-----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, MprXErX1NJRGnwlRCAQ5m3By6ncOct7iPpBXz3ev9dZDmDqhwPOiVi5+zgvdaDQQ e6EeYSDMe/wSSLMmhNDDZg== 0000717538-97-000006.txt : 19970329 0000717538-97-000006.hdr.sgml : 19970329 ACCESSION NUMBER: 0000717538-97-000006 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970328 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: ARROW FINANCIAL CORP CENTRAL INDEX KEY: 0000717538 STANDARD INDUSTRIAL CLASSIFICATION: NATIONAL COMMERCIAL BANKS [6021] 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: 97566785 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, 1996 Commission file number 0-12507 ARROW FINANCIAL CORPORATION (Exact name of registrant as specified in its charter) NEW YORK (State or Other Jurisdiction of Incorporation or Organization) 22-2448962 (I.R.S. Employer 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 Common stock, Par Value $1.00 Per Share Outstanding at March 13, 1997 5,659,840 State the aggregate market value of the voting stock held by non-affiliates of registrant. Aggregate market value of voting stock $137,251,000 Based upon the average of the closing bid and closing asked prices on the NASDAQ Exchange March 13, 1997 DOCUMENTS INCORPORATED BY REFERENCE Portions of Registrant's Proxy Statement for the Annual Meeting of Shareholders to be held April 30, 1997 (Part III) and the Annual Report to Shareholders (Part II, Item 8) ARROW FINANCIAL CORPORATION FORM 10-K INDEX Cautionary Statement under Federal Securities Laws PART I Item 1. Business A. General B. Lending Activities C. Supervision and Regulation D. Competition E. Statistical Disclosure (Guide 3) F. Legislative Developments G. Executive Officers of the Registrant Item 2. Properties Item 3. Legal Proceedings Item 4. Submission of Matters to a Vote of Security Holders PART II Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters Item 6. Selected Financial Data Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations A. Overview B. Results of Operations I. Net Interest Income II. Provision for Loan Losses and Allowance for Loan Losses III. Other Income IV. Other Expense V. Income Taxes C. Financial Condition I. Investment Portfolio II. Loan Portfolio a. Distribution of Loans and Leases b. Risk Elements III. Summary of Loan Loss Experience IV. Deposits ` V. Time Certificates of $100,000 or More D. Liquidity E. 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 Cautionary Statement under Federal Securities Laws: The information contained in this Annual Report on Form 10-K contains forward-looking statements that are based on management's beliefs, certain assumptions made by management and current expectations, estimates and projections about the Company's financial condition and results of operations. Words such as "expects," "believes," "should," "plans," "will," "estimates," and variations of such words and similar expressions are intended to identify such forward-looking statements. These statements are not guarantees of future performance and involve certain risks and uncertainties that are difficult to quantify or, in some cases, to identify. Therefore, actual outcomes and results may differ materially from what is expected or forecasted in such forward- looking statements. Factors that could cause or contribute to such differences include, but are not limited to, changes in economic and market conditions, including unanticipated fluctuations in interest rates, effects of state and federal regulation and risks inherent in banking operations. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. The Company undertakes no obligation to revise or update these forward-looking statements to reflect the occurrence of unanticipated events. PART I Item 1: Business A. GENERAL Arrow Financial Corporation (the "Company"), a New York corporation, was incorporated on March 21, 1983 and is registered as a bank holding company within the meaning of the Bank Holding Company Act of 1956. The Company owns two nationally chartered banks in New York, as well as several non-bank subsidiaries, the operations of which are not significant. The Company also owns an inactive bank charter in Vermont (the former Green Mountain Bank) as well as a second- tier bank holding company, also inactive, in Vermont (Arrow Vermont Corporation), both of which are in the process of being liquidated. The Company sold all of its banking operations in Vermont in 1996 in three separate transactions, the last of which was completed in September 1996. The Company owns directly or indirectly all voting stock of all its subsidiaries. The business of the Company consists primarily of the ownership, supervision and control of its bank subsidiaries. The Company provides its subsidiaries with various advisory and administrative services and coordinates the general policies and operation of the subsidiary banks. There were 302 full-time equivalent employees of the Company and the subsidiary banks at December 31, 1996.
SUBSIDIARY BANKS: GLENS (Dollars in Thousands) FALLS SARATOGA NATIONAL NATIONAL BANK & BANK & TRUST CO. TRUST CO. ("GFNB") ("SNB") Total Assets at Year-End $550,706 $76,115 Trust Assets Under Management at Year-End (Not Included in Total Assets) $432,143 $ 2,420 Date Organized 1851 1988 Employees 170 20 State of Headquarters New York New York Offices 15 2 Counties of Operation Warren Saratoga Washington Saratoga Essex Main Office 50 Glen St. 137 So. Broadway Glens Falls, Saratoga, New York New York
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. Historically, the Company has sold a portion of its residential real estate loan originations into the secondary market, primarily to Freddie Mac and state housing agencies, while retaining the servicing rights. Loan sales into the secondary market, have diminished in the past three years, however, as the banks have sought to increase their own portfolios. In addition to interest earned on loans, the banks receive facility fees for various types of commercial and industrial credits, and commitment fees for extension of letters of credit and certain types of loans. Generally, the Company continues to implement conservative lending strategies, 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 19 to the Consolidated Financial Statements in Part II Item 8 of this report. Except for credit card loans, 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 summarizes statutory or regulatory provisions, it is qualified in its entirety by reference to the particular law or regulation. Any change in applicable law or regulation may have a material effect on the business and prospects of the Company and the banks. The Company is a legal entity separate and distinct from its subsidiaries. Most of the Company's revenues, on a parent company-only basis, result from management fees, dividends and undistributed earnings from the subsidiary banks. The right of the Company, and consequently the right of creditors and shareholders of the Company, to participate in any distribution of the assets or earnings of the banks through the payment of such dividends or otherwise is necessarily subject to the prior claims of creditors of the banks, except to the extent that claims of the Company in its capacity as a creditor of the banks also may be recognized. Moreover, there are various legal and regulatory limitations applicable to the payment of dividends to the Company by its subsidiaries as well as the payment of dividends by the Company to its shareholders. The ability of the Company and the banks to pay dividends in the future is, and is expected to continue to be, influenced by regulatory policies and capital guidelines. The Company is a registered bank holding company within the meaning of the Bank Holding Company Act of 1956 (BHC Act) and is subject to regulation by the Board of Governors of the Federal Reserve System (Federal Reserve Board). Additionally, as a "bank holding company" under New York State Law, the Company is subject to regulation by the New York State Banking Department. The subsidiary banks are nationally chartered banks and are subject to the supervision of and examination by the Office of the Comptroller of the Currency ("OCC"). The banks are members of the Federal Reserve System and the deposits of each subsidiary bank are insured by the Federal Deposit Insurance Corporation ("FDIC"). The BHC Act prohibits the Company, with certain exceptions, from engaging, directly or indirectly, in non-bank activities and restricts loans by the banks to the Company or other 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 is the risk-based capital guidelines, which assign risk weightings to all assets and certain off-balance sheet items and establish an 8% minimum ratio of qualified total capital to the aggregate dollar amount of risk-weighted assets (which is almost always less than the dollar amount of such assets without risk weighting). At least half of total capital must consist of "Tier 1" capital, which comprises common equity, retained earnings and a limited amount of permanent preferred stock, less goodwill. Up to half of total capital may consist of so-called "Tier 2" capital, comprising a limited amount of subordinated debt, other preferred stock, certain other instruments and a limited amount of the allowance for loan losses. The Federal Reserve Board's other 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 (not risk-weighted). For top-rated holding companies, the minimum leverage ratio is 3%, but lower-rated companies may be required to meet substantially greater minimum ratios. Each subsidiary bank is subject to similar capital requirements adopted by its primary federal regulator. The year-end 1996 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 its subsidiary banks, offer substantive equivalents of transaction accounts, credit cards and various other loan and financial products. E. STATISTICAL DISCLOSURE Statistical disclosure required by Securities Act Guide 3 to be set forth herein is found in 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, Congress enacted the Riegle-Neal Interstate Banking and Branching Efficiency Act. Under the Act, as of September 29, 1995, bank holding companies were authorized as a matter of federal law to acquire banks located in any of the 50 states, notwithstanding any state laws to the contrary, provided all required regulatory and other approvals are obtained. Also, under the Act, effective June 1, 1997, banks headquartered in any state 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 permitted 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 1995, the federal bank regulatory authorities promulgated a set of revised regulations addressing the responsibilities of banking organizations under the Community Reinvestment Act ("CRA"). The revised regulations place additional emphasis on the actual experience of a bank in making loans in low- and moderate-income areas within its service area as a key determinant in evaluation of the bank's compliance with the statute. As in the prior regulations, bank regulators are authorized to bring enforcement actions against banks under the CRA only in the context of bank expansion or acquisition transactions. In 1991, the Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA") was enacted. Among other things, FDICIA requires the federal banking regulators to take prompt corrective action with respect to depository institutions that do not meet minimum capital requirements. FDICIA established five capital classifications for banking institutions, the highest being "well capitalized." Under regulations adopted by the federal bank regulators, a banking institution is considered "well capitalized" if it has a total risk-adjusted capital ratio of 10% or greater, a Tier 1 risk-adjusted capital ratio of 6% or greater and a leverage ratio of 5% or greater and is not subject to any regulatory order or written directive regarding capital maintenance. The Company and 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. For the Company, these requirements became effective for Glens Falls National Bank and Trust Company beginning in 1996. The FDIC levies assessments on various deposit obligations of the Company's banking subsidiaries. During 1995, the FDIC reduced the premium paid by the best-rated banks (including all the Company's subsidiary banks) from $.23 per $100 of insured deposits to $.04. In 1996, the FDIC insurance premium was further reduced to a flat charge of $2 thousand per year for the highest-rated banks, including all the Company's subsidiary banks. In 1996, Congress enacted the Deposit Insurance Funds Act, under which deposits insured by the Bank Insurance Fund ("BIF") are subject to assessment for payment on the Financing Corporation ("FICO") bond obligation at 1/5 the rate of the Savings Association Insurance Fund ("SAIF") assessable deposits. Accordingly, for 1997, BIF-assessable deposits (like the Company's) will be assessed an additional 1.3 cents per $100 of insured deposits. Banks and bank holding companies were also significantly affected by the Financial Institutions Reform, Recovery and Enforcement Act of 1989 ("FIRREA"). FIRREA mandated public disclosure by commercial banks of their Community Reinvestment Act ratings and mortgage lending records and imposed cross-liability on any insured financial institution which is 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. 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 62 Chairman and CEO since 1990. Mr. Massiano retired as CEO on January 1, 1997. Mr. Massiano has been with the Company since 1956. Thomas L. Hoy 48 President and CEO since January 1, 1997 and President and COO of Glens Falls National Bank since 1995. Mr. Hoy was Executive Vice President of Glens Falls National Bank prior to 1995. Mr. Hoy has been with the Company since 1974. John J. Murphy 45 Executive Vice President, Treasurer and CFO since 1993. Mr. Murphy has served as Senior Vice President, Treasurer and CFO of the Company since 1983. Mr. Murphy has been with the Company since 1973. Gerard R. Bilodeau 49 Senior Vice President and Secretary since 1994. Mr. Bilodeau was Vice President and Secretary from 1993 to 1994 and was Director of Personnel prior to 1993. Mr. Bilodeau has been with the Company since 1969.
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 and leases one, at market rates. Saratoga National Bank owns both of its offices. The Company continues to own the building in Rutland, Vermont, that served as headquarters for the Company's Vermont operations prior to the divestiture of those operations in 1996. The building was held for sale at December 31, 1996. Rental costs of premises did not exceed 5% of operating costs in 1996. In the opinion of management of the Company, the physical properties of the Company and the subsidiary banks are suitable and adequate. Item 3: Legal Proceedings The Company is not the subject of any material pending legal proceedings, other than ordinary routine litigation occurring in the normal course of its business. The Company's subsidiary banks are the subjects of or parties to various legal claims which arise in the normal course of their business. For example, from time to time, the banks encounter 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 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 1996. 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 listed 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 a 1996 ten percent stock dividend and a 1995 four percent stock dividend.
Market Price Cash (Bid) Dividends High Low Declared 1995 1st Quarter $14.375 $13.500 $.114 2nd Quarter 14.000 12.750 .123 3rd Quarter 15.625 13.125 .131 4th Quarter 17.250 15.375 .145 1996 1st Quarter $18.375 $15.000 $.155 2nd Quarter 21.000 18.625 .155 3rd Quarter 20.750 17.750 .155 4th Quarter 23.750 20.750 .200
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 2,653 holders of record of common stock at December 31, 1996. Item 6: Selected Financial Data
FIVE YEAR SUMMARY OF SELECTED DATA Arrow Financial Corporation and Subsidiaries (Dollars In Thousands, Except Per Share Data) 1996 1995 1994 1993 1992 Consolidated Statements of Income Data: Interest and Dividend Income $54,875 $60,718 $52,514 $51,836 $57,829 Less: Interest Expense 21,826 24,865 18,202 19,583 28,399 Net Interest Income 33,049 35,853 34,312 32,253 29,430 Less: Provision for Loan Losses 896 1,170 (950) 690 1,677 Net Interest Income After Provision for Loan Losses 32,153 34,683 35,262 31,563 27,753 Other Income 23,804 14,473 9,049 9,086 8,606 Net Gains (Losses) on Securities Transactions (101) 23 (481) 26 15 Less: Other Expense 24,774 29,769 31,374 32,118 32,153 Income Before Income Taxes, Extra- ordinary Item and Cumulative Effect of Accounting Change 31,082 19,410 12,456 8,557 4,221 Provision for Income Taxes 10,822 6,986 1,131 381 1,331 Income Before Extraordinary Item & Cumulative Effect of Accounting Change 20,260 12,424 11,325 8,176 2,890 Extraordinary Item: Utilization of Net Operating Loss Carryforward --- --- --- --- 811 Cumulative Effect of a Change in Accounting for Income Taxes --- --- --- 1,457 --- Net Income $20,260 $12,424 $11,325 $ 9,633 $ 3,701 Primary Earnings Per Share: Income Before Extraordinary Item and Accounting Change $ 3.40 $ 1.98 $ 1.79 $ 1.31 $ .48 Extraordinary Item and Accounting Change --- --- --- .23 .12 Net Income $ 3.40 $ 1.98 $ 1.79 $ 1.54 $ .60 Fully Diluted Earnings Per Share: Income Before Extraordinary Item and Accounting Change $ 3.39 $ 1.97 $ 1.73 $ 1.31 $ .48 Extraordinary Item and Accounting Change --- --- --- .23 .12 Net Income $ 3.39 $ 1.97 $ 1.73 $ 1.54 $ .60 Cash Dividends $ .66 $ .51 $ .33 $ .09 $ --- Book Value 12.90 10.91 9.27 7.95 6.43 Consolidated Balance Sheet Data: Total Assets $652,603 $789,790 $746,431 $733,442 $722,415 Securities Available-for-Sale 171,743 178,645 53,868 55,892 55,598 Securities Held-to-Maturity 30,876 13,921 129,735 125,832 97,305 Loans and Leases, Net of Unearned Income 393,511 517,787 507,553 502,784 492,916 Nonperforming Assets 2,754 6,765 7,825 20,136 29,669 Deposits 541,747 694,453 650,485 659,427 657,875 Other Borrowed Funds 22,706 15,297 24,865 12,487 15,162 Long-Term Debt --- --- 5,007 5,289 5,371 Shareholders' Equity 74,296 67,504 58,405 50,069 39,735 Selected Key Ratios: Return on Average Assets 2.86% 1.60% 1.52% 1.33% .50% Return on Average Equity 28.78 19.45 20.79 21.03 10.10 Dividend Payout 19.47 25.89 19.08 5.84 --- Average Equity to Average Assets 9.95 8.22 7.34 6.32 4.97 Per share amounts have been adjusted for the 1996 ten percent and the 1995, 1994, and 1993 four percent stock dividends.
Item 7: Management's Discussion and Analysis of Financial Condition and Results of Operations The following discussion and analysis focuses on and reviews the Company's results of operations for each of the years in the three-year period ended December 31, 1996 and the financial condition of the Company as of December 31, 1996 and 1995. Per share amounts have been restated to reflect the ten percent stock dividend paid in November 1996 and the four percent stock dividend paid in November 1995. 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 $20.3 million for 1996, compared to net income of $12.4 million for 1995. Primary earnings per share were $3.40 and $1.98 for 1996 and 1995, respectively. Book value per share was $12.90 at December 31, 1996, an increase of $1.99, or 18.2%, from December 31, 1995. For 1996, cash dividends per share amounted to 66.4 cents, an increase of 15.1 cents or 29.4%, from cash dividends paid in 1995. The following analysis adjusts net income for nonrecurring items to arrive at a comparative presentation of the Company's core earnings:
SUMMARY OF CORE EARNINGS (In Thousands, Except Per Share Data) 1996 1995 Net Income, as Reported $20,260 $12,424 Adjustments, Net of Tax: Divestiture of Vermont Banking Operations (10,267) --- Insurance Settlement --- (3,250) OREO Transactions 174 136 Severance Benefits --- 388 Net Securities Transactions 57 (12) Other (323) (218) Core Net Income $ 9,901 $ 9,468 Core Primary Earnings per Share $ 1.66 $ 1.51
The company's core earnings for 1996 amounted to $9.9 million, an increase of $433 thousand from core earnings of $9.5 million for 1995. As thus adjusted, core earnings per share were $1.66 and $1.51, for the two respective years, representing an increase of 9.9%. During 1996, in three separate transactions, the Company completed the divestiture of its Vermont banking operations realizing an after tax gain of $10.3 million. The other major nonrecurring income item in the past two years was the Company's receipt in May of 1995 of a $5.0 million pre-tax settlement from its financial institution bond company on a claim for losses suffered in earlier periods. The core earnings analysis has also been adjusted for securities sale transactions, severance benefits for senior officers of Green Mountain Bank, sales of other real estate owned, and other nonrecurring items. Nonperforming assets amounted to $2.8 million at December 31, 1996, down from $6.8 million at December 31, 1995. The reduction was primarily attributable to the disposition of OREO and nonperforming loans as part of the sale of the Vermont banking operations in 1996. The allowance for loan losses was $5.6 million at December 31, 1996, which represented 213% of the amount of nonperforming loans. Divestiture of Vermont Operations During 1996, in three separate transactions, the Company completed the divestiture of its Vermont subsidiary, Green Mountain Bank ("GMB"). In January, the Company sold eight branches of GMB, with related deposits and loans, to Mascoma Savings Bank, Lebanon, NH. In August, the Company sold GMB's trust business to Vermont National Bank, Brattleboro, VT. In September, the Company sold the remaining branches of GMB, with related deposits and loans, to ALBANK, FSB, Albany, NY. The Company did not sell the building which served as GMB's main office in Rutland, Vermont, which was being held for sale at December 31, 1996. Total loans and deposits transferred in these sales amounted to approximately $148 million and $208 million, respectively. These and other changes are more fully described in the following analysis of the results of operations and changes in financial condition. B. RESULTS OF OPERATIONS The following analysis of net interest income, the provision for loan losses, noninterest income, noninterest expense and income taxes, presents the factors that are primarily responsible for the Company's results of operations for 1996 and the prior two years. I. NET INTEREST INCOME (Fully Taxable Basis) Net interest income represents the difference between interest earned on loans securities and other interest-earning assets and interest paid on deposits and other sources of funds. Changes in net interest income result from changes in the level and mix of earning assets and sources of funds (volume) and changes in the yields earned and costs paid (rate). Net interest margin is the ratio of net interest income to average earning assets. Net interest income may also be described as the product of earning assets and the net interest margin.
COMPARISON OF NET INTEREST INCOME (Dollars In Thousands) (Fully Taxable Basis) Years Ended December 31, Change From Prior Year 1996 1995 1994 1996 1995 Amount Percent Amount Percent Interest Income $55,517 $61,411 $52,985 $(5,894) (9.6)% $ 8,426 15.9% Interest Expense 21,826 24,865 18,202 (3,039) (12.2) 6,663 36.6 Net Interest Income $33,691 $36,546 $34,783 $(2,855) (7.8) $ 1,763 5.1
On a tax-equivalent basis, net interest income was $33.7 million in 1996, a decrease of $2.9 million or, 7.8%, from $36.5 million in 1995. The $2.9 million decrease in net interest income was, for the most part, attributable to the decrease in average earning assets resulting from divestiture during the year of the Vermont operations. ANALYSIS OF CHANGES IN NET INTEREST INCOME The following table presents net interest income components on a tax-equivalent basis and reflects changes between periods attributable to movement in either the average daily balances or average rates for both earning assets and interest-bearing liabilities. Changes attributable to both volume and rate have been allocated proportionately between the categories.
CHANGE IN NET INTEREST INCOME (In Thousands) (Fully Taxable Basis)(Unaudited) 1996 to 1995 Change in Net Interest Income Due to: Volume Rate Total Interest and Dividend Income: Federal Funds Sold $ (560) $ (105) $ (665) Securities Available-for-Sale 6,882 199 7,081 Securities Held-to-Maturity: U.S. Treasury and Other Governmental Agencies (3,108) --- (3,108) State and Municipal Obligations 279 (38) 241 Mortgage-Backed Securities (3,366) 306 (3,060) Other Securities (486) --- (486) Total Securities Held-to-Maturity (6,681) 268 (6,413) Loans (4,928) (969) (5,897) Total Interest and Dividend Income (5,287) (607) (5,894) Interest Expense: Deposits: N.O.W./Super N.O.W. (244) 56 (188) Regular Savings and M.M.D.A. (1,298) (272) (1,570) Time Certificates of $100,000 or More 657 (220) 437 Other Time Deposits (1,543) (17) (1,560) Total Deposits (2,428) (453) (2,881) Short-Term Borrowings 122 (50) 72 Long-Term Debt (230) --- (230) Total Interest Expense (2,536) (503) (3,039) Net Interest Income $(2,751) $ (104) $(2,855)
1995 to 1994 Change in Net Interest Income Due to: Volume Rate Total Interest and Dividend Income: Federal Funds Sold $ 521 $ 285 $ 806 Securities Available-for-Sale 334 823 1,157 Securities Held-to-Maturity: U.S. Treasury and Other Governmental Agencies (372) 75 (297) State and Municipal Obligations 548 45 593 Mortgage-Backed Securities 233 87 320 Other Securities 282 11 293 Total Securities Held-to-Maturity 691 218 909 Loans 956 4,598 5,554 Total Interest and Dividend Income 2,502 5,924 8,426 Interest Expense: Deposits: N.O.W./Super N.O.W. 202 1,279 1,481 Regular Savings and M.M.D.A. (1,917) 847 (1,070) Time Certificates of $100,000 or More 2,158 442 2,600 Other Time Deposits 1,121 2,319 3,440 Total Deposits 1,564 4,887 6,451 Short-Term Borrowings 288 137 425 Long-Term Debt (230) 17 (213) Total Interest Expense 1,622 5,041 6,663 Net Interest Income $ 880 $ 883 $1,763
The following table reflects the components of the Company's net interest income, setting forth, for years ended December 31, 1996, 1995 and 1994 (I) average balances of 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 1996 and 1995 and 34% for 1994) (Dollars In Thousands) (Unaudited)
Years Ended December 31, 1996 Interest Rate Average Income/ Earned/ Balance Expense Paid Federal Funds Sold $ 12,150 $ 642 5.28% Securities Available- for-Sale (1) 173,783 11,105 6.39 Securities Held-to-Maturity: U.S. Treasury and Governmental Agencies --- --- --- State and Municipal 16,700 1,365 8.17 Mortgage-Backed Securities 575 40 6.96 Other Securities --- --- --- Total Securities Held- to-Maturity 17,275 1,405 8.13 Loans & Leases (Net of Unearned Income) 459,946 42,365 9.21 Total Earning Assets 663,154 55,517 8.37 Allowance For Loan Losses (10,102) Cash and Due From Banks 25,303 Other Assets 28,975 Total Assets $707,330 Deposits: N.O.W./Super N.O.W. $131,438 3,787 2.88 Savings/M.M.D.A. 157,892 4,617 2.92 Time Certificates of $100,000 or More 79,996 4,198 5.25 Other Time Deposits 156,236 8,333 5.33 Total Interest-Bearing Deposits 525,562 20,935 3.98 Short-Term Borrowings 18,524 891 4.81 Long-Term Debt. --- --- --- Total Interest- Bearing Funds 544,086 21,826 4.01 Demand Deposits 77,479 Other Liabilities 15,374 Total Liabilities 636,939 Shareholders' Equity 70,391 Total Liabilities and Shareholders' Equity $707,330 Net Interest Income (Fully Taxable Basis) 33,691 Reversal of Tax Equivalent Adjustment (642) Net Interest Income $33,049 Net Interest Spread 4.36% Net Interest Margin 5.08% (1) Yields do not give effect to changes in fair value that are reflected as a component of shareholders' equity.
Years Ended December 31, 1995 Interest Rate Average Income/ Earned/ Balance Expense Paid Federal Funds Sold $ 22,596 $ 1,307 5.78% Securities Available- for-Sale (1) 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% (1) Yields do not give effect to changes in fair value that are reflected as a component of shareholders' equity.
Years Ended December 31, 1994 Interest Rate Average Income/ Earned/ Balance Expense Paid Federal Funds Sold $ 12,490 $ 501 4.01% Securities Available- for-Sale (1) 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% (1) Yields do not give effect to changes in fair value that are reflected as a component of shareholders' equity.
CHANGES IN NET INTEREST INCOME DUE TO RATE YIELD ANALYSIS December 31, 1996 1995 1994 Yield on Earning Assets 8.37% 8.43% 7.62% Cost of Interest-Bearing Liabilities 4.01 4.06 3.07 Net Interest Spread 4.36% 4.37% 4.55% Net Interest Margin 5.08% 5.02% 5.01%
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 performance of nonperforming loans. The Federal Reserve Board attempts to influence prevailing federal funds and prime interest rates by changing the Federal Reserve Bank discount rate. The following chart presents recent changes to the discount rate:
Federal Reserve Bank's Discount Rate Changes 1992 - 1996 Date New Rate Old Rate January 31, 1996 5.00% 5.25% February 1, 1995 5.25 4.75 November 15, 1994 4.75 4.00 August 16, 1994 4.00 3.50 May 17, 1994 3.50 3.00 July 2, 1992 3.00 3.50
During 1996, the Company experienced minimal impact on net interest income resulting from changes in interest rates. Throughout 1996, interest rates remained quite stable, largely due to the influence of the Federal Reserve Board's control of the federal discount rate, which changed only once at the beginning of the year. At that time the discount rate decreased 25 basis points to 5.00%. 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 at different rates and the pricing on some products does not change 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 in 1995, the Company experienced an overall beneficial impact from generally rising interest rates due to the fact that average interest-earning assets increased more rapidly than average 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. A discussion of the impact on net interest income resulting from changes in interest rates vis a vis the repricing patterns of the Company's interest-bearing assets and liabilities is included later in this report under Item 7.E. "Interest Rate Risk." During 1996 and 1995, the Company received certain payments on restructured loans in the Vermont portfolio that had not been factored into the effective rate on those loans. The payments, which were recorded as interest income, have been included in the yields in the table above. These payments increased the loan yields by seven and four basis points for the two respective years. CHANGES IN NET INTEREST INCOME DUE TO VOLUME
AVERAGE BALANCES (Dollars in Thousands) $ Change % Change 1996 1995 1994 1996 1995 1996 1995 Earning Assets $663,154 $728,707 $694,946 $(65,553) $33,761 (9.0)% 4.9% Interest-Bearing Liabilities 544,086 612,480 592,414 (68,394) 20,066 (11.2) 3.4 Demand Deposits 77,479 88,961 87,715 (11,482) 1,246 (12.9) 1.4 Total Assets 707,330 777,429 742,636 (70,099) 34,793 (9.0) 4.7 Earning Assets to Total Assets 93.75% 93.73% 93.58% .02% .15% 0.0 0.2
In general, changes in the volume of earning assets or paying liabilities 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 1996, nearly all of the $2.9 million decrease in net interest income was attributable to the change in volume. The decrease was attributable to the divestiture of the Vermont banking operations during 1996. Increases in the volume of loans and deposits, as well as yields and costs by type, for the New York banks are discussed later in this report under Item 7.C. "Financial Condition." In summary, the New York banks experienced significant growth during 1996, with some shifting of emphasis in the loan portfolio from commercial to consumer loans. There was relatively little change in the mix of deposit products from 1995 to 1996. 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). II. PROVISION FOR LOAN LOSSES AND ALLOWANCE FOR LOAN LOSSES Through the provision for loan losses, an allowance (reserve) is maintained for estimated loan losses. Actual loan losses are charged against this allowance when they are identified. In evaluating the adequacy of the allowance for loan losses, management considers various risk factors influencing asset quality. The analysis is performed on a loan by loan basis for impaired and large balance loans, and by portfolio type for smaller balance homogeneous loans. This analysis is based on judgments and estimates and may change in response to economic developments or other conditions that may influence borrowers' economic outlook. The provision for loan losses is largely influenced by the level of nonperforming loans, the expected future levels of nonperforming loans and by the level of loans actually charged-off against the allowance for loan losses during the year. At December 31, 1996, nonperforming loans amounted to $2.6 million, a decrease of 39.9% from the balance at December 31, 1995. The decrease is primarily attributable to nonperforming loans transferred in the divestiture of the Vermont banking operations during 1996. The level of nonperforming loans for the New York based banks was virtually unchanged from 1995 to 1996. During 1996, loan losses charged against the reserve, net of recoveries, were $580 thousand, or .13% of average loans for the period. However, the most significant reduction to the allowance for loan losses was the amount of the reserve attributable to loans transferred in the divestiture of the Vermont banking operations of $6.8 million. These reductions in the allowance for loan losses were offset in part by a provision for loan losses of $896 thousand, or .19% of average loans for the year. At December 31, 1996 the allowance for loan losses was $5.6 million. The allowance for loan losses was 213% of the amount of nonperforming loans at that date. During 1995, nonperforming assets continued the steady decline begun in 1991. The primary portion of the decrease in nonperforming assets in 1995 came from the sale of OREO. Nonaccrual loans increased $626 thousand or 17.3% from the year-end 1994 balance. The increase in nonaccrual loans was due primarily to the aggregate borrowing of one large commercial borrower, which was placed on nonaccrual status in 1995. That loan was accounted for under SFAS No. 114 and was being carried at its estimated fair value. Loans reported as troubled debt restructures at December 31, 1994, were classified as performing in 1995. Net loan losses for 1995 were $1.4 million. These losses compare to net loan losses of $2.8 million, $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. The provision for loan losses in 1994 was actually a credit to the consolidated statement of income resulting in a reduction in the allowance for loan losses. During the second quarter of 1994, with nonperforming assets at significantly reduced levels and a substantial sale of OREO having been completed, the Company reduced the allowance for loan losses by $1.5 million. This reduction was effected by means of a credit to the provision for loan losses. As a result, for the twelve month period ended December 31, 1994, the Company's net provision for loan losses was a benefit $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.
SUMMARY OF THE ALLOWANCE AND PROVISION FOR LOAN LOSSES (Dollars In Thousands) (Loans and Leases, Net of Unearned Income) Years-Ended December 31, 1996 1995 1994 1993 1992 Loans and Leases at End of Period $393,511 $517,787 $507,553 $502,784 $492,916 Average Loans and Leases 459,946 513,266 502,224 489,326 516,711 Total Assets at End of Period 652,603 789,790 746,431 733,442 722,415 Nonperforming Assets: Nonaccrual Loans: Construction and Land Development $ --- $ 104 $ 327 $ 2,534 $ 6,149 Commercial Real Estate 83 1,299 1,050 2,649 7,986 Commercial Loans 1,487 1,979 1,017 2,596 4,168 Other 727 862 1,224 2,082 3,171 Total Nonaccrual Loans 2,297 4,244 3,618 9,861 21,474 Loans Past Due 90 or More Days and Still Accruing Interest 321 111 231 364 1,486 Restructured Loans in Compliance with Modified Terms --- --- 580 2,405 1,161 Total Nonperforming Loans 2,618 4,355 4,429 12,630 24,121 Other Real Estate Owned 136 2,410 3,396 7,506 5,548 Total Nonperforming Assets $ 2,754 $ 6,765 $ 7,825 $ 20,136 $ 29,669 Allowance for Loan Losses: Balance at Beginning of Period $ 12,106 $ 12,338 $ 16,078 $ 17,328 $ 20,387 Transfer with Loan Sales (6,841) --- --- --- --- Loans Charged-off: Commercial, Financial and Agricultural (185) (579) (997) (973) (2,283) Real Estate - Commercial (104) (369) (689) (1,106) (645) Real Estate - Construction (2) (101) (1,181) (377) (2,015) Real Estate - Residential (57) (160) (143) (151) (323) Installment Loans to Individuals (598) (562) (476) (480) (820) Lease Financing Receivables -- -- -- -- (9) Total Loans Charged-off (946) (1,771) (3,486) (3,087) (6,095) Recoveries of Loans Previously Charged-off: Commercial, Financial and Agricultural 84 76 260 694 724 Real Estate - Commercial 48 104 35 75 48 Real Estate - Construction --- 10 68 55 327 Real Estate - Residential 12 8 143 37 22 Installment Loans to Individuals 222 171 188 285 232 Lease Financing Receivables -- -- 2 1 6 Total Recoveries of Loans Previously Charged-off 366 369 696 1,147 1,359 Net Loans Charged-off (580) (1,402) (2,790) (1,940) (4,736) Provision for Loan Losses Charged to Expense 896 1,170 (950) 690 1,677 Balance at End of Period $ 5,581 $ 12,106 $ 12,338 $ 16,078 $ 17,328 Nonperforming Asset Ratio Analysis: Net Loans Charged-off as a Percentage of Average Loans .13% .27% .56 % .40% .92% Provision for Loan Losses as a Percentage of Average Loans .19 .23 (.19) .14 .32 Allowance for Loan Losses as a Percentage of Period-end Loans 1.42 2.34 2.43 3.20 3.52 Allowance for Loan Losses as a Percentage of Nonperforming Loans 213.18 277.98 278.57 127.30 71.84 Nonperforming Loans as a Percentage of Period-end Loans .67 .84 .87 2.51 4.89 Nonperforming Assets as a Percentage of Period-end Total Assets .42 .86 1.05 2.75 4.11
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 securities available-for-sale.
ANALYSIS OF OTHER INCOME (Dollars In Thousands) Change December 31, Amount Percent 1996 1995 1994 1996 1995 1996 1995 Income from Fiduciary Activities $ 3,458 $ 3,752 $3,657 $ (294) $ 95 (7.8)% 2.6% Fees for Other Services 3,959 4,669 4,345 (710) 324 (15.2) 7.5 Net Securities Gains (Losses) (101) 23 (481) (124) 504 --- --- Net Gain on Divestiture of Vermont Operations 15,330 --- --- 15,330 --- --- --- Other Operating Income 1,057 6,052 1,047 (4,995) 5,005 (82.5) 478.0 Total Other Income $23,703 $14,496 $8,568 $ 9,207 $5,928 63.5 69.2
Total other income for 1996 was $23.7 million as compared to $14.5 million for 1995. Without regard to nonrecurring items included in other income for the two years, specifically the divestiture of Vermont operations in 1996, the financial institution bond recovery in 1995 and securities sale transactions for both years, other income was $8.5 million for 1996, compared to $9.5 million in 1995, a decrease of 10.5%. As thus adjusted, other income as a percentage of average assets was 1.20% in 1996, virtually the same as in 1995. During 1996, the Company completed the divestiture of its Vermont banking operations. The pre-tax gain of $15.3 million is net of recording the remaining assets and liabilities at fair value less estimated costs to sell. The major remaining asset, which at December 31, 1996, was held for sale, was the building in Rutland, Vermont, which was the former main office of GMB. Principal remaining liabilities included pension and post-retirement obligations of GMB and amounts reserved for costs and expenses of liquidating GMB's charter. In 1995, the Company received a $5.0 million payment from the Company's financial institution bond carrier, in settlement of a lawsuit filed in 1994 for losses suffered in earlier periods, covered under the Company's policy. During 1996, the Company recognized net losses of $101 thousand on the sale of $51.1 million of securities classified as available-for-sale. Most of the sales were made for the purpose of extending the term of the securities at higher yields. During 1995, the Company recognized net gains of $23 thousand on the sale of $4.2 million of available-for-sale securities. During 1994, the Company recognized net securities losses of $481 thousand on the sale of $16.5 million of available-for-sale securities. Income from fiduciary activities for 1996 was $3.5 million, a decrease of $294 thousand, or 7.8% from 1995. On August 31, 1996, the Company sold its Vermont trust business as part of the divestiture of Vermont operations. In 1995, the Vermont trust business represented approximately 42% of the Company's fiduciary income for the year of $3.8 million. During 1996, the New York based trust business generated $2.4 million in income, an increase of $232 thousand, or 10.6%, from 1995. The increase was attributable to a $35.3 million increase in assets under management, which were $434.6 million at December 31, 1996. Fees for other services include deposit service charges, safe deposit box fees, credit card merchant processing fees, and servicing fees on loans sold with servicing retained by the Company. These fees amounted to $4.0 million for 1996, a decrease of $710 thousand, or 15.2% from 1995, again reflecting the disposition of the Vermont operations during 1996. For the New York based operations, these fees amounted to $3.4 million for both years. 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 amounted to $1.1 million for both 1996 and 1995. Total other income for 1995 amounted to $14.5 million, a $5.9 million increase from 1994. The increase was primarily attributable to a $5.0 million payment received from the Company's financial institution bond carrier. Exclusive of the bond recovery and net securities transactions, total other income in 1995 increased $424 thousand, or 4.7%, above the 1994 level. As adjusted, the ratio of total other income to average assets was 1.22% for both years. Fees for other services to customers 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 credit card merchant processing income. Other operating income in 1995 was virtually unchanged from 1994. 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 1996 1995 1994 1996 1995 1996 1995 Salaries and Benefits $14,971 $16,710 $16,204 $(1,739) $ 506 (10.4)% 3.1 % Net Occupancy Expense 1,790 2,040 2,168 (250) (128) (12.3) (5.9) Furniture and Equipment 1,677 1,930 2,076 (253) (146) (13.1) (7.0) Other Operating Expense 6,336 9,089 10,926 (2,753) (1,837) (30.3) (16.8) Total Other Expense $24,774 $29,769 $31,374$ (4,995) $(1,605) (16.8) (5.1)
Other expense for 1996 was $24.8 million, a decrease of $5.0 million, or 16.8%, from 1995. All four major categories of other expense decreased as a result of the divestiture of the Vermont banking operations. Salaries and benefits for 1996 was $15.0 million, a decrease of $1.7 million, or 10.4%, from 1995. Net occupancy expense and furniture and equipment expense both decreased approximately $250 thousand from 1995, or 12.3% and 13.1%, respectively. ` Other operating expense for 1996 was $6.3 million, a decrease of $2.8 million, or 30.3%, from 1995. In addition to the savings resulting from the divestiture of the Vermont operations, the Company experienced decreased costs for FDIC insurance premiums, legal expenses, expenses related to problem loans and in costs to maintain and dispose of OREO. In mid-1995, the FDIC reduced the insurance premiums for well- capitalized banks, such as the Company's subsidiary banks, from 23 cents per $100 of insured deposits to a flat fee of two thousand dollars per year. Other expense for 1995 amounted to $29.8 million, which compared to $31.4 million for 1994, a decrease of $1.6 million, or 5.1%. An increase in salaries and benefits in 1995 was more than offset by reduced expenses for net occupancy expense, furniture and equipment expense and other operating expenses. Total salaries of $11.1 million for 1995 decreased $284 thousand from the 1994 level. The effect of fewer employees was only partially offset by general salary increases. Between 1994 and 1995, employee benefits increased by $790 thousand, of which $652 thousand represented severance costs incurred the latter year. Otherwise, a slight decrease in payroll taxes was offset by increased expenses for pension plans and health insurance. From 1995 to 1994, net occupancy expense and furniture and equipment expense decreased by $128 thousand and $146 thousand, respectively. The 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 and other insurance premiums, as well as to a large reduction in losses on the sale of OREO. 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, 1996 1995 1994 Provision for Income Taxes $10,822 $6,986 $1,131 Effective Tax Rate 34.8% 36.0% 9.1%
The provisions for federal and state income taxes amounted to $10.8 million, $7.0 million and $1.1 million for 1996, 1995 and 1994, respectively. The 1994 provision was relatively small as a result of a net operating loss carryforward tracing from 1991 and changes in the valuation allowance for deferred tax assets. Eliminating the effect of these two benefits in 1994, the effective income tax rates for 1996, 1995 and 1994 were 34.8%, 36.0% and 38.1%, respectively. The decrease in the effective tax rate in each of the past two years primarily reflected a relative increase in the Company's tax exempt loan and securities portfolios. 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, investment securities must be classified as held- to-maturity, trading, or available-for-sale, depending on the purposes for which such securities were acquired or are being held. Securities held-to-maturity are debt securities that the Company has both the positive intent and ability to hold to maturity; such securities are stated at amortized cost. Debt and equity securities that are bought and held principally for the purpose of sale in the near term are classified as trading securities and are reported at fair value with unrealized gains and losses included in earnings. Debt and equity securities not classified as either held-to-maturity or trading securities are classified as available- for-sale and are reported at fair value with unrealized gains and losses excluded from earnings and reported net of taxes in a separate component of shareholders' equity. At December 31, 1996, 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 additional 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 1996, 1995 and 1994.
SECURITIES AVAILABLE-FOR-SALE (In Thousands) December 31, 1996 1995 1994 U.S. Treasury and Agency Obligations $ 95,733 $114,502 $49,063 State and Municipal Obligations --- 338 2,180 Collateralized Mortgage Obligations 42,894 44,173 475 Other Mortgage-Backed Securities 21,732 10,478 --- Corporate and Other Debt Securities 9,184 7,300 --- Mutual Funds and Equity Securities 2,200 1,854 2,150 Total $171,743 $178,645 $53,868
Other mortgage-backed securities principally included agency mortgage pass-through securities. Pass-through securities provide to the investor monthly portions of principal and interest pursuant to the contractual obligations of the underlying mortgages. Collateralized mortgage obligations ("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 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, 1996. CMO's are included in the table based on their expected average life and other mortgage-backed securities by final maturity date.
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 $34,141 $ 50,767 $10,825 $ -- $ 95,733 Collateralized Mortgage Obligations 1,536 32,230 8,110 1,018 42,894 Other Mortgage-Backed Securities 335 4,195 1,581 15,621 21,732 Corporate and Other Debt Securities 1,010 8,174 --- -- 9,184 Mutual Funds and Equity Securities --- --- --- 2,200 2,200 Total $37,022 $ 95,366 $20,516 $18,839 $171,743
The following table sets forth the tax-equivalent yields of the Company's securities available-for-sale portfolio at December 31, 1996.
YIELDS ON SECURITIES AVAILABLE-FOR-SALE (Fully Tax-Equivalent Basis) After After Within 1 But 5 But After One Within Within 10 Year 5 Years 10 Years Years Total U.S. Treasury and Agency Obligations 6.68% 6.36% 6.83% --% 6.53% Collateralized Mortgage Obligations 9.82 6.71 6.48 7.48 6.79 Other Mortgage-Backed Securities 5.33 7.00 7.14 7.00 6.98 Corporate and Other Debt Securities 7.01 7.30 -- -- 7.26 Mutual Funds and Equity Securities -- -- -- 6.60 6.60 Total 6.80 6.58 6.72 6.98 6.69
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, 1996. 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 1996 the Company recognized net losses of $101 thousand on the sale of $51.1 million from securities within the available-for-sale portfolio. Proceeds from sales early in the year were used to provide funds in completing the branch sale to Mascoma Savings Bank, a transaction in which the deposit liabilities assumed by the purchaser substantially exceeded the purchase price of the loans and other assets acquired and the deposit premium. Other sales of securities from the available-for-sale portfolio were used to extend the maturity dates and increase the yield on the portfolio. 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 deposits transferred with the sale of eight branches of Green Mountain Bank to Mascoma Savings Bank in January 1996. At December 31, 1996 and 1995, the weighted average maturity was 2.71 and 2.03 years, respectively, 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 $16.5 million from the available-for-sale portfolio. The proceeds were reinvested in higher yielding securities. At December 31, 1996, unrealized gains on securities available-for-sale amounted to $208 thousand, net of tax. Unrealized gains or losses, net of tax, are reflected as a separate component of shareholders' equity. 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. The substantial reduction in the held-to-maturity portfolio between year-end 1994 and year-end 1995 reflects the one-time reclassification in November 1995 discussed previously in the introduction to the investment portfolio discussion.
SECURITIES HELD-TO-MATURITY (In Thousands) December 31, 1996 1995 1994 U.S. Treasury and Agency Obligations $ --- $ --- $ 61,390 State and Municipal Obligations 19,765 13,921 10,409 Other Mortgage-Backed Securities 11,111 --- 51,904 Other Securities --- --- 6,032 Total $30,876 $13,921 $129,735
For information regarding the fair value of the Company's portfolio of securities held-to-maturity, see Note 3 to the Consolidated Financial Statements in Part II, Item 8 of this report. The following table sets forth the maturities of the Company's portfolio of securities held-to- maturity, as of December 31, 1996. Other mortgage-backed securities are allocated to maturity periods based on final maturity date.
MATURITIES OF SECURITIES HELD-TO-MATURITY (In Thousands) After After Within 1 But 5 But After One Within Within 10 Year 5 Years 10 Years Years Total State and Municipal Obligations $1,888 $2,784 $5,417 $ 9,676 $19,765 Other Mortgage-Backed Securities --- --- --- 11,111 11,111 Total Securities Held-to- Maturity $1,888 $2,784 $5,417 $20,787 $30,876
The following table sets forth the tax-equivalent yields of the Company's portfolio of securities held-to-maturity at December 31, 1996.
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 7.07% 8.18% 7.93% 7.97% 7.90% Other Mortgage-Backed Securities --- --- --- 7.13 7.13 Total Securities Held-to- Maturity 7.07 8.18 7.93 7.53 7.63
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, 1996. Yields on obligations of states and municipalities were computed on a fully tax-equivalent basis using a marginal tax rate of 35%. During 1996 and 1995, the Company sold no securities from the held-to-maturity portfolio. The weighted-average maturity of the held-to- maturity portfolio was 7.5 years and 8.8 years at December 31, 1996 and 1995, respectively. II. LOAN PORTFOLIO The amounts and respective percentages of loans and leases outstanding represented by each principal category on the dates indicated were as follows:
a. DISTRIBUTION OF LOANS AND LEASES (Dollars In Thousands) December 31, 1996 1995 1994 1993 1992 Amount % Amount % Amount % Amount % Amount % Commercial, Financial and Agricultural $ 48,372 12 $ 79,993 15 $ 74,455 15 $ 82,317 16 $ 85,428 17 Real Estate - Commercial 36,302 9 71,622 14 81,704 16 95,981 19 110,702 22 Real Estate - Construction 971 1 2,051 1 5,136 1 8,702 2 12,167 2 Real Estate - Residential 168,429 43 238,298 46 230,943 45 221,066 44 198,165 40 Installment Loans to Individuals 139,395 35 125,762 24 115,291 23 94,656 19 86,323 19 Lease Financing Receivables 42 -- 61 -- 24 -- 62 -- 131 -- Total Loans and Leases 393,511 100 517,787 100 507,553 100 502,784 100 492,916 100 Allowance for Loan Losses (5,581) (12,106) (12,338) (16,078) (17,328) Total Loans and Leases, Net $387,930 $505,681 $495,215 $486,706 $475,588
During 1996, the Company transferred substantially all of the loans in its Vermont banking operation in two branch sale transactions, to Mascoma Savings Bank in January 1996 and to ALBANK in September 1996. The Vermont loan portfolio had a higher percentage of commercial loans than the loan portfolios of the Company's New York banks. Consequently, the divestiture of the Vermont banking operations is largely responsible for the shift in the mix of the loan portfolio from commercial to consumer loans between year-end 1995 and year-end 1996. Also, the Company concentrated its lending efforts in 1996, in the area of residential real estate loans and installment loans to individuals (primarily automobile loans). Within the installment loan portfolio, the Company has focused on growth in its indirect lending program. Indirect loans are vehicle acquisition 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, 1996, indirect loans amounted to $107.2 million, or 77% of installment loans. While the yields on the consumer portfolios (other than credit card loans) typically are lower than on the commercial portfolios, the Company has historically experienced fewer loan losses in consumer loans than commercial loans, in proportion to outstanding average loan balances. Since 1990, the Company has concentrated its lending efforts in the area of residential real estate loans and installment loans to individuals, while de-emphasizing commercial and commercial real estate loans. Consequently, each of the years preceding 1996, both the dollar amount of loans for commercial and commercial real estate loans and the percentage of such loans to total loans decreased from the prior year, while residential real estate and installment loans to individuals increased each year since 1990, both in dollar amount and in percentage to total loans. The following table indicates the changing mix in the Company's New York 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.
NEW YORK LOAN PORTFOLIO Quarterly Average Loan Balances (Dollars In Thousands) Quarter Ending Dec 1996 Sep 1996 Jun 1996 Mar 1996 Dec 1995 Commercial and Commercial Real Estate $ 84,059 $ 84,789 $ 87,304 $ 87,073 $ 87,388 Residential Real Estate 125,897 123,884 122,858 120,010 119,157 Home Equity 29,863 29,109 28,804 29,226 29,364 Indirect Consumer Loans 105,227 99,059 92,757 82,446 78,823 Direct Consumer Loans 32,013 30,634 31,627 31,555 30,022 Credit Card Loans 8,514 8,733 8,967 9,310 9,413 Total Loans $385,573 $376,208 $372,317 $359,620 $354,167
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, 1996. For purposes of determining relevant maturities, loans are assumed to mature at (but not before) their scheduled repayment dates as required by contractual terms. Demand loans and overdrafts are included in the "Within 1 Year" maturity category.
MATURITY AND REPRICING OF COMMERCIAL LOANS (In Thousands) After 1 After WithinBut Within Five 1 Year 5 Years Years Total Commercial, Financial and Agricultural $24,559 $16,395 $ 7,418 $48,372 Real Estate - Construction 340 74 557 971 Total $24,899 $16,469 $ 7,975 $49,343 Fixed Interest Rates $ 2,963 $ 8,678 $ 6,669 $18,310 Variable Interest Rates 21,936 7,791 1,306 31,033 Total $24,899 $16,469 $ 7,975 $49,343
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 consolidated financial statements because they are not yet funded. As of December 31, 1996, the total contingent liability for standby letters of credit amounted to $1.2 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, which also may be unfunded or only partially funded from time to time. Commercial lines, generally issued for a period of one year, are usually extended to provide for the working capital requirements of the borrower. At December 31, 1996, the Banks had outstanding loan unfunded commitments in the aggregate amount of approximately $60.9 million. b. RISK ELEMENTS NONACCRUAL, PAST DUE AND RESTRUCTURED LOANS The Company designates loans as impaired when the payment of interest and/or principal is due and unpaid for a designated period (generally 90 days) or when the likelihood of the full repayment of principal and interest is, in the opinion of management, uncertain. Loans are written off against the allowance for loan losses for amounts in excess of the fair value of collateral less estimated costs to sell upon reaching 120 days delinquent. There were no material commitments to lend additional funds on outstanding impaired loans at December 31, 1996. Loans and leases past due 90 days or more and still accruing interest, as identified in the following table, are those loans and leases which were contractually past due 90 days or more but because of expected repayments were still accruing interest. 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 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 at the time of restructure and in compliance with modified terms are not subject to the disclosure requirements of SFAS No. 114 in years subsequent to the year of restructure, and thus would be included in performing loans. The Company's nonaccrual, past due and restructured loans and leases were as follows:
SCHEDULE OF NONPERFORMING LOANS (Dollars In Thousands) December 31, 1996 1995 1994 1993 1992 Nonaccrual Loans: Construction and Land Development $ --- $ 104 $ 327 $ 2,534 $ 6,149 Commercial Real Estate 83 1,299 1,050 2,649 7,986 Commercial Loans 1,487 1,979 1,017 2,596 4,168 Other 727 862 1,224 2,082 3,171 Total Nonaccrual Loans 2,297 4,244 3,618 9,861 21,474 Loans Past Due 90 Days or More and Still Accruing Interest 321 111 231 364 1,486 Restructured Loans in Compliance with Modified Terms --- --- 580 2,405 1,161 Total Nonperforming Loans $2,618 $4,355 $4,429 $12,630 $24,121 Total Nonperforming Loans as a Percentage of Total Loans .67% .84% .87% 2.51% 4.89%
The following table presents additional disclosures required by SFAS No. 114 and by the Securities and Exchange Commission's Industry Guide 3 relating to impaired loans accounted for under SFAS No. 114. All loans reported in the schedule below are included in nonaccrual loans in the schedule of nonperforming loans above. The reserves for loans accounted for under SFAS No. 114 in the schedule below are a component of the allowance for loan losses discussed earlier in this report under Item 7.B.II., "Provision for Loan Losses and Allowance for Loan Losses."
SCHEDULE OF IMPAIRED LOANS ACCOUNTED FOR UNDER SFAS NO. 114 (In Thousands) December 31, 1996 Recorded Allowance for Carrying Investment Loan Losses Amount Measured at the Present Value of Expected Cash Flows: Commercial Loans $1,301 $ 195 $1,106
December 31, 1995 Recorded Allowance for Carrying Investment Loan Losses Amount Measured at the Present Value of Expected Cash Flows: Commercial Loans $1,405 $ 211 $1,194 Measured at the Fair Value of Collateral: Commercial Real Estate 258 129 129 Other 444 --- 444 Total $2,107 $ 340 $1,767
At December 31, 1996, nonaccrual loans amounted to $2.3 million. Nearly all of the nonaccrual loans in the Vermont portfolio were transferred in the 1996 branch sales. The New York based nonaccrual loans at December 31, 1996 were virtually unchanged from the level at the prior year-end. Over one-half of the nonaccrual balances at December 31, 1996 was attributable to one borrower whose loan was restructured in 1996. Payments on that loan were current in accordance with the restructured terms as of December 31, 1996 and all payments in 1996 were used to reduce the carrying amount of the loan. During 1996, income recognized on year-end balances of nonaccrual loans was $48 thousand. Income that would have been recognized during that period on nonaccrual loans if such had been current in accordance with their original terms and had been outstanding throughout the period (or since origination if held for part of the period) was $232 thousand. Nonperforming loans amounted to $4.4 million at December 31, 1995, $74 thousand below the balance at year-end 1994. The increase in nonaccrual commercial loans between year-end 1994 and 1995 was primarily attributable to the aggregate borrowing of one commercial borrower, which was placed on nonaccrual status during 1995. Otherwise, nonaccrual loans at December 31, 1995 would have decreased from the prior year-end balance. All loans reported as restructured and in compliance with modified terms at December 31, 1994 were still in compliance with modified terms at year-end 1995 and thus classified as performing at that date. During 1995, income recognized on year-end balances of nonaccrual loans was $116 thousand. Income that would have been recognized during that period on nonaccrual loans if such had been current in accordance with their original terms and had been outstanding throughout the period (or since origination if held for part of the period) was $435 thousand. 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 in 1994, $2.4 million of loans reported as restructured at year-end 1993 was returned to performing status in 1994 in accordance with SFAS No. 15, and another $3.5 million was charged, during 1994, against the allowance for loan losses. The small remaining difference represented the improvement in nonaccrual loans, net of loans newly classified as nonperforming. During 1993, nonperforming loans decreased $11.5 million, or 47.6%. 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 generally 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 19 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, 1996 1995 1994 1993 1992 Single Family 1 - 4 Units $ --- $ 82 $1,073 $1,189 $ 892 Commercial Real Estate 86 2,328 2,128 3,418 1,536 Construction & Land Development 50 --- 195 2,899 3,120 Other Real Estate Owned, Net $ 136 $2,410 $3,396 $7,506 $5,548
The following table summarizes changes in the net carrying amount of other real estate owned at December 31 for each of the periods presented.
SCHEDULE OF CHANGES IN OTHER REAL ESTATE OWNED (Net of Allowance) (In Thousands) 1996 1995 1994 1993 1992 Balance at Beginning of Year $2,410 $ 3,396 $ 7,506 $ 5,548 $ 6,145 Properties Acquired Through Foreclosure 302 642 2,493 7,804 6,446 Adjustment for Change in Fair Value (85) (161) (398) (638) (1,160) Sale (2,491) (1,467) (6,205) (5,208) (5,883) Balance at End of Year $ 136 $ 2,410 $ 3,396 $ 7,506 $ 5,548
The following is a summary of changes in the allowance for OREO losses:
ALLOWANCE FOR OTHER REAL ESTATE OWNED LOSSES (In Thousands) 1996 1995 1994 1993 1992 Balance at Beginning of Year $ 370 $ 369 $ 1,150 $1,120 $ -- Additions 85 161 398 638 1,160 Charge-Offs (347) (160) (1,179) (608) (40) Balance at End of Year $ 108 $ 370 $ 369 $1,150 $1,120
During 1996, the Company acquired five properties totaling $302 thousand through foreclosure. Also during the year, the Company recognized losses of $330 thousand on the sale of OREO properties with a carrying amount of $2.5 million, including OREO disposed of in the Vermont branch sale transactions described under "Overview", earlier in this report, and reduced the carrying amount of the two properties remaining in OREO at December 31, 1996 by $85 thousand. During 1995, the Company acquired $642 thousand of OREO through foreclosure. The Company recognized losses of $48 thousand on the sale of OREO properties carried on the books at $1.5 million. During 1994, the Company acquired $2.5 million of OREO through foreclosure. The Company recognized losses of $1.4 million on the sale of OREO properties carried on the books at $6.2 million. Approximately 65% of the sales took place at an auction of OREO properties held during the second quarter of 1994. 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 Company's net increase in OREO during the year of $2.0 million was primarily attributable to commercial real estate properties, in OREO, which increased by more than $2.0 million during the period, 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 $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. During the year, the Company disposed of $5.9 million of OREO properties, upon which the Company recognized net gains of $257 thousand. 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 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, 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 allocated solely for purposes of complying with disclosure requirements of the Securities and Exchange Commission. However, this allocation should not be interpreted as a projection of (I) likely sources of future 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) 1996 1995 1994 1993 1992 Commercial, Financial and Agricultural $1,946 $ 2,913 $ 2,329 $ 3,908 $ 5,518 Real Estate-Commercial 353 1,755 1,841 3,324 3,626 Real Estate-Construction 49 305 1,994 2,027 2,525 Real Estate-Residential Mortgage 890 1,616 2,098 1,893 1,803 Installment Loans to Individuals 1,959 2,365 1,363 2,032 1,770 Lease Financing Receivables -- -- -- -- 15 Unallocated 384 3,152 2,713 2,894 2,071 Total Loans and Leases $5,581 $12,106 $12,338 $16,078 $17,328 PERCENT OF LOANS IN EACH CATEGORY TO TOTAL LOANS Commercial, Financial and Agricultural 12% 15% 15% 16% 17% Real Estate-Commercial 9 14 16 19 22 Real Estate-Construction 1 1 1 2 2 Real Estate-Residential Mortgage 43 46 45 44 40 Installment Loans to Individuals 35 24 23 19 19 Lease Financing Receivables -- -- -- -- -- Total Loans and Leases 100% 100% 100% 100% 100%
At December 31, 1996, 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) 1996 1995 1994 Average Average Average Balance Rate Balance Rate Balance Rate Demand Deposits $ 77,479 --% $ 88,961 --% $ 87,715 --% N.O.W./Super N.O.W. 131,438 2.88 139,879 2.84 129,999 1.92 Savings/M.M.D.A. 157,892 2.92 201,932 3.06 260,336 2.79 Time Certificates of $100,000 or More 79,996 5.25 67,029 5.61 26,980 4.30 Other Time Deposits 156,236 5.33 185,166 5.34 160,035 4.03 Total Deposits $603,041 3.47 $682,967 3.49 $665,065 2.61
During 1996, average deposits of $85.4 million were attributable to the Vermont banking operations. All Vermont deposits were transferred during the year in connection with the branch sales to Mascoma Savings Bank in January 1996 and ALBANK in September 1996. The following table presents the quarterly average balance by deposit type and the percentage of total deposits represented by each deposit type for each of the most recent five quarters for the Company's New York banks exclusively, i.e. deposits of the Vermont operations have been eliminated from the presentation.
NEW YORK DEPOSIT PORTFOLIO Quarterly Average Deposit Balances (Dollars In Thousands) Quarter Ending Dec 1996 Sep 1996 Jun 1996 Mar 1996 Dec 1995 Demand Deposits $ 67,240 $ 69,216 $ 66,299 $ 63,156 $ 66,437 N.O.W/Super N.O.W 125,559 111,052 104,768 99,004 103,881 Savings and Money Market 133,974 137,768 142,916 145,094 142,582 Time Deposits of $100,000 or More 80,462 84,707 78,063 66,755 67,141 Other Time Deposits 133,041 127,933 120,397 117,682 116,703 Total Deposits $540,276 $530,676 $512,443 $491,691 $496,744 Percentage of Total Quarterly Average Deposits Demand Deposits 12.4% 13.0% 12.9% 12.8% 13.4% N.O.W/Super N.O.W 23.3 20.9 20.4 20.1 20.9 Savings and Money Market 24.7 26.0 27.9 29.5 28.7 Time Deposits of $100,000 or More 14.9 16.0 15.2 13.7 13.5 Other Time Deposits 24.7 24.1 23.6 23.9 23.5 Total Deposits 100.0% 100.0% 100.0% 100.0% 100.0%
During 1996, the Company experienced nominal shifts in the mix of deposit products as decreases in the percentage of demand, savings and money market savings accounts to total deposits were offset by increases in the percentage of N.O.W. and time deposits accounts to total deposits. The Federal Reserve Board attempts to influence prevailing federal funds and prime interest rates by changing the Federal Reserve Bank discount rate. Over the past two years, changes in the discount rate have directly influenced federal funds rates and prime rates, which in turn have had an impact upon the Company's cost of funds. The charts below, demonstrate the positive correlation between changes in the federal discount rate and changes in the Company's cost of funds for its New York operations.
Quarterly Cost of New York Deposits Quarter Ending Dec 1996 Sep 1996 Jun 1996 Mar 1996 Dec 1995 N.O.W/Super N.O.W 3.04% 2.86% 2.69% 2.58% 2.87% Savings and Money Market 2.93 2.92 2.92 3.00 3.08 Time Deposits of $100,000 or More 5.21 5.25 5.15 5.37 5.59 Other Time Deposits 5.34 5.23 5.23 5.49 5.64 Total Deposits 3.52 3.45 3.38 3.45 3.57
Federal Reserve Bank Discount Rate Changes 1992 - 1996 Date New Rate Old Rate January 31, 1996 5.00% 5.25% February 1, 1995 5.25 4.75 November 15, 1994 4.75 4.00 August 16, 1994 4.00 3.50 May 17, 1994 3.50 3.00 July 2, 1992 3.00 3.50
The increase in the discount rate on February 1, 1995 marked the last in a series of interest rate increases by the Federal Reserve Board beginning in May of 1994. After February 1, 1995, rates held steady for twelve months until the Reserve Board lowered rates by twenty five basis points on January 31, 1996. The Company's cost of funds rose throughout 1994 and into 1995 as a result of these changes. Correspondingly, the cost of deposits reached a plateau for the last two quarters of 1995, and as a result of the January 31, 1996 decrease in the federal discount rate, the cost of interest-bearing deposits decreased twelve basis points in the first quarter of 1996, and decreased an additional seven basis points for the second quarter of 1996. The cost of funds for the last two quarters of 1996, however, increased 7 basis points in each quarter as the Company responded to competitive pricing for NOW accounts, large municipal time deposit accounts and other time deposits. The average cost of funds for savings and money market accounts in the last two quarters of the year remained substantially unchanged from the second quarter average. V. TIME CERTIFICATES OF $100,000 OR MORE
The maturities of time certificates of $100,000 or more at December 31, 1996 are presented below. (In Thousands) Maturing in: Under Three Months $60,922 Three to Six Months 12,583 Six to Twelve Months 6,256 1998 1,546 1999 428 2000 1,463 2001 604 Total $83,802
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 savings 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. Historically, the Company has sought to maintain a high ratio of core deposits to total assets. At year-end 1996, core deposits exceeded 70% of the Company's total assets and shareholders' equity represented an additional 11.4% of total assets. Large denomination time deposits, repurchase agreements and other borrowed funds represented 16.3% of total assets at December 31, 1996. 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 1996, average federal funds sold amounted to $12.2 million and federal funds purchased averaged $1.1 million. 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. Other sources of funds include term federal funds arrangements with correspondent banks and a borrowing arrangement with the Federal Home Loan Bank. The Company experienced no liquidity pressures in completing the sale transactions for its Vermont banking operations in 1996. 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, 1996, for purposes of projecting net interest income over the ensuing year, the Company assumed that short-term interest rates would rise by fifty basis points over the following 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, 1996, 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, 1996. 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 in accordance with the Company's internal projections on their likely repricing behavior in the light of historical trends, since these deposits are not apt to reprice to the full extent of prime rate changes and reprice over a period of time after changes to the prime rate. 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. Certain other assets and liabilities lacking specific maturities are classified in the "Over Five Years" category. Nonaccrual loans and overdrafts are excluded from the loan balances. 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, 1996 was .87 for both the ensuing cumulative six month and twelve month repricing periods. These ratios were within the range of ratios the Company seeks to maintain.
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: Federal Funds Sold $ 17,925 $ --- $ --- $ --- $ --- $ 17,925 Securities Available-for-Sale 63,759 1,763 3,677 70,003 32,180 171,382 Securities Held-to-Maturity 609 516 1,513 5,783 22,455 30,876 Loans and Leases, Net of Unearned Income & Nonaccrual Loans 100,408 25,125 50,315 153,128 61,916 390,892 Total Interest Rate Sensitive Assets 182,701 27,404 55,505 228,914 116,551 611,075 Interest Paying Liabilities: Regular Savings Accounts 4,513 --- 4,513 81,233 --- 90,259 N.O.W. Accounts 53,431 --- 3,469 65,063 --- 121,963 Money Market Savings Accounts 40,341 --- --- 1,749 --- 42,090 Time Deposits of $100,000 or More 60,922 12,583 6,256 4,041 --- 83,802 Other Time Deposits 27,191 22,623 46,860 39,082 --- 135,756 Short-Term Borrowings 19,462 244 3,000 --- --- 22,706 Long-Term Debt --- --- --- --- --- --- Total Interest Rate Sensitive Liabilities 205,860 35,450 64,098 191,168 --- 496,576 Interest Rate Sensitive Gap $(23,159) $ (8,046) $ (8,593)$ 37,746 $116,551 $114,499 Cumulative Interest Rate Sensitive Gap $(23,159) $(31,205) $(39,798)$ (2,052) $114,499 Interest Rate Sensitive Gap Ratio .89 .77 .87 1.20 --- 1.23 Cumulative Interest Rate Sensitive Gap Ratio .89 .87 .87 1.00 1.23 N/A
F. CAPITAL RESOURCES AND DIVIDENDS Shareholders' equity was $74.3 million at December 31, 1996, as compared to $67.5 million at December 31, 1995. Changes in shareholders' equity during 1996 included $16.4 million of retained earnings which was partially offset by treasury stock purchases of $10.1. Most of the treasury stock purchases were acquired under two initiatives undertaken by the Company's Board of Directors during the year, each of which authorized management to repurchase from time to time, at its discretion, up to $10 million of the Company's common stock in the open market or privately negotiated transactions. The maintenance of appropriate capital levels is a management priority. Overall capital adequacy is monitored on an ongoing basis by management and reviewed regularly by the Board of Directors. The Company's principal capital planning goal is to provide an adequate return to shareholders while retaining a sufficient base to provide for future expansion and comply with all regulatory standards. 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, 1996: Risk-Based Capital Ratios: Arrow GFNB SNB Tier 1 19.3% 14.3% 9.5% Total Capital 20.6 15.6 10.7 Tier 1 Leverage Ratio 11.2 7.9 7.6
At December 31, 1996, 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). 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, 1996, only the Company's principal bank subsidiary, 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 $8.6 million. See Part II, Item 5 "Market for the Registrant's Common Equity and Related Stockholder Matters" for a recent history of the Company's cash dividend payments. G. FOURTH QUARTER RESULTS The Company reported earnings of $2.4 million for the fourth quarter of 1996, a decrease of $176 thousand or 6.7% from the fourth quarter of 1995. Earnings per share for both periods was $.42. The decrease in earnings was primarily attributable to the decrease in earning assets resulting from the completion of the divestiture of the Vermont banking operations in the first three quarters. Average earning assets for the fourth quarter of 1996 were $606.4 million, a decrease of $134.8 million or 18.2% from average earning assets of $741.2 million for the fourth quarter of 1995. Accordingly, the Company also experienced a proportional decrease in net interest income, to $7.3 million in 1996 (stated on a tax-equivalent basis) down $1.8 million or 19.8% from the fourth quarter of 1995. The Company also experienced a decrease in net interest margin (net interest income to average earning assets), which was 4.78% and 5.00% for the two respective quarters. Noninterest income of $2.2 million for the fourth quarter of 1996 included securities losses of $183 thousand and income of $570 thousand from a post-closing upward price adjustment in the sale of the Vermont trust business upon satisfaction of a contingency condition. On a comparable basis, noninterest income decreased $550 thousand, or 23.7% from the fourth quarter of 1995. The decrease was attributable to the sale of the Vermont trust business and to decreased deposit servicing fee income resulting from the transfer of deposits in the sale of branches in Vermont. Noninterest expense of $5.3 million for the fourth quarter of 1996 decreased $1.8 million, or 25.0%, from the fourth quarter of 1995, again, primarily attributable to the sale of the Vermont operations.
SELECTED FOURTH QUARTER FINANCIAL INFORMATION (Dollars In Thousands) For the Quarter Ended December 31, 1996 1995 Interest Income $12,153 $15,846 Interest Expense 5,025 6,577 Net Interest Income 7,128 9,269 Provision for Loan Losses 224 530 Net Interest Income after Provision for Loan Losses 6,904 8,739 Other Income 2,155 2,342 Other Expense 5,255 7,009 Income Before Income Taxes 3,804 4,072 Provision for Income Taxes 1,370 1,462 Net Income $ 2,434 $ 2,610 Weighted Average Number of Shares and Equivalents Outstanding Primary 5,847 6,239 Fully Diluted 5,850 6,244 Primary Earnings Per Share $ .42 $ .42 Fully Diluted Earnings Per Share .42 .42 SELECTED RATIOS: Return on Average Assets 1.49% 1.30% Return on Average Equity 13.04% 15.58% Per share amounts have been adjusted for the 1996 ten 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, 1996, which Annual Report is attached as Exhibit 13 to this Report: Independent Auditors' Report Financial Statements: Consolidated Balance Sheets as of December 31, 1996 and 1995 Consolidated Statements of Income for the Years Ended December 31, 1996, 1995 and 1994 Consolidated Statements of Changes in Shareholders' Equity for the Years Ended December 31, 1996, 1995 and 1994 Consolidated Statements of Cash Flows for the Years Ended December 31, 1996, 1995 and 1994 Notes to Consolidated Financial Statements Supplementary Data: (Unaudited) Quarterly Financial Data for the Years Ended December 31, 1996 and 1995 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 30, 1997 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 30, 1997 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 30, 1997 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 30, 1997 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, incorporated by reference from Exhibit 13 to this Report, the 1996 Annual Report to Shareholders. 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, 1996 and 1995 Consolidated Statements of Income for the Years Ended December 31, 1996, 1995 and 1994 Consolidated Statements of Changes in Shareholders' Equity for the Years Ended December 31, 1996, 1995 and 1994 Consolidated Statements of Cash Flows for the Years Ended December 31, 1996, 1995 and 1994 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 from the Registrant's Current Report on Form 8-K, filed on August 4, 1995, Exhibit 2.1. 2.2 Supplement to Purchase and Assumption Agreement among Arrow Financial Corporation, Arrow Vermont Corporation, Green Mountain Bank and Mascoma Savings Bank, dated January 12, 1996 incorporated herein by reference from the Registrant's Current Report on Form 8-K, filed January 30, 1996, Exhibit 2.2. 2.3 Purchase and Assumption Agreement among Arrow Financial Corporation, Arrow Vermont Corporation, Green Mountain Bank and ALBANK, FSB, dated February 26, 1996 incorporated herein by reference from the Registrant's Current Report on Form 8-K, filed March 14, 1996, Exhibit 2.1. 2.4 Amendment to Purchase and Assumption Agreement among Arrow Financial Corporation, Arrow Vermont Corporation, Green Mountain Bank and ALBANK, FSB, dated September 26, 1996 incorporated herein by reference from the Registrant's Current Report on Form 8-K filed October 11, 1996, Exhibit 2.3. 2.5 Service Purchasing Agreement among Arrow Financial Corporation, Arrow Vermont Corporation, Green Mountain Bank and ALBANK, FSB, dated February 26, 1996 incorporated herein by reference from the Registrant's Current Report on Form 8-K filed March 14, 1996, Exhibit 2.2. 2.6 Amendment to Service Purchasing Agreement among Arrow Financial Corporation, Arrow Vermont Corporation, Green Mountain Bank and ALBANK, FSB, dated September 26, 1996 incorporated herein by reference from the Registrant's Current Report on Form 8-K, filed October 11, 1996, Exhibit 2.4. 2.7 Stock Purchase Agreement among Arrow Financial Corporation, Arrow Vermont Corporation, Green Mountain Bank and Vermont National Bank, dated February 27, 1996 incorporated herein by reference from the Registrant's Current Report on Form 8-K filed March 14, 1996, Exhibit 2.3. 3.(I) Certificate of Incorporation of the Registrant, as amended, incorporated herein by reference from the Registrant's Annual Report on Form 10-K for the year ended December 31, 1990, Exhibit 3.(a). 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 Short-term Incentive Award 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 herein by reference from Registrant's Annual Report on Form 10-K for the year ended December 31, 1990, Exhibit 10.(k). * 10.5 Employment Agreement between the Registrant and John J. Murphy dated December 31, 1990, incorporated herein by reference from Registrant's Annual Report on Form 10-K for the year ended December 31, 1992, Exhibit 10(g)(1). * 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 herein by reference from Registrant's Annual Report on Form 10-K for the year ended December 31, 1992, Exhibit 10(j)(1). * 10.7 Select Executive Retirement Plan of the Registrant effective January 1, 1992 incorporated herein by reference from Registrant's Annual Report on Form 10-K for December 31, 1992, Exhibit 10(m). * 10.8 Employee Stock Purchase Plan of the Registrant, incorporated herein by reference from Registrant's 1933 Act Registration Statement on Form S-8 (File number 33-48225; filed May 15, 1992). * 10.9 Long Term Incentive Plan of the Registrant, incorporated herein by reference from Registrant's 1933 Act Registration Statement on Form S-8 (File number 33-66192; filed July 19, 1993). * 10.10 Directors Deferred Compensation Plan of Registrant, incorporated herein by reference from Registrant's Annual Report on Form 10-K for December 31, 1993, Exhibit 10(n). * 10.11 Senior Officers Deferred Compensation Plan of the Registrant, incorporated herein by reference from Registrant's Annual Report on Form 10-K for December 31, 1993, Exhibit 10(o).* 10.12 Automatic Dividend Reinvestment Plan of the Registrant incorporated herein by reference from Registrant's Annual Report on Form 10-K for December 31, 1995, Exhibit 10.11.* * Management contracts or compensation plans required to be filed as an exhibit. The following exhibits are submitted herewith: Exhibit Number Exhibit 3.(ii) By-Laws of the Registrant 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) The following Current Reports on Form 8-K were filed during the fourth quarter of 1996: Filed October 11, 1996: Amendment to Purchase and Assumption Agreement among Arrow Financial Corporation, Arrow Vermont Corporation, Green Mountain Bank and ALBANK, FSB, dated September 26, 1996. Filed October 11, 1996: Amendment to Service Purchasing Agreement among Arrow Financial Corporation, Arrow Vermont Corporation, Green Mountain Bank and ALBANK, FSB, dated September 26, 1996. 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 26, 1997 By: /s/ Thomas L. Hoy Thomas L. Hoy President and Chief Executive Officer Date: March 26, 1997 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 26, 1997 by the following persons in the capacities indicated. /s/ John J. Carusone,Jr. John J. Carusone Director /s/ Michael B. Clarke Michael B. Clarke Director /s/ George C. Frost George C. Frost Director /s/ Kenneth C. Hopper, M.D. Kenneth C. Hopper, M.D. Director /s/ Thomas L. Hoy Thomas L. Hoy Director and President /s/ Edward F. Huntington Edward F. Huntington Director /s/ David G. Kruczlnicki David G. Kruczlnicki Director /s/ Michael F. Massiano Michael F. Massiano Director & Chairman /s/ David L. Moynehan David L. Moynehan Director /s/ Doris E. Ornstein Doris E. Ornstein Director /s/ Daniel L. Robertson Daniel L. Robertson Director EXHIBITS INDEX Exhibit Number Exhibit 3.(ii) By-Laws 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 4/26/96 - Article 3.2 12/18/96 - Article 3.2 BY-LAWS ARROW FINANCIAL CORPORATION (A New York Corporation) (As amended to 12/18/96) 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 eleven (11). 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 seventy percent (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 a concise 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-11 3 Exhibit 11 ARROW FINANCIAL CORPORATION AND SUBSIDIARIES STATEMENT RE COMPUTATION OF PER SHARE EARNINGS
1996 1995 1994 1993 1992 Primary Earnings Per Share: Net Income Before Extraordinary Item & Cumulative Effect of Accounting Change $20,260 $12,424 $11,325 $8,176 $2,890 Extraordinary Item --- --- --- --- 811 Cumulative Effect of Accounting Change --- --- --- 1,457 --- Net Income $20,260 $12,424 $11,325 $9,633 $3,701 Wesighted Shares Outstanding 5,919 6,277 6,306 6,247 6,074 ESOP Leveraged Shares (29) (25) --- --- --- Stock Options- Equivalent Shares 60 33 15 --- --- Total Equivalent Shares 5,950 6,285 6,320 6,247 6,074 Primary Eanrings Per Share, Before Extraordinary Item $3.40 $1.98 $1.79 $1.31 $0.48 Primary Earnings Per Share, Extraordinary Item --- --- --- --- 0.12 Primary Earnings Per Share, Cumulative Effect of Accounting Change --- --- 0.23 --- Primary Earnings Per Share $3.40 $1.98 $1.79 $1.54 $0.60 Fully Diluted Earnings Per Share: Net Income Before Extraordinary Item & Cumulative Effect of Accounting Change $12,260 $12,424 $11,325 $8,176 $2,890 Debenture Interest Expense, net of tax --- --- 243 --- --- Fully Diluted Income 12,260 12,424 11,568 8,176 2,890 Extraordinary Item --- --- --- --- 811 Cumulative Effect of Accounting Change --- --- --- 1,457 --- Net Income $12,260 $12,424 $11,568 $9,633 $3,701 Weighted Shares Outstanding 5,919 6,277 6,306 6,247 6,074 ESOP Leveraged Shares (29) (26) --- --- --- Stock Options- Equivalent Shares 81 54 26 --- --- Debentures --- --- 365 --- --- Total Equivalent Shares 5,971 6,305 6,697 6,247 6,074 Fully Diluted Earnings Per Share, Before Extraordinary Item $3.39 $1.97 $1.73 $1.31 $0.48 Fully Diluted Earnings Per Share, Extraordinary Item --- --- --- --- 0.12 Fully Diluted Earnings Per Share, Cumulative Effect of Accounting Change --- --- --- 0.23 --- Fully Diluted Earnings Per Share $3.39 $1.97 $1.73 $1.54 $0.60
EX-13 4 REPORT OF MANAGEMENT The accompanying consolidated financial statements of Arrow Financial Corporation and Subsidiaries are the responsibility of and have been prepared by management in conformity with generally accepted accounting principles. These statements necessarily include some amounts that are based on best judgments and estimates. Other financial information in the annual report is consistent with that in the consolidated financial statements. Management is responsible for maintaining a system of internal accounting control. The purpose of the system is to provide reasonable assurance that transactions are recorded in accordance with management's authorization, that assets are safeguarded against loss or unauthorized use, and that underlying financial records support the preparation of financial statements. The system includes written policies and procedures, selection of qualified personnel, appropriate segregation of responsibilities, and the ongoing internal audit function. The independent auditors conduct an annual audit of the Company's consolidated financial statements to enable them to express an opinion as to the fair presentation of the statements. In connection with the audit, the independent auditors consider the internal control structure, to the extent they consider necessary to determine the nature, timing and extent of their auditing procedures. The independent auditors also prepare recommendations regarding internal controls and other accounting and financial related matters. The implementation of these recommendations by management is monitored directly by the Audit Committee of the Board of Directors. Thomas L. Hoy President and Chief Executive Officer John J. Murphy Executive Vice President, Treasurer and Chief Financial Officer INDEPENDENT AUDITORS' REPORT THE BOARD OF DIRECTORS AND SHAREHOLDERS OF ARROW FINANCIAL CORPORATION: We have audited the accompanying consolidated balance sheets of Arrow Financial Corporation and subsidiaries as of December 31, 1996 and 1995, 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, 1996. 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, 1996 and 1995, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1996, in conformity with generally accepted accounting principles. KPMG Peat Marwick LLP Certified Public Accountants Albany, New York January 17, 1997 CONSOLIDATED BALANCE SHEETS ARROW FINANCIAL CORPORATION AND SUBSIDIARIES (Dollars in Thousands)
December 31, 1996 1995 ASSETS Cash and Due from Banks (Note 2) $ 19,572 $ 23,406 Federal Funds Sold 17,925 35,100 Cash and Cash Equivalents 37,497 58,506 Securities Available-for-Sale (Note 3) 171,743 178,645 Securities Held-to-Maturity: (Approximate Fair Value of $31,519 in 1996 and $14,508 in 1995) (Notes 3 and 18) 30,876 13,921 Loans and Leases (Notes 4 and 18) 393,511 517,787 Less: Allowance for Loan Losses (Note 5) (5,581) (12,106) Net Loans and Leases 387,930 505,681 Premises and Equipment (Note 6) 9,414 13,888 Other Real Estate Owned (Note 7) 136 2,410 Other Assets 15,007 16,739 Total Assets $652,603 $789,790 LIABILITIES Deposits: Demand $ 67,877 $ 94,713 Regular Savings, N.O.W. & Money Market Deposit Accounts 254,312 352,302 Time Deposits of $100,000 or More (Notes 8 and 18) 83,802 57,557 Other Time Deposits (Notes 8 and 18) 135,756 189,881 Total Deposits 541,747 694,453 Short-Term Borrowings: (Note 9) Federal Funds Purchased and Securities Sold Under Agreements to Repurchase 16,597 14,045 Other Short-Term Borrowings 6,109 1,252 Other Liabilities 13,854 12,536 Total Liabilities 578,307 722,286 Commitments and Contingent Liabilities (Notes 3, 11, 16, 17, 19 and 21) SHAREHOLDERS' EQUITY (Notes 10, 12 and 13) Preferred Stock, $5 Par Value; 1,000,000 Shares Authorized --- --- Common Stock, $1 Par Value; 20,000,000 Shares Authorized (6,577,036 Shares Issued in 1996 and 5,979,124 in 1995) 6,577 5,979 Surplus 54,569 40,938 Undivided Profits 26,992 24,296 Unallocated ESOP Shares (43,130 Shares in 1995) (Note 12) --- (700) Valuation Allowance for Securities Available-for-Sale 208 1,152 Treasury Stock (817,743 Shares in 1996 and 309,833 Shares in 1995, at Cost) (14,050) (4,161) Total Shareholders' Equity 74,296 67,504 Total Liabilities and Shareholders' Equity $652,603 $789,790 See notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF INCOME ARROW FINANCIAL CORPORATION AND SUBSIDIARIES (Dollars in Thousands, Except Per Share Data)
Years Ended December 31, 1996 1995 1994 INTEREST AND DIVIDEND INCOME Interest and Fees on Loans and Leases $42,195 $47,988 $42,440 Interest on Federal Funds Sold 642 1,307 501 Interest and Dividends on Securities Available-for-Sale 11,102 3,999 2,867 Interest and Dividends on Securities Held-to-Maturity 936 7,424 6,706 Total Interest and Dividend Income 54,875 60,718 52,514 INTEREST EXPENSE Interest on Deposits: Time Deposits of $100,000 or More 4,198 3,761 1,161 Other Deposits 16,737 20,055 16,204 Interest on Short-Term Borrowings: Federal Funds Purchased and Securities Sold Under Agreements to Repurchase 713 604 273 Other Short-Term Borrowings 178 215 121 Interest on Long-Term Debt --- 230 443 Total Interest Expense 21,826 24,865 18,202 NET INTEREST INCOME 33,049 35,853 34,312 Provision for Loan Losses (Note 5) 896 1,170 (950) NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 32,153 34,683 35,262 OTHER INCOME Income from Fiduciary Activities 3,458 3,752 3,657 Fees for Other Services to Customers 3,959 4,669 4,345 Net Gains (Losses) on Securities Transactions (101) 23 (481) Net Gain on Divestiture of Vermont Operations (Note 21) 15,330 --- --- Other Operating Income (Note 14) 1,057 6,052 1,047 Total Other Income 23,703 14,496 8,568 OTHER EXPENSE Salaries and Employee Benefits (Notes 11, 12 and 13) 14,971 16,710 16,204 Occupancy Expense of Premises, Net 1,790 2,040 2,168 Furniture and Equipment Expense 1,677 1,930 2,076 Other Operating Expense (Note 14) 6,336 9,089 10,926 Total Other Expense 24,774 29,769 31,374 INCOME BEFORE INCOME TAXES 31,082 19,410 12,456 Provision for Income Taxes (Note 15) 10,822 6,986 1,131 NET INCOME $20,260 $12,424 $11,325 Average Shares Outstanding: Primary 5,950 6,285 6,320 Fully Diluted 5,971 6,305 6,697 Earnings Per Common Share: Primary $ 3.40 $ 1.98 $ 1.79 Fully Diluted 3.39 1.97 1.73 Per share amounts have been adjusted for the 1996 ten percent and the 1995 four percent stock dividends. See notes to consolidated financial statements.
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY ARROW FINANCIAL CORPORATION AND SUBSIDIARIES (Dollars in Thousands)
Unallocated Unrealized Employee Gain (Loss) Stock Securities Shares Common Undivided Ownership Available Treasury Issued Stock Surplus Profits Plan for Sale Stock Total Balance at December 31, 1993 5,477,305 $5,477 $32,402 $13,408 $ --- $ 187 $(1,405) $50,069 Net Income --- --- --- 11,325 --- --- --- 11,325 Cash Dividends Declared, $.324 per Share --- --- --- (2,039) --- --- --- (2,039) 4% Stock Dividend 219,823 220 3,325 (3,545) --- --- --- --- Stock Purchase Contracts Exercised 18,581 19 281 --- --- --- --- 300 Stock Options Exercised 10,056 10 94 --- --- --- --- 104 Purchase of Treasury Stock (35,229 shares) --- --- --- --- --- --- (494) (494) Valuation Allowance for Securities Available- for-Sale --- --- --- --- --- (860) --- (860) Balance at December 31, 1994 5,725,765 5,726 36,102 19,149 --- (673) (1,899) 58,405 Net Income --- --- --- 12,424 --- --- --- 12,424 Cash Dividends Declared, $.513 per Share --- --- --- (3,196) --- --- --- (3,196) 4% Stock Dividend 229,966 230 3,851 (4,081) --- --- --- --- Stock Purchase Contracts Exercised 23,393 23 303 --- --- --- --- 326 Acquisition of Common Stock By ESOP (69,500 Shares) --- --- --- --- (1,173) --- --- (1,173) Allocation of ESOP Stock (28,537 Shares) --- --- 24 --- 473 --- --- 497 Stock Options Exercised (92,066 Shares) --- --- 630 --- --- --- 584 1,214 Tax Benefit for Exercise of Stock Options --- --- 28 --- --- --- --- 28 Purchase of Treasury Stock (170,583 Shares) --- --- --- --- --- --- (2,846) 2,846) Valuation Allowance for Securities Available- for-Sale --- --- --- --- --- 1,825 --- 1,825 Balance at December 31, 1995 5,979,124 5,979 40,938 24,296 (700) 1,152 (4,161) 67,504 Net Income --- --- --- 20,260 --- --- --- 20,260 Cash Dividends Declared, $.664 per Share --- --- --- (3,886) --- --- --- (3,886) 10% Stock Dividend 597,912 598 13,080 (13,678) --- --- --- --- Allocation of ESOP Stock (44,424 Shares) --- --- 252 --- 700 --- --- 952 Stock Options Exercised (44,381 Shares) --- --- 249 --- --- --- 287 536 Tax Benefit for Exercise of Stock Options --- --- 50 --- --- --- --- 50 Purchase of Treasury Stock (481,584 Shares) --- --- --- --- --- --- (10,176) (10,176) Valuation Allowance for Securities Available- for-Sale --- --- --- --- --- (944) --- (944) Balance at December 31, 1996 6,577,036 $6,577 $ 54,569 $26,992 $ --- $ 208 (14,050) $74,296 Per share amounts have been adjusted for the 1996 ten percent and the 1995 four percent stock dividends. Included in the shares issued for the stock dividends in 1996, 1995 and 1994 were treasury shares of 70,707, 10,207 and 7,350, respectively, and for 1996 and 1995, unallocated ESOP shares of 1,294 and 2,167, respectively. See notes to consolidated financial statements.
ARROW FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Dollars in Thousands)
Years Ended December 31, 1996 1995 1994 Operating Activities: Net Income $20,260 $12,424 $11,325 Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities: Provision for Loan Losses 896 1,170 (950) Provision for Other Real Estate Owned Losses 85 161 398 Depreciation and Amortization 1,200 1,624 2,167 Compensation Expense for Allocated ESOP Shares 252 24 --- Net Gain on Divestiture of Vermont Operations (15,330) --- --- Gains on the Sale of Securities Available-for-Sale (243) (51) (73) Losses on the Sale of Securities Available-for-Sale 344 28 540 Proceeds from the Sale of Loans 4,882 12,397 6,238 Losses (Gains) on the Sale of Loans, Fixed Assets and Other Real Estate Owned 135 (120) 1,195 Deferred Income Tax Expense (Benefit) 79 272 (1,954) Decrease (Increase) in Interest Receivable 1,130 (725) (165) Increase (Decrease) in Interest Payable (561) 1,196 82 Decrease (Increase) in Other Assets 991 (2,904) 580 Increase (Decrease) in Other Liabilities (1,233) 3,751 1,418 Net Cash Provided By Operating Activities 12,887 29,259 20,801 Investing Activities: Proceeds from the Sale of Securities Available-for-Sale 51,040 4,191 16,059 Proceeds from the Maturities of Securities Available-for-Sale 36,454 26,407 22,463 Purchases of Securities Available-for-Sale (82,398) (33,921) (38,340) Proceeds from the Maturities of Securities Held-to-Maturity 848 6,604 51,257 Purchases of Securities Held-to-Maturity (17,814) (9,157) (55,473) Proceeds from Loans Sold in Branch Divestitures 147,503 --- --- Net Increase in Loans and Leases (32,437) (25,206) (16,170) Proceeds from Fixed Assets Sold in Branch Divestitures 2,525 --- --- Proceeds from Sales of Fixed Assets and Other Real Estate Owned 2,513 1,473 4,930 Purchases of Fixed Assets (2,099) (593) (807) Proceeds from the Sale of Vermont Trust Operations 3,000 --- --- Net Cash Provided By (Used In) Investing Activities 109,135 (30,202) (16,081) Financing Activities: Deposits Transferred in Branch Divestitures, net of Premium (192,953) --- --- Net Increase (Decrease) in Deposits 55,989 43,968 (8,942) Net Increase (Decrease) in Short-Term Borrowings 7,409 (9,568) 12,378 Repayment of Long-Term Debt --- (4,690) (88) Common Stock Issued --- --- 100 Exercise of Stock Options 412 164 104 Disqualifying Disposition of Incentive Stock Options 50 28 --- Purchase of Treasury Stock (10,052) (1,881) (494) Cash Dividends Paid (3,886) (3,196) (2,039) Net Cash (Used In) Provided By Financing Activities (143,031) 24,825 1,019 Net (Decrease) Increase In Cash and Cash Equivalents (21,009) 23,882 5,739 Cash and Cash Equivalents at Beginning of the Year 58,506 34,624 28,885 Cash and Cash Equivalents at End of the Year $37,497 $58,506 $34,624 Supplemental Cash Flow Information: Interest Paid $22,387 $23,670 $18,120 Income Taxes Paid 11,235 6,908 1,537 Transfer of Loans to Other Real Estate Owned 302 642 2,493 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 --- See notes to 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. Principles of Consolidation - The financial statements of the Company and its wholly owned subsidiaries are consolidated and all material intercompany transactions have been eliminated. In the "Parent Company Only" financial statements, the investment in wholly owned subsidiaries is carried under the equity method of accounting. When necessary, prior years' financial statements have been reclassified to conform with the current financial statement presentations. Cash and Cash Equivalents - Cash and cash equivalents in the Consolidated Statements of Cash Flows include the following items: cash at branches, due from bank balances, cash items in the process of collection and federal funds sold. Securities -Securities reported as held-to - -maturity are those 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. The cost of securities is adjusted for amortization of premium and accretion of discount, which is calculated on an effective interest rate method. In November 1995, the Financial Accounting Standards Board (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 maintained by charges to operations based upon management's evaluation of the loan portfolio, current economic conditions, past loan losses and other factors. In management's opinion, the balance is sufficient to provide for probable loan losses. While management uses available information to recognize losses on loans, future additions to the allowance may be necessary based on changes in economic conditions in the Company's market area. In addition, various Federal and State regulatory agencies, as an integral part of their examination process, review the Company's allowance for loan losses. Such agencies may require the Company to recognize additions to the allowance in future periods, based on their judgments about information available to them at the time of their examination which may not be currently available to management. 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 of the collateral less estimated cost to sell. For other loans, impairment is determined by comparing the recorded value for the loan to the present value of the expected cash flows, discounted at the loan's effective interest rate. The Company determines the interest income recognition method on a loan-by-loan basis. Based upon the borrowers' payment histories and cash flow projections, interest recognition methods include full accrual, cash basis and cost recovery. 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. At December 31, 1996 and 1995, the carrying amount of the Company's mortgage servicing rights measured under SFAS No. 122 amounted to $57 thousand for each period. At December 31, 1996 and 1995, the magnitude of the serviced loans was not considered so substantial as to require stratification for purposes of evaluation for impairment. There was no valuation reserve for mortgage servicing rights at December 31, 1996 and 1995, as fair value approximated carrying value. Other Real Estate Owned - Real estate acquired by foreclosure is recorded at the lower of fair value less estimated costs to sell or cost. Subsequent declines in fair value, after transfer to other real estate owned, are recognized through a valuation allowance. Such declines in fair value along with related operating expenses to administer such properties are charged directly to operating expense. Premises and Equipment - Premises and equipment are stated at cost, less accumulated depreciation and amortization. Depreciation and amortization included in operating expenses are stated largely on the straight-line method. The provision is based on the estimated useful lives of the assets and, in the case of leasehold improvements, amortization is computed over the terms of the respective leases or their estimated useful lives, whichever is less. Gains or losses on disposition are reflected in earnings. Assets subject to finance leases are capitalized and depreciated over the life of the lease with appropriate charges to operating expense for implicit interest amounts. Income Taxes - The Company accounts for income taxes under the asset and liability method of accounting for income taxes under SFAS No. 109. Under the asset and liability method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect of deferred tax assets and liabilities for a change in tax rates is recognized in income in the period that includes the enactment date. The Company's policy is that deferred tax assets are reduced by a valuation reserve if, based on the weight of available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized. Intangible Assets - Intangible assets related to the acquisition of 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 $351,000 and $926,000 at December 31, 1996 and 1995, respectively. The related amortization expense totalled $86,000, $161,000 and $172,000 in 1996, 1995 and 1994, respectively. During 1996, a reduction of $489,000 in intangible assets was attributable to the disposition of Vermont operations. 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 at December 31, 1995. There were no deferred loan premiums at December 31, 1996. The amount of loans serviced for others was $21,396,000 and $66,633,000 at December 31, 1996 and 1995, respectively. Long-Lived Assets - On January 1, 1996, the Company adopted 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 costs to sell. Adoption of SFAS No. 121 did not have a material impact on the Company's consolidated financial position, results of operations, or liquidity. Transfers and Servicing of Financial Assets and Extinguishments of Liabilities - In June 1996, the FASB issued SFAS No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities." SFAS No. 125 is effective for transfers and servicing of financial assets and extinguishments of liabilities occurring after December 31, 1996 (except for certain provisions which were deferred for one year by SFAS No. 127) and is to be applied prospectively. This Statement provides accounting and reporting standards for transfers and servicing of financial assets and extinguishments of liabilities based on consistent application of financial-components approach that focuses on control. It distinguishes transfers of financial assets that are sales from transfers that are secured borrowings. Management of the Company does not expect that adoption of SFAS No. 125 will have a material impact on the Company's consolidated financial position, results of operations, or liquidity. 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 18. Use of Estimates - Management of the Company has made a number of estimates and assumptions relating to the reporting of assets and liabilities and the disclosure of contingent assets and liabilities to prepare these consolidated financial statements in conformity with generally accepted accounting principles. Actual results could differ from those estimates. NOTE 2: CASH AND DUE FROM BANKS (In Thousands) The bank subsidiaries are required to maintain a reserve balance with the Federal Reserve Bank. The amount of the required balance at December 31, 1996 and 1995 was approximately $8,122 and $8,864, 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, 1996 and 1995 is presented below: Securities Available-for-Sale:
Gross Gross Amortized Fair Unrealized Unrealized Cost Value Gains Losses December 31, 1996 U.S. Treasury and Agency Obligations $ 95,553 $ 95,733 $ 422 $ 242 Collateralized Mortgage Obligations 42,791 42,894 454 351 Other Mortgage-Backed Securities 21,901 21,732 77 246 Corporate and Other Debt Securities 8,994 9,184 190 --- Mutual Funds and Equity Securities 2,142 2,200 58 --- Total Securities Available-for-Sale $171,381 $171,743 $1,201 $ 839 December 31, 1995 U.S. Treasury and Agency Obligations $113,249 $114,502 $1,458 $ 205 State and Municipal Obligations 338 338 --- --- Collateralized Mortgage Obligations 43,892 44,173 525 244 Other Mortgage-Backed Securities 10,397 10,478 124 43 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
Securities Held-to-Maturity:
Gross Gross Amortized Fair Unrealized Unrealized Cost Value Gains Losses December 31, 1996 State and Municipal Obligations $ 19,765 $ 20,423 $663 $ 5 Other Mortgage-Backed Securities 11,111 11,096 --- 15 Total Securities Held-to-Maturity $ 30,876 $ 31,519 $663 $ 20 December 31, 1995 State and Municipal Obligations $ 13,921 $ 14,508 $648 $ 61 Total Securities Held-to-Maturity $ 13,921 $ 14,508 $648 $ 61
A summary of the maturities of securities as of December 31, 1996 is presented below. Collateral mortgage obligations are included in the schedule based on their expected average lives and other mortgage-backed securities by final maturity date.
Securities Available- Securities Held- for-Sale to-Maturity Amortized Fair Amortized Fair Cost Value Cost Value Within One Year: U.S. Treasury and Agency Obligations $ 33,994 $ 34,141 $ --- $ --- State and Municipal Obligations --- --- 1,888 1,890 Collateralized Mortgage Obligations 1,498 1,536 --- --- Other Mortgage-Backed Securities 339 335 --- --- Corporate and Other Debt Securities 1,001 1,010 --- --- Total 36,832 37,022 1,888 1,890 From 1 - 5 Years: U.S. Treasury and Agency Obligations 50,563 50,767 --- --- State and Municipal Obligations --- --- 2,784 2,893 Collateralized Mortgage Obligations 32,104 32,230 --- --- Other Mortgage-Backed Securities 4,208 4,195 --- --- Corporate and Other Debt Securities 7,993 8,174 --- --- Total 94,868 95,366 2,784 2,893 From 5 - 10 Years: U.S. Treasury and Agency Obligations 10,996 10,825 --- --- State and Municipal Obligations --- --- 5,417 5,669 Collateralized Mortgage Obligations 8,188 8,110 --- --- Other Mortgage-Backed Securities 1,595 1,581 --- --- Corporate and Other Debt Securities --- --- --- --- Total 20,779 20,516 5,417 5,669 Over 10 Years: U.S. Treasury and Agency Obligations --- --- --- --- State and Municipal Obligations --- --- 9,676 9,971 Collateralized Mortgage Obligations 1,001 1,018 --- --- Other Mortgage-Backed Securities 15,759 15,621 11,111 11,096 Corporate and Other Debt Securities --- --- --- --- Mutual Funds and Equity Securities 2,142 2,200 --- --- Total 18,902 18,839 20,787 21,067 Total Securities $171,381 $171,743 $ 30,876 $ 31,519
The carrying amount of securities pledged to secure public and trust deposits and for other purposes totalled $144,367 and $114,643 at December 31, 1996 and 1995, respectively. NOTE 4: LOANS AND LEASES (In Thousands) Loans and leases at December 31, 1996 and 1995 consisted of the following:
1996 1995 Commercial, Financial and Agricultural $ 48,372 $ 79,993 Real Estate - Commercial 36,302 71,622 Real Estate - Residential 168,429 238,298 Real Estate - Construction 971 2,051 Installment Loans to Individuals 139,395 125,762 Lease Financing, Net of Unearned Income 42 61 Total Loans and Leases $393,511 $517,787
The carrying amount of net loans and leases at December 31, 1996 and 1995 was $387,930 and $505,681, respectively. The fair value of net loans and leases at December 31, 1996 and 1995 was $392,128 and $516,999, respectively. Fair values are estimated for portfolios of loans with similar financial characteristics. Loans are segregated by type such as commercial, commercial real estate, residential mortgage, credit card and other consumer loans. Each loan category is further segmented into fixed and adjustable rate interest terms and by performing and nonperforming categories. The fair value of performing loans is calculated by discounting scheduled cash flows through the estimated maturity using estimated market discount rates that reflect the credit and interest rate risk inherent in the loan. The estimate of maturity is based on historical experience with repayments for each loan classification, modified, as required, by an estimate of the effect of current economic and lending conditions. Fair value for nonperforming loans is based on recent external appraisals. If appraisals are not available, estimated cash flows are discounted using a rate commensurate with the risk associated with the estimated cash flows. Assumptions regarding credit risk, cash flows and discount rates are judgmentally determined using available market information and specific borrower information. Certain executive officers and directors, including their immediate families and organizations in which they are principals of the company or affiliates, have various loan, deposit and other transactions with the Company. Such transactions are on substantially the same terms, including interest rates and collateral as to loans, as those prevailing at the time for comparable transactions with others. The amount of such related party loans was $4,652 at December 31, 1996 and $4,277 at December 31, 1995. During 1996 the amount of new loans and renewals extended to such related parties was $3,216 and the total of loan repayments was $3,291. 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.
1996 1995 1994 Principal Amount at December 31 $2,297 $4,244 $4,197 Gross Interest That Would Have Been Earned Under Original Terms 232 435 537 Interest Included in Net Income 48 116 162
NOTE 5: ALLOWANCE FOR LOAN LOSSES (In Thousands) The following summarizes the changes in the allowance for loan losses:
1996 1995 1994 Balance at Beginning of Year $12,106 $12,338 $16,078 Provision for Loan Losses 896 1,170 (950) Recoveries 366 369 696 Charge-Offs (946) (1,771) (3,486) Transfer with Loan Sales (6,841) --- --- Balance at End of Year $ 5,581 $12,106 $12,338
At December 31, 1996 and 1995, the recorded investment in impaired loans amounted to $1,301 and $2,107, respectively. At December 31, 1996, the allowance for loan losses included $195, which represented the amount of allowance related to the impaired loans at that date. 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 in impaired loans for 1996 and 1995 was $1,465 and $1,327, respectively. During 1996 and 1995, 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, 1996 and 1995 is presented below:
1996 1995 Bank Premises, Including Land $11,202 $18,489 Equipment, Furniture and Fixtures 8,992 12,931 Leasehold Improvements 20 334 Sub-Total 20,214 31,754 Accumulated Depreciation and Amortization (10,800) (17,866) Net Premises and Equipment $ 9,414 $13,888
Amounts charged to operations for depreciation and amortization totaled $879, $1,240 and $1,476 in 1996, 1995 and 1994, respectively. NOTE 7: OTHER REAL ESTATE OWNED (In Thousands) Other real estate owned, net of an allowance for estimated losses, at December 31, 1996 and 1995 consisted of the following:
1996 1995 Single-Family 1 - 4 Units $ --- $ 82 Commercial Real Estate 86 2,328 Construction and Land Development 50 --- Other Real Estate Owned, Net $ 136 $2,410
The following table summarizes changes in the net carrying amount of other real estate owned at December 31, 1996 and 1995:
1996 1995 Balance at Beginning of Year $2,410 $3,396 Properties Acquired Through Foreclosure 302 642 Adjustments for Change in Fair Value (85) (161) Sales (2,491) (1,467) Balance at End of Year $ 136 $2,410
The following summarizes the changes in the allowance for other real estate owned losses:
1996 1995 Balance at Beginning of Year $370 $369 Additions 85 161 Charge-Offs (347) (160) Balance at End of Year $108 $370
NOTE 8: TIME DEPOSITS (In Thousands) The following summarizes the contractual maturities of time deposits during years subsequent to December 31, 1996:
Time Deposits Other of $100,000 Time or More Deposits 1997 $79,761 $96,674 1998 1,546 26,893 1999 428 3,606 2000 1,463 5,337 2001 604 3,246 Total $83,802 $135,756
The carrying value of time deposits at December 31, 1996 and 1995 was $219,558 and $247,438, respectively. The fair value of time deposits at December 31, 1996 and 1995 was $219,558 and $247,728, respectively. The fair value of time deposits is based on the discounted value of contractual cash flows, except that the fair value is limited to the extent that the customer could redeem the certificate after imposition of a premature withdrawal penalty. The discount rate is estimated using the rates 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: 1996 1995 Balance at December 31 $16,597 $14,045 Maximum Month-End Balance 20,099 14,460 Average During the Year 15,043 12,166 Average Rate During the Year 4.72% 4.97% Rate at December 31 4.39% 4.29% Other Short-Term Borrowings: Balance at December 31 $6,109 $1,252 Maximum Month-End Balance 8,336 8,402 Average During the Year 3,430 3,689 Average Rate During the Year 5.20% 5.81% Rate at December 31 5.50% 5.15% Average Aggregate Borrowing Rates 4.81% 5.16%
Securities sold under agreements to repurchase generally mature within ninety days. The Company maintains control over the securities underlying the agreements. Federal funds purchased represent overnight transactions. Other short-term borrowings include demand notes issued to the U.S. Treasury, and Federal Home Loan Bank (FHLB) borrowings. The subsidiary banks have lines of credit available with the FHLB. At December 31, 1996, the subsidiary banks could borrow up to approximately $29 million, of which $3 million was outstanding. NOTE 10: REGULATORY MATTERS (In Thousands) In the normal course of business, the Company and its subsidiaries operate under certain regulatory restrictions, such as the extent and structure of covered intercompany borrowings and maintenance of reserve requirement balances. The principal source of the funds for the payment of shareholder dividends by the Company has been from dividends declared and paid to the Company by its bank subsidiaries. As of December 31, 1996, 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 $8.6 million. Under current Federal Reserve regulations, the Company is prohibited from borrowing from the subsidiary banks unless such borrowings are secured by specific obligations. Additionally, the maximum of any such borrowing is limited to 10% of an affiliate's capital and surplus. The Company and its subsidiary banks are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory--and possibly additional discretionary--actions by regulators that, if undertaken, could have a direct material effect on an institution's consolidated financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and its subsidiary banks must meet specific capital guidelines that involve quantitative measures of assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. Capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Quantitative measures established by regulation to ensure capital adequacy require the Company and its subsidiary banks to maintain minimum capital amounts and ratios (set forth in the table below) of total and Tier I capital (as defied in the regulations) to risk-weighted assets (as defined), and of Tier I capital (as defined) to average assets (as defined). Management believes, as of December 31, 1996, that the Company and all subsidiary banks meet all capital adequacy requirements to which they are subject. As of December 31, 1996, the most recent notification from the Federal Reserve Bank of New York (the primary regulator of the Company) and the Office of the Comptroller of the Currency (the primary regulator of the subsidiary banks) categorized each respective entity as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized the Company must maintain minimum total risk-based, Tier I risk-based, and Tier I leverage ratios as set forth in the table below. There are no conditions or events since that notification that management believes have changed the Company's or its subsidiary banks' categories. The Company ("Arrow") and its subsidiary banks, Glens Falls National Bank and Trust Company ("Glens Falls National") and Saratoga National Bank and Trust Company ("Saratoga National") actual capital amounts and ratios are presented in the table below as of December 31, 1996:
(Dollars in Thousands) Minimum Amounts To Be Well Minimum Amounts Capitalized Under For Capital Prompt Corrective Actual Adequacy Purposes Action Purposes Amount Ratio Amount Ratio Amount Ratio As of December 31, 1996: Total Capital (to Risk Weighted Assets): Arrow $76,885 20.6% $29,887 8.0 $37,359 10.0% Glens Falls National 47,902 15.6 24,581 8.0 30,726 10.0 Saratoga National 6,353 10.7 4,741 8.0 5,926 10.0 Tier I Capital (to Risk Weighted Assets): Arrow $72,204 19.3% $14,941 4.0% $22,412 6.0% Glens Falls National 44,050 14.3 12,287 4.0 18,431 6.0 Saratoga National 5,643 9.5 2,371 4.0 3,557 6.0 Tier I Capital (to Average Assets): Arrow $72,204 11.2% $25,856 4.0% $25,856 4.0% Glens Falls National 44,050 7.9 22,360 4.0 27,951 5.0 Saratoga National 5,643 7.6 2,974 4.0 3,717 5.0
NOTE 11: 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 1996 1995 1996 1995 Actuarial Present Value of Benefit Obligations: Vested Benefit Obligation $ 9,430 $ 9,552 $ 2,741 $1,581 Nonvested Benefit Obligation 185 241 --- 6 Accumulated Benefit Obligation 9,615 9,793 2,741 1,587 Effect of Projected Future Compensation Levels 2,742 2,896 419 487 Projected Benefit Obligation 12,357 12,689 3,160 2,074 Plan Assets at Fair Value 14,233 13,636 --- --- Plan Assets in Excess of (Less than) Projected Benefit Obligation 1,876 947 (3,160) (2,074) Unrecognized Net Loss from Past Experience Different from that Assumed and Effect of Changes in Assumptions 326 1,113 419 186 Unrecognized Prior Service Cost (48) (54) 782 1,296 Unrecognized Net Asset at Transition (being recognized over 15 years) (500) (589) --- --- Adjustment Required to Recognize Minimum Liability --- --- (782) (994) Prepaid (Accrued) Pension Cost $ 1,654 $ 1,417 $(2,741) $(1,586)
The following table sets forth the components of the Company's net periodic pension expense:
Qualified Non-contributory Plan: 1996 1995 1994 Service Cost - Benefits Earned During the Period $ 588 $ 481 $533 Interest Cost on Projected Benefit Obligation 918 830 788 Actual Return on Plan Assets (2,133) (2,828) (557) Net Amortization and Deferral 835 1,759 (542) Net Periodic Pension Expense $ 208 $ 242 $222 Supplemental Nonqualified Plan: Service Cost - Benefits Earned During the Period $ 56 $ 53 $ 40 Interest Cost on Projected Benefit Obligation 177 142 66 Net Amortization and Deferral 188 165 104 Net Periodic Pension Expense $ 421 $ 360 $210
The actuarial assumptions used to determine the projected benefit obligation at December 31, 1996 and 1995 include a discount rate of 7.25% for both years, and an assumed rate of increase in future compensation of 4.5% for both years. The expected rate of return on investments was 9.0% for both 1996 and 1995. The plan's assets are primarily comprised of short-term funds and U.S. Treasury obligations, high grade corporate bonds and marketable equity securities. At December 31, 1996 and 1995, plan assets included 102 and 130 shares, respectively, of Arrow Financial Corporation common stock with a market value of $2,397 and $2,414, respectively. During the respective years, the Plan received $88 and $74 from cash dividends on the Company's common stock. During 1996, divestiture of the Company's Vermont banking operations created one-time financial accounting transactions for the defined benefit pension plan and the supplemental nonqualified plan, above, and for the nonpension postretirement benefit plan, discussed below. At December 31, 1996, the prepaid pension cost for the defined benefit plan included a curtailment gain amounting to $445; the accrued pension cost for the supplemental nonqualifed plan reflected a $523 reduction of unrecognized prior service costs and recognition of $551 in additional benefits provided by the plan; and the accrued postretirement benefit cost for the nonpension plan included a curtailment loss of $561. Net expenses for these transactions were charged to the net gain on the disposition of Vermont operations (see Note 21) and, therefore, are not included in the net periodic pension expense above, or the net periodic postretirement benefit expense below. The Company sponsors health and dental care plans along with term life insurance that provide postretirement benefits to eligible full and part-time employees. The medical and life plans are contributory, with retiree contributions based on length of service. The dental plan is fully contributory. The accounting for the health plan provides for automatic increases of Company contributions each year based on the increase in inflation up to a maximum of 5%. The Company's policy is to fund the cost of postretirement benefits in amounts determined at the discretion of management. The following table presents the plan's status reconciled with amounts recognized in the Company's Consolidated Balance Sheets at December 31, 1996 and 1995:
1996 1995 Accumulated Postretirement Benefit Obligation: Retirees $3,112 $2,794 Fully Eligible Active Plan Participants 221 177 Other Active Plan Participants 1,338 1,570 Total Accumulated Postretirement Benefit Obligation 4,671 4,541 Unrecognized Transition Obligation (Being Recognized Over 20 Years) (1,939) (2,977) Unrecognized Prior Service Costs (66) --- Unrecognized Net Loss from Past Experience Different from that Assumed and Effect of Changes in Assumptions (449) (303) Accrued Postretirement Benefit Cost $2,217 $1,261
Net periodic postretirement benefit cost for the years ended December 31, 1996, 1995 and 1994, included the following components:
1996 1995 1994 Service Cost $121 $106 $128 Interest Cost 326 305 304 Net Amortization and Deferral 176 172 203 Net Periodic Postretirement Benefit Expense $623 $583 $635
For measurement purposes, the assumed annual rate of increase in the per capita cost of covered health care benefits for 1996 was 10% for medical benefits and 8% for dental benefits; the rate was assumed to decrease gradually to 5.5% by 2005, for both medical and dental benefits, 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, 1996 by $153 and the aggregate of the service and interest cost components of net periodic postretirement benefit cost for the year then ended by $12. The weighted-average discount rate used in determining the accumulated postretirement benefit obligation at December 31, 1996 and 1995 was 7.25% for both years, and the assumed rate of increase in future compensation was 4.5% for both years. NOTE 12: 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 note required the Company to contribute the amount necessary for the ESOP to discharge its current obligations which included principal and interest payments on the note. The Company's ESOP provision amounted to $840 in 1996 and $750 for both 1995 and 1994. As the debt was repaid, shares were released from collateral and allocated to active employees, based on the proportion 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 were reported as unallocated ESOP shares in shareholders' equity. As shares were released from collateral, the Company reported compensation expense equal to the current market price of the shares, and the shares became outstanding for earnings per share computations. As of Decmeber 31, 1996, the debt was fully repaid. The Company also sponsors an Employee Stock Purchase Plan (ESPP). Substantially all employees of the Company and its subsidiaries are eligible to participate upon satisfaction of applicable service requirements. The aggregate cost of the ESPP as reflected in the Company's consolidated financial statements was $100, $81 and $67 in 1996, 1995 and 1994, 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 $393, $478 and $520 for 1996, 1995 and 1994, respectively. The Company's subsidiary banks have a variety of performance based incentive compensation plans for their employees. NOTE 13: STOCK OPTION PLANS (Dollars In Thousands, Except Per Share Amounts) The Company has established fixed Incentive Stock Option and Non-qualified Stock Option Plans. As amended, these programs reserved 583,377 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. At December 31, 1996, 119,007 shares remained available for grant under these plans. Options may be granted at a price no less than the greater of the par value or fair market value of such shares on the date on which such option is granted, and generally expire ten years from the date of grant. Number of shares and related prices have been adjusted for the effect of the ten percent stock dividend declared in 1996 and the four percent stock dividend declared in 1995. 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. The Company applies APB Opinion No. 25 and related Interpretations in accounting for its plans. Accordingly, no compensation cost has been recognized for its stock option plans. 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 fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted- average assumptions used for grants in 1996 and 1995, respectively: dividend yield of 3.25% for each year; expected volatility of 21.3% and 24.0%; risk free interest rates of 6.05% and 5.68%; and expected lives of 7.0 years for each year. Pro forma disclosures for the Company for the years ending December 31, 1996 and 1995 are as follows:
1996 1995 Net Income: As Reported $20,260 $12,424 Pro Forma 20,191 12,419 Primary Earning Per Share: As Reported $3.40 $1.98 Pro Forma 3.39 1.98 Fully Diluted Earnings Per Share: As Reported $3.39 $1.97 Pro Forma 3.38 1.97
A summary of the status of the Company's stock option plans as of December 31, 1996, 1995 and 1994 and changes during the years ending on those dates is presented below:
1996 1995 1994 Weighted- Weighted- Weighted- Average Average Average Exercise Exercise Exercise Shares Price Shares Price Shares Price Options: Outstanding at January 1 288,071 12.42 341,177 10.87 286,442 10.31 Granted 51,000 23.94 66,990 16.02 77,792 12.89 Exercised (78,120) 11.19 (117,808) 10.00 (11,505) 8.74 Forfeited (4,400) 16.02 (2,288) 12.89 (11,552) 12.53 Outstanding at Year-end 256,551 15.02 288,071 12.42 341,177 10.87 Exercisable at Year-end 120,171 148,216 218,675 Weighted-Average Fair Value of Options Granted During the Year $5.81 $4.03
The following table summarizes information about the Company's stock options at December 31, 1996:
Options Outstanding Options Exercisable Weighted- Average Weighted- Weighted- Range of Number Remaining Average Number Average Exercise Outstanding Contractual Exercise Exercisable Exercise Prices At 12/31/96 Life Price at 12/31/96 Price $4.86-9.90 47,823 6.3 years $ 8.73 42,562 $ 8.58 $11.57-13.43 95,137 6.0 12.74 61,960 12.65 $16.02 62,591 8.9 16.02 15,649 16.02 $23.94 51,000 9.9 23.94 --- --- $4.86-23.94 256,551 7.5 15.02 120,171 11.65
NOTE 14: OTHER OPERATING INCOME AND OTHER OPERATING EXPENSE (In Thousands) Other operating income included in the consolidated statements of income are as follows:
1996 1995 1994 Financial Institution Bond Recovery $ --- $5,000 $ --- All Other 1,849 1,052 1,047 Total Other Operating Income $1,849 $6,052 $1,047
Other operating expenses included in the consolidated statements of income are as follows:
1996 1995 1994 Advertising and Promotion $ 572 $ 694 $ 634 Stationery and Printing 644 735 736 Telephone and Communications 681 707 733 Postage 909 989 1,018 Legal 838 805 508 Other Real Estate Owned Losses, Net 271 209 1,716 Other Real Estate Owned Expenses 85 215 407 FDIC and Other Insurance 258 1,147 2,004 All Other 2,079 3,588 3,170 Total Other Operating Expense $6,336 $9,089 $10,926
NOTE 15: INCOME TAXES (In Thousands) The consolidated provision for income taxes is summarized below:
1996 1995 1994 Current Tax Expense: Federal $ 9,378 $5,650 $2,015 State 1,347 1,064 1,070 Total Current Tax Expense 10,725 6,714 3,085 Deferred Tax Expense: Federal 409 321 (1,893) State (312) (49) (61) Total Deferred Tax Expense (Benefit) 97 272 (1,954) Total Consolidated Provision for Income Taxes $10,822 $6,986 $1,131
The consolidated provisions for income taxes were less than the amounts computed by applying the U.S. Federal Income Tax Rate of 35% for 1996 and 1995, and 34% for 1994 to pre-tax income from continuing operations as a result of the following:
1996 1995 1994 Computed Tax Expense at Statutory Rates $10,879 $6,793 $4,235 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) Tax-Exempt Income (440) (492) (307) Nondeductible Interest Expense 53 74 35 State Taxes, Net of Federal Income Tax Benefit 673 659 666 Other Items, Net (343) (48) 121 Total Consolidated Provision for Income Taxes $10,822 $6,986 $1,131
The components of deferred income tax expense (benefit) for the years ended December 31, 1996, 1995 and 1994 are as follows:
1996 1995 1994 Deferred Tax Expense (Exclusive of the Effects of the Decrease in the Valuation Allowance for Deferred Tax Assets) $ 97 $272 $ 1,665 Decrease in Beginning of the Year Balance of the Valuation Allowance for Deferred Tax Assets --- --- (3,619) Total Deferred Tax Expense (Benefit) $ 97 $272 $(1,954)
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, 1996 and 1995 are presented below:
1996 1995 Deferred Tax Assets: Allowance for Loan Losses $2,300 $4,607 Pension and Deferred Compensation Plans 2,188 1,251 Deferred Expenses 1,699 1,063 Total Gross Deferred Tax Assets 6,187 6,921 Deferred Tax Liabilities: Pension Plans 555 653 Depreciation 297 412 Deferred Income 447 475 Other 250 646 Total Gross Deferred Tax Liabilities 1,549 2,186 Net Deferred Tax Asset $4,638 $4,735
Management believes that the realization of the recognized net deferred tax asset of $4,638 at December 31, 1996, is more likely than not, based on existing carryback ability, available tax planning strategies and expectations as to future taxable income. Accordingly, there was no valuation allowance for deferred tax assets as of December 31, 1996. Not included in net deferred tax assets above are deferred tax liabilities relating to unrealized gains on securities available for sale of $154 at December 31, 1996 and $793 at December 31, 1995. NOTE 16: LEASE COMMITMENTS (In Thousands) At December 31, 1996, the Company was obligated under a number of noncancellable operating leases for land, buildings and equipment. Certain of these leases provide for escalation clauses and contain renewal options calling for increased rentals if the lease is renewed. Future minimum lease payments on operating leases at December 31, 1996 were as follows: Operating Leases 1997 $ 70 1998 49 1999 39 2000 39 2001 39 Later Years 646 Total Minimum Lease Payments $882 NOTE 17: 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:
1996 1995 Fixed Variable Total Fixed Variable Total Commitments to Extend Credit $ --- $60,919 $60,919 $ --- $75,899 $75,899 Standby Letters of Credit --- 1,185 1,185 --- 3,352 3,352
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 18: 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:
1996 1995 Carrying Fair Carrying Fair Amount Value Amount Value Securities Held-to-Maturity (Notes 1 and 3) $ 30,876 $ 31,519 $ 13,921 $ 14,508 Net Loans and Leases (Notes 1 and 4) 387,930 392,128 505,681 516,999 Time Deposits (Notes 1 and 8) 219,558 219,558 247,438 247,728
NOTE 19: SIGNIFICANT GROUP CONCENTRATIONS OF CREDIT RISK (In Thousands) Most of the Company's loans are with customers in northeastern New York. Although the loan portfolios of the subsidiary banks are well diversified, tourism has a substantial impact on the northeastern New York economy. The commitments to extend credit are fairly consistent with the distribution of loans presented in Note 4. Generally, the loans are secured by assets and are expected to be repaid from cash flow or the sale of selected assets of the borrowers. The Company evaluates each customer's creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Company upon extension of credit, is based upon management's credit evaluation of the counterparty. The nature of the collateral varies with the type of loan and may include: residential real estate, cash and securities, inventory, accounts receivable, property, plant and equipment, income producing commercial properties and automobiles. NOTE 20: PARENT ONLY FINANCIAL INFORMATION (In Thousands) Condensed financial information for Arrow Financial Corporation is as follows:
BALANCE SHEETS December 31, 1996 1995 ASSETS Cash in Subsidiary Banks $ --- $ 269 Interest-Bearing Deposits with Subsidiary Banks 374 388 Cash and Cash Equivalents 374 657 Securities Available-for-Sale 50 44 Investment in Subsidiaries at Equity 83,588 69,949 Premises and Equipment, Net 19 30 Other Assets 3,136 2,047 Total Assets $87,167 $72,727 LIABILITIES Short-Term Debt with Nonbank Subsidiary $ 6,375 $ --- Note Payable - ESOP --- 700 Other Liabilities 6,496 4,523 Total Liabilities 12,871 5,223 SHAREHOLDERS' EQUITY Common Stock 6,577 5,979 Surplus 54,569 40,938 Undivided Profits 26,992 24,296 Unallocated ESOP Shares --- (700) Valuation Allowance for Securities Available-for-Sale 208 1,152 Treasury Stock, at Cost (14,050) (4,161) Total Shareholders' Equity 74,296 67,504 Total Liabilities and Shareholders' Equity $87,167 $72,727
STATEMENTS OF INCOME Years Ended December 31, Income: 1996 1995 1994 Dividends from Bank Subsidiaries $ 3,990 $3,155 $ 2,075 Dividends from Nonbank Subsidiaries 2,569 3,129 --- Interest and Dividends on Securities Available-for-Sale 2 16 15 Other Income (Including Management Fees) 8,214 7,454 7,498 Net Gains on Securities Transactions --- 51 70 Total Income 14,775 13,805 9,658 Expense: Interest Expense 421 244 409 Salaries and Benefits 5,666 5,727 5,087 Occupancy and Equipment 995 969 1,015 Other Expense 1,764 1,406 1,496 Total Expense 8,846 8,346 8,007 Income Before Income Tax Benefit and Equity in Undistributed Net Income of Subsidiaries 5,929 5,459 1,651 Income Tax Benefit 244 270 448 Income Before Equity in Undistributed Net Income of Subsidiaries 6,173 5,729 2,099 Equity in Undistributed Net Income of Subsidiaries 14,087 6,695 9,226 Net Income $20,260 $12,424 $11,325
STATEMENTS OF CASH FLOWS Years Ended December 31, 1996 1995 1994 Operating Activities: Net Income $20,260 $12,424 $11,325 Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities: Undistributed Earnings of Subsidiaries (14,087) (6,695) (9,226) Depreciation and Amortization 12 38 41 Compensation Expense for Allocated ESOP Shares 252 24 --- Gains on the Sale of Securities Available-for-Sale --- (51) (70) Deferred Income Tax Benefit (740) (229) (643) Changes in Other Assets and Liabilities 1,622 686 1,218 Net Cash Provided by Operating Activities 7,319 6,197 2,645 Investing Activities: Proceeds from the Sale of Securities Available-for-Sale --- 469 596 Purchases of Securities Available-for-Sale (1) --- (680) Purchases of Securities Held-to-Maturity --- --- --- Capital Investment in Subsidiary Banks (500) --- (1,000) Return of Capital from Subsidiary Banks --- --- 2,000 Sale of Fixed Assets to Subsidiaries --- 859 --- Purchases of Fixed Assets --- --- (23) Net Cash (Used in) Provided by Investing Activities (501) 1,328 893 Financing Activities: Net Increase in Short-Term Borrowings 6,375 --- --- Repayment of Long-Term Debt --- (4,470) --- Common Stock Issued --- --- 100 Exercise of Stock Options 412 164 104 Disqualifying Disposition of Incentive Stock Options 50 28 --- Purchase of Treasury Stock (10,052) (1,881) (494) Cash Dividends Paid (3,886) (3,196) (2,039) Net Cash Used in Financing Activities (7,101) (9,355) (2,329) Net (Decrease) Increase in Cash and Cash Equivalents (283) (1,830) 1,209 Cash and Cash Equivalents at Beginning of the Year 657 2,487 1,278 Cash and Cash Equivalents at End of the Year $ 374 $ 657 $2,487 Supplemental Cash Flow Information: Interest Paid $ 288 $ 277 $ 404 Income Taxes Paid 11,235 6,908 1,537 Cancellation of Debentures by Exercise of Cancellable Mandatory Stock Purchase Contracts --- 370 200
NOTE 21: DIVESTITURE OF VERMONT OPERATIONS (In Thousands) During 1996, the Company, in three separate transactions, completed the divestiture of its Vermont banking operations. This included the transfer of approximately $208 million of deposits, the sale of approximately $148 million of loans and the sale of the Vermont trust operation. The net gain on the divestiture was $15.3 million. Principal components of the net gain included: premium on deposits transferred ($15.7 million), proceeds from the sale of the trust operation ($3.0 million) and a gain on the loans sold ($2.6 million), partially offset by personnel costs relating to severance and the costs of benefits related to the Company's pension and postretirement plans, as described in Note 11 ($1.7 million), the writedown of certain fixed assets, principally the main office ($2.0 million) and other net costs ($2.3 million), which included professional fees, reserves for certain warranties provided to the purchasers, losses on various other assets and miscellaneous costs. The Company did not transfer the main office located in Rutland, Vermont. At December 31, 1996, the Company was holding the building for sale and it was carried at estimated fair value less costs to sell and included in other assets on the consolidated balance sheet. EX-21 5 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 6 Exhibit 23 Consent of Independent Certified Public Accountants The Board of Directors Arrow Financial Corporation We consent to incorporation by reference in the following registration statements: File No. 2-98735 on Form S-8, File No. 2-98736 on Form S-8 File No. 33-48225 on Form S-8, and File No. 33-66192 on Form S-8 of Arrow Financial Corporation of our report dated January 17, 1997, relating to the consolidated balance sheets of Arrow Financial Corporation and subsidiaries as of December 31, 1996 and 1995, and the related consolidated statements of income, changes in shareholders' equity, and cash flows for the three-year period ended December 31, 1996, which report appears in the December 31, 1996 Annual Report on Form 10-K of Arrow Financial Corporation. KPMG Peat Marwick March 25, 1997 EX-27 7 ARTICLE 9 FDS FOR 10-K
9 1000 YEAR DEC-31-1996 DEC-31-1996 19572 0 17925 0 171743 30876 31519 393511 5581 652603 541747 22706 13854 0 6577 0 0 67719 652603 42195 936 11744 54875 20935 21826 33049 896 (101) 24774 31082 31082 0 0 20260 3.40 3.39 5.08 2297 321 0 0 12106 946 366 5581 5581 0 384
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