-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, LsSHX7g9LoipyBO46sLn8BwtoSH7F/pto6bgNpGmm531NNCFuDAKRg80vF47XvVV UmFxJONnvuzH56FNRTywCQ== 0000717538-96-000019.txt : 19960329 0000717538-96-000019.hdr.sgml : 19960329 ACCESSION NUMBER: 0000717538-96-000019 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 19951231 FILED AS OF DATE: 19960328 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: ARROW FINANCIAL CORP CENTRAL INDEX KEY: 0000717538 STANDARD INDUSTRIAL CLASSIFICATION: STATE COMMERCIAL BANKS [6022] IRS NUMBER: 222448962 STATE OF INCORPORATION: NY FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-12507 FILM NUMBER: 96540098 BUSINESS ADDRESS: STREET 1: 250 GLEN ST CITY: GLENS FALLS STATE: NY ZIP: 12801 BUSINESS PHONE: 5187451000 MAIL ADDRESS: STREET 1: 250 GLEN STREET CITY: GLENS FALLS STATE: NY ZIP: 12801 FORMER COMPANY: FORMER CONFORMED NAME: ARROW BANK CORP DATE OF NAME CHANGE: 19900710 10-K 1 SECURITIES AND EXCHANGE COMMISSION Washington D.C. 20549 FORM 10-K Annual Report Pursuant to Section 13 or 15(d) of The Securities Exchange Act of 1934 For the fiscal year ended December 31, 1995 Commission file number 0-12507 ARROW FINANCIAL CORPORATION (Exact name of registrant as specified in its charter) NEW YORK 22-2448962 (State or Other Jurisdiction of (I.R.S. Employer Incorporation or Organization) Identification No.) 250 GLEN STREET, GLENS FALLS, NEW YORK 12801 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (518) 745-1000 ___________________________ SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT - NONE SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT Common stock, Par Value $1.00 (Title of Class) Indicate by checkmark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. Indicate by checkmark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No Indicate the number of shares outstanding of each of the registrant's classes of common stock, as of the latest practicable date. Class Outstanding at March 4, 1996 Common stock, Par Value $1.00 Per Share 5,587,735 State the aggregate market value of the voting stock held by non-affiliates of registrant. Aggregate market value Based upon the average of the closing bid of voting stock and closing asked prices on the NASDAQ Exchange $108,961,000 March 4, 1996 DOCUMENTS INCORPORATED BY REFERENCE Portions of Registrant's Proxy Statement for the Annual Meeting of Shareholders to be held April 24, 1996 (Part III) and the Annual Report to Shareholders (Part II, Item 8) ARROW FINANCIAL CORPORATION FORM 10-K INDEX PART I Item 1. Business A. General B. Lending Activities C. Supervision and Regulation D. Competition E. Statistical Disclosure (Guide 3) F. Legislative Developments G. Executive Officers of the Registrant Item 2. Properties Item 3. Legal Proceedings Item 4. Submission of Matters to a Vote of Security Holders PART II Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters Item 6. Selected Financial Data Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations A. Overview B. Results of Operations I. Net Interest Income II. Provision for Loan Losses and Allowance for Loan Losses III. Other Income IV. Other Expense V. Income Taxes C. Financial Condition I. Investment Portfolio II. Loan Portfolio a. Distribution of Loans and Leases b. Risk Elements III. Summary of Loan Loss Experience IV. Deposits V. Time Certificates of $100,000 or More D. Liquidity E. Interest Rate Risk F. Capital Resources and Dividends G. Fourth Quarter Results Item 8. Financial Statements and Supplementary Data Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure PART III Item 10. Directors and Executive Officers of the Registrant Item 11. Executive Compensation Item 12. Security Ownership of Certain Beneficial Owners and Management Item 13. Certain Relationships and Related Transactions PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K Signatures Exhibits Index PART I Item 1: Business A. GENERAL Arrow Financial Corporation (the "Company"), a New York corporation, was incorporated on March 21, 1983 and is registered as a bank holding company within the meaning of the Bank Holding Company Act of 1956. The Company owns two national banks in New York and one state-chartered bank in Vermont. The Company owns directly or indirectly all of the common stock of its subsidiaries. The business of the Company consists primarily of the ownership, supervision and control of its bank subsidiaries. The Company provides its subsidiaries with various advisory and administrative services and coordinates the general policies and operation of the subsidiary banks. There were 421 full-time equivalent employees of the Company and the subsidiary banks at December 31, 1995.
SUBSIDIARY BANKS: GLENS (Dollars in Thousands) FALLS SARATOGA NATIONAL NATIONAL GREEN BANK & BANK & MOUNTAIN TRUST CO. TRUST CO. BANK ("GFNB") ("SNB") ("GMB") Total Assets at Year-End $513,150 $60,890 $234,486 (a) 155,000 Trust Assets Under Management at Year-End (Not Included in Total Assets) $397,176 $ 2,082 $258,960 Date Organized 1851 1988 1891 Employees 161 21 109 (a) 76 State of Headquarters New York New York Vermont Offices 14 2 14 (a) 6 Counties of Operation Warren Saratoga Rutland Washington Addison Saratoga Bennington Essex (b) Orange (b) Windsor 137 So. Main Office 250 Glen St. Broadway 80 West St. Glens Falls, Saratoga, Rutland, New York New York Vermont (a) After branch sale on January 15, 1996. (b) Counties of sold branches.
Each subsidiary bank offers a full range of commercial and consumer financial products. The banks' deposit base consists of core deposits derived principally from the communities which the banks serve. The banks target their lending activities to consumers and small and mid-sized companies in the banks' immediate geographic areas. In addition to traditional banking services, the Company offers credit card processing services for other financial institutions and, through its banks' trust departments, provides retirement planning, trust and estate administration services for individuals and pension, profit-sharing and employee benefit plan administration for corporations. B. LENDING ACTIVITIES The Company's subsidiary banks engage in a wide range of lending activities, including commercial and industrial lending primarily to small and mid-sized companies; mortgage lending for the purchase of residential and commercial properties; and consumer installment, credit card and home equity financing. Although the Company's Vermont bank previously held a substantial amount of construction and land development loans in its portfolio, this segment of the portfolio has been steadily reduced in recent years and only a small number of new loans of this type have been extended. Historically, the Company has sold a portion of its residential real estate loan originations into the secondary market, primarily to Freddie Mac and state housing agencies, while retaining servicing rights. Loan sales, have diminished in the past three years, however, as the banks have sought to increase their own portfolios. In addition to interest earned on loans, the banks receive facility fees for various types of commercial and industrial credits, and commitment fees for extension of letters of credit and certain types of loans. Generally, the Company continues to implement conservative lending strategies, policies and procedures which are intended to protect the quality of the loan portfolio. These include stringent underwriting and collateral control procedures and credit review systems through which intensive reviews are conducted. It is the Company's policy to discontinue the accrual of interest on loans when the payment of interest and/or principal is due and unpaid for a designated period (generally 90 days) or when the likelihood of repayment is, in the opinion of management, uncertain. Income on such loans is thereafter recognized only upon receipt (see Item 7.C.II.b. "Risk Elements"). The banks lend primarily to borrowers within the geographic areas served by the banks. The banks' combined loan portfolios do not include any foreign loans or any significant industry concentrations except as described in Note 21 to the Consolidated Financial Statements in Part II Item 8 of this report. The portfolios are substantially secured, and many commercial loans are further secured by personal guarantees. C. SUPERVISION AND REGULATION The following generally describes the regulation to which the Company and its banks are subject. Bank holding companies and banks are extensively regulated under both federal and state law. To the extent that the following information describes statutory or regulatory provisions, it is qualified in its entirety by reference to the particular law or regulation. Any change in applicable law or regulation may have a material effect on the business and prospects of the Company and the banks. The Company is a legal entity separate and distinct from its subsidiaries. Most of the Company's revenues result from management fees, dividends and undistributed earnings from the subsidiary banks. The right of the Company, and consequently the right of creditors and shareholders of the Company, to participate in any distribution of the assets or earnings of the banks through the payment of such dividends or otherwise is necessarily subject to the prior claims of creditors of the banks, except to the extent that claims of the Company in its capacity as a creditor may be recognized. Moreover, there are various legal and regulatory limitations applicable to the payment of dividends to the Company by its subsidiaries as well as the payment of dividends by the Company to its shareholders. The ability of the Company and the banks to pay dividends in the future is, and is expected to continue to be, influenced by regulatory policies and capital guidelines. The Company is a registered bank holding company within the meaning of the Bank Holding Company Act of 1956 (BHC Act) and is subject to regulation by the Board of Governors of the Federal Reserve System (Federal Reserve Board). Additionally, the Company is subject to regulation by the New York State Banking Department. The New York banks are nationally chartered banks and are subject to the supervision of and examination by the Office of the Comptroller of the Currency ("OCC"). The Vermont bank is chartered by the State of Vermont and is supervised at the state level by the Vermont Department of Banking, Insurance and Securities and at the federal level by the Federal Deposit Insurance Corporation ("FDIC"). The New York banks are members of the Federal Reserve System and the deposits of each subsidiary bank are insured by the FDIC. The BHC Act prohibits the Company, with certain exceptions, from engaging, directly or indirectly, in non-bank activities and restricts loans by the banks to the Company or other affiliates. Under the BHC Act, a bank holding company must obtain Federal Reserve Board approval before acquiring, directly or indirectly, 5% or more of the voting shares of another bank or bank holding company (unless it already owns a majority of such shares) or acquiring all or substantially all of the assets of another bank or bank holding company. Under the 1994 Riegle-Neal Act, bank holding companies are now able to acquire banks located in all 50 states (see Item 1.F. "Legislative Developments".) The Federal Reserve Board has adopted various "capital adequacy guidelines" for use in the examination and supervision of bank holding companies. One set of guidelines are the risk-based capital guidelines, which assign risk weightings to all assets and certain off-balance sheet items and establish an 8% minimum ratio of qualified total capital to risk-weighted assets. At least half of total capital must consist of "Tier 1" capital, which comprises common equity, retained earnings and a limited amount of permanent preferred stock, less goodwill. Up to half of total capital may consist of so-called "Tier 2" capital, comprising a limited amount of subordinated debt, other preferred stock, certain other instruments and a limited amount of loan loss reserves. The Reserve Board's other capital guideline is the leverage ratio standard, which establishes minimum limits on the ratio of a bank holding company's "Tier 1" capital to total tangible assets. For top-rated holding companies, the minimum leverage ratio is 3%, but lower-rated companies may be required to meet substantially greater minimum ratios. Each subsidiary bank is subject to similar capital requirements adopted by its primary federal regulator. The year-end 1995 capital ratios of the Company and the banks are set forth in Part II, Item 7.F. "Capital Resources and Dividends." A holding company's ability to pay dividends and expand its business through acquisitions of new subsidiaries can be restricted if capital falls below these capital adequacy guidelines. Neither the Company nor any of its subsidiaries is now, or has been within the past year, subject to any formal or informal regulatory enforcement order. D. COMPETITION The Company and its subsidiaries face intense competition in all markets that they serve. Traditional competitors are other local commercial banks, savings banks, savings and loan institutions and credit unions, as well as local offices of major regional and money center banks. Also, non-banking organizations, such as consumer finance companies, insurance companies, securities firms, money market and mutual funds and credit card companies, which are not subject to the same array of regulatory restrictions and capital requirements as the Company and the subsidiary banks, offer substantive equivalents of transaction accounts, credit cards and various other loan and financial products. E. STATISTICAL DISCLOSURE Statistical disclosure required by Securities Act Guide 3 to be set forth herein is found in Item 7 "Management's Discussion and Analysis of Financial Condition and Results of Operations" and Item 8 "Financial Statements and Supplementary Data." INDEX TO SECURITIES ACT GUIDE 3, STATISTICAL DISCLOSURE BY BANK HOLDING COMPANIES Required Information Location Distribution of Assets, Liabilities and Stockholders' Equity; Interest Rates and Interest Differential Part II, Item 7.B.I. Investment Portfolio Part II, Item 7.C.I. Loan Portfolio Part II, Item 7.C.II. Summary of Loan Loss Experience Part II, Item 7.C.III. Deposits Part II, Item 7.C.IV. Return on Equity and Assets Part II, Item 6. Short-Term Borrowings Part II, Item 8. Note 9. F. LEGISLATIVE DEVELOPMENTS In 1994, the Riegle-Neal Interstate Banking and Branching Efficiency Act was enacted. Under the Act, as of September 29, 1995, bank holding companies were authorized as a matter of federal law to acquire banks located in any of the 50 states, notwithstanding any state laws to the contrary, provided all required regulatory and other approvals have been obtained. Also, under the Act, effective June 1, 1997, banks headquartered in any state will be permitted to branch into any other state, except for those states which may enact legislation prior to June 1, 1997 "opting out" of interstate branching. States may "opt in" to interstate branching prior to June 1, 1997, by affirmatively adopting legislation to that effect. The Act also permits commonly-controlled banks to act as agents for one another, effective September 29, 1995, by accepting deposits or loan payments or closing or servicing loans for one another, regardless of any branching laws to the contrary. In 1991, the Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA") was enacted. Among other things, FDICIA requires the federal banking regulators to take prompt corrective action with respect to depository institutions that do not meet minimum capital requirements. FDICIA establishes five capital classifications for banking institutions, the highest of which is "well-capitalized." Under regulations adopted by the federal regulators, a banking institution is considered "well-capitalized" if it has a total risk-adjusted capital ratio of 10% or greater, a Tier 1 risk-adjusted capital ratio of 6% or greater and a leverage ratio of 5% or greater and is not subject to any regulatory order or written directive regarding capital maintenance. The Company and its subsidiary banks are all well-capitalized. FDICIA also imposed expanded accounting and audit reporting requirements for depository institutions whose total assets exceed $500 million. The FDIC levies assessments on various deposit obligations of the Company's banking subsidiaries. In 1993, the FDIC implemented a new risk-based system of assessing deposit insurance premiums to bring the level of the Bank Insurance Fund (BIF) to a FDICIA required level of 1.25% of insured deposits. During 1995, the FDIC reduced the premium paid by the best-rated banks (including all the Company's subsidiary banks) from $.23 per $100 of insured deposits to $.04, upon the recapitalization of the BIF. In 1996, the FDIC insurance premium was further reduced to a flat charge of $2 thousand per year for the highest-rated banks, including all the Company's subsidiary banks. Legislation is currently under consideration that would recapitalize the Savings Association Insurance Fund (SAIF) and merge the SAIF with the BIF. It is not anticipated that this legislation would have an immediate impact on the assessment rate for BIF insured institutions or otherwise would have any negative impact on the Company or its subsidiary banks. Banks and bank holding companies are also significantly affected by the Financial Institutions Reform, Recovery and Enforcement Act of 1989 ("FIRREA"). Although FIRREA dealt primarily with the thrift industry, it also impacted commercial banking organizations. FIRREA mandates public disclosure by commercial banks of their Community Reinvestment Act ratings and mortgage lending records and imposed cross-liability on any insured financial institutions which are affiliated with any other insured institution to which the FDIC gives financial assistance. Various other banking legislation, including proposals to permit banks to affiliate with full-service securities underwriting firms or non-financial organizations (Glass-Steagall Reform) have been introduced in Congress from time to time. The Company cannot determine the ultimate effect that any such potential legislation, if enacted, would have upon its financial condition or operations. In 1995, the federal bank regulatory authorities promulgated a set of revised regulations addressing the responsibilities of banking organizations under the Community Reinvestment Act ("CRA"). The revised regulations place additional emphasis on the actual experience of a bank in making loans in low- and moderate-income areas within its service area as a key determinant in evaluation of the bank's compliance with the statute. As in the prior regulations, bank regulators are authorized to bring enforcement actions against banks under the CRA only in the context of bank expansion or acquisition affiliations. G. EXECUTIVE OFFICERS OF THE REGISTRANT The names and ages of the principal executive officers of the Company and positions held are presented in the following table. The officers are elected annually by the Board of Directors. Name Age Positions Held and Years from Which Held Michael F. Massiano 61 Chairman, President and CEO. Mr. Massiano has been Chairman and CEO since 1990 and was President and CEO of the Company prior to 1990. Mr. Massiano is also CEO of Glens Falls National Bank. John J. Murphy 44 Executive Vice President, Treasurer and CFO. Mr. Murphy has served as Treasurer and Chief Financial Officer of the Company since 1983. Thomas L. Hoy 47 President and COO of Glens Falls National Bank. Mr. Hoy was Executive Vice President of Glens Falls National Bank prior to 1995. Gerard R. Bilodeau 48 Senior Vice President and Secretary since 1994. Mr. Bilodeau was Vice President and Secretary from 1993 to 1994 and was Director of Personnel prior to 1993. Item 2: Properties The Company is headquartered at 250 Glen Street, Glens Falls, New York. The building is owned by Glens Falls National Bank and serves as its main office. Glens Falls National Bank owns thirteen additional offices. Saratoga National Bank owns both of its offices. Green Mountain Bank owns its main office and nine other offices and leases four offices. Of the eight branches sold on January 15, 1996, six were owned and two were leased. Offices leased from unrelated third parties are at market rates. Rental costs of premises did not exceed 5% of operating costs in 1995. In the opinion of management of the Company, the physical properties of the Company and the Banks are suitable and adequate. Item 3: Legal Proceedings The Company is not the subject of any material pending legal proceedings, other than ordinary routine litigation occurring in the normal course of its business. The Company's subsidiary banks are the subjects of or parties to various legal claims which arise in the normal course of their business. For example, the banks, especially Green Mountain Bank, have in recent periods encountered claims against them grounded in lender liability, of the sort often asserted against financial institutions. These lender liability claims normally take the form of counterclaims to lawsuits filed by the banks for collection of past due loans. The various pending legal claims against the subsidiary banks, including such lender liability claims, will not, in the opinion of management, result in any material liability to the banks or the Company. Item 4: Submission of Matters to a Vote of Security Holders None in the fourth quarter of 1995. PART II Item 5: Market for the Registrant's Common Equity and Related Stockholder Matters The common stock of Arrow Financial Corporation is traded over-the-counter. It is registered with and its price is quoted by the National Association of Securities Dealers, Inc., through its national quotation system (NASDAQ). The price ranges below represent actual transactions rounded to the nearest 1/8 point. Although there may have been isolated sales at prices outside the parameters shown, the Company believes that the price ranges fairly represent the trading ranges. Per share amounts and market prices have been adjusted for the 1995 four percent stock dividend and the 1994 four percent stock dividend.
Market Price Cash (Bid) Dividends High Low Declared 1994 1st Quarter $11.375 $10.625 $.065 2nd Quarter 14.750 10.250 .074 3rd Quarter 16.625 14.250 .102 4th Quarter 15.375 13.500 .115 1995 1st Quarter $15.875 $14.875 $.125 2nd Quarter 15.375 14.000 .135 3rd Quarter 17.125 14.375 .144 4th Quarter 19.000 16.875 .160
The payment of dividends by the Company is at the discretion of the Board of Directors and is dependent upon, among other things, the Company's earnings, financial condition and other factors, including applicable governmental regulations and restrictions. See "Capital Resources and Dividends" in Part II, Item 7.F. of this report. There were approximately 2,505 holders of record of common stock at December 31, 1995. Item 6: Selected Financial Data FIVE YEAR SUMMARY OF SELECTED DATA Arrow Financial Corporation and Subsidiaries (Dollars In Thousands, except per share data)
1995 1994 1993 1992 1991 Consolidated Statements of Income Data: Interest Income $60,718 $52,514 $51,836 $57,829 $ 73,755 Less: Interest Expense 24,865 18,202 19,583 28,399 43,556 Net Interest Income 35,853 34,312 32,253 29,430 30,199 Less: Provision for Loan Losses 1,170 (950) 690 1,677 46,185 Net Interest Income (Loss) After Provision for Loan Losses 34,683 35,262 31,563 27,753 (15,986) Other Income 14,473 9,049 9,086 8,606 8,934 Net Gains (Losses) on Securities Transactions 23 (481) 26 15 684 Less: Other Expense 29,769 31,374 32,118 32,153 31,879 Income (Loss) Before Income Taxes, Extra- ordinary Item and Cumulative Effect of Accounting Change 19,410 12,456 8,557 4,221 (38,247) Provision for (Benefit from) Income Taxes 6,986 1,131 381 1,331 (4,865) Income (Loss) Before Extraordinary Item & Cumulative Effect of Accounting Change 12,424 11,325 8,176 2,890 (33,382) Extraordinary Item: Utilization of Net Operating Loss Carryforward --- --- --- 811 --- Cumulative Effect of a Change in Accounting for Income Taxes --- --- 1,457 --- --- Net Income (Loss) $12,424 $11,325 $ 9,633 $ 3,701 $(33,382) Primary Earnings (Loss) Per Share: Income (Loss) Before Extraordinary Item and Accounting Change $ 2.17 $ 1.97 $ 1.44 $ .53 $(6.13) Extraordinary Item and Accounting Change --- --- .25 .13 --- Net Income (Loss) $ 2.17 $ 1.97 $ 1.69 $ .66 $(6.13) Fully Diluted Earnings (Loss) Per Share: Income (Loss) Before Extraordinary Item and Accounting Change $ 2.17 $ 1.90 $ 1.44 $ .53 $(6.13) Extraordinary Item and Accounting Change --- --- .25 .13 --- Net Income (Loss) $ 2.17 $ 1.90 $ 1.69 $ .66 $(6.13) Cash Dividends $ .56 $ .36 $ .10 $ --- $ .23 Book Value 12.00 10.20 8.74 7.07 6.40 Consolidated Balance Sheet Data: Total Assets $789,790 $746,431 $733,442 $722,415 $769,942 Securities Held-to-Maturity 13,921 129,735 125,832 97,305 145,250 Securities Available-for-Sale 178,645 53,868 55,892 55,598 --- Loans and Leases, Net of Unearned Income 517,787 507,553 502,784 492,916 547,419 Nonperforming Assets 6,765 7,825 20,136 29,669 43,890 Deposits 694,453 650,485 659,427 657,875 696,402 Other Borrowed Funds 15,297 24,865 12,487 15,162 25,141 Long-Term Debt --- 5,007 5,289 5,371 7,048 Shareholders' Equity 67,504 58,405 50,069 39,735 34,900 Selected Key Ratios: Return on Average Assets 1.60% 1.52% 1.33% .50% (4.07)% Return on Average Equity 19.45 20.79 21.03 10.10 (64.54) Dividend Payout 25.81 18.05 5.93 --- --- Average Equity to Average Assets 8.22 7.34 6.32 4.97 6.30 Per share amounts have been adjusted for the 1995, 1994, 1993 and 1992 four percent stock dividends.
Item 7: Management's Discussion and Analysis of Financial Condition and Results of Operations The following discussion presents an analysis of the Company's results of operations for each of the years in the three-year period ended December 31, 1995 and the financial condition of the Company as of December 31, 1995 and 1994. Per share amounts have been restated to reflect the four percent stock dividend paid in November 1995 and the four percent stock dividend paid in November 1994. The discussion below should be read in conjunction with the consolidated financial statements and other financial data presented elsewhere herein. A. OVERVIEW The Company reported net income of $12.4 million for 1995, which compared to net income of $11.3 million for 1994. Primary earnings per share were $2.17 and $1.97 for 1995 and 1994, respectively. The following analysis adjusts net income for unusual and nonrecurring items to arrive at a comparative presentation of the Company's core earnings: SUMMARY OF CORE EARNINGS (In Thousands)
1995 1994 Net Income, as Reported $12,424 $11,325 Net Operating Loss Benefits --- (3,560) Other Items, Net of Tax: Insurance Settlement (3,250) --- OREO Transactions 136 1,133 Credit to the Provision for Loan Losses --- (990) Severance Benefits 388 --- Net Securities Transactions (12) 285 Other (218) --- Recurring Net Income $ 9,468 $ 8,193 Recurring Primary Earnings per Share $ 1.66 $ 1.43
In May of 1995, the Company received a $5.0 million pre-tax settlement from the Company's financial institution bond company on a claim for losses suffered in earlier periods. During 1994, the Company fully utilized the tax benefits resulting from net operating losses sustained in 1991. In the second quarter of 1994, the Company adjusted its reserve for loan losses by means of a $1.5 million credit to the provision for loan losses, reflected as income. This adjustment was offset by a similar amount of losses in the same period on the sale of real estate acquired through foreclosures (OREO), which was reflected as other operating expense. The increase in core earnings from 1994 to 1995 is attributable to an increase in net interest income, increases in all areas of noninterest income and a decrease in operating expenses. Nonperforming assets, which include nonaccrual loans, loans past due 90 days or more and still accruing interest, restructured loans in compliance with modified terms and OREO, amounted to $6.8 million at December 31, 1995, down from $7.8 million at December 31, 1994. The reduction was primarily attributable to sales of OREO. The allowance for loan losses was $12.1 million at December 31, 1995, which represented 278% of the amount of nonperforming loans at that date. This position was substantially unchanged from the prior year-end. Sale of Vermont Operations On January 15, 1996, the Company completed its sale of eight branches of Green Mountain Bank in eastern Vermont to Mascoma Savings Bank of Lebanon, New Hampshire. The following table presents unaudited consolidated balance sheet information at January 15, 1996 in comparison to December 31, 1995 and 1994. SELECTED BALANCE SHEET INFORMATION (In Thousands)
January 15, December 31, December 31, 1996 1995 1994 Liquid Assets (1) $204,505 $237,151 $ 88,492 Investments 13,851 13,921 129,735 Loans 474,463 517,787 507,553 Total Assets 712,493 789,790 746,431 Deposits 592,633 694,453 650,485 Shareholders' Equity 72,728 67,504 58,405 (1) Cash and Due From Banks, Federal Funds Sold and Securities Available-for-Sale.
On February 27, 1996, the Company announced that it had entered into a definitive agreement with ALBANK FSB, an Albany, New York based savings bank with Vermont operations, to sell to ALBANK the remaining six Green Mountain Bank branches including substantially all remaining loans and deposits of Green Mountain Bank ($112 million and $110 million, respectively, at the date of signing). On February 27, 1996, the Company entered into a definitive agreement with Vermont National Bank, Brattleboro, Vermont, to sell to Vermont National the Green Mountain Bank trust business. After the completion of these sales, the Company effectively will have no remaining operations in Vermont. These and other changes are more fully described in the following analysis of the results of operations and changes in financial condition. B. RESULTS OF OPERATIONS The following analysis of net interest income, the provision and allowance for loan losses, noninterest income, other expense and income taxes, presents the factors that are primarily responsible for the Company's results of operations for 1995 and the prior two years. I. NET INTEREST INCOME (Fully Taxable Basis) Net interest income represents the difference between interest earned on loans and investments and interest paid on deposits and other sources of funds. Changes in net interest income result from (I) changes in the level and mix of earning assets and sources of funds (volume) (II) changes in the yields earned and costs paid (rate), and (III) the relative volume of nonperforming assets. Net interest margin is the ratio of net interest income to average earning assets. Net interest income may also be described as the product of earning assets and net interest margin. COMPARISON OF NET INTEREST INCOME (Dollars In Thousands) (Fully Taxable Basis)
Years Ended December 31, Change From Prior Year 1995 1994 1993 1995 1994 Amount Percent Amount Percent Interest Income $61,411 $52,985 $52,415 $ 8,426 15.9 % $ 570 1.1 % Interest Expense 24,865 18,202 19,583 6,663 36.6 (1,381) (7.1) Net Interest Income $36,546 $34,783 $32,832 $ 1,763 5.1 $ 1,951 5.9
On a tax-equivalent basis, net interest income was $36.5 million in 1995, an increase of $1.8 million or 5.1% from $34.8 million in 1994. Net interest income, for both 1995 and 1994, was favorably impacted by both the changing interest rate environment and an increase in average earning assets. In addition to general changes in rates and volume, net interest income was enhanced by the reduction of nonaccrual loans, both in absolute amounts and as a ratio to earning assets. The Company also benefitted from retained earnings as a source of funds and from the investment of the proceeds from OREO sales into earning assets. In 1989, under the influence of the Federal Reserve Board, interest rates began a steady decline, and for a two year period beginning in the spring of 1992, the prime rate was unchanged. During that period, the Company experienced a benefit from a change in the mix of deposits from higher cost time deposits to lower cost N.O.W. and money market deposit accounts. During 1994, the prolonged period of falling interest rates came to an end as the Federal Reserve Board began a series of interest rate increases which extended into 1995. As a result, the mix of average deposits in 1994 was virtually the same as for 1993, but in 1995, depositors began to move a portion of their deposits back to higher cost time deposits. ANALYSIS OF CHANGES IN NET INTEREST INCOME The following table presents net interest income components on a tax-equivalent basis and reflects changes between periods attributable to movement in either the average daily balance or average rates for both earning assets and interest-bearing liabilities. Changes attributable to both volume and rate have been allocated proportionately between the categories. CHANGE IN NET INTEREST INCOME (In Thousands) (Fully Taxable Basis)
1995 to 1994 1994 to 1993 Change in Net Interest Income Change in Net Interest Income Due to: Due to: Volume Rate Total Volume Rate Total Interest Income: Interest-Bearing Deposits With Banks $ --- $ --- $ --- $ (34) $ (34) $ (68) Federal Funds Sold 521 285 806 (1,051) 934 (117) Securities Available- for-Sale 334 823 1,157 525 (626) (101) Securities Held-to-Maturity: U.S. Treasury and Other Governmental Agencies (372) 75 (297) (776) (469) (1,245) State and Municipal Obligations 548 45 593 218 (321) (103) Mortgage-Backed Securities 233 87 320 1,044 10 1,054 Other Securities 282 11 293 42 71 113 Total Securities Held- to-Maturity 691 218 909 528 (709) (181) Loans 956 4,598 5,554 1,097 (60) 1,037 Total Interest Income 2,502 5,924 8,426 1,065 (495) 570 Interest Expense: Deposits: N.O.W./Super N.O.W. 202 1,279 1,481 65 (430) (365) Regular Savings and M.M.D.A. (1,917) 847 (1,070) 25 (555) (530) Time Certificates of $100,000 or More 2,158 442 2,600 507 (54) 453 Other Time Deposits 1,121 2,319 3,440 (516) (469) (985) Total Deposits 1,564 4,887 6,451 81 (1,508) (1,427) Short-Term Borrowings 288 137 425 29 29 58 Long-Term Debt (230) 17 (213) (11) (1) (12) Total Interest Expense 1,622 5,041 6,663 99 (1,480) (1,381) Net Interest Income $ 880 $ 883 $1,763 $ 966 $ 985 $1,951
The following table reflects the components of the Company's net interest income, setting forth, for years ended December 31, 1995, 1994 and 1993 (I) average assets, liabilities and shareholders' equity, (II) interest income earned on earning assets and interest expense incurred on interest-bearing liabilities, (III) average yields earned on earning assets and average rates paid on interest-bearing liabilities, (IV) the net interest spread (average yield less average cost) and (V) the net interest margin (yield) on earning assets. Rates are computed on a tax-equivalent basis. Nonaccrual loans are included in average loans and leases, while unearned income has been eliminated. AVERAGE CONSOLIDATED BALANCE SHEETS AND NET INTEREST INCOME ANALYSIS Arrow Financial Corporation and Subsidiaries (Fully Taxable Basis using a marginal tax rate of 35% for 1995 and 34% for 1994 and 1993) (Dollars In Thousands) (Unaudited)
Years Ended December 31, 1995 Interest Rate Average Income/ Earned/ Balance Expense Paid Interest-Bearing Deposits With Banks $ --- $ --- ---% Federal Funds Sold 22,596 1,307 5.78 Securities Available- for-Sale 66,075 4,024 6.09 Securities Held-to-Maturity: U.S. Treasury and Governmental Agencies 57,993 3,108 5.36 State and Municipal 13,271 1,124 8.47 Mortgage-Backed Securities 48,933 3,100 6.34 Other Securities 6,573 486 7.39 Total Securities Held- to-Maturity 126,770 7,818 6.17 Loans & Leases (Net of Unearned Income) 513,266 48,262 9.40 Total Earning Assets 728,707 61,411 8.43 Allowance for Loan Losses (12,288) Cash and Due From Banks 28,081 Other Assets 32,929 Total Assets $777,429 Deposits: N.O.W./Super N.O.W. $139,879 3,975 2.84 Savings/M.M.D.A. 201,932 6,187 3.06 Time Certificates of $100,000 or More 67,029 3,761 5.61 Other Time Deposits 185,166 9,893 5.34 Total Interest-Bearing Deposits 594,006 23,816 4.01 Short-Term Borrowings 15,855 819 5.17 Long-Term Debt. 2,619 230 8.78 Total Interest- Bearing Funds 612,480 24,865 4.06 Demand Deposits 88,961 Other Liabilities 12,097 Total Liabilities 713,538 Shareholders' Equity 63,891 Total Liabilities and Shareholders' Equity $777,429 Net Interest Income (Fully Taxable Basis) 36,546 Reversal of Tax Equivalent Adjustment (693) Net Interest Income $35,853 Net Interest Spread 4.37% Net Interest Margin 5.02%
AVERAGE CONSOLIDATED BALANCE SHEETS AND NET INTEREST INCOME ANALYSIS Arrow Financial Corporation and Subsidiaries (Fully Taxable Basis using a marginal tax rate of 35% for 1995 and 34% for 1994 and 1993) (Dollars In Thousands) (Unaudited)
Years Ended December 31, 1994 Interest Rate Average Income/ Earned/ Balance Expense Paid Interest-Bearing Deposits With Banks $ --- $ --- ---% Federal Funds Sold 12,490 501 4.01 Securities Available- for-Sale 60,591 2,867 4.73 Securities Held-to-Maturity U.S. Treasury and Governmental Agencies 64,908 3,405 5.25 State and Municipal 6,761 531 7.85 Mortgage-Backed Securities 45,221 2,780 6.15 Other Securities 2,751 193 7.02 Total Securities Held- to-Maturity 119,641 6,909 5.77 Loans & Leases (Net of Unearned Income) 502,224 42,708 8.50 Total Earning Assets 694,946 52,985 7.62 Allowance for Loan Losses (16,954) Cash and Due From Banks 27,009 Other Assets 37,635 Total Assets $742,636 Deposits: N.O.W./Super N.O.W. $129,999 2,494 1.92 Savings/M.M.D.A. 260,336 7,257 2.79 Time Certificates of $100,000 or More 26,980 1,161 4.30 Other Time Deposits 160,035 6,453 4.03 Total Interest-Bearing Deposits 577,350 17,365 3.01 Short-Term Borrowings 9,838 394 4.00 Long-Term Debt. 5,226 443 8.48 Total Interest- Bearing Funds 592,414 18,202 3.07 Demand Deposits 87,715 Other Liabilities 8,028 Total Liabilities 688,157 Shareholders' Equity 54,479 Total Liabilities and Shareholders' Equity $742,636 Net Interest Income (Fully Taxable Basis) 34,783 Reversal of Tax Equivalent Adjustment (471) Net Interest Income $34,312 Net Interest Spread 4.55% Net Interest Margin 5.01%
AVERAGE CONSOLIDATED BALANCE SHEETS AND NET INTEREST INCOME ANALYSIS Arrow Financial Corporation and Subsidiaries (Fully Taxable Basis using a marginal tax rate of 35% for 1995 and 34% for 1994 and 1993) (Dollars In Thousands) (Unaudited)
Years Ended December 31, 1993 Interest Rate Average Income/ Earned/ Balance Expense Paid Interest-Bearing Deposits With Banks $ 2,151 $ 68 3.16% Federal Funds Sold 20,927 618 2.95 Securities Available- for-Sale 49,489 2,968 6.00 Securities Held-to-Maturity: U.S. Treasury and Governmental Agencies 79,060 4,651 5.88 State and Municipal 5,595 634 11.33 Mortgage-Backed Securities 28,235 1,726 6.11 Other Securities 1,935 79 4.08 Total Securities Held- to-Maturity 114,825 7,090 6.17 Loans & Leases (Net of Unearned Income) 489,326 41,671 8.52 Total Earning Assets 676,718 52,415 7.75 Allowance For Loan Losses (16,954) Cash and Due From Banks 26,963 Other Assets 37,998 Total Assets $724,725 Deposits: N.O.W./Super N.O.W. $127,163 2,859 2.25 Savings/M.M.D.A. 259,519 7,787 3.00 Time Certificates of $100,000 or More 15,077 708 4.70 Other Time Deposits 172,422 7,438 4.31 Total Interest-Bearing Deposits 574,181 18,792 3.27 Short-Term Borrowings 9,083 336 3.70 Long-Term Debt. 5,359 455 8.49 Total Interest- Bearing Funds 588,623 19,583 3.33 Demand Deposits 83,971 Other Liabilities 6,317 Total Liabilities 678,911 Shareholders' Equity 45,814 Total Liabilities and Shareholders' Equity $724,725 Net Interest Income (Fully Taxable Basis) 32,832 Reversal of Tax Equivalent Adjustment (579) Net Interest Income $32,253 Net Interest Spread 4.42% Net Interest Margin 4.85%
CHANGES IN NET INTEREST INCOME DUE TO RATE YIELD ANALYSIS December 31,
1995 1994 1993 Yield on Earning Assets 8.43% 7.62% 7.75% Cost of Interest-Bearing Liabilities 4.06 3.07 3.33 Net Interest Spread 4.37% 4.55% 4.42% Net Interest Margin 5.02% 5.01% 4.85%
The following items have a major impact on changes in net interest income due to rate: general interest rate changes, the ratio of the Company's rate sensitive assets to rate sensitive liabilities (interest rate sensitive gap) during periods of interest rate changes and the relative level of nonaccrual loans. In 1995, the change in net interest income attributable to changes in interest rates had an $883 thousand positive impact on net interest income. During the first half of the year, the Company was still experiencing the effect from rising interest rates which had begun in the second half of 1994. Various loan and deposit products react to interest rate changes with different speeds and for some products not to the full extent of changes in the prime rate. During 1994, assets in general repriced more quickly than time deposits. Repricing of short-term deposit products also tended to lag behind prime rate changes and did not change to the full extent of prime rate changes. Consequently, the spread between the yield on earning assets and the cost of interest paying liabilities increased from 1993 to 1994 by 13 basis points, while decreasing by 18 basis points from 1994 to 1995. Notwithstanding the decrease in the net interest spread, the Company experienced a beneficial impact from generally rising interest rates due to the fact that the increase in average interest bearing assets exceeded the increase in interest paying liabilities as discussed more fully in the following section on changes in net interest income due to volume. As a result, the net interest margin increased from 1994 to 1995, albeit by only one basis point. In 1994, the change in net interest income attributable to changes in interest rates had a $985 thousand positive impact on net interest income. During the first half of the year, the Company was still experiencing the effect from falling interest rates in prior periods, as higher yielding fixed rate loan and time deposit maturities repriced at current rates. During the second half of the year the Federal Reserve Board began a series of interest rate increases and the Company, as well as many financial institutions, benefitted from a more rapid repricing of earning assets than paying liabilities. The effect of the downward repricing of fixed rate loan and time deposit maturities in the first half of the year was more pronounced than the effect of rising interest rates at the end of the year, as both the yield on earnings assets and the cost of paying liabilities fell from 1993 to 1994. The Company also experienced the benefit of reduced levels of nonaccrual loans, both in absolute amounts and as a ratio to earning assets, and was able to apply the proceeds from OREO sales to earning assets. Nonaccrual loans amounted to $3.6 million and $9.9 million at December 31, 1994 and 1993, respectively, and the proceeds from OREO sales amounted to $4.8 million in 1994. CHANGES IN NET INTEREST INCOME DUE TO VOLUME AVERAGE BALANCES (Dollars in Thousands)
$ Change % Change 1995 1994 1993 1995 1994 1995 1994 Earning Assets $728,707 $694,946 $676,718 $33,761 $18,228 4.9% 2.7% Interest-Bearing Liabilities 612,480 592,414 588,623 20,066 3,791 3.4 .6 Demand Deposits 88,961 87,715 83,971 1,246 3,744 1.4 4.5 Total Assets 777,429 742,636 724,725 34,793 17,911 4.7 2.5 Earning Assets to Total Assets 93.73% 93.58% 93.38% .15% .20% .2 .2
In general, changes in volume will result in corresponding changes in net interest income. However, changes due to volume can be enhanced or restricted by shifts in the relative mix between instruments of different rates. In 1995, the change in volume had an $880 thousand positive impact on net interest income. Of the $33.8 million increase in average earning assets from 1994 to 1995, average loan balances accounted for $11.0 million. The Company used the remaining funds to increase its liquid assets. Only $20.1 million of the $33.8 million increase in average earning assets was funded by paying liabilities. The primary sources of funds for the remainder came from retained earnings ($9.4 million) and proceeds from the sale of OREO ($1.5 million). In 1994, the change in volume had a $966 thousand positive impact on net interest income. Of the $18.2 million increase in average earning assets from 1993 to 1994, average loan balances accounted for $12.9 million. The Company used the remaining funds as well as $8.4 million from decreased average federal funds balances to increase both the held-to-maturity and available-for-sale securities portfolios. Only $3.8 million of the $18.2 million increase in average earning assets was funded by paying liabilities. The primary sources of funds for the remainder came from retained earnings ($8.7 million) and proceeds from the sale of OREO ($4.8 million). II. PROVISION FOR LOAN LOSSES AND ALLOWANCE FOR LOAN LOSSES Through the provision for loan losses, an allowance (reserve) is established for estimated future loan losses. Actual loan losses are charged against this allowance when they occur. In evaluating the adequacy of the allowance for loan losses, management considers various risk factors influencing asset quality. This analysis is based on judgments and estimates and may change in response to economic developments or other conditions that may influence borrowers' economic outlook. On January 1, 1995, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 114, "Accounting by Creditors for Impairment of a Loan." SFAS No. 114, as amended, requires that impaired loans, except for large groups of smaller-balance homogeneous loans, be measured based on (i) the present value of expected future cash flows discounted at the loan's effective interest rate, (ii) the loan's observable market price or (iii) the fair value of the collateral if the loan is collateral dependent. The Company applies the provisions of SFAS No. 114 to all impaired commercial and commercial real estate loans over $250,000, and to all loans restructured subsequent to adoption. Reserves for losses for the remaining smaller-balance loans are evaluated under SFAS No. 5. Under the provisions of SFAS No. 114, the Company determines impairment for collateralized loans based on fair value of the collateral less estimated cost to sell. For other loans, impairment is determined by comparing the recorded value of the loan to the present value of the expected cash flows, discounted at the loan's effective interest rate. The Company determines the interest income recognition method on a loan by loan basis. Based upon the borrowers' payment histories and cash flow projections, interest recognition methods include full accrual, cash basis and cost recovery. During 1995, nonperforming assets continued the steady decline begun in 1991. The primary portion of the decrease in nonperforming assets in 1995 came from the sale of OREO. Nonaccrual loans increased $626 thousand or 17.3% from the year-end 1994 balance. The increase in nonaccrual loans represents the aggregate borrowing of one large commercial borrower, which was placed on nonaccrual status in 1995. That loan was accounted for under SFAS No. 114 and was being carried at its estimated fair value. Loans reported as troubled debt restructures at December 31, 1994, were classified as performing in 1995. Net charge-offs for 1995 of $1.4 million, or .27% of average loans for the year, was typical of the Company's historical experience with the exception of 1991 and 1992. The provision for loan losses of $1.2 million, or .23% of average loans, remained below the Company's historical average. The 1995 provision, however, was deemed adequate in consideration of the ratio of the allowance for loan losses to nonperforming loans, which amounted to 278% at December 31, 1995. The provision for loan losses in 1994 was actually a credit to the provision and a reduction in the allowance for loan losses. During the second quarter of 1994, with nonperforming assets at significantly reduced levels and a substantial sale of OREO having been completed, the Company reduced the unallocated portion of the allowance for loan losses by $1.5 million. This reduction was effected by means of a credit to the provision for loan losses. As a result, for the twelve month period ended December 31, 1994, the Company's net provision for loan losses was a negative $950 thousand, compared to a provision of $690 thousand in 1993 and $1.7 million in 1992. As a ratio of average loans, the provisions were (.19)% in 1994 and .14% and .32% for 1993 and 1992, respectively. While the absolute balance of the allowance for loan losses has decreased in each of the past four years, the ratio of the allowance to nonperforming loans has increased or remained steady, with the ratio at the end of 1995 virtually unchanged from the year-end 1994 level. The balance of the allowance for loan losses was $12.1 million, $12.3 million, $16.1 million and $17.3 million at December 31, 1995, 1994, 1993 and 1992, respectively. The ratio of the allowance to nonperforming loans was 278%, 279%, 127% and 72% at the end of the same respective periods. Net loan losses for 1995 were $1.4 million. These losses compare to net loan losses of $2.8 million, $1.9 million and $4.7 million for the years ended December 31, 1994, 1993 and 1992, respectively. As a ratio to average loans, the net loan losses were .27%, .56%, .40% and .92% for the same respective periods. SUMMARY OF THE ALLOWANCE AND PROVISION FOR LOAN LOSSES (Dollars In Thousands) (Loans and Leases, Net of Unearned Income)
Years-Ended December 31, 1995 1994 1993 1992 1991 Loans and Leases at End of Period $517,787 $507,553 $502,784 $492,916 $547,419 Average Loans and Leases 513,266 502,224 489,326 516,711 607,601 Total Assets at End of Period 789,790 746,431 733,442 722,415 769,942 Nonperforming Assets: Nonaccrual Loans: Construction and Land Development $ 104 $ 327 $ 2,534 $ 6,149 $ 13,163 Commercial Real Estate 1,299 1,050 2,649 7,986 9,133 Commercial Loans 1,979 1,017 2,596 4,168 7,393 Other 862 1,224 2,082 3,171 3,764 Total Nonaccrual Loans 4,244 3,618 9,861 21,474 33,453 Loans Past Due 90 or More Days and Still Accruing Interest 111 231 364 1,486 329 Restructured Loans in Compliance with Modified Terms --- 580 2,405 1,161 3,963 Total Nonperforming Loans 4,355 4,429 12,630 24,121 37,745 Other Real Estate Owned 2,410 3,396 7,506 5,548 6,145 Total Nonperforming Assets $ 6,765 $ 7,825 $ 20,136 $ 29,669 $ 43,890 Allowance for Loan Losses: Balance at Beginning of Period $ 12,338 $ 16,078 $ 17,328 $ 20,387 $ 11,656 Loans Charged-off: Commercial, Financial and Agricultural (579) (997) (973) (2,283) (7,804) Real Estate - Commercial (369) (689) (1,106) (645) (6,804) Real Estate - Construction (101) (1,181) (377) (2,015) (20,941) Real Estate - Residential (160) (143) (151) (323) (335) Installment Loans to Individuals (562) (476) (480) (820) (2,128) Lease Financing Receivables --- --- --- (9) (8) Total Loans Charged-off (1,771) (3,486) (3,087) (6,095) (38,020) Recoveries of Loans Previously Charged-off: Commercial, Financial and Agricultural 76 260 694 724 56 Real Estate - Commercial 104 35 75 48 --- Real Estate - Construction 10 68 55 327 138 Real Estate - Residential 8 143 37 22 81 Installment Loans to Individuals 171 188 285 232 291 Lease Financing Receivables --- 2 1 6 --- Total Recoveries of Loans Previously Charged-off 369 696 1,147 1,359 566 Net Loans Charged-off (1,402) (2,790) (1,940) (4,736) (37,454) Provision for Loan Losses Charged to Expense 1,170 (950) 690 1,677 46,185 Balance at End of Period $ 12,106 $ 12,338 $ 16,078 $ 17,328 $ 20,387 Nonperforming Asset Ratio Analysis: Net Loans Charged-off as a Percentage of Average Loans .27% .56 % .40% .92% 6.16% Provision for Loan Losses as a Percentage of Average Loans .23 (.19) .14 .32 7.60 Allowance for Loan Losses as a Percentage of Period-end Loans 2.34 2.43 3.20 3.52 3.72 Allowance for Loan Losses as a Percentage of Nonperforming Loans 277.98 278.57 127.30 71.84 54.01 Nonperforming Loans as a Percentage of Period-end Loans .84 .87 2.51 4.89 6.90 Nonperforming Assets as a Percentage of Period-end Total Assets .86 1.05 2.75 4.11 5.70
III. OTHER INCOME The majority of other (i.e., noninterest) income is derived from fees and commissions from fiduciary services, deposit account service charges, computer processing fees to correspondents and other "core" or recurring sources. Additionally, other income is influenced by transactions involving the sale of investment securities. ANALYSIS OF OTHER INCOME
(Dollars In Thousands) Change December 31, Amount Percent 1995 1994 1993 1995 1994 1995 1994 Income from Fiduciary Activities $ 3,752 $3,657 $3,661 $ 95 $ (4) 2.6% (.1)% Fees for Other Services 4,669 4,345 4,459 324 (114) 7.5 (2.6) Net Securities Gains (Losses) 23 (481) 26 504 (507) -- -- Other Operating Income 6,052 1,047 966 5,005 81 478.0 8.4 Total Other Income $14,496 $8,568 $9,112 $5,928 $(544) 69.2 (6.0)
Total other income for 1995 amounted to $14.5 million. The $5.9 million increase from 1994 was primarily attributable to a $5.0 million payment received from the Company's financial institution bond company, in settlement of a lawsuit filed by the Company in 1994 for losses suffered in earlier periods and covered under the Company's $7.0 million financial institution bond. Exclusive of the bond recovery and securities transactions, other income increased $424 thousand in 1995 or 4.7% above the amount earned in 1994. As adjusted, other income to average assets was 1.22% for both years. While all areas of other (noninterest) income increased, including income from fiduciary activities and other operating income, the largest increase was in fees for other services to customers. These fees include deposit account service charges, safe deposit box fees, merchant credit card processing fees and servicing fees on loans sold with servicing retained by the Company. These fees amounted to $4.7 million in 1995, compared to $4.3 million in 1994, a 7.5% increase. The increase was primarily attributable to increases in service charges on deposit accounts and merchant credit card processing income. Other operating income includes, as a primary component, fees earned on servicing credit card portfolios for correspondent banks. This category of noninterest income also includes gains on the sale of loans, other real estate owned and other assets. Without regard to the bond recovery, other operating income in 1995 was virtually unchanged from 1994. Total other income for 1994, was $8.6 million, or 6.0% less than the $9.1 million recorded in 1993. Exclusive of securities transactions, other income for 1994 was essentially unchanged from the prior year, with a small shift from fees for other services to customers to other operating income. As a percentage of average assets, noninterest income was 1.15% and 1.26% for 1994 and 1993, respectively. Without regard to securities transactions the ratios were 1.22% and 1.25% for the same respective periods. Income from fiduciary activities in 1994 was virtually unchanged from the prior year, as was the average dollar amount of assets under administration. Fees for other services to customers amounted to $4.3 million in 1994, a decrease of 2.6% from the prior year. The decrease was primarily attributable to a slight reduction in the average balance of the serviced loan portfolio and the corresponding reduction in related servicing fees. Other operating income for 1994 was $1.0 million, an increase of $81 thousand or 8.4% over 1993. The increase was primarily attributable to increased fees from credit card servicing operations. IV. OTHER EXPENSE Other (i.e., noninterest) expense is a means of measuring the delivery cost of services, products and business activities of the Company. The key components of other expense are presented in the following table. ANALYSIS OF OTHER EXPENSE (Dollars In Thousands)
Change December 31, Amount Percent 1995 1994 1993 1995 1994 1995 1994 Salaries and Benefits $16,710 $16,204 $16,101 $ 506 $ 103 3.1 % .6 % Net Occupancy Expense 2,040 2,168 2,418 (128) (250) (5.9) (10.3) Equipment and Furniture 1,930 2,076 2,254 (146) (178) (7.0) (7.9) Other Operating Expense 9,089 10,926 11,345 (1,837) (419) (16.8) (3.7) Total Other Expense $29,769 $31,374 $32,118 $(1,605) $ (744) (5.1) (2.3)
Other expense amounted to $29.8 million for 1995, which compared to $31.4 million for 1994, a decrease of $1.6 million or 5.1%. An increase in salaries and benefits was offset by reduced expenses for occupancy, equipment and other operating expenses. Total salaries of $11.1 million for 1995 decreased $284 thousand from the 1994 level. As in the prior year analysis, the effect of fewer employees was only partially offset by general salary increases. Of the $790 thousand increase in employee benefits from 1994 to 1995, severance benefits of $652 thousand paid in 1995 accounted for most of the increase. Otherwise, slight decreases in payroll taxes and profit sharing expenses were offset by increased expenses for pension plans and health insurance. Occupancy and equipment expenses both decreased from 1994 to 1995 by $128 thousand and $146 thousand, respectively. Both decreases were primarily attributable to reduced depreciation expenses. Other operating expense was $9.1 million for 1995, a decrease of $1.8 million or 16.8% from 1994. The decrease was primarily attributable to a reduction in FDIC deposit insurance premiums and other insurance, as well as to a large reduction in losses on the sale of OREO. In mid-1995, the FDIC reduced the deposit insurance rate for well-capitalized banks from 23 cents per hundred dollars of insured deposits to 4 cents (and the premium has been further reduced in 1996). All of the Company's banks are well-capitalized. Other expense amounted to $31.4 million for 1994, a decrease of $744 thousand or 2.3% from the $32.1 million reported for 1993. Except for a slight increase in salaries and benefits, all areas in 1994 were below 1993 levels. Total salaries of $11.4 million for 1994 decreased $235 thousand or 2.0% from 1993, with the effect of fewer employees being only partially offset by selective salary increases. A $338 thousand increase in employee benefits was attributable to nearly all areas of employee benefits, including pension, postretirement, profit sharing and health insurance costs. Occupancy expenses and furniture and equipment expenses for 1994 decreased by 10.3% and 7.9%, respectively from 1993. The decreases were attributable to the closing of four small branches in Vermont in the last two quarters of 1993 and also to general decreases in depreciation expenses. Other operating expense of $10.9 million in 1994 decreased $419 thousand or 2.3% from $11.3 million in 1993. Included in other operating expense in the 1994 period was a loss of $1.5 million on the sale of OREO, while the 1993 period included a charge of $497 thousand relating to closed branches. The Company experienced a significant decrease in the costs to carry and dispose of OREO and other loan workout expenses, which decreased 56.2% or $865 thousand from 1993 to 1994. V. INCOME TAXES The following table sets forth the Company's income tax expense and effective tax rates for the periods presented herein. INCOME TAXES AND EFFECTIVE RATES
(Dollars in Thousands) Years Ended December 31, 1995 1994 1993 Provision for Income Taxes $6,986 $1,131 $ 381 Effective Tax Rate 36.0% 9.1% 4.5%
The provisions for income taxes amounted to $7.0 million, $1.1 million and $381 thousand for 1995, 1994 and 1993, respectively. For all of 1993 and into the fourth quarter of 1994, the provision for income taxes was reduced by a net operating loss carryforward and changes in the valuation allowance for deferred tax assets. Without consideration of the net operating loss carryforward and changes in the valuation allowance, the effective rates for 1995, 1994 and 1993 were 36%, 38% and 37%, respectively. The decrease in the effective rate from 1994 to 1995 reflects the relative increase in the Company's tax exempt loan and securities portfolios. In 1993 the Company recognized a $1.5 million benefit resulting from the January 1, 1993 adoption of Statement of Financial Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes." The benefit was recorded as a cumulative effect of accounting change. C. FINANCIAL CONDITION I. INVESTMENT PORTFOLIO The Company adopted SFAS No. 115 "Accounting for Certain Investments in Debt and Equity Securities" at December 31, 1993. Under SFAS No. 115, securities held-to-maturity are debt securities which the Company has both the positive intent and ability to hold to maturity; such securities are stated at amortized cost. Debt and equity securities that are bought and held principally for the purpose of selling them in the near term are classified as trading securities and are reported at fair value with unrealized gains and losses included in earnings. Debt and equity securities not classified as either held-to-maturity or trading securities are classified as available-for-sale and are reported at fair value with unrealized gains and losses excluded from earnings and reported net of taxes in a separate component of shareholders' equity. At December 31, 1995, the Company held no trading securities. In November 1995, the FASB issued "A Guide to Implementation of Statement 115 on Accounting for Certain Investments in Debt and Equity Securities." The Guide allowed a one-time reclassification of held-to-maturity securities before December 31, 1995. Acting under this provision of the Guide, the Company reclassified $118.2 million of held-to-maturity securities to available-for-sale in December of 1995. The Company took advantage of this one-time provision as a means to improve liquidity and to gain some flexibility in the management of the Company's interest rate risk. See the following sections D. on liquidity and E. on interest rate risk. Securities Available-for-Sale: The following table sets forth the book value of the Company's securities available-for-sale portfolio, at year-end 1995, 1994 and 1993. SECURITIES AVAILABLE-FOR-SALE (In Thousands)
December 31, 1995 1994 1993 U.S. Treasury and Agency Obligations $114,502 $49,063 $53,694 State and Municipal Obligations 338 2,180 -- Mortgage-Backed Securities 54,651 475 -- Corporate and Other Debt Securities 7,300 -- -- Mutual Funds and Equity Securities 1,854 2,150 2,198 Total $178,645 $53,868 $55,892
Included in mortgage-backed securities were agency mortgage pass- through securities and agency collateralized mortgage obligations. Pass-through securities provide to the investor monthly portions of principal and interest pursuant to the contractual obligations of the underlying mortgages. Collateralized mortgage obligations ("CMO's") separate the repayments into two or more components (tranches), where each tranche has a separate estimated life and yield. The Company's practice is to purchase pass-through securities guaranteed by federal agencies and tranches of CMO's with the shorter maturities. Regulatory agencies have devised a high-risk test for mortgage- backed securities. The test evaluates the following: (I) Average Life Test - the product has an average life of less than 10 years; (II) Average Life Sensitivity Test - an immediate and sustained change in interest rates of 300 basis points will not extend the expected life by more than four years; and (III) Price Sensitivity Test - an immediate and sustained change in interest rates of 300 basis points will not change the price by more than 17%. The Company evaluates each mortgage-backed security at the time of purchase and quarterly thereafter. Although none of the Company's investments have failed to pass the high-risk test subsequent to acquisition, it is the Company's policy to analyze the appropriateness of divesting high-risk securities. Included in corporate and other debt securities are highly rated corporate bonds. The following table sets forth the maturities of the Company's securities available-for-sale portfolio as of December 31, 1995. MATURITIES OF SECURITIES AVAILABLE-FOR-SALE (In Thousands)
After After Within 1 But 5 But After One Within Within 10 Year 5 Years 10 Years Years Total U.S. Treasury and Agency Obligations $49,983 $ 64,519 $ -- $ -- $114,502 State and Municipal Obligations 192 64 82 -- 338 Mortgage-Backed Securities 3,311 36,562 8,085 6,693 54,651 Corporate and Other Debt Securities -- 7,300 --- -- 7,300 Mutual Funds and Equity Securities -- -- -- 1,854 1,854 Total $53,486 $108,445 $8,167 $8,547 $178,645
The following table sets forth the tax-equivalent yields of the Company's securities available-for-sale portfolio at December 31, 1995. YIELDS ON SECURITIES AVAILABLE-FOR-SALE (Fully Tax-Equivalent Basis)
After After Within 1 But 5 But After One Within Within 10 Year 5 Years 10 Years Years Total U.S. Treasury and Agency Obligations 5.05% 6.63% --% --% 5.93% State and Municipal Obligations 6.68 10.15 8.78 -- 7.85 Mortgage-Backed Securities 8.88 6.42 7.39 6.81 6.76 Corporate and Other Debt Securities -- 7.28 -- -- 7.28 Mutual Funds and Equity Securities -- -- -- 6.72 6.72 Total 5.29 6.60 7.41 6.79 6.25
The yields for debt securities shown in the table above are calculated by dividing annual interest, including accretion of discounts and amortization of premiums, by the carrying value of the securities at December 31, 1995. Yields on obligations of states and municipalities were computed on a fully tax-equivalent basis using a marginal tax rate of 35%. Dividend earnings derived from equity securities were adjusted to reflect applicable federal income tax exclusions. During the last quarter of 1995, the Company recognized net gains of $23 thousand on sales of $4.2 million from the available-for-sale portfolio. The proceeds were used to fund the sale of eight branches of Green Mountain Bank to Mascoma Savings Bank in January 1996. At December 31, 1995, the weighted average maturity was 2.03 years for debt securities in the available-for-sale portfolio. During the last quarter of 1994, the Company recognized net losses of $481 thousand on sales of $16.6 million from the available-for- sale portfolio. The proceeds were reinvested in higher yielding securities. Net securities gains of $26 thousand were recognized in 1993 on sales of $23.9 million from the available-for-sale portfolio. At December 31, 1995, unrealized gains on securities available- for-sale amounted to $1.2 million, net of tax. Unrealized gains or losses are reflected as a separate component of shareholders' equity. These securities, to a great extent, match fixed rate time deposits of similar maturities. Consequently, the Company did not recognize the gains during 1995. Securities Held-to-Maturity: The following table sets forth the book value of the Company's portfolio of securities held-to-maturity for each of the last three years. Year-end amounts and data in the following tables do not include the securities available-for-sale portfolio discussed previously. SECURITIES HELD-TO-MATURITY (In Thousands)
December 31, 1995 1994 1993 U.S. Treasury and Agency Obligations $ --- $ 61,390 $ 76,311 State and Municipal Obligations 13,921 10,409 5,006 Mortgage-Backed Securities --- 51,904 43,350 Other Securities --- 6,032 1,165 Total $13,921 $129,735 $125,832
For information regarding the market value of the Company's portfolio of securities held-to-maturity, see Note 3 to the Consolidated Financial Statements in Part II, Item 8 of this report. The following table sets forth the maturities of the Company's portfolio of securities held-to-maturity, as of December 31, 1995. MATURITIES OF SECURITIES HELD-TO-MATURITY (In Thousands)
After After Within 1 But 5 But After One Within Within 10 Year 5 Years 10 Years Years Total State and Municipal Obligations $1,984 $1,591 $5,492 $4,854 $13,921
The following table sets forth the tax-equivalent yields of the Company's portfolio of securities held-to-maturity at December 31, 1995. YIELDS ON SECURITIES HELD-TO-MATURITY (Fully Tax-Equivalent Basis)
After After Within 1 But 5 But After One Within Within 10 Year 5 Years 10 Years Years Total State and Municipal Obligations 7.48% 8.97% 8.44% 8.58% 8.41%
The yields for debt securities shown in the tables above are calculated by dividing annual interest, including accretion of discounts and amortization of premiums, by the carrying value of the securities at December 31, 1995. Yields on obligations of states and municipalities were computed on a fully tax-equivalent basis using a marginal tax rate of 35%. During 1995 and 1994, the Company sold no securities from the held- to-maturity portfolio. The weighted-average maturity of the held- to-maturity portfolio is 8.8 years. II. LOAN PORTFOLIO The amounts and respective percentages of loans and leases outstanding represented by each principal category on the dates indicated were as follows: a. DISTRIBUTION OF LOANS AND LEASES (Dollars In Thousands)
December 31, 1995 1994 1993 Amount % Amount % Amount % Commercial, Financial and Agricultural $ 79,993 15 $ 74,455 15 $ 82,317 16 Real Estate - Commercial 71,622 14 81,704 16 95,981 19 Real Estate - Construction 2,051 1 5,136 1 8,702 2 Real Estate - Residential 238,298 46 230,943 45 221,066 44 Installment Loans to Individuals 125,762 24 115,291 23 94,656 19 Lease Financing Receivables 61 -- 24 -- 62 -- Total Loans and Leases 517,787 100 507,553 100 502,784 100 Allowance for Loan Losses (12,106) (12,338) (16,078) Total Loans and Leases, Net $505,681 $495,215 $486,706
DISTRIBUTION OF LOANS AND LEASES (Dollars In Thousands)
December 31, 1992 1991 Amount % Amount % Commercial, Financial and Agricultural $ 85,428 17 $ 97,237 18 Real Estate - Commercial 110,702 22 134,379 25 Real Estate - Construction 12,167 2 24,290 4 Real Estate - Residential 198,165 40 200,112 37 Installment Loans to Individuals 86,323 19 91,224 16 Lease Financing Receivables 131 -- 177 -- Total Loans and Leases 492,916 100 547,419 100 Allowance for Loan Losses (17,328) (20,387) Total Loans and Leases, Net $475,588 $527,032
During 1995 and 1994, the Company concentrated its lending efforts in the area of residential real estate loans and installment loans to individuals (primarily automobile loans). Since 1990, the Company has de-emphasized commercial, commercial real estate and construction and land development loans. Consequently, balances for these three classifications continued to decrease, while the overall portfolio increased $10.2 million, or 2.0%, from 1994 to 1995 and $4.8 million or 1.0% from 1993 to 1994. Within the installment loan portfolio, the Company has focused on growth in its indirect lending program. Indirect loans are loans to consumers financed through local dealerships where, by prior arrangement, the Company acquires the dealer paper. At year-end 1992, indirect loans amounted to $42.1 million or 49% of installment loans. By December 31, 1995, indirect loans amounted to $91.0 million, or 72% of installment loans. The following table indicates the changing mix in the loan portfolio by presenting the quarterly average balance for the Company's significant loan products for the past five quarters. In addition, the table presents the percentage of total loans represented by each category as well as the annualized tax-equivalent yield. LOAN PORTFOLIO Quarterly Average Loan Balances (Dollars In Thousands)
Quarter Ending the Last Day of Dec 1995 Sep 1995 Jun 1995 Mar 1995 Dec 1994 Commercial and Commercial Real Estate $160,348 $160,268 $166,378 $168,386 $166,528 Residential Real Estate 176,481 175,462 174,927 174,947 176,120 Home Equity 45,993 45,292 44,539 43,282 42,023 Indirect Consumer Loans 89,721 86,799 83,289 80,279 76,827 Direct Consumer Loans 33,529 36,534 35,964 34,091 34,233 Credit Card Loans 9,425 9,349 8,815 8,902 8,939 Total Loans $515,497 $513,704 $513,912 $509,887 $504,670 Percentage of Total Quarterly Average Loans Commercial and Commercial Real Estate 31.1% 31.2% 32.4% 33.0% 33.0% Residential Real Estate 34.2 34.2 34.0 34.3 34.9 Home Equity 8.9 8.8 8.7 8.5 8.3 Indirect Consumer Loans 17.5 16.9 16.2 15.6 15.2 Direct Consumer Loans 6.6 7.1 7.0 7.8 6.8 Credit Card Loans 1.8 1.8 1.7 1.7 1.8 Total Loans 100.0% 100.0% 100.0% 100.0% 100.0% Quarterly Taxable Equivalent Yield on Loans Commercial and Commercial Real Estate 10.21% 10.30% 10.35% 10.29% 9.87% Residential Real Estate 8.42 8.38 8.35 8.22 7.90 Home Equity 9.44 9.59 9.67 9.38 8.80 Indirect Consumer Loans 8.47 8.42 8.27 8.08 7.98 Direct Consumer Loans 9.88 9.91 9.93 9.96 9.81 Credit Card Loans 15.62 13.91 14.66 12.36 12.27 Total Loans 9.31 9.35 9.37 9.32 8.85
During 1995, the Company received certain payments on restructured loans that had not been factored into the effective rate on those loans. The payments, which were recorded as interest income, have not been included in the yields in the table above. While the yields on the consumer portfolios are less than on the commercial portfolios, the Company has historically experienced fewer loan losses in consumer loans than commercial loans. During 1993, the loan portfolio increased $9.9 million, or 2.0%, from the prior year-end balance. The balances in all categories of commercial loans, including commercial real estate and construction and land development loans, decreased during the year, while balances of loans to consumers and residential real estate loans increased during the year. During 1992, the loan portfolio decreased $54.5 million or 10.0%. In part, this reflected the Company's exercise of prudent lending standards as well as a decision to reduce total assets and improve capital ratios. During this period, the various loan categories maintained the same relative proportions, vis-a-vis one another. During 1991, certain commercial loans were reclassified as commercial real estate loans on a prospective basis. Had the reclassification been made on a retroactive basis, the balances of commercial, financial and agricultural loan balances and real estate - commercial loan balances as a percent of total loans and leases for 1990 would have approximated the respective proportions of these categories in 1991. The 1991 decrease in real estate - construction loans was due to loan charge-offs and transfers to OREO. The decrease in 1991 of installment loans to individuals came as a result of a slow-down in consumer credit demand, particularly automobile financing. The following table indicates the respective maturities and repricing structure of the Company's commercial, financial and agricultural loans and its real estate - construction loans at December 31, 1995. Scheduled repayments are reported in the maturity category, based upon the contractual terms, in which the payment is due. Demand loans and overdrafts are reported as due in one year or less. MATURITY AND REPRICING OF COMMERCIAL LOANS (In Thousands)
After 1 After Within But Within Five 1 Year 5 Years Years Total Commercial, Financial and Agricultural $54,822 $7,534 $17,637 $79,993 Real Estate - Construction 1,070 --- 981 2,051 Total $55,892 $7,534 $18,618 $82,044 Fixed Interest Rates $ 5,841 $1,596 $18,618 $26,055 Variable Interest Rates 50,051 5,938 --- 55,989 Total $55,892 $7,534 $18,618 $82,044
COMMITMENTS AND LINES OF CREDIT Letters of credit represent extensions of credit granted in the normal course of business which are not reflected in the accompanying financial statements. As of December 31, 1995, the total contingent liability for standby letters of credit amounted to $3.4 million. In addition to these instruments, the Banks have issued lines of credit to customers, including home equity lines of credit, credit card lines of credit, commitments for residential and commercial construction and other personal and commercial lines of credit. Commercial lines, generally issued for a period of one year, are usually extended to provide for the working capital requirements of the borrower. At December 31, 1995, the Banks had outstanding loan commitments in the aggregate amount of approximately $75.9 million. b. RISK ELEMENTS NONACCRUAL, PAST DUE AND RESTRUCTURED LOANS The Company designates loans as nonaccrual when the payment of interest and/or principal is due and unpaid for a designated period (generally 90 days) or when the likelihood of repayment is, in the opinion of management, uncertain. There were no material commitments to lend additional funds on outstanding nonaccrual loans at December 31, 1995. Loans and leases past due 90 days or more and still accruing interest, as identified in the table below, are those loans and leases which were contractually past due 90 days or more but because of expected repayments were still accruing interest. For years prior to 1995, loans were classified as "restructured" in accordance with SFAS No. 15, "Accounting by Debtors and Creditors for Troubled Debt Restructurings." On January 1, 1995, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 114, "Accounting by Creditors for Impairment of a Loan." SFAS No. 114, as amended, requires that impaired loans, except for large groups of smaller-balance homogeneous loans, be measured based on (I) the present value of expected future cash flows discounted at the loan's effective interest rate, (ii) the loan's observable market price or (iii) the fair value of the collateral if the loan is collateral dependent. The Company applies the provisions of SFAS No. 114 to all impaired commercial and commercial real estate loans over $250,000, and to all loans restructured subsequent to adoption. Reserves for possible losses for the remaining smaller-balance loans are evaluated under SFAS No. 5. Under the provisions of SFAS No. 114, the Company determines impairment for collateralized loans based on fair value of the collateral less estimated cost to sell. For other loans, impairment is determined by comparing the recorded value of the loan to the present value of the expected cash flows, discounted at the loan's effective interest rate. The Company determines the interest income recognition method on a loan by loan basis. Based upon the borrowers' payment histories and cash flow projections, interest recognition methods include full accrual, cash basis and cost recovery. Loans accounted for under SFAS No. 114 may be reported as either nonaccrual, restructured or performing. Those loans recognizing interest income on a cash or cost recovery basis are reported as nonaccrual. Loans restructured under SFAS No. 15 are reported as restructured if the loan is in compliance with the modified terms. Under SFAS No. 15, as amended, loans bearing a market rate and in compliance with modified terms are not subject to the disclosure requirements of SFAS No. 114 in years subsequent to restructure, and thus would be included in performing loans. At December 31, 1995, $2.1 million of nonaccrual loans were accounted for under SFAS No. 114. There were no performing loans at December 31, 1995 for which the provisions of SFAS No. 114 were first applied in 1995. The Company's nonaccrual, past due and restructured loans and leases were as follows: SCHEDULE OF NONPERFORMING LOANS (Dollars In Thousands)
December 31, 1995 1994 1993 1992 1991 Nonaccrual Loans: Construction and Land Development $ 104 $ 327 $ 2,534 $ 6,149 $13,163 Commercial Real Estate 1,299 1,050 2,649 7,986 9,133 Commercial Loans 1,979 1,017 2,596 4,168 7,393 Other 862 1,224 2,082 3,171 3,764 Total Nonaccrual Loans 4,244 3,618 9,861 21,474 33,453 Loans Past Due 90 Days or More and Still Accruing Interest 111 231 364 1,486 329 Restructured Loans in Compliance with Modified Terms --- 580 2,405 1,161 3,963 Total Nonperforming Loans $4,355 $4,429 $12,630 $24,121 $37,745 Total Nonperforming Loans as a Percentage of Total Loans .84% .87% 2.51% 4.89% 6.90%
Nonperforming loans amounted to $4.4 million at December 31, 1995, $74 thousand below the balance at year-end 1994. The increase in nonaccrual commercial loans from 1994 to 1995 is primarily attributable to the aggregate borrowing of one commercial borrower, which was placed on nonaccrual status during 1995. Otherwise, nonaccrual loans at December 31, 1995 would have decreased from the prior year-end balance. Loans reported as restructured and in compliance with modified terms at December 31, 1994 were classified as performing in 1995. During 1995, income recognized on year-end balances of nonaccrual loans was $116 thousand. Income that would have been recognized during that period on nonaccrual loans if such had been current in accordance with their original terms and had been outstanding throughout the period (or since origination if held for part of the period) was $435 thousand. Nonperforming loans amounted to $4.4 million at December 31, 1994, a decrease of $8.2 million or 64.9% from the prior year-end. Of the $12.6 million in nonperforming loans at December 31, 1993, $2.5 million was transferred to OREO, $2.4 million of loans restructured in 1993 was returned to performing status in accordance with SFAS No. 15, and another $3.5 million was charged against the allowance for loan losses. The small remaining difference represents the improvement in nonaccrual loans, net of loans newly classified as nonperforming. Nonperforming loans decreased $11.5 million or 47.6% during 1993. During the year $7.8 million of nonaccrual loans and leases was acquired through foreclosure and transferred to OREO. Much of the $3.1 million of loan charge-offs during the year was also attributable to prior year-end nonaccrual loans. The remaining difference represented a net improvement in the amount of nonaccrual loans and included the return to performing status of certain nonaccrual loans. The balance of $2.4 million of restructured loans in compliance with modified terms as of December 31, 1993 represented three commercial loans restructured during the year. POTENTIAL PROBLEM LOANS While levels of nonperforming loans and delinquency trends have fallen since 1991, the Company expects that there will be continued exposure in the commercial real estate portfolio in forthcoming periods and until the regional economy shows substantial strengthening. FOREIGN OUTSTANDINGS - None LOAN CONCENTRATIONS The loan portfolio is well diversified. There are no concentrations of credit that exceed 10% of the portfolio, other than the general categories reported in the previous section of this report. For a further discussion, see Note 21 to the Consolidated Financial Statements in Part II, Item 8 of this report. OTHER REAL ESTATE OWNED Other real estate owned (OREO) consists of real property acquired in foreclosure. OREO is carried at the lower of fair value less estimated cost to sell or cost in accordance with Statement of Position (SOP) 92-3 "Accounting for Foreclosed Assets." Also, in compliance with SOP 92-3, the Company's subsidiary banks have established allowances for OREO losses. The allowances are established and monitored on a property by property basis and reflect management's ongoing estimate of the difference between the property's carrying amount and cost, when the carrying amount is less than cost. For all periods, all OREO was held for sale. DISTRIBUTION OF OTHER REAL ESTATE OWNED (Net of Allowance) (In Thousands)
December 31, 1995 1994 1993 1992 1991 Single Family 1 - 4 Units $ 82 $1,073 $1,189 $ 892 $ 910 Commercial Real Estate 2,328 2,128 3,418 1,536 3,476 Construction & Land Development --- 195 2,899 3,120 1,759 Other Real Estate Owned, Net $2,410 $3,396 $7,506 $5,548 $6,145
The following table summarizes changes in the net carrying amount of other real estate owned at December 31,: SCHEDULE OF CHANGES IN OTHER REAL ESTATE OWNED (Net of Allowance) (In Thousands)
1995 1994 1993 1992 1991 Balance at Beginning of Year $ 3,396 $ 7,506 $ 5,548 $ 6,145 $ 2,552 Properties Acquired 642 2,493 7,804 6,446 7,498 Provision for Estimated Losses (161) (398) (638) (1,160) (612) Sale of Properties (1,467) (6,205) (5,208) (5,883) (3,293) Balance at End of Year $ 2,410 $ 3,396 $ 7,506 $ 5,548 $ 6,145
The following summarizes the changes in the allowance for OREO losses: ALLOWANCE FOR OTHER REAL ESTATE OWNED LOSSES (In Thousands)
1995 1994 1993 1992 Balance at Beginning of Year $ 369 $ 1,150 $1,120 $ -- Additions 161 398 638 1,160 Charge-Offs (160) (1,179) (608) (40) Balance at End of Year $ 370 $ 369 $1,150 $1,120
During 1995, the Company acquired $642 thousand of OREO through foreclosure. The Company recognized losses of $48 thousand on the sale of OREO properties carried on the books at $1.5 million. During 1994, the Company acquired $2.5 million of OREO through foreclosure. The Company recognized losses of $1.4 million on the sale of OREO properties carried on the books at $6.2 million. Approximately 65% of the sales took place at an auction of OREO properties held during the second quarter of 1994. During 1993, the Company acquired $7.8 million in OREO through foreclosure, of which $3.6 million was formerly classified as in-substance foreclosed property. The $2.0 million increase in OREO during 1993 was primarily attributable to commercial real estate properties, whereas construction and land development properties held in OREO decreased $221 thousand during 1993. For the year, the Company recognized net gains of $366 thousand on the sale of $5.2 million of OREO properties. These net gains partially offset the $638 thousand provision for estimated OREO losses taken during the year. During 1992, the Company acquired an additional $6.4 million in OREO through foreclosure. The provision for estimated OREO losses of $1.2 million in 1992 reflects the SOP 92-3 adjustment for estimated selling costs as well as adjustments for declines in fair value. The Company disposed of $5.9 million through sales of OREO properties, upon which the Company recognized net gains of $257 thousand. During 1991, the Company acquired over $7.5 million in OREO through foreclosure. The primary OREO acquisitions were in the area of construction and land development loans. During 1991, the Company recognized $25 thousand in net gains on sales of $3.3 million of OREO properties. III. SUMMARY OF LOAN LOSS EXPERIENCE The Company monitors credit quality through a continuous review of the entire loan portfolio. All significant loans (primarily commercial and commercial real estate) and leases are reviewed at least semi-annually, and those under special supervision are reviewed at least quarterly. The boards of directors of the Company's individual subsidiary banks, upon recommendations from management, determine the extent of charge-offs and have the final decision-making responsibility in authorizing charge-offs. Additionally, regulatory examiners perform periodic examinations of the banks' loan and lease portfolios and report on these examinations to the boards of directors. Provisions for loan losses are determined by the managements of the subsidiary banks, in consultation with the Company's management, and are based upon an overall evaluation of the appropriate levels of the allowances for loan losses. Factors incorporated in such determination include the existing risk characteristics of the portfolio, prevailing national and local economic conditions, historical loss experience and expected performance within a range of anticipated future economic conditions. The Company's management believes that the banks' allowances for loan losses are adequate to absorb reasonably foreseeable loan losses. The table in Part II, Item 7.B.II. "Provision for Loan Losses and Allowance for Loan Losses" presents a summary of the activity in the Company's allowance for loan losses. ALLOCATION OF THE ALLOWANCE FOR LOAN AND LEASE LOSSES The allowance for loan losses is a general allowance applicable to estimated future losses. For internal operating purposes, the allowance is not allocated among loan categories. In the following table, the allowance has been distributed for purposes of complying with disclosure requirements of the Securities and Exchange Commission. However, this allocation should not be interpreted as a projection of (I) likely sources of future losses, (II) likely proportional distribution of future losses among loan categories or (III) likely amounts of future losses. Since management regards the allowance as a general balance and has assigned an unallocated value to the schedule, the amounts presented do not represent the total balance available to absorb future losses that might occur within the principal categories. Subject to the qualifications noted above, an allocation of the allowance for loan losses by principal classification and the proportion of the related loan balance is presented below as of December 31 for each of the years indicated. ALLOCATION OF THE ALLOWANCE FOR LOAN AND LEASE LOSSES (Dollars in Thousands)
1995 1994 1993 1992 1991 Commercial, Financial and Agricultural $ 2,913 $ 2,329 $ 3,908 $ 5,518 $ 4,596 Real Estate-Commercial 1,755 1,841 3,324 3,626 4,558 Real Estate-Construction 305 1,994 2,027 2,525 6,917 Real Estate-Residential Mortgage 1,616 2,098 1,893 1,803 1,268 Installment Loans to Individuals 2,365 1,363 2,032 1,770 1,343 Lease Financing Receivables -- -- -- 15 7 Unallocated 3,152 2,713 2,894 2,071 1,698 Total Loans and Leases $12,106 $12,338 $16,078 $17,328 $20,387 PERCENT OF LOANS IN EACH CATEGORY TO TOTAL LOANS Commercial, Financial and Agricultural 15% 15% 16% 17% 18% Real Estate-Commercial 14 16 19 22 25 Real Estate-Construction 1 1 2 2 4 Real Estate-Residential Mortgage 46 45 44 40 37 Installment Loans to Individuals 24 23 19 19 16 Lease Financing Receivables -- -- -- -- -- Total Loans and Leases 100% 100% 100% 100% 100%
At December 31, 1995, the allocated reserve for each indicated classification of loans exceeded 100% of the dollar amount of loans in such classification that were then reported as nonperforming. IV. DEPOSITS The following table sets forth the average balances of and average rates paid on deposits for the periods indicated. AVERAGE DEPOSIT BALANCES Years Ended December 31, (Dollars In Thousands)
1995 1994 1993 Average Average Average Balance Rate Balance Rate Balance Rate Demand Deposits $ 88,961 --% $ 87,715 --% $ 83,971 --% N.O.W./Super N.O.W. 139,879 2.84 129,999 1.92 127,163 2.25 Savings/M.M.D.A. 201,932 3.06 260,336 2.79 259,519 3.00 Time Certificates of $100,000 or More 67,029 5.61 26,980 4.30 15,077 4.70 Other Time Deposits 185,166 5.34 160,035 4.03 172,422 4.31 Total Deposits $682,967 3.49 $665,065 2.61 $658,152 2.86
During the last half of 1994 and into the first part of 1995, rates on deposit accounts increased, mirroring, although with some time lag, the rise in the prime rate that took place over this period. Changing interest rates also have an impact on the mix of deposits within the deposit portfolio for the Company, as well as financial institutions in general. Beginning in the late 1980's until the middle of 1992, rates declined in small but steady increments, and then remained stable for the next two years. During that period, as the price differential between time deposits and short-term interest-bearing deposits narrowed, depositors transferred a significant portion of maturing time deposits to savings, N.O.W. and money market accounts, and some funds left the Company entirely for competing investment products not offered by financial institutions. During the recent period of rising interest rates, the Company experienced a shift in the mix of deposits from short-term back to time deposits. As interest rates leveled-off and even fell during the latter part of 1995, the increase in the percentage of time deposits to total deposits also stabilized. For the third and fourth quarters of 1995, time deposits averaged 27% of total deposits. V. TIME CERTIFICATES OF $100,000 OR MORE The maturities of time certificates of $100,000 or more at December 31, 1995 are presented below. (In Thousands) Maturing in: Under 3 3 to 6 6 to 12 Over 12 Months Months Months Months Total $34,287 $14,438 $5,566 $3,266 $57,557 D. LIQUIDITY The objective of liquidity management is to satisfy cash flow requirements, principally the needs of depositors and borrowers to access funds. Liquidity is provided through assumption or "purchase" of liabilities, the maturity of asset balances and the sale of assets. Liability liquidity arises primarily from the significant base of "core" and other deposits gathered through a branch network operating over a dispersed geographical area. These "core" balances consist of demand deposits, savings, N.O.W. and money market account balances and small denomination time deposits. Core deposits are considered to be less volatile in their movement into and out of financial institutions, as compared to large denomination time deposits, brokered time deposits and repurchase agreements, which are perceived as more sensitive to changes in interest rates than core deposits. Core deposits represented a substantial proportion of the Company's total assets. At year-end 1995, core deposits represented more than 80% of the Company's total assets and stockholders' equity contributed 8.5% as a source of funds. Large denomination time deposits, repurchase agreements and other borrowed funds represented 9.2% of total assets at December 31, 1995. Federal funds sold are overnight sales of the Company's surplus funds to correspondent banks, while federal funds purchased represent overnight borrowings. The Company's practice is to be a net seller of federal funds on average, and to avoid extended periods of purchasing federal funds. During 1995, average federal funds sold amounted to $22.6 million and average federal funds purchased amounted to $480 thousand. On December 31, 1993, the Company, upon adoption of SFAS No. 115, segregated its investment portfolio into securities available-for - -sale and those held-to-maturity. In November 1995, the FASB issued "A Guide to Implementation of Statement 115 on Accounting for Certain Investments in Debt and Equity Securities." The Guide allowed a one-time reclassification of held-to-maturity securities before December 31, 1995. Acting under those provisions, in December 1995 the Company reclassified $118.2 million of held-to - -maturity securities into its available-for-sale portfolio. Apart from federal funds, securities available-for-sale represent the Company's primary source of liquidity. This liquidity arises both from an ability to quickly sell the securities, as well as from the ability to use the securities as collateral for borrowing. After completion of the Company's sale of eight branches of Green Mountain Bank to Mascoma Savings Bank on January 15, 1996, the Company had $173.4 million of securities in its available-for-sale portfolio. Other sources of funds include term federal funds arrangements with correspondent banks and a borrowing arrangement with the Federal Home Loan Bank. The Company is not aware of any known trends, events or uncertainties that will have or that are reasonably likely to have a material effect or make material demands on the Company's liquidity, capital resources or results of operations. E. INTEREST RATE RISK While managing liquidity, the Company must monitor and control interest rate risk. Interest rate risk is the exposure of the Company's net interest income to changes in interest rates. Interest rate risk is directly related to the different maturities and repricing characteristics of interest-bearing assets and liabilities, as well as to prepayment risks for mortgage-backed assets, early withdrawal of time deposits, and the fact that the speed and magnitude of responses to interest rate changes varies by product. While many of the Company's loan products are indexed to independent rates, such as prime or treasury notes, the rates on most deposit products are set by management pricing committees. The Company's primary short-term measure of interest rate risk projects net interest income for the ensuing twelve-month period based on the maturity, prepayment assumption and repricing characteristic of each individual interest-bearing asset and liability under a variety of interest rate projections. The Company obtains interest rate projections from a third party provider of economic data. These projections are applied to existing interest sensitive assets and liabilities and to expected new and rollover amounts. As a base, the Company projects net interest income for the ensuing twelve months for the most likely projection and for a no-change scenario. Exposure to rising or falling rates are calculated to cover a high distribution of the perceived probable interest rate scenarios. At December 31, 1995, the Company expected interest rates to fall early in 1996 and then again later in the year. For a long-term measure of interest rate risk, the Company measures the economic value of equity for immediate and sustained changes in interest rates. At December 31, 1995, the Company was operating within established internal policy limits for both the short-term and long-term measures of interest rate risk.. The Company is able to reduce interest rate risk by adjusting the mix of loan products as well as the balance of fixed and variable rate products within the various loan categories. To a lesser extent, the Company manages interest rate risk through selection of investments for the securities portfolios. The Company does not, and in the foreseeable future, will not use derivative financial instruments to manage interest rate risk. The Company prepares an interest rate gap analysis to identify the repricing pattern of interest-bearing assets and liabilities. The interest rate sensitive gap is the difference between interest rate sensitive assets and interest rate sensitive liabilities. The interest rate sensitive gap ratio is the ratio of interest rate sensitive assets to interest rate sensitive liabilities. When the interest rate sensitive gap ratio exceeds the balanced position of 1.0, the Company is susceptible to falling interest rates over the time horizon indicated, as assets may reprice downward more rapidly than liabilities. Conversely, the Company is susceptible to rising rates when the gap ratio for a particular time horizon falls below the balanced position of 1.0. While the static gap analysis will reveal mismatches in the repricing patterns of assets and liabilities, the dynamic modeling of projected net interest income, as described above, provides a much more reliable tool for assessing the Company's net interest income exposure to changes in interest rates. The following table "Interest Rate Sensitive Gap Analysis" presents the Company's interest rate sensitive position at December 31, 1995. For purposes of the table, an asset or liability is considered rate sensitive within a specified period when it matures or could be repriced within such period in accordance with its contractual terms except for certain deposit balances without specific maturities. These deposit balances have been allocated to various time horizons to reflect the fact that these deposits do not reprice to the full extent of prime rate changes, and tend to lag behind changes to the prime rate. Certain other assets and liabilities lacking specific maturities are classified in the "Over Five Years" category. Nonaccrual loans are excluded. Securities available-for-sale are presented at amortized cost. Various assets and liabilities that reprice before maturity demonstrate different repricing patterns. Nearly three-fourths of the Company's commercial loans are prime based, and consequently, reprice immediately, or in some cases monthly, upon changes in the prime rate. The greater portion of variable rate residential real estate loans reprice annually and are often tied to an average short-term treasury rate, with the repricing date lagging behind changes in the indexed rate. Rates on credit card lines are largely variable at management's discretion and in general reprice more slowly than prime based loans. The cumulative gap ratio at December 31, 1995 was 1.06 and 1.21 for the ensuing six month and twelve month repricing periods, respectively. These ratios are within the range of ratios the Company seeks to maintain, although the twelve month ratio is at the upper threshold of the established range. Since the Company has more interest-bearing assets than liabilities, the twelve month ratio of 1.21 should be considered vis-a-vis the total ratio of 1.20, which is what the ratio would have been for each period if all interest-bearing assets and liabilities were spread evenly throughout the time periods. Nearly all of the Company's time deposits are fixed rate, and therefore, reprice upon maturity. Money market deposit accounts are immediately repriceable and often fluctuate with the frequency of prime rate changes, but rarely to the magnitude of changes in the prime rate. N.O.W. accounts are also subject to immediate rate changes, but again, rates tend to move more slowly than prime rate changes and to a smaller degree. Savings accounts, which remained stable for an extended period of time after deregulation, have been the least sensitive of deposit balances to interest rate changes. In response to the FDIC Improvement Act of 1991, regulators have proposed an interest rate risk analysis that distributes savings, N.O.W. and money market accounts among the earlier repricing periods. Such a distribution of the Company's savings, N.O.W. and money market accounts could have a material impact on the Company's gap analysis at year-end 1995 if distribution of these deposits are limited to the first three repricing periods, as presented in the table below. INTEREST RATE SENSITIVE GAP ANALYSIS (Dollars In Thousands)
Within Three Six to One to Over Three to Six Twelve Five Five Months Months Months Years Years Total Earning Assets: Securities Held-to-Maturity: State and Municipal Obligations $ 843 $ 350 $ 961 $ 1,598 $ 10,169 $ 13,921 Securities Available-for-Sale: U.S. Treasury and Agency Obligations 13,998 8,000 30,014 61,237 -- 113,249 State and Municipal Obligations 163 172 2 1 -- 338 Mortgage-Backed Securities 1,555 787 4,084 42,626 5,237 54,289 Corporate Bonds -- -- -- 3,016 4,008 7,024 Equity Securities -- -- -- -- 1,798 1,798 Federal Funds Sold 35,100 -- -- -- -- 35,100 Loans and Leases, Net of Unearned Income & Nonaccrual Loans 168,762 29,126 73,898 156,227 85,530 513,543 Total Interest Rate Sensitive Assets 220,421 38,435 108,959 264,705 106,742 739,262 Interest Paying Liabilities: Regular Savings Accounts 22,484 --- --- 111,038 -- 133,522 N.O.W. Accounts 38,560 --- --- 124,861 -- 163,421 Money Market Deposit Accounts 13,634 --- --- 41,725 -- 55,359 Time Deposits of $100,000 or More 34,287 14,438 5,566 3,266 -- 57,557 Other Time Deposits 59,615 46,043 52,979 31,244 --- 189,881 Short-Term Borrowings 15,297 -- -- --- -- 15,297 Long-Term Debt -- -- --- --- -- --- Total Interest Rate Sensitive Liabilities 183,877 60,481 58,545 312,134 --- 615,037 Interest Rate Sensitive Gap $ 36,544 $(22,046) $ 50,414 $(47,429) $106,742 $124,225 Cumulative Interest Rate Sensitive Gap $ 36,544 $ 14,498 $ 64,912 $ 17,483 $124,225 Interest Rate Sensitive Gap Ratio 1.20 .64 1.86 .85 -- 1.20 Cumulative Interest Rate Sensitive Gap Ratio 1.20 1.06 1.21 1.03 1.20 N/A
F. CAPITAL RESOURCES AND DIVIDENDS Shareholders' equity was $67.5 million at December 31, 1995, as compared to $58.4 million at December 31, 1994. The increase was primarily attributable to retained earnings. During 1995, in accordance with a program previously approved by the board of directors, the Company repurchased at market prices 110,687 shares of common stock, at an aggregate purchase price of $1.9 million. At year-end the total treasury stock was 309,833 shares with a cost basis of $4.2 million. On February 27, 1996, the Company announced that the board of directors had approved an expanded stock repurchase program. Under the program, the Company's management is authorized to repurchase from time to time during the next two years, at its discretion, up to $10 million of the Company's outstanding common stock in the open market or privately negotiated transactions. Based upon the average of the closing bid and asked prices for the Company's common stock as reported by NASDAQ on March 4, 1996, completion of this repurchase program would represent over 512,000 shares, or 9.3% of the total number of shares then outstanding. The maintenance of appropriate capital levels is a management priority. Overall capital adequacy is monitored on an ongoing basis by management and reviewed regularly by the Board of Directors. The Company's principal capital planning goals are to provide an adequate return to shareholders while retaining a sufficient base to provide for future expansion and compliance with all regulatory standards. Under regulatory capital guidelines, the Company and the subsidiary banks are required to satisfy certain risk-based capital measures. The minimum ratio of "Tier 1" capital to risk-weighted assets is 4.0% and the minimum ratio of total capital to risk-weighted assets is 8.0%. For the Company, Tier 1 capital is comprised of shareholders' equity less intangible assets. Total capital includes a portion of the allowance for loan losses. In addition to the risk-based capital measures, the federal bank regulatory agencies require banks and bank holding companies to satisfy another capital guideline, the Tier 1 leverage ratio (Tier 1 capital to total assets less goodwill). The minimum Tier 1 leverage ratio is 3.0% for the most highly rated institutions. The guidelines provide that other institutions should maintain a Tier 1 leverage ratio that is at least 1.0% to 2.0% higher than the 3.0% minimum level for top-rated institutions. The table below sets forth the capital ratios of the Company and its subsidiary banks as of December 31, 1995: Risk-Based Capital Ratios:
Arrow GFNB GMB SNB Tier 1 13.48% 13.71% 14.93% 11.90% Total Capital 14.75 14.96 16.22 13.15 Tier 1 Leverage Ratio 8.09 7.61 9.73 8.42
At December 31, 1995, all subsidiary banks and the Company exceeded the minimum capital ratios established by these guidelines, as well as the "well-capitalized" thresholds set by federal bank regulatory agencies pursuant to FDICIA (see the disclosure under "Legislative Developments" in Part I, Item 1.F. of this report). After the January 15, 1996 sale of Green Mountain Bank branches to Mascoma Savings Bank, the Company's consolidated Tier 1 leverage ratio increased to 9.91% from 8.09% at December 31, 1995. The principal source of funds for the payment of shareholder dividends by the Company has been dividends declared and paid to the Company by its bank subsidiaries. As of December 31, 1995, only the Company's principal bank subsidiary, the Glens Falls National Bank and Trust Company ("GFNB") was in a position to pay any material amount of dividends without prior regulatory approval. At that time, the maximum amount that could have been paid by GFNB to the Company was approximately $8.7 million. Payments of dividends by Green Mountain Bank ("GMB") to the Company were restricted during 1995 as a matter of law by the negative undivided profits account of GMB, despite the very high capital ratios maintained by GMB (which became even higher after the sale by GMB of eight branches to Mascoma Savings Bank on January 15, 1996). In 1995, however, with regulatory approval, GMB did repurchase a portion of its common stock from its holding company, Arrow Vermont Corporation, for $3.15 million, thereby achieving the equivalent of a dividend. See Part II, Item 5 "Market for the Registrant's Common Equity and Related Stockholder Matters" for a recent history of the Company's cash dividend payments. G. FOURTH QUARTER RESULTS The Company reported earnings of $2.6 million for the fourth quarter of 1995, an increase of $256 thousand or 10.9% from the fourth quarter of 1994. During the 1991 - 1994 period, the provision for income taxes was reduced to low levels because of the availability of a significant net operating loss carryforward. During the fourth quarter of 1994 the net operating loss carryforward was fully utilized. As a result, for the fourth quarter of 1994 the provision for income taxes was reduced by $415 thousand, while income for the 1995 quarter was fully tax effected. Net interest income of $9.3 million in 1995 increased $290 thousand or 3.2% from the fourth quarter of 1994. The increase was primarily attributable to an increase in average earning assets. Average earning assets amounted to $747.7 million and $699.1 million for the fourth quarter of 1995 and 1994, respectively. Noninterest income of $2.3 million in the fourth quarter of 1995 increased $595 thousand from the respective period in 1994. The increase was primarily attributable to net securities losses of $471 thousand in the fourth quarter of 1994, while the Company recognized $23 thousand of net securities gains in the fourth quarter of 1995. Noninterest expenses decreased $453 thousand or 6.1% in the same comparative time frame. As discussed above in the year-to-year analysis, the decrease in noninterest expense between the quarterly periods was primarily attributable to lower FDIC insurance premiums and decreased expenses for salaries, offset only partially by increases in legal and professional fees. SELECTED FOURTH QUARTER FINANCIAL INFORMATION (Dollars In Thousands)
For the Quarter Ended December 31, 1995 1994 Interest Income $15,846 $13,813 Interest Expense 6,577 4,834 Net Interest Income 9,269 8,979 Provision for Loan Losses 530 67 Net Interest Income after Provision for Loan Losses 8,739 8,912 Other Income 2,342 1,747 Other Expense 7,009 7,462 Income Before Income Taxes 4,072 3,197 Provision for Income Taxes 1,462 843 Net Income $ 2,610 $ 2,354 Weighted Average Number of Shares and Equivalents Outstanding Primary 5,672 5,750 Fully Diluted 5,677 6,079 Primary Earnings Per Share $ .46 $ .41 Fully Diluted Earnings Per Share .46 .40 SELECTED RATIOS: Return on Average Assets 1.30% 1.25% Return on Average Equity 15.58% 16.44% Per share amounts have been adjusted for the 1995 four percent stock dividend.
Item 8: Financial Statements and Supplementary Data The following audited financial statements and supplementary data are incorporated herein by reference to the Company's Annual Report to Shareholders for December 31, 1995, which financial statements and supplementary data are also filed as Exhibit 13 to this report: Independent Auditors' Report Financial Statements: Consolidated Balance Sheets as of December 31, 1995 and 1994 Consolidated Statements of Income for the Years Ended December 31, 1995, 1994 and 1993 Consolidated Statements of Changes in Shareholders' Equity for the Years Ended December 31, 1995, 1994 and 1993 Consolidated Statements of Cash Flows for the Years Ended December 31, 1995, 1994 and 1993 Notes to Consolidated Financial Statements Supplementary Data: (Unaudited) Quarterly Financial Data for the Years Ended December 31, 1995 and 1994 Item 9: Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. - None. PART III Item 10: Directors and Executive Officers of the Registrant Item 1, "Election of Directors and Information with Respect to Directors and Officers" of the Company's Proxy Statement for its Annual Meeting of Shareholders to be held April 24, 1996 is incorporated herein by reference. Required information regarding the Company's Executive Officers is contained in Part I, Item 1.E., "Executive Officers of the Registrant." Item 11: Executive Compensation Item 1, "Election of Directors and Information with Respect to Directors and Officers" of the Company's Proxy Statement for its Annual Meeting of Shareholders to be held April 24, 1996 is incorporated herein by reference. Item 12: Security Ownership of Certain Beneficial Owners and Management Item 1, "Election of Directors and Information with Respect to Directors and Officers" of the Company's Proxy Statement for its Annual Meeting of Shareholders to be held April 24, 1996 is incorporated herein by reference. Item 13: Certain Relationships and Related Transactions Item 1, "Election of Directors and Information with Respect to Directors and Officers" of the Company's Proxy Statement for its Annual Meeting of Shareholders to be held April 24, 1996 is incorporated herein by reference. PART IV Item 14: Exhibits, Financial Statement Schedules and Reports on Form 8-K A) Documents filed as part of this report: I Financial Statements: The following financial statements, the notes thereto, and the independent auditors' reports thereon are filed as part of this report. See the index to such financial statements in Part II, Item 8 of this report. Independent Auditors' Report Consolidated Balance Sheets as of December 31, 1995 and 1994 Consolidated Statements of Income for the Years Ended December 31, 1995, 1994 and 1993 Consolidated Statements of Changes in Shareholders' Equity for the Years Ended December 31, 1995, 1994 and 1993 Consolidated Statements of Cash Flows for the Years Ended December 31, 1995, 1994 and 1993 Notes to Consolidated Financial Statements II Schedules: All schedules are omitted since the required information is either not applicable or not required or is contained in the respective financial statements or in the notes thereto. III. Exhibits: The following exhibits are incorporated by reference herein. Exhibit Number Exhibit 2.1 Purchase and Assumption Agreement among Arrow Financial Corporation, Arrow Vermont Corporation, Green Mountain Bank and Mascoma Savings Bank, dated June 1, 1995 incorporated herein by reference to Form 8-K dated June 1, 1995 filed as exhibit 2.1. 2.2 Supplement to Purchase and Assumption Agreement among Arrow Financial Corporation, Arrow Vermont Corporation, Green Mountain Bank and Mascoma Savings Bank, dated January 12, 1996 incorporated herein by reference to Form 8-K dated January 15, 1996 filed as exhibit 2.2. 2.3 Purchase and Assumption Agreement among Arrow Financial Corporation, Arrow Vermont Corporation, Green Mountain Bank and ALBANK, FSB, dated February 26, 1996 incorporated herein by reference to Form 8-K dated February 26, 1995 filed as exhibit 2.1. 2.4 Service Purchasing Agreement among Arrow Financial Corporation, Arrow Vermont Corporation, Green Mountain Bank and ALBANK, FSB, dated February 26, 1996 incorporated herein by reference to Form 8-K dated February 26, 1995 filed as exhibit 2.2. 2.5 Stock Purchase Agreement among Arrow Financial Corporation, Arrow Vermont Corporation, Green Mountain Bank and Vermont National Bank, dated February 27, 1996 incorporated herein by reference to Form 8-K dated February 26, 1995 filed as exhibit 2.3. 3.(i) Certificate of Incorporation of the Registrant, as amended, incorporated by reference herein from Registrant's Annual Report for the year ended December 31, 1990 filed on Form 10-K. 4.1 Indenture and Form of Debenture, incorporated herein by reference from Registrant's 1933 Act Registration Statement on Form S-2 (file number 33-10109; effective December 16, 1986). 4.2 Equity Contract Agency Agreement and Form of Equity Contract, incorporated herein by reference from Registrant's 1933 Act Registration Statement on Form S-2 (file number 33-10109; effective December 16, 1986). 10.1 1985 Incentive Stock Option Plan of the Registrant, incorporated herein by reference from Registrant's 1933 Act Registration Statement on Form S-8 (file number 2-98736; filed on July 1, 1985).* 10.2 1985 Non-Qualified Stock Option Plan of the Registrant, incorporated herein by reference from Registrant's 1933 Act Registration Statement on Form S-8 (file number 2-98735; filed July 1, 1985).* 10.3 Executive Incentive Plan of Glens Falls National Bank and Trust Company, incorporated herein by reference from Registrant's 1933 Act Registration Statement on Form S-2 (file number 33-10109; filed December 16, 1986).* 10.4 Employment Agreement between the Registrant and Michael F. Massiano dated December 31, 1990, incorporated by reference herein from Registrant's Annual Report for the year ended December 31, 1990 filed on Form 10-K.* 10.5 Employment Agreement between the Registrant and John J. Murphy dated December 31, 1990, incorporated by reference herein from Registrant's Annual Reports for the years ended December 31, 1990 and 1992 filed on Form 10-K.* 10.6 Employment Agreement between the Registrant, its subsidiary bank, Glens Falls National Bank & Trust Company, and Thomas L. Hoy dated December 31, 1990, incorporated by reference herein from Registrant's Annual Reports for the years ended December 31, 1990 and 1992 filed on Form 10-K.* 10.7 Select Executive Retirement Plan of the Registrant effective January 1, 1992 incorporated by reference herein from Registrant's Annual Report for December 31, 1992 on Form 10-K.* 10.8 Long Term Incentive Plan of the Registrant, incorporated by reference herein from Registrant's 1933 Act Registration Statement on Form S-8 (File number 33-66192; filed July 19, 1993).* 10.9 Directors Deferred Compensation Plan of Registrant, incorporated by reference herein from Registrant's Annual Report for December 31, 1993 filed on Form 10-K.* 10.10 Senior Officers Deferred Compensation Plan of the Registrant, incorporated by reference herein from Registrant's Annual Report for December 31, 1993 filed on Form 10-K.* * Management contracts or compensation plans required to be filed as an exhibit. The following exhibits are submitted herewith: Exhibit Number Exhibit 3.(ii) By-Laws of the Registrant 10.11 Automatic Dividend Reinvestment Plan of the Registrant 11 Computation of Earnings per Share 13 Annual Report to Shareholders 21 Subsidiaries of the Company 23 Consent of Independent Certified Public Accountants 27 Financial Data Schedule (submitted with electronic filing only) (B) No reports on Form 8-K have been filed for the 3 months ended December 31, 1995. SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. ARROW FINANCIAL CORPORATION Date: March 27, 1996 By: /s/ Michael F. Massiano Michael F. Massiano Chairman and President (Chief Executive Officer) Date: March 27, 1996 By: /s/ John J. Murphy John J. Murphy Executive Vice President, Treasurer and Chief Financial Officer (Principal Financial and Accounting Officer) Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below on March 27, 1996 by the following persons in the capacities indicated. /s/ Richard J. Bartlett /s/ David L. Moynehan Richard J. Bartlett David L. Moynehan Director Director /s/ Michael B. Clark Michael B. Clark Doris E. Ornstein Director Director /s/ George C. Frost George C. Frost Edward C. Pike Director Director /s/ Herbert A. Heineman, Jr. /s/ Daniel L. Robertson Herbert A. Heineman, Jr. Daniel L. Robertson Director Director /s/ Kenneth C. Hopper, M.D. /s/ Preston Leete Smith Kenneth C. Hopper, M.D. Preston Leete Smith Director Director /s/ Edward F. Huntington Edward F. Huntington Thomas C. Webb Director Director /s/ David G. Kruczlnicki /s/ Michael F. Massiano David G. Kruczlnicki Michael F. Massiano Director Director & Chairman EXHIBIT INDEX Exhibit Number Exhibit 3.(ii) By-Laws of the Registrant 10.11 Automatic Dividend Reinvestment Plan of the Registrant 11 Computation of Earnings per Share 13 Annual Report to Shareholders 21 Subsidiaries of the Company 23 Consent of Independent Certified Public Accountants 27 Financial Data Schedule (submitted with electronic filing only) EX-3.(II) 2 ARROW FINANCIAL CORPORATION (A New York Corporation) BY-LAWS (Effective 7/2/90) Revisions: 1/23/91 - Article 3.2 4/24/91 - Article 3.2 7/24/91 - Article 3.2 9/25/91 - Article 3.2 2/26/92 - Article 3.2 2/26/92 - Article 4.1 12/16/92 - Article 3.2 4/20/94 - Article 3.2 4/20/94 - Article 3.20 7/01/95 - Article 3.2 10/25/95 - Article 3.4 BY-LAWS ARROW FINANCIAL CORPORATION (A New York Corporation) (As amended to 10/25/95) ARTICLE I Definitions As used in these By-laws, unless the context otherwise requires, the term: 1.1 "Assistant Secretary" means an Assistant Secretary of the Corporation. 1.2 "Assistant Treasurer" means an Assistant Treasurer of the Corporation. 1.3 "Board" means the Board of Directors of the Corporation. 1.4 "Business Corporation Law" means the Business Corporation Law of the State of New York, as amended from time to time. 1.5 "By-laws" means the initial By-laws of the Corporation, as amended from time to time. 1.6 "Certificate of Incorporation" means the initial certificate of incorporation of the Corporation, as amended, supplemented or restated from time to time. 1.7 "Corporation" means Arrow Financial Corporation 1.8 "Directors" means directors of the Corporation 1.9 "Entire Board" means the total number of directors which the Corporation would have if there were no vacancies. 1.10 "Office of the Corporation" means the executive office of the Corporation, anything in Section 102(10) of the Business Corporation Law to the contrary notwithstanding. 1.11 "Chairman of the Board" means the Chairman of the Board of the Corporation. 1.12 "President" means the President of the Corporation. 1.13 "Secretary" means the Secretary of the Corporation. 1.14 "Shareholders" means shareholders of the Corporation. 1.15 "Treasurer" means the Treasurer of the Corporation. 1.16 "Vice President" means a Vice President of the Corporation. ARTICLE II Shareholders 2.1 Place of Meetings. Every meeting of shareholders shall be held at the office of the Corporation or at such other place within or without the State of New York as shall be designated in the notice of such meeting or in the waiver of notice 2.2 Annual Meeting. A meeting of shareholders shall be held annually for the election of directors and the transaction of other business at such hour and on such business day in April, May or June as may be determined by the Board and designated in the notice of meeting. 2.3 Special Meeting for Election of Directors, Etc. If the annual meeting of shareholders for the election of directors and the transaction of other business is not held within the months specified in Section 2.2, the Board may call a special meeting of shareholders for the election of directors and the transaction of other business at any time thereafter. 2.4 Special Meetings. A special meeting of shareholders, (other than a special meeting for the election of directors), unless otherwise prescribed by statute, may be called at any time by the Board or by the Chairman of the Board or by the Secretary. At any special meeting of shareholders, only such business may be transacted as is related to the purpose or purposes of such meeting set forth in the notice thereof given pursuant to Section 2.6 of the By-laws or in any waiver of notice thereof given pursuant to Section 2.7 of the By-laws. 2.5 Fixing Record Date. For the purpose of determining the shareholders entitled to notice of or to vote at any meeting of shareholders or any adjournment thereof, or to express consent to or dissent from any proposal without a meeting, or for the purpose of determining shareholders entitled to receive payment of any dividend or the allotment of any rights, or for the purpose of any other action, the Board may fix, in advance, a date as the record date for any such determination of shareholders. Such date shall not be more than fifty nor less than ten days before the date of such meeting, nor more than fifty days prior to any other action. If no such record date is fixed: 2.5.1 The record date for the determination of shareholders entitled to notice of or to vote at a meeting of shareholders shall be at the close of business on the day next preceding the day on which notice is given, or, if no notice is given, the day on which the meeting is held; 2.5.2 The record date for determining shareholders for any purpose other than that specified in Section 2.5.1 shall be at the close of business on the day on which the resolution of the Board relating thereto is adopted. When a determination of shareholders entitled to notice of or to vote at any meeting of shareholders has been made as provided in this Section 2.5, such determination shall apply to any adjournment thereof, unless the Board fixes a new record date for the adjourned meeting. 2.6 Notice of Meetings of Shareholders. Except as otherwise provided in Section 2.5 and Section 2.7 of the By-laws, whenever under the Business Corporation Law or the Certificate of Incorporation or the By-laws, shareholders are required or permitted to take any action at a meeting, written notice shall be given stating the place, date and hour of the meeting and, unless it is the annual meeting, indicating that it is being issued by or at the direction of the person or persons calling the meeting. Notice of a special meeting shall also state the purpose or purposes for which the meeting is called. If, at any meeting, action is proposed to be taken which would, if taken entitle shareholders fulfilling the requirements of Section 623 of the Business Corporation Law to receive payment for their shares, the notice of such meeting shall include a statement of that purpose and to that effect. A copy of the notice of any meeting shall be given, personally or by mail, not less than ten nor more than fifty days before the date of the meeting, to each shareholder entitled to notice of or to vote at such meeting. If mailed, such notice shall be deemed to be given when deposited in the United States mail, with postage thereon prepaid, directed to the shareholder at his/her address as it appears on the record of shareholders, or if he/she shall have filed with the Secretary of the Corporation a written request that notices to him/her be mailed to some other address, then directed to him/her at such other address. An affidavit of the Secretary or other person giving the notice or of the transfer agent of the Corporation that the notice required by this section has been given shall, in the absence of fraud, be prima facie evidence of the facts therein stated. When a meeting is adjourned to another time or place, it shall not be necessary to give any notice of the adjourned meeting if the time and place to which the meeting is adjourned are announced at the meeting at which the adjournment is taken, and at the adjourned meeting any business may be transacted that might have been transacted at the meeting as originally called. However, if after the adjournment the Board fixes a new record date for the adjourned meeting, a notice of the adjourned meeting shall be given to each shareholder of record on the new record date who is entitled to notice. 2.7 Waivers of Notice. Notice of meeting need not be given to any shareholder who submits a signed waiver of notice in person or by proxy, whether before or after the meeting. The attendance of any shareholder at a meeting, in person or by proxy, without protesting prior to the conclusion of the meeting the lack of notice of such meeting, shall constitute a waiver of notice by him/her. 2.8 List of Shareholders at Meeting. A list of shareholders as of the record date, certified by the officer of the Corporation responsible for its preparation, or by a transfer agent, shall be produced at any meeting of shareholders upon the request thereat or prior thereto of any shareholder. If the right to vote at any meeting is challenged, the inspectors of election, or person presiding thereat, shall require such list of shareholders to be produced as evidence of the right of the persons challenged to vote at such meeting, and all persons who appear from such list to be shareholders entitled to vote thereat may vote at such meeting. 2.9 Quorum of Shareholders; Adjournment. The holders of one-third of the shares entitled to vote at any meeting of shareholders, present in person or represented by proxy, shall constitute a quorum for the transaction of any business at any such meeting, provided that when a specified item of business is required to be voted on by a class or series (if the Corporation shall then have outstanding shares of more than one class or series), voting as a class, the holders of one-third of the shares of such class or series shall constitute a quorum (as to such class or series) for the transaction of such item of business. When a quorum is once present to organize a meeting of shareholders, it is not broken by the subsequent withdrawal of any shareholders or their proxies. The holders of a majority of shares present in person or represented by proxy at any meeting of shareholders, including an adjourned meeting, whether or not a quorum is present, may adjourn such meeting to another time and place. 2.10 Voting; Proxies. Unless otherwise provided in the Certificate of Incorporation, every shareholder of record shall be entitled to vote at every meeting of hareholders determined in accordance with Section 2.5 of the By-laws. Theprovisions of Section 612 of the Business Corporation Law shall apply in determining whether any shares may be voted and the persons, if any, entitled to vote such shares; but the Corporation shall be protected in treating the persons in whose names such shares stand on the record of shareholders as owners thereof for all purposes. At any meeting of shareholders (at which a quorum was once present to organize the meeting), all matters, except as otherwise provided by law or by the Certificate of Incorporation or by the By-laws, shall be decided by a majority of the votes cast at such meeting by the holders of shares present in person or represented by proxy and entitled to vote thereon, whether or not a quorum is present when the vote is taken. In voting on any questions on which a vote by ballot is required by law or is demanded by any shareholder entitled to vote, the voting shall be by ballot. Each ballot shall be signed by the shareholder voting or by his proxy, and shall state the number of shares voted. On all other questions, the voting may be viva voce. Every shareholder entitled to vote at a meeting of shareholders or to express consent or dissent without a meeting may authorize another person or persons to act for him by proxy. The validity and enforceability of any proxy shall be determined in accordance with Section 609 of the Business Corporation Law. 2.11 Selection and Duties of Inspectors at Meetings of Shareholders. The Board, in advance of any meeting of shareholders, may appoint one or more inspectors to act at the meeting or any adjournment thereof. If inspectors are not so appointed, the person presiding at such meeting may, and on the request of any shareholder entitled to vote thereat shall, appoint one or more inspectors. In case any person appointed fails to appear or act, the vacancy may be filled by appointment made by the Board in advance of the meeting or at the meeting by the person presiding thereat. Each inspector, before entering upon the discharge of his/her duties, shall take and sign an oath faithfully to execute the duties of inspector at such meeting with strict impartiality and according to the best of his/her ability. The inspector or inspectors represented at the meeting, shall determine the number of shares outstanding and the voting power of each, the shares represented at the meeting, the existence of a quorum, the validity and effect of proxies, and shall receive votes, ballots or consents, hear and determine all challenges and questions arising in connection with the right to vote, count and tabulate all votes, ballots or consents, determine the result, and shall do such acts as are proper to conduct the election or vote with fairness to all shareholders. On request of the person presiding at the meeting or any shareholder entitled to vote thereat, the inspector or inspectors shall make a report in writing of any challenge, question or matter determined by his/her or them and execute a certificate of any act found by him/her or them. Any report or certificate made by the inspector or inspectors shall be prima facie evidence of the facts stated and of the vote as certified by him/her or them. 2.12 Organization. At every meeting of shareholders, the Chairman of the Board, or in his/her absence the President, shall act as Chairman of the meeting. The Secretary, or in his/her absence one of the Assistant Secretaries, shall act as Secretary of the meeting. In case none of the officers above designated to act as Chairman or Secretary of the meeting, respectively, shall be present, a Chairman or a Secretary of the meeting, as the case may be, shall be chosen by a majority of the votes cast at such meeting by the holders of shares present in person or represented by proxy and entitled to vote at the meeting. 2.13 Order of Business. The order of business at all meetings of shareholders shall be as determined by the Chairman of the meeting, but the order of business to be followed at any meeting at which a quorum is present may be changed by a majority of the votes cast at such meeting by the holders of shares present in person or represented by proxy and entitled to vote at the meeting. 2.14 Written Consent of Shareholders Without a Meeting. Whenever the shareholders are required or permitted to take any action by vote, such action may be taken without a meeting on written consent, setting forth the action so taken or to be taken, signed by the holders of all outstanding shares entitled to vote thereon. Such consent shall have the same effect as a unanimous vote of shareholders. ARTICLE III Directors 3.1 General Powers. Except as otherwise provided in the Certificate of Incorporation, the business of the Corporation shall be managed under the direction of its Board. The Board may adopt such rules and regulations, not inconsistent with the Certificate of Incorporation or the By-Laws or applicable laws, as it may deem proper for the conduct of its meetings and the management of the Corporation. In addition to the powers expressly conferred by the By-laws, the Board may exercise all powers and perform all acts which are not required, by the By-laws or the Certificate of Incorporation or by law, to be exercised and performed by the shareholders. 3.2 Number and Qualification. The number of directors constituting the Entire Board is fixed at fourteen (14). 3.3 Qualifications. Each director shall, at the time of his election, be at least eighteen (18) years of age, but not more than seventy (70) years of age. 3.4 Election and Classification. The entire Board of Directors shall be divided into three (3) classes of not less than three (3) members each, which classes are designated as Class A, Class B and Class C. The number of directors of Class A shall equal one-third (1/3) of the total number of directors as determined in the manner provided in the By-laws (with any fractional remainder to count as one); the number of directors of Class B shall equal one-third (1/3) of said total number of directors (or the nearest whole number thereto); and the number of directors of Class C shall equal said total number of directors minus the aggregate number of directors of Classes A and B. At the election of the first Board of Directors, the class of each of the members then elected shall be designated. The term of office of each member then designated as a Class A director shall expire at the annual meeting of shareholders next ensuing, that of each member then designated as a Class B director at the annual meeting of shareholders one year thereafter, and that of each member then designated as a Class C director at the annual meeting of shareholders two years thereafter. At each annual meeting of shareholders held after the election and classification of the first Board of directors, directors to succeed those whose terms expire at such annual meeting shall be elected to hold office for a term expiring at the third succeeding annual meeting of shareholders and until their respective successors are elected and have qualified or until their respective earlierdisplacement from office by resignation, removal or otherwise. Directors shall, except as otherwise required by law or by the Certificate of Incorporation, be elected by a plurality of the votes cast at a meeting of shareholders by the holders of shares entitled to vote in the election. Only persons who have been nominated in accordance with the following procedures shall be eligible for election as directors of the Corporation. Nominations of persons for election to the Board of Directors may be made at any annual meeting of shareholders or special meeting of shareholders called and held for such express purpose (a) by or at the direction of the Board of Directors (or any duly authorized committee thereof) or (b) by any shareholder of the Corporation who (i) is a shareholder of record both on the date of the giving of the notice provided for in this Section 3.4 and on the record date for the determination of shareholders entitled to vote at such annual or special meeting and (ii) complies with the notice procedures set forth in this Section 3.4. In addition to any other applicable requirements, for a nomination to be made by a shareholder, such shareholder must have given a timely notice of nomination in proper written form to the Secretary of the Corporation. To be timely given in the case of an annual meeting, a shareholder's notice of nomination to the Secretary must be delivered to or mailed and received at the principal executive offices of the Corporation not less than one hundred twenty (120) days prior to the anniversary date of the immediately preceding annual meeting of shareholders. To be timely given in the case of a special meeting called and held for such express purpose, a shareholder's notice of nomination to the Secretary must be delivered to or mailed and received at the principal executive offices of the Corporation not later than close of business on the tenth (10th) day following the date on which the notice of the special meeting was first mailed to shareholders. To be in proper written form, a shareholder's notice of nomination to the Secretary must set forth (a) as to each person whom the shareholder proposes to nominate for election as a director (i) the name, age, business address and residence address of such person, (ii) the principal occupation or employment of such person, (iii) the class or series and number of shares of capital stock of the Corporation which are owned beneficially or of record by such person and (iv) any other information relating to such person that may be required to be disclosed by the Corporation in connection with its solicitations of proxies for election of directors pursuant to Section 14 of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and the rules and regulations promulgated thereunder, or as may be required in order to ascertain that the person meets any prerequisites contained in applicable law, the Corporation's Certificate of Incorporation or these Bylaws for serving as a director of the Corporation; and (b) as to the shareholder giving such notice (i) the name and record address of such shareholder, (ii) the class or series and number of shares of capital stock of the Corporation which are owned beneficially or of record by such shareholder, (iii) a description of all arrangements or understandings between such shareholder and each proposed nominee and any other person or persons (including their names) pursuant to which the nomination(s) are to be made by such shareholder, (iv) a representation that such shareholder intends to appear in person or by proxy at the annual meeting to nominate the person or persons named in the notice of nomination, and (v) any other information relating to such shareholder that would be required to be disclosed by the Corporation in connection with its solicitations of proxies for election of directors pursuant to Section 14 of the Exchange Act and the rules and regulations promulgated thereunder. Such notice of nomination must be accompanied by a written consent of each proposed nominee to being named as a nominee and to serve as a director if elected. No person shall be eligible for election as a director of the Corporation unless nominated in accordance with the procedures set forth in this Section 3.4. If the Chairman of the annual or special meeting determines that a nomination was not made in accordance with the foregoing procedures, the Chairman shall declare to the meeting that the nomination was defective and such defective nomination shall be disregarded. 3.5 Newly Created Directorships and Vacancies. Newly created directorships resulting from an increase in the number of directors and vacancies occurring in the Board for any reason, including the removal of directors without cause, may be filled by vote of a majority of the directors then in office, although less than a quorum, at any meeting of the Board, or may be elected by a plurality of the votes cast by the holders of shares entitled to vote in the election at a special meeting of shareholders called for that purpose. A director elected to fill a vacancy shall hold office during the term to which his/her predecessor had been elected and until his/her successor shall have been elected and shall qualify, or until his/her earlier death, resignation or removal. 3.6 Resignations. Any director may resign at any time by written notice to the Chairman of the Board or the Secretary. Such resignation shall take effect at the time therein specified, and unless otherwise specified, the acceptance of such resignation shall not be necessary to make it effective. 3.7 Removal of Directors. The Entire Board, or less than the Entire Board, may be removed for cause by vote of the shareholders or by action of the Board. The Entire Board, or less than the Entire Board may be removed without cause only in the manner prescribed in the Certificate of Incorporation. 3.8 Compensation. Each director, in consideration of his/his service as such, shall be entitled to receive from the corporation such amount per annum or such fees for attendance at directors' meetings, or both, as the Board may from time to time determine, together with reimbursement for the reasonable expenses incurred by him/her in connection with the performance of his/her duties. Each director who shall serve as a member of any committee of directors in consideration of his/her serving as such shall be entitled to such additional amount per annum or such fees for attendance at committee meetings, or both, as the Board may from time to time determine, together with reimbursement for the reasonable expenses incurred by him/her in the performance of his/her duties. Nothing in this section contained shall preclude any director from serving the corporation or its subsidiaries in any other capacity and receiving proper compensation therefor. 3.9 Place and Time of Meetings of the Board. Meetings of the Board, regular or special, may be held at such times and places within or without the State of New York as the Board will by vote determine at its annual meeting, and may alter or amend from time to time. The times and places for holding meetings may be fixed from time to time by resolution of the Board or (unless contrary to resolution of the Board) in the notice of the meeting. 3.10 Annual Meetings. On the day when and at the place where the annual meeting of shareholders for the election of directors is held, and as soon as practicable thereafter, the Board may hold its annual meeting, without notice of such meeting, for the purposes of organization, the election of officers and the transaction of other business. The annual meeting of the Board may be held at any other time and place specified in a notice given as provided in Section 3.12 of the By-laws for special meetings of the Board or in a waiver of notice thereof. 3.11 Regular Meetings. Regular meetings of the Board may be held at such times and places as may be fixed from time to time by the Board. Unless otherwise required by the Board, regular meetings of the Board may be held without notice. If any day fixed for a regular meeting of the Board shall be a Saturday or Sunday or a legal holiday at the place where such meeting is to be held, then such meeting shall be held at the same hour at the same place on the first business day thereafter which is not a Saturday, Sunday or legal holiday. 3.12 Special Meetings. Special meetings of the Board shall be held whenever called by the Chairman of the Board or the Secretary or by any three (3) or more directors. Notice of each special meeting of the Board shall, if mailed, be addressed to each director at the address designated by him/her for that purpose or, if none is designated, at his/her last known address not later than 24 hours before the date on which such meeting is to be held; or such notice shall be sent to each director at such address by telegraph, Telex, TWX, cable,wireless, or similar means of communication, or be delivered to him/he personally, not later than the day before the date on which such meeting is to be held. Every such notice shall state the time and place of the meeting but need not state the purpose of the meeting, except to the extent required by law. If mailed, each notice shall be deemed given when deposited, with postage thereon prepaid, in the post office or official depository under the exclusive care and custody of the United States post office department. Such mailing shall be by first class mail. 3.13 Adjourned Meetings. A majority of the directors present at any meeting of the Board, including an adjourned meeting, whether or not a quorum is present, may adjourn such meeting to another time and place. Notice of any adjourned meeting of the Board need not be given to any director whether or not present at the time of the adjournment. Any business may be transacted at any adjourned meeting that might have been transacted at the meeting as originally called. 3.14 Waivers of Notice. Anything in these By-laws or in any resolution adopted by the Board to the contrary notwithstanding, notice of any meeting of the Board need not be given to any director who submits a signed waiver of such notice, whether before or after such meeting, or who attends such meeting without protesting, prior thereto or at its commencement, the lack of notice to him/her. 3.15 Organization. At each meeting of the Board, the Chairman of the Board of the Corporation, or a chairman chosen by the majority of the directors present, shall preside. The Secretary shall act as Secretary at each meeting of the Board. In case the Secretary shall be absent from any meeting of the Board, an Assistant Secretary shall perform the duties of Secretary at such meeting; and in the absence from any such meeting of the Secretary and Assistant Secretaries, the person presiding at the meeting may appoint any person to act as Secretary of the meeting. 3.16 Quorum of Directors. A majority of the directors shall constitute a quorum at any meeting of the Board. 3.17 Action by the Board. Except as otherwise provided in Section 3.18 of the By-laws, all corporate action taken by the board shall be taken at a meeting of the Board. Except as otherwise provided herein or by the Certificate of Incorporation or by law, the vote of a majority of the directors present at the time of the vote, if a quorum is present at such time, shall be the act of the Board. Notwithstanding anything herein to the contrary, (1) abolition of the undertakings contained in Section 16 of a certain Affiliation Agreement dated August 17, 1989 by and between the Corporation and United Vermont Bancorporation shall require a vote of seventy percent (70%) of the full Board of Directors or (2) whenever a vote of the shareholders of any direct or indirectbanking subsidiary of the Corporation is required by law or the Charter or the By-laws of such banking subsidiary, the Corporation shall vote its shares of any such direct banking subsidiary, and cause the shares of any such indirect subsidiary held by any other subsidiary of the Corporation to be voted, only as directed by a seventy percent (70%) vote of the full Board of Directors. 3.18 Written Consent of Directors Without a Meeting. Any action required or permitted to be taken by the Board may be taken without a meeting if all members of the Board consent in writing to the adoption of a resolution authorizing the action. The resolution and the written consents thereto by the members of the Board shall be filed with the minutes of the proceedings of the Board. 3.19 Participation in Meeting of Board by Means of Conference Telephone or Similar Communications Equipment. Any one or more members of the Board may participate in a meeting of the Board by means of a conference telephone or similar communications equipment allowing all persons participating in the meeting to hear each other at the same time. Participation by such means shall constitute presence in person at a meeting. 3.20 Retirement of Directors. Any director who shall have attained the age of 70 during his/her term office shall retire from the Board at the first annual meeting of shareholders held on or after his/her birthdate. ARTICLE IV Executive Committee and Other Committees 4.1 How Constituted and Powers. The Board shall, by resolution adopted by a majority of the Entire Board, designate from among its members an Executive Committee of three (3) or more members which shall have all the authority of the Board, except that it shall have no authority as to the following matters: 4.1.1 The submission to shareholders of any matter that needs shareholders' approval; 4.1.2 The filling of vacancies in the Board or in any committee; 4.1.3 The fixing of compensation of the directors for serving on the Board or on any committee; 4.1.4 The amendment or repeal of the By-laws, or the adoption of new By-laws; 4.1.5 The amendment or repeal of any resolution of the Board which includes among its terms a provision that it is not so amendable or repealable. The Board, by resolution adopted by a majority of the Entire Board, may designate from among its members other committees, each consisting of three or more directors, which shall have the authority provided in such resolution. The Chairman of the Executive Committee shall vote only in the case of a tie. 4.2 General. Any committee designated by the Board pursuant to Section 4.1 of the By-laws, and each of the members and alternate members thereof, shall serve at the pleasure of such committee, who may replace any absent member or members at any meeting of such committee. All corporate action taken by any committee designated by the Board pursuant to Section 4.1 of the By-laws shall be taken at a meeting of such committee except that any action required or permitted to be taken by any committee may be taken without a meeting if all members of the committee consent in writing to the adoption of a resolution authorizing the action; in such event the resolution and the written consents thereto by the members of the committee shall be filed with the minutes of the proceedings of the committee. Any one or more members of any committee may participate in a meeting of such committee by means of conference telephone or similar communications equipment allowing all persons participating in the meeting to hear each other at the same time. Participation by such means shall constitute presence in person at a meeting. Any committee may adopt such rules and regulations, not inconsistent with the Certificate of Incorporation or the By-laws or applicable laws or resolution of the Board designating such committee, as it may deem proper for the conduct of its meetings and the exercise by it of the authority of the Board conferred upon such committee by the resolution of the Board designating such committee. ARTICLE V Officers 5.1 Officers. The Board may elect or appoint a Chairman of the Board, President, one or more Vice Presidents, a Secretary and a Treasurer, and such other officers as it may determine. All officers shall be elected or appointed to hold offices until the meeting of the Board following the next annual meeting of shareholders. The Board may designate one or more Vice Presidents as Executive Vice Presidents, and may use descriptive words or phrases to designate the standing, seniority or area of special competence of the Vice Presidents elected or appointed by it. Each officer shall hold office for the term for which he/she is elected or appointed, and until his/her successor shall have been elected or appointed and qualified or until his/her death, his/her resignation or his/her removal in the manner provided in Section 5.2 of the By-laws. Any two or more offices may be held by the same person, except the offices of President and Secretary; provided, however, that if all of the issued and outstanding shares of the Corporation are owned by one person, such person may hold all or any combination of offices. The Board may require any officers to give a bond or other security for the faithful performance of his/her duties, in such amount and with such sureties as the Board may determine. All officers as between themselves and the Corporation shall have such authority and perform such duties in the management of the Corporation as may be provided in the By-laws or as the Board may from time to time determine. 5.2 Removal of Officers. Any officer elected or appointed by the Board may be removed by the Board with or without cause. The removal of an officer without cause shall be without prejudice to his/her contract rights, if any. The election or appointment of an officer shall not of itself create contract rights. 5.3 Resignations. Any officer may resign at any time by notifying the Board or the Chairman of the Board or the Secretary in writing. Such resignation shall take effect at the date of receipt of such notice or at such later time as is therein specified, and, unless otherwise specified, the acceptance of such resignation shall not be necessary to make it effective. The resignation of an officer shall be without prejudice to the contract rights of the Corporation, if any. 5.4 Vacancies. A vacancy in any office because of death, resignation, removal, disqualification or any other cause may be filled for the unexpired portion of the term by the Board at any regular or special meeting of the Board. 5.5 Compensation. Salaries or other compensation of the officers may be fixed from time to time by the Board. No officer shall be prevented from receiving a salary or other compensation by reason of the fact that he/she is also a director. 5.6 Chairman of the Board. The Chairman of the Board of Directors shall preside at all meetings of the stockholders and Directors, and shall have such other duties as may be assigned to him from time to time by the Board of Directors. Unless the Board of Directors otherwise determines, the Chairman of the Board shall be the chief executive officer and head of the Corporation. Under the supervision of the Board of Directors and of the executive committee, the chief executive officer shall have the general control and management of its business and affairs, subject, however, to the right of the Board of Directors and of the executive committee to confer any specific power, except such as may be by statute exclusively conferred on the chief executive officer, upon any other officer or officers of the Corporation. The chief executive officer shall perform and do all acts and things incident to the position of chief executive officer and such other duties as may be lawfully assigned to him/her from time to time by the Board of Directors or the executive committee. 5.7 President. The President shall perform such duties as may be assigned to him/her from time to time by the Board of Directors, by the executive committee or by the Chairman of the Board. Unless the Board of Directors otherwise determines, the President shall be chief operating officer of the Corporation. He/she shall have such responsibilities as are assigned to him/her by the Board. In the event the President is designated as chief executive officer by the Board of Directors, the President shall have and possess all of the powers and discharge all of the duties of the chief executive officer, subject to the control of the Board and the executive committee. 5.8 Vice Presidents. At the request of the Chairman of the Board, or in his/her absence, at the request of the President, or in his/her absence, at the request of the Board, the Vice President shall (in such order as may be designated by the Board) perform all of the duties of the President and so acting shall have all the powers of and be subject to all restrictions upon the President. Any Vice President may also, with the Secretary or the Treasurer or an Assistant Secretary or an Assistant Treasurer, sign certificates for shares of the Corporation; may sign and execute, in the name of the Corporation, deeds, mortgages, bonds, contracts or other instruments authorized by the Board, except in cases where the signing and execution thereof shall be expressly delegated by the Board or by the By-laws to some other officer or agent of the Corporation, or shall be required by law otherwise to be signed or executed; and shall perform such other duties as from time to time may be assigned to him/her by the Board or by the Chairman of the Board, or in his/her absence, by the President. 5.9 Secretary. The Secretary, if present, shall act as Secretary of all meetings of the shareholders and of the Board, and shall keep the minutes thereof in the proper book or books to be provided for that purpose; he/she shall see that all notices required to be given by the Corporation are duly given and served; he/she may, with the Chairman of the Board, the President or a Vice President, sign certificates for shares of the Corporation; he/she shall be custodian of the seal of the Corporation and may seal with the seal of the Corporation or a facsimile thereof, all certificates for shares of the Corporation and all documents the execution of which on behalf of the Corporation under its corporate seal is authorized in accordance with the provisions of the By-laws; he/she shall have charge of the share records and also of the other books, records and papers of the Corporation relating to its organization and management as a Corporation, and shall see that the reports, statements and other documents required by law are properly kept and filed; and shall, in general perform all the duties incident to the office of Secretary and such other duties as from time to time may be assigned to him/her by the Board or by the Chairman of the Board, or in his/her absence, by the President. 5.10 Treasurer. The Treasurer shall have charge and custody of, and be responsible for, all funds, securities and notes of the Corporation; receive and give receipts for moneys due and payable to the Corporation from any sources whatsoever; deposit all such moneys in the name of the Corporation in such banks, trust companies or other depositories as shall be selected in accordance with these By-laws; against proper vouchers, cause such funds to be disbursed by checks or drafts on the authorized depositories of the Corporation signed in such manner as shall be determined in accordance with any provisions of the by-laws, and be responsible for the accuracy of the amounts of all moneys so disbursed; regularly enter or cause to be entered in books to be kept by him/her under his/her direction full and adequate account of all moneys received or paid by him/her the account of the Corporation; have the right to require, from time to time, reports or statements giving such information as he/she may desire with respect to any and all financial transactions of the Corporation from the officers or agents transacting the same; render to the Chairman of the Board or the Board, whenever the Chairman of the Board or the Board, respectively, shall require him/her so to do, an account of the financial condition of the Corporation and of all his/her transactions as Treasurer; exhibit at all reasonable times his/her books of account and other records to any of the directors upon application at the office of the Corporation where such books and records are kept; and, in general, perform all the duties incident to the office of Treasurer and such other duties as from time to time may be assigned to him/her by the Board or by the Chairman of the Board, or in his/her absence, by the President; and he/she may sign with the Chairman of the Board or the President or a Vice President certificates for shares of the Corporation. 5.11 Assistant Secretaries and Assistant Treasurers. Assistant Secretaries and Assistant Treasurers shall perform such duties as shall be assigned to them by the Secretary or by the Treasurer, respectively, or by the Board of by the Chairman of the Board or in his/her absence, by the President. Assistant Secretaries and Assistant Treasurers may, with the Chairman of the Board or President or a Vice President, sign certificates for shares of the Corporation. ARTICLE VI Contracts, Checks, Drafts, Bank Accounts, Etc. 6.1 Execution of Contracts. The Board may authorize any officer, employee or agent, in the name and on behalf of the Corporation, to enter into any contract or execute and satisfy any instrument, and any such authority may be general or confined to specific instances, or otherwise limited. 6.2 Loans. The Chairman of the Board or any other officer, employee or agent authorized by the By-laws or by the Board may effect loans and advances at any time for the Corporation from any bank, trust company or other institution or from any firm, corporation or individual and for such loans and advances may make, execute and deliver promissory notes, bonds or other certificates or evidences of indebtedness of the Corporation, and when authorized so to do may pledge and hypothecate or transfer any securities or other property of the Corporation as security for any such loans or advances. Such authority conferred by the Board may be general or confined to specific instances or otherwise limited. 6.3 Checks, Drafts, Etc. All checks, drafts and other orders for the payment of money out of the funds of the Corporation and all notes or other evidences of indebtedness of the Corporation shall be signed on behalf of the Corporation in such manner as shall from time to time be determined by resolution of the Board. 6.4 Deposits. The funds of the Corporation not otherwise employed shall be deposited rom time to time to the order of the Corporation in such banks, trust companies or other depositories as the Board may select or as may be selected by an officer, employee or agent of the Corporation to whom such power may from time to time be delegated by the Board. ARTICLE VII Shares and Dividends 7.1 Certificates Representing Shares. The shares of the Corporation shall be represented by certificates in such form (consistent with the provisions of Section 508 of the Business Corporation Law) as shall be approved by the Board. Such certificates shall be signed by the Chairman of the Board or the President or a Vice President and by the Secretary or an Assistant Secretary or the Treasurer or an Assistant Treasurer, and may be sealed with the seal of the Corporation or a facsimile thereof. The signatures of the officers upon a certificate may be facsimiles, if the certificate is countersigned by a transfer agent or registered by a registrar other than the Corporation itself or its employee. In case any officer who has signed or whose facsimile signature has been placed upon any certificate shall have ceased to be such officer before such certificate is issued, such certificate may, unless otherwise ordered by the Board, be issued by the Corporation with the same effect as if such person were such officer at the date of issue. 7.2 Transfer of Shares. Transfers of shares shall be made only on the books of the Corporation by the holder thereof or by his/her duly authorized attorney appointed by a power of attorney duly executed and filed with the Secretary or a transfer agent of the Corporation, and on surrender of the certificate or certificates representing such shares properly endorsed for transfer and uponpayment of all necessary transfer taxes. Every certificate exchanged, returned or surrendered to the Corporation shall be marked "Canceled", with the date of cancellation, by the Secretary or an Assistant Secretary or the transfer agent of the Corporation. A person in whose name shares shall stand on the books of the Corporation shall be deemed the owner thereof to receive dividends, to vote as such owner and for all other purposes as respects the Corporation. No transfer of shares shall be valid as against the Corporation, its shareholders and creditors for any purpose, except to render the transferee liable for the debts of the Corporation to the extent provided by law, until such transfer shall have been entered on the books of the Corporation by an entry showing from and to whom transferred. 7.3 Transfer and Registry Agents. The Corporation may from time to time maintain one or more transfer offices or agents and registry offices or agents at such place or places as may be determined form time to time by the Board. 7.4 Lost, Destroyed, Stolen and Mutilated Certificates. The holder of any shares shall immediately notify the Corporation of any loss, destruction, theft or mutilation of the certificate representing such shares, and the Corporation mayissue a new certificate to replace the certificate alleged to have been lost, destroyed, stolen or mutilated. The Board may, in its discretion, as a condition to the issue of any such new certificate, require the owner of the lost, destroyed, stolen or mutilated certificate, or his/her legal representatives, to advertise such fact in such manner as the Board may require, and to give the Corporation and its transfer agents and registrars, or such of them as the Board may require, a bond in such form, in such sums and with such surety or sureties as the board may direct, to indemnify the Corporation and its transfer agents and registrars against any claim that may be made against any of them on account of the continued existence of any such certificate so alleged to have been lost, destroyed, stolen or mutilated and against any expense in connection with such claim. 7.5 Regulations. The Board may make such rules and regulations as it may deem expedient, not inconsistent with the By-laws or with the Certificate of Incorporation, concerning the issue, transfer and registration of certificates representing shares. 7.6 Limitation on Transfers. If any two or more shareholders or subscribers for shares shall enter into any agreement whereby the rights of any one or more of them to sell, assign, transfer, mortgage, pledge, hypothecate, or transfer on the books of the Corporation, any or all of such shares held by them shall be abridged, limited or restricted, and if a copy of such agreement shall be filed with the Corporation and shall contain a provision that the certificatesrepresenting shares covered or affected by said agreement shall have such reference thereto endorsed thereon; and such shares shall not thereafter be transferred on the books of the Corporation except in accordance with the terms and provisions of such agreement. 7.7 Dividends, Surplus, Etc. Subject to the provisions of the Certificate of Incorporation and of law, the Board: 7.7.1 May declare and pay dividends or make other distributions on the outstanding shares in such amounts and at such time or times as, in its discretion, the condition of the affairs of the Corporation shall render advisable; 7.7.2 May use and apply, in its discretion, any of the surplus of the Corporation in purchasing or acquiring any shares of the Corporation, or purchase warrants therefor, in accordance with law, or any of its bonds, debentures, notes, scrip or other securities or evidences of indebtedness; 7.7.3 May set aside from time to time out of such surplus or net profits such sum or sums as, in its discretion, it may think proper, as a reserve fund to meet contingencies, or for equalizing dividends or for the purpose of maintaining or increasing the property or business of the Corporation, or for any other purpose it may think conducive to the best interests of the Corporation. ARTICLE VIII Indemnification 8.1 Indemnification of Others. The Board in its discretion shall have power on behalf of the Corporation to indemnify any person, other than a director or officer, made a party to any action, suit or proceeding by reason of the fact that he/she, his/her testator or intestate, is or was an employee of the Corporation. 8.2 Insurance. The Board in its discretion shall have the power to purchase and maintain insurance in accordance with, and subject to, the provisions of Section 727 of the Business Corporation Law. ARTICLE IX Books and Records 9.1 Books and Records. The Corporation shall keep correct and complete books and records of account and shall keep minutes of the proceedings of the shareholders, Board and executive committee, if any. The Corporation shall keep at the office designated in the Certificate of Incorporation or at the office of the transfer agent or registrar of the Corporation in New York State, a recordcontaining the names and addresses of all shareholders, the number and classof shares held by each and the dates when they respectively became the owners of record thereof. Any of the foregoing books, minutes or records may be in written form or in any other form capable of being converted into written form within a reasonable time. 9.2 Inspection of Books and Records. Except as otherwise provided by law, the Board shall determine from time to time whether, and, if allowed, when and under what conditions and regulations, the accounts, books, minutes and other records of the Corporation, or any of them, shall be open to the inspection of the shareholders. ARTICLE X Seal The Board may adopt a corporate seal which shall be in the form of a circle and shall bear the full name of the Corporation and the year of its incorporation. ARTICLE XI Fiscal Year The fiscal year of the Corporation shall be determined, and may be changed, by resolution of the Board. ARTICLE XII Voting of Shares Held Unless otherwise provided in Section 3.17 hereof or by resolution of the Board, the Chairman of the Board or in his/her absence the President may, from time to time, appoint one or more attorneys or agents of the Corporation, in the name and on behalf of the Corporation, to cast as a shareholder or otherwise in any other corporation, any of whose shares or securities may be held by the Corporation, at meetings of the holders of the shares or other securities of such other corporation, and to consent in writing to any action, by any such other corporation, and may instruct the person or persons so appointed as to the manner of casting such votes or giving such consent, and may execute or cause to be executed on behalf of the Corporation and under its corporate seal, or otherwise, such written proxies, consents, waivers or other instruments as he may deem necessary and proper in the premises; or the Chairman of the Board or in his absence, the President, may himself/herself attend any meeting of the holders of the shares or other securities of any other such corporation and thereat vote or exercise any or all other powers of the Corporation as the holder of such shares or other securities of such other corporation. ARTICLE XIII Amendments The By-laws may be altered, amended, supplemented or repealed, or new By-laws may be adopted, by vote of the holders of a majority of the shares of the Corporation entitled to vote in the election of directors or by vote of a majority of the Board; provided, however, that any alteration, amendment, supplement or repeal of (1) Section 3.3 of Article III of the By-laws or of this proviso to Article XIII of the By-laws, shall require the vote of not less than eighty percent (80%) of the shares entitled to vote in the election of directors, or the vote of at least eighty percent (80%) of the Entire Board, for approval and (2) Section 3.2 or 3.17 of Article III or Section 4.1 of Article IV of the By-laws shall require the vote of not less than seventypercent (70%) of the Entire Board for approval. If any By-law regulating an impending election of directors is adopted, altered, amended, supplemented or repealed by the Board, such By-law shall be set forth in the notice of the next meeting of shareholders for election of directors, together with aconcise statement of the changes made. Any By-laws adopted, altered, amended, or supplemented by the Board may be altered, amended, supplemented or repealed by the shareholders entitled to vote thereon. EX-10.11 3 Exhibit 10.11 AUTOMATIC DIVIDEND REINVESTMENT PLAN A service for the Shareholders of ARROW FINANCIAL CORPORATION ARROW FINANCIAL CORPORATION AUTOMATIC DIVIDEND REINVESTMENT PLAN The Arrow Financial Corporation Automatic Dividend Reinvestment Plan (the "Plan") offers shareholders a convenient and economical way to acquire additional common stock of Arrow Financial Corporation ("Arrow") without payment of any brokerage commission or service charge. Participants in the Plan may reinvest all stock and cash dividends in the common stock of Arrow as well as make optional cash contributions for such purchases. Participation in the Plan is entirely voluntary, and you may join at any time and terminate whenever you wish. Arrow will administer this plan and act as agent for shareholders who participate, to the extent and subject to the limitations imposed by law, including federal securities laws, applicable to purchases and sales by a publicly held company of its own securities. Arrow will engage one or more third parties to effect purchases and sales on behalf of the Plan when required by law, and when not required by law, if Arrow deems it necessary or appropriate. Presently, Arrow is engaging the services of such a third party agent. SHAREHOLDER BENEFITS 1. No service charge or commission on shares purchased - Arrow pays all service charges associated with the Plan as well as all brokerage commissions on shares purchased by you. 2. Full Investment of Funds - The Plan permits fractional as well as full shares to be credited to your account. 3. Added Income - Fractional shares, like full shares, earn dividends. 4. Simplified Record Keeping - All paper work is done for your, and you receive a detailed quarterly statement. PLAN OPERATION By completing and returning the enclosed authorization form, you may become a Plan participant. Arrow or its designated third party agent will then invest your dividends, any optional cash contribution, plus dividends on any shares previously acquired and held for you under the Plan, in additional shares of Arrow stock. On or about the 1st of each month, any cash received by the 25th of the previous month from optional contributions will be used to purchase shares at the then current market price to be credited to your account accordingly. TERMINATION You may terminate your participation at any time by writing to American Stock Transfer and Trust Company. All dividends with a record date after receipt of your letter will be sent to you. Upon termination, certificates for full shares may be issued in your name or sold and proceeds sent to you. Fractional shares will be automatically converted to cash and the proceeds remitted to you. PROXY VOTING As Arrow shareholders, participants will receive proxy materials, including a form of proxy reflecting the number of shares owned through the Plan and otherwise, in connection with any annual or special meeting of Arrow shareholders. Arrow will vote full shares held for you in accordance with your instructions subject to the terms and conditions of the Plan. PARTICIPATION Holders of record may join the Plan at any time by completing an authorization form and mailing it to the address on the form. Individuals who are not shareholders of record may make their initial purchase of Arrow stock through a cash contribution of $300 or more to the Plan. Optional cash contributions of up to $10,000 quarterly may be forwarded to American Stock Transfer and Trust Company for deposit to a participant's account at any time. There is a minimum cash contribution of $50. (Checks should be made payable to American Stock Transfer and Trust Company.) All correspondence concerning the Plan should be direct to: American Stock Transfer and Trust Company 40 Wall Street New York, New York 10005 Telephone: (718) 921-8200 TERMS AND CONDITIONS Plan participants agree that Arrow or its designated third party agent, will reinvest all of the stock and cash dividends received on the common shares of Arrow, held by the participant, and dividends on any full or fractional shares acquired under the Plan, in addition to optional cash contributions, to the purchase of common shares of Arrow to be held in the participant's account. Such purchases may be made on any securities exchange where such shares are traded, in the over-the-counter market, of in negotiated transactions, and may be on such terms as to price, delivery and otherwise as Arrow or its designated third party agent may determine to the extent permitted by law. Optional cash contributions will be invested in Arrow stock on a monthly basis, generally on, or shortly after the first of the month. Dividends received into the Plan will be reinvested as soon as practical after receipt. However, if considered appropriate by Arrow, or its designated third party agent, such purchases may be made later and over an extended period of time to the extent permitted by law. Arrow or its designated third party agent, making purchases for the participants account, may hold the participant's funds with those of other shareholders of Arrow participating in the Plan pending purchase of Arrow stock. The price at which Arrow or its designated third party agent, shall be deemed to have acquired shares for the participant's account shall be the average price of all shares purchased by it, as agent for the Plan, in that investment period. Arrow may hold the shares of all participants together in its name or in the name of its nominee. Arrow shall have no responsibility as to the market value of Arrow common shares acquired for the participant's account. For a number of reasons, including observance of the Rules and Regulations of the Securities and Exchange Commission, purchases may be temporarily curtailed or suspended. Arrow shall not be held accountable for its inability to make purchases at such times. As soon as practicable after the completion of an investment on behalf of a participant, following a dividend payment, Arrow will mail to such participant a statement indicating the amount invested and the price per share, the number of shares purchased for all transactions during the quarter, total shares held in the account, and all year-to-date transactions for the account. No certificates will be issued to a participant for such shares unless so requested or until the account is terminated. Such requests must be made in writing and will only apply to those shares already purchased as of the date the request is received. No certificates for fractional shares will be issued. The reinvestment of dividends does not relieve the participant of any income tax which may be payable on such dividends. Termination may be made at any time by writing to American Stock Transfer and Trust Company. All dividends with a record date after receipt of such letter will be sent to the participant along with any voluntary cash payment received by Arrow but not yet invested. Arrow may terminate the account by notice in writing mailed to the participant. Upon receipt of the notice of termination from the participant, Arrow will send certificates for the full shares in the account. Upon request, Arrow will sell full shares and deliver the proceeds, less brokerage commissions. In every case of termination, Arrow will send the participant a check in an amount equal to the value of any fractional share equivalent based upon the then current market price of a full share. If a participant disposes of all shares registered in his/her name, Arrow may, at is option, terminate the account or determine from the participant to continue participation in the Plan. Shares issued by Arrow pursuant to stock dividends or stock splits on shares held by Arrow for the participant will be credited to the participant's account. In the event that Arrow make available to its shareholders rights to purchase additional common shares or any other securities, Arrow, or its designated third party agent, will sell such rights accruing to shares held by Arrow under the Plan. Arrow shall not be liable for any act done in good faith or for any good faith omission to act, to the extent such disclaimer or liability is permitted by federal securities law, including, without limitation, any claims of liability (1) arising out of failure to terminate the participant's account on the death of such participant prior to receipt of written notice by Arrow of such death, (2) with respect to the price or prices at which shares are purchased or sold for the participant's account, and (3) concerning the times the purchases or sales are made. Arrow reserves the right to amend, supplement or terminate the Plan, but such action shall have no retroactive effect that would prejudice the interest of the participant. Terms and conditions of this Plan shall be governed by the laws of the State of New York. Effective 1/3/96 Mkt. 2/96 EX-11 4 Exhibit 11 ARROW FINANCIAL CORPORATION AND SUBSIDIARIES STATEMENT RE COMPUTATION OF PER SHARE EARNINGS
1995 1994 1993 1992 1991 Primary Earnings Per Share: Net Income Before Extraordinary Item & Cumulative Effect of Accounting Change $12,424 $11,325 $8,176 $2,890 $(33,382) Extraordinary Item --- --- --- 811 --- Cumulative Effect of Accounting Change --- --- 1,457 --- --- Net Income $12,424 $11,325 $9,633 $3,701 $(33,382) Wesighted Shares Outstanding 5,707 5,732 5,679 5,522 5,438 Stock Options- Equivalent Shares 6 13 --- --- --- Total Equivalent Shares 5,713 5,746 5,679 5,522 5,438 Primary Eanrings Per Share, Before Extraordinary Item $2.17 $1.97 $1.44 $0.53 $(6.13) Primary Earnings Per Share, Extraordinary Item --- --- --- 0.13 --- Primary Earnings Per Share, Cumulative Effect of Accounting Change --- --- 0.25 --- --- Primary Earnings Per Share $2.17 $1.97 $1.69 $0.66 $(6.13) Fully Diluted Earnings Per Share: Net Income Before Extraordinary Item & Cumulative Effect of Accounting Change $12,424 $11,325 $8,176 $2,890 $(33,382) Debenture Interest Expense, net of tax --- 243 --- --- --- Fully Diluted Income 12,424 11,568 8,176 2,890 (33,382) Extraordinary Item --- --- --- 811 --- Cumulative Effect of Accounting Change --- --- 1,457 --- --- Net Income $12,424 $11,568 $9,633 $3,701 $(33,382) Weighted Shares Outstanding 5,707 5,732 5,679 5,522 5,438 Stock Options- Equivalent Shares 25 24 --- --- --- Debentures --- 333 --- --- --- Total Equivalent Shares 5,732 6,089 5,679 5,522 5,438 Fully Diluted Earnings Per Share, Before Extraordinary Item $2.17 $1.90 $1.44 $0.53 $(6.13) Fully Diluted Earnings Per Share, Extraordinary Item --- --- --- 0.13 --- Fully Diluted Earnings Per Share, Cumulative Effect of Accounting Change --- --- 0.25 --- --- Fully Diluted Earnings Per Share $2.17 $1.90 $1.69 $0.66 $(6.13)
EX-13 5 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, 1995 and 1994, 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, 1995. Theses 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, an all material respects, the financial position of Arrow Financial Corporation and subsidiaries as of December 31, 1995 and 1994, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1995, in conformity with generally accepted accounting principles. As discussed in Notes 1 and 17, the Company changed its method of accounting for income taxes in 1993 to adopt the provisions of the Financial Accounting Standards Board's SFAS No. 109, "Accounting for Income Taxes." KPMG Peat Marwick LLP Certified Public Accountants 74 North Pearl Street Albany, NY 12207 January 19, 1996 Consolidated Balance Sheets Arrow Financial Corporation and Subsidiaries (Dollars in Thousands)
December 31, 1995 1994 ASSETS Cash and Due from Banks (Note 2) $ 23,406 $ 26,624 Federal Funds Sold and Securities Purchased Under Agreements to Resell 35,100 8,000 Securities Available-for-Sale (Note 3) 178,645 53,868 Securities Held-to-Maturity: (Approximate Fair Value of $14,508 in 1995 and $123,519 in 1994) (Notes 3 and 20) 13,921 129,735 Loans and Leases (Notes 4 and 20) 517,787 507,553 Less: Allowance for Loan Losses (Note 5) (12,106) (12,338) Net Loans and Leases 505,681 495,215 Premises and Equipment (Note 6) 13,888 14,590 Other Real Estate Owned (Note 7) 2,410 3,396 Other Assets 16,739 15,003 Total Assets $789,790 $746,431 LIABILITIES Deposits: Demand $ 94,713 $ 93,075 Regular Savings, N.O.W. & Money Market Deposit Accounts 352,302 359,143 Time Certificates of $100,000 or More (Notes 8 and 20) 57,557 36,171 Other Time Deposits (Notes 8 and 20) 189,881 162,096 Total Deposits 694,453 650,485 Short-Term Borrowings: (Note 9) Federal Funds Purchased and Securities Sold Under Agreements to Repurchase 14,045 21,162 Other Short-Term Borrowings 1,252 3,703 Other Liabilities 12,536 7,669 Long-Term Debt (Notes 10 and 20) --- 5,007 Total Liabilities 722,286 688,026 Commitments and Contingent Liabilities (Notes 3, 13, 18, 19 and 21) SHAREHOLDERS' EQUITY (Notes 11, 12, 14 and 15) Preferred Stock, $5 Par Value; 1,000,000 Shares Authorized --- --- Common Stock, $1 Par Value; 20,000,000 Shares Authorized (5,979,124 Shares Issued in 1995 and 5,725,765 in 1994) 5,979 5,726 Surplus 40,938 36,102 Undivided Profits 24,296 19,149 Valuation Allowance for Securities Available-for-Sale 1,152 (673) Unallocated ESOP Shares (43,130 in 1995) (Note 14) (700) --- Treasury Stock (309,833 Shares in 1995 and 221,109 in 1994, at Cost) (4,161) (1,899) Total Shareholders' Equity 67,504 58,405 Total Liabilities and Shareholders' Equity $789,790 $746,431 The accompanying notes are an integral part of these consolidated financial statements.
Consolidated Statements of Income Arrow Financial Corporation and Subsidiaries (Dollars in Thousands, Except Per Share Data)
Years Ended December 31, 1995 1994 1993 INTEREST INCOME Interest and Fees on Loans and Leases $47,988 $42,440 $41,374 Interest on Deposits with Banks --- --- 68 Interest and Dividends on Securities Held-to-Maturity: U.S. Government, Agencies and Corporations 6,208 6,169 6,348 State and Municipal Obligations 733 332 386 Other Securities 483 205 287 Interest on Federal Funds Sold and Securities Purchased Under Agreements to Resell 1,307 501 618 Interest and Dividends on Securities Available-for-Sale 3,999 2,867 2,755 Total Interest Income 60,718 52,514 51,836 INTEREST EXPENSE Interest on Deposits: Time Certificates of $100,000 or More 3,761 1,161 708 Other Deposits 20,055 16,204 18,084 Interest on Short-Term Borrowings: Federal Funds Purchased and Securities Sold Under Agreements to Repurchase 604 273 155 Other Short-Term Borrowings 215 121 181 Interest on Long-Term Debt 230 443 455 Total Interest Expense 24,865 18,202 19,583 NET INTEREST INCOME 35,853 34,312 32,253 Provision for Loan Losses (Note 5) 1,170 (950) 690 NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 34,683 35,262 31,563 OTHER INCOME Income from Fiduciary Activities 3,752 3,657 3,661 Fees for Other Services to Customers 4,669 4,345 4,459 Net Gains (Losses) on Securities Transactions 23 (481) 26 Other Operating Income (Note 16) 6,052 1,047 966 Total Other Income 14,496 8,568 9,112 OTHER EXPENSE Salaries and Employee Benefits (Notes 13, 14 and 15) 16,710 16,204 16,101 Occupancy Expense of Premises, Net 2,040 2,168 2,418 Furniture and Equipment Expense 1,930 2,076 2,254 Other Operating Expense (Note 16) 9,089 10,926 11,345 Total Other Expense 29,769 31,374 32,118 INCOME BEFORE INCOME TAXES AND CUMULATIVE EFFECT OF ACCOUNTING CHANGE 19,410 12,456 8,557 Provision for Income Taxes (Note 17) 6,986 1,131 381 INCOME BEFORE CUMULATIVE EFFECT OF ACCOUNTING CHANGE 12,424 11,325 8,176 Cumulative Effect of a Change in Accounting for Income Taxes --- --- 1,457 NET INCOME $12,424 $11,325 $ 9,633 . . . . . . . . . . . . . . . . . . . . . Primary Earnings Per Share: Income Before Accounting Change $ 2.17 $ 1.97 $ 1.44 Accounting Change --- --- .25 Net Income $ 2.17 $ 1.97 $ 1.69 Fully Diluted Earnings Per Share: Income Before Accounting Change $ 2.17 $ 1.90 $ 1.44 Accounting Change --- --- .25 Net Income $ 2.17 $ 1.90 $ 1.69 Per share amounts have been adjusted for the 1995 four percent and the 1994 four percent stock dividends. The accompanying notes are an integral part of these consolidated financial statements.
Consolidated Statement of Changes in Shareholders' Equity Arrow Financial Corporation and Subsidiaries (Dollars in Thousands)
Shares Common Undivided Issued Stock Surplus Profits Balance at December 31, 1992 5,172,139 $5,172 $28,970 $ 6,998 Net Income --- --- --- 9,633 Cash Dividends Declared, $.096 per Share --- --- --- (571) 4% Stock Dividend 210,000 210 2,442 (2,652) Sale of Common Stock 89,704 90 938 --- Stock Options Exercised 5,462 5 52 --- Valuation Allowance for Securities Available- for-Sale --- --- --- --- Balance at December 31, 1993 5,477,305 5,477 32,402 13,408 Net Income --- --- --- 11,325 Cash Dividends Declared, $.356 per Share --- --- --- (2,039) 4% Stock Dividend 219,823 220 3,325 (3,545) Stock Purchase Contracts Exercised 18,581 19 281 --- Stock Options Exercised 10,056 10 94 --- Purchase of Treasury Stock (35,229 shares) --- --- --- --- Valuation Allowance for Securities Available- for-Sale --- --- --- --- Balance at December 31, 1994 5,725,765 5,726 36,102 19,149 Net Income --- --- --- 12,424 Cash Dividends Declared, $.564 per Share --- --- --- (3,196) 4% Stock Dividend 229,966 230 3,851 (4,081) Stock Purchase Contracts Exercised 23,393 23 303 --- Acquisition of Common Stock By ESOP (69,500 Shares) --- --- --- --- Allocation of ESOP Stock (29,150 Shares) --- --- 24 --- Stock Options Exercised with Stock (59,896 Shares) --- --- --- --- Stock Options Exercised (92,066 Shares) --- --- 630 --- Tax Benefit for Exercise of Stock Options --- --- 28 --- Purchase of Treasury Stock (110,687 Shares) --- --- --- --- Valuation Allowance for Securities Available- for-Sale --- --- --- --- Balance at December 31, 1995 5,979,124 $5,979 $40,938 $24,296 Consolidated Statement of Changes in Shareolders' Equity, Continued
Unallocated Unrealized Employee Gain(Loss) Stock Securities Osnership Available Treasury Plan for Sale Stock Total Balance at December 31, 1992 $ --- $ --- $(1,405) $39,735 Net Income --- --- --- 9,633 Cash Dividends Declared, $.096 per Share --- --- --- (571) 4% Stock Dividend --- --- --- --- Sale of Common Stock --- --- --- 1,028 Stock Options Exercised --- --- --- 57 Valuation Allowance for Securities Available- for-Sale --- 187 --- 187 Balance at December 31, 1993 --- 187 (1,405) 50,069 Net Income --- --- --- 11,325 Cash Dividends Declared, $.356 per Share --- --- --- (2,039) 4% Stock Dividend --- --- --- --- Stock Purchase Contracts Exercised --- --- --- 300 Stock Options Exercised --- --- --- 104 Purchase of Treasury Stock (35,229 shares) --- --- (494) (494) Valuation Allowance for Securities Available- for-Sale --- (860) --- (860) Balance at December 31, 1994 --- (673) (1,899) 58,405 Net Income --- --- --- 12,424 Cash Dividends Declared, $.564 per Share --- --- --- (3,196) 4% Stock Dividend --- --- --- --- Stock Purchase Contracts Exercised --- --- --- 326 Acquisition of Common Stock By ESOP (69,500 Shares) (1,173) --- --- (1,173) Allocation of ESOP Stock (29,150 Shares) 473 --- --- 497 Stock Options Exercised with Stock (59,896 Shares) --- --- (965) (965) Stock Options Exercised (92,066 Shares) --- --- 584 1,214 Tax Benefit for Exercise of Stock Options --- --- --- 28 Purchase of Treasury Stock (110,687 Shares) --- --- (1,881) (1,881) Valuation Allowance for Securities Available- for-Sale --- 1,825 --- 1,825 Balance at December 31, 1995 $ (700) $1,152 $(4,161) $67,504 Per share amounts have been adjusted for the 1995 four percent and the 1994 four percent stock dividends. The accompanying notes are an integral part of these consolidated financial statements.
Consolidated Statements of Cash Flows Arrow Financial Corporation and Subsidiaries
(Dollars in Thousands) Years Ended December 31, 1995 1994 1993 Operating Activities: Net Income $12,424 $11,325 $ 9,633 Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities: Provision for Loan Losses 1,170 (950) 690 Provision for Other Real Estate Owned Losses 161 398 638 Depreciation and Amortization 1,624 2,167 3,649 Gains on the Sale of Securities Available-for-Sale (51) (73) --- Losses on the Sale of Securities Available-for-Sale 28 540 --- Proceeds from the Sale of Loans 12,397 6,238 12,660 Losses (Gains) on the Sale of Loans, Fixed Assets and Other Real Estate Owned (120) 1,195 (274) Deferred Income Taxes (497) (1,950) (2,659) Decrease (Increase) in Interest Receivable (725) (165) 665 Increase (Decrease) in Interest Payable 1,196 82 (421) Decrease (Increase) in Other Assets (2,123) 576 (3,388) Increase (Decrease) in Other Liabilities 3,763 1,418 2,403 Net Cash Provided By Operating Activities 29,247 20,801 23,596 Investing Activities: Proceeds from the Sale of Securities Available-for-Sale 4,191 16,059 23,906 Proceeds from the Maturities of Securities Available-for-Sale 26,407 22,463 33,500 Purchases of Securities Available-for-Sale (33,921) (38,340) (37,005) Proceeds from the Maturities of Securities Held-to-Maturity 6,604 51,257 22,039 Purchases of Securities Held-to-Maturity (9,157) (55,473) (72,119) Net Increase in Loans and Leases (25,206) (16,170) (28,163) Proceeds from Sales of Fixed Assets and Other Real Estate Owned 1,473 4,930 6,021 Purchases of Fixed Assets (593) (807) (390) Net Cash Used In Investing Activities (30,202) (16,081) (52,211) Financing Activities: Net Increase (Decrease) in Deposits 43,968 (8,942) 1,552 Net Increase (Decrease) in Short-Term Borrowings (9,568) 12,378 (2,575) Repayment of Long-Term Debt (4,650) (88) (88) Common Stock Issued --- 100 843 Exercise of Stock Options 164 104 57 Purchase of Treasury Stock (1,881) (494) --- Cash Dividends Paid (3,196) (2,039) (571) Net Cash Provided By (Used In) Financing Activities 24,837 1,019 (782) Net Increase (Decrease) In Cash and Cash Equivalents 23,882 5,739 (29,397) Cash and Cash Equivalents at Beginning of the Year 34,624 28,885 58,282 Cash and Cash Equivalents at End of the Year $58,506 $34,624 $28,885 Cash and Cash Equivalents: Cash and Due From Banks $23,406 $26,624 $22,885 Federal Funds Sold and Securities Purchased Under Agreements to Resell 35,100 8,000 6,000 Total Cash and Cash Equivalents $58,506 $34,624 $28,885 Supplemental Cash Flow Information: Interest Paid $23,670 $18,120 $20,004 Income Taxes Paid 6,908 1,537 858 Transfer of Loans to Other Real Estate Owned 642 2,493 7,804 Common Stock Exchanged for Short-Term Borrowings --- --- 100 Common Stock Issued to the Company's ESOP --- --- 85 Cancellation of Debentures by Exercise of Cancellable Mandatory Stock Purchase Contracts 370 200 --- Transfer of Securities Held-to-Maturity to Securities Available-for-Sale 118,200 --- 20,574 The accompanying notes are an integral part of these consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES 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. Prior years' financial statements have been reclassified to conform with the current financial statement presentations. 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. 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 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 a separate component of shareholders' equity. Realized gains and losses are based upon specific identification. In November 1995, the FASB issued "A Guide to Implementation of Statement 115 on Accounting for Certain Investments in Debt and Equity Securities." The Guide allowed a one-time reclassification of held-to-maturity securities before December 31, 1995. Accordingly, the Company reclassified $118.2 million of held-to-maturity securities to available-for-sale in December of 1995. 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 established 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. Loans held for sale are carried at the lower of aggregate cost or market. As of December 31, 1995, there were no loans held for sale. On January 1, 1995, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 114, "Accounting by Creditors for Impairment of a Loan." SFAS No. 114, as amended, requires that impaired loans, except for large groups of smaller-balance homogeneous loans, be measured based on 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 $250,000, 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 for 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 effect of adopting SFAS No. 114 was not material to the Company's consolidated financial statements. In May 1995, the FASB issued SFAS No. 122, "Accounting for Mortgage Servicing Rights", which amended SFAS No. 65 to require that mortgage banking enterprises recognize as separate assets rights to service loans for others, however those servicing rights are acquired. The Company adopted SFAS No. 122 as of January 1, 1995, for loans originated after that date. As of December 31, 1995, the fair value of the Company's mortgage servicing rights measured under SFAS No. 122 amounted to $57 thousand. At December 31, 1995, the magnitude of the serviced loans was not considered so substantial as to require stratification. There was no valuation reserve for mortgage servicing rights at December 31, 1995. 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 - In February 1992, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes." Statement 109 requires a change from the deferred method of accounting for income taxes of Accounting Principles Board (APB) Opinion 11 to the asset and liability method of accounting for income taxes. Under the asset and liability method of Statement 109, 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. Under Statement 109, the effect of deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Effective January 1, 1993, the Company adopted Statement 109 and has reported the cumulative effect of that change in the 1993 consolidated statement of income. Intangible Assets - Intangible assets related to the acquisition of subsidiary banks and branches, and the related amortization, are included in other assets and other noninterest expense, respectively. Intangible assets, which are being amortized over 15 years, amounted to $926,000 and $1,087,000 at December 31, 1995 and 1994, respectively. The related amortization expense totalled $161,000, $172,000 and $185,000 in 1995, 1994 and 1993, respectively. Gains and losses on the sale of loans are recognized at the time of sale and are adjusted to the extent that the average interest rate on the loans sold, adjusted for a normal servicing fee, differs from the yield to the buyer. The resulting deferred loan premium is amortized using the level-yield method over the estimated remaining life of the loans. Such deferred loan premiums amounted to $220,000 and $329,000 at December 31, 1995 and 1994, respectively. The amount of loans serviced for others was $66,633,000 and $72,373,000 at December 31, 1995 and 1994, respectively. Long-Lived Assets - In March 1995, the FASB released SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." SFAS No. 121 requires that long-lived assets and certain identifiable intangibles to be held and used by an entity be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. SFAS No. 121 requires that long-lived assets and certain identifiable intangibles to be disposed of be reported at the lower of carrying amount or fair value less cost to sell. SFAS No. 121 is effective for years beginning after December 15, 1995, with earlier adoption allowed. The Company plans to adopt SFAS No. 121 in 1996. Management anticipates that the adoption of SFAS No. 121 will not have a material effect on the Company's consolidated financial statements. Per Share Computations - Earnings per common share are determined by using the weighted average number of common shares and common stock equivalents outstanding during each year, retroactively adjusted to give effect to the declaration of stock dividends and stock splits. Financial Instruments - Statement of Financial Accounting Standards 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, standby letters of credit and, in prior periods, loans sold with recourse. 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, property, plant, 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 20. NOTE 2: CASH AND DUE FROM BANKS (In Thousands) The bank subsidiaries are required to maintain a reserve balance with the Federal Reserve Bank. The amount of the required balance at December 31, 1995 and 1994 was approximately $8,864 and $8,683, respectively. NOTE 3: SECURITIES (In Thousands) The fair value of securities, except certain state and municipal securities, is estimated based on published bid 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, 1995 and 1994 is presented below: Securities Held-to-Maturity:
Gross Gross December 31, 1995 Amortized Fair Unrealized Unrealized Cost Value Gains Losses State and Municipal Obligations $ 13,921 $ 14,508 $648 $ 61 Total Securities Held-to-Maturity $ 13,921 $ 14,508 $648 $ 61 December 31, 1994 U.S. Treasury and Agency Obligations $ 61,390 $ 59,046 $--- $2,344 State and Municipal Obligations 10,409 10,375 71 105 Mortgage-Backed Securities 51,904 48,279 11 3,636 Corporate and Other Debt Securities 6,032 5,819 --- 213 Total Securities Held-to-Maturity $129,735 $123,519 $ 82 $6,298
Securities Available-for-Sale:
Gross Gross December 31, 1995 Amortized Fair Unrealized Unrealized Cost Value Gains Losses U.S. Treasury and Agency Obligations $113,249 $114,502 $1,458 $ 205 State and Municipal Obligations 338 338 --- --- Mortgage-Backed Securities 54,289 54,651 649 287 Corporate and Other Debt Securities 7,024 7,300 276 --- Mutual Funds and Equity Securities 1,798 1,854 56 --- Total Securities Available-for-Sale $176,698 $178,645 $2,439 $ 492 December 31, 1994 U.S. Treasury and Agency Obligations $50,236 $49,063 $ 1 $1,174 State and Municipal Obligations 2,180 2,180 --- --- Mortgage-Backed Securities 475 475 --- --- Mutual Funds and Equity Securities 2,097 2,150 70 17 Total Securities Available-for-Sale $54,988 $53,868 $ 71 $1,191
A summary of the maturities of securities as of December 31, 1995 is presented below:
Securities Held- Securities Available- to-Maturity for-Sale Amortized Fair Amortized Fair Cost Value Cost Value Within One Year: U.S. Treasury and Agency Obligations $ --- $ --- $ 50,014 $ 49,983 State and Municipal Obligations 1,984 1,984 192 192 Mortgage-Backed Securities --- --- 3,278 3,311 Corporate and Other Debt Securities --- --- --- --- Total 1,984 1,984 53,484 53,486 From 1 - 5 Years: U.S. Treasury and Agency Obligations --- --- 63,235 64,519 State and Municipal Obligations 1,591 1,644 64 64 Mortgage-Backed Securities --- --- 36,375 36,562 Corporate and Other Debt Securities --- --- 7,024 7,300 Total 1,591 1,644 106,698 108,445 From 5 - 10 Years: U.S. Treasury and Agency Obligations --- --- --- --- State and Municipal Obligations 5,492 5,827 82 82 Mortgage-Backed Securities --- --- 8,020 8,085 Corporate and Other Debt Securities --- --- --- --- Total 5,492 5,827 8,102 8,167 Over 10 Years: U.S. Treasury and Agency Obligations --- --- --- --- State and Municipal Obligations 4,854 5,053 --- --- Mortgage-Backed Securities --- --- 6,616 6,693 Corporate and Other Debt Securities --- --- --- --- Mutual Funds and Equity Securities --- --- 1,798 1,854 Total 4,854 5,053 8,414 8,547 Total Securities $ 13,921 $ 14,508 $176,698 $178,645
Assets pledged to secure public and trust deposits and for other purposes totalled $114,643 and $121,146 at December 31, 1995 and 1994, respectively. NOTE 4: LOANS AND LEASES (In Thousands) Loans and leases at December 31, 1995 and 1994 consisted of the following:
1995 1994 Commercial, Financial and Agricultural $ 79,993 $ 74,455 Real Estate - Commercial 71,622 81,704 Real Estate - Residential 238,298 230,943 Real Estate - Construction 2,051 5,136 Installment Loans to Individuals 125,762 115,291 Lease Financing, Net of Unearned Income 61 24 Total Loans and Leases $517,787 $507,553
The carrying amount of net loans and leases at December 31, 1995 and 1994 was $505,681 and $495,215, respectively. The fair value of net loans and leases at December 31, 1995 and 1994 was $516,999 and $500,325, 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, except residential mortgage and credit card 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. For performing residential mortgage loans, written to secondary market standards and the credit card portfolio, fair value is estimated using quotes from secondary market sources. For other performing residential mortgage loans, fair value is estimated by discounting contractual cash flows adjusted for prepayment estimates using discount rates based on secondary market sources adjusted to reflect differences in servicing and credit costs. 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 to loans, as those prevailing at the time for comparable transactions with others. The amount of such related party loans was $5,156 at December 31, 1995 and $4,323 at December 31, 1994. During 1995 the amount of new loans and renewals extended to such related parties was $4,517 and the total of loan repayments was $3,684. The Company designates certain loans as nonaccrual 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. Loans are classified as "restructured," in compliance with SFAS No. 15, when the Company grants concessionary terms. The Company has no material commitments to make additional advances to nonaccrual or restructured loans. The following table presents the balance of nonaccrual and restructured loans and other information implicit to the interest income accounts.
1995 1994 1993 Principal Amount at December 31 $4,244 $4,197 $12,266 Gross Interest That Would Have Been Earned Under Original Terms 435 537 1,101 Interest Included in Net Income 116 162 504
NOTE 5: ALLOWANCE FOR LOAN LOSSES (In Thousands) The following summarizes the changes in the allowance for loan losses:
1995 1994 1993 Balance at Beginning of Year $12,338 $16,078 $17,328 Provision for Loan Losses 1,170 (950) 690 Recoveries 369 696 1,147 Charge-Offs (1,771) (3,486) (3,087) Balance at End of Year $12,106 $12,338 $16,078
At December 31, 1995 the recorded investment in impaired loans amounted to $2,107 for which the related allowance for loan losses was determined in accordance with SFAS No. 114, as amended. At December 31, 1995 the allowance for loan losses included $340 which represented the amount of the allowance related to $1,663 of impaired loans. There was no related allowance for the remaining $444 of impaired loans. The average recorded investment of impaired loans for 1995 was $1,327 and 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, 1995 and 1994 is presented below:
1995 1994 Bank Premises, Including Land $18,489 $18,315 Equipment, Furniture and Fixtures 12,931 12,636 Leasehold Improvements 334 334 Sub-Total 31,754 31,285 Accumulated Depreciation and Amortization (17,866) (16,695) Net Premises and Equipment $13,888 $14,590
Amounts charged to operations for depreciation and amortization aggregated $1,240, $1,476 and $1,820 in 1995, 1994 and 1993, respectively. NOTE 7: OTHER REAL ESTATE OWNED (In Thousands) Other real estate owned, net of an allowance for estimated losses, at December 31, 1995 and 1994 consisted of the following:
1995 1994 Single-Family 1 - 4 Units $ 82 $1,073 Commercial Real Estate 2,328 2,128 Construction and Land Development --- 195 Other Real Estate Owned, Net $2,410 $3,396
The following table summarizes changes in the net carrying amount of other real estate owned at December 31, 1995 and 1994:
1995 1994 Balance at Beginning of Year $3,396 $7,506 Properties Acquired Through Foreclosure 642 2,493 Adjustments for Change in Fair Value (161) (398) Sales (1,467) (6,205) Balance at End of Year $2,410 $3,396
The following summarizes the changes in the allowance for other real estate owned losses:
1995 1994 Balance at Beginning of Year $369 $1,150 Additions 161 398 Charge-Offs (160) (1,179) Balance at End of Year $370 $ 369
NOTE 8: TIME DEPOSITS (In Thousands)
Under 3 3 to 6 6 to 12 Over 12 Months Months Months Months Total Maturities of Time Certificates of $100,000 or More $34,287 $14,438 $5,566 $3,266 $57,557
The carrying value of time deposits at December 31, 1995 and 1994 was $247,438 and $198,267, respectively. The fair value of time deposits at December 31, 1995 and 1994 was $247,728 and $197,744, respectively. The fair value of time certificates of deposit 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 currently offered for deposits of similar remaining maturities. 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: 1995 1994 Balance at December 31 $14,045 $21,162 Maximum Month-End Balance 14,460 21,162 Average During the Year 12,166 6,674 Average Rate During the Year 4.97% 4.09% Rate at December 31 4.29% 5.47% Other Short-Term Borrowings: Balance at December 31 $1,252 $3,703 Maximum Month-End Balance 8,402 6,587 Average During the Year 3,689 3,163 Average Rate During the Year 5.81% 3.82% Rate at December 31 5.15% 5.20%
Securities sold under agreements to repurchase generally mature within ninety days. Federal funds purchased represent overnight transactions. Other short-term borrowings include demand notes issued to the U.S. Treasury, and short-term notes payable. The average aggregate borrowing rates were 5.16% and 4.00% for the years 1995 and 1994, respectively. NOTE 10: LONG-TERM DEBT (In Thousands) The following is a summary of the long-term debt at December 31:
1995 1994 8.125% Debentures Due 1996 $ --- $4,787 Obligation Under Capitalized Lease --- 220 Total Long-Term Debt $ --- $5,007
The 8.125% Debentures were issued on December 23, 1986 in the face amount of $5,000. The debentures were redeemable, unsecured and subordinated and, if not called, were to have matured on December 1, 1996. The indenture agreement contained certain restrictions on disposition of certain capital stock. The Company redeemed the remaining debentures on July 8, 1995. The fair value of long-term debt was determined using rates currently available to the Company for instruments with similar terms and maturities. The estimated fair value at December 31,1994 was $4,843. NOTE 11: SHAREHOLDERS' EQUITY On July 8, 1995 the Company cancelled certain cancellable mandatory stock purchase contracts originally issued on December 26, 1986. The contracts required the purchase of $5,100,000 in common stock at a price of $15.20 (as adjusted) per share not later than December 1, 1995. Prior to the cancellation, $670,000 of the cancellable mandatory stock purchase contracts had been converted into common shares of the Company. NOTE 12: REGULATORY RESTRICTIONS 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, 1995, only the Company's principal bank subsidiary, the Glens Falls National Bank and Trust Company ("GFNB") was in a position to pay dividends without prior regulatory approval. At that time, the maximum amount that could have been paid by GFNB to the Company was approximately $8.7 million. The Federal Deposit Insurance Corporation Improvement Act of 1991 (the "Act"), in addition to providing substantial additional borrowing authority to the FDIC, contained many provisions that relate to supervisory reforms, deposit insurance reform, curtailment of the "too big to fail" doctrine, risk-based deposit insurance premiums, restrictions on bank activities and consumer matters. Among the key supervisory reform provisions are: requirements for "prompt corrective action" of troubled institutions; classification of institutions based on capital levels, which will be linked to various sanctions; establishment of noncapital "tripwire" standards for safety and soundness assessments; annual on-site examinations; expanded audit requirements and accounting reforms. Measures involving capital based supervision became effective December 1992. Effective dates for other provisions vary. 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. NOTE 13: RETIREMENT PLANS (In Thousands) 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 following table sets forth the plans' funded status and amounts recognized in the Company's consolidated financial statements:
Qualified Plan Nonqualified Plan 1995 1994 1995 1994 Actuarial Present Value of Benefit Obligations: Vested Benefit Obligation $ 9,552 $ 8,796 $ 1,581 $ 604 Nonvested Benefit Obligation 241 145 6 --- Accumulated Benefit Obligation 9,793 8,941 1,587 604 Effect of Projected Future Compensation Levels 2,896 2,011 487 347 Projected Benefit Obligation 12,689 10,952 2,074 951 Plan Assets at Fair Value 13,636 12,049 --- --- Plan Assets in Excess of (Less than) Projected Benefit Obligation 947 1,097 (2,074) (951) Unrecognized Net Loss from Past Experience Different from that Assumed and Effect of Changes in Assumptions 1,113 1,302 186 (209) Unrecognized Prior Service Cost (54) (61) 1,296 837 Unrecognized Net Asset at Transition (being recognized over 15 years) (589) (678) --- --- Adjustment Required to Recognize Minimum Liability --- --- (994) (281) Prepaid (Accrued) Pension Cost $ 1,417 $ 1,660 $(1,586) $ (604)
The following table sets forth the components of the Company's net periodic pension expense:
Qualified Non-contributory Plan: 1995 1994 1993 Service Cost - Benefits Earned During the Period $ 481 $533 $495 Interest Cost on Projected Benefit Obligation 830 788 754 Actual Return on Plan Assets (2,828) (557) (912) Net Amortization and Deferral 1,759 (542) (189) Net Periodic Pension Expense $ 242 $222 $148 Supplemental Nonqualified Plan: Service Cost - Benefits Earned During the Period $ 53 $ 40 $--- Interest Cost on Projected Benefit Obligation 142 66 19 Net Amortization and Deferral 165 104 9 Net Periodic Pension Expense $ 360 $210 $ 28
1995 1994 Accumulated Postretirement Benefit Obligation: Retirees $2,794 $2,679 Fully Eligible Active Plan Participants 177 288 Other Active Plan Participants 1,570 1,175 Total Accumulated Postretirement Benefit Obligation 4,541 4,142 Unrecognized Transition Obligation (Being Recognized Over 20 Years) (2,977) (3,157) Unrecognized Net Loss from Past Experience Different from that Assumed and Effect of Changes in Assumptions (303) (98) Accrued Postretirement Benefit Cost $1,261 $ 887
Net periodic postretirement benefit cost for the years ended December 31, 1995 and 1994, included the following components:
1995 1994 Service Cost $106 $128 Interest Cost 305 304 Net Amortization and Deferral 172 203 Net Periodic Postretirement Benefit Cost $583 $635
For measurement purposes, a 10.5% annual rate of increase in the per capita cost of covered health care benefits was assumed for 1995; the rate was assumed to decrease gradually to 5.5% for 2005 and remain at that level thereafter. The health care cost trend rate assumption has a significant effect on the amounts reported. To illustrate, increasing the assumed health care cost trend rates by 1 percentage point in each year would increase the accumulated postretirement benefit obligation as of December 31, 1995 by $624 and the aggregate of the service and interest cost components of net periodic postretirement benefit cost for the year then ended by $9. The weighted-average discount rate used in determining the accumulated postretirement benefit obligation at December 31, 1995 and 1994 was 7.25% and 8.0%, respectively, and the assumed rate of increase in future compensation was 4.5% for both years. NOTE 14: 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 1995, the ESOP borrowed $1.2 million from one of the Company's subsidiary banks to purchase outstanding shares of the Company's common stock. The ESOP requires the Company to contribute the amount necessary for the ESOP to discharge its current obligations which included principal and interest payments on the note. Contributions to the ESOP amounted to $750, $750 and $600 for 1995, 1994 and 1993, respectively. As the debt is repaid, shares are released from colllateral and allocated to active employees, based on the proporation of debt and interest paid in 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 are released from collateral, the Company reports compensation expense equal to the current market price of the shares, and the shares become outstanding for earnings per share computations. The ESOP shares as of December 31, 1995 were as follows: 1995 Allocated Shares 320 Shares Released for Allocation 29 Unallocated Shares 43 Total ESOP Shares 392 Market Value of Unallocated Shares $798 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 financial statements was $81, $67 and $63 in 1995, 1994 and 1993, 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 $478, $520 and $417 for 1995, 1994 and 1993, respectively. The Company's subsidiary banks have a variety of performance based incentive compensation plans for their employees. NOTE 15: STOCK OPTION PLANS The Company has established Incentive Stock Option and Non-qualified Stock Option Plans. As amended, these programs reserve 412,432 shares of common stock (adjusted for stock splits and dividends) for issuance to key employees and provide for the granting of stock appreciation rights to key employees. 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 four percent stock dividend declared in 1995 and the four percent stock dividend declared in 1994. Stock Appreciation Rights, which were granted in tandem with 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. In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based Compensation." SFAS No. 123 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 Statement is effective for fiscal years beginning after December 15, 1995. The Company will adopt SFAS No. 123 in 1996 by providing pro forma financial disclosures. The following summarizes the Company's stock option plans. Price ranges relate to the 1995 activity.
1995 1994 1993 Options: Outstanding at January 1 ($5.34 - $14.77) 310,159 260,400 217,596 Granted ($17.63) 60,900 70,720 57,152 Exercised ($5.34 - $14.77) (107,099) (10,459) (5,921) Cancelled ($14.18) (2,080) (10,502) (8,427) Outstanding at December 31 ($5.34 - $17.63) 261,880 310,159 260,400 Exercisable at December 31 ($5.34 - $14.77) 134,744 198,795 184,514
NOTE 16: OTHER OPERATING INCOME AND OTHER OPERATING EXPENSE (In Thousands) Other operating income included in the consolidated statements of income are as follows:
1995 1994 1993 Financial Institution Bond Recovery $5,000 $ --- $ --- All Other 1,052 1,047 966 Total Other Operating Income $6,052 $1,047 $ 966
Other operating expenses included in the consolidated statements of income are as follows:
1995 1994 1993 Advertising and Promotion $ 694 $ 634 $ 646 Stationery and Printing 735 736 691 Telephone and Communications 707 733 790 Postage 989 1,018 1,031 Legal 805 508 538 Other Real Estate Owned Losses, Net 209 1,716 272 Other Real Estate Owned Expenses 215 407 922 FDIC and Other Insurance 1,147 2,004 2,116 All Other 3,588 3,170 4,339 Total Other Operating Expense $9,089 $10,926 $11,345
NOTE 17: INCOME TAXES (In Thousands) The consolidated provision for income taxes is summarized below:
1995 1994 1993 Current Tax Expense: Federal $5,650 $2,015 $ 926 State 1,064 1,070 786 Total Current Tax Expense 6,714 3,085 1,712 Deferred Tax Expense: Federal 321 (1,893) (1,399) State (49) (61) 68 Total Deferred Tax Expense (Benefit) 272 (1,954) (1,331) Total Consolidated Provision for Income Taxes $6,986 $1,131 $ 381
The consolidated provisions for income taxes were less than the amounts computed by applying the U.S. Federal Income Tax Rate of 35% for 1995 and 34% for 1994 and 1993 to pre-tax income from continuing operations as a result of the following:
1995 1994 1993 Computed Tax Expense at Statutory Rates $6,793 $4,235 $2,909 Increase (Reduction) in Income Taxes Resulting From: Change in the Beginning of the Year Balance of the Valuation Allowance for Deferred Tax Assets Allocated to Income Tax Expense --- (3,619) (2,809) Tax-Exempt Income (492) (307) (379) Nondeductible Interest Expense 74 35 41 State Taxes, Net of Federal Income Tax Benefit 659 666 564 Other Items, Net (48) 121 55 Total Consolidated Provision for Income Taxes $6,986 $1,131 $ 381
The components of deferred income tax expense (benefit) for the years ended December 31, 1995,1994 and 1993 are as follows:
1995 1994 1993 Deferred Tax Expense (Exclusive of the Effects of the Decrease in the Valuation Allowance for Deferred Tax Assets) $ 272 $ 1,665 $ 1,478 Decrease in Beginning of the Year Balance of the Valuation Allowance for Deferred Tax Assets --- (3,619) (2,809) Total Deferred Tax Expense (Benefit) $ 272 $(1,954) $(1,331)
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, 1995 and 1994 are presented below:
1995 1994 Deferred Tax Assets: Allowance for Loan Losses $4,607 $4,236 Investment Tax Credit Carryforwards --- 292 Alternative Minimum Tax Credit Carryforwards --- 899 Pension and Deferred Compensation Plans 1,251 974 Deferred Expenses 1,063 1,096 Total Gross Deferred Tax Assets 6,921 7,497 Deferred Tax Liabilities: Pension Plans 653 766 Depreciation 412 468 Deferred Income 796 858 Other 646 719 Total Gross Deferred Tax Liabilities 2,507 2,811 Net Deferred Tax Asset $4,414 $4,686
The valuation allowance for deferred tax assets as of January 1, 1994 was $3,619. The net change in the valuation allowance for the years ended December 31, 1995 and 1994 was a decrease of $0 and $3,619, respectively. Not included in net deferred tax assets above are deferred tax liabilities relating to unrealized gains on securities available for sale of $472 at December 31, 1995 and none at December 31, 1994. By December 31, 1995, the Company had fully utilized investment tax credit carryforwards for federal income tax purposes. In addition, the Company had also fully utilized alternative minimum tax credit carryforwards. NOTE 18: LEASE COMMITMENTS (In Thousands) At December 31, 1995, the Company was obligated under a number of noncancellable leases for land, buildings and equipment. Certain of these leases provide for escalation clauses and contain renewal options calling for increased rentals as the leases expire. Future minimum lease payments on operating leases at December 31, 1995 were as follows: Operating Leases 1996 $ 185 1997 154 1998 133 1999 104 2000 33 Later Years 536 Total Minimum Lease Payments $1,145 NOTE 19: 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 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 and loans sold with recourse written 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:
1995 1994 Fixed Variable Total Fixed Variable Total Commitments to Extend Credit $ --- $75,899 $75,899 $ --- $77,635 $77,635 Standby Letters of Credit --- 3,352 3,352 --- 4,533 4,533
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 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. NOTE 20: 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:
1995 1994 Carrying Fair Carrying Fair Amount Value Amount Value Securities Held-to-Maturity (Notes 1 and 3) $ 13,921 $ 14,508 $129,735 $123,519 Net Loans and Leases (Notes 1 and 4) 505,681 516,999 495,215 500,325 Time Deposits (Notes 1 and 8) 247,438 247,728 198,267 197,744 Long-Term Debt (Notes 1 and 10) --- --- 5,007 4,843
NOTE 21: SIGNIFICANT GROUP CONCENTRATIONS OF CREDIT RISK (In Thousands) Most of the Company's loans are with customers in Vermont and northeastern New York. Although the loan portfolios of the subsidiary banks are well diversified, tourism has a substantial impact on the Vermont and the northeastern New York economies. 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 22: PARENT ONLY FINANCIAL INFORMATION (In Thousands) Condensed financial information for Arrow Financial Corporation is as follows:
BALANCE SHEETS December 31, 1995 1994 ASSETS Cash in Subsidiary Banks $ 269 $ 79 Interest-Bearing Deposits with Subsidiary Banks 388 2,408 Securities Available-for-Sale 44 475 Investment in Subsidiaries at Equity 69,949 61,421 Premises and Equipment, Net 30 914 Other Assets 2,047 1,693 Total Assets $72,727 $66,990 LIABILITIES Long-Term Debt $ --- $ 4,787 Note Payable - ESOP 700 --- Other Liabilities 4,523 3,798 Total Liabilities 5,223 8,585 SHAREHOLDERS' EQUITY Common Stock 5,979 5,726 Surplus 40,938 36,102 Undivided Profits 24,296 19,149 Unallocated ESOP Shares (700) --- Valuation Allowance for Securities Available-for-Sale 1,152 (673) Treasury Stock, at Cost (4,161) (1,899) Total Shareholders' Equity 67,504 58,405 Total Liabilities and Shareholders' Equity $72,727 $66,990
STATEMENTS OF INCOME Years Ended December 31, Income: 1995 1994 1993 Dividends from Bank Subsidiaries $ 3,155 $2,075 $ 1,000 Dividends from Nonbank Subsidiaries 3,129 --- 30 Interest and Dividends on Securities Available-for-Sale 54 55 54 Other Income (Including Management Fees) 7,416 7,458 7,044 Net Gains on Securities Transactions 51 70 --- Total Income 13,805 9,658 8,128 Expense: Interest Expense 244 409 491 Salaries and Benefits 5,727 5,087 5,030 Occupancy and Equipment 969 1,015 1,020 Other Expense 1,406 1,496 1,497 Total Expense 8,346 8,007 8,038 Income Before Income Tax Benefit and Equity in Undistributed Net Income of Subsidiaries 5,459 1,651 90 Income Tax Benefit 270 448 796 Income Before Equity in Undistributed Net Income of Subsidiaries 5,729 2,099 886 Equity in Undistributed Net Income of Subsidiaries 6,695 9,226 8,747 Net Income $12,424 $11,325 $ 9,633
STATEMENTS OF CASH FLOWS Years Ended December 31, 1995 1994 1993 Operating Activities: Net Income $12,424 $11,325 $ 9,633 Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities: Undistributed Earnings of Subsidiaries (6,695) (9,226) (8,747) Depreciation and Amortization 38 41 40 Gains on the Sale of Securities Available-for-Sale (51) (70) --- Deferred Income Taxes (229) (643) (292) Changes in Other Assets and Liabilities 698 1,218 (33) Net Cash Provided by Operating Activities 6,185 2,645 601 Investing Activities: Net Decrease (Increase) in Interest-Bearing Deposits with Subsidiary Banks 2,020 (1,199) 108 Proceeds from the Sale of Securities Available-for-Sale 469 596 --- Purchases of Securities Available-for-Sale --- (680) --- Purchases of Securities Held-to-Maturity --- --- (12) Net Return of Capital from Subsidiary Banks --- 1,000 --- Sale of Fixed Assets to Subsidiaries 859 --- --- Purchase of Fixed Assets --- (23) (17) Net Cash Provided by (Used in) Investing Activities 3,348 (306) 79 Financing Activities: Net Decrease in Short-Term Borrowings --- --- (1,000) Repayment of Long-Term Debt (4,430) --- --- Common Stock Issued --- 100 843 Exercise of Stock Options 164 104 57 Purchase of Treasury Stock (1,881) (494) --- Cash Dividends Paid (3,196) (2,039) (571) Net Cash Used in Financing Activities (9,343) (2,329) (671) Net Increase in Cash and Cash Equivalents 190 10 9 Cash and Cash Equivalents at Beginning of the Year 79 69 60 Cash and Cash Equivalents at End of the Year $ 269 $ 79 $ 69 Supplemental Cash Flow Information: Interest Paid $ 277 $ 404 $ 412 Income Taxes Paid 6,908 1,537 858 Common Stock Exchanged for Short-Term Borrowings --- --- 100 Common Stock Issued to the Company's ESOP --- --- 85 Transfer of Securities Held-to-Maturity to Securities Available-for-Sale --- --- 482 Cancellation of Debentures by Exercise of Cancellable Mandatory Stock Purchase Contracts 370 200 ---
NOTE 23: DISPOSITION OF GREEN MOUNTAIN BANK BRANCHES On June 1, 1995 the Company entered into a definitive agreement with the Mascoma Savings Bank, Lebanon, New Hampshire, to sell eight branches of the Green Mountain Bank. On January 15, 1996, the Company completed the sale of these eight branches, including $40 million of loans and $101 million of deposits. On February 27, 1996, the Company entered into a definitive agreement with ALBANK FSB, an Albany, New York based bank, with Vermont operations, to sell the remaining six Green Mountain Bank branches, including $112 million of net loans and $110 million of deposits. The Company also entered into a definitive agreement with Vermont National Bank, a Vermont institution, to sell the Green Mountain Bank trust business. After completion of these sales, the Company will effectively have no remaining operations in Vermont. NOTE 24: SUMMARY OF FINANCIAL INFORMATION - UNAUDITED The following quarterly financial information for 1995 and 1994 is unaudited, but, in the opinion of management, fairly presents the earnings of the Company. Per share amounts have been adjusted for the 1995 four percent stock dividend and the 1994 four percent stock dividend.
(In Thousands, Except Per Share Amounts) 1995 Fourth Third Second First Quarter Quarter Quarter Quarter Total Interest Income $15,846 $15,433 $15,043 $14,396 Net Interest Income 9,269 8,929 8,757 8,898 Provision for Loan Losses 530 280 230 130 Net Securities Gains 23 --- --- --- Net Income 2,610 2,490 4,940 2,384 Earnings Per Share - Primary and Fully Diluted .46 .43 .87 .41 1994 Total Interest Income $13,813 $13,303 $12,832 $12,566 Net Interest Income 8,979 8,787 8,342 8,204 Provision for Loan Losses 67 108 (1,312) 187 Net Securities Losses (471) --- --- (10) Net Income 2,354 3,587 2,761 2,623 Earnings Per Share - Primary .41 .63 .48 .45 Earnings Per Share - Fully Diluted .40 .60 .46 .44
EX-21 6 Exhibit 21 Arrow Financial Corporation Subsidiaries Subsidiary % Common Stock Owned Subsidiaries of Arrow Financial Corporation: Glens Falls National Bank & Trust Co. 100 Saratoga National Bank & Trust Co. 100 Arrow Vermont Corporation 100 Subsidiaries of Arrow Vermont Corporation: Green Mountain Bank 100 EX-23 7 Exhibit 23 Arrow Financial Corporation Consent of Independent Certified Public Accountants The Board of Directors Arrow Financial Corporation We consent to incorporation by reference in the following registration statements: 1985 Non-Qualified Stock Option Plan, filed December 16, 1986 (File No. 2-98735); 1985 Incentive Stock Option Plan, filed December 16, 1986 (File No. 2-98736); 1989 Employee Stock Purchase Plan, as amended and filed May 15, 1992 (File No. 33-48225) and 1993 Long-Term Incentive Plan (File No. 33-66192) of Arrow Financial Corporation of our report dated January 19, 1995, relating to the consolidated balance sheets of Arrow Financial Corporation and subsidiaries as of December 31, 1995 and 1994, and the related consolidated statements of income, changes in shareholders' equity, and cash flows for the three-year period ended December 31, 1995, which report appears in the December 31, 1995 Annual Report on Form 10-K of Arrow Financial Corporation. Our report refers to the adoption of the provision of Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes". KPMG Peat Marwick, LLP Albany, New York March 22, 1996 EX-27 8 ARTICLE 9 FDS FOR 10-K
9 1000 YEAR DEC-31-1995 DEC-31-1995 23406 0 35100 0 178645 13921 14508 517787 12106 789790 694453 15297 12536 0 5979 0 0 61525 789790 47988 7424 5306 60718 23816 24865 35853 1170 23 29769 19410 19410 0 0 12424 2.17 2.17 8.33 4244 111 0 0 12338 1771 369 12106 12106 0 3152
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