-----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, DtRsH+ZdbL7gbX7tAI/PRfwWjk097FhHAnXQ0KsyrGtlSIih67aw0WaQglvgusp6 VH56aWbM8Ig3P6vZpgmyLw== 0000717538-99-000005.txt : 19990325 0000717538-99-000005.hdr.sgml : 19990325 ACCESSION NUMBER: 0000717538-99-000005 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990323 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: SEC FILE NUMBER: 000-12507 FILM NUMBER: 99570269 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, 1998 Commission file number 0-12507 ARROW FINANCIAL CORPORATION (Exact name of registrant as specified in its charter) NEW YORK 22-2448962 (State or Other Jurisdiction of (I.R.S. Employer Incorporation or Organization) Identification No.) 250 GLEN STREET, GLENS FALLS, NEW YORK 12801 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (518) 745-1000 ___________________________ SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT - NONE SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT Common stock, Par Value $1.00 (Title of Class) Indicate by checkmark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. Indicate by checkmark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No Indicate the number of shares outstanding of each of the registrant's classes of common stock, as of the latest practicable date. Class Outstanding at February 26, 1999 Common stock, Par Value $1.00 Per Share 6,207,753 State the aggregate market value of the voting stock held by non-affiliates of registrant. Aggregate market value Based upon the average of the closing bid of voting stock and closing asked prices on the NASDAQ Exchange $171,489,000 February 26, 1999 DOCUMENTS INCORPORATED BY REFERENCE Portions of Registrant's Proxy Statement for the Annual Meeting of Shareholders to be held April 14, 1999 (Part III) ARROW FINANCIAL CORPORATION FORM 10-K INDEX Cautionary Statement under Federal Securities Laws PART I Item 1. Business A. General B. Lending Activities C. Supervision and Regulation D. Competition E. Statistical Disclosure (Guide 3) F. Legislative Developments G. Executive Officers of the Registrant Item 2. Properties Item 3. Legal Proceedings Item 4. Submission of Matters to a Vote of Security Holders PART II Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters Item 6. Selected Financial Data Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations A. Overview B. Results of Operations I. Net Interest Income II. Provision for Loan Losses and Allowance for Loan Losses III. Other Income IV. Other Expense V. Income Taxes C. Financial Condition I. Investment Portfolio II. Loan Portfolio a. Distribution of Loans and Leases b. Risk Elements III. Summary of Loan Loss Experience IV. Deposits V. Time Certificates of $100,000 or More D. Liquidity E. Capital Resources and Dividends F. Fourth Quarter Results G. Year 2000 Readiness Disclosure Item 7A. Quantitative and Qualitative Disclosures About Market Risk Item 8. Financial Statements and Supplementary Data Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure PART III Item 10. Directors and Executive Officers of the Registrant Item 11. Executive Compensation Item 12. Security Ownership of Certain Beneficial Owners and Management Item 13. Certain Relationships and Related Transactions PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K Signatures Exhibits Index Cautionary Statement under Federal Securities Laws: The information contained in this Annual Report on Form 10-K contains statements that are not historical in nature but rather are based on management's beliefs, assumptions, expectations, estimates and projections about the future. These statements are "forward-looking statements" within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, and involve a degree of uncertainty and attendant risk. Words such as "expects," "believes," "should," "plans," "will," "estimates," and variations of such words and similar expressions are intended to identify such forward-looking statements. Some of these statements, such as those included in the interest rate sensitivity analysis in section 7A, below, entitled "Quantitative and Qualitative Disclosures About Market Risk," are merely presentations of what future performance or changes in future performance would look like based on hypothetical assumptions and on simulation models. Other forward-looking statements, such as those in Section G of "Management's Discussion and Analysis" below, dealing with the Company's program to deal with the so-called "Year 2000 Readiness" problem, involve speculation about a broad range of factors, many of which are beyond the Company's control or its ability to evaluate with any degree of precision. These statements are not guarantees of future performance and involve certain risks and uncertainties that are difficult to quantify or, in some cases, to identify. In the case of all forward-looking statements, actual outcomes and results may differ materially from what the statements predict or forecast. Factors that could cause or contribute to such differences include, but are not limited to, changes in economic and market conditions, including unanticipated fluctuations in interest rates, effects of state and federal regulation, prevailing levels of competition, emerging technologies and the Company's ability to adapt thereto, and risks inherent in banking operations. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. The Company undertakes no obligation to revise or update these forward-looking statements to reflect the occurrence of unanticipated events. PART I Item 1: Business A. GENERAL Arrow Financial Corporation (the "Company"), a New York corporation, was incorporated on March 21, 1983 and is registered as a bank holding company within the meaning of the Bank Holding Company Act of 1956. The Company owns two nationally chartered banks in New York, Glens Falls National Bank and Trust Company, Glens Falls, New York ("GFNB") and Saratoga National Bank and Trust Company, Saratoga Springs, New York ("SNB"), as well as one non-bank subsidiary, the operations of which are not significant. The Company previously owned a bank in Vermont but sold all of its Vermont operations in 1996 in three separate transactions and liquidated its Vermont bank charter in 1997. The Company owns directly or indirectly all voting stock of all its subsidiaries. The business of the Company consists primarily of the ownership, supervision and control of its bank subsidiaries. The Company provides its subsidiaries with various advisory and administrative services and coordinates the general policies and operation of the subsidiary banks. There were 366 full-time equivalent employees of the Company and the subsidiary banks at December 31, 1998.
SUBSIDIARY BANKS: GLENS (Dollars in Thousands) FALLS SARATOGA NATIONAL NATIONAL BANK & BANK & TRUST CO. TRUST CO. ("GFNB") ("SNB") Total Assets at Year-End $850,481 $96,328 Trust Assets Under Management at Year-End (Not Included in Total Assets) $593,164 $ 5,592 Date Organized 1851 1988 Employees 344 22 State of Headquarters New York New York Offices 21 2 Counties of Operation Warren Saratoga Washington Saratoga Essex Clinton Main Office 250 Glen St. 137 So. Broadway Glens Falls, Saratoga Springs, New York New York
The Company through its subsidiary banks offers a full range of commercial and consumer financial products. The banks' deposit base consists of core deposits derived principally from the communities which the banks serve. The banks target their lending activities to consumers and small and mid-sized companies in the banks' immediate geographic areas. In addition to traditional banking services, the Company offers credit card processing services for other financial institutions and, through its banks' trust departments, provides retirement planning, trust and estate administration services for individuals and pension, profit-sharing and employee benefit plan administration for corporations. B. LENDING ACTIVITIES The Company's subsidiary banks engage in a wide range of lending activities, including commercial and industrial lending primarily to small and mid-sized companies; mortgage lending for the purchase of residential and commercial properties; and consumer installment, credit card and home equity financing. The Company also maintains an active indirect lending program through its sponsorship of dealer programs, under which it purchases dealer paper from automobile and other dealers meeting pre-established specifications. Historically, the Company has sold a portion of its residential real estate loan originations into the secondary market, primarily to Freddie Mac and state housing agencies, while retaining the servicing rights. Loan sales into the secondary market have diminished in the past three years, however, as the banks have sought to increase their own portfolios. In addition to interest earned on loans, the banks receive facility fees for various types of commercial and industrial credits, and commitment fees for extension of letters of credit and certain types of loans. Generally, the Company continues to implement conservative lending strategies and policies that are intended to protect the quality of the loan portfolio. These include stringent underwriting and collateral control procedures and credit review systems through which intensive reviews are conducted. It is the Company's policy to discontinue the accrual of interest on loans when the payment of interest and/or principal is due and unpaid for a designated period (generally 90 days) or when the likelihood of repayment is, in the opinion of management, uncertain. Income on such loans is thereafter recognized only upon receipt (see Part II, Item 7.C.II.b., "Risk Elements"). The banks lend primarily to borrowers within the geographic areas served by the banks. The banks' combined loan portfolios do not include any foreign loans or any significant industry concentrations except as described in Note 24 to the Consolidated Financial Statements in Part II, Item 8 of this report. Except for credit card loans, the portfolios generally are fully collateralized, and many commercial loans are further secured by personal guarantees. C. SUPERVISION AND REGULATION The following generally describes the regulation to which the Company and its banks are subject. Bank holding companies and banks are extensively regulated under both federal and state law. To the extent that the following information summarizes statutory or regulatory provisions, it is qualified in its entirety by reference to the particular law or regulation. Any change in applicable law or regulation may have a material effect on the business and prospects of the Company and the banks. The Company is a legal entity separate and distinct from its subsidiaries. Most of the Company's revenues, on a parent company only basis, result from management fees, dividends and undistributed earnings from the subsidiary banks. The right of the Company, and consequently the right of creditors and shareholders of the Company, to participate in any distribution of the assets or earnings of the banks through the payment of such dividends or otherwise is necessarily subject to the prior claims of creditors of the banks, except to the extent that claims of the Company in its capacity as a creditor of the banks also may be recognized. Moreover, there are various legal and regulatory limitations applicable to the payment of dividends to the Company by its subsidiaries as well as the payment of dividends by the Company to its shareholders. (See "Capital Resources and Dividends" in Part II, Item 7.E of this report). The ability of the Company and the banks to pay dividends in the future is, and is expected to continue to be, influenced by regulatory policies and capital guidelines. The Company is a registered bank holding company within the meaning of the Bank Holding Company Act of 1956 (BHC Act) and is subject to regulation by the Board of Governors of the Federal Reserve System (Federal Reserve Board). Additionally, as a "bank holding company" under New York State Law, the Company is subject to regulation by the New York State Banking Department. The subsidiary banks are nationally chartered banks and are subject to the supervision of and examination by the Office of the Comptroller of the Currency ("OCC"). The banks are members of the Federal Reserve System and the deposits of each subsidiary bank are insured by the Bank Insurance Fund of the Federal Deposit Insurance Corporation ("FDIC"). The BHC Act prohibits the Company, with certain exceptions, from engaging, directly or indirectly, in non-bank activities and restricts loans by the banks to the Company or other non-bank affiliates. Under the BHC Act, a bank holding company must obtain Federal Reserve Board approval before acquiring, directly or indirectly, 5% or more of the voting shares of another bank or bank holding company (unless it already owns a majority of such shares). Under the 1994 Riegle-Neal Act, bank holding companies are now able to acquire banks or other bank holding companies located in all 50 states (see Item 1.F. "Legislative Developments".) During 1997 and 1998 banking regulators developed guidelines that financial institutions follow to ensure that their computer applications will operate properly for all dates after December 31, 1999. Additionally, the SEC prescribed disclosures for all publicly traded corporations, such as the Company, related to year 2000 preparedness. Those disclosures are located in section G of Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations." The Federal Reserve Board has adopted various "capital adequacy guidelines" for use in the examination and supervision of bank holding companies. One set of guidelines is the risk-based capital guidelines, which assign risk weightings to all assets and certain off-balance sheet items and establish an 8% minimum ratio of qualified total capital to the aggregate dollar amount of risk-weighted assets (which is almost always less than the dollar amount of such assets without risk weighting). At least half of total capital must consist of "Tier 1" capital, which comprises common equity, retained earnings and a limited amount of permanent preferred stock, less goodwill. Up to half of total capital may consist of so-called "Tier 2" capital, comprising a limited amount of subordinated debt, other preferred stock, certain other instruments and a limited amount of the allowance for loan losses. The Federal Reserve Board's other important guideline for measuring a bank holding company's capital is the leverage ratio standard, which establishes minimum limits on the ratio of a bank holding company's "Tier 1" capital to total tangible assets (not risk-weighted). For top-rated holding companies, the minimum leverage ratio is 3%, but lower-rated companies may be required to meet substantially greater minimum ratios. The subsidiary banks are subject to similar capital requirements adopted by their primary federal regulators. The year-end 1998 capital ratios of the Company and its subsidiary banks are set forth in Part II, Item 7.E. "Capital Resources and Dividends." A holding company's ability to pay dividends, repurchase its outstanding stock or expand its business through acquisitions of new subsidiaries can be restricted if capital falls below these capital adequacy guidelines or other informal capital guidelines or ratios that bank regulators may apply from time to time to specific banking organizations. In cases where banking regulators have significant concerns regarding the financial condition, assets or operations of a bank or bank holding company, the regulators may take enforcement action or impose enforcement orders, formal or informal, against the organization. Neither the Company nor any of its subsidiaries is now, or has been within the past year, subject to any formal or informal regulatory enforcement action or order. D. COMPETITION The Company and its subsidiaries face intense competition in all markets that they serve. Traditional competitors are other local commercial banks, savings banks, savings and loan institutions and credit unions, as well as local offices of major regional and money center banks. Also, non-banking organizations, such as consumer finance companies, insurance companies, securities firms, money market and mutual funds and credit card companies, which are not subject to the same regulatory restrictions and capital requirements that apply to the Company and its subsidiary banks, offer substantive equivalents of transaction accounts, credit cards and various other loan and financial products. E. STATISTICAL DISCLOSURE Statistical disclosure required by Securities Act Guide 3 to be set forth herein is found in Part II, Item 7 of this report, "Management's Discussion and Analysis of Financial Condition and Results of Operations," and in Part II, Item 8, "Financial Statements and Supplementary Data." INDEX TO SECURITIES ACT GUIDE 3, STATISTICAL DISCLOSURE BY BANK HOLDING COMPANIES Required Information Location Distribution of Assets, Liabilities and Stockholders' Equity; Interest Rates and Interest Differential Part II, Item 7.B.I. Investment Portfolio Part II, Item 7.C.I. Loan Portfolio Part II, Item 7.C.II. Summary of Loan Loss Experience Part II, Item 7.C.III. Deposits Part II, Item 7.C.IV. Return on Equity and Assets Part II, Item 6. Short-Term Borrowings Part II, Item 8. Note 9. F. LEGISLATIVE DEVELOPMENTS In 1994, Congress enacted the Riegle-Neal Interstate Banking and Branching Efficiency Act. Under the Act, as of September 29, 1995, bank holding companies were authorized as a matter of federal law to acquire banks located in any of the 50 states, notwithstanding any state laws to the contrary, provided all required regulatory and other approvals are obtained. Also, under the Act, effective June 1, 1997, banks headquartered in any state were permitted to branch into any other state, except for those states which enacted legislation prior to June 1, 1997 "opting out" of interstate branching. Only Colorado and Montana elected to "opt out" of interstate branching; thus, the Company's banks may branch into all other states, including all states adjacent to New York, upon receipt of all required approvals and subject to certain conditions of state law. In 1995, the federal bank regulatory authorities promulgated a set of revised regulations addressing the responsibilities of banking organizations under the Community Reinvestment Act ("CRA"). The revised regulations place additional emphasis on the actual experience of a bank in making loans in low- and moderate-income areas within its service area as a key determinant in evaluation of the bank's compliance with the statute. As in the prior regulations, bank regulators are authorized to bring enforcement actions against banks under the CRA only in the context of bank expansion or acquisition transactions. In 1991, the Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA") was enacted. Among other things, FDICIA requires the federal banking regulators to take prompt corrective action with respect to depository institutions that do not meet minimum capital requirements. FDICIA established five capital classifications for banking institutions, the highest being "well capitalized." Under regulations adopted by the federal bank regulators, a banking institution is considered "well capitalized" if it has a total risk-adjusted capital ratio of 10% or greater, a Tier 1 risk-adjusted capital ratio of 6% or greater and a leverage ratio of 5% or greater and is not subject to any regulatory order or written directive regarding capital maintenance. The Company and each of its subsidiary banks meet all these conditions and thus are classified as "well capitalized." FDICIA also imposed expanded accounting and audit reporting requirements for depository institutions whose total assets exceed $500 million. These requirements became effective for Glens Falls National Bank and Trust Company beginning in 1996. The FDIC levies assessments on various deposit obligations of the Company's banking subsidiaries. During 1995, the FDIC reduced the premium paid by the best-rated banks (including the Company's subsidiary banks) from $.23 per $100 of insured deposits to $.04. In 1996, the FDIC insurance premium was further reduced to a flat charge of $2 thousand per year for the highest-rated banks, including the Company's subsidiary banks. In 1996, Congress enacted the Deposit Insurance Funds Act, under which deposits insured by the Bank Insurance Fund ("BIF") are subject to assessment for payment on the Financing Corporation ("FICO") bond obligation at 1/5 the rate of the Savings Association Insurance Fund ("SAIF") assessable deposits. Accordingly, BIF-assessable deposits (like the deposits of the Company's banks) were assessed an additional 1.220 cents per $100 of insured deposits in 1998 and an additional 1.256 cents in 1997. Various other federal bills that would significantly affect banks, including proposals to permit banks to affiliate with full-service securities underwriting firms or non-financial organizations (Glass-Steagall Reform) have been introduced in Congress from time to time. The Company cannot estimate the likelihood of any such bills being enacted into law, or the ultimate effect that any such potential legislation, if enacted, would have upon its financial condition or operations. G. EXECUTIVE OFFICERS OF THE REGISTRANT The names and ages of the principal executive officers of the Company and positions held are presented in the following table. The officers are elected annually by the Board of Directors.
Name Age Positions Held and Years from Which Held Thomas L. Hoy 50 President and CEO since January 1, 1997 and President and COO of Glens Falls National Bank since 1995. Mr. Hoy was Executive Vice President of Glens Falls National Bank prior to 1995. Mr. Hoy has been with the Company since 1974. John J. Murphy 47 Executive Vice President, Treasurer and CFO since 1993. Mr. Murphy has served as Senior Vice President, Treasurer and CFO of the Company since 1983. Mr. Murphy has been with the Company since 1973. Gerard R. Bilodeau 51 Senior Vice President and Secretary since 1994. Mr. Bilodeau was Vice President and Secretary from 1993 to 1994 and was Director of Personnel prior to 1993. Mr. Bilodeau has been with the Company since 1969. John C. Van Leeuwen 55 Senior Vice President and Chief Credit Officer since 1995. Prior to 1995, Mr. Van Leeuwen served as Vice President and Loan Review Officer. Mr. Van Leeuwen has been with the Company since 1985.
Item 2: Properties The Company is headquartered at 250 Glen Street, Glens Falls, New York. The building is owned by Glens Falls National Bank and serves as its main office. Glens Falls National Bank owns eighteen additional offices and leases two, at market rates. Saratoga National Bank owns both of its offices. The Company continues to own the building in Rutland, Vermont, that served as headquarters for the Company's Vermont bank prior to the divestiture of those operations in 1996. The building was under contract for sale at December 31, 1998. Rental costs of premises did not exceed 5% of operating costs in 1998. In the opinion of management of the Company, the physical properties of the Company and the subsidiary banks are suitable and adequate. Item 3: Legal Proceedings The Company is not the subject of any material pending legal proceedings, other than ordinary routine litigation occurring in the normal course of its business. The Company's subsidiary banks are the subjects of or parties to various legal claims which arise in the normal course of their business. For example, from time to time, the banks have encountered claims against them grounded in lender liability, of the sort often asserted against financial institutions. These lender liability claims normally take the form of counterclaims to lawsuits filed by the banks for collection of past due loans. The various pending legal claims against the Company's current or former subsidiary banks, including lender liability claims, will not, in the opinion of management, result in any material liability. Item 4: Submission of Matters to a Vote of Security Holders None in the fourth quarter of 1998. PART II Item 5: Market for the Registrant's Common Equity and Related Stockholder Matters The common stock of Arrow Financial Corporation is traded on The Nasdaq Stock MarketSM under the symbol AROW. The high and low prices listed below represent actual sales transactions, as reported by Nasdaq, rounded to the nearest 1/8 point. Per share amounts and market prices have been adjusted for the August 1998 ten percent and the November 1997 five percent stock dividends.
Cash Sales Price Dividends High Low Declared 1997 1st Quarter $21.875 $20.125 $.173 2nd Quarter 24.500 21.250 .173 3rd Quarter 26.125 22.150 .173 4th Quarter 31.755 26.255 .191 1998 1st Quarter $31.250 $26.875 $.191 2nd Quarter 32.750 27.755 .191 3rd Quarter 32.750 24.000 .210 4th Quarter 29.125 24.500 .220
The payment of dividends by the Company is at the discretion of the Board of Directors and is dependent upon, among other things, the Company's earnings, financial condition and other factors, including applicable governmental regulations and restrictions. See "Capital Resources and Dividends" in Part II, Item 7.E. of this report. There were approximately 2,697 holders of record of common stock at December 31, 1998.
Item 6: Selected Financial Data FIVE YEAR SUMMARY OF SELECTED DATA Arrow Financial Corporation and Subsidiaries (Dollars In Thousands, Except Per Share Data) 1998 1997 1996 1995 1994 Consolidated Statements of Income Data: Interest and Dividend Income $63,033 $54,861 $54,875 $60,718 $52,514 Less: Interest Expense 28,142 23,887 21,826 24,865 18,202 Net Interest Income 34,891 30,974 33,049 35,853 34,312 Less: Provision for Loan Losses 1,386 1,303 896 1,170 (950) Net Interest Income After Provision for Loan Losses 33,505 29,671 32,153 34,683 35,262 Other Income 8,172 8,109 23,804 14,473 9,049 Net Gains (Losses) on Securities Transactions 408 74 (101) 23 (481) Less: Other Expense 24,506 21,702 24,774 29,769 31,374 Income Before Income Taxes 17,579 16,152 31,082 19,410 12,456 Provision for Income Taxes 5,744 5,155 10,822 6,986 1,131 Net Income $11,835 $10,997 $20,260 $12,424 $11,325 Earnings Per Common Share1: Basic $ 1.88 $ 1.71 $ 2.98 $ 1.72 $ 1.55 Diluted 1.85 1.69 2.95 1.71 1.50 Per Common Share1: Cash Dividends $ .81 $ .71 $ .57 $ .45 $ .28 Book Value 12.39 11.65 11.17 9.45 8.03 Tangible Book Value2 10.32 9.46 10.89 9.15 7.79 Consolidated Year-End Balance Sheet Data: Total Assets $939,029 $831,559 $652,603 $789,790 $746,431 Securities Available-for-Sale 267,731 221,837 171,743 178,645 53,868 Securities Held-to-Maturity 63,016 44,082 30,876 13,921 129,735 Loans and Leases, Net of Unearned Income 546,126 485,810 393,511 517,787 507,553 Nonperforming Assets 3,592 3,999 2,754 6,765 7,825 Deposits 775,597 720,915 541,747 694,453 650,485 Other Borrowed Funds 24,032 24,755 22,706 15,297 24,865 Long-Term Debt 45,000 --- --- --- 5,007 Shareholders' Equity 77,146 73,871 74,296 67,504 58,405 Selected Key Ratios: Return on Average Assets 1.36% 1.49% 2.86% 1.60% 1.52% Return on Average Equity 15.51 15.19 8.78 19.45 20.79 Dividend Payout 43.78 41.49 19.47 25.89 19.08 Average Equity to Average Assets 8.74 9.80 9.95 8.22 7.34
1 Per share amounts have been adjusted for the 1998 ten percent, the 1997 five percent, the 1996 ten percent and the 1995 four percent stock dividends. 2 Tangible book value excludes from total equity intangible assets, primarily goodwill associated with branch purchases. Item 7: Management's Discussion and Analysis of Financial Condition and Results of Operations The following discussion and analysis focuses on and reviews the Company's results of operations for each of the years in the three-year period ended December 31, 1998 and the financial condition of the Company as of December 31, 1998 and 1997. Per share amounts have been restated to reflect the ten percent stock dividend paid in August 1998 and the five percent stock dividend paid in November 1997. The discussion below should be read in conjunction with the consolidated financial statements and other financial data presented elsewhere herein. A. OVERVIEW The Company reported net income of $11.8 million for 1998 compared to net income of $11.0 million for 1997 and $20.3 million for 1996. As indicated in the following table "Summary of Core Earnings," net income from each year included nonrecurring items. For 1997, the principal nonrecurring item was a favorable tax settlement with New York State over a combined reporting issue. For 1996 the major item was the $10.3 million in net after-tax gains from the sale of the Company's Vermont bank. Net income, on a recurring basis, increased $1.5 million, or 15.2% from 1997 to 1998 after increasing by $157 thousand, or 1.6% from 1996 to 1997. Diluted earnings per share (stated on a recurring basis) increased $.27, or 17.5%, from 1997 to 1998, and by $.10, or 6.9%, from 1996 to 1997. The following analysis adjusts net income for nonrecurring items to arrive at a comparative presentation of the Company's "core" earnings. Also presented are "cash" earnings per share, which adds-back to recurring net income the amortization of goodwill, net of tax, associated with branch purchases.
SUMMARY OF CORE EARNINGS (In Thousands, Except Per Share Data) 1998 1997 1996 Net Income, as Reported $11,835 $10,997 $20,260 Nonrecurring Items, Net of Tax: Divestiture of Vermont Banking Operations --- --- (10,267) State Tax Settlement --- (464) --- OREO Transactions (10) (70) 174 Net Securities Transactions (241) (44) 57 Other --- (361) (323) Recurring Net Income $11,584 $10,058 $ 9,901 Recurring Diluted Earnings Per Share $ 1.81 $ 1.54 $ 1.44 Recurring "Cash" Diluted Earnings Per Share 1.90 1.59 1.44 Diluted Earnings Per Share, as Reported 1.85 1.69 2.95 Return on Average Assets 1.36% 1.49% 2.86% Return on Average Assets, Based on Recurring Net Income 1.33 1.36 1.41 Return on Average Equity 15.51% 15.19% 28.78% Return on Average Equity, Based on Recurring Net Income 15.20 14.02 15.46
At the end of the second quarter of 1997, the Company completed the acquisition of six branches from Fleet Bank, extending the Company's market area northward to Plattsburgh, New York. Effects of the acquisition are discussed in various sections of this "Management's Discussion and Analysis" and in Note 25 to the Consolidated Financial Statements. At December 31, 1998, the Company's tangible book value per share (shareholders' equity reduced by intangible assets including goodwill, mortgage servicing rights and intangible pension plan assets) amounted to $10.32, an increase of $.86, or 9.1%, from the prior year-end. The increase was primarily attributable to retained current year earnings. At year-end, the average of the Company's bid and asked stock price was $26.125, resulting in a trading multiple of 2.53 to tangible book value. The Company's cash dividend for the first two quarters of 1998, as restated for the August 1998 10% stock dividend, was $.19. The Company increased its quarterly cash dividend to $.21 for the third quarter and again to $.22 for the fourth quarter of 1998. On an annual basis, cash dividends of $.81 for 1998 increased $.10, or 14.1%, from cash dividends of $.71 in 1997. Nonperforming assets amounted to $3.6 million at December 31, 1998, a decrease of $485 thousand from the prior year-end. At year-end, the allowance for loan losses, at $6.7 million, represented 230% of nonperforming loans. Acquisition of Six Fleet Branches On June 27, 1997, the Company completed the acquisition of six branches in upstate New York from Fleet Bank, a subsidiary of Fleet Financial Group, Hartford, CT. The branches, located in the towns of Plattsburgh (2), Lake Luzerne, Port Henry, Ticonderoga and Warrensburg, became branches of Glens Falls National Bank. Glens Falls National Bank acquired substantially all deposits at the branches and most of the loans held by Fleet Bank related to the branches. Total deposit liabilities at the branches assumed by Glens Falls National Bank were approximately $140 million and the total amount of branch-related loans acquired was approximately $34 million. Under the purchase agreement, Glens Falls National Bank also acquired from Fleet an additional $10 million of residential real estate loans not related to the branches. Divestiture of Vermont Operations During 1996, in three separate transactions, the Company completed the divestiture of its Vermont subsidiary, Green Mountain Bank ("GMB"). In January, the Company sold eight branches of GMB, with related deposits and loans, to Mascoma Savings Bank, Lebanon, NH. In August, the Company sold GMB's trust business to Vermont National Bank, Brattleboro, VT. In September, the Company sold the remaining branches of GMB, with related deposits and loans, to ALBANK, FSB, Albany, NY. The charter of GMB was liquidated in 1997 and remaining net assets distributed to the Company. All significant assets relating to the business or operations of GMB have been sold, except for the building which served as GMB's main office in Rutland, VT, which was held for sale at December 31, 1998. Total loans and deposits transferred in the three Vermont sale transactions amounted to approximately $148 million and $208 million, respectively. These and other changes are more fully described in the following analysis of the results of operations and changes in financial condition. The net gain realized on these sale transactions in 1996, net of tax, was approximately $10.3 million. B. RESULTS OF OPERATIONS The following analysis of net interest income, the provision for loan losses, noninterest income, noninterest expense and income taxes, presents the factors that are primarily responsible for the Company's results of operations for 1998 and the prior two years. I. NET INTEREST INCOME (Fully Taxable Basis) Net interest income represents the difference between interest and dividends earned on loans, securities and other earning assets and interest paid on deposits and other sources of funds. Changes in net interest income result from changes in the level and mix of earning assets and sources of funds (volume) and changes in the yields earned and costs paid (rate). Net interest margin is the ratio of net interest income to average earning assets. Net interest income may also be described as the product of earning assets and the net interest margin.
COMPARISON OF NET INTEREST INCOME (Dollars In Thousands) (Fully Taxable Basis) Years Ended December 31, Change From Prior Year 1998 1997 1996 1998 1997 Amount Percent Amount Percent Interest and Dividend Income $64,131 $55,705 $55,517 $ 8,426 15.1% $ 188 .3% Interest Expense 28,142 23,887 21,826 4,255 17.8 2,061 9.4 Net Interest Income $35,989 $31,818 $33,691$ 4,171 13.1 $(1,873) (5.6)
On a tax-equivalent basis, net interest income was $36.0 million in 1998, an increase of $4.2 million, or 13.1% from $31.8 million in 1997. Factors contributing to the $4.2 million increase in net interest income are discussed in the following section. ANALYSIS OF CHANGES IN NET INTEREST INCOME The following table presents net interest income components on a tax-equivalent basis and reflects changes between periods attributable to movement in either the average daily balances or average rates for both earning assets and interest-bearing liabilities. Changes attributable to both volume and rate have been allocated proportionately between the categories.
CHANGE IN NET INTEREST INCOME (In Thousands) (Fully Taxable Basis) 1998 Compared to 1997 1997 Compared to 1996 Change in Net Interest IncomeChange in Net Interest Income Due to: Due to: Volume Rate Total Volume Rate Total Interest and Dividend Income: Federal Funds Sold $ (404) $ (23) $ (427) $ 363 $ 30 $ 393 Securities Available-for-Sale Taxable 2,788 (464) 2,324 626 493 1,119 Non-Taxable 529 3 532 60 --- 60 Securities Held-to-Maturity: Taxable 167 (71) 96 1,394 9 1,403 Non-Taxable 772 (161) 611 517 (27) 490 Loans and Leases 6,524 (1,234) ,290 (1,882) (1,395) (3,277) Total Interest and Dividend Income 10,376 (1,950) 8,426 1,078 (890) 188 Interest Expense: Deposits: Interest-Bearing Demand Deposits 794 (328) 466 383 297 680 Regular and Money Market Savings 418 (350) 68 (326) (108) (434) Time Deposits of $100,000 or More 1,313 28 1,341 426 110 536 Other Time Deposits 1,287 43 1,330 848 204 1,052 Total Deposits 3,812 (607) 3,205 1,331 503 1,834 Short-Term Borrowings 262 (61) 201 196 31 227 Long-Term Debt 849 --- 849 --- --- --- Total Interest Expense 4,923 (668) 4,255 1,527 534 2,061 Net Interest Income $ 5,453 $(1,282) $4,171 $ (449) $(1,424) $(1,873)
The following table reflects the components of the Company's net interest income, setting forth, for years ended December 31, 1998, 1997 and 1996 (I) average balances of assets, liabilities and shareholders' equity, (II) interest and dividend income earned on earning assets and interest expense incurred on interest-bearing liabilities, (III) average yields earned on earning assets and average rates paid on interest-bearing liabilities, (IV) the net interest spread (average yield less average cost) and (V) the net interest margin (yield) on earning assets. Rates are computed on a tax-equivalent basis. The yield on securities available-for-sale is based on the amortized cost of the securities. Nonaccrual loans are included in average loans and leases, while unearned income has been eliminated.
AVERAGE CONSOLIDATED BALANCE SHEETS AND NET INTEREST INCOME ANALYSIS Arrow Financial Corporation and Subsidiaries (Fully Taxable Basis using a marginal tax rate of 35%) (Dollars In Thousands) Years Ended December 31, 1998 1997 1996 Interest Rate Interest Rate Interest Rate Average Income/ Earned/ Average Income/ Earned/ Average Income/ Earned/ Balance Expense Paid Balance Expense Paid Balance Expense Paid Federal Funds Sold $ 11,280 $ 609 5.40% $ 18,752 $ 1,035 5.52% $ 12,150 $ 642 5.28% Securities Available- for-Sale: (1) Taxable 226,447 14,542 6.42 183,261 12,219 6.67 173,703 1,100 6.39 Non-Taxable 10,005 597 5.97 1,142 65 5.73 80 5 5.75 Securities Held-to- Maturity: Taxable 22,825 1,560 6.84 20,413 1,464 7.17 959 61 6.36 Non-Taxable 32,988 2,445 7.41 22,713 1,834 8.08 16,316 1,344 8.24 Loans & Leases 514,348 44,378 8.63 439,103 39,088 8.90 459,946 42,365 9.21 otal Earning Assets 817,893 64,131 7.84 685,384 55,705 8.13 663,154 55,517 8.37 Allowance For Loan Losses (6,514) (6,021) (10,102) Cash and Due From Banks 22,891 26,341 25,303 Other Assets 39,101 32,732 28,975 Total Assets $873,371 $738,436 $707,330 Deposits: Interest-Bearing Demand Deposits $171,209 4,933 2.88 $144,204 4,467 3.10 $131,438 3,787 2.88 Regular and Money Market Savings 161,874 4,251 2.63 146,529 4,183 2.85 157,892 4,617 2.92 Time Deposits of $100,000 or More 112,226 6,075 5.41 87,956 4,734 5.38 79,996 4,198 5.25 Other Time Deposits 195,283 10,715 5.49 171,820 9,385 5.46 156,236 8,333 5.33 Total Interest- Bearing Deposits 640,592 25,974 4.05 550,509 22,769 4.14 525,562 20,935 3.98 Short-Term Borrowings 28,001 1,319 4.71 22,491 1,118 4.97 18,524 891 4.81 Long-Term Debt. 16,548 849 5.13 --- --- --- --- --- --- Total Interest- Bearing Funds 685,141 28,142 4.11 573,000 23,887 4.17 544,086 21,826 4.01 Demand Deposits 96,149 78,704 77,479 Other Liabilities 15,752 14,339 15,374 Total Liabilities 797,042 666,043 636,939 Shareholders' Equity 76,329 72,393 70,391 Total Liabilities and Shareholders' Equity $873,371 $738,436 $707,330 Net Interest Income (Fully Taxable Basis) 35,989 31,818 33,691 Reversal of Tax Equivalent Adjustment (1,098) (844) (642) Net Interest Income $34,891 $30,974 $33,049 Net Interest Spread 3.73% 3.96% 4.36% Net Interest Margin 4.40% 4.64% 5.08%
CHANGES IN NET INTEREST INCOME DUE TO RATE
YIELD ANALYSIS December 31, 1998 1997 1996 Yield on Earning Assets 7.84% 8.13% 8.37% Cost of Interest-Bearing Liabilities 4.11 4.17 4.01 Net Interest Spread 3.73% 3.96% 4.36% Net Interest Margin 4.40% 4.64% 5.08%
The following items have a major impact on changes in net interest income due to rate: general interest rate changes, the ratio of the Company's rate sensitive assets to rate sensitive liabilities (interest rate sensitive gap) during periods of interest rate changes and the level of nonperforming loans. The change in net interest income due to changes in rate was a decrease of $1.3 million in 1998 and a decrease of $1.4 million in 1997. The Federal Reserve Board attempts to influence prevailing federal funds and prime interest rates and sets changes to the Federal Reserve Bank discount rate. The following chart presents recent changes:
Key Interest Rate Changes 1996 - 1998 Federal Discount Funds Prime Date Rate Rate Rate November 17, 1998 4.50% 4.75% 7.75% October 8, 1998 4.75 5.00 8.00 September 29, 1998 4.75 5.25 8.25 March 26, 1997 4.75 5.50 8.50 January 31, 1996 5.00 5.25 8.00
In the fall of 1998, after 18 months of relative interest rate stability, the Federal Reserve Board took steps in its open market operations leading to three 25 basis point decreases in the federal funds target rate, which led to parallel changes in the prime rate. Net interest margin for 1998, at 4.40%, represented a 24 basis point decrease from the net interest margin of 4.64% in 1997. This reflects a 29 basis point decrease in the yield on earning assets and a 6 basis point decrease in the cost of paying liabilities from 1997 to 1998. The decrease in net interest margin was primarily attributable to three factors: (i) The lack of any significant slope to the yield curve (the normal slope of the yield curve is caused by higher yields for instruments with longer maturities) was the most significant factor leading to the decrease in net interest margin from 1997 to 1998, since the Company was unable to obtain the same spread as in prior periods between longer-term interest bearing liabilities and earning assets as those items repriced. (ii) The fact that the decrease in the yield on earning assets was greater than the decrease in the cost of paying liabilities from 1997 to 1998 reflected the competitive environment for loan products in the Company's market area. (iii) The Company took advantage of its borrowing arrangement with the Federal Home Loan Bank ("FHLB") during 1998. These FHLB borrowings, amounting to $45 million by year-end, were primarily secured by 1-4 family residential real estate loans. The spread that the Company was able to earn on the difference between the rates on the FHLB advances and in invested funds, was less than the Company's total net interest spread. However, there was a positive increase to net interest income, even though there was a negative impact on net interest margin. In the 1996 to 1997 analysis, the negative impact on net interest income attributable to rate changes was $1.4 million. Although the Federal Reserve Board did not raise the discount rate during 1997, its open market operations early in 1997 led directly to a 25 basis point increase in the federal funds overnight rate. This increase in the cost of federal funds was mirrored in an overall increase in the cost of funds to the Company, while at the same time its yield on earning assets decreased. The net interest margin for 1997, at 4.64%, represented a 44 basis point decrease from the net interest margin of 5.08% in 1996. This reflected a 24 basis point decrease in the yield on earning assets and a 16 basis point increase in the cost of paying liabilities from 1996 to 1997. A significant shift in the mix of earning assets between the two periods accounted for most of the decrease in the yield on earning assets. After the sale of the remaining Vermont branches at the end of September 1996, and particularly after the June 1997 acquisition of the six Fleet branches, the Company maintained a significantly larger portion of its earning assets in securities and federal funds sold, which were at lower yields than the Company's loan portfolio. This was due to the fact that the Vermont banking operations maintained a high loan to deposit ratio during the 1996 period whereas the loan to deposit ratio of the Fleet branches acquired was much lower; the lower-yielding liquid assets received from Fleet were only gradually reinvested in securities and loans. The 1996 to 1997 change was further exasperated by the fact that, in the 1996 period, the yield on loans in the Vermont portfolio was temporarily boosted as a result of unexpected payments on certain restructured loans reported in that period as interest income. Also contributing to the 1996 to 1997 decline in net interest margin was a shift in the New York based loan portfolio of loan products between the years favoring lower yielding indirect loans. A discussion of the impact on net interest income resulting from changes in interest rates vis a vis the repricing patterns of the Company's earning assets and interest-bearing liabilities is included later in this report under Item 7A "Quantitative and Qualitative Disclosures About Market Risk." CHANGES IN NET INTEREST INCOME DUE TO VOLUME
AVERAGE BALANCES (Dollars in Thousands) Change % Change 1998 1997 1996 1998 1997 1998 1997 Earning Assets $817,893 $685,384 $663,154 $132,509 $ 22,230 19.3% 3.4% Interest-Bearing Liabilities 685,141 573,000 544,086 112,141 28,914 19.6 5.3 Demand Deposits 96,149 78,704 77,479 17,445 1,225 22.2 1.6 Total Assets 873,371 738,436 707,330 134,935 31,106 18.3 4.4 Earning Assets to Total Assets 93.65% 92.82% 93.75% .83% (.94)% 0.9 (1.0)
In general, changes in the volume of earning assets and paying liabilities will result in corresponding changes in net interest income. However, changes due to volume can be enhanced or restricted by shifts within the relative mix of earning assets or interest-bearing liabilities between instruments of different rates. The change in net interest income due to changes in volume was an increase of $5.5 million in 1998 and a decrease of $449 thousand in 1997. Average earning assets increased by $132.5 million, or 19.3%, between 1997 and 1998. Average interest-bearing liabilities increased similarly, by 19.6%, between the two years. This increase in volume led to a $5.5 million increase in net interest income from 1997 to 1998. While the Fleet branch acquisition had a significant impact on the increase in average earning assets between 1997 and 1998, due to the fact that the average balances in 1997 only had a six month impact on average earning assets in that year, the chief factor was the internal asset growth in 1998 itself. From year-end 1997 to year-end 1998 earning assets increased $108.6 million. Of that increase, $60.3 million occurred within the loan portfolio, with nearly all of the increases attributable to indirect automobile loans and residential real estate loans. During 1998 the Company took advantage of its borrowing agreement with the FHLB accepting advances of $45 million by year-end. The remaining increase in earning assets was essentially funded primarily by deposit growth. Average earning assets increased by $22.2 million, or 3.4%, between 1996 and 1997. However, average interest-bearing liabilities increased even more, by 5.3%, between the two years. The negative impact of faster growth in interest-bearing liabilities than in earning assets was exacerbated by shifts within average earning assets between the two years. The disposition of the Vermont bank in 1996 involved the sale of an operation with a relatively high loan-to-deposit ratio. The acquisition of six branches from Fleet Bank in June 1997, on the other hand, involved the acquisition of a relatively small percentage of loans (approximately $44 million) and a relatively high level of lower-yielding liquid assets (approximately $80 million in cash) with the latter initially being invested in federal funds and only gradually being reinvested in higher-yielding securities and loans. Increases in the volume of loans and deposits, as well as yields and costs by type, for the continuing New York operations are discussed later in this report under Item 7.C. "Financial Condition." II. PROVISION FOR LOAN LOSSES AND ALLOWANCE FOR LOAN LOSSES Through the provision for loan losses, an allowance (reserve) is maintained for estimated loan losses. Actual loan losses are charged against this allowance when they are identified. In evaluating the adequacy of the allowance for loan losses, management considers various risk factors influencing asset quality. The analysis is performed on a loan by loan basis for impaired and large balance loans, and by portfolio type for smaller balance homogeneous loans. This analysis is based on judgments and estimates and may change in response to economic developments or other conditions that may influence borrowers' economic outlook. The provision for loan losses was largely influenced by the level of nonperforming loans, the expected future levels of nonperforming loans, by the level of loans actually charged-off against the allowance for loan losses during the year and by the change in the mix of loan categories within the loan portfolio. At December 31, 1998, nonperforming loans amounted to $2.9 million, a decrease of 20.5% from the balance at December 31, 1997. The decrease was primarily attributable to one large commercial loan, placed on nonaccrual status during 1997, which fully paid-off in 1998. At December 31, 1998 the allowance for loan losses was $6.7 million. The allowance for loan losses was 230% of the amount of nonperforming loans at that date. During 1998, loan losses charged against the allowance, net of recoveries, were $835 thousand, or .16% of average loans for the period. The provision for loan losses charged to expense for 1998 was $1.4 million, or .27% of average loans for the period. At December 31, 1997, nonperforming loans amounted to $3.7 million, an increase of 40.7% from the balance at December 31, 1996. The increase was primarily attributable to a large commercial loan placed on nonaccrual status during 1997, the same loan discussed above that was fully paid off in 1998. At December 31, 1997 the allowance for loan losses was $6.2 million. The allowance for loan losses was 168% of the amount of nonperforming loans at that date. During 1997, loan losses charged against the allowance, net of recoveries, were $1.4 million, or .32% of average loans for the period. The provision for loan losses charged to expense for 1997 was $1.3 million, or .30% of average loans for the period. In addition, in mid-1997, the Company made a purchase acquisition adjustment to the allowance of $700 thousand for loans acquired in the Fleet branch transaction. This adjustment represented the allowance for inherent risk of loss in the loans acquired. During 1996, loan losses charged against the allowance, net of recoveries, were $580 thousand, or .13% of average loans for the period. However, the allowance for loan losses was significantly reduced during the year by $6.8 million. This was the amount of the reserve attributable to loans transferred in the divestiture of the Vermont banking operations. These reductions in the allowance for loan losses were offset in part by a provision for loan losses of $896 thousand, or .19% of average loans for the year. At December 31, 1996 the allowance for loan losses was $5.6 million. The allowance for loan losses was 213% of the amount of nonperforming loans at that date. During 1995, nonperforming assets continued the steady decline begun in 1991. The primary portion of the decrease in nonperforming assets in 1995 came from the sale of OREO out of the Vermont banking operations. Nonaccrual loans increased $626 thousand or 17.3% from the year-end 1994 balance. The increase in nonaccrual loans was due primarily to the aggregate borrowing of one large commercial borrower, which was placed on nonaccrual status in 1995. That loan was accounted for under SFAS No. 114 and was being carried at its estimated fair value. Loans reported as troubled debt restructures at December 31, 1994, were classified as performing in 1995. Net loan losses for 1995 were $1.4 million. These losses compare to net loan losses of $2.8 million for the year ended December 31, 1994. As a ratio to average loans, the net loan losses were .27% and .56%, for the same respective periods. The provision for loan losses in 1994 was actually a credit to the consolidated statement of income resulting in a reduction in the allowance for loan losses. During the second quarter of 1994, with nonperforming assets at significantly reduced levels and a substantial sale of OREO from the Company's Vermont operations having been completed, the Company reduced the allowance for loan losses by $1.5 million. This reduction was effected by means of a credit to the provision for loan losses. As a result, for the twelve month period ended December 31, 1994, the Company's net provision for loan losses was a net credit of $950 thousand and as a ratio of average loans, the provision was (.19)% in 1994.
SUMMARY OF THE ALLOWANCE AND PROVISION FOR LOAN LOSSES (Dollars In Thousands) (Loans and Leases, Net of Unearned Income) Years-Ended December 31, 1998 1997 1996 1995 1994 Loans and Leases at End of Period $546,126 $485,810 $393,511 $517,787 $507,553 Average Loans and Leases 514,348 439,103 459,946 513,266 502,224 Total Assets at End of Period 939,029 831,599 652,603 789,790 746,431 Nonperforming Assets: Nonaccrual Loans: Construction and Land Development $ --- $ --- $ --- $ 104 $ 327 Commercial Real Estate 191 119 83 1,299 1,050 Commercial Loans 671 1,951 1,487 1,979 1,017 Other 1,408 1,251 727 862 1,224 Total Nonaccrual Loans 2,270 3,321 2,297 4,244 3,618 Loans Past Due 90 or More Days and Still Accruing Interest 657 363 321 111 231 Restructured Loans in Compliance with Modified Terms --- --- --- --- 580 Total Nonperforming Loans 2,927 3,684 2,618 4,355 4,429 Repossessed Assets 38 78 45 25 1 Other Real Estate Owned 627 315 136 2,410 3,396 Total Nonperforming Assets $3,592 $ 4,077 $ 2,799 $ 6,790 $ 7,826 Allowance for Loan Losses: Balance at Beginning of Period $6,191 $ 5,581 $12,106 $12,338 $16,078 Allowance Acquired (Transferred) --- 700 (6,841) --- --- Loans Charged-off: Commercial, Financial and Agricultural (166) (596) (185) (579) (997) Real Estate - Commercial (43) --- (104) (369) (689) Real Estate - Construction --- --- (2) (101) (1,181) Real Estate - Residential (133) (121) (57) (160) (143) Installment Loans to Individuals (836) (881) (598) (562) (476) Lease Financing Receivables --- --- --- --- --- Total Loans Charged-off (1,178) (1,598) (946) (1,771) 3,486) Recoveries of Loans Previously Charged-off: Commercial, Financial and Agricultural 19 27 84 76 260 Real Estate - Commercial --- 2 48 104 35 Real Estate - Construction --- --- --- 10 68 Real Estate - Residential 23 3 12 8 143 Installment Loans to Individuals 301 173 222 171 188 Lease Financing Receivables --- --- --- --- 2 Total Recoveries of Loans Previously Charged-off 343 205 366 369 696 Net Loans Charged-off (835) (1,393) (580) (1,402) (2,790) Provision for Loan Losses Charged to Expense 1,386 1,303 896 1,170 (950) Balance at End of Period $6,742 $ 6,191 $ 5,581 $12,106 $12,338 Nonperforming Asset Ratio Analysis: Net Loans Charged-off as a Percentage of Average Loans .16% .32% .13% .27% .56% Provision for Loan Losses as a Percentageof Average Loans .27 .30 .19 .23 (.19) Allowance for Loan Losses as a Percentage of Period-end Loans 1.23 1.27 1.42 2.34 2.43 Allowance for Loan Losses as a Percentage of Nonperforming Loans 230.32 168.05 213.18 277.98 278.57 Nonperforming Loans as a Percentage of Period-end Loans .54 .76 .67 .84 .87 Nonperforming Assets as a Percentage of Period-end Total Assets .38 .49 .43 .86 1.05
III. OTHER INCOME The majority of other (i.e., noninterest) income is derived from fees and commissions from fiduciary services, deposit account service charges, computer processing fees to correspondents and other "core" or recurring sources. Net gains or losses on the sale of securities available-for-sale is another category of other income.
ANALYSIS OF OTHER INCOME (Dollars In Thousands) Change December 31, Amount Percent 1998 1997 1996 1998 1997 1998 1997 Income from Fiduciary Activities $ 3,025 $ 2,672 $ 3,458 $ 353 $ (786) 13.2% (22.7)% Fees for Other Services 4,236 3,723 3,959 513 (236) 13.8 (6.0) Net Securities Gains (Losses) 408 74 (101) 334 175 51.4 --- Net Gain on Divestiture of Vermont Operations --- --- 15,330 --- (15,330) --- --- Other Operating Income 911 1,714 1,057 (803) 657 (46.8) 62.2 Total Other Income $ 8,580 $ 8,183 $23,703 $ 397 $(15,520) 4.9 (65.5)
Total other income increased $397 thousand, or 4.9%, from 1997 to 1998. Without regard to net securities transactions and one-time nonrecurring items, total other income was $8.2 million for 1998 and $7.4 million for 1997, an increase of $738 thousand, or 9.9%. For 1998, income from fiduciary activities increased $353 thousand, or 13.2%, from 1997. The increase was in large part attributable to an increase in fees from processing estates, a source of fee income which is not consistent from year to year. At year-end, trust assets under management amounted to $598.8 million, an increase of $71.9 million, or 13.6%, from year-end 1997, with a modest increase in the total number of accounts under administration. Fees for other services include deposit service charges, credit card merchant processing fees, safe deposit box fees and loan servicing fees. These fees amounted to $4.2 million in 1998, an increase of $513 thousand, or 13.8%, from 1997. The increase in 1998 was primarily attributable to increased deposit service charges (largely traceable to the deposit accounts acquired in the Fleet transaction which were only held for six months in the 1997 period) and increased fee income from processing merchant credit card transactions. Other operating income includes, as a primary component, fees earned on servicing credit card portfolios for correspondent banks. This category of noninterest income also includes net gains on the sale of loans and other real estate owned, if any, as well as other miscellaneous revenues. For 1998, other operating income, on a recurring basis, amounted to $895 thousand, a decrease of $127 thousand, or 12.4%, from $1.022 million in 1997. The decrease was primarily attributable to a decrease in fees from servicing credit card portfolios for correspondent banks. During 1998, the Company realized net securities gains of $408 thousand on the sale of $41.0 million from its available-for-sale portfolio. The primary purpose of these sales was to extend the weighted average maturity of the investments in that portfolio. For the 1996 to 1997 comparison, without regard to the $15.3 million net pre-tax gain on the divestiture of the Vermont operations in 1996 and the impact of net securities transactions in both years, other income for 1997 decreased $365 thousand, or 4.3%, from the 1996 period. Income from fiduciary activities decreased $786 thousand, or 22.7%, from 1996 to 1997. The Vermont trust business, which was sold in August 1996, had represented approximately one half of the Company's income from fiduciary activities. The Company did not acquire any trust business from Fleet in the June 1997 branch acquisition. Income from the New York based trust business increased by $249 thousand, or 10.3% from 1996 to 1997, but this was not enough to offset the decrease in trust income resulting from the Vermont sale. Trust assets under management were $526.9 million at December 31, 1997, an increase of $92.3 million, or 21.2%, from December 31, 1996. Fees for other services amounted to $3.7 million in 1997, a decrease of $236 thousand, or 6.0%, from 1996. The decrease was primarily attributable to loan servicing fees related to serviced loans transferred in the disposition of Vermont operations in September 1996. To a lesser extent, the decrease was attributable to the fact that the Company sold deposit balances in 1996 of $108 million, which contributed fee income for nine months in that period, and purchased $140 million of deposit balances from Fleet in June 1997, which contributed service fee income for only six months in that year. Other operating income for 1997 amounted to $1.7 million, an increase of $657 thousand, or 62.2%, from 1996. The increase was primarily attributable to one-time receipts in 1996 relating to an insurance settlement and unexpected payments related to the former Vermont operations. Without regard to these two items, the period-to-period change would have been an increase of $126 thousand, or 11.9%, from 1996, and was attributable to an increase in miscellaneous other revenues. During 1997, the Company realized net gains of $74 thousand on the sale of securities classified as available-for-sale. Proceeds from these sales amounted to $37.0 million with gross gains of $137 thousand, offset in part by gross losses of $63 thousand. The primary purpose of the sales was to extend the average maturity of the portfolio. During 1996, the Company recognized net losses of $101 thousand on the sale of $51.1 million of securities classified as available-for-sale. Most of the sales were made for the purpose of extending the term of the securities at higher yields. IV. OTHER EXPENSE Other (i.e., noninterest) expense is a means of measuring the delivery cost of services, products and business activities of the Company. The key components of other expense are presented in the following table.
ANALYSIS OF OTHER EXPENSE (Dollars In Thousands) Change December 31, Amount Percent 1998 1997 1996 1998 1997 1998 1997 Salaries and Benefits $13,810 $12,726 $14,971 $1,084 $(2,245) 8.5% (15.0)% Net Occupancy Expense 1,674 1,561 1,790 113 (229) 7.2 (12.8) Furniture and Equipment 2,190 1,792 1,677 398 115 22.2 6.9 Other Operating Expense 6,832 5,623 6,336 1,209 (713) 21.5 (11.3) Total Other Expense $24,506 $21,702 $24,774 $2,804 $(3,072) 12.9 (12.4)
Other expense for 1998 amounted to $24.5 million, an increase of $2.8 million, or 12.9%, from 1997. The most significant factor in the year-to-year increase was the June 1997 Fleet branch acquisition, which had a full twelve month impact on 1998 but only a six month impact on 1997. Upon acquisition of the Fleet branches in June 1997, the Company retained all 34 employees (32 full-time equivalent). Total full-time equivalent staff at the end of 1998 was 366, an increase of 16, or 4.6%, from year-end 1997. The 8.5% period-to-period increase in salary and benefit expenses also included normal salary raises. Occupancy expense increased by 7.2% from 1997 to 1998. The increase, again, was primarily attributable to the acquisition of six Fleet branches in June 1997. The increase in furniture and equipment expense of $398 thousand, or 22.2%, from 1997 to 1998 was affected by the branch acquisition and also by the increased depreciation expense resulting from a significant investment in software and hardware for servicing the Company's and correspondent banks' credit card portfolios. Other operating expense increased $1.2 million, or 21.5% from 1997 to 1998. This category of expense includes the amortization of goodwill associated with branch acquisitions. The 1997 period included only six months of expense for the branches acquired from Fleet in mid-1997, whereas the 1998 period included a full year. Total goodwill amortization expense for 1998 was $944, an increase of $451 thousand from 1997. The Company also devoted significant resources towards establishing a marketing presence in the Plattsburgh, New York area. The Company's costs to implement its year 2000 preparedness program are reported in section G of "Management's Discussion and Analysis of Financial Condition and Results of Operations." In the prior year comparison, other expense for 1997 amounted to $21.7 million, a decrease of $3.1 million, or 12.4%, from 1996. Most of the decrease was in the area of employee salaries and benefits. With the sale of the Vermont operations in 1996, the Company reduced the number of its employees by 83 (71 full-time equivalent), most of whom continued as employees of the purchasers. Upon acquisition of the Fleet branches in June 1997, the Company retained all 34 employees (32 full-time equivalent). The net reduction in staff was primarily responsible for the $2.2 million decrease in salaries and benefits, offset in part by normal salary increases. Occupancy expenses and other operating expenses decreased by 12.8% and 11.3%, respectively, from 1996 to 1997. The decreases, again, were primarily attributable to the fact that the decrease in expenses resulting from the sale of the Vermont operations in 1996 outweighed the increase in expenses resulting from the acquisition of six Fleet branches in June 1997. Furniture and equipment expense increased by $115 thousand, or 6.9%, from 1996 to 1997, primarily due to an investment in data processing equipment at the end of 1996. V. INCOME TAXES The following table sets forth the Company's provision for income taxes and effective tax rates for the periods presented.
INCOME TAXES AND EFFECTIVE RATES (Dollars in Thousands) Years Ended December 31, 1998 1997 1996 Provision for Income Taxes $5,744 $5,155 $10,822 Effective Tax Rate 32.7% 31.9% 34.8%
The provisions for federal and state income taxes amounted to $5.7 million, $5.2 million and $10.8 million for 1998, 1997 and 1996, respectively. The effective income tax rates for 1998, 1997 and 1996 were 32.7%, 31.9% and 34.8%, respectively. The increase in the effective income tax rate from 1997 to 1998, as well as the decrease in the effective income tax rate from 1996 to 1997 was primarily attributable to a favorable settlement with the New York State Department of Taxation and Finance over a combined reporting issue in the first quarter of 1997. Adjusting for the effects of the 1997 settlement, the effective rate for 1997 was 34.8%. As adjusted for 1997, the decrease in the effective rate from 1997 to 1998 was primarily attributable to the implementation of certain tax planning strategies. C. FINANCIAL CONDITION I. INVESTMENT PORTFOLIO Investment securities are classified as held-to- maturity, trading, or available-for-sale, depending on the purposes for which such securities were acquired or are being held. Securities held-to-maturity are debt securities that the Company has both the positive intent and ability to hold to maturity; such securities are stated at amortized cost. Debt and equity securities that are bought and held principally for the purpose of sale in the near term are classified as trading securities and are reported at fair value with unrealized gains and losses included in earnings. Debt and equity securities not classified as either held-to-maturity or trading securities are classified as available-for-sale and are reported at fair value with unrealized gains and losses excluded from earnings and reported net of taxes in accumulated other comprehensive income. At December 31, 1998, the Company held no trading securities. Securities Available-for-Sale: The following table sets forth the carrying value of the Company's securities available-for-sale portfolio, at year-end 1998, 1997 and 1996.
SECURITIES AVAILABLE-FOR-SALE (In Thousands) December 31, 1998 1997 1996 U.S. Treasury and Agency Obligations $ 30,134 $ 76,006 $ 95,733 State and Municipal Obligations 9,240 2,999 --- Collateralized Mortgage Obligations 69,257 67,207 42,894 Other Mortgage-Backed Securities 120,104 64,057 21,732 Corporate and Other Debt Securities 34,953 9,145 9,184 Mutual Funds and Equity Securities 4,043 2,423 2,200 Total $267,731 $221,837 $171,743
Other mortgage-backed securities principally consisted of agency mortgage pass-through securities. Pass-through securities provide to the investor monthly portions of principal and interest pursuant to the contractual obligations of the underlying mortgages. Collateralized mortgage obligations ("CMOs") separate the repayments into two or more components (tranches), where each tranche has a separate estimated life and yield. The Company's practice is to purchase pass-through securities guaranteed by federal agencies and tranches of CMOs with shorter maturities. Included in corporate and other debt securities are highly rated corporate bonds. The following table sets forth the maturities of the Company's securities available-for-sale portfolio as of December 31, 1998. CMO's and other mortgage-backed securities are included in the table based on their expected average lives.
MATURITIES OF SECURITIES AVAILABLE-FOR-SALE (In Thousands) After After Within 1 But 5 But After One Within Within 10 Year 5 Years 10 Years Years Total U.S. Treasury and Agency Obligations $ 1,513 $ 13,317 $15,304 $ -- $ 30,134 State and Municipal Obligations 7,240 --- --- 2,000 9,240 Collateralized Mortgage Obligations 25,865 43,392 --- --- 69,257 Other Mortgage-Backed Securities 728 114,332 5,044 --- 120,104 Corporate and Other Debt Securities 30,869 3,084 --- 1,000 34,953 Mutual Funds and Equity Securities --- --- --- 4,043 4,043 Total $66,215 $174,215 $20,348 $7,043 $267,731
The following table sets forth the tax-equivalent yields of the Company's securities available-for- sale portfolio at December 31, 1998.
YIELDS ON SECURITIES AVAILABLE-FOR-SALE (Fully Tax-Equivalent Basis) After After Within 1 But 5 But After One Within Within 10 Year 5 Years 10 Years Years Total U.S. Treasury and Agency Obligations 6.66% 5.94% 6.46% ---% 6.24% State and Municipal Obligations 5.99 --- --- 8.65 6.56 Collateralized Mortgage Obligations 6.52 6.32 --- --- 6.40 Other Mortgage-Backed Securities 6.85 6.44 6.14 --- 6.43 Corporate and Other Debt Securities 5.88 7.32 --- 9.90 6.12 Mutual Funds and Equity Securities --- --- --- 6.88 6.88 Total 6.19 6.39 6.37 7.81 6.37
The yields on debt securities shown in the table above are calculated by dividing annual interest, including accretion of discounts and amortization of premiums, by the carrying value of the securities at December 31, 1998. Yields on obligations of states and municipalities exempt from federal taxation were computed on a fully tax-equivalent basis using a marginal tax rate of 35%. Dividend earnings derived from equity securities were adjusted to reflect applicable federal income tax exclusions. During 1998, the Company realized net securities gains of $408 thousand on the sale of $41.0 million from its available-for-sale portfolio. The primary purpose of the sales was to extend the weighted average maturity of investments in the portfolio, by reinvesting in securities with later expected maturities. During 1997, the Company realized net gains of $74 thousand on the sale of securities available- for-sale. Proceeds from these sales amounted to $37.0 million with gross gains of $137 thousand, offset in part by gross losses of $63 thousand. Proceeds were reinvested in available-for-sale securities having later maturities than the securities sold. During 1996, the Company realized net losses of $101 thousand on the sale of $51.1 million of securities from the available-for-sale portfolio. Proceeds from sales early in the year were used to provide funds required in completing the sale of eight branches of the Vermont bank to Mascoma Savings Bank, a transaction in which the deposit liabilities assumed by the purchaser substantially exceeded the loans and other branch-related assets acquired including the deposit premium. Other sales of securities from the available-for-sale portfolio were used to extend the average maturity and increase the yield on the portfolio. At December 31, 1998 and 1997, the weighted average maturity was 2.6 and 2.4 years, respectively, for debt securities in the available-for-sale portfolio. At December 31, 1998 the net unrealized gain on securities available-for-sale amounted to $1.1 million. The net unrealized gain or loss, net of tax, is reflected in accumulated other comprehensive income. Securities Held-to-Maturity: The following table sets forth the book value of the Company's portfolio of securities held-to- maturity for each of the last three years.
SECURITIES HELD-TO-MATURITY (In Thousands) December 31, 1998 1997 1996 U.S. Treasury and Agency Obligations $ 3,989 $ --- $ --- State and Municipal Obligations 42,458 24,800 19,765 Other Mortgage-Backed Securities 16,569 19,282 11,111 Total $63,016 $44,082 $30,876
For information regarding the fair value of the Company's portfolio of securities held-to-maturity, see Note 3 to the Consolidated Financial Statements in Part II, Item 8 of this report. The following table sets forth the maturities of the Company's portfolio of securities held-to- maturity, as of December 31, 1998. Other mortgage-backed securities are allocated to maturity periods based on final maturity date.
MATURITIES OF SECURITIES HELD-TO-MATURITY (In Thousands) After After Within 1 But 5 But After One Within Within 10 Year 5 Years 10 Years Years Total U.S. Treasury and Agency Obligations $ --- $ --- $ 3,989 $ --- $ 3,989 State and Municipal Obligations. . 4,055 3,874 17,208 17,321 42,458 Other Mortgage-Backed Securities --- --- --- 16,569 16,569 Total Securities Held-to- Maturity $4,055 $3,874 $21,197 $33,890 $63,016
The following table sets forth the tax-equivalent yields of the Company's portfolio of securities held-to-maturity at December 31, 1998.
YIELDS ON SECURITIES HELD-TO-MATURITY (Fully Tax-Equivalent Basis) After After Within 1 But 5 But After One Within Within 10 Year 5 Years 10 Years Years Total U.S. Treasury & Agency Obligations ---% ---% 6.24% ---% 6.24% State and Municipal Obligations 6.40 7.90 7.35 6.90 7.13 Other Mortgage-Backed Securities --- --- --- 6.77 6.77 Total Securities Held-to- Maturity 6.40 7.90 7.35 6.84 7.03
The yields for debt securities shown in the tables above are calculated by dividing annual interest, including accretion of discounts and amortization of premiums, by the carrying value of the securities at December 31, 1998. Yields on obligations of states and municipalities exempt from federal taxation were computed on a fully tax-equivalent basis using a marginal tax rate of 35%. During 1998, 1997 and 1996, the Company sold no securities from the held-to-maturity portfolio. The weighted-average maturity of the held-to- maturity portfolio was 6.4 years and 5.7 years at December 31, 1998 and 1997, respectively. II. LOAN PORTFOLIO The amounts and respective percentages of loans and leases outstanding represented by each principal category on the dates indicated were as follows:
a. DISTRIBUTION OF LOANS AND LEASES (Dollars In Thousands) December 31, 1998 1997 1996 1995 1994 Amount % Amount % Amount % Amount % Amount % Commercial, Financial and Agricultural $ 35,961 6 $ 46,124 9 $ 48,372 12 $ 79,993 15 $ 74,455 15 Real Estate - Commercial 58,420 11 50,680 10 36,302 9 71,622 14 81,704 16 Real Estate - Construction 3,406 1 2,072 1 971 1 2,051 1 5,136 1 Real Estate - Residential 238,425 44 208,258 43 168,429 43 238,298 46 230,943 45 Installment Loans to Individuals 209,914 38 178,676 37 139,437 35 125,823 24 115,315 23 Total Loans and Leases 546,126 100 485,810 100 393,511 100 17,787 100 507,553 100 Allowance for Loan Losses (6,742) (6,191) (5,581) (12,106) (12,338) Total Loans and Leases, Net $539,384 $479,619 $387,930 $505,681 $495,215
Compared to prior years, the Company experienced a significant increase in originations for residential real estate loans during 1998. The majority of the residential loan originations represented new-money mortgages, rather than the refinancing of existing loans. The Company closed nearly 700 residential loans during the year, amounting to $59.0 million of loan originations. Unlike 1998, the increase in residential real estate loans in 1997 was primarily attributable to the acquisition of such loans incident to the purchase of the branches from Fleet Bank. In 1998, the Company also continued to expand its indirect automobile lending program, which is the primary factor in the $31.2 million increase in installment loans to individuals from 1997 to 1998. Indirect loans are vehicle acquisition loans to consumers financed through local dealerships where, by prior arrangement, the Company acquires the dealer paper. The Company also experienced an increase in consumer installment loans in 1997 with most of the increase attributable to the Fleet Branch acquisition and the remainder principally due to steady growth of the indirect loan program. Although the yields on the consumer portfolios (other than credit card loans) typically are lower than on the commercial portfolios, the Company has historically experienced fewer loan losses in consumer loans than commercial loans, in proportion to outstanding average loan balances. Overall, the Company experienced a slight shift during the year in the mix within the loan categories above, with a small percentage increase in residential real estate loans and installment loans to individuals and a small decrease in commercial loans. In the Fleet branch acquisition completed on June 27, 1997, the Company acquired $44.2 million of loans (consumer loans - $16.6 million, home equity loans - $7.1 million, commercial loans - $5.6 million, commercial real estate loans - $4.8 million, and residential real estate loans - $10.1 million). The communities served by the acquired branches have contributed to the internal loan growth experienced by the Company since the closing of the branch acquisition. During 1996, the Company transferred substantially all of the loans in its Vermont banking operation in two branch sale transactions, the sale of eight branches to Mascoma Savings Bank in January 1996 and the sale of the Company's remaining six Vermont branches to ALBANK in September 1996. The Vermont loan portfolio had a higher percentage of commercial loans than the loan portfolios of the Company's New York banks. Consequently, the divestiture of the Vermont banking operations is largely responsible for the shift in the mix of the loan portfolio from commercial to consumer loans between year-end 1995 and year-end 1996. This shift was augmented by the Company's concentration in its New York residential real estate loans and installment loans to individuals (primarily automobile loans). The following table indicates the changing mix in the Company's loan portfolio by presenting the quarterly average balances for the Company's significant loan products for the past five quarters. The ensuing tables present the percentage of total loans represented by each category as well as the annualized tax-equivalent yield.
LOAN PORTFOLIO Quarterly Average Loan Balances (Dollars In Thousands) Quarter Ending Dec 1998 Sep 1998 Jun 1998 Mar 1998 Dec 1997 Commercial and Commercial Real Estate $ 99,718 $ 98,177 $103,805 $102,983 $100,604 Residential Real Estate 181,211 173,598 162,071 151,417 147,928 Home Equity 32,782 33,474 35,331 36,593 36,601 Indirect Consumer Loans 172,921 161,508 151,603 143,495 139,401 Direct Consumer Loans 46,033 46,253 46,495 49,047 49,747 Credit Card Loans 6,841 6,855 7,138 7,413 7,602 Total Loans $539,506 $519,865 $506,443 $490,948 $481,883 Percentage of Total Quarterly Average Loans Commercial and Commercial Real Estate 18.5% 18.9% 20.5% 21.0% 20.9% Residential Real Estate 33.6 33.4 32.0 30.8 30.7 Home Equity 6.1 6.4 7.0 7.5 7.6 Indirect Consumer Loans 32.0 31.1 29.9 29.2 28.9 Direct Consumer Loans 8.5 8.9 9.2 10.0 10.3 Credit Card Loans 1.3 1.3 1.4 1.5 1.6 Total Loans 100.0% 100.0% 100.0% 100.0% 100.0% Quarterly Tax-Equivalent Yield on Loans Commercial and Commercial Real Estate 9.22% 9.50% 10.24% 9.60% 9.62% Residential Real Estate 7.77 7.86 8.13 8.34 8.23 Home Equity 8.78 9.00 9.10 9.07 9.10 Indirect Consumer Loans 8.11 8.13 8.16 8.17 8.24 Direct Consumer Loans 8.72 8.55 9.00 9.18 9.18 Credit Card Loans 15.02 15.51 16.34 16.41 16.07 Total Loans 8.38 8.51 8.83 8.82 8.81
During the quarter ending June 1998, the Company received a payoff on a loan which had been on nonaccrual status. Otherwise the yield on commercial and commercial real estate would have been 9.46% for that quarter, rather than 10.24%. The following table indicates the respective maturities and repricing structure of the Company's commercial, financial and agricultural loans and its real estate - construction loans at December 31, 1998. For purposes of determining relevant maturities, loans are assumed to mature at (but not before) their scheduled repayment dates as required by contractual terms. Demand loans and overdrafts are included in the "Within 1 Year" maturity category.
MATURITY AND REPRICING OF COMMERCIAL LOANS (In Thousands) After 1 After WithinBut Within Five 1 Year 5 Years Years Total Commercial, Financial and Agricultural $17,552 $10,280 $ 8,129 $35,961 Real Estate - Construction 410 819 2,177 3,406 Total $17,962 $11,099 $10,306 $39,367 Fixed Interest Rates $ 2,656 $ 8,788 $ 9,635 $21,079 Variable Interest Rates 15,306 2,311 671 18,288 Total $17,962 $11,099 $10,306 $39,367
During 1998, the Company borrowed funds from the FHLB. The borrowings, which equaled $45 million at December 31, 1998, were used to finance expansion in the Company's loan and investment portfolios. The borrowings were collateralized with approximately $152.6 million in 1-4 family residential real estate loans. COMMITMENTS AND LINES OF CREDIT Letters of credit represent extensions of credit granted in the normal course of business which are not reflected in the financial statements because they were not yet funded. As of December 31, 1998, the total contingent liability for standby letters of credit amounted to $723 thousand. In addition to these instruments, the Company has issued lines of credit to customers, including home equity lines of credit, credit card lines of credit, commitments for residential and commercial construction loans and other personal and commercial lines of credit, which also may be unfunded or only partially funded from time to time. Commercial lines, generally issued for a period of one year, are usually extended to provide for the working capital requirements of the borrower. At December 31, 1998, the Company had outstanding unfunded loan commitments in the aggregate amount of approximately $92.8 million. b. RISK ELEMENTS NONACCRUAL, PAST DUE AND RESTRUCTURED LOANS The Company designates loans as nonaccrual when the payment of interest and/or principal is due and unpaid for a designated period (generally 90 days) or when the likelihood of the full repayment of principal and interest is, in the opinion of management, uncertain. Upon reaching 120 days delinquent, loans are charged-off against the allowance for loan losses in an amount equal to unpaid principal and accrued interest minus the fair value of collateral plus estimated costs to sell. There were no material commitments to lend additional funds on outstanding nonaccrual loans at December 31, 1998. Loans and leases past due 90 days or more and still accruing interest, as identified in the following table, are those loans and leases which were contractually past due 90 days or more but because of expected repayments, were still accruing interest. Loans classified as "restructured" are reported in accordance with SFAS No. 15, "Accounting by Debtors and Creditors for Troubled Debt Restructurings," as amended by SFAS No. 114 and 118. The standard requires that impaired loans, except for large groups of smaller-balance homogeneous loans, be measured based on (I) the present value of expected future cash flows discounted at the loan's effective interest rate, (II) the loan's observable market price or (III) the fair value of the collateral if the loan is collateral dependent. The Company applies the provisions of SFAS No. 114 to all impaired commercial and commercial real estate loans over $250,000, and to all restructured loans. Reserves for losses for the remaining smaller- balance loans are evaluated under SFAS No. 5. Under the provisions of SFAS No. 114, the Company determines impairment for collateralized loans based on fair value of the collateral less estimated cost to sell. For other loans, impairment is determined by comparing the recorded value of the loan to the present value of the expected cash flows, discounted at the loan's effective interest rate. The Company determines the interest income recognition method on a loan by loan basis. Based upon the borrowers' payment histories and cash flow projections, interest recognition methods include full accrual, cash basis and cost recovery. The Company's nonaccrual, past due and restructured loans and leases were as follows:
SCHEDULE OF NONPERFORMING LOANS (Dollars In Thousands) December 31, 1998 1997 1996 1995 1994 Nonaccrual Loans: Construction and Land Development $ --- $ --- $ --- $ 104 $ 327 Commercial Real Estate 191 119 83 1,299 1,050 Commercial Loans 671 1,951 1,487 1,979 1,017 Other 1,408 1,251 727 862 1,224 Total Nonaccrual Loans 2,270 3,321 2,297 4,244 3,618 Loans Past Due 90 Days or More and Still Accruing Interest 657 363 321 111 231 Restructured Loans in Compliance with Modified Terms --- --- --- --- 580 Total Nonperforming Loans $2,927 $3,684 $2,618 $4,355 $4,429 Total Nonperforming Loans as a Percentage of Period-End Loans .54% .76% .67% .84% .87%
The following table presents additional disclosures required by SFAS No. 114 relating to impaired loans accounted for under SFAS No. 114. All loans reported in the schedule below are included in nonaccrual loans in the schedule of nonperforming loans above. The reserves for loans accounted for under SFAS No. 114 in the schedule below are a component of the allowance for loan losses discussed earlier in this report under Item 7.B.II., "Provision for Loan Losses and Allowance for Loan Losses."
SCHEDULE OF IMPAIRED LOANS ACCOUNTED FOR UNDER SFAS NO. 114 (In Thousands) December 31, 1998 Recorded Allowance for Carrying Investment Loan Losses Amount Measured at the Present Value of Expected Cash Flows: Commercial Loans $ 671 $ 201 $ 470 December 31, 1997 Measured at the Present Value of Expected Cash Flows: Commercial Loans $1,935 $ 225 $1,710
At December 31, 1998, nonaccrual loans amounted to $2.3 million, a decrease of $1.1 million from December 31, 1997. The decrease was primarily attributable to one large commercial loan placed on nonaccrual status during 1997 which was fully paid-off in 1998. Loans past due 90 or more days and still accruing interest amounted to $657 thousand at December 31, 1998, an increase of $294 thousand from December 31, 1997. Total nonperforming loans, at year-end 1998, represented .54% of period-end loans, a decrease from .76% at year-end 1997. During 1998 income recognized on year-end balances of nonaccrual loans was $76 thousand. Income that would have been recognized during that period on nonaccrual loans if all such had been current in accordance with their original terms and had been outstanding throughout the period (or since origination if held for part of the period) was $208 thousand. At December 31, 1997, nonaccrual loans amounted to $3.3 million, an increase of $1.0 million from December 31, 1996. The increase was primarily attributable to one large commercial loan placed on nonaccrual status during 1997, the same loan referenced above that was paid off in 1998. Loans past due 90 or more days and still accruing interest amounted to $363 thousand at December 31, 1997, an increase of $42 thousand from December 31, 1996. Total nonperforming loans, at year-end 1997, represented .76% of period-end loans, an increase from .67% at year-end 1996. During 1997 income recognized on year-end balances of nonaccrual loans was $90 thousand. Income that would have been recognized during that period on nonaccrual loans if all such had been current in accordance with their original terms and had been outstanding throughout the period (or since origination if held for part of the period) was $246 thousand. At December 31, 1996, nonaccrual loans amounted to $2.3 million, a decrease of $1.9 million from the year-end 1995 total. During 1996, nearly all of the nonaccrual loans in the Vermont portfolio were transferred in connection with the sale of the Vermont operations that year. The New York based nonaccrual loans at December 31, 1996 were virtually unchanged from the level at the prior year-end. Over one-half of the nonaccrual balance at December 31, 1996 was attributable to one borrower whose loan was restructured in 1996. Payments on that loan were current in accordance with the restructured terms as of December 31, 1996 and all payments in 1996 were used to reduce the carrying amount of the loan. During 1996 income recognized on year-end balances of nonaccrual loans was $48 thousand. Income that would have been recognized during that period on nonaccrual loans if all such had been current in accordance with their original terms and had been outstanding throughout the period (or since origination if held for part of the period) was $232 thousand. Nonperforming loans amounted to $4.4 million at December 31, 1995, $74 thousand below the balance at year-end 1994. The increase in nonaccrual commercial loans between year-end 1994 and 1995 was primarily attributable to the aggregate borrowing of one commercial borrower, which was placed on nonaccrual status during 1995. Otherwise, nonaccrual loans at December 31, 1995 would have decreased from the prior year-end balance. All loans reported as restructured and in compliance with modified terms at December 31, 1994 were still in compliance with modified terms at year-end 1995 and thus classified as performing at that date. During 1995, income recognized on year-end balances of nonaccrual loans was $116 thousand. Income that would have been recognized during that period on nonaccrual loans if such had been current in accordance with their original terms and had been outstanding throughout the period (or since origination if held for part of the period) was $435 thousand. POTENTIAL PROBLEM LOANS On at least a quarterly basis, the Company applies an internal credit quality rating system to past due commercial loans. Loans are placed on nonaccrual status when the likely amount of future principal and interest payments are expected to be less than the contractual amounts. Because of its aggressive approach toward placing commercial loans on nonaccrual status, the Company has not separately identified any potential problem loans in this report not included in the classifications discussed above. The level of problem loans is for the most part dependent on economic conditions in northeastern New York State. In general, the economy in the Company's geographic market area is quite strong. In the "capital district" in and around Albany, unemployment is significantly below the national average, and north of the capital district, the total number of jobs has held steady over recent periods with nominal growth in the job rate. However, unemployment remains above the national average in the Glens Falls and Plattsburgh areas. FOREIGN OUTSTANDINGS - None LOAN CONCENTRATIONS The loan portfolio is well diversified. There are no concentrations of credit that exceed 10% of the portfolio, other than the general categories reported in the preceding Section II.a. of this report. For a further discussion, see Note 23 to the Consolidated Financial Statements in Part II, Item 8 of this report. OTHER REAL ESTATE OWNED Other real estate owned (OREO) consists of real property acquired in foreclosure. OREO is carried at the lower of fair value less estimated cost to sell or cost in accordance with Statement of Position (SOP) 92-3 "Accounting for Foreclosed Assets." Also, in compliance with SOP 92-3, the Company's subsidiary banks have established allowances for OREO losses. The allowances are established and monitored on a property by property basis and reflect management's ongoing estimate of the difference between the property's carrying amount and cost, when the carrying amount is less than cost. For all periods, all OREO was held for sale.
DISTRIBUTION OF OTHER REAL ESTATE OWNED (Net of Allowance) (In Thousands) December 31, 1998 1997 1996 1995 1994 Single Family 1 - 4 Units $ 540 $ 227 $ --- $ 82 $1,073 Commercial Real Estate 86 86 86 2,328 2,128 Construction & Land Development 1 2 50 --- 195 Other Real Estate Owned, Net $ 627 $ 315 $ 136 $2,410 $3,396
The following table summarizes changes in the net carrying amount of other real estate owned at December 31 for each of the periods presented.
SCHEDULE OF CHANGES IN OTHER REAL ESTATE OWNED (Net of Allowance) (In Thousands) 1998 1997 1996 1995 1994 Balance at Beginning of Year $ 315 $ 136 $2,410 $ 3,396 $ 7,506 Properties Acquired Through Foreclosure 679 307 302 642 2,493 Adjustment for Change in Fair Value --- --- (85) (161) (398) Sale (367) (128) (2,491) (1,467) (6,205) Balance at End of Year $ 627 $ 315 $ 136 $ 2,410 $ 3,396
The following is a summary of changes in the allowance for OREO losses:
ALLOWANCE FOR OTHER REAL ESTATE OWNED LOSSES (In Thousands) 1998 1997 1996 1995 1994 Balance at Beginning of Year $ 65 $ 108 $ 370 $ 369 $ 1,150 Additions --- --- 85 161 398 Charge-Offs (6) (43) (347) (160) (1,179) Balance at End of Year $ 59 $ 65 $ 108 $ 370 $ 369
During 1998, the Company acquired eleven properties totaling $679 thousand through foreclosure. Also during the year, the Company sold ten properties with a carrying amount of $367 thousand for net gains of $38 thousand. During 1997, the Company acquired six properties totaling $307 thousand through foreclosure. Also during the year, the Company sold properties with a carrying amount of $128 thousand for net gains of $110 thousand. During 1996, the Company acquired five properties totaling $302 thousand through foreclosure. Also during the year, the Company recognized losses of $330 thousand on the sale of OREO properties with a carrying amount of $2.5 million (including OREO disposed of in the Vermont branch sale transactions) and further reduced the carrying amount of the two properties remaining in OREO at December 31, 1996 by $85 thousand. During 1995, the Company acquired $642 thousand of OREO through foreclosure. The Company recognized losses of $48 thousand on the sale of OREO properties carried on the books at $1.5 million. During 1994, the Company acquired $2.5 million of OREO through foreclosure. The Company recognized losses of $1.4 million on the sale of OREO properties carried on the books at $6.2 million. Approximately 65% of the sales took place at an auction of OREO properties held during the second quarter of 1994. III. SUMMARY OF LOAN LOSS EXPERIENCE The Company monitors credit quality through a continuous review of the entire loan portfolio. All significant loans (primarily commercial and commercial real estate) are reviewed at least semi-annually, and those under special supervision are reviewed at least quarterly. The boards of directors of the Company's subsidiary banks, upon recommendations from management, determine the extent of charge-offs and have the final decision-making responsibility in authorizing charge-offs. Additionally, regulatory examiners perform periodic examinations of the banks' loan portfolios and report on these examinations to the boards of directors. Through the provision for loan losses, an allowance (reserve) is maintained for estimated loan losses. Actual loan losses are charged against this allowance when they are identified. In evaluating the adequacy of the allowance for loan losses, management considers various risk factors influencing asset quality. The analysis is performed on a loan by loan basis for impaired and large balance loans, and by portfolio type for smaller balance homogeneous loans. This analysis is based on judgments and estimates and may change in response to economic developments or other conditions that may influence borrowers' economic outlook. The provision for loan losses was largely influenced by the level of nonperforming loans, the expected future levels of nonperforming loans, by the level of loans actually charged-off against the allowance for loan losses during the year and by the change in the mix of loan categories within the loan portfolio. The table in Part II, Item 7.B.II. "Provision for Loan Losses and Allowance for Loan Losses" presents a summary of the activity in the Company's allowance for loan losses. ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES The allowance for loan losses is a general allowance applicable to losses inherent in the loan portfolio. For internal operating purposes, the allowance is not allocated among loan categories. In the following table, the allowance has been allocated solely for purposes of complying with disclosure requirements of the Securities and Exchange Commission. However, this allocation should not be interpreted as a projection of (I) likely sources of future charge-offs, (II) likely proportional distribution of future charge-offs among loan categories or (III) likely amounts of future charge-offs. Since management regards the allowance as a general balance and has assigned an unallocated value to the schedule, the amounts presented do not represent the total balance available to absorb future charge-offs that might occur within the principal categories. Subject to the qualifications noted above, an allocation of the allowance for loan losses by principal classification and the proportion of the related loan balance is presented below as of December 31 for each of the years indicated.
ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES (Dollars in Thousands) 1998 1997 1996 1995 1994 Commercial, Financial and Agricultural $1,219 $1,972 $1,946 $ 2,913 $ 2,329 Real Estate-Commercial 505 219 353 1,755 1,841 Real Estate-Construction --- 17 49 305 1,994 Real Estate-Residential Mortgage 1,529 902 890 1,616 2,098 Installment Loans to Individuals 3,308 2,882 1,959 2,365 1,363 Unallocated 181 199 384 3,152 2,713 Total $6,742 $6,191 $5,581 $12,106 $12,338 PERCENT OF LOANS IN EACH CATEGORY TO TOTAL LOANS Commercial, Financial and Agricultural 6% 9% 12% 15% 15% Real Estate-Commercial 11 10 9 14 16 Real Estate-Construction 1 1 1 1 1 Real Estate-Residential Mortgage 44 43 43 46 45 Installment Loans to Individuals 38 37 35 24 23 Total 100% 100% 100% 100% 100%
IV. DEPOSITS The following table sets forth the average balances of and average rates paid on deposits for the periods indicated.
AVERAGE DEPOSIT BALANCES Years Ended December 31, (Dollars In Thousands) 1998 1997 1996 Average Average Average Balance Rate Balance Rate Balance Rate Demand Deposits $ 96,149 --% $ 78,704 --% $ 77,479 --% Interest-Bearing Demand Deposits 171,209 2.88 144,204 3.10 131,438 2.88 Regular and Money Market Savings 161,873 2.63 146,529 2.85 157,892 2.92 Time Deposits of $100,000 or More 112,226 5.41 87,956 5.38 79,996 5.25 Other Time Deposits 195,283 5.49 171,820 5.46 156,236 5.33 Total Deposits $736,740 3.53 $629,213 3.62 $603,041 3.47
The year-to-year changes in average deposit balances, reflected above, were impacted to some degree by branch acquisitions and dispositions, the acquisition being the purchase of six branches from Fleet Bank in mid-1997 and the dispositions being the sale of all 14 Vermont branch offices in two separate transactions completed in 1996. The deposit growth in the past year, however, reflected above and in the quarterly average deposit table below, was entirely the result of internal deposit growth at the Company's existing branches. On June 27, 1997, the Company assumed $140 million of deposit balances in the Fleet branch acquisition (demand - $17.3 million, interest- bearing demand deposits - $23.6 million, regular and money market savings - $42.7 million, and other time deposits - $56.2 million). These balances, accordingly, had a six month impact on average deposits for 1997. The deposit balances in the Vermont branches that were sold in 1996 impacted average deposit balances for only a portion of that year. For the aggregated 1996 average deposit total, average deposits of $85.4 million were attributable to the Vermont banking operations. The following table presents the quarterly average balance by deposit type and the percentage of total deposits represented by each deposit type for each of the most recent five quarters.
DEPOSIT PORTFOLIO Quarterly Average Deposit Balances (Dollars In Thousands) Quarter Ending Dec 1998 Sep 1998 Jun 1998 Mar 1998 Dec 1997 Demand Deposits $ 98,254 $101,053 $ 92,590 $ 92,584 $ 91,309 Interest-Bearing Demand Deposits 182,290 165,547 170,394 166,494 170,321 Regular and Money Market Savings 160,347 167,066 161,009 158,997 159,591 Time Deposits of $100,000 or More 116,394 116,375 113,672 102,263 96,851 Other Time Deposits 196,642 195,567 193,866 195,039 198,018 Total Deposits $753,927 $745,608 $731,531 $715,377 $716,090
Total average deposits for the fourth quarter of 1998 increased $37.8 million, or 5.3% from the average for the fourth quarter of 1997. This internal deposit growth was almost evenly split between transaction account balances and time deposits of $100,000 or more. The increase in time deposits of $100,000 are primarily attributable to municipal deposits.
Percentage of Total Quarterly Average Deposits Quarter Ending Dec 1998 Sep 1998 Jun 1998 Mar 1998 Dec 1997 Demand Deposits 13.0% 13.6% 12.7% 12.9% 12.8% Interest-Bearing Demand Deposits 24.2 22.2 23.3 23.3 23.8 Regular and Money Market Savings 21.3 22.4 22.0 22.2 22.3 Time Deposits of $100,000 or More 15.4 15.6 15.5 14.3 13.5 Other Time Deposits 26.1 26.2 26.5 27.3 27.6 Total Deposits 100.0% 100.0% 100.0% 100.0% 100.0% Quarterly Cost of Deposits Interest-Bearing Demand Deposits 2.79% 2.83% 2.92% 2.99% 3.16% Regular and Money Market Savings 2.35 2.68 2.71 2.78 2.79 Time Deposits of $100,000 or More 5.26 5.45 5.49 5.47 5.45 Other Time Deposits 5.36 5.40 5.52 5.57 5.50 Total Deposits 3.38 3.52 3.59 3.61 3.63
In general, prevailing interest rates as reflected in the Company's cost of deposits were quite steady from March 1997 until the fall of 1998 when the Federal Reserve Board took actions resulting in three 25 basis point decreases in the target federal funds rate. Although the Company did lower interest rates on its deposit products in the fourth quarter of 1998, most of these reductions were much less than the total 75 basis point decrease in the federal funds rate. Moreover, a significant amount of the Company's pre-existing time deposits have yet to reprice at the lower yields. The Company did not reduce the rates paid on deposits by the full amount of the 75 basis point decrease in the federal funds rate both because of competitive pressures in the Company's market area and because of potential consumer resistance to further reduction in already historically low rates being paid on transaction and savings accounts. V. TIME DEPOSITS OF $100,000 OR MORE The maturities of time deposits of $100,000 or more at December 31, 1998 are presented below. (In Thousands) Maturing in: Under Three Months $ 88,195 Three to Six Months 20,489 Six to Twelve Months 7,053 2000 5,593 2001 967 2002 400 2003 and Beyond 342 Total $123,039 D. LIQUIDITY Liquidity is measured by the ability of the Company to raise cash when it needs it at a reasonable cost. The Company must be capable of meeting expected and unexpected obligations to its customers at any time. Given the uncertain nature of customer demands as well as the need to maximize earnings, the Company must have available reasonably priced sources of funds, on- and off-balance sheet, that can be accessed quickly in time of need. Securities available-for-sale represent a primary source of balance sheet cash flow. Certain investment securities are selected at purchase as available-for-sale based on their marketability and collateral value, as well as their yield and maturity. In addition to liquidity arising from balance sheet cash flows, the Company has supplemented liquidity with additional off-balance sheet sources such as credit lines with the Federal Home Loan Bank. The Company also has identified wholesale and retail repurchase agreements and brokered certificates of deposit as appropriate off-balance sheet sources of funding. The Company measures its basic liquidity as a ratio of liquid assets to short-term liabilities, both with and without the availability of borrowing arrangements. Understanding that excess liquidity will have a negative impact on earnings, the Company establishes a target range for its liquidity ratios. At December 31, 1998, the Company was operating within those thresholds. E. CAPITAL RESOURCES AND DIVIDENDS Shareholders' equity was $77.1 million at December 31, 1998, an increase of $3.3 million, or 4.4%, from the prior year-end. The increase in shareholders' equity during 1998 primarily reflected retained earnings offset by the purchase of treasury shares throughout the year. On January 27, 1999, the Board of Directors announced that it had authorized management to repurchase from time to time, in market or privately negotiated transactions, up to an additional $2 million of the Company's common stock, representing approximately 1.2% of its total market capitalization on that date. The maintenance of appropriate capital levels is a management priority. Overall capital adequacy is monitored on an ongoing basis by management and reviewed regularly by the Board of Directors. The Company's principal capital planning goal is to provide an adequate return to shareholders while retaining a sufficient base to provide for future expansion and comply with all regulatory standards. One set of regulatory capital guidelines applicable to the Company and the subsidiary banks are so-called risk-based capital measures. Under these measures, the minimum ratio of "Tier 1" capital to risk-weighted assets is 4.0% and the minimum ratio of total capital to risk-weighted assets is 8.0%. For the Company, Tier 1 capital is comprised of shareholders' equity less intangible assets. Total capital includes Tier 1 capital plus a portion of the Company's allowance for loan losses. In addition to the risk-based capital measures, the federal bank regulatory agencies require banks and bank holding companies to satisfy another capital guideline, the Tier 1 leverage ratio (Tier 1 capital to quarterly average assets less intangible assets). The minimum Tier 1 leverage ratio is 3.0% for the most highly rated institutions. The guidelines provide that other institutions should maintain a Tier 1 leverage ratio that is at least 1.0% to 2.0% higher than the 3.0% minimum level for top-rated institutions. The table below sets forth the capital ratios of the Company and its subsidiary banks as of December 31, 1998:
Risk-Based Capital Ratios: Arrow GFNB SNB Tier 1 11.2% 11.9% 8.8% Total Capital 12.4 13.1 13.6 Tier 1 Leverage Ratio 7.1 7.2 7.7
At December 31, 1998, both subsidiary banks and the Company exceeded the minimum capital ratios established by these guidelines, and qualified as "well-capitalized", the highest category, in the capital classification scheme set by federal bank regulatory agencies pursuant to FDICIA (see the disclosure under "Legislative Developments" in Part I, Item 1.F. of this report). The principal source of funds for the payment of shareholder dividends by the Company has been dividends declared and paid to the Company by its bank subsidiaries. As of December 31, 1998, the maximum amount that could have been paid by the bank subsidiaries to the Company was approximately $12.6 million. See Part II, Item 5 "Market for the Registrant's Common Equity and Related Stockholder Matters" for a recent history of the Company's cash dividend payments. F. FOURTH QUARTER RESULTS The Company reported earnings of $3.2 million for the fourth quarter of 1998, an increase of $356 thousand, or 12.7%, from the fourth quarter of 1997. Diluted earnings per common share for the respective quarters was $.50 and $.44, respectively. The increase in earnings was primarily attributable to a $651 increase in tax- equivalent net interest income. This increase, in turn, was principally due to a $90.3 million increase in average earning assets from the fourth quarter of 1997 to the fourth quarter of 1998. Other income increased $263 thousand between the respective periods. The increase was only $46 thousand without securities transactions and other nonrecurring items, while other expense increased $417 thousand from the fourth quarter of 1997 to the fourth quarter of 1998.
SELECTED FOURTH QUARTER FINANCIAL INFORMATION (Dollars In Thousands, Except Per Share Amounts) For the Quarter Ended December 31, 1998 1997 Interest and Dividend Income $16,207 $15,266 Interest Expense 7,184 6,850 Net Interest Income 9,023 8,416 Provision for Loan Losses 360 331 Net Interest Income after Provision for Loan Losses 8,663 8,085 Other Income 2,268 2,005 Other Expense 6,331 5,914 Income Before Income Taxes 4,600 4,176 Provision for Income Taxes 1,434 1,366 Net Income $ 3,166 $ 2,810 SHARE AND PER SHARE DATA:1 Weighted Average Number of Shares and Equivalents Outstanding: Basic 6,241 6,335 Diluted 6,328 6,445 Basic Earnings Per Common Share $ .51 $ .44 Diluted Earnings Per Common Share .50 .44 Diluted Earnings Per Common Share, Based on Core Earnings2 .48 .43 Diluted Earnings Per Common Share, Based on Cash Earnings3 .50 .45 Cash Dividends Per Common Share .22 .19 AVERAGE BALANCES: Assets $912,301 $826,281 Earning Assets 858,194 767,873 Loans 539,505 481,883 Deposits 753,928 716,090 Shareholders' Equity 77,404 72,878 SELECTED RATIOS (Annualized): Return on Average Assets 1.38% 1.35% Return on Average Assets, Based on Core Earnings2 1.31% 1.32% Return on Average Equity 16.23% 15.30% Return on Average Equity, Based on Core Earnings2 15.51% 15.20% Efficiency Ratio4 54.66% 54.58% Net Interest Margin5 4.31% 4.48% Net Charge-offs to Average Loans .20% .30% Provision to Average Loans .27% .27%
1 Per share amounts have been adjusted for the 1998 ten percent stock dividend. 2 Core Net Income excludes one time material nonrecurring income and expense items and gains/losses on securities transactions. 3 Cash Earnings Per Share adds back to core net income the amortization, net of tax, of goodwill associated with branch purchases. 4 The Efficiency Ratio is the ratio of core noninterest expense less goodwill amortization to the sum of tax-equivalent net interest income and core noninterest income. 5 Net Interest Margin is the ratio of tax-equivalent core net interest income to average earning assets. G. YEAR 2000 READINESS DISCLOSURE Year 2000 Readiness General The advent of the year 2000 poses certain technological challenges resulting from a reliance in computer technologies on two digits rather than four digits to represent the calendar year (e.g., "98" for "1998"). Computer technologies programmed in this manner, if not corrected, could produce inaccurate or unpredictable results or system failures in connection with the transition from 1999 to 2000, when dates will begin to have a lower two-digit number than dates in the prior century. This problem, the so-called "Year 2000 Problem" or "Y2K Problem," may have a material adverse effect on the Company's financial condition, results of operations, business or business prospects because the Company, like most financial institutions, relies extensively on computer technology to manage its financial information and serve its customers. The Company and its banking subsidiaries are regulated by federal banking agencies, which are requiring substantial efforts by banks and their affiliated companies to prevent or mitigate disruptions relating to the year 2000. The Company's State of Readiness To deal with the Year 2000 Problem, the Company, beginning in 1997, formed a Year 2000 Project Team (the "Team"). The Team, which includes members of senior management, has developed a Year 2000 Action Plan (the "Plan"), specifying a range of tasks and goals to be achieved at various dates before the year 2000. To date, the Plan is on target and major deadlines have been met. The Team has kept other senior officers and the board of directors of the Company apprised of its progress, and has received input and guidance from both. The Company's Year 2000 Action Plan is divided into five phases consistent with guidance issued by the federal bank regulators: 1) Awareness; (2) Assessment; (3) Renovation; (4) Validation (testing); and (5) Implementation. As of December 31, 1998, the Company had completed the Awareness, Assessment and Renovation phases of the Plan, and had partially completed the Validation phase. The first two of these phases involved, among other things, identification of those data systems, including information technology ("IT") and non-information technology ("Non-IT") systems, that are deemed critical to the continuing functioning of the Company's principal business operations (so-called "mission critical systems"). The Renovation phase of the Plan consists of replacing or updating certain mission critical systems or components thereof with a view to preventing or minimizing any Y2K related problems. The Renovation phase for all internal mission critical systems was completed prior to year-end 1998. As part of the Renovation phase, the Company accelerated, and has now completed, the installation of a major upgrade to its central computer processing system, which had originally been scheduled for implementation in 1999. Acceleration of the upgrade has enabled the Company to conduct certain Year 2000 testing in-house, which otherwise would have to have been conducted by a third party provider at additional expense to the Company. As of December 31, 1998, the Company had completed the Validation (testing) phase of the Plan with respect to those mission critical systems that are operated by the Company internally. Moreover, the Validation (testing) phase with respect to mission critical systems furnished to the Company by third party providers was underway as of December 31, 1998, and is scheduled to be completed prior to March 31, 1999. The Implementation phase, involving all modifications to systems indicated by the testing phase as well as on-going monitoring of Y2K concerns generally, is on-going and the Company anticipates it will continue throughout 1999. During all phases of the Plan, the Year 2000 Project Team has actively monitored the Y2K preparedness of its third party providers and servicers, utilizing various methods for testing and verification. The Company has requested certifications of Year 2000 preparedness from principal providers and has participated in user groups. The Company also has completed an assessment of major borrowing accounts and has assigned a risk rating to each based on information obtained from the borrower. Year 2000 preparedness assessment is now a part of on-going loan account review. The Company also has contacted and reviewed the state of Y2K preparedness of the Company's principal sources of liquidity. The Company believes that there is no single credit account or source of funding that is sufficiently critical to the Company's profitability or operations such that Y2K preparedness or lack thereof represents a material exposure to the Company (see "Year 2000 Risks Facing the Company and the Company's Contingency Plans," below). The Company has not yet engaged in discussions with its utility providers (e.g., electricity, gas, telecommunications) regarding Y2K concerns. As part of the Plan, however, the Company will continue to monitor Y2K disclosures by all such providers to the businesses and financial organizations, such as the Company that rely on them. The Company will also continue to monitor such disclosures by the governmental agencies upon which the Company relies for certain services (e.g., the Federal Reserve System, the Federal Home Loan Bank of New York). In accordance with its Plan, the Company will make particular inquiries of such providers and agencies when circumstances warrant, and will generally strive for a Y2K preparedness against industry-wide and geographic Y2K systemic risks comparable to that maintained by similarly situated organizations exercising appropriate due care. Of course, any industry-wide or regional disruptions arising out of the Y2K Problem may be expected to affect the Company and its customers. The significance of any such disruption will depend on its duration and its systemic and geographic magnitude (see "Year 2000 Risks Facing the Company and the Company's Contingency Plans"). The following table sets forth the Company's timetable for completion of the various phases of its Year 2000 Action Plan, showing the Company's estimate of percentages of each phase completed as of December 31, 1998.
Internal System External Systems Third Parites Not Not Percent Mission Critical Mission Critical Mission Critical Mission Critical Loan Funds Complete IT NonIT IT NonIT IT NonIT* IT NonIT* Customers Providers Awareness 100% 9/30/98 9/30/98 9/30/98 9/30/98 9/30/98 9/30/98 9/30/98 9/30/98 9/30/98 9/30/98 Assessment 100% 9/30/98 9/30/98 9/30/98 9/30/98 9/30/98 9/30/98 9/30/98 9/30/98 9/30/98 9/30/98 Renovation 100% 12/31/98 9/30/98 12/31/98 9/30/98 12/31/98 12/31/98 12/31/98 12/31/98 N/A N/A Validation 90% 12/31/98 9/30/98 3/31/99 3/31/99 3/31/99 3/31/99 N/A N/A N/A N/A Implementation 80% 6/30/99 6/30/99 12/31/99 12/31/99 6/30/99 6/30/99 12/31/99 12/31/99 12/31/99 12/31/99
* External Non-IT systems are generally described as product vendors. The Costs to Address the Company's Year 2000 Issues The Company originally projected Y2K expenditures of between $250 thousand and $500 thousand. Y2K expenditures through December 31, 1998, were approximately $290 thousand, 64% of which represented the cost of the accelerated upgrading of the Company's central computer processing systems which was substantially complete as of that date. The projection of the Company's Y2K costs does not include internal personnel costs, which are not expected to be significantly greater as a result of the Year 2000 Problem, or external consulting or advisory fees, which have been and are expected to be minimal. The Company's budget for Y2K expenditures consists predominantly of expenditures for the upgrading or replacement of hardware and software systems, divided approximately 83% for hardware and 17% for software. The Company has funded, and plans to fund, its Year 2000 related expenditures out of general operating resources. The Company has postponed certain minor computer- related projects that otherwise might have been completed during 1998 and 1999, due to the resources directed to the accelerated upgrading of the central computer processing systems and other Y2K related projects. The Company does not believe this postponement will have any significant effect on its operations or customer service. Year 2000 Risks Facing the Company and the Company's Contingency Plans The failure of the Company to complete all material aspects of its Plan or to complete them on time could result in an interruption in or failure of certain normal business activities or operations. Such failures could materially adversely affect the Company's results of operations, liquidity and financial condition. Currently, the Plan is on schedule and management believes that successful completion of the Plan should significantly reduce the risks faced by the Company with respect to the Year 2000 Problem. There is no single credit account or group of related credits which, in the Company's assessment, is or may be likely to present any significant exposure due to the Year 2000 Problem. The Company does not have any significant concentration of borrowers from any particular industry (to the extent some industries might be particularly susceptible to Y2K concerns), and no individual borrower accounts for a significant portion of the Company's assets. However, management anticipates some negative impact on the performance of various loan accounts due to failure of the borrowers to prepare adequately for the Year 2000 Problem. In a worst-case scenario, these borrower-related difficulties might require the Company to downgrade the affected credits in its internal loan classification system or to make one or more special provisions to its loan loss allowance for resulting anticipated losses in ensuing periods. In addition, although the Company is adopting special measures to maintain necessary liquidity to meet funding demands in the periods surrounding the transition from 1999 to 2000, the Company also could face increased funding costs or liquidity pressures if depositors are motivated out of Y2K concerns to withdraw substantial amounts of deposits or to shift their deposits from short-term to long-term accounts. A significant portion of the Company's deposits are so-called municipal deposits (i.e., provided by local municipalities, school districts and other governmental bodies), but the Company does not anticipate any increased Year 2000 related risk due to this concentration of deposits. The Company does not currently expect any material impact from Y2K related issues on its costs of funds or liquidity, but in a worst-case scenario, if funding costs do rise, net interest margins may be negatively impacted over the relevant time frame. The Company could face some risk from the possible failure of one or more of its third party vendors to continue to provide uninterrupted service through the changeover to the year 2000. Critical providers include the Company's automated teller machine switching networks, the Company's credit card vendors (Visa and MasterCard), the Company's provider of trust department data processing, and the various credit bureaus upon which the Company relies for information necessary to evaluate credit risk. While an evaluation of the Year 2000 preparedness of its third party vendors has been part of the Company's Plan, the Company's ability to evaluate is limited to some extent by the willingness of vendors to supply information and the inability of some vendors to verify with any high degree of reliability the Y2K preparedness of their own systems or their sub-providers. However, the Company participates in user groups that include some of its third party vendors, and receives assessments of Y2K preparedness of vendors periodically from federal banking agencies. The Company's Plan also includes protocols for interface testing with third party vendors systems. In summary, the Company does not currently anticipate that its significant third party vendors will experience material failures in their ability to provide continuing service to the Company due to the Year 2000 Problem. The Company, like similarly-situated enterprises, is subject to certain risks as a result of possible industry-wide or area-wide failures triggered by the Year 2000 Problem. For example, the failure of certain utility providers (e.g., electricity, gas, telecommunications) or governmental agencies (e.g., the Federal Reserve System, the Federal Home Loan Bank of New York) to avoid disruption of service in connection with the transition from 1999 to 2000 could materially adversely affect the Company's results of operations, liquidity and financial condition. In management's estimate, such a system-wide or area-wide failure presents a significant risk to the Company in connection with the Year 2000 Problem because the resulting disruption may be entirely beyond the ability of the Company to cure. The significance of any such disruption would depend on its duration and systemic and geographic magnitude. Of course, any such disruption would likely impact businesses other than the Company. In order to reduce the risks enumerated above, the Company's Year 2000 Project Team has begun to develop contingency plans in accordance with guidance issued by the federal bank regulators. The Team has identified the Company's core business processes (e.g., providing customers with access to funds and information) and has reviewed the Company's existing business continuity and contingency plans. The Team also has performed a risk analysis of each core business process, defined and documented Year 2000 failure scenarios, and determined the minimum acceptable level of outputs and services. The Team is in the process of finalizing an overall contingency strategy with specific contingency plans for each core business process, assigning responsibilities and trigger dates for each contingency plan, and validating the plans. These activities are anticipated to be completed during the first quarter of 1999. Certain catastrophic events (such as the protracted loss of essential utilities or the failure of certain governmental bodies to function) are outside the scope of the Company's contingency plans, although the Company anticipates that it would respond to any such catastrophe in a manner designed to minimize disruptions in customer service and in full cooperation with its peer providers, community leaders and service organizations. Forward-Looking Statement Warnings As discussed in the lead-in paragraph to this Annual Report under the "Cautionary Statement under Federal Securities Laws," the above analysis of the Company's Year 2000 Readiness contains a substantial number of forward-looking statements that are based on the Company's and management's beliefs, assumptions, expectations, estimates and projections. These statements are indicated by such words as "expects," "believes," "estimates," "anticipates," "plans," "assessment," "should," "will," and similar words. Any or all of these forward-looking statements may prove to be inaccurate or incomplete, are depending on unknown developments and facts. These forward-looking statements should be read in light of the various risks and uncertainties cited in the lead-in paragraph in this Report mentioned above. Item 7A: Quantitative and Qualitative Disclosures About Market Risk In addition to credit risk in the Company's loan portfolio and liquidity risk, discussed earlier, the Company's business activities also generate market risk. Market risk is the possibility that changes in future market rates or prices will make the Company's position less valuable. The ongoing monitoring and management of risk is an important component of the Company's asset/liability management process which is governed by policies established by its Board of Directors that are reviewed and approved annually. The Board of Directors delegates responsibility for carrying out the asset/liability management to management's Asset/Liability Committee ("ALCO"). In this capacity ALCO develops guidelines and strategies impacting the Company's asset/liability management related activities based upon estimated market risk sensitivity, policy limits and overall market interest rate levels and trends. Interest rate risk is the most significant market risk affecting the Company. Interest rate risk is the exposure of the Company's net interest income to changes in interest rates. Interest rate risk is directly related to the different maturities and repricing characteristics of interest-bearing assets and liabilities, as well as to prepayment risks for mortgage-related assets, early withdrawal of time deposits, and the fact that the speed and magnitude of responses to interest rate changes varies by product. The ALCO utilizes the results of a detailed and dynamic simulation model to quantify the estimated exposure of net interest income to sustained interest rate changes. While ALCO routinely monitors simulated net interest income sensitivity over a rolling two-year horizon, it also utilizes additional tools to monitor potential longer-term interest rate risk. The simulation model captures the impact of changing interest rates on the interest income received and interest expense paid on all interest-bearing assets and liabilities reflected on the Company's consolidated balance sheet. This sensitivity analysis is compared to ALCO policy limits which specify a maximum tolerance level for net interest income exposure over a one year horizon, assuming no balance sheet growth and a 200 basis point upward and downward shift in interest rates, where interest-bearing assets and liabilities reprice at their earliest possible repricing date. A parallel and pro rata shift in rates over a 12 month period is assumed. As of December 31, 1998 under this analysis, a 200 basis point increase in interest rates resulted in a 4.1% decrease in net interest income and a 200 basis point decrease in interest rates resulted in a 3.2% increase in net interest income. These amounts were well within the Company's ALCO policy limits. The preceding sensitivity analysis does not represent a Company forecast and should not be relied upon as being indicative of expected operating results. These hypothetical estimates are based upon numerous assumptions including: the nature and timing of interest rate levels including yield curve shape, prepayments on loans and securities, deposit decay rates, pricing decisions on loans and deposits, reinvestment/replacement of asset and liability cashflows, and others. While assumptions are developed based upon current economic and local market conditions, the Company cannot make any assurance as to the predictive nature of these assumptions including how customer preferences or competitor influences might change. Also, as market conditions vary from those assumed in the sensitivity analysis, actual results will differ due to: prepayment/refinancing levels likely deviating from those assumed, the varying impact of interest rate changes on caps or floors on adjustable rate assets, the potential effect of changing debt service levels on customers with adjustable rate loans, depositor early withdrawals and product preference changes, and other internal/external variables. Furthermore, the sensitivity analysis does not reflect actions that ALCO might take in responding to or anticipating changes in interest rates. Item 8: Financial Statements and Supplementary Data The following audited financial statements and supplementary data are submitted herewith: Report of Management Independent Auditors' Report Financial Statements: Consolidated Balance Sheets as of December 31, 1998 and 1997 Consolidated Statements of Income for the Years Ended December 31, 1998, 1997 and 1996 Consolidated Statements of Changes in Shareholders' Equity for the Years Ended December 31, 1998, 1997 and 1996 Consolidated Statements of Cash Flows for the Years Ended December 31, 1998, 1997 and 1996 Notes to Consolidated Financial Statements Supplementary Data: (Unaudited) Summary of Quarterly Financial Data for the Years Ended December 31, 1998 and 1997 REPORT OF MANAGEMENT The accompanying consolidated financial statements of Arrow Financial Corporation and Subsidiaries are the responsibility of management, and have been prepared in conformity with generally accepted accounting principles. These statements necessarily include some amounts that are based on best judgments and estimates. Other financial information in the annual report is consistent with that in the consolidated financial statements. Management is responsible for maintaining a system of internal accounting control. The purpose of the system is to provide reasonable assurance that transactions are recorded in accordance with management's authorization, that assets are safeguarded against loss or unauthorized use, and that underlying financial records support the preparation of financial statements. The system includes written policies and procedures, selection of qualified personnel, appropriate segregation of responsibilities, and the ongoing internal audit function. The independent auditors conduct an annual audit of the Company's consolidated financial statements to enable them to express an opinion as to the fair presentation of the statements. In connection with the audit, the independent auditors consider internal control, to the extent they consider necessary to determine the nature, timing and extent of their auditing procedures. The independent auditors may also prepare recommendations regarding internal controls and other accounting and financial related matters. The implementation of these recommendations by management is monitored directly by the Audit Committee of the Board of Directors. /s/ Thomas L. Hoy /s/ John J. Murphy Thomas L. Hoy John J. Murphy President and Executive Vice President, Chief Executive Officer Treasurer and Chief Financial Officer INDEPENDENT AUDITORS' REPORT THE BOARD OF DIRECTORS AND SHAREHOLDERS OF ARROW FINANCIAL CORPORATION: We have audited the accompanying consolidated balance sheets of Arrow Financial Corporation and subsidiaries as of December 31, 1998 and 1997, and the related consolidated statements of income, changes in shareholders' equity, and cash flows for each of the years in the three-year period ended December 31, 1998. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Arrow Financial Corporation and subsidiaries as of December 31, 1998 and 1997, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1998, in conformity with generally accepted accounting principles. /s/ KPMG LLP Albany, New York January 22, 1999
CONSOLIDATED BALANCE SHEETS ARROW FINANCIAL CORPORATION AND SUBSIDIARIES (Dollars in Thousands) December 31, 1998 1997 ASSETS Cash and Due from Banks $ 24,246 $ 23,909 Federal Funds Sold 6,500 23,000 Cash and Cash Equivalents 30,746 46,909 Securities Available-for-Sale 267,731 221,837 Securities Held-to-Maturity (Approximate Fair Value of $65,055 in 1998 and $45,562 in 1997) 63,016 44,082 Loans and Leases 546,126 485,810 Less: Allowance for Loan Losses (6,742) (6,191) Net Loans and Leases 539,384 479,619 Premises and Equipment, Net 11,103 10,760 Other Real Estate Owned and Repossessed Assets, Net 665 393 Other Assets 26,384 27,999 Total Assets $939,029 $831,599 LIABILITIES Deposits: Demand $101,860 $ 96,482 Regular Savings, N.O.W. & Money Market Deposit Accounts 355,002 320,706 Time Deposits of $100,000 or More 123,039 106,620 Other Time Deposits 195,696 197,107 Total Deposits 775,597 720,915 Short-Term Borrowings: Securities Sold Under Agreements to Repurchase 22,275 20,918 Other Short-Term Borrowings 1,757 3,837 Federal Home Loan Bank Advances 45,000 --- Other Liabilities 17,254 12,058 Total Liabilities 861,883 757,728 Commitments and Contingent Liabilities (Notes 3, 14, 20, 21, 24 and 25) SHAREHOLDERS' EQUITY Preferred Stock, $5 Par Value; 1,000,000 Shares Authorized --- --- Common Stock, $1 Par Value; 20,000,000 Shares Authorized (7,596,477 Shares Issued in 1998 and 6,905,888 in 1997) 7,596 6,906 Surplus 87,262 65,277 Undivided Profits 6,721 22,531 Accumulated Other Comprehensive Income 579 764 Unearned ESOP Shares (56,795 Shares in 1998) (1,555) --- Treasury Stock, at Cost (1,311,518 Shares in 1998 and 1,143,553 Shares in 1997) (23,457) (21,607) Total Shareholders' Equity 77,146 73,871 Total Liabilities and Shareholders' Equity $939,029 $831,599 See notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF INCOME ARROW FINANCIAL CORPORATION AND SUBSIDIARIES (Dollars in Thousands, Except Per Share Data) Years Ended December 31, 1998 1997 1996 INTEREST AND DIVIDEND INCOME Interest and Fees on Loans and Leases $44,201 $38,917 $42,195 Interest on Federal Funds Sold 609 1,035 642 Interest and Dividends on Securities Available-for-Sale 15,019 12,263 11,102 Interest on Securities Held-to-Maturity 3,204 2,646 936 Total Interest and Dividend Income 63,033 54,861 54,875 INTEREST EXPENSE Interest on Deposits: Time Deposits of $100,000 or More 6,075 4,734 4,198 Other Deposits 19,899 18,035 16,737 Interest on Short-Term Borrowings: Federal Funds Purchased and Securities Sold Under Agreements to Repurchase 1,181 827 713 Other Short-Term Borrowings 138 291 178 Interest on Federal Home Loan Bank Advances 849 --- --- Total Interest Expense 28,142 23,887 21,826 NET INTEREST INCOME 34,891 30,974 33,049 Provision for Loan Losses 1,386 1,303 896 NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 33,505 29,671 32,153 OTHER INCOME Income from Fiduciary Activities 3,025 2,672 3,458 Fees for Other Services to Customers 4,236 3,723 3,959 Net Gains (Losses) on Securities Transactions 408 74 (101) Net Gain on Divestiture of Vermont Operations --- --- 15,330 Other Operating Income 911 1,714 1,057 Total Other Income 8,580 8,183 23,703 OTHER EXPENSE Salaries and Employee Benefits 13,810 12,726 14,971 Occupancy Expense of Premises, Net 1,674 1,561 1,790 Furniture and Equipment Expense 2,190 1,792 1,677 Other Operating Expense 6,832 5,623 6,336 Total Other Expense 24,506 21,702 24,774 INCOME BEFORE INCOME TAXES 17,579 16,152 31,082 Provision for Income Taxes 5,744 5,155 10,822 NET INCOME $11,835 $10,997 $20,260 . . . . . . . . . . . . . . . . . . . . . Average Shares Outstanding: Basic 6,303 6,431 6,803 Diluted 6,39 6,518 6,873 Earnings Per Common Share: Basic $ 1.88 $ 1.71 $ 2.98 Diluted 1.85 1.69 2.95 Share and per share amounts have been adjusted for the 1998 ten percent and the 1997 five percent stock dividends. See notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY ARROW FINANCIAL CORPORATION AND SUBSIDIARIES (Dollars in Thousands, Except per Share Data) Unallocated Accumulated Employee Other Stock Compre- Shares Common Undivided Ownership hensive Treasury Issued Stock Surplus Profits Plan Income Stock Total Balance at December 31, 1995 5,979,124 $5,979 $40,938 $24,296 $ (700) $1,152 $ (4,161) $67,504 Comprehensive Income, Net of Tax: Net Income --- --- --- 20,260 --- --- --- 20,260 Net Unrealized Securities Holding Losses Arising During the Period, Net of Tax (Pretax $1,697) --- --- --- --- --- (1,004) --- (1,004) Reclassification Adjust- ment for Net Securities Losses Included in Net Income, Net of Tax (Pretax $101) --- --- --- --- --- 60 --- 60 Other Comprehensive Income (944) Comprehensive Income 19,316 Cash Dividends Declared, $.575 per Share --- --- --- (3,886) --- --- --- (3,886) 10% Stock Dividend 597,912 598 13,080 (13,678) --- --- --- --- Allocation of ESOP Stock (48,866 Shares) --- --- 252 --- 700 --- --- 952 Stock Options Exercised (51,261 Shares) --- --- 249 --- --- --- 287 536 Tax Benefit for Disposition of Stock Options --- --- 50 --- --- --- --- 50 Purchase of Treasury Stock (576,541 Shares) --- --- --- --- --- --- (10,176) (10,176) Balance at December 31, 1996 6,577,036 6,577 54,569 26,992 --- 208 (14,050) 74,296 Comprehensive Income, Net of Tax: Net Income --- --- --- 10,997 --- --- --- 10,997 Net Unrealized Securities Holding Gains Arising During the Period, Net of Tax (Pretax $1,014) --- --- --- --- --- 600 --- 600 Reclassification Adjust- ment for Net Securities Gains Included in Net Income, Net of Tax (Pretax $74) --- --- --- --- --- (44) --- (44) Other Comprehensive Income 556 Comprehensive Income 11,553 Cash Dividends Declared, $.710 per Share --- --- --- (4,565) --- --- --- (4,565) 5% Stock Dividend 328,852 329 10,564 (10,893) --- --- --- --- Stock Options Exercised (56,141 Shares) --- --- 111 --- --- --- 448 559 Tax Benefit for Disposition of Stock Options --- --- 33 --- --- --- --- 33 Purchase of Treasury Stock (368,862 Shares) --- --- --- --- --- --- (8,005) (8,005) Balance at December 31, 1997 6,905,888 6,906 65,277 22,531 --- 764 (21,607) 73,871 Comprehensive Income, Net of Tax: Net Income --- --- --- 11,835 --- --- --- 11,835 Excess of Additional Pension Liability Over Unrecognized Prior Service Cost (Pretax $74) --- --- --- --- --- (44) --- (44) Net Unrealized Securities Holding Gains Arising During the Period, Net of Tax (Pretax $169) --- --- --- --- --- 100 --- 100 Reclassification Adjust- ment for Net Securities Gains Included in Net Income, Net of Tax (Pretax $408) --- --- --- --- --- (241) --- (241) Other Comprehensive Income (185) Comprehensive Income 11,650 Cash Dividends Declared, $.812 per Share --- --- --- (5,115) --- --- --- (5,115) 10% Stock Dividend 690,589 690 21,840 (22,530) --- --- --- --- Stock Options Exercised (18,109 Shares) --- --- 101 --- --- --- 102 203 Tax Benefit for Disposition of Stock Options --- --- 51 --- --- --- --- 51 Purchase of Treasury Stock (70,500 Shares) --- --- --- --- --- --- (1,952) (1,952) Acquisition of Common Stock By ESOP (62,000 Shares) --- --- --- --- (1,728) --- --- (1,728) Allocation of ESOP Stock (6,305 Shares) --- --- (7) --- 173 --- --- 166 Balance at December 31, 1998 7,596,477 $7,596 $87,262 $ 6,721 $(1,555) $ 579 $(23,457) $77,146
Per share amounts have been adjusted for the 1998 ten percent and the 1997 five percent stock dividends. Included in the shares issued for the stock dividends in 1998, 1997 and 1996 were treasury shares of 115,574, 41,518 and 30,383 respectively, and for 1998 and 1996, unallocated ESOP shares of 1,100 and 1,294, respectively. See notes to consolidated financial statements.
ARROW FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Dollars in Thousands) Years Ended December 31, 1998 1997 1996 Operating Activities: Net Income $ 11,835 $ 10,997 $ 20,260 Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities: Provision for Loan Losses 1,386 1,303 896 Provision for Other Real Estate Owned Losses --- --- 85 Depreciation and Amortization 1,412 1,430 1,200 Compensation Expense for Allocated ESOP Shares 166 --- 252 Net Gain on Divestiture of Vermont Operations --- --- (15,330) Gains on the Sale of Securities Available-for-Sale (416) (137) (243) Losses on the Sale of Securities Available-for-Sale 8 63 344 Proceeds from the Sale of Loans 3,598 2,158 4,882 (Gains) Losses on the Sale of Loans, Fixed Assets and Other Real Estate Owned (66) (144) 135 Deferred Income Tax Expense 316 410 97 Decrease (Increase) in Interest Receivable 218 (772) 1,130 Increase (Decrease) in Interest Payable 296 539 (561) Decrease (Increase) in Other Assets 60 (1,501) 991 Increase (Decrease) in Other Liabilities 4,900 (2,334) (1,251) Net Cash Provided By Operating Activities 23,713 12,012 12,887 Investing Activities: Proceeds from the Sale of Securities Available-for-Sale 41,391 37,029 51,040 Proceeds from the Maturities of Securities Available-for-Sale 156,560 29,208 36,454 Purchases of Securities Available-for-Sale (242,999) (115,386) (82,398) Proceeds from the Maturities of Securities Held-to-Maturity 6,017 2,752 848 Purchases of Securities Held-to-Maturity (24,989) (15,989) (17,814) Loans (Purchased) Sold in Branch Transactions --- (44,190) 147,503 Net Increase in Loans and Leases (65,408) (51,249) (32,437) Fixed Assets (Purchased) Sold in Branch Transactions --- (1,338) 2,525 Proceeds from Sales of Fixed Assets and Other Real Estate Owned 487 303 2,513 Purchases of Fixed Assets (1,353) (893) (2,099) Proceeds from the Sale of Vermont Trust Operations --- --- 3,000 Net Cash (Used In) Provided By Investing Activities (130,294) (159,753) 109,135 Financing Activities: Deposits Assumed (Transferred) in Branch Transactions, Net of Premium --- 127,708 (192,953) Net Increase in Deposits 54,682 39,374 55,989 Net (Decrease) Increase in Short-Term Borrowings (723) 2,049 7,409 Federal Home Loan Bank Advances 45,000 --- --- Exercise of Stock Options 203 33 412 Disqualifying Disposition of Incentive Stock Options 51 33 50 Purchase of Treasury Stock (1,952) (7,479) (10,052) Purchase of Common Stock by ESOP (1,728) --- --- Cash Dividends Paid (5,115) (4,565) (3,886) Net Cash Provided By (Used In) Financing Activities 90,418 157,153 (143,031) Net (Decrease) Increase In Cash and Cash Equivalents (16,163) 9,412 (21,009) Cash and Cash Equivalents at Beginning of the Year 46,909 37,497 58,506 Cash and Cash Equivalents at End of the Year $ 30,746 $ 46,909 $ 37,497 Supplemental Cash Flow Information: Interest Paid $27,846 $23,352 $ 22,387 Income Taxes Paid 152 6,571 11,235 Transfer of Loans to Other Real Estate Owned 679 307 302
See notes to consolidated financial statements. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (In Thousands) Arrow Financial Corporation (the "Company") is a bank holding company organized in 1983 under the laws of New York and registered under the Bank Holding Company Act of 1956. The accounting and reporting policies of Arrow Financial Corporation and its subsidiaries conform to generally accepted accounting principles and general practices within the industry in all material aspects. Principles of Consolidation - The financial statements of the Company and its wholly owned subsidiaries are consolidated and all material intercompany transactions have been eliminated. In the "Parent Company Only" financial statements, the investment in wholly owned subsidiaries is carried under the equity method of accounting. When necessary, prior years' consolidated financial statements have been reclassified to conform with the current financial statement presentations. Cash and Cash Equivalents - Cash and cash equivalents in the Consolidated Statements of Cash Flows include the following items: cash at branches, due from bank balances, cash items in the process of collection and federal funds sold. Securities - Securities reported as held - -to-maturity are those debt securities which the Company has both the positive intent and ability to hold to maturity and are stated at amortized cost. Securities available-for-sale are reported at fair value, with unrealized gains and losses, net of taxes, reported in accumulated other comprehensive income. Realized gains and losses are based upon specific identification. The cost of securities is adjusted for amortization of premium and accretion of discount, which is calculated on an effective interest rate method. Loans, Leases and Allowance for Loan Losses - Interest income on commercial loans, mortgages, credit card and installment loans is accrued and credited to income, based upon the principal amount outstanding. The financing method of accounting is used for direct lease contract receivables. Loan fees and costs, where material, are deferred and amortized as an adjustment to yield over the lives of the loans originated. The allowance for loan losses is maintained by charges to operations based upon management's evaluation of the loan portfolio, current economic conditions, past loan losses and other factors. In management's opinion, the balance is sufficient to provide for probable loan losses. While management uses available information to recognize losses on loans, future additions to the allowance may be necessary based on changes in economic conditions in the Company's market area. In addition, various Federal and State regulatory agencies, as an integral part of their examination process, review the Company's allowance for loan losses. Such agencies may require the Company to recognize additions to the allowance in future periods, based on their judgments about information available to them at the time of their examination which may not be currently available to management. The Company accounts for impaired loans under Statement of Financial Accounting Standards (SFAS) No. 114, "Accounting by Creditors for Impairment of a Loan." SFAS No. 114, as amended, requires that impaired loans, except for large groups of smaller-balance homogeneous loans, be measured based on the present value of expected future cash flows discounted at the loan's effective interest rate, the loan's observable market price or the fair value of the collateral if the loan is collateral dependent. The Company applies the provisions of SFAS No. 114 to all impaired commercial and commercial real estate loans over $250, and to all loans restructured subsequent to adoption. Reserves for loan losses for the remaining smaller-balance loans are evaluated under SFAS No. 5. Under the provisions of SFAS No. 114, the Company determines impairment for collateralized loans based on fair value of the collateral less estimated cost to sell. For other loans, impairment is determined by comparing the recorded value for the loan to the present value of the expected cash flows, discounted at the loan's effective interest rate. The Company determines the interest income recognition method on a loan-by-loan basis. Based upon the borrowers' payment histories and cash flow projections, interest recognition methods include full accrual, cash basis and cost recovery. Transfers and Servicing of Financial Assets and Extinguishments of Liabilities - In June 1996, the FASB issued SFAS No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities". SFAS No. 125 was effective for transfers and servicing of financial assets and extinguishments of liabilities occurring after December 31, 1996 (except for certain provisions which were deferred for one year by SFAS No. 127) and was applied prospectively. This Statement provides accounting and reporting standards for transfers and servicing of financial assets and extinguishments of liabilities based on consistent application of the financial-components approach that focuses on control. It distinguishes transfers of financial assets that are sales from transfers that are secured borrowings. The adoption of SFAS No. 125 did not have a material impact on the Company's consolidated financial position, results of operations, or liquidity. SFAS No. 125 superseded SFAS No. 122, "Accounting for Mortgage Servicing Rights". At December 31, 1998 and 1997, the carrying amount of the Company's mortgage servicing rights measured under SFAS No. 125 amounted to $34 and $46 for each respective period. At December 31, 1998 and 1997, the magnitude of the servicing rights was not considered so substantial as to require stratification for purposes of evaluation for impairment. There was no valuation reserve for mortgage servicing rights at December 31, 1998 and 1997, as fair value approximated carrying value. The amount of loans serviced for others was $11,862 and $14,880 at December 31, 1998 and 1997, respectively. Other Real Estate Owned - Real estate acquired by foreclosure is recorded at the lower of fair value less estimated costs to sell or cost. Subsequent declines in fair value, after transfer to other real estate owned, are recognized through a valuation allowance. Such declines in fair value along with related operating expenses to administer such properties are charged directly to operating expense. Premises and Equipment - Premises and equipment are stated at cost, less accumulated depreciation and amortization. Depreciation and amortization included in operating expenses are stated largely on the straight-line method. The provision is based on the estimated useful lives of the assets and, in the case of leasehold improvements, amortization is computed over the terms of the respective leases or their estimated useful lives, whichever is less. Gains or losses on disposition are reflected in earnings. Assets subject to finance leases are capitalized and depreciated over the life of the lease with appropriate charges to operating expense for implicit interest amounts. Income Taxes - The Company accounts for income taxes under the asset and liability method of accounting for income taxes under SFAS No. 109. Under the asset and liability method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect of deferred tax assets and liabilities for a change in tax rates is recognized in income in the period that includes the enactment date. The Company's policy is that deferred tax assets are reduced by a valuation reserve if, based on the weight of available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized. Intangible Assets - Intangible assets related to the acquisition of branches, and the related amortization, are included in other assets and other noninterest expense, respectively. Intangible assets, which are being amortized, on a straight-line basis, over 15 years, amounted to $12,206 and $13,131 at December 31, 1998 and 1997, respectively. The related amortization expense totaled $944, $493, $80 in 1998, 1997 and 1996, respectively. Earnings Per Share - The Company adopted SFAS No. 128, "Earnings Per Share," at December 31, 1997. Basic EPS excludes dilution and is computed by dividing income available to common stockholders by the weighted average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the entity (such as the Company's stock options). All EPS data reflects the ten percent stock dividend in August 1998 and the five percent stock dividend in November 1997. Financial Instruments - SFAS No. 107, "Disclosures about Fair Value of Financial Instruments," requires that the Company disclose estimated fair values for its financial instruments, both on- and off-balance sheet. The Company is a party to certain financial instruments with off-balance sheet risk, such as: commercial lines of credit, construction lines of credit, credit card lines of credit, overdraft protection, home equity lines of credit and standby letters of credit. The Company's policy is to record such instruments when funded. Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial instrument. These estimates do not reflect any premium or discount that could result from offering for sale at one time the Company's entire holdings of a particular financial instrument. Because no market exists for a significant portion of the Company's financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments, and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates. Fair value estimates are based on existing on- and off-balance sheet financial instruments without attempting to estimate the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments. For example, the Company has a substantial trust department that contributes net fee income annually. The trust department is not considered a financial instrument, and its value has not been incorporated into the fair value estimates. Other significant assets and liabilities that are not considered financial assets or liabilities include credit card servicing operations, deferred taxes, premises and equipment, the value of low-cost long-term core deposits and goodwill. In addition, the tax ramifications related to the realization of the unrealized gains and losses can have a significant effect on fair value estimates and have not been considered in any of the estimates. The carrying amount of certain short-term assets and liabilities, namely: cash and due from banks, federal funds sold, securities sold under agreements to repurchase, demand deposits, savings, N.O.W. and money market deposits, other short-term borrowings, accrued interest receivable and accrued interest payable, is a reasonable estimate of fair value. The fair value estimates of other on- and off-balance sheet financial instruments, as well as the method of arriving at fair value estimates, are included in the related footnotes and summarized in Note 22. Segment Reporting - In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information." SFAS No. 131 establishes standards for the way that public business enterprises report information about operating segments. For the Company, the statement was effective for annual financial statements issued for the year ended December 31, 1998. The Company's operations are solely in the financial services industry and include the traditional operations of a commercial banking enterprise. The Company operates primarily in northern New York State in Warren, Washington, Saratoga, Essex and Clinton counties and surrounding areas. Use of Estimates - Management of the Company has made a number of estimates and assumptions relating to the reporting of assets and liabilities and the disclosure of contingent assets and liabilities to prepare these consolidated financial statements in conformity with generally accepted accounting principles. Actual results could differ from those estimates. NOTE 2: CASH AND DUE FROM BANKS (In Thousands) The bank subsidiaries are required to maintain certain reserves of vault cash and/or deposits with the Federal Reserve Bank. The total amount of the required reserve at December 31, 1998 and 1997 was approximately $7,930 and $9,034, respectively. NOTE 3: SECURITIES (In Thousands) The fair value of securities, except certain state and municipal securities, is estimated based on published prices or bid quotations received from securities dealers. The fair value of certain state and municipal securities is not readily available through market sources, so fair value estimates are based on the discounted contractual cash flows using estimated market discount rates that reflect the credit and interest rate risk inherent in the instrument, or for short-term securities, the carrying amount. A summary of the amortized costs and the approximate fair values of securities at December 31, 1998 and 1997 is presented below:
Securities Available-for-Sale: Gross Gross Amortized Fair Unrealized Unrealized Cost Value Gains Losses December 31, 1998 U.S. Treasury and Agency Obligations $ 29,567 $ 30,134 $ 567 $ --- State and Municipal Obligations 9,235 9,240 5 --- Collateralized Mortgage Obligations 68,954 69,257 410 107 Other Mortgage-Backed Securities 120,107 120,104 428 431 Corporate and Other Debt Securities 34,899 34,953 118 64 Mutual Funds and Equity Securities 3,916 4,043 127 --- Total Securities Available-for-Sale $266,678 $267,731 $1,655 $ 602 December 31, 1997 U.S. Treasury and Agency Obligations $ 75,553 $ 76,006 $ 463 $ 10 State and Municipal Obligations 3,000 2,999 --- 1 Collateralized Mortgage Obligations 66,919 67,207 656 368 Other Mortgage-Backed Securities 63,763 64,057 341 47 Corporate and Other Debt Securities 8,998 9,145 153 6 Mutual Funds and Equity Securities 2,325 2,423 98 --- Total Securities Available-for-Sale $220,558 $221,837 $1,711 $ 432
Securities Held-to-Maturity: Gross Gross Amortized Fair Unrealized Unrealized Cost Value Gains Losses December 31, 1998 U.S. Treasury and Agency Obligations $ 3,989 $ 4,050 $ 61 $ --- State and Municipal Obligations 42,458 44,320 1,872 10 Other Mortgage-Backed Securities 16,569 16,685 165 49 Total Securities Held-to-Maturity $63,016 $65,055 $2,098 $ 59 December 31, 1997 State and Municipal Obligations $24,800 $26,106 $1,307 $ 1 Other Mortgage-Backed Securities 19,282 19,456 174 --- Total Securities Held-to-Maturity $44,082 $45,562 $1,481 $ 1
A summary of the maturities of securities as of December 31, 1998 is presented below. Collateralized mortgage obligations and other mortgage-backed securities are included in the schedule based on their expected average lives. Actual maturities may differ from the table below because issuers may have the right to call or prepay obligations with or without prepayment penalties.
Securities Available- Securities Held- for-Sale to-Maturity Amortized Fair Amortized Fair Cost Value Cost Value Within One Year: U.S. Treasury and Agency Obligations $ 1,500 $ 1,513 $ --- $ --- State and Municipal Obligations 7,235 7,240 4,055 4,058 Collateralized Mortgage Obligations 25,816 25,865 --- --- Other Mortgage-Backed Securities 730 728 --- --- Corporate and Other Debt Securities 30,916 30,869 --- --- Total 66,197 66,215 4,055 4,058 From 1 - 5 Years: U.S. Treasury and Agency Obligations 13,032 13,317 --- --- State and Municipal Obligations --- --- 3,874 4,074 Collateralized Mortgage Obligations 43,138 43,392 --- --- Other Mortgage-Backed Securities 114,287 114,332 16,569 16,685 Corporate and Other Debt Securities 2,989 3,084 --- --- Total 173,446 174,125 20,443 20,759 From 5 - 10 Years: U.S. Treasury and Agency Obligations 15,035 15,304 3,989 4,050 State and Municipal Obligations --- --- 17,208 18,389 Collateralized Mortgage Obligations --- --- --- --- Other Mortgage-Backed Securities 5,090 5,044 --- --- Corporate and Other Debt Securities --- --- --- --- Total 20,125 20,348 21,197 22,439 Over 10 Years: U.S. Treasury and Agency Obligations --- --- --- --- State and Municipal Obligations 2,000 2,000 17,321 17,799 Collateralized Mortgage Obligations --- --- --- --- Other Mortgage-Backed Securities --- --- --- --- Corporate and Other Debt Securities 994 1,000 --- --- Mutual Funds and Equity Securities 3,916 4,043 --- --- Total 6,910 7,043 17,321 17,799 Total Securities $266,678 $267,731 $63,016 $65,055
The carrying amount of securities pledged to secure public and trust deposits and for other purposes totaled $205,812 and $179,232 at December 31, 1998 and 1997, respectively. NOTE 4: LOANS AND LEASES (In Thousands) Loans and leases at December 31, 1998 and 1997 consisted of the following:
1998 1997 Commercial, Financial and Agricultural $ 35,961 $ 46,124 Real Estate - Commercial 58,420 50,680 Real Estate - Residential 238,425 208,258 Real Estate - Construction 3,406 2,072 Installment Loans to Individuals 209,914 178,676 Total Loans and Leases $546,126 $485,810 /TABLE The carrying amount of net loans and leases at December 31, 1998 and 1997 was $539,384 and $479,619, respectively. The fair value of net loans and leases at December 31, 1998 and 1997 was $547,648 and $489,031, respectively. Fair values are estimated for portfolios of loans with similar financial characteristics. Loans are segregated by type such as commercial, commercial real estate, residential mortgage, credit card and other consumer loans. Each loan category is further segmented into fixed and adjustable rate interest terms and by performing and nonperforming categories. The fair value of performing loans is calculated by discounting scheduled cash flows through the estimated maturity using estimated market discount rates that reflect the credit and interest rate risk inherent in the loan. The estimate of maturity is based on historical experience with repayments for each loan classification, modified, as required, by an estimate of the effect of current economic and lending conditions. Fair value for nonperforming loans is based on recent external appraisals. If appraisals are not available, estimated cash flows are discounted using a rate commensurate with the risk associated with the estimated cash flows. Assumptions regarding credit risk, cash flows and discount rates are judgmentally determined using available market information and specific borrower information. Certain executive officers and directors, including their immediate families and organizations in which they are principals of the Company or affiliates, have various loan, deposit and other transactions with the Company. Such transactions are on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with others. The amount of such related party loans was $3,702 at December 31, 1998 and $3,285 at December 31, 1997. During 1998, the amount of new loans and renewals extended to such related parties was $1,832 and the total of loan repayments was $1,415. The Company has pledged certain loans secured by one to four family residential mortgages as collateral for borrowings from the Federal Home Loan Bank (see Note 10). As of December 31, 1998 the amount of such pledging amounted to $152,645. The Company designates certain loans as nonaccrual and suspends the amortization of net deferred fees or costs when payment of interest and/or principal is due and unpaid for a period of, generally, ninety days or the likelihood of repayment is uncertain in the opinion of management. The following table presents the balance of nonaccrual and restructured loans and other information implicit to the interest income accounts.
1998 1997 1996 Principal Amount at December 31 $2,270 $3,321 $2,297 Gross Interest That Would Have Been Earned Under Original Terms 208 246 232 Interest Included in Net Income 76 90 48
The Company has no material commitments to make additional advances to borrowers with nonaccrual or restructured loans. NOTE 5: ALLOWANCE FOR LOAN LOSSES (In Thousands) The following summarizes the changes in the allowance for loan losses during the years ended December 31:
1998 1997 1996 Balance at Beginning of Year $6,191 $5,581 $12,106 Provision for Loan Losses 1,386 1,303 896 Recoveries 343 205 366 Charge-Offs (1,178) (1,598) (946) Allowance Acquired (Transferred) --- 700 (6,841) Balance at End of Year $6,742 $6,191 $ 5,581
At December 31, 1998 and 1997, the recorded investment in impaired loans amounted to $671 and $1,935, respectively. At December 31, 1998, the allowance for loan losses included $201, which represented the amount of allowance related to the impaired loans at that date. At December 31, 1997, the allowance for loan losses included $225, which represented the amount of the allowance related to the impaired loans at that date. The average recorded investment in impaired loans for 1998, 1997 and 1996 was $1,273, $1,566 and $1,465, respectively. During 1998, 1997 and 1996, no interest income was recorded on such loans during the period of impairment. NOTE 6: PREMISES AND EQUIPMENT (In Thousands) A summary of premises and equipment at December 31, 1998 and 1997 is presented below:
1998 1997 Bank Premises, Including Land $13,106 $12,592 Equipment, Furniture and Fixtures 10,236 9,539 Leasehold Improvements 171 169 Sub-Total 23,513 22,300 Accumulated Depreciation and Amortization (12,410) (11,540) Net Premises and Equipment $11,103 $10,760
Amounts charged to operations for depreciation and amortization totaled $936, $836 and $879 in 1998, 1997 and 1996, respectively. NOTE 7: OTHER REAL ESTATE OWNED (In Thousands) Other real estate owned, net of an allowance for estimated losses, at December 31, 1998 and 1997 consisted of the following:
1998 1997 Single-Family 1 - 4 Units $540 $227 Commercial Real Estate 86 86 Construction and Land Development 1 2 Other Real Estate Owned, Net $627 $315
The following table summarizes changes in the net carrying amount of other real estate owned at December 31, 1998 and 1997:
1998 1997 Balance at Beginning of Year $315 $136 Properties Acquired Through Foreclosure 679 307 Sales (367) (128) Balance at End of Year $627 $315
The following summarizes the changes in the allowance for other real estate owned losses:
1998 1997 Balance at Beginning of Year $ 65 $108 Charge-Offs (6) ( 43) Balance at End of Year $ 59 $ 65
Repossessed assets totaled $38 and $78 at December 31, 1998 and 1997, respectively, and consisted solely of automobiles repossessed in satisfaction of loans. NOTE 8: TIME DEPOSITS (In Thousands) The following summarizes the contractual maturities of time deposits during years subsequent to December 31, 1998:
Time Deposits Other of $100,000 Time or More Deposits C> 1999 $115,737 $142,637 2000 5,593 34,601 2001 967 7,416 2002 400 2,346 2003 and Beyond 342 8,696 Total $123,039 $195,696
The carrying value of time deposits at December 31, 1998 and 1997 was $318,735 and $303,727, respectively. The fair value of time deposits at December 31, 1998 and 1997 was $319,224 and $304,374, respectively. The fair value of time deposits is based on the discounted value of contractual cash flows, except that the fair value is limited to the extent that the customer could redeem the certificate after imposition of a premature withdrawal penalty. The discount rate is estimated using the rates indexed to the FHLB advance rates at December 31, 1998. NOTE 9: SHORT-TERM BORROWINGS (In Thousands) A summary of short-term borrowings is presented below:
Federal Funds Purchased and Securities Sold Under Agreements to Repurchase: 1998 1997 1996 Balance at December 31 $22,275 $20,918 $16,597 Maximum Month-End Balance 41,576 21,510 20,099 Average During the Year 25,575 17,450 15,094 Average Rate During the Year 4.62% 4.74% 4.72% Rate at December 31 4.36% 4.39% 4.39% Other Short-Term Borrowings: Balance at December 31 $1,757 $3,837 $6,109 Maximum Month-End Balance 5,042 8,322 8,336 Average During the Year 2,426 5,041 3,430 Average Rate During the Year 5.67% 5.77% 5.20% Rate at December 31 5.19% 5.27% 5.50% Average Aggregate Borrowing Rates During the Year 4.71% 4.97% 4.81%
Securities sold under agreements to repurchase generally mature within ninety days. The Company maintains control over the securities underlying the agreements. Federal funds purchased represent overnight transactions. At December 31, 1998 other short-term borrowings included demand notes issued to the U.S. Treasury. The Company has established overnight and 30 day term lines of credit with the Federal Home Loan Bank ("FHLB") each in the amount of $39,200. If advanced, such lines of credit will be collateralized by mortgage-backed securities, loans and FHLB stock. Participation in the FHLB program requires an investment in FHLB stock. Investment in FHLB stock, included in Securities Available-for-Sale on the Consolidated Balance Sheets, amounted to $3,128 and $1,903 at December 31, 1998 and 1997, respectively. NOTE 10: FHLB Advances (In Thousands) During 1998 the Company began to borrow long-term funds from the FHLB in the form of "convertible advances." These advances have a set final maturity, but are callable by the FHLB at certain dates beginning no earlier than one year from the issuance date. If the advances are called, the Company may elect to have the funds replaced by the FHLB at the then prevailing market rate of interest. The borrowings are secured by mortgage-backed loans and/or securities. The total amount of assets pledged to the FHLB at December 31, 1998 amounted to $191,163 for borrowing arrangements. The table below presents information applicable to FHLB Advances held as of December 31, 1998:
Par Amount Effective Rate Option Date Maturity Date $ 5,000 5.11% March 11, 1999 March 11, 2008 5,000 5.28% March 13, 2000 March 11, 2008 10,000 4.75% November 19, 2000 November 19, 2003 5,000 5.43% March 12, 2001 March 11, 2008 10,000 4.59% October 19, 2001 October 20, 2003 10,000 4.98% November 19, 2001 November 19, 2003 Total $45,000 4.94%
NOTE 11: ACCUMULATED OTHER COMPREHENSIVE INCOME (In Thousands) The following table presents the components, net of tax, of accumulated other comprehensive income as of December 31:
1998 1997 Excess of Additional Pension Liability Over Unrecognized Prior Service Cost $(44) $--- Net Unrealized Securities Holding Gains 623 764 Total Accumulated Other Comprehensive Income $579 $764
NOTE 12: EARNINGS PER COMMON SHARE (In Thousands, Except Per Share Amounts) The following table presents a reconciliation of the numerator and denominator used in the calculation of basic and diluted earnings per common share (EPS) for each of the three year periods ended December 31, 1998. Shares outstanding have been restated for the August 1998 ten percent stock dividend and the November 1997 five percent stock dividend.
Income Shares Per Share (Numerator) (Denominator) Amount For the Year Ended December 31, 1998: Basic EPS: Income Available to Common Shareholders $11,835 6,303 $1.88 Dilutive Effect of Stock Options --- 96 Diluted EPS: Income Available to Common Shareholders and Assumed Conversions $11,835 6,399 $1.85 For the Year Ended December 31, 1997: Basic EPS: Income Available to Common Shareholders $10,997 6,431 $1.71 Dilutive Effect of Stock Options --- 87 Diluted EPS: Income Available to Common Shareholders and Assumed Conversions $10,997 6,518 $1.69 For the Year Ended December 31, 1996: Basic EPS: Income Available to Common Shareholders $20,260 6,803 $2.98 Dilutive Effect of Stock Options --- 70 Diluted EPS: Income Available to Common Shareholders and Assumed Conversions $20,260 6,873 $2.95
Options to purchase 47 shares of common stock at $29.83 per share were outstanding during 1998 and the last quarter of 1997 but were not included in the computation of diluted EPS because the options' exercise price was greater than the average market price of the common shares. The options, which expire on November 26, 2007, were still outstanding at the end of 1998. NOTE 13: REGULATORY MATTERS (In Thousands) In the normal course of business, the Company and its subsidiaries operate under certain regulatory restrictions, such as the extent and structure of covered intercompany borrowings and maintenance of reserve requirement balances. The principal source of the funds for the payment of shareholder dividends by the Company has been from dividends declared and paid to the Company by its bank subsidiaries. As of December 31, 1998, the maximum amount that could have been paid by subsidiary banks to the Company was approximately $18,718. Under current Federal Reserve regulations, the Company is prohibited from borrowing from the subsidiary banks unless such borrowings are secured by specific obligations. Additionally, the maximum of any such borrowing is limited to 10% of an affiliate's capital and surplus. The Company and its subsidiary banks are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory--and possibly additional discretionary--actions by regulators that, if undertaken, could have a direct material effect on an institution's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and its subsidiary banks must meet specific capital guidelines that involve quantitative measures of assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. Capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Quantitative measures established by regulation to ensure capital adequacy require the Company and its subsidiary banks to maintain minimum capital amounts and ratios (set forth in the table below) of total and Tier I capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier I capital (as defined) to average assets (as defined). Management believes, as of December 31, 1998 and 1997, that the Company and all subsidiary banks meet all capital adequacy requirements to which they are subject. As of December 31, 1998 the most recent notification from the Federal Reserve Bank of New York (the primary regulator of the Company) and the Office of the Comptroller of the Currency (the primary regulator of the subsidiary banks) categorized each respective entity as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized the Company must maintain minimum total risk-based, Tier I risk-based, and Tier I leverage ratios as set forth in the table below. There are no conditions or events since that notification that management believes have changed the Company's or its subsidiary banks' categories. The Company ("Arrow") and its subsidiary banks, Glens Falls National Bank and Trust Company ("Glens Falls National") and Saratoga National Bank and Trust Company ("Saratoga National") actual capital amounts and ratios are presented in the table below as of December 31, 1998 and 1997:
Minimum Amounts Minimum Amounts For Capital To Be Actual Adequacy Purposes Well Capitalized Amount Ratio Amount Ratio Amount Ratio As of December 31, 1998: Total Capital (to Risk Weighted Assets): Arrow $70,538 12.4% $45,582 8.0% $56,977 10.0% Glens Falls National 64,327 13.1 39,314 8.0 49,142 10.0 Saratoga National 7,906 13.6 4,654 8.0 5,817 10.0 Tier I Capital (to Risk Weighted Assets): Arrow $63,739 11.2% $22,784 4.0% $34,176 6.0% Glens Falls National 58,444 11.9 19,662 4.0 29,492 6.0 Saratoga National 7,026 8.8 3,208 4.0 4,812 6.0 Tier I Capital (to Average Assets): Arrow $63,739 7.1% $35,909 4.0% $35,909 4.0% Glens Falls National 58,444 7.2 32,424 4.0 40,530 5.0 Saratoga National 7,026 7.7 3,650 4.0 4,562 5.0 As of December 31, 1997: Total Capital (to Risk Weighted Assets): Arrow $65,334 13.5% $38,803 8.0% $48,503 10.0% Glens Falls National 57,762 13.9 33,340 8.0 41,675 10.0 Saratoga National 6,995 10.8 5,172 8.0 6,465 10.0 Tier I Capital (to Risk Weighted Assets): Arrow $59,267 12.2% $19,416 4.0% $29,124 6.0% Glens Falls National 52,550 12.6 16,669 4.0 25,004 6.0 Saratoga National 6,258 9.7 2,586 4.0 3,879 6.0 Tier I Capital (to Average Assets): Arrow $59,267 7.3% $32,431 4.0% $32,431 4.0% Glens Falls National 52,550 7.2 29,194 4.0 36,493 5.0 Saratoga National 6,258 7.6 3,307 4.0 4,133 5.0 /TABLE NOTE 14: RETIREMENT PLANS (In Thousands) The Company sponsors qualified and nonqualified defined benefit pension plans and other postretirement benefit plans for its employees. The Company maintains a non-contributory pension plan which covers substantially all employees. Benefits are based on years of service and the participants' final compensation (as defined). The funding policy is to contribute the maximum amount that can be deducted for federal income tax purposes. The Company also maintains a supplemental nonqualified unfunded retirement plan to provide eligible employees of the Company and its subsidiaries with benefits in excess of qualified plan limits imposed by federal tax law. The Company has multiple nonpension postretirement benefit plans. The health care, dental and life insurance plans are contributory, with participants' contributions adjusted annually. The health care plan provides for automatic increases of Company contributions each year based on the increase in inflation up to a maximum of 5%. The Company's policy is to fund the cost of postretirement benefits in amounts determined at the discretion of management. The following tables provide a reconciliation of the changes in the plans' benefit obligations and fair value of the plans' assets over the two-year period ending December 31, 1998, and a statement of the funded status as of December 31 of both years:
Pension Postretirement Benefits Benefits 1998 1997 1998 1997 Reconciliation of Benefit Obligation: Benefit Obligation at January 1 $15,260 $15,517 $ 4,708 $ 4,671 Service Cost 563 425 117 94 Interest Cost 1,118 1,112 338 312 Participant Contributions --- --- 53 39 Actuarial (Gain) Loss 1,750 608 426 (125) Settlement (former Vermont operations) --- (1,401) --- --- Prior Service Cost (Plan Amendment) 27 --- --- --- Benefit Payments (1,091) (1,001) (322) (283) Benefit Obligation at December 31 17,627 15,260 5,320 4,708 Reconciliation of Fair Value of Plan Assets: Fair Value of Plan Assets at January 1 15,043 14,233 --- --- Actual Return on Plan Assets 2,119 2,880 --- --- Employer Contributions 326 332 269 244 Participant Contributions --- --- 53 39 Settlement (former Vermont operations) --- (1,401) --- --- Benefit Payments (1,091) (1,001) (322) (283) Fair Value of Plan Assets at December 31 16,397 15,043 --- --- Funded Status: Funded Status at December 31 (1,230) (217) (5,320) (4,708) Unrecognized Transition (Asset) Obligation (289) (369) 1,683 1,811 Unrecognized Prior Service Cost 620 662 55 61 Unrecognized Net (Gain) Loss 739 (218) 737 327 Net Amount Recognized $ (160) $ (142) $(2,845) $(2,509)
The following table provides the amounts recognized in the consolidated balance sheets as of December 31 of both years:
Pension Postretirement Benefits Benefits 1998 1997 1998 1997 Prepaid Benefit Cost $1,706 $1,772 $ --- $ --- Accrued Benefit Liability (2,568) (2,630) (2,845) (2,509) Intangible Asset 628 716 --- --- Accumulated Other Comprehensive Income 74 --- --- --- Net Amount Recognized $ (160) $ (142) $(2,845) $(2,509)
The Company's nonqualified pension plan's projected benefit obligation was $2,822 at December 31, 1998 and $2,826 at December 31, 1997. There are no plan assets in the nonqualified plan. All of the Company's postretirement benefit plans also have no plan assets. The accumulated benefit obligation for the postretirement benefit plans was $5,320 and $4,708 at December 31, 1998 and 1997, respectively. The amount included within other comprehensive income arising from a change in the additional minimum pension liability was $74 for 1998 and $0 for 1997 and 1996. The qualified pension plan's assets are primarily comprised of short-term funds and U.S. Treasury obligations, high grade corporate bonds and marketable equity securities. At December 31, 1998 and 1997, plan assets included 82 and 81 shares, respectively, of Arrow Financial Corporation common stock with a market value of $2,129 and $2,502, respectively. During the respective years, the Plan received $66 and $75 from cash dividends on the Company's common stock. The following table provides the components of net periodic benefit costs for the plans for the three years ending December 31:
Pension Benefits Postretirement Benefits 1998 1997 1996 1998 1997 1996 Service Cost $ 563 $ 425 $ 644 $117 $ 94 $121 Interest Cost on Benefit Obligation 1,118 1,112 1,095 338 312 326 Expected Return on Plan Assets (1,327) (1,256) (1,202) --- --- --- Amortization of Transition (Asset) Obligation (80) (90) (90) 128 128 163 Amortization of Prior Service Cost 69 68 168 5 5 2 Amortization of Net (Gain) Loss --- --- 14 17 (2) 11 Net Periodic Benefit Cost 343 259 629 605 537 623 Settlement Gain --- (89) --- --- --- --- Net Periodic Benefit Cost after Settlement Gain $ 343 $ 170 $ 629 $605 $537 $623
The prior service costs are amortized on a straight-line basis over the average remaining service period of active participants. Gains and losses in excess of 10% of the greater of the benefit obligation or the market-related value of assets are amortized over the average remaining service period of active participants. During 1996, divestiture of the Company's Vermont banking operations created one-time financial accounting transactions for the defined benefit pension plan and the supplemental nonqualified plan and for the nonpension postretirement benefit plan. At December 31, 1996, the prepaid pension cost for the defined benefit plan included a curtailment gain amounting to $445; the accrued pension cost for the supplemental nonqualifed plan reflected a $523 reduction of unrecognized prior service costs and recognition of $551 in additional benefits provided by the plan; and the accrued postretirement benefit cost for the nonpension plan included a curtailment loss of $561. Net expenses for these transactions were charged to the net gain on the disposition of Vermont operations (see Note 25) and, therefore, are not included in the net periodic benefit costs above. During 1997, the Company settled its pension obligation in the qualified plan for former employees of the previously divested Vermont operations by purchasing annuities from an insurance company or distributing cash at the employees' option. The settlement reduced the pension obligation and the fair value of plan assets by $1,401 and resulted in a settlement gain of $89. The assumptions used in the measurement of the Company's benefit obligations and net periodic benefit costs are shown in the following table:
Pension Benefits Postretirement Benefits As of December 31, 1998 1997 1996 1998 1997 1996 Weighted-average assumptions: Discount Rate 6.75% 7.00% 7.25% 6.75% 7.00% 7.25% Expected Return on Plan Assets 9.00 9.00 9.00 --- --- --- Rate of Compensation Increase 4.00 4.00 4.50 --- --- ---
For measurement purposes, an 8.5% annual rate of increase in the per capita cost of covered medical benefits was assumed for 1999 and 7.5% for dental benefits. The rate was assumed to decrease gradually each year to a rate of 5.5% for 2005 and remain at that level thereafter for both the medical and dental benefit plans. Assumed medical and dental cost trend rates have a significant effect on the amounts reported for the plans. A 1% change in assumed medical and dental cost trend rates would have the following effects:
1% Increase 1% Decrease Effect on Total Service and Interest Cost Components of Net Periodic Postretirement Benefit Cost For the Year Ended December 31, 1998 $ 11 $(50) Effect on the Accumulated Postretirement Benefit Obilgation as of December 31, 1998 170 (489)
NOTE 15: OTHER EMPLOYEE BENEFIT PLANS (In Thousands) The Company maintains an employee stock ownership plan (ESOP). Substantially all employees of the Company, and its subsidiaries, are eligible to participate upon satisfaction of applicable service requirements. During 1998, the ESOP borrowed $1,700 from one of the Company's subsidiary banks to purchase outstanding shares of the Company's common stock. The note requires the Company to contribute an amount necessary for the ESOP to discharge its current obligations which include principal and interest payments on the note. The Company's ESOP provision amounted to $564, $600 and $840 in 1998, 1997 and 1996, respectively. As the debt was repaid, shares were released from collateral and allocated to active employees, based on the proportion of debt paid to total debt outstanding for the year. The Company accounts for the ESOP under SOP 93-6, and accordingly, the shares pledged as collateral are reported as unallocated ESOP shares in shareholders' equity. As shares were released from collateral, the Company reported compensation expense equal to the current average market price of the shares, and the shares became outstanding for earnings per share computations. The ESOP shares as of December 31, 1998 were as follows:
Allocated Shares 420 Shares Released for Allocation 6 Unallocated Shares 57 Total ESOP Shares 483 Market Value of Unallocated Shares $1,477 The Company also sponsors an Employee Stock Purchase Plan (ESPP). Substantially all employees of the Company and its subsidiaries are eligible to participate upon satisfaction of applicable service requirements. The aggregate cost of the ESPP as reflected in the Company's consolidated financial statements was $97, $95 and $100 in 1998, 1997 and 1996, respectively. The Company also sponsors a Short-Term Incentive Award Plan for senior management and a Profit Sharing Plan for substantially all employees. The cost of these plans was $411, $318 and $393 for 1998, 1997 and 1996, respectively. NOTE 16: STOCK OPTION PLANS (In Thousands, Except Per Share Amounts) The Company has established fixed Incentive Stock Option and Non-qualified Stock Option Plans. At December 31, 1998, 363 shares remained available for grant under these plans. Options may be granted at a price no less than the greater of the par value or fair market value of such shares on the date on which such option is granted, and generally expire ten years from the date of grant. Number of shares and related prices have been adjusted for the effect of the ten percent stock dividend declared in 1998 and the five percent stock dividend declared in 1997. Stock Appreciation Rights, which were granted in tandem with certain non-qualified options, entitle the holder of an option to surrender the unexercised option, or any part thereof and receive in exchange a payment in cash representing the difference between the base value and the fair market value of the common stock of the Company. The Company applies APB Opinion No. 25 and related Interpretations in accounting for its plans. Accordingly, no compensation cost has been recognized for its stock option plans. SFAS No. 123, "Accounting for Stock-Based Compensation" requires companies not using a fair value based method of accounting for employee stock options or similar plans, to provide pro forma disclosure of net income and earnings per share as if that method of accounting had been applied. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions used for grants in 1998, 1997 and 1996 respectively: dividend yields of 3.40%, 2.50% and 3.25%; expected volatility of 22.4%, 20.5% and 21.3%; risk free interest rates of 4.73%, 5.76% and 6.05%; and expected lives of 7.0 years for each year. The effects of applying SFAS No. 123 on the pro forma net income may not be representative of the effects on pro forma net income for future years. Pro forma disclosures for the Company for the years ending December 31, 1998, 1997 and 1996 for options granted in 1995 and later are as follows:
1998 1997 1996 Net Income: As Reported $11,835 $10,977 $20,260 Pro Forma 11,605 10,854 21,191 Basic Earning Per Share: As Reported $1.88 $1.71 $2.98 Pro Forma 1.84 1.69 2.97 Diluted Earnings Per Share: As Reported $1.85 $1.69 $2.95 Pro Forma 1.81 1.67 2.94
A summary of the status of the Company's stock option plans as of December 31, 1998, 1997 and 1996 and changes during the years ending on those dates is presented below:
1998 1997 1996 Weighted- Weighted- Weighted- Average Average Average Exercise Exercise Exercise Shares Price Shares Price Shares Price Options: Outstanding at January 1 288,099 $16.39 296,375 $13.00 332,836 $10.75 Granted 48,400 26.25 47,850 29.83 58,850 20.73 Exercised (20,364) 12.06 (56,126) 9.97 (90,229) 9.70 Forfeited (550) 29.83 --- --- (5,082) 13.87 Outstanding at Year-end 315,585 18.16 288,099 16.39 296,375 13.00 Exercisable at Year-end 186,580 145,604 138,798 Weighted-Average Fair Value of Options Granted During the Year $5.58 $7.76 $5.03
The following table summarizes information about the Company's stock options at December 31, 1998:
Options Outstanding Options Exercisable Weighted- Average Weighted- Weighted- Range of Number Remaining Average Number Average Exercise Outstanding Contractual Exercise Exercisable Exercise Prices At 12/31/98 Life Price at 12/31/98 Price $4.21-$8.57 32,017 4.0 years $ 6.82 32,017 $ 6.82 $11.16-$11.63 64,395 5.2 11.23 64,395 11.23 $13.87 65,977 6.9 13.87 48,555 13.87 $20.73 57,496 7.9 20.73 29,792 20.73 $26.25 48,400 9.9 26.25 --- --- $29.83 47,300 8.9 29.83 11,821 29.83 $4.21-$29.83 315,585 7.2 18.16 186,580 13.85 /TABLE NOTE 17: SHAREHOLDER RIGHTS PLAN In 1997, the Board of Directors of the Company adopted a shareholder rights plan. The plan provides for the distribution of one preferred stock purchase right for each outstanding share of common stock of the Company. Each right entitles the holder, following the occurrence of certain events, to purchase a unit, consisting of one-hundredth of a share of Series 1 Junior Participating Preferred Stock, at a purchase price of $75 per unit, subject to adjustment. The rights will not be exercisable or transferable apart from the common stock except under certain circumstances in which a person or group of affiliated persons acquires, or commences a tender offer to acquire, 20% or more of the Company's common stock. Rights held by such an acquiring person or persons may thereafter become void. Under certain circumstances a right may become a right to purchase common stock or assets of the Company or common stock of an acquiring corporation at a substantial discount. Under certain circumstances, the Company may redeem the rights at $.01 per right. The rights will expire in April 2007 unless earlier redeemed or exchanged by the Company. NOTE 18: OTHER OPERATING EXPENSE (In Thousands) Other operating expenses included in the consolidated statements of income are as follows:
1998 1997 1996 Advertising and Promotion $ 660 $ 558 $ 572 Stationery and Printing 660 715 644 Telephone and Communications 637 546 681 Postage 899 811 909 Legal, Professional and Accounting Fees 837 663 838 Charitable Contributions 155 88 117 Other Real Estate Owned Losses, Net --- --- 271 Other Real Estate Owned Expenses 147 74 84 FDIC and Other Insurance 208 218 258 Branch Acquisition Intangible Asset Amortization 944 493 41 All Other 1,685 1,457 1,921 Total Other Operating Expense $6,832 $5,623 $6,336
NOTE 19: INCOME TAXES (In Thousands) The consolidated provision for income taxes is summarized below:
1998 1997 1996 Current Tax Expense: Federal $4,515 $4,367 $ 9,378 State 913 378 1,347 Total Current Tax Expense 5,428 4,745 10,725 Deferred Tax Expense (Benefit): Federal 343 737 409 State (27) (327) (312) Total Deferred Tax Expense 316 410 97 Total Consolidated Provision for Income Taxes $5,744 $5,155 $10,822
The consolidated provisions for income taxes differed from the amounts computed by applying the U.S. Federal Income Tax Rate of 35% for 1998, 1997 and 1996 to pre-tax income from continuing operations as a result of the following:
1998 1997 1996 Computed Tax Expense at Statutory Rates $6,153 $5,653 $10,879 Increase (Reduction) in Income Taxes Resulting From: Tax-Exempt Income (807) (563) (440) Nondeductible Interest Expense 101 65 53 State Taxes, Net of Federal Income Tax Benefit 576 497 673 State Tax Settlement, Net of Federal Income Tax Benefit --- (464) --- Other Items, Net (279) (33) (343) Total Consolidated Provision for Income Taxes $5,744 $5,155 $10,822
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, 1998 and 1997 are presented below:
1998 1997 Deferred Tax Assets: Allowance for Loan Losses $2,788 $2,555 Pension and Deferred Compensation Plans 2,495 2,570 Deferred Expenses 1,258 1,115 Total Gross Deferred Tax Assets 6,541 6,240 Deferred Tax Liabilities: Pension Plans 734 758 Depreciation 453 398 Deferred Income 1,086 466 Other 99 113 Total Gross Deferred Tax Liabilities 2,372 1,735 Net Deferred Tax Assets $4,169 $4,505
Management believes that the realization of the recognized net deferred tax asset of $4,169 and $4,505 at December 31, 1998 and 1997, respectively, is more likely than not, based on existing carryback ability, available tax planning strategies and expectations as to future taxable income. Accordingly, there was no valuation allowance for deferred tax assets as of December 31, 1998 and 1997. Not included in net deferred tax assets above are deferred tax liabilities relating to unrealized gains on securities available for sale of $453 at December 31, 1998 and $553 at December 31, 1997 and a deferred tax asset relating to recognized minimum pension liabilities of $30 at December 31, 1998. During 1997, the increase in deferred net tax assets relating to purchase acquisition transactions amounted to $277. NOTE 20: LEASE COMMITMENTS (In Thousands) At December 31, 1998, the Company was obligated under a number of noncancellable operating leases for land, buildings and equipment. Certain of these leases provide for escalation clauses and contain renewal options calling for increased rentals if the lease is renewed. Future minimum lease payments on operating leases at December 31, 1998 were as follows:
Operating Leases 1999 $ 71 2000 71 2001 71 2002 71 2003 70 Later Years 634 Total Minimum Lease Payments $988
NOTE 21: FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK AND CONTINGENT LIABILITIES (In Thousands) The Company is party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit, standby letters of credit and loans sold with recourse. Commitments to extend credit include home equity lines of credit, credit card lines of credit, commitments for residential and commercial construction loans and other personal and commercial lines of credit. Those instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the consolidated balance sheets. The contract or notional amounts of those instruments reflect the extent of the involvement the Company has in particular classes of financial instruments. The Company's exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby letters of credit is represented by the contractual notional amount of those instruments. The Company uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments. Financial instruments whose contract amounts represent credit risk as of December 31 are as follows:
1998 1997 Fixed Variable Total Fixed Variable Total Commitments to Extend Credit $ --- $92,779 $92,779 $ --- $77,307 $77,307 Standby Letters of Credit --- 723 723 --- 653 653
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company evaluates each customer's creditworthiness on a case-by-case basis. Credit card lines of credit are generally unsecured. Home equity lines of credit are secured by residential real estate. Construction lines of credit are secured by underlying real estate. For other lines of credit, the amount of collateral obtained, if deemed necessary by the Company upon extension of credit, is based on management's credit evaluation of the counter-party. Collateral held varies, but may include accounts receivable, inventory, property, plant and equipment, and income-producing commercial properties. Standby letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. The credit risk involved in issuing standby letters of credit is essentially the same as that involved in extending loan facilities to customers. Under SFAS No. 107 the fair value of commitments to extend credit is determined by estimating the fees to enter into similar agreements, taking into account the remaining terms and present creditworthiness of the counterparties, and for fixed rate loan commitments, the difference between the current and committed interest rates. The fair value of standby letters of credit is based on the fees currently charged for similar agreements or the cost to terminate the arrangement with the counterparties. The Company provides several types of commercial lines of credit and standby letters of credit to its commercial customers. The pricing of these services is not isolated as the Company considers the customer's complete deposit and borrowing relationship in pricing individual products and services. The commitments to extend credit also include commitments under home equity lines of credit, for which the Company charges no fee. Unadvanced credit card lines comprise the other major category of commitments to extend credit. The bank charges a nominal annual fee to the cardholders which covers both the cost to process purchases made and settled before interest is charged as well as cash advances and financings of purchases. The carrying value and fair value of commitments to extend credit are not material and the Company does not expect to incur any material loss as a result of these commitments. In the normal course of business, the Company and its subsidiary banks became involved in a variety of routine legal proceedings including so-called "lender liability" claims, in which borrowers allege that they have suffered loss as a result of inappropriate actions taken by lending banks. At present, there are no legal proceedings pending or threatened which, in the opinion of management and counsel, would result in a material loss to the Company. In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," which establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. This Statement is effective for all fiscal quarters of fiscal years beginning after June 15, 1999. Management is currently evaluating the impact of this Statement on the Company's consolidated financial statements. NOTE 22: FAIR VALUE OF FINANCIAL INSTRUMENTS (In Thousands) The following table presents a summary of the carrying amount and fair value of the Company's financial instruments not carried at fair value:
1998 1997 Carrying Fair Carrying Fair Amount Value Amount Value Securities Held-to-Maturity (Note 3) $ 63,016 $ 65,055 $ 44,082 $ 45,562 Net Loans and Leases (Note 4) 539,384 547,648 479,619 489,031 Time Deposits (Note 8) 318,735 319,224 303,727 304,374 FHLB Advances (Note 10) 45,000 44,399 --- ---
NOTE 23: PARENT ONLY FINANCIAL INFORMATION (In Thousands) Condensed financial information for Arrow Financial Corporation is as follows:
BALANCE SHEETS December 31, 1998 1997 ASSETS Interest-Bearing Deposits with Subsidiary Banks $ 490 $ 156 Cash and Cash Equivalents 490 156 Securities Available-for-Sale 101 1,129 Investment in Subsidiaries at Equity 78,877 73,418 Other Assets 4,065 4,469 Total Assets $83,533 $79,172 LIABILITIES Note Payable - ESOP $ 1,555 $ --- Other Liabilities 4,832 5,301 Total Liabilities 6,387 5,301 SHAREHOLDERS' EQUITY Total Shareholders' Equity 77,146 73,871 Total Liabilities and Shareholders' Equity $83,533 $79,172
STATEMENTS OF INCOME Years Ended December 31, Income: 1998 1997 1996 Dividends from Bank Subsidiaries $ 6,200 $ 2,300 $ 3,990 Liquidating Dividends from Vermont Operations 175 33,060 --- Dividends from Nonbank Subsidiaries --- 320 2,569 Interest and Dividends on Securities Available-for-Sale 72 222 2 Other Income (Including Management Fees) 8 398 8,214 Net Gains on Securities Transactions 14 --- --- Total Income 6,469 36,300 14,775 Expense: Interest Expense 50 128 421 Salaries and Benefits 41 476 5,666 Occupancy and Equipment --- 6 995 Other Expense 436 418 1,764 Total Expense 527 1,028 8,846 Income Before Income Tax Benefit and Equity in Undistributed Net Income of Subsidiaries 5,942 35,272 5,929 Income Tax Benefit 287 351 244 Income Before Equity in Undistributed Net Income of Subsidiaries 6,229 35,623 6,173 Equity in (Distributions in Excess of) Undistributed Net Income of Subsidiaries 5,606 (24,626) 14,087 Net Income $11,835 $10,997 $20,260 /TABLE
STATEMENTS OF CASH FLOWS Years Ended December 31, 1998 1997 1996 Operating Activities: Net Income $11,835 $10,997 $20,260 Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities: Distributions in Excess of (Undistributed) Net Income of Subsidiaries (5,606) 24,626 (14,087) Depreciation and Amortization --- 8 12 Compensation Expense for Allocated ESOP Shares (7) --- 252 Gains on the Sale of Securities Available-for-Sale (14) --- --- Changes in Other Assets and Other Liabilities (118) (2,535) 882 Net Cash Provided by Operating Activities 6,090 33,096 7,319 Investing Activities: Proceeds from the Sale of Securities Available-for-Sale 1,069 9,793 --- Proceeds from the Maturities of Securities Available-for-Sale --- 342 --- Purchases of Securities Available-for-Sale (12) (11,196) (1) Capital Investment in Subsidiary Banks --- (13,917) (500) Sale of Fixed Assets to Subsidiaries --- 17 --- Net Cash Provided by (Used in) Investing Activities 1,057 (14,961) (501) Financing Activities: Net (Decrease) Increase in Short-Term Borrowings --- (6,375) 6,375 Exercise of Stock Options 203 33 412 Disqualifying Disposition of Incentive Stock Options 51 33 50 Purchase of Treasury Stock (1,952) (7,479) (10,052) Cash Dividends Paid (5,115) (4,565) (3,886) Net Cash Used in Financing Activities (6,813) (18,353) (7,101) Net Increase (Decrease) in Cash and Cash Equivalents 334 (218) ( 283) Cash and Cash Equivalents at Beginning of the Year 156 374 657 Cash and Cash Equivalents at End of the Year $ 490 $ 156 $ 374 Supplemental Cash Flow Information: Interest Paid $ --- $ 262 $ 288 Income Taxes Paid 152 6,571 11,235
NOTE 24: CONCENTRATIONS OF CREDIT RISK (In Thousands) Most of the Company's loans are with customers in northern New York. Although the loan portfolios of the subsidiary banks are well diversified, tourism has a substantial impact on the northern New York economy. The commitments to extend credit are fairly consistent with the distribution of loans presented in Note 4. Generally, the loans are secured by assets and are expected to be repaid from cash flow or the sale of selected assets of the borrowers. The Company evaluates each customer's creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Company upon extension of credit, is based upon management's credit evaluation of the counterparty. The nature of the collateral varies with the type of loan and may include: residential real estate, cash and securities, inventory, accounts receivable, property, plant and equipment, income producing commercial properties and automobiles. NOTE 25: BRANCH ACQUISITIONS AND DIVESTITURE OF VERMONT OPERATIONS (In Thousands) On June 27, 1997 the Company completed the acquisition of six branches in upstate New York from Fleet Bank, a subsidiary of Fleet Financial Group, Hartford, CT. The branches are located in the towns of Plattsburgh (2), Lake Luzerne, Port Henry, Ticonderoga and Warrensburg and became branches of GFNB. GFNB acquired substantially all deposits at the branches and most of the loans held by Fleet Bank related to the branches. Total deposit liabilities at the branches assumed by GFNB were approximately $140,000 and the total amount of the branch-related loans acquired was approximately $34,000. Under the purchase agreement, GFNB also acquired from Fleet an additional $10,000 of residential real estate loans not related to the branches. During 1996, the Company, in three separate transactions, completed the divestiture of its Vermont banking operations. This included the transfer of approximately $208,000 of deposits, the sale of approximately $148,000 of loans and the sale of the Vermont trust operation. The net gain on the divestiture was $15,300. Principal components of the net gain included: premium on deposits transferred ($15,700), proceeds from the sale of the trust operation ($3,000) and a gain on the loans sold ($2,600), partially offset by personnel costs relating to severance and the costs of benefits related to the Company's pension and postretirement plans, as described in Note 14 ($1,700), the writedown of certain fixed assets, principally the main office ($2,000) and other net costs ($2,300), which included professional fees, reserves for certain warranties provided to the purchasers, losses on various other assets and miscellaneous costs. The Company did not transfer the main office building located in Rutland, Vermont. At December 31, 1998 and 1997, the Company was holding the building for sale and it was carried at estimated fair value less costs to sell and included in other assets on the consolidated balance sheets. The building was held for sale at December 31, 1998. SUMMARY OF QUARTERLY FINANCIAL DATA (Unaudited) The following quarterly financial information for 1998 and 1997 is unaudited, but, in the opinion of management, fairly presents the earnings of the Company. Per share amounts have been adjusted for the 1998 ten percent stock dividend and the 1997 five percent stock dividend.
SELECTED QUARTERLY FINANCIAL DATA (In Thousands, Except Per Share Amounts) 1998 Fourth Third Second First Quarter Quarter Quarter Quarter Total Interest and Dividend Income $16,207 $15,796 $15,876 $15,154 Net Interest Income 9,023 8,632 8,784 8,452 Provision for Loan Losses 360 342 342 342 Net Securities Gains (Losses) 242 --- 9 157 Income Before Income Taxes 4,600 4,194 4,357 4,428 Net Income 3,166 2,906 2,860 2,903 Basic Earning Per Common Share .51 .46 .45 .46 Diluted Earnings Per Common Share .51 .45 .44 .45 1997 Fourth Third Second First Quarter Quarter Quarter Quarter Total Interest and Dividend Income $15,266 $14,831 $12,596 $12,168 Net Interest Income 8,416 8,327 7,158 7,073 Provision for Loan Losses 331 500 236 236 Net Securities Gains (Losses) 37 --- 65 (28) Income Before Income Taxes 4,176 4,219 3,946 3,811 Net Income 2,810 2,768 2,518 2,901 Basic Earning Per Common Share .44 .44 .39 .44 Diluted Earnings Per Common Share .43 .43 .39 .44
Item 9: Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. - None. PART III Item 10: Directors and Executive Officers of the Registrant Item 1, "Election of Directors and Information with Respect to Directors and Officers" from the Company's Proxy Statement for its Annual Meeting of Shareholders to be held April 14, 1999, is incorporated herein by reference. Certain required information regarding the Company's Executive Officers is contained in Part I, Item 1.E., of this Annual Report, "Executive Officers of the Registrant." Item 11: Executive Compensation Item 1, "Election of Directors and Information with Respect to Directors and Officers" and "Principal Shareholders of the Company," from the Company's Proxy Statement for its Annual Meeting of Shareholders to be held April 14, 1999, is incorporated herein by reference. Item 12: Security Ownership of Certain Beneficial Owners and Management Item 1, "Election of Directors and Information with Respect to Directors and Officers" from the Company's Proxy Statement for its Annual Meeting of Shareholders to be held April 14, 1999, is incorporated herein by reference. Item 13: Certain Relationships and Related Transactions Item 1, "Election of Directors and Information with Respect to Directors and Officers" from the Company's Proxy Statement for its Annual Meeting of Shareholders to be held April 14, 1999, is incorporated herein by reference. PART IV Item 14: Exhibits, Financial Statement Schedules and Reports on Form 8-K (a) List of Documents filed as part of this report: 1. Financial Statements The following financial statements, the notes thereto, and the independent auditors' report thereon are filed as part of this report. See the index to such financial statements in Part II, Item 8 of this report. Independent Auditors' Report Consolidated Balance Sheets as of December 31, 1998 and 1997 Consolidated Statements of Income for the Years Ended December 31, 1998, 1997 and 1996 Consolidated Statements of Changes in Shareholders' Equity for the Years Ended December 31, 1998, 1997 and 1996 Consolidated Statements of Cash Flows for the Years Ended December 31, 1998, 1997 and 1996 Notes to Consolidated Financial Statements 2. Schedules All schedules are omitted since the required information is either not applicable or not required or is contained in the respective financial statements or in the notes thereto. III. Exhibits: The following exhibits are incorporated by reference herein. Exhibit Number Exhibit 2.1 Purchase and Assumption Agreement among Arrow Financial Corporation, Arrow Vermont Corporation, Green Mountain Bank and Mascoma Savings Bank, dated June 1, 1995 incorporated herein by reference from the Registrant's Current Report on Form 8-K, filed on August 4, 1995, Exhibit 2.1. 2.2 Supplement to Purchase and Assumption Agreement among Arrow Financial Corporation, Arrow Vermont Corporation, Green Mountain Bank and Mascoma Savings Bank, dated January 12, 1996 incorporated herein by reference from the Registrant's Current Report on Form 8-K, filed January 30, 1996, Exhibit 2.2. 2.3 Purchase and Assumption Agreement among Arrow Financial Corporation, Arrow Vermont Corporation, Green Mountain Bank and ALBANK, FSB, dated February 26, 1996 incorporated herein by reference from the Registrant's Current Report on Form 8-K, filed March 14, 1996, Exhibit 2.1. 2.4 Amendment to Purchase and Assumption Agreement among Arrow Financial Corporation, Arrow Vermont Corporation, Green Mountain Bank and ALBANK, FSB, dated September 26, 1996 incorporated herein by reference from the Registrant's Current Report on Form 8-K filed October 11, 1996, Exhibit 2.3. 2.5 Service Purchasing Agreement among Arrow Financial Corporation, Arrow Vermont Corporation, Green Mountain Bank and ALBANK, FSB, dated February 26, 1996 incorporated herein by reference from the Registrant's Current Report on Form 8-K filed March 14, 1996, Exhibit 2.2. 2.6 Amendment to Service Purchasing Agreement among Arrow Financial Corporation, Arrow Vermont Corporation, Green Mountain Bank and ALBANK, FSB, dated September 26, 1996 incorporated herein by reference from the Registrant's Current Report on Form 8-K, filed October 11, 1996, Exhibit 2.4. 2.7 Stock Purchase Agreement among Arrow Financial Corporation, Arrow Vermont Corporation, Green Mountain Bank and Vermont National Bank, dated February 27, 1996 incorporated herein by reference from the Registrant's Current Report on Form 8-K filed March 14, 1996, Exhibit 2.3. 2.8 Purchase and Assumption Agreement between Fleet Bank and Glens Falls National Bank and Trust Company, dated March 21, 1997, incorporated herein by reference from the Registrant's Current Report on Form 8-K dated June 27, 1997, Exhibit 2.1. 3.(i) Certificate of Incorporation of the Registrant, as amended, incorporated herein by reference from the Registrant's Annual Report on Form 10-K for the year ended December 31, 1990, Exhibit 3.(a). 4.1 Shareholder Protection Rights Agreement dated as of May 1, 1997, between Arrow Financial Corporation and Glens Falls National Bank and Trust Company, as Rights Agent, incorporated herein by reference from the Registrant's Statement on Form 8-A, dated May 16, 1997, Exhibit 4. 10.1 1984 Non-Qualified Stock Option Plan of the Registrant, incorporated herein by reference from the Registrant's Proxy Statement for its 1985 Meeting of Shareholders, Exhibit C. 10.2 Short-term Incentive Award Plan of the Registrant, incorporated herein by reference from Registrant's 1933 Act Registration Statement on Form S-2 (file number 33-10109; filed December 16, 1986). * 10.3 Employment Agreement among the Registrant, its subsidiary bank, Glens Falls National Bank & Trust Company, and Thomas L. Hoy dated November 26, 1997, incorporated herein by reference from Registrant's Annual Report on Form 10-K for the year ended December 31, 1997, Exhibit 10.5. * 10.4 Employment Agreement among the Registrant, its subsidiary bank, Glens Falls National Bank and Trust Company and John J. Murphy dated November 26, 1997, incorporated herein by reference from Registrant's Annual Report on Form 10-K for the year ended December 31, 1997, Exhibit 10.6. * 10.5 Select Executive Retirement Plan of the Registrant effective January 1, 1992 incorporated herein by reference from Registrant's Annual Report on Form 10-K for December 31, 1992, Exhibit 10(m). * 10.6 1989 Employee Stock Purchase Plan of the Registrant, incorporated herein by reference from Registrant's 1933 Act Registration Statement on Form S-8, Exhibit 4 (File number 33-48225; filed May 15, 1992). * 10.7 1993 Long Term Incentive Plan of the Registrant, incorporated herein by reference from Registrant's 1933 Act Registration Statement on Form S-8, Exhibit 4.1 (File number 33-66192; filed July 19, 1993). * 10.8 1998 Long Term Incentive Plan of the Registrant, incorporated herein by reference from Registrant's 1933 Act Registration Statement on Form S-8, Exhibit 4.1 (File number 333-62719; filed September 2, 1998). * 10.9 Directors Deferred Compensation Plan of Registrant, incorporated herein by reference from Registrant's Annual Report on Form 10-K for December 31, 1993, Exhibit 10(n). 10.10 Senior Officers Deferred Compensation Plan of the Registrant, incorporated herein by reference from Registrant's Annual Report on Form 10-K for December 31, 1993, Exhibit 10(o).* 10.11 Automatic Dividend Reinvestment Plan of the Registrant incorporated herein by reference from Registrant's Annual Report on Form 10-K for December 31, 1995, Exhibit 10.11. * Management contracts or compensation plans required to be filed as an exhibit. The following exhibits are submitted herewith: Exhibit Number Exhibit 3.(ii) By-laws of the Registrant. 10.12 Employment Agreement among the Registrant, its subsidiary bank, Glens Falls National Bank and Trust Company and John C. Van Leeuwen dated December 29, 1998. * 10.13 Prototype of a change of control agreement between the registrant and to certain officers (excluding senior officers) of the Registrant or its subsidiaries, as entered into from time to time. * 11 Computation of Earnings per Share. 21 Subsidiaries of the Company. 23 Consent of Independent Certified Public Accountants. 27 Financial Data Schedule (submitted with electronic filing only). * Management contracts or compensation plans required to be filed as an exhibit. (B) Current Reports on Form 8-K filed during the fourth quarter of 1998: None SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. ARROW FINANCIAL CORPORATION Date: February 24, 1999 /s/ Thomas L. Hoy By: Thomas L. Hoy President and Chief Executive Officer Date: February 24, 1999 /s/ John J. Murphy By: John J. Murphy Executive Vice President, Treasurer and Chief Financial Officer (Principal Financial and Accounting Officer) Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below on February 24, 1999 by the following persons in the capacities indicated. /s/ John J. Carusone, Jr. John J. Carusone Director /s/ Michael B. Clarke Michael B. Clarke Director /s/ Kenneth C. Hopper, M.D. Kenneth C. Hopper, M.D. Director /s/ Thomas L. Hoy Thomas L. Hoy Director and President /s/ Dr. Edward F. Huntington Dr. Edward F. Huntington Director /s/ David G. Kruczlnicki David G. Kruczlnicki Director /s/ Michael F. Massiano Michael F. Massiano Director & Chairman /s/ David L. Moynehan David L. Moynehan Director /s/ Doris E. Ornstein Doris E. Ornstein Director /s/ Daniel L. Robertson Daniel L. Robertson Director SIGNATURES EXHIBITS INDEX Exhibit Number Exhibit 3.(ii) By-laws of the Registrant. 10.12 Employment Agreement among the Registrant, its subsidiary bank, Glens Falls National Bank and Trust Company and John C. Van Leeuwen dated December 29, 1998. * 10.13 Prototype of a change of control agreement offered to certain officers from time to time. * 11 Computation of Earnings per Share. 21 Subsidiaries of the Company. 23 Consent of Independent Certified Public Accountants. 27 Financial Data Schedule (submitted with electronic filing only). * Management contracts or compensation plans required to be filed as an exhibit. EX-3.(II) 2 ARROW FINANCIAL CORPORATION (A New York Corporation) BY-LAWS (Effective 7/2/90) Revisions: 1/23/91 - Section 3.2 4/24/91 - Section 3.2 7/24/91 - Section 3.2 9/25/91 - Section 3.2 2/26/92 - Section 3.2 2/26/92 - Section 4.1 12/16/92 - Section 3.2 4/20/94 - Section 3.2 4/20/94 - Section 3.20 7/01/95 - Section 3.2 10/25/95 - Section 3.4 4/26/96 - Section 3.2 12/18/96 - Section 3.2 2/26/97 - Section 3.17 2/26/97 - Article XIII 3/26/97 - Section 3.2 10/28/98 - Section 2.2 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. No business may be transacted at an annual meeting of shareholders, other than business that is either (a) specified in the notice of meeting (or any supplement thereto) given by or at the direction of the Board, (b) otherwise properly brought before the annual meeting by or at the direction of the Board, or (c) otherwise properly brought before the annual meeting by any shareholder of the Company (i) who is a shareholder of record on the date of the giving of the notice provided for in Section 2.6 of these By-laws and on the record date for the determination of shareholders entitled to vote at such annual meeting and (ii) who complies with the notice procedures set forth in this Section 2.2. In addition to any other applicable requirements, for business to be properly brought before an annual meeting by a shareholder, such shareholder must have given timely notice thereof in proper written form to the Secretary of the Company. To be timely, a shareholder's notice to the Secretary must be delivered to or mailed and received at the principal executive offices of the Company not less than one hundred twenty (120) days prior to the anniversary date of the immediately preceding annual meeting of shareholders; provided, however, that in the event that the annual meeting is called for a date that is not within thirty (30) days before or after the anniversary date of the prior year's annual meeting, notice by the shareholder in order to be timely must be so received not later than the close of business on the tenth (10th) day following the day on which notice of the date of the annual meeting is first mailed or public disclosure of the date of the annual meeting is first made, whichever first occurs. To be in proper written form, a shareholder's notice to the Secretary must set forth as to each matter such shareholder proposes to bring before the annual meeting (i) a brief description of the business desired to be brought before the annual meeting and the reasons for conducting such business at the annual meeting, (ii) the name and record address of such shareholder, (iii) the class or series and number of shares of capital stock of the Company that are owned beneficially or of record by such shareholder, (iv) a description of all arrangements or understandings between such shareholder and any other person or persons (including their names) in connection with the proposal of such business by such shareholder and any material interest of such shareholder in such business and (v) a representation that such shareholder intends to appear in person or by proxy at the annual meeting to bring such business before the meeting. No business shall be conducted at the annual meeting of shareholders except business brought before the annual meeting in accordance with the procedures set forth in this Section 2.2 and Section 2.6 of these By-laws; provided, however, that, once business has been properly brought before the annual meeting in accordance with such procedures, nothing in this Section 2.2 shall be deemed to preclude discussion by any shareholder of any such business. If the Chairman of an annual meeting determines that business was not properly brought before the annual meeting in accordnace with the foregoing procedures of this Section 2.2 and Section 2.6 of these By-laws, the Chairman shall declare to the meeting that the business was not properly brought before the meeting and such business shall not be transacted or discussed. 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 ten (10). 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. 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 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-10.12 3 December 29, 1998 John C. Van Leeuwen Glens Falls National Bank & Trust Company Dear Jack: We hereby agree with you that, if there is a "change in control" of Arrow and you are not offered a position with the surviving or resulting company at a base salary at least equal to your base salary immediately prior to the change in control (your "Base Salary") or if you are offered a position which requires you to relocate more than 50 miles, you will be entitled to receive, upon termination of your employment, a lump sum payment in cash equal to two years' Base Salary, plus continuing coverage for two years after the termination of your employment, under Arrow's group medical, dental and term life insurance arrangements that are in effect at the time of such "change in control", including any cost-sharing arrangements. A "change in control" of Arrow is described on Exhibit A attached to this letter. To receive the above benefits, you must remain with Arrow at least until the change in control is completed. If you are offered a continuing position but at a reduced salary or which requires you to relocate more than 50 miles, and you elect to accept that offer, your right to terminate your employment and collect the benefits hereunder will expire six (6) months after the change in control. This letter agreement will continue until December 31, 1999, or your earlier retirement or termination of employment. Please indicate your acceptance of this proposal by signing below on the enclosed copy, and return the letter to me. Upon my receipt of your executed copy, this letter will constitute a binding agreement between us, governed by New York law. Very truly yours, /s/ Thomas L. Hoy President and Chief Executive Officer ACCEPTED AND AGREED TO this 29 day of December, 1998. /s/ John C. Van Leewuen EXHIBIT A CHANGE IN CONTROL A "change in control" of Arrow shall be deemed to have occurred as of the first date that (A) any individual, corporation (other than Arrow), partnership, trust, association, pool, syndicate, or any other entity or any group of persons acting in concert becomes the beneficial owner, as that concept is defined in Rule 13d-3 promulgated by the Securities and Exchange Commission under the Securities Exchange Act of 1934, as the result of any one or more securities transactions (including gifts but excluding acquisitions directly from sales to Arrow, acquisitions by any employee benefit plan (or related trust) sponsored or maintained by Arrow, or transactions described in subdivision (B), following), of securities of Arrow possessing twenty-five percent (25%) or more of the Voting Power, as defined below, of such entity, (B) there shall be consummated any Sale of Arrow, as defined below, or (C) "approved directors" shall constitute less than a majority of the entire Board of Directors of Arrow (the "Board"), with "approved directors" defined to mean all members of the Board as of the date of the letter agreement to which this Exhibit A is attached and any subsequent members of the Board who shall be elected by shareholders after being nominated or approved by a majority of the approved directors on the Board prior to such election or who shall be appointed to the Board to fill a vacancy thereon with the approval of a majority of the approved directors on the Board prior to such appointment. "Sale of Arrow" shall mean (i) any consolidation, merger or stock-for-stock exchange involving Arrow or the securities of Arrow in which the holders of voting securities of Arrow immediately prior to such consummation own, as a group, immediately after such consummation, voting securities of Arrow (or, if Arrow does not survive such transaction, voting securities of the corporation surviving such transaction) having less than fifty percent (50%) of the Voting Power, as defined below, of Arrow (or such other surviving corporation), excluding securities received by any members of such group which represent disproportionate percentage increases in their shareholdings vis-a-vis the other members of such group, or (ii) any sale, lease, exchange or other transfer (in one transaction or series of related transactions), of all, or substantially all of the assets of Arrow to a party which is not controlled by or under common control with Arrow prior to such transaction or series of transactions. The "Voting Power" of an entity at any given time shall mean the total number of votes entitled to be cast generally in an election of directors of such entity at such time by all holders of outstanding equity securities of such entity. EX-10.13 4 (DATE) (OFFICER) (TITLE) Dear (OFFICER): We hereby agree with you that, if there is a "change in control" of Arrow and you are not offered a position with the surviving or resulting company at a base salary at least equal to your base salary immediately prior to the change in control (your "Base Salary") or if you are offered a position which requires you to relocate more than 50 miles, you will be entitled to receive, upon termination of your employment, a lump sum payment in cash equal to (ONE / TWO) years' Base Salary, plus continuing coverage for (ONE / TWO) years after the termination of your employment, under Arrow's group medical, dental and term life insurance arrangements that are in effect at the time of such "change in control", including any cost-sharing arrangements. A "change in control" of Arrow is described on Exhibit A attached to this letter. To receive the above benefits, you must remain with Arrow at least until the change in control is completed. If you are offered a continuing position but at a reduced salary or which requires you to relocate more than 50 miles, and you elect to accept that offer, your right to terminate your employment and collect the benefits hereunder will expire six (6) months after the change in control. This letter agreement will continue until (DATE), or your earlier retirement or termination of employment. Please indicate your acceptance of this proposal by signing below on the enclosed copy, and return the letter to me. Upon my receipt of your executed copy, this letter will constitute a binding agreement between us, governed by New York law. Very truly yours, /s/ (PRESIDENT) President and Chief Executive Officer ACCEPTED AND AGREED TO this (DATE). /s/ (OFFICER) EXHIBIT A CHANGE IN CONTROL A "change in control" of Arrow shall be deemed to have occurred as of the first date that (A) any individual, corporation (other than Arrow), partnership, trust, association, pool, syndicate, or any other entity or any group of persons acting in concert becomes the beneficial owner, as that concept is defined in Rule 13d-3 promulgated by the Securities and Exchange Commission under the Securities Exchange Act of 1934, as the result of any one or more securities transactions (including gifts but excluding acquisitions directly from sales to Arrow, acquisitions by any employee benefit plan (or related trust) sponsored or maintained by Arrow, or transactions described in subdivision (B), following), of securities of Arrow possessing twenty-five percent (25%) or more of the Voting Power, as defined below, of such entity, (B) there shall be consummated any Sale of Arrow, as defined below, or (C) "approved directors" shall constitute less than a majority of the entire Board of Directors of Arrow (the "Board"), with "approved directors" defined to mean all members of the Board as of the date of the letter agreement to which this Exhibit A is attached and any subsequent members of the Board who shall be elected by shareholders after being nominated or approved by a majority of the approved directors on the Board prior to such election or who shall be appointed to the Board to fill a vacancy thereon with the approval of a majority of the approved directors on the Board prior to such appointment. "Sale of Arrow" shall mean (i) any consolidation, merger or stock-for-stock exchange involving Arrow or the securities of Arrow in which the holders of voting securities of Arrow immediately prior to such consummation own, as a group, immediately after such consummation, voting securities of Arrow (or, if Arrow does not survive such transaction, voting securities of the corporation surviving such transaction) having less than fifty percent (50%) of the Voting Power, as defined below, of Arrow (or such other surviving corporation), excluding securities received by any members of such group which represent disproportionate percentage increases in their shareholdings vis-a-vis the other members of such group, or (ii) any sale, lease, exchange or other transfer (in one transaction or series of related transactions), of all, or substantially all of the assets of Arrow to a party which is not controlled by or under common control with Arrow prior to such transaction or series of transactions. The "Voting Power" of an entity at any given time shall mean the total number of votes entitled to be cast generally in an election of directors of such entity at such time by all holders of outstanding equity securities of such entity. EX-11 5 Exhibit 11
ARROW FINANCIAL CORPORATION AND SUBSIDIARIES STATEMENT RE COMPUTATION OF PER SHARE EARNINGS 1998 1997 1996 1995 1994 Basic Earnings Per Share: Net Income $11,835 $10,997 $20,260 $12,424 $11,325 Weighted Shares Outstanding 6,303 6,431 6,803 7,220 7,283 Basic Earnings Per Share $1.88 $1.71 $2.98 $1.72 $1.55 Diluted Earnings Per Share: Net Income Before Cumulative Effect of Accounting Change $11,835 $10,997 $12,260 $12,424 $11,325 Debenture Interest Expense, net of tax --- --- --- --- 243 Diluted Net Income $11,835 $10,997 $12,260 $12,424 $11,568 Weighted Shares Outstanding 6,303 6,431 6,803 7,220 7,283 Stock Options- Equivalent Shares 96 87 70 61 28 Debentures --- --- --- --- 411 Total Equivalent Shares 6,399 6,518 6,873 7,281 7,722 Diluted Earnings Per Share $1.85 $1.69 $2.95 $1.71 $1.50
EX-21 6 Exhibit 21 Arrow Financial Corporation Subsidiaries Subsidiary % Common Stock Owned Subsidiaries of Arrow Financial Corporation: Glens Falls National Bank & Trust Co. 100 Saratoga National Bank & Trust Co. 100 GMB Asset Management Corporation 100 Subsidiaries of Glens Fall National Bank & Trust Co.: Arrow Properties, Inc. 100 EX-23 7 Exhibit 23 Consent of Independent Certified Public Accountants The Board of Directors of Arrow Financial Corporation: We consent to incorporation by reference in the following registration statements: File No. 2-98735 on Form S-8, File No. 33-48225 on Form S-8, File No. 33-66192 on Form S-8, and File No. 333-62719 on Form S-8 of Arrow Financial Corporation of our report dated January 22, 1999, relating to the consolidated balance sheets of Arrow Financial Corporation and subsidiaries as of December 31, 1998 and 1997, and the related consolidated statements of income, changes in shareholders' equity, and cash flows for each of the years in the three-year period ended December 31, 1998, which report appears in the December 31, 1998 Annual Report on Form 10-K of Arrow Financial Corporation. /s/ KPMG LLP Albany, New York March 17, 1999 EX-27 8 ARTICLE 9 FDS FOR 10-K
9 PREVIOUSLY FILED 1997 EPS DATA RESTATED FOR FOR AUGUST 1998 10% STOCK DIVIDEND 1000 YEAR YEAR DEC-31-1998 DEC-31-1997 DEC-31-1998 DEC-31-1997 24246 23909 0 0 6500 23000 0 0 267731 221837 63016 44082 65055 45562 546126 485810 6742 6191 939029 831599 775597 720915 24032 24755 17254 12058 45000 0 7596 6906 0 0 0 0 69550 66965 939029 831599 44201 38917 3204 2646 15628 13298 63033 54861 25974 22769 28142 23887 34891 30974 1386 1303 408 74 24506 21702 17579 16152 17579 16152 0 0 0 0 11835 10997 1.88 1.71 1.85 1.69 4.40 4.64 2270 3321 657 363 0 0 0 0 6191 5581 1178 1598 343 205 6742 6191 6742 6191 0 0 181 199
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