expense for implicit interest amounts.
Income Taxes - The Company accounts for
income taxes under the asset and liability method
of accounting for income taxes under SFAS No.
109. Under the asset and liability method,
deferred tax assets and liabilities are
recognized for the future tax consequences
attributable to differences between the financial
statement carrying amounts of existing assets and
liabilities and their respective tax bases.
Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to
taxable income in the years in which those
temporary differences are expected to be
recovered or settled. The effect of deferred tax
assets and liabilities for a change in tax rates
is recognized in income in the period that
includes the enactment date. The Company's
policy is that deferred tax assets are reduced by
a valuation reserve if, based on the weight of
available evidence, it is more likely than not
that some or all of the deferred tax assets will
not be realized.
Intangible Assets - Intangible assets
related to the acquisition of branches, and the
related amortization, are included in other
assets and other noninterest expense,
respectively. Intangible assets, which are being
amortized, on a straight-line basis, over 15
years, amounted to $12,206 and $13,131 at
December 31, 1998 and 1997, respectively. The
related amortization expense totaled $944, $493,
$80 in 1998, 1997 and 1996, respectively.
Earnings Per Share - The Company adopted
SFAS No. 128, "Earnings Per Share," at December
31, 1997. Basic EPS excludes dilution and is
computed by dividing income available to common
stockholders by the weighted average number of
common shares outstanding for the period.
Diluted EPS reflects the potential dilution that
could occur if securities or other contracts to
issue common stock were exercised or converted
into common stock or resulted in the issuance of
common stock that then shared in the earnings of
the entity (such as the Company's stock options).
All EPS data reflects the ten percent stock
dividend in August 1998 and the five percent
stock dividend in November 1997.
Financial Instruments - SFAS No. 107,
"Disclosures about Fair Value of Financial
Instruments," requires that the Company disclose
estimated fair values for its financial
instruments, both on- and off-balance sheet. The
Company is a party to certain financial
instruments with off-balance sheet risk, such as:
commercial lines of credit, construction lines of
credit, credit card lines of credit, overdraft
protection, home equity lines of credit and
standby letters of credit. The Company's policy
is to record such instruments when funded. Fair
value estimates are made at a specific point in
time, based on relevant market information and
information about the financial instrument.
These estimates do not reflect any premium or
discount that could result from offering for sale
at one time the Company's entire holdings of a
particular financial instrument. Because no
market exists for a significant portion of the
Company's financial instruments, fair value
estimates are based on judgments regarding future
expected loss experience, current economic
conditions, risk characteristics of various
financial instruments, and other factors. These
estimates are subjective in nature and involve
uncertainties and matters of significant judgment
and therefore cannot be determined with
precision. Changes in assumptions could
significantly affect the estimates.
Fair value estimates are based on
existing on- and off-balance sheet financial
instruments without attempting to estimate the
value of anticipated future business and the
value of assets and liabilities that are not
considered financial instruments. For example,
the Company has a substantial trust department
that contributes net fee income annually. The
trust department is not considered a financial
instrument, and its value has not been
incorporated into the fair value estimates.
Other significant assets and liabilities that are
not considered financial assets or liabilities
include credit card servicing operations,
deferred taxes, premises and equipment, the value
of low-cost long-term core deposits and goodwill.
In addition, the tax ramifications related to the
realization of the unrealized gains and losses
can have a significant effect on fair value
estimates and have not been considered in any of
the estimates.
The carrying amount of certain
short-term assets and liabilities, namely: cash
and due from banks, federal funds sold,
securities sold under agreements to repurchase,
demand deposits, savings, N.O.W. and money market
deposits, other short-term borrowings, accrued
interest receivable and accrued interest payable,
is a reasonable estimate of fair value. The fair
value estimates of other on- and off-balance
sheet financial instruments, as well as the
method of arriving at fair value estimates, are
included in the related footnotes and summarized
in Note 22.
Segment Reporting - In June 1997, the
FASB issued SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related
Information." SFAS No. 131 establishes
standards for the way that public business
enterprises report information about operating
segments. For the Company, the statement was
effective for annual financial statements issued
for the year ended December 31, 1998. The
Company's operations are solely in the financial
services industry and include the traditional
operations of a commercial banking enterprise.
The Company operates primarily in northern New
York State in Warren, Washington, Saratoga, Essex
and Clinton counties and surrounding areas.
Use of Estimates - Management of the
Company has made a number of estimates and
assumptions relating to the reporting of assets
and liabilities and the disclosure of contingent
assets and liabilities to prepare these
consolidated financial statements in conformity
with generally accepted accounting principles.
Actual results could differ from those estimates.
NOTE 2: CASH AND DUE FROM BANKS (In Thousands)
The bank subsidiaries are required to
maintain certain reserves of vault cash and/or
deposits with the Federal Reserve Bank. The
total amount of the required reserve at December
31, 1998 and 1997 was approximately $7,930 and
$9,034, respectively.
NOTE 3: SECURITIES (In Thousands)
The fair value of securities, except
certain state and municipal securities, is
estimated based on published prices or bid
quotations received from securities dealers. The
fair value of certain state and municipal
securities is not readily available through
market sources, so fair value estimates are based
on the discounted contractual cash flows using
estimated market discount rates that reflect the
credit and interest rate risk inherent in the
instrument, or for short-term securities, the
carrying amount.
A summary of the amortized costs and the
approximate fair values of securities at December
31, 1998 and 1997 is presented below:
Securities Available-for-Sale:
Gross Gross
Amortized Fair Unrealized Unrealized
Cost Value Gains Losses
December 31, 1998
U.S. Treasury and Agency Obligations $ 29,567 $ 30,134 $ 567 $ ---
State and Municipal Obligations 9,235 9,240 5 ---
Collateralized Mortgage Obligations 68,954 69,257 410 107
Other Mortgage-Backed Securities 120,107 120,104 428 431
Corporate and Other Debt Securities 34,899 34,953 118 64
Mutual Funds and Equity Securities 3,916 4,043 127 ---
Total Securities Available-for-Sale $266,678 $267,731 $1,655 $ 602
December 31, 1997
U.S. Treasury and Agency Obligations $ 75,553 $ 76,006 $ 463 $ 10
State and Municipal Obligations 3,000 2,999 --- 1
Collateralized Mortgage Obligations 66,919 67,207 656 368
Other Mortgage-Backed Securities 63,763 64,057 341 47
Corporate and Other Debt Securities 8,998 9,145 153 6
Mutual Funds and Equity Securities 2,325 2,423 98 ---
Total Securities Available-for-Sale $220,558 $221,837 $1,711 $ 432
Securities Held-to-Maturity:
Gross Gross
Amortized Fair Unrealized Unrealized
Cost Value Gains Losses
December 31, 1998
U.S. Treasury and Agency Obligations $ 3,989 $ 4,050 $ 61 $ ---
State and Municipal Obligations 42,458 44,320 1,872 10
Other Mortgage-Backed Securities 16,569 16,685 165 49
Total Securities Held-to-Maturity $63,016 $65,055 $2,098 $ 59
December 31, 1997
State and Municipal Obligations $24,800 $26,106 $1,307 $ 1
Other Mortgage-Backed Securities 19,282 19,456 174 ---
Total Securities Held-to-Maturity $44,082 $45,562 $1,481 $ 1
A summary of the maturities of
securities as of December 31, 1998 is presented
below. Collateralized mortgage obligations and
other mortgage-backed securities are included in
the schedule based on their expected average
lives. Actual maturities may differ from the
table below because issuers may have the right to
call or prepay obligations with or without
prepayment penalties.
Securities Available- Securities Held-
for-Sale to-Maturity
Amortized Fair Amortized Fair
Cost Value Cost Value
Within One Year:
U.S. Treasury and Agency Obligations $ 1,500 $ 1,513 $ --- $ ---
State and Municipal Obligations 7,235 7,240 4,055 4,058
Collateralized Mortgage Obligations 25,816 25,865 --- ---
Other Mortgage-Backed Securities 730 728 --- ---
Corporate and Other Debt Securities 30,916 30,869 --- ---
Total 66,197 66,215 4,055 4,058
From 1 - 5 Years:
U.S. Treasury and Agency Obligations 13,032 13,317 --- ---
State and Municipal Obligations --- --- 3,874 4,074
Collateralized Mortgage Obligations 43,138 43,392 --- ---
Other Mortgage-Backed Securities 114,287 114,332 16,569 16,685
Corporate and Other Debt Securities 2,989 3,084 --- ---
Total 173,446 174,125 20,443 20,759
From 5 - 10 Years:
U.S. Treasury and Agency Obligations 15,035 15,304 3,989 4,050
State and Municipal Obligations --- --- 17,208 18,389
Collateralized Mortgage Obligations --- --- --- ---
Other Mortgage-Backed Securities 5,090 5,044 --- ---
Corporate and Other Debt Securities --- --- --- ---
Total 20,125 20,348 21,197 22,439
Over 10 Years:
U.S. Treasury and Agency Obligations --- --- --- ---
State and Municipal Obligations 2,000 2,000 17,321 17,799
Collateralized Mortgage Obligations --- --- --- ---
Other Mortgage-Backed Securities --- --- --- ---
Corporate and Other Debt Securities 994 1,000 --- ---
Mutual Funds and Equity Securities 3,916 4,043 --- ---
Total 6,910 7,043 17,321 17,799
Total Securities $266,678 $267,731 $63,016 $65,055
The carrying amount of securities
pledged to secure public and trust deposits and
for other purposes totaled $205,812 and $179,232
at December 31, 1998 and 1997, respectively.
NOTE 4: LOANS AND LEASES (In Thousands)
Loans and leases at December 31, 1998 and
1997 consisted of the following:
1998 1997
Commercial, Financial and Agricultural $ 35,961 $ 46,124
Real Estate - Commercial 58,420 50,680
Real Estate - Residential 238,425 208,258
Real Estate - Construction 3,406 2,072
Installment Loans to Individuals 209,914 178,676
Total Loans and Leases $546,126 $485,810
/TABLE
The carrying amount of net loans and
leases at December 31, 1998 and 1997 was $539,384
and $479,619, respectively. The fair value of
net loans and leases at December 31, 1998 and
1997 was $547,648 and $489,031, respectively.
Fair values are estimated for portfolios
of loans with similar financial characteristics.
Loans are segregated by type such as commercial,
commercial real estate, residential mortgage,
credit card and other consumer loans. Each loan
category is further segmented into fixed and
adjustable rate interest terms and by performing
and nonperforming categories.
The fair value of performing loans is
calculated by discounting scheduled cash flows
through the estimated maturity using estimated
market discount rates that reflect the credit and
interest rate risk inherent in the loan. The
estimate of maturity is based on historical
experience with repayments for each loan
classification, modified, as required, by an
estimate of the effect of current economic and
lending conditions.
Fair value for nonperforming loans is
based on recent external appraisals. If
appraisals are not available, estimated cash
flows are discounted using a rate commensurate
with the risk associated with the estimated cash
flows. Assumptions regarding credit risk, cash
flows and discount rates are judgmentally
determined using available market information and
specific borrower information.
Certain executive officers and
directors, including their immediate families and
organizations in which they are principals of the
Company or affiliates, have various loan, deposit
and other transactions with the Company. Such
transactions are on substantially the same terms,
including interest rates and collateral, as those
prevailing at the time for comparable
transactions with others. The amount of such
related party loans was $3,702 at December 31,
1998 and $3,285 at December 31, 1997. During
1998, the amount of new loans and renewals
extended to such related parties was $1,832 and
the total of loan repayments was $1,415.
The Company has pledged certain loans
secured by one to four family residential
mortgages as collateral for borrowings from the
Federal Home Loan Bank (see Note 10). As of
December 31, 1998 the amount of such pledging
amounted to $152,645.
The Company designates certain loans as
nonaccrual and suspends the amortization of net
deferred fees or costs when payment of interest
and/or principal is due and unpaid for a period
of, generally, ninety days or the likelihood of
repayment is uncertain in the opinion of
management. The following table presents the
balance of nonaccrual and restructured loans and
other information implicit to the interest income
accounts.
1998 1997 1996
Principal Amount at December 31 $2,270 $3,321 $2,297
Gross Interest That Would Have Been Earned
Under Original Terms 208 246 232
Interest Included in Net Income 76 90 48
The Company has no material commitments
to make additional advances to borrowers with
nonaccrual or restructured loans.
NOTE 5: ALLOWANCE FOR LOAN LOSSES (In
Thousands)
The following summarizes the changes in
the allowance for loan losses during the years
ended December 31:
1998 1997 1996
Balance at Beginning of Year $6,191 $5,581 $12,106
Provision for Loan Losses 1,386 1,303 896
Recoveries 343 205 366
Charge-Offs (1,178) (1,598) (946)
Allowance Acquired (Transferred) --- 700 (6,841)
Balance at End of Year $6,742 $6,191 $ 5,581
At December 31, 1998 and 1997, the
recorded investment in impaired loans amounted to
$671 and $1,935, respectively. At December 31,
1998, the allowance for loan losses included
$201, which represented the amount of allowance
related to the impaired loans at that date. At
December 31, 1997, the allowance for loan losses
included $225, which represented the amount of
the allowance related to the impaired loans at
that date. The average recorded investment in
impaired loans for 1998, 1997 and 1996 was
$1,273, $1,566 and $1,465, respectively. During
1998, 1997 and 1996, no interest income was
recorded on such loans during the period of
impairment.
NOTE 6: PREMISES AND EQUIPMENT (In Thousands)
A summary of premises and equipment at
December 31, 1998 and 1997 is presented below:
1998 1997
Bank Premises, Including Land $13,106 $12,592
Equipment, Furniture and Fixtures 10,236 9,539
Leasehold Improvements 171 169
Sub-Total 23,513 22,300
Accumulated Depreciation and Amortization (12,410) (11,540)
Net Premises and Equipment $11,103 $10,760
Amounts charged to operations for
depreciation and amortization totaled $936, $836
and $879 in 1998, 1997 and 1996, respectively.
NOTE 7: OTHER REAL ESTATE OWNED (In
Thousands)
Other real estate owned, net of an
allowance for estimated losses, at December 31,
1998 and 1997 consisted of the following:
1998 1997
Single-Family 1 - 4 Units $540 $227
Commercial Real Estate 86 86
Construction and Land Development 1 2
Other Real Estate Owned, Net $627 $315
The following table summarizes changes
in the net carrying amount of other real estate
owned at December 31, 1998 and 1997:
1998 1997
Balance at Beginning of Year $315 $136
Properties Acquired Through Foreclosure 679 307
Sales (367) (128)
Balance at End of Year $627 $315
The following summarizes the changes in the
allowance for other real estate owned losses:
1998 1997
Balance at Beginning of Year $ 65 $108
Charge-Offs (6) ( 43)
Balance at End of Year $ 59 $ 65
Repossessed assets totaled $38 and $78 at
December 31, 1998 and 1997, respectively, and
consisted solely of automobiles repossessed in
satisfaction of loans.
NOTE 8: TIME DEPOSITS (In Thousands)
The following summarizes the contractual
maturities of time deposits during years
subsequent to December 31, 1998:
Time
Deposits Other
of $100,000 Time
or More Deposits
C>
1999 $115,737 $142,637
2000 5,593 34,601
2001 967 7,416
2002 400 2,346
2003 and Beyond 342 8,696
Total $123,039 $195,696
The carrying value of time deposits at
December 31, 1998 and 1997 was $318,735 and
$303,727, respectively. The fair value of time
deposits at December 31, 1998 and 1997 was
$319,224 and $304,374, respectively. The fair
value of time deposits is based on the discounted
value of contractual cash flows, except that the
fair value is limited to the extent that the
customer could redeem the certificate after
imposition of a premature withdrawal penalty.
The discount rate is estimated using the rates
indexed to the FHLB advance rates at December 31,
1998.
NOTE 9: SHORT-TERM BORROWINGS (In Thousands)
A summary of short-term borrowings is
presented below:
Federal Funds Purchased and Securities Sold
Under Agreements to Repurchase: 1998 1997 1996
Balance at December 31 $22,275 $20,918 $16,597
Maximum Month-End Balance 41,576 21,510 20,099
Average During the Year 25,575 17,450 15,094
Average Rate During the Year 4.62% 4.74% 4.72%
Rate at December 31 4.36% 4.39% 4.39%
Other Short-Term Borrowings:
Balance at December 31 $1,757 $3,837 $6,109
Maximum Month-End Balance 5,042 8,322 8,336
Average During the Year 2,426 5,041 3,430
Average Rate During the Year 5.67% 5.77% 5.20%
Rate at December 31 5.19% 5.27% 5.50%
Average Aggregate Borrowing Rates During the Year 4.71% 4.97% 4.81%
Securities sold under agreements to
repurchase generally mature within ninety days.
The Company maintains control over the securities
underlying the agreements. Federal funds
purchased represent overnight transactions.
At December 31, 1998 other short-term
borrowings included demand notes issued to the
U.S. Treasury. The Company has established
overnight and 30 day term lines of credit with
the Federal Home Loan Bank ("FHLB") each in the
amount of $39,200. If advanced, such lines of
credit will be collateralized by mortgage-backed
securities, loans and FHLB stock. Participation
in the FHLB program requires an investment in
FHLB stock. Investment in FHLB stock, included
in Securities Available-for-Sale on the
Consolidated Balance Sheets, amounted to $3,128
and $1,903 at December 31, 1998 and 1997,
respectively.
NOTE 10: FHLB Advances (In Thousands)
During 1998 the Company began to borrow long-term
funds from the FHLB in the form of "convertible
advances." These advances have a set final
maturity, but are callable by the FHLB at certain
dates beginning no earlier than one year from the
issuance date. If the advances are called, the
Company may elect to have the funds replaced by
the FHLB at the then prevailing market rate of
interest. The borrowings are secured by
mortgage-backed loans and/or securities. The
total amount of assets pledged to the FHLB at
December 31, 1998 amounted to $191,163 for
borrowing arrangements. The table below presents
information applicable to FHLB Advances held as
of December 31, 1998:
Par Amount Effective Rate Option Date Maturity Date
$ 5,000 5.11% March 11, 1999 March 11, 2008
5,000 5.28% March 13, 2000 March 11, 2008
10,000 4.75% November 19, 2000 November 19, 2003
5,000 5.43% March 12, 2001 March 11, 2008
10,000 4.59% October 19, 2001 October 20, 2003
10,000 4.98% November 19, 2001 November 19, 2003
Total $45,000 4.94%
NOTE 11: ACCUMULATED OTHER COMPREHENSIVE
INCOME (In Thousands)
The following table presents the
components, net of tax, of accumulated other
comprehensive income as of December 31:
1998 1997
Excess of Additional Pension Liability Over
Unrecognized Prior Service Cost $(44) $---
Net Unrealized Securities Holding Gains 623 764
Total Accumulated Other Comprehensive Income $579 $764
NOTE 12: EARNINGS PER COMMON SHARE (In
Thousands, Except Per Share Amounts)
The following table presents a
reconciliation of the numerator and denominator
used in the calculation of basic and diluted
earnings per common share (EPS) for each of the
three year periods ended December 31, 1998.
Shares outstanding have been restated for the
August 1998 ten percent stock dividend and the
November 1997 five percent stock dividend.
Income Shares Per Share
(Numerator) (Denominator) Amount
For the Year Ended December 31, 1998:
Basic EPS: Income Available to Common Shareholders $11,835 6,303 $1.88
Dilutive Effect of Stock Options --- 96
Diluted EPS: Income Available to Common Shareholders
and Assumed Conversions $11,835 6,399 $1.85
For the Year Ended December 31, 1997:
Basic EPS: Income Available to Common Shareholders $10,997 6,431 $1.71
Dilutive Effect of Stock Options --- 87
Diluted EPS: Income Available to Common Shareholders
and Assumed Conversions $10,997 6,518 $1.69
For the Year Ended December 31, 1996:
Basic EPS: Income Available to Common Shareholders $20,260 6,803 $2.98
Dilutive Effect of Stock Options --- 70
Diluted EPS: Income Available to Common Shareholders
and Assumed Conversions $20,260 6,873 $2.95
Options to purchase 47 shares of common stock at
$29.83 per share were outstanding during 1998 and
the last quarter of 1997 but were not included in
the computation of diluted EPS because the
options' exercise price was greater than the
average market price of the common shares. The
options, which expire on November 26, 2007, were
still outstanding at the end of 1998.
NOTE 13: REGULATORY MATTERS (In Thousands)
In the normal course of business, the
Company and its subsidiaries operate under
certain regulatory restrictions, such as the
extent and structure of covered intercompany
borrowings and maintenance of reserve requirement
balances.
The principal source of the funds for the
payment of shareholder dividends by the Company
has been from dividends declared and paid to the
Company by its bank subsidiaries. As of December
31, 1998, the maximum amount that could have been
paid by subsidiary banks to the Company was
approximately $18,718.
Under current Federal Reserve regulations,
the Company is prohibited from borrowing from the
subsidiary banks unless such borrowings are
secured by specific obligations. Additionally,
the maximum of any such borrowing is limited to
10% of an affiliate's capital and surplus.
The Company and its subsidiary banks are
subject to various regulatory capital
requirements administered by the federal banking
agencies. Failure to meet minimum capital
requirements can initiate certain mandatory--and
possibly additional discretionary--actions by
regulators that, if undertaken, could have a
direct material effect on an institution's
financial statements. Under capital adequacy
guidelines and the regulatory framework for
prompt corrective action, the Company and its
subsidiary banks must meet specific capital
guidelines that involve quantitative measures of
assets, liabilities, and certain off-balance
sheet items as calculated under regulatory
accounting practices. Capital amounts and
classification are also subject to qualitative
judgments by the regulators about components,
risk weightings, and other factors.
Quantitative measures established by
regulation to ensure capital adequacy require the
Company and its subsidiary banks to maintain
minimum capital amounts and ratios (set forth in
the table below) of total and Tier I capital (as
defined in the regulations) to risk-weighted
assets (as defined), and of Tier I capital (as
defined) to average assets (as defined).
Management believes, as of December 31, 1998 and
1997, that the Company and all subsidiary banks
meet all capital adequacy requirements to which
they are subject.
As of December 31, 1998 the most recent
notification from the Federal Reserve Bank of
New York (the primary regulator of the Company)
and the Office of the Comptroller of the Currency
(the primary regulator of the subsidiary banks)
categorized each respective entity as well
capitalized under the regulatory framework for
prompt corrective action. To be categorized as
well capitalized the Company must maintain
minimum total risk-based, Tier I risk-based, and
Tier I leverage ratios as set forth in the table
below. There are no conditions or events since
that notification that management believes have
changed the Company's or its subsidiary banks'
categories.
The Company ("Arrow") and its subsidiary
banks, Glens Falls National Bank and Trust
Company ("Glens Falls National") and Saratoga
National Bank and Trust Company ("Saratoga
National") actual capital amounts and ratios are
presented in the table below as of December 31,
1998 and 1997:
Minimum Amounts Minimum Amounts
For Capital To Be
Actual Adequacy Purposes Well Capitalized
Amount Ratio Amount Ratio Amount Ratio
As of December 31, 1998:
Total Capital
(to Risk Weighted Assets):
Arrow $70,538 12.4% $45,582 8.0% $56,977 10.0%
Glens Falls National 64,327 13.1 39,314 8.0 49,142 10.0
Saratoga National 7,906 13.6 4,654 8.0 5,817 10.0
Tier I Capital
(to Risk Weighted Assets):
Arrow $63,739 11.2% $22,784 4.0% $34,176 6.0%
Glens Falls National 58,444 11.9 19,662 4.0 29,492 6.0
Saratoga National 7,026 8.8 3,208 4.0 4,812 6.0
Tier I Capital
(to Average Assets):
Arrow $63,739 7.1% $35,909 4.0% $35,909 4.0%
Glens Falls National 58,444 7.2 32,424 4.0 40,530 5.0
Saratoga National 7,026 7.7 3,650 4.0 4,562 5.0
As of December 31, 1997:
Total Capital
(to Risk Weighted Assets):
Arrow $65,334 13.5% $38,803 8.0% $48,503 10.0%
Glens Falls National 57,762 13.9 33,340 8.0 41,675 10.0
Saratoga National 6,995 10.8 5,172 8.0 6,465 10.0
Tier I Capital
(to Risk Weighted Assets):
Arrow $59,267 12.2% $19,416 4.0% $29,124 6.0%
Glens Falls National 52,550 12.6 16,669 4.0 25,004 6.0
Saratoga National 6,258 9.7 2,586 4.0 3,879 6.0
Tier I Capital
(to Average Assets):
Arrow $59,267 7.3% $32,431 4.0% $32,431 4.0%
Glens Falls National 52,550 7.2 29,194 4.0 36,493 5.0
Saratoga National 6,258 7.6 3,307 4.0 4,133 5.0
/TABLE
NOTE 14: RETIREMENT PLANS (In Thousands)
The Company sponsors qualified and
nonqualified defined benefit pension plans and
other postretirement benefit plans for its
employees. The Company maintains a
non-contributory pension plan which covers
substantially all employees. Benefits are based
on years of service and the participants' final
compensation (as defined). The funding policy is
to contribute the maximum amount that can be
deducted for federal income tax purposes. The
Company also maintains a supplemental
nonqualified unfunded retirement plan to provide
eligible employees of the Company and its
subsidiaries with benefits in excess of qualified
plan limits imposed by federal tax law.
The Company has multiple nonpension
postretirement benefit plans. The health care,
dental and life insurance plans are contributory,
with participants' contributions adjusted
annually. The health care plan provides for
automatic increases of Company contributions each
year based on the increase in inflation up to a
maximum of 5%. The Company's policy is to fund
the cost of postretirement benefits in amounts
determined at the discretion of management.
The following tables provide a
reconciliation of the changes in the plans'
benefit obligations and fair value of the plans'
assets over the two-year period ending December
31, 1998, and a statement of the funded status as
of December 31 of both years:
Pension Postretirement
Benefits Benefits
1998 1997 1998 1997
Reconciliation of Benefit Obligation:
Benefit Obligation at January 1 $15,260 $15,517 $ 4,708 $ 4,671
Service Cost 563 425 117 94
Interest Cost 1,118 1,112 338 312
Participant Contributions --- --- 53 39
Actuarial (Gain) Loss 1,750 608 426 (125)
Settlement (former Vermont operations) --- (1,401) --- ---
Prior Service Cost (Plan Amendment) 27 --- --- ---
Benefit Payments (1,091) (1,001) (322) (283)
Benefit Obligation at December 31 17,627 15,260 5,320 4,708
Reconciliation of Fair Value of Plan Assets:
Fair Value of Plan Assets at January 1 15,043 14,233 --- ---
Actual Return on Plan Assets 2,119 2,880 --- ---
Employer Contributions 326 332 269 244
Participant Contributions --- --- 53 39
Settlement (former Vermont operations) --- (1,401) --- ---
Benefit Payments (1,091) (1,001) (322) (283)
Fair Value of Plan Assets at December 31 16,397 15,043 --- ---
Funded Status:
Funded Status at December 31 (1,230) (217) (5,320) (4,708)
Unrecognized Transition (Asset) Obligation (289) (369) 1,683 1,811
Unrecognized Prior Service Cost 620 662 55 61
Unrecognized Net (Gain) Loss 739 (218) 737 327
Net Amount Recognized $ (160) $ (142) $(2,845) $(2,509)
The following table provides the amounts recognized
in the consolidated balance sheets as of
December 31 of both years:
Pension Postretirement
Benefits Benefits
1998 1997 1998 1997
Prepaid Benefit Cost $1,706 $1,772 $ --- $ ---
Accrued Benefit Liability (2,568) (2,630) (2,845) (2,509)
Intangible Asset 628 716 --- ---
Accumulated Other Comprehensive Income 74 --- --- ---
Net Amount Recognized $ (160) $ (142) $(2,845) $(2,509)
The Company's nonqualified pension plan's
projected benefit obligation was $2,822 at
December 31, 1998 and $2,826 at December 31,
1997. There are no plan assets in the
nonqualified plan. All of the Company's
postretirement benefit plans also have no plan
assets. The accumulated benefit obligation for
the postretirement benefit plans was $5,320 and
$4,708 at December 31, 1998 and 1997,
respectively. The amount included within other
comprehensive income arising from a change in the
additional minimum pension liability was $74 for
1998 and $0 for 1997 and 1996.
The qualified pension plan's assets are
primarily comprised of short-term funds and U.S.
Treasury obligations, high grade corporate bonds
and marketable equity securities. At December
31, 1998 and 1997, plan assets included 82 and 81
shares, respectively, of Arrow Financial
Corporation common stock with a market value of
$2,129 and $2,502, respectively. During the
respective years, the Plan received $66 and $75
from cash dividends on the Company's common
stock.
The following table provides the
components of net periodic benefit costs for the
plans for the three years ending December 31:
Pension Benefits Postretirement Benefits
1998 1997 1996 1998 1997 1996
Service Cost $ 563 $ 425 $ 644 $117 $ 94 $121
Interest Cost on
Benefit Obligation 1,118 1,112 1,095 338 312 326
Expected Return on Plan Assets (1,327) (1,256) (1,202) --- --- ---
Amortization of Transition
(Asset) Obligation (80) (90) (90) 128 128 163
Amortization of Prior Service Cost 69 68 168 5 5 2
Amortization of Net (Gain) Loss --- --- 14 17 (2) 11
Net Periodic Benefit Cost 343 259 629 605 537 623
Settlement Gain --- (89) --- --- --- ---
Net Periodic Benefit Cost
after Settlement Gain $ 343 $ 170 $ 629 $605 $537 $623
The prior service costs are amortized on
a straight-line basis over the average remaining
service period of active participants. Gains and
losses in excess of 10% of the greater of the
benefit obligation or the market-related value of
assets are amortized over the average remaining
service period of active participants.
During 1996, divestiture of the Company's
Vermont banking operations created one-time
financial accounting transactions for the defined
benefit pension plan and the supplemental
nonqualified plan and for the nonpension
postretirement benefit plan. At December 31,
1996, the prepaid pension cost for the defined
benefit plan included a curtailment gain
amounting to $445; the accrued pension cost for
the supplemental nonqualifed plan reflected a
$523 reduction of unrecognized prior service
costs and recognition of $551 in additional
benefits provided by the plan; and the accrued
postretirement benefit cost for the nonpension
plan included a curtailment loss of $561. Net
expenses for these transactions were charged to
the net gain on the disposition of Vermont
operations (see Note 25) and, therefore, are not
included in the net periodic benefit costs above.
During 1997, the Company settled its
pension obligation in the qualified plan for
former employees of the previously divested
Vermont operations by purchasing annuities from
an insurance company or distributing cash at the
employees' option. The settlement reduced the
pension obligation and the fair value of plan
assets by $1,401 and resulted in a settlement
gain of $89.
The assumptions used in the measurement
of the Company's benefit obligations and net
periodic benefit costs are shown in the following
table:
Pension Benefits Postretirement Benefits
As of December 31, 1998 1997 1996 1998 1997 1996
Weighted-average assumptions:
Discount Rate 6.75% 7.00% 7.25% 6.75% 7.00% 7.25%
Expected Return on Plan Assets 9.00 9.00 9.00 --- --- ---
Rate of Compensation Increase 4.00 4.00 4.50 --- --- ---
For measurement purposes, an 8.5% annual rate of
increase in the per capita cost of covered
medical benefits was assumed for 1999 and 7.5%
for dental benefits. The rate was assumed to
decrease gradually each year to a rate of 5.5%
for 2005 and remain at that level thereafter for
both the medical and dental benefit plans.
Assumed medical and dental cost trend rates have
a significant effect on the amounts reported for
the plans. A 1% change in assumed medical and
dental cost trend rates would have the following
effects:
1% Increase 1% Decrease
Effect on Total Service and Interest Cost
Components of Net Periodic Postretirement
Benefit Cost For the Year Ended
December 31, 1998 $ 11 $(50)
Effect on the Accumulated Postretirement Benefit
Obilgation as of December 31, 1998 170 (489)
NOTE 15: OTHER EMPLOYEE BENEFIT PLANS (In
Thousands)
The Company maintains an employee stock
ownership plan (ESOP). Substantially all
employees of the Company, and its subsidiaries,
are eligible to participate upon satisfaction of
applicable service requirements. During 1998,
the ESOP borrowed $1,700 from one of the
Company's subsidiary banks to purchase
outstanding shares of the Company's common stock.
The note requires the Company to contribute an
amount necessary for the ESOP to discharge its
current obligations which include principal and
interest payments on the note. The Company's ESOP
provision amounted to $564, $600 and $840 in
1998, 1997 and 1996, respectively. As the debt
was repaid, shares were released from collateral
and allocated to active employees, based on the
proportion of debt paid to total debt outstanding
for the year.
The Company accounts for the ESOP under
SOP 93-6, and accordingly, the shares pledged as
collateral are reported as unallocated ESOP
shares in shareholders' equity. As shares were
released from collateral, the Company reported
compensation expense equal to the current average
market price of the shares, and the shares became
outstanding for earnings per share computations.
The ESOP shares as of December 31, 1998 were as
follows:
Allocated Shares 420
Shares Released for Allocation 6
Unallocated Shares 57
Total ESOP Shares 483
Market Value of Unallocated Shares $1,477
The Company also sponsors an Employee
Stock Purchase Plan (ESPP). Substantially all
employees of the Company and its subsidiaries are
eligible to participate upon satisfaction of
applicable service requirements. The aggregate
cost of the ESPP as reflected in the Company's
consolidated financial statements was $97, $95
and $100 in 1998, 1997 and 1996, respectively.
The Company also sponsors a Short-Term
Incentive Award Plan for senior management and a
Profit Sharing Plan for substantially all
employees. The cost of these plans was $411,
$318 and $393 for 1998, 1997 and 1996,
respectively.
NOTE 16: STOCK OPTION PLANS (In Thousands,
Except Per Share Amounts)
The Company has established fixed
Incentive Stock Option and Non-qualified Stock
Option Plans. At December 31, 1998, 363 shares
remained available for grant under these plans.
Options may be granted at a price no less than
the greater of the par value or fair market value
of such shares on the date on which such option
is granted, and generally expire ten years from
the date of grant. Number of shares and related
prices have been adjusted for the effect of the
ten percent stock dividend declared in 1998 and
the five percent stock dividend declared in 1997.
Stock Appreciation Rights, which were
granted in tandem with certain non-qualified
options, entitle the holder of an option to
surrender the unexercised option, or any part
thereof and receive in exchange a payment in cash
representing the difference between the base
value and the fair market value of the common
stock of the Company.
The Company applies APB Opinion No. 25
and related Interpretations in accounting for its
plans. Accordingly, no compensation cost has
been recognized for its stock option
plans. SFAS No. 123, "Accounting for Stock-Based
Compensation" requires companies not using
a fair value based method of accounting for
employee stock options or similar plans, to
provide pro forma disclosure of net income and
earnings per share as if that method of
accounting had been applied. The fair value of
each option grant is estimated on the date of
grant using the Black-Scholes option-pricing
model with the following weighted-average
assumptions used for grants in 1998, 1997 and
1996 respectively: dividend yields of 3.40%,
2.50% and 3.25%; expected volatility of 22.4%,
20.5% and 21.3%; risk free interest rates of
4.73%, 5.76% and 6.05%; and expected lives of 7.0
years for each year. The effects of applying
SFAS No. 123 on the pro forma net income may not
be representative of the effects on pro forma net
income for future years. Pro forma disclosures
for the Company for the years ending December 31,
1998, 1997 and 1996 for options granted in 1995
and later are as follows:
1998 1997 1996
Net Income:
As Reported $11,835 $10,977 $20,260
Pro Forma 11,605 10,854 21,191
Basic Earning Per Share:
As Reported $1.88 $1.71 $2.98
Pro Forma 1.84 1.69 2.97
Diluted Earnings Per Share:
As Reported $1.85 $1.69 $2.95
Pro Forma 1.81 1.67 2.94
A summary of the status of the Company's
stock option plans as of December 31, 1998, 1997
and 1996 and changes during the years ending on
those dates is presented below:
1998 1997 1996
Weighted- Weighted- Weighted-
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
Options:
Outstanding at January 1 288,099 $16.39 296,375 $13.00 332,836 $10.75
Granted 48,400 26.25 47,850 29.83 58,850 20.73
Exercised (20,364) 12.06 (56,126) 9.97 (90,229) 9.70
Forfeited (550) 29.83 --- --- (5,082) 13.87
Outstanding at Year-end 315,585 18.16 288,099 16.39 296,375 13.00
Exercisable at Year-end 186,580 145,604 138,798
Weighted-Average Fair Value
of Options Granted During
the Year $5.58 $7.76 $5.03
The following table summarizes information about
the Company's stock options at December 31, 1998:
Options Outstanding Options Exercisable
Weighted-
Average Weighted- Weighted-
Range of Number Remaining Average Number Average
Exercise Outstanding Contractual Exercise Exercisable Exercise
Prices At 12/31/98 Life Price at 12/31/98 Price
$4.21-$8.57 32,017 4.0 years $ 6.82 32,017 $ 6.82
$11.16-$11.63 64,395 5.2 11.23 64,395 11.23
$13.87 65,977 6.9 13.87 48,555 13.87
$20.73 57,496 7.9 20.73 29,792 20.73
$26.25 48,400 9.9 26.25 --- ---
$29.83 47,300 8.9 29.83 11,821 29.83
$4.21-$29.83 315,585 7.2 18.16 186,580 13.85
/TABLE
NOTE 17: SHAREHOLDER RIGHTS PLAN
In 1997, the Board of Directors of the
Company adopted a shareholder rights plan. The
plan provides for the distribution of one
preferred stock purchase right for each
outstanding share of common stock of the Company.
Each right entitles the holder, following the
occurrence of certain events, to purchase a unit,
consisting of one-hundredth of a share of Series
1 Junior Participating Preferred Stock, at a
purchase price of $75 per unit, subject to
adjustment. The rights will not be exercisable
or transferable apart from the common stock
except under certain circumstances in which a
person or group of affiliated persons acquires,
or commences a tender offer to acquire, 20% or
more of the Company's common stock. Rights held
by such an acquiring person or persons may
thereafter become void. Under certain
circumstances a right may become a right to
purchase common stock or assets of the Company or
common stock of an acquiring corporation at a
substantial discount. Under certain
circumstances, the Company may redeem the rights
at $.01 per right. The rights will expire in
April 2007 unless earlier redeemed or exchanged
by the Company.
NOTE 18: OTHER OPERATING EXPENSE (In
Thousands)
Other operating expenses included in the
consolidated statements of income are as follows:
1998 1997 1996
Advertising and Promotion $ 660 $ 558 $ 572
Stationery and Printing 660 715 644
Telephone and Communications 637 546 681
Postage 899 811 909
Legal, Professional and Accounting Fees 837 663 838
Charitable Contributions 155 88 117
Other Real Estate Owned Losses, Net --- --- 271
Other Real Estate Owned Expenses 147 74 84
FDIC and Other Insurance 208 218 258
Branch Acquisition Intangible Asset Amortization 944 493 41
All Other 1,685 1,457 1,921
Total Other Operating Expense $6,832 $5,623 $6,336
NOTE 19: INCOME TAXES (In Thousands)
The consolidated provision for income
taxes is summarized below:
1998 1997 1996
Current Tax Expense:
Federal $4,515 $4,367 $ 9,378
State 913 378 1,347
Total Current Tax Expense 5,428 4,745 10,725
Deferred Tax Expense (Benefit):
Federal 343 737 409
State (27) (327) (312)
Total Deferred Tax Expense 316 410 97
Total Consolidated Provision for Income Taxes $5,744 $5,155 $10,822
The consolidated provisions for income taxes
differed from the amounts computed by applying
the U.S. Federal Income Tax Rate of 35% for 1998,
1997 and 1996 to pre-tax income from continuing
operations as a result of the following:
1998 1997 1996
Computed Tax Expense at Statutory Rates $6,153 $5,653 $10,879
Increase (Reduction) in Income Taxes Resulting From:
Tax-Exempt Income (807) (563) (440)
Nondeductible Interest Expense 101 65 53
State Taxes, Net of Federal Income Tax Benefit 576 497 673
State Tax Settlement, Net of Federal
Income Tax Benefit --- (464) ---
Other Items, Net (279) (33) (343)
Total Consolidated Provision for Income Taxes $5,744 $5,155 $10,822
The tax effects of temporary differences
that give rise to significant portions of the
deferred tax assets and deferred tax liabilities
at December 31, 1998 and 1997 are presented
below:
1998 1997
Deferred Tax Assets:
Allowance for Loan Losses $2,788 $2,555
Pension and Deferred Compensation Plans 2,495 2,570
Deferred Expenses 1,258 1,115
Total Gross Deferred Tax Assets 6,541 6,240
Deferred Tax Liabilities:
Pension Plans 734 758
Depreciation 453 398
Deferred Income 1,086 466
Other 99 113
Total Gross Deferred Tax Liabilities 2,372 1,735
Net Deferred Tax Assets $4,169 $4,505
Management believes that the realization
of the recognized net deferred tax asset of
$4,169 and $4,505 at December 31, 1998 and 1997,
respectively, is more likely than not, based on
existing carryback ability, available tax
planning strategies and expectations as to future
taxable income. Accordingly, there was no
valuation allowance for deferred tax assets as of
December 31, 1998 and 1997. Not included in net
deferred tax assets above are deferred tax
liabilities relating to unrealized gains on
securities available for sale of $453 at December
31, 1998 and $553 at December 31, 1997 and a
deferred tax asset relating to recognized minimum
pension liabilities of $30 at December 31, 1998.
During 1997, the increase in deferred net tax
assets relating to purchase acquisition
transactions amounted to $277.
NOTE 20: LEASE COMMITMENTS (In Thousands)
At December 31, 1998, the Company was
obligated under a number of noncancellable
operating leases for land, buildings and
equipment. Certain of these leases provide for
escalation clauses and contain renewal options
calling for increased rentals if the lease is
renewed.
Future minimum lease payments on
operating leases at December 31, 1998 were as
follows:
Operating
Leases
1999 $ 71
2000 71
2001 71
2002 71
2003 70
Later Years 634
Total Minimum Lease Payments $988
NOTE 21: FINANCIAL INSTRUMENTS WITH
OFF-BALANCE SHEET RISK AND CONTINGENT LIABILITIES
(In Thousands)
The Company is party to financial
instruments with off-balance sheet risk in the
normal course of business to meet the financing
needs of its customers. These financial
instruments include commitments to extend credit,
standby letters of credit and loans sold with
recourse. Commitments to extend credit include
home equity lines of credit, credit card lines of
credit, commitments for residential and
commercial construction loans and other personal
and commercial lines of credit. Those
instruments involve, to varying degrees, elements
of credit and interest rate risk in excess of the
amount recognized in the consolidated balance
sheets. The contract or notional amounts of
those instruments reflect the extent of the
involvement the Company has in particular classes
of financial instruments.
The Company's exposure to credit loss in
the event of nonperformance by the other party to
the financial instrument for commitments to
extend credit and standby letters of credit is
represented by the contractual notional amount of
those instruments. The Company uses the same
credit policies in making commitments and
conditional obligations as it does for on-balance
sheet instruments.
Financial instruments whose contract
amounts represent credit risk as of December 31
are as follows:
1998 1997
Fixed Variable Total Fixed Variable Total
Commitments to Extend Credit $ --- $92,779 $92,779 $ --- $77,307 $77,307
Standby Letters of Credit --- 723 723 --- 653 653
Commitments to extend credit are
agreements to lend to a customer as long as there
is no violation of any condition established in
the contract. Commitments generally have fixed
expiration dates or other termination clauses and
may require payment of a fee. Since many of the
commitments are expected to expire without being
drawn upon, the total commitment amounts do not
necessarily represent future cash requirements.
The Company evaluates each customer's
creditworthiness on a case-by-case basis. Credit
card lines of credit are generally unsecured.
Home equity lines of credit are secured by
residential real estate. Construction lines of
credit are secured by underlying real estate.
For other lines of credit, the amount of
collateral obtained, if deemed necessary by the
Company upon extension of credit, is based on
management's credit evaluation of the
counter-party. Collateral held varies, but may
include accounts receivable, inventory, property,
plant and equipment, and income-producing
commercial properties.
Standby letters of credit are
conditional commitments issued by the Company to
guarantee the performance of a customer to a
third party. The credit risk involved in issuing
standby letters of credit is essentially the same
as that involved in extending loan facilities to
customers.
Under SFAS No. 107 the fair value of
commitments to extend credit is determined by
estimating the fees to enter into similar
agreements, taking into account the remaining
terms and present creditworthiness of the
counterparties, and for fixed rate loan
commitments, the difference between the current
and committed interest rates. The fair value of
standby letters of credit is based on the fees
currently charged for similar agreements or the
cost to terminate the arrangement with the
counterparties. The Company provides several
types of commercial lines of credit and standby
letters of credit to its commercial customers.
The pricing of these services is not isolated as
the Company considers the customer's complete
deposit and borrowing relationship in pricing
individual products and services. The
commitments to extend credit also include
commitments under home equity lines of credit,
for which the Company charges no fee. Unadvanced
credit card lines comprise the other major
category of commitments to extend credit. The
bank charges a nominal annual fee to the
cardholders which covers both the cost to process
purchases made and settled before interest is
charged as well as cash advances and financings
of purchases. The carrying value and fair value
of commitments to extend credit are not material
and the Company does not expect to incur any
material loss as a result of these commitments.
In the normal course of business, the
Company and its subsidiary banks became involved
in a variety of routine legal proceedings
including so-called "lender liability" claims, in
which borrowers allege that they have suffered
loss as a result of inappropriate actions taken
by lending banks. At present, there are no legal
proceedings pending or threatened which, in the
opinion of management and counsel, would result
in a material loss to the Company.
In June 1998, the FASB issued SFAS No.
133, "Accounting for Derivative Instruments and
Hedging Activities," which establishes accounting
and reporting standards for derivative
instruments, including certain derivative
instruments embedded in other contracts, and for
hedging activities. This Statement is effective
for all fiscal quarters of fiscal years beginning
after June 15, 1999. Management is currently
evaluating the impact of this Statement on the
Company's consolidated financial statements.
NOTE 22: FAIR VALUE OF FINANCIAL INSTRUMENTS
(In Thousands)
The following table presents a summary
of the carrying amount and fair value of the
Company's financial instruments not carried at
fair value:
1998 1997
Carrying Fair Carrying Fair
Amount Value Amount Value
Securities Held-to-Maturity (Note 3) $ 63,016 $ 65,055 $ 44,082 $ 45,562
Net Loans and Leases (Note 4) 539,384 547,648 479,619 489,031
Time Deposits (Note 8) 318,735 319,224 303,727 304,374
FHLB Advances (Note 10) 45,000 44,399 --- ---
NOTE 23: PARENT ONLY FINANCIAL INFORMATION (In
Thousands)
Condensed financial information for
Arrow Financial Corporation is as follows:
BALANCE SHEETS December 31,
1998 1997
ASSETS
Interest-Bearing Deposits with Subsidiary Banks $ 490 $ 156
Cash and Cash Equivalents 490 156
Securities Available-for-Sale 101 1,129
Investment in Subsidiaries at Equity 78,877 73,418
Other Assets 4,065 4,469
Total Assets $83,533 $79,172
LIABILITIES
Note Payable - ESOP $ 1,555 $ ---
Other Liabilities 4,832 5,301
Total Liabilities 6,387 5,301
SHAREHOLDERS' EQUITY
Total Shareholders' Equity 77,146 73,871
Total Liabilities and Shareholders' Equity $83,533 $79,172
STATEMENTS OF INCOME Years Ended December 31,
Income: 1998 1997 1996
Dividends from Bank Subsidiaries $ 6,200 $ 2,300 $ 3,990
Liquidating Dividends from Vermont Operations 175 33,060 ---
Dividends from Nonbank Subsidiaries --- 320 2,569
Interest and Dividends on Securities
Available-for-Sale 72 222 2
Other Income (Including Management Fees) 8 398 8,214
Net Gains on Securities Transactions 14 --- ---
Total Income 6,469 36,300 14,775
Expense:
Interest Expense 50 128 421
Salaries and Benefits 41 476 5,666
Occupancy and Equipment --- 6 995
Other Expense 436 418 1,764
Total Expense 527 1,028 8,846
Income Before Income Tax Benefit and Equity
in Undistributed Net Income of Subsidiaries 5,942 35,272 5,929
Income Tax Benefit 287 351 244
Income Before Equity in Undistributed
Net Income of Subsidiaries 6,229 35,623 6,173
Equity in (Distributions in Excess of)
Undistributed Net Income of Subsidiaries 5,606 (24,626) 14,087
Net Income $11,835 $10,997 $20,260
/TABLE
STATEMENTS OF CASH FLOWS Years Ended December 31,
1998 1997 1996
Operating Activities:
Net Income $11,835 $10,997 $20,260
Adjustments to Reconcile Net Income to Net Cash
Provided by Operating Activities:
Distributions in Excess of
(Undistributed) Net Income of Subsidiaries (5,606) 24,626 (14,087)
Depreciation and Amortization --- 8 12
Compensation Expense for Allocated ESOP Shares (7) --- 252
Gains on the Sale of Securities Available-for-Sale (14) --- ---
Changes in Other Assets and Other Liabilities (118) (2,535) 882
Net Cash Provided by Operating Activities 6,090 33,096 7,319
Investing Activities:
Proceeds from the Sale of Securities Available-for-Sale 1,069 9,793 ---
Proceeds from the Maturities
of Securities Available-for-Sale --- 342 ---
Purchases of Securities Available-for-Sale (12) (11,196) (1)
Capital Investment in Subsidiary Banks --- (13,917) (500)
Sale of Fixed Assets to Subsidiaries --- 17 ---
Net Cash Provided by (Used in) Investing Activities 1,057 (14,961) (501)
Financing Activities:
Net (Decrease) Increase in Short-Term Borrowings --- (6,375) 6,375
Exercise of Stock Options 203 33 412
Disqualifying Disposition of Incentive Stock Options 51 33 50
Purchase of Treasury Stock (1,952) (7,479) (10,052)
Cash Dividends Paid (5,115) (4,565) (3,886)
Net Cash Used in Financing Activities (6,813) (18,353) (7,101)
Net Increase (Decrease) in Cash and Cash Equivalents 334 (218) ( 283)
Cash and Cash Equivalents at Beginning of the Year 156 374 657
Cash and Cash Equivalents at End of the Year $ 490 $ 156 $ 374
Supplemental Cash Flow Information:
Interest Paid $ --- $ 262 $ 288
Income Taxes Paid 152 6,571 11,235
NOTE 24: CONCENTRATIONS OF CREDIT RISK (In
Thousands)
Most of the Company's loans are with
customers in northern New York. Although the loan
portfolios of the subsidiary banks are well
diversified, tourism has a substantial impact on
the northern New York economy. The commitments
to extend credit are fairly consistent with the
distribution of loans presented in Note 4.
Generally, the loans are secured by assets and
are expected to be repaid from cash flow or the
sale of selected assets of the borrowers. The
Company evaluates each customer's
creditworthiness on a case-by-case basis. The
amount of collateral obtained, if deemed
necessary by the Company upon extension of
credit, is based upon management's credit
evaluation of the counterparty. The nature of
the collateral varies with the type of loan and
may include: residential real estate, cash and
securities, inventory, accounts receivable,
property, plant and equipment, income producing
commercial properties and automobiles.
NOTE 25: BRANCH ACQUISITIONS AND DIVESTITURE
OF VERMONT OPERATIONS (In Thousands)
On June 27, 1997 the Company
completed the acquisition of six branches in
upstate New York from Fleet Bank, a subsidiary of
Fleet Financial Group, Hartford, CT. The
branches are located in the towns of Plattsburgh
(2), Lake Luzerne, Port Henry, Ticonderoga and
Warrensburg and became branches of GFNB. GFNB
acquired substantially all deposits at the
branches and most of the loans held by Fleet Bank
related to the branches. Total deposit
liabilities at the branches assumed by GFNB were
approximately $140,000 and the total amount of
the branch-related loans acquired was
approximately $34,000. Under the purchase
agreement, GFNB also acquired from Fleet an
additional $10,000 of residential real estate
loans not related to the branches.
During 1996, the Company, in three
separate transactions, completed the divestiture
of its Vermont banking operations. This included
the transfer of approximately $208,000 of
deposits, the sale of approximately $148,000 of
loans and the sale of the Vermont trust
operation. The net gain on the divestiture was
$15,300.
Principal components of the net gain
included: premium on deposits transferred
($15,700), proceeds from the sale of the trust
operation ($3,000) and a gain on the loans sold
($2,600), partially offset by personnel costs
relating to severance and the costs of benefits
related to the Company's pension and
postretirement plans, as described in Note 14
($1,700), the writedown of certain fixed assets,
principally the main office ($2,000) and other
net costs ($2,300), which included professional
fees, reserves for certain warranties provided to
the purchasers, losses on various other assets
and miscellaneous costs.
The Company did not transfer the main
office building located in Rutland, Vermont. At
December 31, 1998 and 1997, the Company was
holding the building for sale and it was carried
at estimated fair value less costs to sell and
included in other assets on the consolidated
balance sheets. The building was held for sale
at December 31, 1998.
SUMMARY OF QUARTERLY FINANCIAL DATA (Unaudited)
The following quarterly financial
information for 1998 and 1997 is unaudited, but,
in the opinion of management, fairly presents the
earnings of the Company. Per share amounts have
been adjusted for the 1998 ten percent stock
dividend and the 1997 five percent stock
dividend.
SELECTED QUARTERLY FINANCIAL DATA
(In Thousands, Except Per Share Amounts) 1998
Fourth Third Second First
Quarter Quarter Quarter Quarter
Total Interest and Dividend Income $16,207 $15,796 $15,876 $15,154
Net Interest Income 9,023 8,632 8,784 8,452
Provision for Loan Losses 360 342 342 342
Net Securities Gains (Losses) 242 --- 9 157
Income Before Income Taxes 4,600 4,194 4,357 4,428
Net Income 3,166 2,906 2,860 2,903
Basic Earning Per Common Share .51 .46 .45 .46
Diluted Earnings Per Common Share .51 .45 .44 .45
1997
Fourth Third Second First
Quarter Quarter Quarter Quarter
Total Interest and Dividend Income $15,266 $14,831 $12,596 $12,168
Net Interest Income 8,416 8,327 7,158 7,073
Provision for Loan Losses 331 500 236 236
Net Securities Gains (Losses) 37 --- 65 (28)
Income Before Income Taxes 4,176 4,219 3,946 3,811
Net Income 2,810 2,768 2,518 2,901
Basic Earning Per Common Share .44 .44 .39 .44
Diluted Earnings Per Common Share .43 .43 .39 .44
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" from the
Company's Proxy Statement for its Annual Meeting
of Shareholders to be held April 14, 1999, is
incorporated herein by reference. Certain
required information regarding the Company's
Executive Officers is contained in Part I, Item
1.E., of this Annual Report, "Executive Officers
of the Registrant."
Item 11: Executive Compensation
Item 1, "Election of Directors and Information
with Respect to Directors and Officers" and
"Principal Shareholders of the Company," from
the Company's Proxy Statement for its Annual
Meeting of Shareholders to be held April 14,
1999, 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" from the
Company's Proxy Statement for its Annual Meeting
of Shareholders to be held April 14, 1999, 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" from the
Company's Proxy Statement for its Annual Meeting
of Shareholders to be held April 14, 1999, is
incorporated herein by reference.
PART IV
Item 14: Exhibits, Financial Statement
Schedules and Reports on Form 8-K
(a) List of Documents filed as part of this
report:
1. Financial Statements
The following financial statements, the
notes thereto, and the independent
auditors' report 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, 1998 and 1997
Consolidated Statements of Income
for the Years Ended December 31, 1998,
1997 and 1996
Consolidated Statements of Changes
in Shareholders' Equity for the Years
Ended December 31, 1998, 1997 and 1996
Consolidated Statements of Cash
Flows for the Years Ended December 31, 1998,
1997 and 1996
Notes to Consolidated Financial
Statements
2. 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
from the Registrant's Current Report on
Form 8-K, filed on August 4, 1995,
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 from the Registrant's
Current Report on Form 8-K, filed January
30, 1996, 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 from the
Registrant's Current Report on Form 8-K,
filed March 14, 1996, Exhibit 2.1.
2.4 Amendment to Purchase and Assumption
Agreement among Arrow Financial
Corporation, Arrow Vermont Corporation,
Green Mountain Bank and ALBANK, FSB,
dated September 26, 1996 incorporated
herein by reference from the Registrant's
Current Report on Form 8-K filed October
11, 1996, Exhibit 2.3.
2.5 Service Purchasing Agreement among Arrow
Financial Corporation, Arrow Vermont
Corporation, Green Mountain Bank and
ALBANK, FSB, dated February 26, 1996
incorporated herein by reference from the
Registrant's Current Report on Form 8-K
filed March 14, 1996, Exhibit 2.2.
2.6 Amendment to Service Purchasing Agreement
among Arrow Financial Corporation, Arrow
Vermont Corporation, Green Mountain Bank
and ALBANK, FSB, dated September 26, 1996
incorporated herein by reference from the
Registrant's Current Report on Form 8-K,
filed October 11, 1996, Exhibit 2.4.
2.7 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
from the Registrant's Current Report on
Form 8-K filed March 14, 1996, Exhibit
2.3.
2.8 Purchase and Assumption Agreement between
Fleet Bank and Glens Falls National Bank
and Trust Company, dated March 21, 1997,
incorporated herein by reference from the
Registrant's Current Report on Form 8-K
dated June 27, 1997, Exhibit 2.1.
3.(i) Certificate of Incorporation of the
Registrant, as amended, incorporated
herein by reference from the Registrant's
Annual Report on Form 10-K for the year
ended December 31, 1990, Exhibit 3.(a).
4.1 Shareholder Protection Rights Agreement
dated as of May 1, 1997, between Arrow
Financial Corporation and Glens Falls
National Bank and Trust Company, as
Rights Agent, incorporated herein by
reference from the Registrant's Statement
on Form 8-A, dated May 16, 1997, Exhibit
4.
10.1 1984 Non-Qualified Stock Option Plan of
the Registrant, incorporated herein by
reference from the Registrant's Proxy Statement
for its 1985 Meeting of Shareholders, Exhibit C.
10.2 Short-term Incentive Award Plan of the
Registrant, incorporated herein by
reference from Registrant's 1933 Act
Registration Statement on Form S-2 (file
number 33-10109; filed December 16,
1986). *
10.3 Employment Agreement among the
Registrant, its subsidiary bank, Glens
Falls National Bank & Trust Company, and
Thomas L. Hoy dated November 26, 1997,
incorporated herein by reference from
Registrant's Annual Report on Form 10-K
for the year ended December 31, 1997,
Exhibit 10.5. *
10.4 Employment Agreement among the
Registrant, its subsidiary bank, Glens
Falls National Bank and Trust Company and
John J. Murphy dated November 26, 1997,
incorporated herein by reference from
Registrant's Annual Report on Form 10-K
for the year ended December 31, 1997,
Exhibit 10.6. *
10.5 Select Executive Retirement Plan of the
Registrant effective January 1, 1992
incorporated herein by reference from
Registrant's Annual Report on Form 10-K
for December 31, 1992, Exhibit 10(m). *
10.6 1989 Employee Stock Purchase Plan of the
Registrant, incorporated herein by
reference from Registrant's 1933 Act
Registration Statement on Form S-8, Exhibit 4
(File number 33-48225; filed May 15, 1992). *
10.7 1993 Long Term Incentive Plan of the
Registrant, incorporated herein by
reference from Registrant's 1933 Act
Registration Statement on Form S-8, Exhibit 4.1
(File number 33-66192; filed July 19, 1993). *
10.8 1998 Long Term Incentive Plan of the
Registrant, incorporated herein by
reference from Registrant's 1933 Act
Registration Statement on Form S-8,
Exhibit 4.1 (File number 333-62719; filed
September 2, 1998). *
10.9 Directors Deferred Compensation Plan of
Registrant, incorporated herein by
reference from Registrant's Annual
Report on Form 10-K for December 31,
1993, Exhibit 10(n).
10.10 Senior Officers Deferred Compensation
Plan of the Registrant, incorporated
herein by reference from Registrant's
Annual Report on Form 10-K for December
31, 1993, Exhibit 10(o).*
10.11 Automatic Dividend Reinvestment Plan of
the Registrant incorporated herein by
reference from Registrant's Annual Report
on Form 10-K for December 31, 1995,
Exhibit 10.11.
* 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.
10.12 Employment Agreement among the
Registrant, its subsidiary bank, Glens
Falls National Bank and Trust Company
and John C. Van Leeuwen dated December
29, 1998. *
10.13 Prototype of a change of control
agreement between the registrant and to
certain officers (excluding senior officers)
of the Registrant or its subsidiaries, as
entered into from time to time. *
11 Computation of Earnings per Share.
21 Subsidiaries of the Company.
23 Consent of Independent Certified Public
Accountants.
27 Financial Data Schedule (submitted with
electronic filing only).
* Management contracts or compensation
plans required to be filed as an exhibit.
(B) Current Reports on Form 8-K filed during
the fourth quarter of 1998:
None
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: February 24, 1999
/s/ Thomas L. Hoy
By:
Thomas L. Hoy
President and
Chief Executive Officer
Date: February 24, 1999
/s/ John J. Murphy
By:
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 February 24, 1999 by the following
persons in the capacities indicated.
/s/ John J. Carusone, Jr.
John J. Carusone
Director
/s/ Michael B. Clarke
Michael B. Clarke
Director
/s/ Kenneth C. Hopper, M.D.
Kenneth C. Hopper, M.D.
Director
/s/ Thomas L. Hoy
Thomas L. Hoy
Director and
President
/s/ Dr. Edward F. Huntington
Dr. Edward F. Huntington
Director
/s/ David G. Kruczlnicki
David G. Kruczlnicki
Director
/s/ Michael F. Massiano
Michael F. Massiano
Director & Chairman
/s/ David L. Moynehan
David L. Moynehan
Director
/s/ Doris E. Ornstein
Doris E. Ornstein
Director
/s/ Daniel L. Robertson
Daniel L. Robertson
Director
SIGNATURES
EXHIBITS INDEX
Exhibit
Number Exhibit
3.(ii) By-laws of the Registrant.
10.12 Employment Agreement among the
Registrant, its subsidiary bank, Glens
Falls National Bank and Trust Company
and John C. Van Leeuwen dated December
29, 1998. *
10.13 Prototype of a change of control
agreement offered to certain officers
from time to time. *
11 Computation of Earnings per Share.
21 Subsidiaries of the Company.
23 Consent of Independent Certified Public
Accountants.
27 Financial Data Schedule (submitted with
electronic filing only).
* Management contracts or compensation
plans required to be filed as an exhibit.