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SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d) of
The Securities Exchange Act of 1934
For the fiscal year ended December 31, 1996
Commission file number 0-12507
ARROW FINANCIAL
CORPORATION
(Exact name of registrant as specified in its charter)
NEW YORK
(State or Other Jurisdiction of
Incorporation or Organization)
22-2448962
(I.R.S. Employer Identification No.)
250 GLEN STREET, GLENS FALLS, NEW YORK 12801
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code:
(518) 745-1000
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF
THE ACT - NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF
THE ACT
Common stock, Par Value $1.00
(Title of Class)
Indicate by checkmark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy
or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K.
Indicate by checkmark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such
shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90
days.
Yes X No
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practicable date.
Class
Common stock, Par Value $1.00 Per Share
Outstanding at March 13, 1997
5,659,840
State the aggregate market value of the voting stock held by
non-affiliates of registrant.
Aggregate market value
of voting stock
$137,251,000
Based upon the average of the
closing bid and closing asked prices on
the NASDAQ Exchange
March 13, 1997
DOCUMENTS INCORPORATED BY REFERENCE
Portions of Registrant's Proxy Statement for the Annual Meeting
of Shareholders to be held April 30, 1997 (Part III) and
the Annual Report to Shareholders (Part II, Item 8)
ARROW FINANCIAL CORPORATION
FORM 10-K
INDEX
Cautionary Statement under Federal Securities
Laws
PART I
Item 1. Business
A. General
B. Lending Activities
C. Supervision and Regulation
D. Competition
E. Statistical Disclosure
(Guide 3)
F. Legislative Developments
G. Executive Officers of
the Registrant
Item 2. Properties
Item 3. Legal Proceedings
Item 4. Submission of Matters to a Vote of
Security Holders
PART II
Item 5. Market for the Registrant's Common
Equity and
Related Stockholder Matters
Item 6. Selected Financial Data
Item 7. Management's Discussion and
Analysis of Financial
Condition and Results of
Operations
A. Overview
B. Results of Operations
I. Net Interest Income
II. Provision for
Loan Losses and
Allowance
for Loan Losses
III. Other Income
IV. Other Expense
V. Income Taxes
C. Financial Condition
I. Investment Portfolio
II. Loan Portfolio
a. Distribution of Loans
and Leases
b. Risk Elements
III. Summary of
Loan Loss Experience
IV. Deposits
` V. Time Certificates of
$100,000 or More
D. Liquidity
E. Interest Rate Risk
F. Capital Resources and
Dividends
G. Fourth Quarter Results
Item 8. Financial Statements and
Supplementary Data
Item 9. Changes in and Disagreements with
Accountants on Accounting and Financial
Disclosure
PART III
Item 10. Directors and Executive Officers
of the Registrant
Item 11. Executive Compensation
Item 12. Security Ownership of Certain
Beneficial Owners and Management
Item 13. Certain Relationships and Related
Transactions
PART IV
Item 14. Exhibits, Financial Statement
Schedules and
Reports on Form 8-K
Signatures
Exhibits Index
Cautionary Statement under Federal Securities
Laws: The information contained in this Annual
Report on Form 10-K contains forward-looking
statements that are based on management's
beliefs, certain assumptions made by management
and current expectations, estimates and
projections about the Company's financial
condition and results of operations. Words such
as "expects," "believes," "should," "plans,"
"will," "estimates," and variations of such words
and similar expressions are intended to identify
such forward-looking statements. These
statements are not guarantees of future
performance and involve certain risks and
uncertainties that are difficult to quantify or,
in some cases, to identify. Therefore, actual
outcomes and results may differ materially from
what is expected or forecasted in such forward-
looking statements. Factors that could cause or
contribute to such differences include, but are
not limited to, changes in economic and market
conditions, including unanticipated fluctuations
in interest rates, effects of state and federal
regulation and risks inherent in banking
operations. Readers are cautioned not to place
undue reliance on these forward-looking
statements, which speak only as of the date
hereof. The Company undertakes no obligation to
revise or update these forward-looking statements
to reflect the occurrence of unanticipated
events.
PART I
Item 1: Business
A. GENERAL
Arrow Financial Corporation (the "Company"), a
New York corporation, was incorporated on March
21, 1983 and is registered as a bank holding
company within the meaning of the Bank Holding
Company Act of 1956. The Company owns two
nationally chartered banks in New York, as well
as several non-bank subsidiaries, the operations
of which are not significant. The Company also
owns an inactive bank charter in Vermont (the
former Green Mountain Bank) as well as a second-
tier bank holding company, also inactive, in
Vermont (Arrow Vermont Corporation), both of
which are in the process of being liquidated. The
Company sold all of its banking operations in
Vermont in 1996 in three separate transactions,
the last of which was completed in September
1996. The Company owns directly or indirectly
all voting stock of all its subsidiaries.
The business of the Company consists primarily of
the ownership, supervision and control of its
bank subsidiaries. The Company provides its
subsidiaries with various advisory and
administrative services and coordinates the
general policies and operation of the subsidiary
banks. There were 302 full-time equivalent
employees of the Company and the subsidiary banks
at December 31, 1996.
SUBSIDIARY BANKS: GLENS
(Dollars in Thousands) FALLS SARATOGA
NATIONAL NATIONAL
BANK & BANK &
TRUST CO. TRUST CO.
("GFNB") ("SNB")
Total Assets at Year-End $550,706 $76,115
Trust Assets Under Management at
Year-End (Not Included
in Total Assets) $432,143 $ 2,420
Date Organized 1851 1988
Employees 170 20
State of Headquarters New York New York
Offices 15 2
Counties of Operation Warren Saratoga
Washington
Saratoga Essex
Main Office 50 Glen St. 137 So. Broadway
Glens Falls, Saratoga,
New York New York
Each subsidiary bank offers a full range of
commercial and consumer financial products. The
banks' deposit base consists of core deposits
derived principally from the communities which
the banks serve. The banks target their lending
activities to consumers and small and mid-sized
companies in the banks' immediate geographic
areas. In addition to traditional banking
services, the Company offers credit card
processing services for other financial
institutions and, through its banks' trust
departments, provides retirement planning, trust
and estate administration services for
individuals and pension, profit-sharing and
employee benefit plan administration for
corporations.
B. LENDING ACTIVITIES
The Company's subsidiary banks engage in a wide
range of lending activities, including commercial
and industrial lending primarily to small and
mid-sized companies; mortgage lending for the
purchase of residential and commercial
properties; and consumer installment, credit card
and home equity financing. Historically, the
Company has sold a portion of its residential
real estate loan originations into the secondary
market, primarily to Freddie Mac and state
housing agencies, while retaining the servicing
rights. Loan sales into the secondary market,
have diminished in the past three years, however,
as the banks have sought to increase their own
portfolios. In addition to interest earned on
loans, the banks receive facility fees for
various types of commercial and industrial
credits, and commitment fees for extension of
letters of credit and certain types of loans.
Generally, the Company continues to implement
conservative lending strategies, policies and
procedures which are intended to protect the
quality of the loan portfolio. These include
stringent underwriting and collateral control
procedures and credit review systems through
which intensive reviews are conducted. It is the
Company's policy to discontinue the accrual of
interest on loans when the payment of interest
and/or principal is due and unpaid for a
designated period (generally 90 days) or when the
likelihood of repayment is, in the opinion of
management, uncertain. Income on such loans is
thereafter recognized only upon receipt (see Item
7.C.II.b. "Risk Elements").
The banks lend primarily to borrowers within the
geographic areas served by the banks. The banks'
combined loan portfolios do not include any
foreign loans or any significant industry
concentrations except as described in Note 19 to
the Consolidated Financial Statements in Part II
Item 8 of this report. Except for credit card
loans, the portfolios are substantially secured,
and many commercial loans are further secured by
personal guarantees.
C. SUPERVISION AND REGULATION
The following generally describes the regulation
to which the Company and its banks are subject.
Bank holding companies and banks are extensively
regulated under both federal and state law. To
the extent that the following information
summarizes statutory or regulatory provisions, it
is qualified in its entirety by reference to the
particular law or regulation. Any change in
applicable law or regulation may have a material
effect on the business and prospects of the
Company and the banks.
The Company is a legal entity separate and
distinct from its subsidiaries. Most of the
Company's revenues, on a parent company-only
basis, result from management fees, dividends and
undistributed earnings from the subsidiary banks.
The right of the Company, and consequently the
right of creditors and shareholders of the
Company, to participate in any distribution of
the assets or earnings of the banks through the
payment of such dividends or otherwise is
necessarily subject to the prior claims of
creditors of the banks, except to the extent that
claims of the Company in its capacity as a
creditor of the banks also may be recognized.
Moreover, there are various legal and regulatory
limitations applicable to the payment of
dividends to the Company by its subsidiaries as
well as the payment of dividends by the Company
to its shareholders. The ability of the Company
and the banks to pay dividends in the future is,
and is expected to continue to be, influenced by
regulatory policies and capital guidelines.
The Company is a registered bank holding company
within the meaning of the Bank Holding Company
Act of 1956 (BHC Act) and is subject to
regulation by the Board of Governors of the
Federal Reserve System (Federal Reserve Board).
Additionally, as a "bank holding company" under
New York State Law, the Company is subject to
regulation by the New York State Banking
Department. The subsidiary banks are nationally
chartered banks and are subject to the
supervision of and examination by the Office of
the Comptroller of the Currency ("OCC"). The
banks are members of the Federal Reserve System
and the deposits of each subsidiary bank are
insured by the Federal Deposit Insurance
Corporation ("FDIC"). The BHC Act prohibits the
Company, with certain exceptions, from engaging,
directly or indirectly, in non-bank activities
and restricts loans by the banks to the Company
or other affiliates. Under the BHC Act, a bank
holding company must obtain Federal Reserve Board
approval before acquiring, directly or
indirectly, 5% or more of the voting shares of
another bank or bank holding company (unless it
already owns a majority of such shares) or
acquiring all or substantially all of the assets
of another bank or bank holding company.
Under the 1994 Riegle-Neal Act, bank holding
companies are now able to acquire banks located
in all 50 states (see Item 1.F. "Legislative
Developments".)
The Federal Reserve Board has adopted various
"capital adequacy guidelines" for use in the
examination and supervision of bank holding
companies. One set of guidelines is the
risk-based capital guidelines, which assign risk
weightings to all assets and certain off-balance
sheet items and establish an 8% minimum ratio of
qualified total capital to the aggregate dollar
amount of risk-weighted assets (which is almost
always less than the dollar amount of such assets
without risk weighting). At least half of total
capital must consist of "Tier 1" capital, which
comprises common equity, retained earnings and a
limited amount of permanent preferred stock, less
goodwill. Up to half of total capital may
consist of so-called "Tier 2" capital, comprising
a limited amount of subordinated debt, other
preferred stock, certain other instruments and a
limited amount of the allowance for loan losses.
The Federal Reserve Board's other capital
guideline is the leverage ratio standard, which
establishes minimum limits on the ratio of a bank
holding company's "Tier 1" capital to total
tangible assets (not risk-weighted). For
top-rated holding companies, the minimum leverage
ratio is 3%, but lower-rated companies may be
required to meet substantially greater minimum
ratios. Each subsidiary bank is subject to
similar capital requirements adopted by its
primary federal regulator. The year-end 1996
capital ratios of the Company and the banks are
set forth in Part II, Item 7.F. "Capital
Resources and Dividends." A holding company's
ability to pay dividends and expand its business
through acquisitions of new subsidiaries can be
restricted if capital falls below these capital
adequacy guidelines.
Neither the Company nor any of its subsidiaries
is now, or has been within the past year, subject
to any formal or informal regulatory enforcement
order.
D. COMPETITION
The Company and its subsidiaries face intense
competition in all markets that they serve.
Traditional competitors are other local
commercial banks, savings banks, savings and loan
institutions and credit unions, as well as local
offices of major regional and money center banks.
Also, non-banking organizations, such as consumer
finance companies, insurance companies,
securities firms, money market and mutual funds
and credit card companies, which are not subject
to the same array of regulatory restrictions and
capital requirements as the Company and its
subsidiary banks, offer substantive equivalents
of transaction accounts, credit cards and various
other loan and financial products.
E. STATISTICAL DISCLOSURE
Statistical disclosure required by Securities Act
Guide 3 to be set forth herein is found in Item 7
"Management's Discussion and Analysis of
Financial Condition and Results of Operations"
and Item 8 "Financial Statements and
Supplementary Data."
INDEX TO SECURITIES ACT GUIDE 3, STATISTICAL
DISCLOSURE BY BANK HOLDING COMPANIES
Required Information Location
Distribution of Assets, Liabilities
and Stockholders' Equity; Interest
Rates and Interest Differential Part II, Item 7.B.I.
Investment Portfolio Part II, Item 7.C.I.
Loan Portfolio Part II, Item 7.C.II.
Summary of Loan Loss Experience Part II, Item 7.C.III.
Deposits Part II, Item 7.C.IV.
Return on Equity and Assets Part II, Item 6.
Short-Term Borrowings Part II, Item 8. Note 9.
F. LEGISLATIVE DEVELOPMENTS
In 1994, Congress enacted the Riegle-Neal
Interstate Banking and Branching Efficiency Act.
Under the Act, as of September 29, 1995, bank
holding companies were authorized as a matter of
federal law to acquire banks located in any of
the 50 states, notwithstanding any state laws to
the contrary, provided all required regulatory
and other approvals are obtained. Also, under
the Act, effective June 1, 1997, banks
headquartered in any state will be permitted to
branch into any other state, except for those
states which may enact legislation prior to June
1, 1997 "opting out" of interstate branching.
States may "opt in" to interstate branching prior
to June 1, 1997, by affirmatively adopting
legislation to that effect. The Act also
permitted commonly controlled banks to act as
agents for one another, effective September 29,
1995, by accepting deposits or loan payments or
closing or servicing loans for one another,
regardless of any branching laws to the contrary.
In 1995, the federal bank regulatory authorities
promulgated a set of revised regulations
addressing the responsibilities of banking
organizations under the Community Reinvestment
Act ("CRA"). The revised regulations place
additional emphasis on the actual experience of a
bank in making loans in low- and moderate-income
areas within its service area as a key
determinant in evaluation of the bank's
compliance with the statute. As in the prior
regulations, bank regulators are authorized to
bring enforcement actions against banks under the
CRA only in the context of bank expansion or
acquisition transactions.
In 1991, the Federal Deposit Insurance
Corporation Improvement Act of 1991 ("FDICIA")
was enacted. Among other things, FDICIA requires
the federal banking regulators to take prompt
corrective action with respect to depository
institutions that do not meet minimum capital
requirements. FDICIA established five capital
classifications for banking institutions, the
highest being "well capitalized." Under
regulations adopted by the federal bank
regulators, a banking institution is considered
"well capitalized" if it has a total
risk-adjusted capital ratio of 10% or greater, a
Tier 1 risk-adjusted capital ratio of 6% or
greater and a leverage ratio of 5% or greater and
is not subject to any regulatory order or written
directive regarding capital maintenance. The
Company and its subsidiary banks are all well
capitalized.
FDICIA also imposed expanded accounting and audit
reporting requirements for depository
institutions whose total assets exceed $500
million. For the Company, these requirements
became effective for Glens Falls National Bank
and Trust Company beginning in 1996.
The FDIC levies assessments on various deposit
obligations of the Company's banking
subsidiaries. During 1995, the FDIC reduced the
premium paid by the best-rated banks (including
all the Company's subsidiary banks) from $.23 per
$100 of insured deposits to $.04. In 1996, the
FDIC insurance premium was further reduced to a
flat charge of $2 thousand per year for the
highest-rated banks, including all the Company's
subsidiary banks. In 1996, Congress enacted the
Deposit Insurance Funds Act, under which deposits
insured by the Bank Insurance Fund ("BIF") are
subject to assessment for payment on the
Financing Corporation ("FICO") bond obligation at
1/5 the rate of the Savings Association Insurance
Fund ("SAIF") assessable deposits. Accordingly,
for 1997, BIF-assessable deposits (like the
Company's) will be assessed an additional 1.3
cents per $100 of insured deposits.
Banks and bank holding companies were also
significantly affected by the Financial
Institutions Reform, Recovery and Enforcement Act
of 1989 ("FIRREA"). FIRREA mandated public
disclosure by commercial banks of their Community
Reinvestment Act ratings and mortgage lending
records and imposed cross-liability on any
insured financial institution which is affiliated
with any other insured institution to which the
FDIC gives financial assistance.
Various other banking legislation, including
proposals to permit banks to affiliate with
full-service securities underwriting firms or
non-financial organizations (Glass-Steagall
Reform) have been introduced in Congress from
time to time. The Company cannot determine the
ultimate effect that any such potential
legislation, if enacted, would have upon its
financial condition or operations.
G. EXECUTIVE OFFICERS OF THE REGISTRANT
The names and ages of the principal executive
officers of the Company and positions held are
presented in the following table. The officers
are elected annually by the Board of Directors.
Name Age Positions Held and Years from Which Held
Michael F. Massiano 62 Chairman and CEO since 1990. Mr. Massiano retired
as CEO on January 1, 1997. Mr. Massiano has been
with the Company since 1956.
Thomas L. Hoy 48 President and CEO since January 1, 1997 and
President and COO of Glens Falls National Bank
since 1995. Mr. Hoy was Executive Vice President
of Glens Falls National Bank prior to 1995. Mr.
Hoy has been with the Company since 1974.
John J. Murphy 45 Executive Vice President, Treasurer and CFO since
1993. Mr. Murphy has served as Senior Vice
President, Treasurer and CFO of the Company since
1983. Mr. Murphy has been with the Company since
1973.
Gerard R. Bilodeau 49 Senior Vice President and Secretary since 1994.
Mr. Bilodeau was Vice President and Secretary from
1993 to 1994 and was Director of Personnel prior
to 1993. Mr. Bilodeau has been with the Company
since 1969.
Item 2: Properties
The Company is headquartered at 250 Glen Street,
Glens Falls, New York. The building is owned by
Glens Falls National Bank and serves as its main
office. Glens Falls National Bank owns thirteen
additional offices and leases one, at market rates.
Saratoga National Bank owns both of its offices.
The Company continues to own the building in
Rutland, Vermont, that served as headquarters for
the Company's Vermont operations prior to the
divestiture of those operations in 1996. The
building was held for sale at December 31, 1996.
Rental costs of premises did not exceed 5% of
operating costs in 1996.
In the opinion of management of the Company, the
physical properties of the Company and the
subsidiary banks are suitable and adequate.
Item 3: Legal Proceedings
The Company is not the subject of any material
pending legal proceedings, other than ordinary
routine litigation occurring in the normal course
of its business.
The Company's subsidiary banks are the subjects
of or parties to various legal claims which arise
in the normal course of their business. For
example, from time to time, the banks encounter
claims against them grounded in lender liability,
of the sort often asserted against financial
institutions. These lender liability claims
normally take the form of counterclaims to
lawsuits filed by the banks for collection of
past due loans. The various pending legal claims
against the subsidiary banks, including lender
liability claims, will not, in the opinion of
management, result in any material liability to
the banks or the Company.
Item 4: Submission of Matters to a Vote of
Security Holders
None in the fourth quarter of 1996.
PART II
Item 5: Market for the Registrant's Common
Equity and Related Stockholder Matters
The common stock of Arrow Financial Corporation
is traded over-the-counter. It is registered
with and its price is quoted by the National
Association of Securities Dealers, Inc., through
its national quotation system (NASDAQ).
The price ranges listed below represent actual
transactions rounded to the nearest 1/8 point.
Although there may have been isolated sales at
prices outside the parameters shown, the
Company believes that the price ranges fairly
represent the trading ranges.
Per share amounts and market prices have been
adjusted for a 1996 ten percent stock dividend
and a 1995 four percent stock dividend.
Market Price Cash
(Bid) Dividends
High Low Declared
1995 1st Quarter $14.375 $13.500 $.114
2nd Quarter 14.000 12.750 .123
3rd Quarter 15.625 13.125 .131
4th Quarter 17.250 15.375 .145
1996 1st Quarter $18.375 $15.000 $.155
2nd Quarter 21.000 18.625 .155
3rd Quarter 20.750 17.750 .155
4th Quarter 23.750 20.750 .200
The payment of dividends by the Company is at the
discretion of the Board of Directors and is
dependent upon, among other things, the Company's
earnings, financial condition and other factors,
including applicable governmental regulations and
restrictions. See "Capital Resources and
Dividends" in Part II, Item 7.F. of this report.
There were approximately 2,653 holders of record
of common stock at December 31, 1996.
Item 6: Selected Financial Data
FIVE YEAR SUMMARY OF SELECTED DATA
Arrow Financial Corporation and Subsidiaries
(Dollars In Thousands, Except Per Share Data)
1996 1995 1994 1993 1992
Consolidated Statements of Income Data:
Interest and Dividend Income $54,875 $60,718 $52,514 $51,836 $57,829
Less: Interest Expense 21,826 24,865 18,202 19,583 28,399
Net Interest Income 33,049 35,853 34,312 32,253 29,430
Less: Provision for Loan Losses 896 1,170 (950) 690 1,677
Net Interest Income After Provision
for Loan Losses 32,153 34,683 35,262 31,563 27,753
Other Income 23,804 14,473 9,049 9,086 8,606
Net Gains (Losses) on Securities
Transactions (101) 23 (481) 26 15
Less: Other Expense 24,774 29,769 31,374 32,118 32,153
Income Before Income Taxes, Extra-
ordinary Item and Cumulative Effect
of Accounting Change 31,082 19,410 12,456 8,557 4,221
Provision for Income Taxes 10,822 6,986 1,131 381 1,331
Income Before Extraordinary Item &
Cumulative Effect of Accounting Change 20,260 12,424 11,325 8,176 2,890
Extraordinary Item: Utilization of Net
Operating Loss Carryforward --- --- --- --- 811
Cumulative Effect of a Change in
Accounting for Income Taxes --- --- --- 1,457 ---
Net Income $20,260 $12,424 $11,325 $ 9,633 $ 3,701
Primary Earnings Per Share:
Income Before Extraordinary Item
and Accounting Change $ 3.40 $ 1.98 $ 1.79 $ 1.31 $ .48
Extraordinary Item and Accounting Change --- --- --- .23 .12
Net Income $ 3.40 $ 1.98 $ 1.79 $ 1.54 $ .60
Fully Diluted Earnings Per Share:
Income Before Extraordinary Item
and Accounting Change $ 3.39 $ 1.97 $ 1.73 $ 1.31 $ .48
Extraordinary Item and Accounting Change --- --- --- .23 .12
Net Income $ 3.39 $ 1.97 $ 1.73 $ 1.54 $ .60
Cash Dividends $ .66 $ .51 $ .33 $ .09 $ ---
Book Value 12.90 10.91 9.27 7.95 6.43
Consolidated Balance Sheet Data:
Total Assets $652,603 $789,790 $746,431 $733,442 $722,415
Securities Available-for-Sale 171,743 178,645 53,868 55,892 55,598
Securities Held-to-Maturity 30,876 13,921 129,735 125,832 97,305
Loans and Leases, Net of Unearned Income 393,511 517,787 507,553 502,784 492,916
Nonperforming Assets 2,754 6,765 7,825 20,136 29,669
Deposits 541,747 694,453 650,485 659,427 657,875
Other Borrowed Funds 22,706 15,297 24,865 12,487 15,162
Long-Term Debt --- --- 5,007 5,289 5,371
Shareholders' Equity 74,296 67,504 58,405 50,069 39,735
Selected Key Ratios:
Return on Average Assets 2.86% 1.60% 1.52% 1.33% .50%
Return on Average Equity 28.78 19.45 20.79 21.03 10.10
Dividend Payout 19.47 25.89 19.08 5.84 ---
Average Equity to Average Assets 9.95 8.22 7.34 6.32 4.97
Per share amounts have been adjusted for the 1996 ten percent and the 1995, 1994, and 1993
four percent stock dividends.
Item 7: Management's Discussion and Analysis of
Financial Condition and Results of Operations
The following discussion and analysis focuses on
and reviews the Company's results of operations
for each of the years in the three-year period
ended December 31, 1996 and the financial
condition of the Company as of December 31, 1996
and 1995. Per share amounts have been restated
to reflect the ten percent stock dividend paid in
November 1996 and the four percent stock dividend
paid in November 1995. The discussion below
should be read in conjunction with the
consolidated financial statements and other
financial data presented elsewhere herein.
A. OVERVIEW
The Company reported net income of $20.3 million
for 1996, compared to net income of $12.4 million
for 1995. Primary earnings per share were $3.40
and $1.98 for 1996 and 1995, respectively. Book
value per share was $12.90 at December 31, 1996,
an increase of $1.99, or 18.2%, from December 31,
1995. For 1996, cash dividends per share
amounted to 66.4 cents, an increase of 15.1 cents
or 29.4%, from cash dividends paid in 1995. The
following analysis adjusts net income for
nonrecurring items to arrive at a comparative
presentation of the Company's core earnings:
SUMMARY OF CORE EARNINGS
(In Thousands, Except Per Share Data)
1996 1995
Net Income, as Reported $20,260 $12,424
Adjustments, Net of Tax:
Divestiture of Vermont Banking Operations (10,267) ---
Insurance Settlement --- (3,250)
OREO Transactions 174 136
Severance Benefits --- 388
Net Securities Transactions 57 (12)
Other (323) (218)
Core Net Income $ 9,901 $ 9,468
Core Primary Earnings per Share $ 1.66 $ 1.51
The company's core earnings for 1996 amounted to
$9.9 million, an increase of $433 thousand from
core earnings of $9.5 million for 1995. As thus
adjusted, core earnings per share were $1.66 and
$1.51, for the two respective years, representing
an increase of 9.9%.
During 1996, in three separate transactions, the
Company completed the divestiture of its Vermont
banking operations realizing an after tax gain of
$10.3 million. The other major nonrecurring
income item in the past two years was the
Company's receipt in May of 1995 of a $5.0
million pre-tax settlement from its financial
institution bond company on a claim for losses
suffered in earlier periods. The core earnings
analysis has also been adjusted for securities
sale transactions, severance benefits for senior
officers of Green Mountain Bank, sales of other
real estate owned, and other nonrecurring items.
Nonperforming assets amounted to $2.8 million at
December 31, 1996, down from $6.8 million at
December 31, 1995. The reduction was primarily
attributable to the disposition of OREO and
nonperforming loans as part of the sale of the
Vermont banking operations in 1996. The
allowance for loan losses was $5.6 million at
December 31, 1996, which represented 213% of the
amount of nonperforming loans.
Divestiture of Vermont Operations
During 1996, in three separate transactions, the
Company completed the divestiture of its Vermont
subsidiary, Green Mountain Bank ("GMB"). In
January, the Company sold eight branches of GMB,
with related deposits and loans, to Mascoma
Savings Bank, Lebanon, NH. In August, the
Company sold GMB's trust business to Vermont
National Bank, Brattleboro, VT. In September, the
Company sold the remaining branches of GMB, with
related deposits and loans, to ALBANK, FSB,
Albany, NY. The Company did not sell the
building which served as GMB's main office in
Rutland, Vermont, which was being held for sale
at December 31, 1996.
Total loans and deposits transferred in these
sales amounted to approximately $148 million and
$208 million, respectively. These and other
changes are more fully described in the following
analysis of the results of operations and changes
in financial condition.
B. RESULTS OF OPERATIONS
The following analysis of net interest income,
the provision for loan losses, noninterest
income, noninterest expense and income taxes,
presents the factors that are primarily
responsible for the Company's results of
operations for 1996 and the prior two years.
I. NET INTEREST INCOME (Fully Taxable Basis)
Net interest income represents the difference
between interest earned on loans securities and
other interest-earning assets and interest paid
on deposits and other sources of funds. Changes
in net interest income result from changes in the
level and mix of earning assets and sources of
funds (volume) and changes in the yields earned
and costs paid (rate). Net interest margin is
the ratio of net interest income to average
earning assets. Net interest income may also be
described as the product of earning assets and
the net interest margin.
COMPARISON OF NET INTEREST INCOME
(Dollars In Thousands) (Fully Taxable Basis)
Years Ended December 31, Change From Prior Year
1996 1995 1994 1996 1995
Amount Percent Amount Percent
Interest Income $55,517 $61,411 $52,985 $(5,894) (9.6)% $ 8,426 15.9%
Interest Expense 21,826 24,865 18,202 (3,039) (12.2) 6,663 36.6
Net Interest Income $33,691 $36,546 $34,783 $(2,855) (7.8) $ 1,763 5.1
On a tax-equivalent basis, net interest income
was $33.7 million in 1996, a decrease of $2.9
million or, 7.8%, from $36.5 million in 1995. The
$2.9 million decrease in net interest income was,
for the most part, attributable to the decrease
in average earning assets resulting from
divestiture during the year of the Vermont
operations.
ANALYSIS OF CHANGES IN NET INTEREST INCOME
The following table presents net interest income
components on a tax-equivalent basis and reflects
changes between periods attributable to movement
in either the average daily balances or average
rates for both earning assets and
interest-bearing liabilities. Changes
attributable to both volume and rate have been
allocated proportionately between the categories.
CHANGE IN NET INTEREST INCOME
(In Thousands) (Fully Taxable Basis)(Unaudited)
1996 to 1995
Change in Net Interest Income
Due to:
Volume Rate Total
Interest and Dividend Income:
Federal Funds Sold $ (560) $ (105) $ (665)
Securities Available-for-Sale 6,882 199 7,081
Securities Held-to-Maturity:
U.S. Treasury and Other
Governmental Agencies (3,108) --- (3,108)
State and Municipal Obligations 279 (38) 241
Mortgage-Backed Securities (3,366) 306 (3,060)
Other Securities (486) --- (486)
Total Securities Held-to-Maturity (6,681) 268 (6,413)
Loans (4,928) (969) (5,897)
Total Interest and Dividend Income (5,287) (607) (5,894)
Interest Expense:
Deposits:
N.O.W./Super N.O.W. (244) 56 (188)
Regular Savings and M.M.D.A. (1,298) (272) (1,570)
Time Certificates of
$100,000 or More 657 (220) 437
Other Time Deposits (1,543) (17) (1,560)
Total Deposits (2,428) (453) (2,881)
Short-Term Borrowings 122 (50) 72
Long-Term Debt (230) --- (230)
Total Interest Expense (2,536) (503) (3,039)
Net Interest Income $(2,751) $ (104) $(2,855)
1995 to 1994
Change in Net Interest Income
Due to:
Volume Rate Total
Interest and Dividend Income:
Federal Funds Sold $ 521 $ 285 $ 806
Securities Available-for-Sale 334 823 1,157
Securities Held-to-Maturity:
U.S. Treasury and Other
Governmental Agencies (372) 75 (297)
State and Municipal Obligations 548 45 593
Mortgage-Backed Securities 233 87 320
Other Securities 282 11 293
Total Securities Held-to-Maturity 691 218 909
Loans 956 4,598 5,554
Total Interest and Dividend Income 2,502 5,924 8,426
Interest Expense:
Deposits:
N.O.W./Super N.O.W. 202 1,279 1,481
Regular Savings and M.M.D.A. (1,917) 847 (1,070)
Time Certificates of
$100,000 or More 2,158 442 2,600
Other Time Deposits 1,121 2,319 3,440
Total Deposits 1,564 4,887 6,451
Short-Term Borrowings 288 137 425
Long-Term Debt (230) 17 (213)
Total Interest Expense 1,622 5,041 6,663
Net Interest Income $ 880 $ 883 $1,763
The following table reflects the components of the
Company's net interest income, setting forth, for
years ended December 31, 1996, 1995 and 1994 (I)
average balances of assets, liabilities and
shareholders' equity, (II) interest income earned
on earning assets and interest expense incurred on
interest-bearing liabilities, (III) average yields
earned on earning assets and average rates paid on
interest-bearing liabilities, (IV) the net
interest spread (average yield less average cost)
and (V) the net interest margin (yield) on earning
assets. Rates are computed on a tax-equivalent
basis. Nonaccrual loans are included in average
loans and leases, while unearned income has been
eliminated.
AVERAGE CONSOLIDATED BALANCE SHEETS AND NET
INTEREST INCOME ANALYSIS
Arrow Financial Corporation and Subsidiaries
(Fully Taxable Basis using a marginal tax rate of
35% for 1996 and 1995 and 34% for 1994)
(Dollars In Thousands) (Unaudited)
Years Ended December 31, 1996
Interest Rate
Average Income/ Earned/
Balance Expense Paid
Federal Funds Sold $ 12,150 $ 642 5.28%
Securities Available-
for-Sale (1) 173,783 11,105 6.39
Securities Held-to-Maturity:
U.S. Treasury and
Governmental Agencies --- --- ---
State and Municipal 16,700 1,365 8.17
Mortgage-Backed
Securities 575 40 6.96
Other Securities --- --- ---
Total Securities Held-
to-Maturity 17,275 1,405 8.13
Loans & Leases (Net of
Unearned Income) 459,946 42,365 9.21
Total Earning Assets 663,154 55,517 8.37
Allowance For Loan
Losses (10,102)
Cash and Due From Banks 25,303
Other Assets 28,975
Total Assets $707,330
Deposits:
N.O.W./Super N.O.W. $131,438 3,787 2.88
Savings/M.M.D.A. 157,892 4,617 2.92
Time Certificates of
$100,000 or More 79,996 4,198 5.25
Other Time Deposits 156,236 8,333 5.33
Total Interest-Bearing
Deposits 525,562 20,935 3.98
Short-Term Borrowings 18,524 891 4.81
Long-Term Debt. --- --- ---
Total Interest-
Bearing Funds 544,086 21,826 4.01
Demand Deposits 77,479
Other Liabilities 15,374
Total Liabilities 636,939
Shareholders' Equity 70,391
Total Liabilities and
Shareholders' Equity $707,330
Net Interest Income
(Fully Taxable Basis) 33,691
Reversal of Tax Equivalent
Adjustment (642)
Net Interest Income $33,049
Net Interest Spread 4.36%
Net Interest Margin 5.08%
(1) Yields do not give effect to changes in fair value that
are reflected as a component of shareholders' equity.
Years Ended December 31, 1995
Interest Rate
Average Income/ Earned/
Balance Expense Paid
Federal Funds Sold $ 22,596 $ 1,307 5.78%
Securities Available-
for-Sale (1) 66,075 4,024 6.09
Securities Held-to-Maturity:
U.S. Treasury and
Governmental Agencies 57,993 3,108 5.36
State and Municipal 13,271 1,124 8.47
Mortgage-Backed
Securities 48,933 3,100 6.34
Other Securities 6,573 486 7.39
Total Securities Held-
to-Maturity 126,770 7,818 6.17
Loans & Leases (Net of
Unearned Income) 513,266 48,262 9.40
Total Earning Assets 728,707 61,411 8.43
Allowance For Loan
Losses (12,288)
Cash and Due From Banks 28,081
Other Assets 32,929
Total Assets $777,429
Deposits:
N.O.W./Super N.O.W. $139,879 3,975 2.84
Savings/M.M.D.A. 201,932 6,187 3.06
Time Certificates of
$100,000 or More 67,029 3,761 5.61
Other Time Deposits 185,166 9,893 5.34
Total Interest-Bearing
Deposits 594,006 23,816 4.01
Short-Term Borrowings 15,855 819 5.17
Long-Term Debt. 2,619 230 8.78
Total Interest-
Bearing Funds 612,480 24,865 4.06
Demand Deposits 88,961
Other Liabilities 12,097
Total Liabilities 713,538
Shareholders' Equity 63,891
Total Liabilities and
Shareholders' Equity $777,429
Net Interest Income
(Fully Taxable Basis) 36,546
Reversal of Tax Equivalent
Adjustment (693)
Net Interest Income $35,853
Net Interest Spread 4.37%
Net Interest Margin 5.02%
(1) Yields do not give effect to changes in fair value that
are reflected as a component of shareholders' equity.
Years Ended December 31, 1994
Interest Rate
Average Income/ Earned/
Balance Expense Paid
Federal Funds Sold $ 12,490 $ 501 4.01%
Securities Available-
for-Sale (1) 60,591 2,867 4.73
Securities Held-to-Maturity:
U.S. Treasury and
Governmental Agencies 64,908 3,405 5.25
State and Municipal 6,761 531 7.85
Mortgage-Backed
Securities 45,221 2,780 6.15
Other Securities 2,751 193 7.02
Total Securities Held-
to-Maturity 119,641 6,909 5.77
Loans & Leases (Net of
Unearned Income) 502,224 42,708 8.50
Total Earning Assets 694,946 52,985 7.62
Allowance For Loan
Losses (16,954)
Cash and Due From Banks 27,009
Other Assets 37,635
Total Assets $742,636
Deposits:
N.O.W./Super N.O.W. $129,999 2,494 1.92
Savings/M.M.D.A. 260,336 7,257 2.79
Time Certificates of
$100,000 or More 26,980 1,161 4.30
Other Time Deposits 160,035 6,453 4.03
Total Interest-Bearing
Deposits 577,350 17,365 3.01
Short-Term Borrowings 9,838 394 4.00
Long-Term Debt. 5,226 443 8.48
Total Interest-
Bearing Funds 592,414 18,202 3.07
Demand Deposits 87,715
Other Liabilities 8,028
Total Liabilities 688,157
Shareholders' Equity 54,479
Total Liabilities and
Shareholders' Equity $742,636
Net Interest Income
(Fully Taxable Basis) 34,783
Reversal of Tax Equivalent
Adjustment (471)
Net Interest Income $34,312
Net Interest Spread 4.55%
Net Interest Margin 5.01%
(1) Yields do not give effect to changes in fair value that
are reflected as a component of shareholders' equity.
CHANGES IN NET INTEREST INCOME DUE TO RATE
YIELD ANALYSIS December 31,
1996 1995 1994
Yield on Earning Assets 8.37% 8.43% 7.62%
Cost of Interest-Bearing Liabilities 4.01 4.06 3.07
Net Interest Spread 4.36% 4.37% 4.55%
Net Interest Margin 5.08% 5.02% 5.01%
The following items have a major impact on
changes in net interest income due to rate:
general interest rate changes, the ratio of the
Company's rate sensitive assets to rate sensitive
liabilities (interest rate sensitive gap) during
periods of interest rate changes and the
performance of nonperforming loans.
The Federal Reserve Board attempts to influence
prevailing federal funds and prime interest rates
by changing the Federal Reserve Bank discount
rate. The following chart presents recent
changes to the discount rate:
Federal Reserve Bank's Discount Rate Changes 1992 - 1996
Date New Rate Old Rate
January 31, 1996 5.00% 5.25%
February 1, 1995 5.25 4.75
November 15, 1994 4.75 4.00
August 16, 1994 4.00 3.50
May 17, 1994 3.50 3.00
July 2, 1992 3.00 3.50
During 1996, the Company experienced minimal
impact on net interest income resulting from
changes in interest rates. Throughout 1996,
interest rates remained quite stable, largely due
to the influence of the Federal Reserve Board's
control of the federal discount rate, which
changed only once at the beginning of the year.
At that time the discount rate decreased 25 basis
points to 5.00%.
In 1995, the change in net interest income
attributable to changes in interest rates had an
$883 thousand positive impact on net interest
income. During the first half of the year, the
Company was still experiencing the effect from
rising interest rates which had begun in the
second half of 1994. Various loan and deposit
products react to interest rate changes at
different rates and the pricing on some products
does not change to the full extent of changes in
the prime rate. During 1994, assets in general
repriced more quickly than time deposits.
Repricing of short-term deposit products also
tended to lag behind prime rate changes and did
not change to the full extent of prime rate
changes. Consequently, the spread between the
yield on earning assets and the cost of interest
paying liabilities increased from 1993 to 1994 by
13 basis points, while decreasing by 18 basis
points from 1994 to 1995. Notwithstanding the
decrease in the net interest spread in 1995, the
Company experienced an overall beneficial impact
from generally rising interest rates due to the
fact that average interest-earning assets
increased more rapidly than average interest-paying
liabilities, as discussed more fully in the
following section on changes in net interest
income due to volume. As a result, the net
interest margin increased from 1994 to 1995,
albeit by only one basis point.
A discussion of the impact on net interest income
resulting from changes in interest rates vis a
vis the repricing patterns of the Company's
interest-bearing assets and liabilities is
included later in this report under Item 7.E.
"Interest Rate Risk."
During 1996 and 1995, the Company received
certain payments on restructured loans in the
Vermont portfolio that had not been factored into
the effective rate on those loans. The payments,
which were recorded as interest income, have been
included in the yields in the table above. These
payments increased the loan yields by seven and
four basis points for the two respective years.
CHANGES IN NET INTEREST INCOME DUE TO VOLUME
AVERAGE BALANCES
(Dollars in Thousands)
$ Change % Change
1996 1995 1994 1996 1995 1996 1995
Earning Assets $663,154 $728,707 $694,946 $(65,553) $33,761 (9.0)% 4.9%
Interest-Bearing
Liabilities 544,086 612,480 592,414 (68,394) 20,066 (11.2) 3.4
Demand Deposits 77,479 88,961 87,715 (11,482) 1,246 (12.9) 1.4
Total Assets 707,330 777,429 742,636 (70,099) 34,793 (9.0) 4.7
Earning Assets to
Total Assets 93.75% 93.73% 93.58% .02% .15% 0.0 0.2
In general, changes in the volume of earning
assets or paying liabilities will result in
corresponding changes in net interest income.
However, changes due to volume can be enhanced or
restricted by shifts in the relative mix between
instruments of different rates. In 1996, nearly
all of the $2.9 million decrease in net interest
income was attributable to the change in volume.
The decrease was attributable to the divestiture
of the Vermont banking operations during 1996.
Increases in the volume of loans and deposits, as
well as yields and costs by type, for the New
York banks are discussed later in this report
under Item 7.C. "Financial Condition." In
summary, the New York banks experienced
significant growth during 1996, with some shifting
of emphasis in the loan portfolio from commercial
to consumer loans. There was relatively little
change in the mix of deposit products from 1995 to
1996.
In 1995, the change in volume had an $880 thousand
positive impact on net interest income. Of the
$33.8 million increase in average earning assets
from 1994 to 1995, average loan balances accounted
for $11.0 million. The Company used the remaining
funds to increase its liquid assets. Only $20.1
million of the $33.8 million increase in average
earning assets was funded by paying liabilities.
The primary sources of funds for the remainder
came from retained earnings ($9.4 million) and
proceeds from the sale of OREO ($1.5 million).
II. PROVISION FOR LOAN LOSSES AND ALLOWANCE FOR
LOAN LOSSES
Through the provision for loan losses, an
allowance (reserve) is maintained for estimated
loan losses. Actual loan losses are charged
against this allowance when they are identified.
In evaluating the adequacy of the allowance for
loan losses, management considers various risk
factors influencing asset quality. The analysis
is performed on a loan by loan basis for impaired
and large balance loans, and by portfolio type for
smaller balance homogeneous loans. This analysis
is based on judgments and estimates and may change
in response to economic developments or other
conditions that may influence borrowers' economic
outlook.
The provision for loan losses is largely
influenced by the level of nonperforming loans,
the expected future levels of nonperforming loans
and by the level of loans actually charged-off
against the allowance for loan losses during the
year.
At December 31, 1996, nonperforming loans amounted
to $2.6 million, a decrease of 39.9% from the
balance at December 31, 1995. The decrease is
primarily attributable to nonperforming loans
transferred in the divestiture of the Vermont
banking operations during 1996. The level of
nonperforming loans for the New York based banks
was virtually unchanged from 1995 to 1996.
During 1996, loan losses charged against the
reserve, net of recoveries, were $580 thousand, or
.13% of average loans for the period. However,
the most significant reduction to the allowance
for loan losses was the amount of the reserve
attributable to loans transferred in the
divestiture of the Vermont banking operations of
$6.8 million. These reductions in the allowance
for loan losses were offset in part by a provision
for loan losses of $896 thousand, or .19% of
average loans for the year.
At December 31, 1996 the allowance for loan losses
was $5.6 million. The allowance for loan losses
was 213% of the amount of nonperforming loans at
that date.
During 1995, nonperforming assets continued the
steady decline begun in 1991. The primary portion
of the decrease in nonperforming assets in 1995
came from the sale of OREO. Nonaccrual loans
increased $626 thousand or 17.3% from the year-end
1994 balance. The increase in nonaccrual loans
was due primarily to the aggregate borrowing of
one large commercial borrower, which was placed
on nonaccrual status in 1995. That loan was
accounted for under SFAS No. 114 and was being
carried at its estimated fair value. Loans
reported as troubled debt restructures at December
31, 1994, were classified as performing in 1995.
Net loan losses for 1995 were $1.4 million. These
losses compare to net loan losses of $2.8 million,
$1.9 million and $4.7 million for the years ended
December 31, 1994, 1993 and 1992, respectively.
As a ratio to average loans, the net loan losses
were .27%, .56%, .40% and .92% for the same
respective periods.
The provision for loan losses in 1994 was actually
a credit to the consolidated statement of income
resulting in a reduction in the allowance for loan
losses. During the second quarter of 1994, with
nonperforming assets at significantly reduced
levels and a substantial sale of OREO having been
completed, the Company reduced the allowance for
loan losses by $1.5 million. This reduction was
effected by means of a credit to the provision for
loan losses. As a result, for the twelve month
period ended December 31, 1994, the Company's net
provision for loan losses was a benefit $950
thousand, compared to a provision of $690 thousand
in 1993 and $1.7 million in 1992. As a ratio of
average loans, the provisions were (.19)% in 1994
and .14% and .32% for 1993 and 1992, respectively.
SUMMARY OF THE ALLOWANCE AND PROVISION FOR LOAN LOSSES
(Dollars In Thousands) (Loans and Leases, Net of Unearned Income)
Years-Ended December 31, 1996 1995 1994 1993 1992
Loans and Leases at End of Period $393,511 $517,787 $507,553 $502,784 $492,916
Average Loans and Leases 459,946 513,266 502,224 489,326 516,711
Total Assets at End of Period 652,603 789,790 746,431 733,442 722,415
Nonperforming Assets:
Nonaccrual Loans:
Construction and Land Development $ --- $ 104 $ 327 $ 2,534 $ 6,149
Commercial Real Estate 83 1,299 1,050 2,649 7,986
Commercial Loans 1,487 1,979 1,017 2,596 4,168
Other 727 862 1,224 2,082 3,171
Total Nonaccrual Loans 2,297 4,244 3,618 9,861 21,474
Loans Past Due 90 or More Days and
Still Accruing Interest 321 111 231 364 1,486
Restructured Loans in Compliance with
Modified Terms --- --- 580 2,405 1,161
Total Nonperforming Loans 2,618 4,355 4,429 12,630 24,121
Other Real Estate Owned 136 2,410 3,396 7,506 5,548
Total Nonperforming Assets $ 2,754 $ 6,765 $ 7,825 $ 20,136 $ 29,669
Allowance for Loan Losses:
Balance at Beginning of Period $ 12,106 $ 12,338 $ 16,078 $ 17,328 $ 20,387
Transfer with Loan Sales (6,841) --- --- --- ---
Loans Charged-off:
Commercial, Financial
and Agricultural (185) (579) (997) (973) (2,283)
Real Estate - Commercial (104) (369) (689) (1,106) (645)
Real Estate - Construction (2) (101) (1,181) (377) (2,015)
Real Estate - Residential (57) (160) (143) (151) (323)
Installment Loans to Individuals (598) (562) (476) (480) (820)
Lease Financing Receivables -- -- -- -- (9)
Total Loans Charged-off (946) (1,771) (3,486) (3,087) (6,095)
Recoveries of Loans Previously
Charged-off:
Commercial, Financial
and Agricultural 84 76 260 694 724
Real Estate - Commercial 48 104 35 75 48
Real Estate - Construction --- 10 68 55 327
Real Estate - Residential 12 8 143 37 22
Installment Loans to Individuals 222 171 188 285 232
Lease Financing Receivables -- -- 2 1 6
Total Recoveries of Loans
Previously Charged-off 366 369 696 1,147 1,359
Net Loans Charged-off (580) (1,402) (2,790) (1,940) (4,736)
Provision for Loan Losses
Charged to Expense 896 1,170 (950) 690 1,677
Balance at End of Period $ 5,581 $ 12,106 $ 12,338 $ 16,078 $ 17,328
Nonperforming Asset Ratio Analysis:
Net Loans Charged-off as a Percentage
of Average Loans .13% .27% .56 % .40% .92%
Provision for Loan Losses as a
Percentage of Average Loans .19 .23 (.19) .14 .32
Allowance for Loan Losses as a
Percentage of Period-end Loans 1.42 2.34 2.43 3.20 3.52
Allowance for Loan Losses as a
Percentage of Nonperforming Loans 213.18 277.98 278.57 127.30 71.84
Nonperforming Loans as a Percentage
of Period-end Loans .67 .84 .87 2.51 4.89
Nonperforming Assets as a Percentage
of Period-end Total Assets .42 .86 1.05 2.75 4.11
III. OTHER INCOME
The majority of other (i.e., noninterest) income
is derived from fees and commissions from
fiduciary services, deposit account service
charges, computer processing fees to
correspondents and other "core" or recurring
sources. Additionally, other income is
influenced by transactions involving the sale of
securities available-for-sale.
ANALYSIS OF OTHER INCOME
(Dollars In Thousands) Change
December 31, Amount Percent
1996 1995 1994 1996 1995 1996 1995
Income from Fiduciary
Activities $ 3,458 $ 3,752 $3,657 $ (294) $ 95 (7.8)% 2.6%
Fees for Other Services 3,959 4,669 4,345 (710) 324 (15.2) 7.5
Net Securities
Gains (Losses) (101) 23 (481) (124) 504 --- ---
Net Gain on Divestiture
of Vermont Operations 15,330 --- --- 15,330 --- --- ---
Other Operating Income 1,057 6,052 1,047 (4,995) 5,005 (82.5) 478.0
Total Other Income $23,703 $14,496 $8,568 $ 9,207 $5,928 63.5 69.2
Total other income for 1996 was $23.7 million as
compared to $14.5 million for 1995. Without
regard to nonrecurring items included in other
income for the two years, specifically the
divestiture of Vermont operations in 1996, the
financial institution bond recovery in 1995 and
securities sale transactions for both years,
other income was $8.5 million for 1996, compared
to $9.5 million in 1995, a decrease of 10.5%. As
thus adjusted, other income as a percentage of
average assets was 1.20% in 1996, virtually the
same as in 1995.
During 1996, the Company completed the
divestiture of its Vermont banking operations.
The pre-tax gain of $15.3 million is net of
recording the remaining assets and liabilities at
fair value less estimated costs to sell. The
major remaining asset, which at December 31,
1996, was held for sale, was the building in
Rutland, Vermont, which was the former main
office of GMB. Principal remaining liabilities
included pension and post-retirement obligations
of GMB and amounts reserved for costs and
expenses of liquidating GMB's charter.
In 1995, the Company received a $5.0 million
payment from the Company's financial institution
bond carrier, in settlement of a lawsuit filed in
1994 for losses suffered in earlier periods,
covered under the Company's policy.
During 1996, the Company recognized net losses of
$101 thousand on the sale of $51.1 million of
securities classified as available-for-sale.
Most of the sales were made for the purpose of
extending the term of the securities at higher
yields. During 1995, the Company recognized net
gains of $23 thousand on the sale of $4.2 million
of available-for-sale securities. During 1994,
the Company recognized net securities losses of
$481 thousand on the sale of $16.5 million of
available-for-sale securities.
Income from fiduciary activities for 1996 was
$3.5 million, a decrease of $294 thousand, or
7.8% from 1995. On August 31, 1996, the Company
sold its Vermont trust business as part of the
divestiture of Vermont operations. In 1995, the
Vermont trust business represented approximately
42% of the Company's fiduciary income for the
year of $3.8 million. During 1996, the New York
based trust business generated $2.4 million in
income, an increase of $232 thousand, or 10.6%,
from 1995. The increase was attributable to a
$35.3 million increase in assets under
management, which were $434.6 million at December
31, 1996.
Fees for other services include deposit service
charges, safe deposit box fees, credit card
merchant processing fees, and servicing fees on
loans sold with servicing retained by the
Company. These fees amounted to $4.0 million for
1996, a decrease of $710 thousand, or 15.2% from
1995, again reflecting the disposition of the
Vermont operations during 1996. For the New York
based operations, these fees amounted to $3.4
million for both years.
Other operating income includes, as a primary
component, fees earned on servicing credit card
portfolios for correspondent banks. This category
of noninterest income also includes gains on the
sale of loans, other real estate owned and other
assets. Without regard to the bond recovery,
other operating income amounted to $1.1 million
for both 1996 and 1995.
Total other income for 1995 amounted to $14.5
million, a $5.9 million increase from 1994. The
increase was primarily attributable to a $5.0
million payment received from the Company's
financial institution bond carrier.
Exclusive of the bond recovery and net securities
transactions, total other income in 1995
increased $424 thousand, or 4.7%, above the 1994
level. As adjusted, the ratio of total other
income to average assets was 1.22% for both
years.
Fees for other services to customers amounted to
$4.7 million in 1995, compared to $4.3 million in
1994, a 7.5% increase. The increase was
primarily attributable to increases in service
charges on deposit accounts and credit card
merchant processing income.
Other operating income in 1995 was virtually
unchanged from 1994.
IV. OTHER EXPENSE
Other (i.e., noninterest) expense is a means of
measuring the delivery cost of services, products
and business activities of the Company. The key
components of other expense are presented in the
following table.
ANALYSIS OF OTHER EXPENSE
(Dollars In Thousands)
Change
December 31, Amount Percent
1996 1995 1994 1996 1995 1996 1995
Salaries and Benefits $14,971 $16,710 $16,204 $(1,739) $ 506 (10.4)% 3.1 %
Net Occupancy Expense 1,790 2,040 2,168 (250) (128) (12.3) (5.9)
Furniture and Equipment 1,677 1,930 2,076 (253) (146) (13.1) (7.0)
Other Operating Expense 6,336 9,089 10,926 (2,753) (1,837) (30.3) (16.8)
Total Other Expense $24,774 $29,769 $31,374$ (4,995) $(1,605) (16.8) (5.1)
Other expense for 1996 was $24.8 million, a
decrease of $5.0 million, or 16.8%, from 1995.
All four major categories of other expense
decreased as a result of the divestiture of the
Vermont banking operations.
Salaries and benefits for 1996 was $15.0 million,
a decrease of $1.7 million, or 10.4%, from 1995.
Net occupancy expense and furniture and equipment
expense both decreased approximately $250
thousand from 1995, or 12.3% and 13.1%,
respectively.
`
Other operating expense for 1996 was $6.3
million, a decrease of $2.8 million, or 30.3%,
from 1995. In addition to the savings resulting
from the divestiture of the Vermont operations,
the Company experienced decreased costs for FDIC
insurance premiums, legal expenses, expenses
related to problem loans and in costs to maintain
and dispose of OREO. In mid-1995, the FDIC
reduced the insurance premiums for well-
capitalized banks, such as the Company's
subsidiary banks, from 23 cents per $100 of
insured deposits to a flat fee of two thousand
dollars per year.
Other expense for 1995 amounted to $29.8 million,
which compared to $31.4 million for 1994, a
decrease of $1.6 million, or 5.1%. An increase
in salaries and benefits in 1995 was more than
offset by reduced expenses for net occupancy
expense, furniture and equipment expense and
other operating expenses.
Total salaries of $11.1 million for 1995
decreased $284 thousand from the 1994 level. The
effect of fewer employees was only partially
offset by general salary increases. Between 1994
and 1995, employee benefits increased by $790
thousand, of which $652 thousand represented
severance costs incurred the latter year.
Otherwise, a slight decrease in payroll taxes was
offset by increased expenses for pension plans
and health insurance.
From 1995 to 1994, net occupancy expense and
furniture and equipment expense decreased by
$128 thousand and $146 thousand, respectively.
The decreases were primarily attributable to
reduced depreciation expenses.
Other operating expense was $9.1 million for
1995, a decrease of $1.8 million, or 16.8%, from
1994. The decrease was primarily attributable to
a reduction in FDIC and other insurance premiums,
as well as to a large reduction in losses on the
sale of OREO.
V. INCOME TAXES
The following table sets forth the Company's
income tax expense and effective tax rates for
the periods presented herein.
INCOME TAXES AND EFFECTIVE RATES
(Dollars in Thousands) Years Ended December 31,
1996 1995 1994
Provision for Income Taxes $10,822 $6,986 $1,131
Effective Tax Rate 34.8% 36.0% 9.1%
The provisions for federal and state income taxes
amounted to $10.8 million, $7.0 million and $1.1
million for 1996, 1995 and 1994, respectively.
The 1994 provision was relatively small as a
result of a net operating loss carryforward
tracing from 1991 and changes in the valuation
allowance for deferred tax assets. Eliminating
the effect of these two benefits in 1994, the
effective income tax rates for 1996, 1995 and 1994
were 34.8%, 36.0% and 38.1%, respectively. The
decrease in the effective tax rate in each of the
past two years primarily reflected a relative
increase in the Company's tax exempt loan and
securities portfolios.
C. FINANCIAL CONDITION
I. INVESTMENT PORTFOLIO
The Company adopted SFAS No. 115 "Accounting for
Certain Investments in Debt and Equity Securities"
at December 31, 1993. Under SFAS No. 115,
investment securities must be classified as held-
to-maturity, trading, or available-for-sale,
depending on the purposes for which such
securities were acquired or are being held.
Securities held-to-maturity are debt securities
that the Company has both the positive intent and
ability to hold to maturity; such securities are
stated at amortized cost. Debt and equity
securities that are bought and held principally
for the purpose of sale in the near term are
classified as trading securities and are reported
at fair value with unrealized gains and losses
included in earnings. Debt and equity securities
not classified as either held-to-maturity or
trading securities are classified as available-
for-sale and are reported at fair value with
unrealized gains and losses excluded from earnings
and reported net of taxes in a separate component
of shareholders' equity. At December 31, 1996,
the Company held no trading securities.
In November 1995, the FASB issued "A Guide to
Implementation of Statement 115 on Accounting for
Certain Investments in Debt and Equity
Securities." The Guide allowed a one-time
reclassification of held-to-maturity securities
before December 31, 1995. Acting under this
provision of the Guide, the Company reclassified
$118.2 million of held-to-maturity securities to
available-for-sale in December of 1995. The
Company took advantage of this one-time provision
as a means to improve liquidity and to gain some
additional flexibility in the management of the
Company's interest rate risk. See the following
sections D. on "Liquidity" and E. on "Interest
Rate Risk."
Securities Available-for-Sale:
The following table sets forth the book value of
the Company's securities available-for-sale
portfolio, at year-end 1996, 1995 and 1994.
SECURITIES AVAILABLE-FOR-SALE
(In Thousands) December 31,
1996 1995 1994
U.S. Treasury and Agency Obligations $ 95,733 $114,502 $49,063
State and Municipal Obligations --- 338 2,180
Collateralized Mortgage Obligations 42,894 44,173 475
Other Mortgage-Backed Securities 21,732 10,478 ---
Corporate and Other Debt Securities 9,184 7,300 ---
Mutual Funds and Equity Securities 2,200 1,854 2,150
Total $171,743 $178,645 $53,868
Other mortgage-backed securities principally
included agency mortgage pass-through
securities. Pass-through securities provide to
the investor monthly portions of principal and
interest pursuant to the contractual obligations
of the underlying mortgages. Collateralized
mortgage obligations ("CMO's") separate the
repayments into two or more components
(tranches), where each tranche has a separate
estimated life and yield. The Company's
practice is to purchase pass-through securities
guaranteed by federal agencies and tranches of
CMO's with shorter maturities.
Regulatory agencies have devised a high-risk
test for mortgage-backed securities. The test
evaluates the following: (I) Average Life Test -
the product has an average life of less than 10
years; (II) Average Life Sensitivity Test - an
immediate and sustained change in interest rates
of 300 basis points will not extend the expected
life by more than four years; and (III) Price
Sensitivity Test - an immediate and sustained
change in interest rates of 300 basis points
will not change the price by more than 17%. The
Company evaluates each mortgage-backed security
at the time of purchase and quarterly
thereafter. Although none of the Company's
investments have failed to pass the high-risk
test subsequent to acquisition, it is the
Company's policy to analyze the appropriateness
of divesting high-risk securities.
Included in corporate and other debt securities
are highly rated corporate bonds.
The following table sets forth the maturities of
the Company's securities available-for-sale
portfolio as of December 31, 1996. CMO's are
included in the table based on their expected
average life and other mortgage-backed securities
by final maturity date.
MATURITIES OF SECURITIES AVAILABLE-FOR-SALE
(In Thousands) After After
Within 1 But 5 But After
One Within Within 10
Year 5 Years 10 Years Years Total
U.S. Treasury and
Agency Obligations $34,141 $ 50,767 $10,825 $ -- $ 95,733
Collateralized Mortgage
Obligations 1,536 32,230 8,110 1,018 42,894
Other Mortgage-Backed
Securities 335 4,195 1,581 15,621 21,732
Corporate and
Other Debt Securities 1,010 8,174 --- -- 9,184
Mutual Funds and
Equity Securities --- --- --- 2,200 2,200
Total $37,022 $ 95,366 $20,516 $18,839 $171,743
The following table sets forth the tax-equivalent
yields of the Company's securities available-for-sale portfolio
at December 31, 1996.
YIELDS ON SECURITIES AVAILABLE-FOR-SALE
(Fully Tax-Equivalent Basis) After After
Within 1 But 5 But After
One Within Within 10
Year 5 Years 10 Years Years Total
U.S. Treasury and
Agency Obligations 6.68% 6.36% 6.83% --% 6.53%
Collateralized Mortgage
Obligations 9.82 6.71 6.48 7.48 6.79
Other Mortgage-Backed
Securities 5.33 7.00 7.14 7.00 6.98
Corporate and
Other Debt Securities 7.01 7.30 -- -- 7.26
Mutual Funds and
Equity Securities -- -- -- 6.60 6.60
Total 6.80 6.58 6.72 6.98 6.69
The yields for debt securities shown in the table
above are calculated by dividing annual interest,
including accretion of discounts and amortization
of premiums, by the carrying value of the
securities at December 31, 1996. Yields on
obligations of states and municipalities were
computed on a fully tax-equivalent basis using a
marginal tax rate of 35%. Dividend earnings
derived from equity securities were adjusted to
reflect applicable federal income tax exclusions.
During 1996 the Company recognized net losses of
$101 thousand on the sale of $51.1 million from
securities within the available-for-sale
portfolio. Proceeds from sales early in the
year were used to provide funds in completing the
branch sale to Mascoma Savings Bank, a
transaction in which the deposit liabilities
assumed by the purchaser substantially exceeded
the purchase price of the loans and other assets
acquired and the deposit premium. Other sales of
securities from the available-for-sale portfolio
were used to extend the maturity dates and
increase the yield on the portfolio.
During the last quarter of 1995, the Company
recognized net gains of $23 thousand on sales of
$4.2 million from the available-for-sale
portfolio. The proceeds were used to fund the
deposits transferred with the sale of eight
branches of Green Mountain Bank to Mascoma
Savings Bank in January 1996.
At December 31, 1996 and 1995, the weighted
average maturity was 2.71 and 2.03 years,
respectively, for debt securities in the
available-for-sale portfolio.
During the last quarter of 1994, the Company
recognized net losses of $481 thousand on sales
of $16.5 million from the available-for-sale
portfolio. The proceeds were reinvested in
higher yielding securities.
At December 31, 1996, unrealized gains on
securities available-for-sale amounted to $208
thousand, net of tax. Unrealized gains or
losses, net of tax, are reflected as a separate
component of shareholders' equity.
Securities Held-to-Maturity:
The following table sets forth the book value of
the Company's portfolio of securities held-to-
maturity for each of the last three years.
Year-end amounts and data in the following tables
do not include the securities available-for-sale
portfolio discussed previously. The substantial
reduction in the held-to-maturity portfolio
between year-end 1994 and year-end 1995 reflects
the one-time reclassification in November 1995
discussed previously in the introduction to the
investment portfolio discussion.
SECURITIES HELD-TO-MATURITY
(In Thousands) December 31,
1996 1995 1994
U.S. Treasury and Agency Obligations $ --- $ --- $ 61,390
State and Municipal Obligations 19,765 13,921 10,409
Other Mortgage-Backed Securities 11,111 --- 51,904
Other Securities --- --- 6,032
Total $30,876 $13,921 $129,735
For information regarding the fair value of the
Company's portfolio of securities held-to-maturity,
see Note 3 to the Consolidated
Financial Statements in Part II, Item 8 of this
report.
The following table sets forth the maturities of
the Company's portfolio of securities held-to-
maturity, as of December 31, 1996. Other
mortgage-backed securities are allocated to
maturity periods based on final maturity date.
MATURITIES OF SECURITIES HELD-TO-MATURITY
(In Thousands)
After After
Within 1 But 5 But After
One Within Within 10
Year 5 Years 10 Years Years Total
State and Municipal Obligations $1,888 $2,784 $5,417 $ 9,676 $19,765
Other Mortgage-Backed Securities --- --- --- 11,111 11,111
Total Securities Held-to-
Maturity $1,888 $2,784 $5,417 $20,787 $30,876
The following table sets forth the tax-equivalent
yields of the Company's portfolio of securities
held-to-maturity at December 31, 1996.
YIELDS ON SECURITIES HELD-TO-MATURITY
(Fully Tax-Equivalent Basis)
After After
Within 1 But 5 But After
One Within Within 10
Year 5 Years 10 Years Years Total
State and Municipal Obligations 7.07% 8.18% 7.93% 7.97% 7.90%
Other Mortgage-Backed Securities --- --- --- 7.13 7.13
Total Securities Held-to-
Maturity 7.07 8.18 7.93 7.53 7.63
The yields for debt securities shown in the
tables above are calculated by dividing annual
interest, including accretion of discounts and
amortization of premiums, by the carrying value
of the securities at December 31, 1996. Yields
on obligations of states and municipalities were
computed on a fully tax-equivalent basis using a
marginal tax rate of 35%.
During 1996 and 1995, the Company sold no
securities from the held-to-maturity portfolio.
The weighted-average maturity of the held-to-
maturity portfolio was 7.5 years and 8.8 years at
December 31, 1996 and 1995, respectively.
II. LOAN PORTFOLIO
The amounts and respective percentages of loans
and leases outstanding represented by each
principal category on the dates indicated were as
follows:
a. DISTRIBUTION OF LOANS AND LEASES
(Dollars In Thousands) December 31,
1996 1995 1994 1993 1992
Amount % Amount % Amount % Amount % Amount %
Commercial, Financial
and Agricultural $ 48,372 12 $ 79,993 15 $ 74,455 15 $ 82,317 16 $ 85,428 17
Real Estate - Commercial 36,302 9 71,622 14 81,704 16 95,981 19 110,702 22
Real Estate - Construction 971 1 2,051 1 5,136 1 8,702 2 12,167 2
Real Estate - Residential 168,429 43 238,298 46 230,943 45 221,066 44 198,165 40
Installment Loans to
Individuals 139,395 35 125,762 24 115,291 23 94,656 19 86,323 19
Lease Financing
Receivables 42 -- 61 -- 24 -- 62 -- 131 --
Total Loans and Leases 393,511 100 517,787 100 507,553 100 502,784 100 492,916 100
Allowance for Loan Losses (5,581) (12,106) (12,338) (16,078) (17,328)
Total Loans and Leases,
Net $387,930 $505,681 $495,215 $486,706 $475,588
During 1996, the Company transferred
substantially all of the loans in its Vermont
banking operation in two branch sale
transactions, to Mascoma Savings Bank in January
1996 and to ALBANK in September 1996. The Vermont
loan portfolio had a higher percentage of
commercial loans than the loan portfolios of the
Company's New York banks. Consequently, the
divestiture of the Vermont banking operations is
largely responsible for the shift in the mix of
the loan portfolio from commercial to consumer
loans between year-end 1995 and year-end 1996.
Also, the Company concentrated its lending
efforts in 1996, in the area of residential real
estate loans and installment loans to individuals
(primarily automobile loans).
Within the installment loan portfolio, the
Company has focused on growth in its indirect
lending program. Indirect loans are vehicle
acquisition loans to consumers financed through
local dealerships where, by prior arrangement,
the Company acquires the dealer paper. At year-
end 1992, indirect loans amounted to $42.1
million or 49% of installment loans. By
December 31, 1996, indirect loans amounted to
$107.2 million, or 77% of installment loans.
While the yields on the consumer portfolios
(other than credit card loans) typically are
lower than on the commercial portfolios, the
Company has historically experienced fewer loan
losses in consumer loans than commercial loans,
in proportion to outstanding average loan
balances.
Since 1990, the Company has concentrated its
lending efforts in the area of residential real
estate loans and installment loans to
individuals, while de-emphasizing commercial and
commercial real estate loans. Consequently, each
of the years preceding 1996, both the dollar
amount of loans for commercial and commercial
real estate loans and the percentage of such
loans to total loans decreased from the prior
year, while residential real estate and
installment loans to individuals increased each
year since 1990, both in dollar amount and in
percentage to total loans.
The following table indicates the changing mix in
the Company's New York loan portfolio by
presenting the quarterly average balance for the
Company's significant loan products for the past
five quarters. In addition, the table presents
the percentage of total loans represented by each
category as well as the annualized tax-equivalent
yield.
NEW YORK LOAN PORTFOLIO
Quarterly Average Loan Balances
(Dollars In Thousands)
Quarter Ending
Dec 1996 Sep 1996 Jun 1996 Mar 1996 Dec 1995
Commercial and
Commercial Real Estate $ 84,059 $ 84,789 $ 87,304 $ 87,073 $ 87,388
Residential Real Estate 125,897 123,884 122,858 120,010 119,157
Home Equity 29,863 29,109 28,804 29,226 29,364
Indirect Consumer Loans 105,227 99,059 92,757 82,446 78,823
Direct Consumer Loans 32,013 30,634 31,627 31,555 30,022
Credit Card Loans 8,514 8,733 8,967 9,310 9,413
Total Loans $385,573 $376,208 $372,317 $359,620 $354,167
Percentage of Total
Quarterly Average Loans
Commercial and
Commercial Real Estate 21.8% 22.6% 23.5% 24.2% 24.7%
Residential Real Estate 32.7 32.9 33.0 33.4 33.6
Home Equity 7.7 7.7 7.7 8.1 8.3
Indirect Consumer Loans 27.3 26.4 24.9 22.9 22.2
Direct Consumer Loans 8.3 8.1 8.5 8.8 8.5
Credit Card Loans 2.2 2.3 2.4 2.6 2.7
Total Loans 100.0% 100.0% 100.0% 100.0% 100.0%
Quarterly Taxable Equivalent
Yield on Loans
Commercial and
Commercial Real Estate 9.36% 9.76% 9.22% 9.98% 10.07%
Residential Real Estate 8.30 8.26 8.42 8.55 8.47
Home Equity 9.08 9.10 9.03 9.40 9.76
Indirect Consumer Loans 8.35 8.43 8.52 8.62 8.56
Direct Consumer Loans 10.73 9.45 9.44 9.43 9.90
Credit Card Loans 16.46 16.66 16.55 16.45 15.64
Total Loans 8.99 9.00 9.12 9.26 9.30
The following table indicates the respective
maturities and repricing structure of the
Company's commercial, financial and agricultural
loans and its real estate - construction loans at
December 31, 1996. For purposes of determining
relevant maturities, loans are assumed to mature
at (but not before) their scheduled repayment
dates as required by contractual terms. Demand
loans and overdrafts are included in the "Within
1 Year" maturity category.
MATURITY AND REPRICING OF COMMERCIAL LOANS
(In Thousands) After 1 After
WithinBut Within Five
1 Year 5 Years Years Total
Commercial, Financial and Agricultural $24,559 $16,395 $ 7,418 $48,372
Real Estate - Construction 340 74 557 971
Total $24,899 $16,469 $ 7,975 $49,343
Fixed Interest Rates $ 2,963 $ 8,678 $ 6,669 $18,310
Variable Interest Rates 21,936 7,791 1,306 31,033
Total $24,899 $16,469 $ 7,975 $49,343
COMMITMENTS AND LINES OF CREDIT
Letters of credit represent extensions of credit
granted in the normal course of business which
are not reflected in the accompanying
consolidated financial statements because they
are not yet funded. As of December 31, 1996, the
total contingent liability for standby letters of
credit amounted to $1.2 million. In addition to
these instruments, the Banks have issued lines of
credit to customers, including home equity lines
of credit, credit card lines of credit,
commitments for residential and commercial
construction and other personal and commercial
lines of credit, which also may be unfunded or
only partially funded from time to time.
Commercial lines, generally issued for a period
of one year, are usually extended to provide for
the working capital requirements of the borrower.
At December 31, 1996, the Banks had outstanding
loan unfunded commitments in the aggregate amount
of approximately $60.9 million.
b. RISK ELEMENTS
NONACCRUAL, PAST DUE AND RESTRUCTURED LOANS
The Company designates loans as impaired when the
payment of interest and/or principal is due and
unpaid for a designated period (generally 90
days) or when the likelihood of the full
repayment of principal and interest is, in the
opinion of management, uncertain. Loans are
written off against the allowance for loan losses
for amounts in excess of the fair value of
collateral less estimated costs to sell upon
reaching 120 days delinquent. There were no
material commitments to lend additional funds on
outstanding impaired loans at December 31, 1996.
Loans and leases past due 90 days or more and
still accruing interest, as identified in the
following table, are those loans and leases which
were contractually past due 90 days or more but
because of expected repayments were still
accruing interest.
For years prior to 1995, loans were classified as
"restructured" in accordance with SFAS No. 15,
"Accounting by Debtors and Creditors for Troubled
Debt Restructurings."
On January 1, 1995, the Company adopted Statement
of Financial Accounting Standards (SFAS) No. 114,
"Accounting by Creditors for Impairment of a
Loan." SFAS No. 114, as amended, requires that
impaired loans, except for large groups of
smaller-balance homogeneous loans, be measured
based on (I) the present value of expected future
cash flows discounted at the loan's effective
interest rate, (II) the loan's observable market
price or (III) the fair value of the collateral
if the loan is collateral dependent. The Company
applies the provisions of SFAS No. 114 to all
impaired commercial and commercial real estate
loans over $250,000, and to all loans
restructured subsequent to adoption. Reserves
for losses for the remaining smaller-balance
loans are evaluated under SFAS No. 5. Under the
provisions of SFAS No. 114, the Company
determines impairment for collateralized loans
based on fair value of the collateral less
estimated cost to sell. For other loans,
impairment is determined by comparing the
recorded value of the loan to the present value
of the expected cash flows, discounted at the
loan's effective interest rate. The Company
determines the interest income recognition method
on a loan by loan basis. Based upon the
borrowers' payment histories and cash flow
projections, interest recognition methods include
full accrual, cash basis and cost recovery.
Loans accounted for under SFAS No. 114 may be
reported as either nonaccrual, restructured or
performing. Those loans recognizing interest
income on a cash or cost recovery basis are
reported as nonaccrual. Loans restructured under
SFAS No. 15 are reported as restructured if the
loan is in compliance with the modified terms.
Under SFAS No. 15, as amended, loans bearing a
market rate at the time of restructure and in
compliance with modified terms are not subject to
the disclosure requirements of SFAS No. 114 in
years subsequent to the year of restructure, and
thus would be included in performing loans.
The Company's nonaccrual, past due and
restructured loans and leases were as follows:
SCHEDULE OF NONPERFORMING LOANS
(Dollars In Thousands) December 31,
1996 1995 1994 1993 1992
Nonaccrual Loans:
Construction and Land Development $ --- $ 104 $ 327 $ 2,534 $ 6,149
Commercial Real Estate 83 1,299 1,050 2,649 7,986
Commercial Loans 1,487 1,979 1,017 2,596 4,168
Other 727 862 1,224 2,082 3,171
Total Nonaccrual Loans 2,297 4,244 3,618 9,861 21,474
Loans Past Due 90 Days or More
and Still Accruing Interest 321 111 231 364 1,486
Restructured Loans in Compliance
with Modified Terms --- --- 580 2,405 1,161
Total Nonperforming Loans $2,618 $4,355 $4,429 $12,630 $24,121
Total Nonperforming Loans
as a Percentage of Total Loans .67% .84% .87% 2.51% 4.89%
The following table presents additional
disclosures required by SFAS No. 114 and by the
Securities and Exchange Commission's Industry
Guide 3 relating to impaired loans accounted for
under SFAS No. 114. All loans reported in the
schedule below are included in nonaccrual loans
in the schedule of nonperforming loans above.
The reserves for loans accounted for under SFAS
No. 114 in the schedule below are a component of
the allowance for loan losses discussed earlier
in this report under Item 7.B.II., "Provision for
Loan Losses and Allowance for Loan Losses."
SCHEDULE OF IMPAIRED LOANS ACCOUNTED FOR UNDER SFAS NO. 114
(In Thousands)
December 31, 1996
Recorded Allowance for Carrying
Investment Loan Losses Amount
Measured at the Present Value
of Expected Cash Flows:
Commercial Loans $1,301 $ 195 $1,106
December 31, 1995
Recorded Allowance for Carrying
Investment Loan Losses Amount
Measured at the Present Value
of Expected Cash Flows:
Commercial Loans $1,405 $ 211 $1,194
Measured at the Fair Value
of Collateral:
Commercial Real Estate 258 129 129
Other 444 --- 444
Total $2,107 $ 340 $1,767
At December 31, 1996, nonaccrual loans amounted
to $2.3 million. Nearly all of the nonaccrual
loans in the Vermont portfolio were transferred
in the 1996 branch sales. The New York based
nonaccrual loans at December 31, 1996 were
virtually unchanged from the level at the prior
year-end. Over one-half of the nonaccrual
balances at December 31, 1996 was attributable to
one borrower whose loan was restructured in 1996.
Payments on that loan were current in accordance
with the restructured terms as of December 31,
1996 and all payments in 1996 were used to reduce
the carrying amount of the loan.
During 1996, income recognized on year-end
balances of nonaccrual loans was $48 thousand.
Income that would have been recognized during
that period on nonaccrual loans if such had been
current in accordance with their original terms
and had been outstanding throughout the period
(or since origination if held for part of the
period) was $232 thousand.
Nonperforming loans amounted to $4.4 million at
December 31, 1995, $74 thousand below the
balance at year-end 1994. The increase in
nonaccrual commercial loans between year-end 1994
and 1995 was primarily attributable to the
aggregate borrowing of one commercial borrower,
which was placed on nonaccrual status during
1995. Otherwise, nonaccrual loans at December
31, 1995 would have decreased from the prior
year-end balance. All loans reported as
restructured and in compliance with modified
terms at December 31, 1994 were still in
compliance with modified terms at year-end 1995
and thus classified as performing at that date.
During 1995, income recognized on year-end
balances of nonaccrual loans was $116 thousand.
Income that would have been recognized during
that period on nonaccrual loans if such had been
current in accordance with their original terms
and had been outstanding throughout the period
(or since origination if held for part of the
period) was $435 thousand.
Nonperforming loans amounted to $4.4 million at
December 31, 1994, a decrease of $8.2 million or
64.9% from the prior year-end. Of the $12.6
million in nonperforming loans at December 31,
1993, $2.5 million was transferred to OREO in
1994, $2.4 million of loans reported as
restructured at year-end 1993 was returned to
performing status in 1994 in accordance with SFAS
No. 15, and another $3.5 million was charged,
during 1994, against the allowance for loan
losses. The small remaining difference
represented the improvement in nonaccrual loans,
net of loans newly classified as nonperforming.
During 1993, nonperforming loans decreased $11.5
million, or 47.6%. During the year $7.8 million
of nonaccrual loans and leases was acquired
through foreclosure and transferred to OREO.
Much of the $3.1 million of loan charge-offs
during the year was also attributable to prior
year-end nonaccrual loans. The remaining
difference represented a net improvement in the
amount of nonaccrual loans and included the
return to performing status of certain nonaccrual
loans. The balance of $2.4 million of
restructured loans in compliance with modified
terms as of December 31, 1993 represented three
commercial loans restructured during the year.
POTENTIAL PROBLEM LOANS
While levels of nonperforming loans and
delinquency trends have generally fallen since
1991, the Company expects that there will be
continued exposure in the commercial real estate
portfolio in forthcoming periods and until the
regional economy shows substantial strengthening.
FOREIGN OUTSTANDINGS - None
LOAN CONCENTRATIONS
The loan portfolio is well diversified. There
are no concentrations of credit that exceed 10%
of the portfolio, other than the general
categories reported in the previous section of
this report. For a further discussion, see Note
19 to the Consolidated Financial Statements in
Part II, Item 8 of this report.
OTHER REAL ESTATE OWNED
Other real estate owned (OREO) consists of real
property acquired in foreclosure. OREO is
carried at the lower of fair value less estimated
cost to sell or cost in accordance with Statement
of Position (SOP) 92-3 "Accounting for Foreclosed
Assets." Also, in compliance with SOP 92-3, the
Company's subsidiary banks have established
allowances for OREO losses. The allowances are
established and monitored on a property by
property basis and reflect management's ongoing
estimate of the difference between the property's
carrying amount and cost, when the carrying
amount is less than cost. For all periods, all
OREO was held for sale.
DISTRIBUTION OF OTHER REAL ESTATE OWNED
(Net of Allowance) (In Thousands) December 31,
1996 1995 1994 1993 1992
Single Family 1 - 4 Units $ --- $ 82 $1,073 $1,189 $ 892
Commercial Real Estate 86 2,328 2,128 3,418 1,536
Construction & Land Development 50 --- 195 2,899 3,120
Other Real Estate Owned, Net $ 136 $2,410 $3,396 $7,506 $5,548
The following table summarizes changes in the
net carrying amount of other real estate owned
at December 31 for each of the periods
presented.
SCHEDULE OF CHANGES IN OTHER REAL ESTATE OWNED
(Net of Allowance) (In Thousands)
1996 1995 1994 1993 1992
Balance at Beginning of Year $2,410 $ 3,396 $ 7,506 $ 5,548 $ 6,145
Properties Acquired Through Foreclosure 302 642 2,493 7,804 6,446
Adjustment for Change in Fair Value (85) (161) (398) (638) (1,160)
Sale (2,491) (1,467) (6,205) (5,208) (5,883)
Balance at End of Year $ 136 $ 2,410 $ 3,396 $ 7,506 $ 5,548
The following is a summary of changes in the
allowance for OREO losses:
ALLOWANCE FOR OTHER REAL ESTATE OWNED LOSSES
(In Thousands) 1996 1995 1994 1993 1992
Balance at Beginning of Year $ 370 $ 369 $ 1,150 $1,120 $ --
Additions 85 161 398 638 1,160
Charge-Offs (347) (160) (1,179) (608) (40)
Balance at End of Year $ 108 $ 370 $ 369 $1,150 $1,120
During 1996, the Company acquired five properties
totaling $302 thousand through foreclosure. Also
during the year, the Company recognized losses of
$330 thousand on the sale of OREO properties with
a carrying amount of $2.5 million, including OREO
disposed of in the Vermont branch sale
transactions described under "Overview", earlier
in this report, and reduced the carrying amount
of the two properties remaining in OREO at
December 31, 1996 by $85 thousand.
During 1995, the Company acquired $642 thousand
of OREO through foreclosure. The Company
recognized losses of $48 thousand on the sale of
OREO properties carried on the books at $1.5
million.
During 1994, the Company acquired $2.5 million of
OREO through foreclosure. The Company recognized
losses of $1.4 million on the sale of OREO
properties carried on the books at $6.2 million.
Approximately 65% of the sales took place at an
auction of OREO properties held during the second
quarter of 1994.
During 1993, the Company acquired $7.8 million in
OREO through foreclosure, of which $3.6 million
was formerly classified as in-substance
foreclosed property. The Company's net increase
in OREO during the year of $2.0 million was
primarily attributable to commercial real estate
properties, in OREO, which increased by more than
$2.0 million during the period, whereas
construction and land development properties held
in OREO decreased $221 thousand during 1993. For
the year, the Company recognized net gains of
$366 thousand on the sale of $5.2 million of OREO
properties. These net gains partially offset the
$638 thousand provision for estimated OREO losses
taken during the year.
During 1992, the Company acquired $6.4 million in
OREO through foreclosure. The provision for
estimated OREO losses of $1.2 million in 1992
reflects the SOP 92-3 adjustment for estimated
selling costs as well as adjustments for declines
in fair value. During the year, the Company
disposed of $5.9 million of OREO properties, upon
which the Company recognized net gains of $257
thousand.
III. SUMMARY OF LOAN LOSS EXPERIENCE
The Company monitors credit quality through a
continuous review of the entire loan portfolio.
All significant loans (primarily commercial and
commercial real estate) and leases are reviewed
at least semi-annually, and those under special
supervision are reviewed at least quarterly. The
boards of directors of the Company's subsidiary
banks, upon recommendations from management,
determine the extent of charge-offs and have the
final decision-making responsibility in
authorizing charge-offs. Additionally,
regulatory examiners perform periodic
examinations of the banks' loan and lease
portfolios and report on these examinations to
the boards of directors.
Provisions for loan losses are determined by the
managements of the subsidiary banks, and are
based upon an overall evaluation of the
appropriate levels of the allowances for loan
losses. Factors incorporated in such
determination include the existing risk
characteristics of the portfolio, prevailing
national and local economic conditions,
historical loss experience and expected
performance within a range of anticipated future
economic conditions. The Company's management
believes that the banks' allowances for loan
losses are adequate to absorb reasonably
foreseeable loan losses.
The table in Part II, Item 7.B.II. "Provision for
Loan Losses and Allowance for Loan Losses"
presents a summary of the activity in the
Company's allowance for loan losses.
ALLOCATION OF THE ALLOWANCE FOR LOAN AND LEASE
LOSSES
The allowance for loan losses is a general
allowance applicable to estimated future losses.
For internal operating purposes, the allowance is
not allocated among loan categories.
In the following table, the allowance has been
allocated solely for purposes of complying with
disclosure requirements of the Securities and
Exchange Commission. However, this allocation
should not be interpreted as a projection of (I)
likely sources of future losses, (II) likely
proportional distribution of future losses among
loan categories or (III) likely amounts of future
losses. Since management regards the allowance
as a general balance and has assigned an
unallocated value to the schedule, the amounts
presented do not represent the total balance
available to absorb future losses that might
occur within the principal categories.
Subject to the qualifications noted above, an
allocation of the allowance for loan losses by
principal classification and the proportion of
the related loan balance is presented below as of
December 31 for each of the years indicated.
ALLOCATION OF THE ALLOWANCE FOR LOAN AND LEASE LOSSES
(Dollars in Thousands)
1996 1995 1994 1993 1992
Commercial, Financial
and Agricultural $1,946 $ 2,913 $ 2,329 $ 3,908 $ 5,518
Real Estate-Commercial 353 1,755 1,841 3,324 3,626
Real Estate-Construction 49 305 1,994 2,027 2,525
Real Estate-Residential
Mortgage 890 1,616 2,098 1,893 1,803
Installment Loans to
Individuals 1,959 2,365 1,363 2,032 1,770
Lease Financing Receivables -- -- -- -- 15
Unallocated 384 3,152 2,713 2,894 2,071
Total Loans and Leases $5,581 $12,106 $12,338 $16,078 $17,328
PERCENT OF LOANS IN EACH
CATEGORY TO TOTAL LOANS
Commercial, Financial
and Agricultural 12% 15% 15% 16% 17%
Real Estate-Commercial 9 14 16 19 22
Real Estate-Construction 1 1 1 2 2
Real Estate-Residential
Mortgage 43 46 45 44 40
Installment Loans to
Individuals 35 24 23 19 19
Lease Financing Receivables -- -- -- -- --
Total Loans and Leases 100% 100% 100% 100% 100%
At December 31, 1996, the allocated reserve for
each indicated classification of loans exceeded
100% of the dollar amount of loans in such
classification that were then reported as
nonperforming.
IV. DEPOSITS
The following table sets forth the average
balances of and average rates paid on deposits for
the periods indicated.
AVERAGE DEPOSIT BALANCES
Years Ended December 31,
(Dollars In Thousands)
1996 1995 1994
Average Average Average
Balance Rate Balance Rate Balance Rate
Demand Deposits $ 77,479 --% $ 88,961 --% $ 87,715 --%
N.O.W./Super N.O.W. 131,438 2.88 139,879 2.84 129,999 1.92
Savings/M.M.D.A. 157,892 2.92 201,932 3.06 260,336 2.79
Time Certificates
of $100,000 or More 79,996 5.25 67,029 5.61 26,980 4.30
Other Time Deposits 156,236 5.33 185,166 5.34 160,035 4.03
Total Deposits $603,041 3.47 $682,967 3.49 $665,065 2.61
During 1996, average deposits of $85.4 million
were attributable to the Vermont banking
operations. All Vermont deposits were
transferred during the year in connection with
the branch sales to Mascoma Savings Bank in
January 1996 and ALBANK in September 1996. The
following table presents the quarterly average
balance by deposit type and the percentage of
total deposits represented by each deposit type
for each of the most recent five quarters for the
Company's New York banks exclusively, i.e.
deposits of the Vermont operations have been
eliminated from the presentation.
NEW YORK DEPOSIT PORTFOLIO
Quarterly Average Deposit Balances
(Dollars In Thousands)
Quarter Ending
Dec 1996 Sep 1996 Jun 1996 Mar 1996 Dec 1995
Demand Deposits $ 67,240 $ 69,216 $ 66,299 $ 63,156 $ 66,437
N.O.W/Super N.O.W 125,559 111,052 104,768 99,004 103,881
Savings and Money Market 133,974 137,768 142,916 145,094 142,582
Time Deposits of $100,000
or More 80,462 84,707 78,063 66,755 67,141
Other Time Deposits 133,041 127,933 120,397 117,682 116,703
Total Deposits $540,276 $530,676 $512,443 $491,691 $496,744
Percentage of Total
Quarterly Average Deposits
Demand Deposits 12.4% 13.0% 12.9% 12.8% 13.4%
N.O.W/Super N.O.W 23.3 20.9 20.4 20.1 20.9
Savings and Money Market 24.7 26.0 27.9 29.5 28.7
Time Deposits of $100,000
or More 14.9 16.0 15.2 13.7 13.5
Other Time Deposits 24.7 24.1 23.6 23.9 23.5
Total Deposits 100.0% 100.0% 100.0% 100.0% 100.0%
During 1996, the Company experienced nominal
shifts in the mix of deposit products as
decreases in the percentage of demand, savings
and money market savings accounts to total
deposits were offset by increases in the
percentage of N.O.W. and time deposits accounts
to total deposits.
The Federal Reserve Board attempts to influence
prevailing federal funds and prime interest rates
by changing the Federal Reserve Bank discount
rate. Over the past two years, changes in the
discount rate have directly influenced federal
funds rates and prime rates, which in turn have
had an impact upon the Company's cost of funds.
The charts below, demonstrate the positive
correlation between changes in the federal
discount rate and changes in the Company's cost
of funds for its New York operations.
Quarterly Cost of New York Deposits
Quarter Ending
Dec 1996 Sep 1996 Jun 1996 Mar 1996 Dec 1995
N.O.W/Super N.O.W 3.04% 2.86% 2.69% 2.58% 2.87%
Savings and Money Market 2.93 2.92 2.92 3.00 3.08
Time Deposits of $100,000
or More 5.21 5.25 5.15 5.37 5.59
Other Time Deposits 5.34 5.23 5.23 5.49 5.64
Total Deposits 3.52 3.45 3.38 3.45 3.57
Federal Reserve Bank Discount Rate Changes 1992 - 1996
Date New Rate Old Rate
January 31, 1996 5.00% 5.25%
February 1, 1995 5.25 4.75
November 15, 1994 4.75 4.00
August 16, 1994 4.00 3.50
May 17, 1994 3.50 3.00
July 2, 1992 3.00 3.50
The increase in the discount rate on February 1,
1995 marked the last in a series of interest rate
increases by the Federal Reserve Board beginning
in May of 1994. After February 1, 1995, rates
held steady for twelve months until the Reserve
Board lowered rates by twenty five basis points
on January 31, 1996. The Company's cost of
funds rose throughout 1994 and into 1995 as a
result of these changes. Correspondingly, the
cost of deposits reached a plateau for the last
two quarters of 1995, and as a result of the
January 31, 1996 decrease in the federal discount
rate, the cost of interest-bearing deposits
decreased twelve basis points in the first
quarter of 1996, and decreased an additional
seven basis points for the second quarter of
1996. The cost of funds for the last two
quarters of 1996, however, increased 7 basis
points in each quarter as the Company responded
to competitive pricing for NOW accounts, large
municipal time deposit accounts and other time
deposits. The average cost of funds for savings
and money market accounts in the last two
quarters of the year remained substantially
unchanged from the second quarter average.
V. TIME CERTIFICATES OF $100,000 OR MORE
The maturities of time certificates of $100,000 or more at December 31, 1996 are presented
below. (In Thousands)
Maturing in:
Under Three Months $60,922
Three to Six Months 12,583
Six to Twelve Months 6,256
1998 1,546
1999 428
2000 1,463
2001 604
Total $83,802
D. LIQUIDITY
The objective of liquidity management is to
satisfy cash flow requirements, principally the
needs of depositors and borrowers to access
funds. Liquidity is provided through assumption
or "purchase" of liabilities, the maturity of
asset balances and the sale of assets. Liability
liquidity arises primarily from the significant
base of "core" and other deposits gathered
through a branch network operating over a
dispersed geographical area. These "core"
balances consist of demand deposits, savings,
N.O.W. and money market savings account balances
and small denomination time deposits. Core
deposits are considered to be less volatile in
their movement into and out of financial
institutions, as compared to large denomination
time deposits, brokered time deposits and
repurchase agreements, which are perceived as
more sensitive to changes in interest rates than
core deposits. Historically, the Company has
sought to maintain a high ratio of core deposits
to total assets. At year-end 1996, core deposits
exceeded 70% of the Company's total assets and
shareholders' equity represented an additional
11.4% of total assets. Large denomination time
deposits, repurchase agreements and other
borrowed funds represented 16.3% of total assets
at December 31, 1996.
Federal funds sold are overnight sales of the
Company's surplus funds to correspondent banks,
while federal funds purchased represent overnight
borrowings. The Company's practice is to be a
net seller of federal funds on average, and to
avoid extended periods of purchasing federal
funds. During 1996, average federal funds sold
amounted to $12.2 million and federal funds
purchased averaged $1.1 million.
On December 31, 1993, the Company, upon adoption
of SFAS No. 115, segregated its investment
portfolio into securities available-for-sale and
those held-to-maturity. In November 1995, the
FASB issued "A Guide to Implementation of
Statement 115 on Accounting for Certain
Investments in Debt and Equity Securities." The
Guide allowed a one-time reclassification of
held-to-maturity securities before December 31,
1995. Acting under those provisions, in December
1995 the Company reclassified $118.2 million of
held-to-maturity securities into its available-
for-sale portfolio.
Apart from federal funds, securities available-
for-sale represent the Company's primary source
of liquidity. This liquidity arises both from an
ability to quickly sell the securities, as well
as from the ability to use the securities as
collateral for borrowing.
Other sources of funds include term federal funds
arrangements with correspondent banks and a
borrowing arrangement with the Federal Home Loan
Bank.
The Company experienced no liquidity pressures in
completing the sale transactions for its Vermont
banking operations in 1996.
The Company is not aware of any known trends,
events or uncertainties that will have or that
are reasonably likely to have a material effect
or make material demands on the Company's
liquidity, capital resources or results of
operations.
E. INTEREST RATE RISK
While managing liquidity, the Company must
monitor and control interest rate risk. Interest
rate risk is the exposure of the Company's net
interest income to changes in interest rates.
Interest rate risk is directly related to the
different maturities and repricing
characteristics of interest-bearing assets and
liabilities, as well as to prepayment risks for
mortgage-backed assets, early withdrawal of time
deposits, and the fact that the speed and
magnitude of responses to interest rate changes
varies by product. While many of the Company's
loan products are indexed to independent rates,
such as prime or treasury notes, the rates on
most deposit products are set by management
pricing committees.
The Company's primary short-term measure of
interest rate risk projects net interest income
for the ensuing twelve-month period based on the
maturity, prepayment assumption and repricing
characteristic of each individual interest-
bearing asset and liability under a variety of
interest rate projections. The Company obtains
interest rate projections from a third party
provider of economic data. These projections are
applied to existing interest sensitive assets and
liabilities and to expected new and rollover
amounts. As a base, the Company projects net
interest income for the ensuing twelve months for
the most likely projection and for a no-change
scenario. Exposure to rising or falling rates
are calculated to cover a high distribution of
the perceived probable interest rate scenarios.
At December 31, 1996, for purposes of projecting
net interest income over the ensuing year, the
Company assumed that short-term interest rates
would rise by fifty basis points over the
following year.
For a long-term measure of interest rate risk,
the Company measures the economic value of equity
for immediate and sustained changes in interest
rates. At December 31, 1996, the Company was
operating within established internal policy
limits for both the short-term and long-term
measures of interest rate risk.
The Company is able to reduce interest rate risk
by adjusting the mix of loan products as well as
the balance of fixed and variable rate products
within the various loan categories. To a lesser
extent, the Company manages interest rate risk
through selection of investments for the
securities portfolios. The Company does not, and
in the foreseeable future, will not use
derivative financial instruments to manage
interest rate risk.
The Company prepares an interest rate gap
analysis to identify the repricing pattern of
interest-bearing assets and liabilities. The
interest rate sensitive gap is the difference
between interest rate sensitive assets and
interest rate sensitive liabilities. The
interest rate sensitive gap ratio is the ratio of
interest rate sensitive assets to interest rate
sensitive liabilities. When the interest rate
sensitive gap ratio exceeds the balanced position
of 1.0, the Company is susceptible to falling
interest rates over the time horizon indicated,
as assets may reprice downward more rapidly than
liabilities. Conversely, the Company is
susceptible to rising rates when the gap ratio
for a particular time horizon falls below the
balanced position of 1.0.
While the static gap analysis will reveal
mismatches in the repricing patterns of assets
and liabilities, the dynamic modeling of
projected net interest income, as described
above, provides a much more reliable tool for
assessing the Company's net interest income
exposure to changes in interest rates.
The following table "Interest Rate Sensitive Gap
Analysis" presents the Company's interest rate
sensitive position at December 31, 1996. For
purposes of the table, an asset or liability is
considered rate sensitive within a specified
period when it matures or could be repriced
within such period in accordance with its
contractual terms except for certain deposit
balances without specific maturities. These
deposit balances have been allocated to various
time horizons in accordance with the Company's
internal projections on their likely repricing
behavior in the light of historical trends, since
these deposits are not apt to reprice to the full
extent of prime rate changes and reprice over a
period of time after changes to the prime rate.
Nearly all of the Company's time deposits are
fixed rate, and therefore, reprice upon maturity.
Money market deposit accounts are immediately
repriceable and often fluctuate with the
frequency of prime rate changes, but rarely to
the magnitude of changes in the prime rate.
N.O.W. accounts are also subject to immediate
rate changes, but again, rates tend to move more
slowly than prime rate changes and to a smaller
degree. Savings accounts, which remained stable
for an extended period of time after
deregulation, have been the least sensitive of
deposit balances to interest rate changes.
Certain other assets and liabilities lacking
specific maturities are classified in the "Over
Five Years" category. Nonaccrual loans and
overdrafts are excluded from the loan balances.
Securities available-for-sale are presented at
amortized cost.
Various assets and liabilities that reprice
before maturity demonstrate different repricing
patterns. Nearly three-fourths of the Company's
commercial loans are prime based, and
consequently, reprice immediately, or in some
cases monthly, upon changes in the prime rate.
The greater portion of variable rate residential
real estate loans reprice annually and are often
tied to an average short-term treasury rate, with
the repricing date lagging behind changes in the
indexed rate. Rates on credit card lines are
largely variable at management's discretion and
in general reprice more slowly than prime based
loans.
The cumulative gap ratio at December 31, 1996 was
.87 for both the ensuing cumulative six month and
twelve month repricing periods. These ratios were
within the range of ratios the Company seeks to
maintain.
INTEREST RATE SENSITIVE GAP ANALYSIS
(Dollars In Thousands) Within Three Six to One to Over
Three to Six Twelve Five Five
Months Months Months Years Years Total
Earning Assets:
Federal Funds Sold $ 17,925 $ --- $ --- $ --- $ --- $ 17,925
Securities Available-for-Sale 63,759 1,763 3,677 70,003 32,180 171,382
Securities Held-to-Maturity 609 516 1,513 5,783 22,455 30,876
Loans and Leases,
Net of Unearned
Income & Nonaccrual Loans 100,408 25,125 50,315 153,128 61,916 390,892
Total Interest Rate
Sensitive Assets 182,701 27,404 55,505 228,914 116,551 611,075
Interest Paying Liabilities:
Regular Savings Accounts 4,513 --- 4,513 81,233 --- 90,259
N.O.W. Accounts 53,431 --- 3,469 65,063 --- 121,963
Money Market Savings Accounts 40,341 --- --- 1,749 --- 42,090
Time Deposits of
$100,000 or More 60,922 12,583 6,256 4,041 --- 83,802
Other Time Deposits 27,191 22,623 46,860 39,082 --- 135,756
Short-Term Borrowings 19,462 244 3,000 --- --- 22,706
Long-Term Debt --- --- --- --- --- ---
Total Interest Rate
Sensitive Liabilities 205,860 35,450 64,098 191,168 --- 496,576
Interest Rate Sensitive Gap $(23,159) $ (8,046) $ (8,593)$ 37,746 $116,551 $114,499
Cumulative Interest Rate
Sensitive Gap $(23,159) $(31,205) $(39,798)$ (2,052) $114,499
Interest Rate Sensitive
Gap Ratio .89 .77 .87 1.20 --- 1.23
Cumulative Interest Rate
Sensitive Gap Ratio .89 .87 .87 1.00 1.23 N/A
F. CAPITAL RESOURCES AND DIVIDENDS
Shareholders' equity was $74.3 million at
December 31, 1996, as compared to $67.5 million
at December 31, 1995. Changes in shareholders'
equity during 1996 included $16.4 million of
retained earnings which was partially offset by
treasury stock purchases of $10.1.
Most of the treasury stock purchases were
acquired under two initiatives undertaken by the
Company's Board of Directors during the year,
each of which authorized management to repurchase
from time to time, at its discretion, up to $10
million of the Company's common stock in the open
market or privately negotiated transactions.
The maintenance of appropriate capital levels is
a management priority. Overall capital adequacy
is monitored on an ongoing basis by management
and reviewed regularly by the Board of Directors.
The Company's principal capital planning goal is
to provide an adequate return to shareholders
while retaining a sufficient base to provide for
future expansion and comply with all regulatory
standards.
Under regulatory capital guidelines, the Company
and the subsidiary banks are required to satisfy
certain risk-based capital measures. The minimum
ratio of "Tier 1" capital to risk-weighted assets
is 4.0% and the minimum ratio of total capital to
risk-weighted assets is 8.0%. For the Company,
Tier 1 capital is comprised of shareholders'
equity less intangible assets. Total capital
includes a portion of the allowance for loan
losses.
In addition to the risk-based capital measures,
the federal bank regulatory agencies require
banks and bank holding companies to satisfy
another capital guideline, the Tier 1 leverage
ratio (Tier 1 capital to total assets less
goodwill). The minimum Tier 1 leverage ratio is
3.0% for the most highly rated institutions. The
guidelines provide that other institutions should
maintain a Tier 1 leverage ratio that is at least
1.0% to 2.0% higher than the 3.0% minimum level
for top-rated institutions.
The table below sets forth the capital ratios of
the Company and its subsidiary banks as of
December 31, 1996:
Risk-Based Capital Ratios: Arrow GFNB SNB
Tier 1 19.3% 14.3% 9.5%
Total Capital 20.6 15.6 10.7
Tier 1 Leverage Ratio 11.2 7.9 7.6
At December 31, 1996, all subsidiary banks and
the Company exceeded the minimum capital ratios
established by these guidelines, as well as the
"well-capitalized" thresholds set by federal bank
regulatory agencies pursuant to FDICIA (see the
disclosure under "Legislative Developments" in
Part I, Item 1.F. of this report).
The principal source of funds for the payment of
shareholder dividends by the Company has been
dividends declared and paid to the Company by its
bank subsidiaries. As of December 31, 1996, only
the Company's principal bank subsidiary, Glens
Falls National Bank and Trust Company ("GFNB")
was in a position to pay any material amount of
dividends without prior regulatory approval. At
that time, the maximum amount that could have
been paid by GFNB to the Company was
approximately $8.6 million.
See Part II, Item 5 "Market for the Registrant's
Common Equity and Related Stockholder Matters"
for a recent history of the Company's cash
dividend payments.
G. FOURTH QUARTER RESULTS
The Company reported earnings of $2.4 million for
the fourth quarter of 1996, a decrease of $176
thousand or 6.7% from the fourth quarter of 1995.
Earnings per share for both periods was $.42.
The decrease in earnings was primarily
attributable to the decrease in earning assets
resulting from the completion of the divestiture
of the Vermont banking operations in the first
three quarters. Average earning assets for the
fourth quarter of 1996 were $606.4 million, a
decrease of $134.8 million or 18.2% from average
earning assets of $741.2 million for the fourth
quarter of 1995.
Accordingly, the Company also experienced a
proportional decrease in net interest income, to
$7.3 million in 1996 (stated on a tax-equivalent
basis) down $1.8 million or 19.8% from the fourth
quarter of 1995. The Company also experienced a
decrease in net interest margin (net interest
income to average earning assets), which was
4.78% and 5.00% for the two respective quarters.
Noninterest income of $2.2 million for the fourth
quarter of 1996 included securities losses of
$183 thousand and income of $570 thousand from a
post-closing upward price adjustment in the sale
of the Vermont trust business upon satisfaction
of a contingency condition. On a comparable
basis, noninterest income decreased $550
thousand, or 23.7% from the fourth quarter of
1995. The decrease was attributable to the sale
of the Vermont trust business and to decreased
deposit servicing fee income resulting from the
transfer of deposits in the sale of branches in
Vermont.
Noninterest expense of $5.3 million for the
fourth quarter of 1996 decreased $1.8 million, or
25.0%, from the fourth quarter of 1995, again,
primarily attributable to the sale of the Vermont
operations.
SELECTED FOURTH QUARTER FINANCIAL INFORMATION
(Dollars In Thousands)
For the Quarter Ended
December 31,
1996 1995
Interest Income $12,153 $15,846
Interest Expense 5,025 6,577
Net Interest Income 7,128 9,269
Provision for Loan Losses 224 530
Net Interest Income after Provision for Loan Losses 6,904 8,739
Other Income 2,155 2,342
Other Expense 5,255 7,009
Income Before Income Taxes 3,804 4,072
Provision for Income Taxes 1,370 1,462
Net Income $ 2,434 $ 2,610
Weighted Average Number of Shares and
Equivalents Outstanding
Primary 5,847 6,239
Fully Diluted 5,850 6,244
Primary Earnings Per Share $ .42 $ .42
Fully Diluted Earnings Per Share .42 .42
SELECTED RATIOS:
Return on Average Assets 1.49% 1.30%
Return on Average Equity 13.04% 15.58%
Per share amounts have been adjusted for the 1996 ten percent stock dividend.
Item 8: Financial Statements and Supplementary
Data
The following audited financial statements and
supplementary data are incorporated herein by
reference to the Company's Annual Report to
Shareholders for December 31, 1996, which Annual
Report is attached as Exhibit 13 to this Report:
Independent Auditors' Report
Financial Statements:
Consolidated Balance Sheets as of
December 31, 1996 and 1995
Consolidated Statements of Income for the Years
Ended December 31, 1996, 1995 and 1994
Consolidated Statements of Changes in
Shareholders' Equity for the Years
Ended December 31, 1996, 1995
and 1994
Consolidated Statements of Cash Flows for the
Years Ended December 31, 1996, 1995 and 1994
Notes to Consolidated Financial Statements
Supplementary Data: (Unaudited)
Quarterly Financial Data for the Years Ended
December 31, 1996 and 1995
Item 9: Changes in and Disagreements with
Accountants on Accounting and Financial
Disclosure. - None.
PART III
Item 10: Directors and Executive Officers of
the Registrant
Item 1, "Election of Directors and Information
with Respect to Directors and Officers" of the
Company's Proxy Statement for its Annual Meeting
of Shareholders to be held April 30, 1997 is
incorporated herein by reference. Required
information regarding the Company's Executive
Officers is contained in Part I, Item 1.E.,
"Executive Officers of the Registrant."
Item 11: Executive Compensation
Item 1, "Election of Directors and Information
with Respect to Directors and Officers" of the
Company's Proxy Statement for its Annual Meeting
of Shareholders to be held April 30, 1997 is
incorporated herein by reference.
Item 12: Security Ownership of Certain
Beneficial Owners and Management
Item 1, "Election of Directors and Information
with Respect to Directors and Officers" of the
Company's Proxy Statement for its Annual Meeting
of Shareholders to be held April 30, 1997 is
incorporated herein by reference.
Item 13: Certain Relationships and Related
Transactions
Item 1, "Election of Directors and Information
with Respect to Directors and Officers" of the
Company's Proxy Statement for its Annual Meeting
of Shareholders to be held April 30, 1997 is
incorporated herein by reference.
PART IV
Item 14: Exhibits, Financial Statement
Schedules and Reports on Form 8-K
A) Documents filed as part of this report:
I Financial Statements:
The following financial statements, the
notes thereto, and the independent auditors'
reports thereon are filed as part of this
report, incorporated by reference from
Exhibit 13 to this Report, the 1996 Annual
Report to Shareholders. See the index to
such financial statements in Part II, Item
8 of this report.
Independent Auditors' Report
Consolidated Balance Sheets as of
December 31, 1996 and 1995
Consolidated Statements of Income for
the Years Ended December 31, 1996,
1995 and 1994
Consolidated Statements of Changes in
Shareholders' Equity for the Years
Ended December 31, 1996,
1995 and 1994
Consolidated Statements of Cash Flows
for the Years Ended December 31,
1996, 1995 and 1994
Notes to Consolidated Financial
Statements
II Schedules:
All schedules are omitted since the required
information is either not applicable or not
required or is contained in the respective
financial statements or in the notes
thereto.
III. Exhibits:
The following exhibits are incorporated by
reference herein.
Exhibit
Number Exhibit
2.1 Purchase and Assumption Agreement among
Arrow Financial Corporation, Arrow Vermont
Corporation, Green Mountain Bank and Mascoma
Savings Bank, dated June 1, 1995
incorporated herein by reference from the
Registrant's Current Report on Form 8-K,
filed on August 4, 1995, Exhibit 2.1.
2.2 Supplement to Purchase and Assumption
Agreement among Arrow Financial Corporation,
Arrow Vermont Corporation, Green Mountain
Bank and Mascoma Savings Bank, dated January
12, 1996 incorporated herein by reference
from the Registrant's Current Report on Form
8-K, filed January 30, 1996, Exhibit 2.2.
2.3 Purchase and Assumption Agreement among
Arrow Financial Corporation, Arrow Vermont
Corporation, Green Mountain Bank and ALBANK,
FSB, dated February 26, 1996 incorporated
herein by reference from the Registrant's
Current Report on Form 8-K, filed March 14,
1996, Exhibit 2.1.
2.4 Amendment to Purchase and Assumption
Agreement among Arrow Financial Corporation,
Arrow Vermont Corporation, Green Mountain
Bank and ALBANK, FSB, dated September 26,
1996 incorporated herein by reference from
the Registrant's Current Report on Form 8-K
filed October 11, 1996, Exhibit 2.3.
2.5 Service Purchasing Agreement among Arrow
Financial Corporation, Arrow Vermont
Corporation, Green Mountain Bank and ALBANK,
FSB, dated February 26, 1996 incorporated
herein by reference from the Registrant's
Current Report on Form 8-K filed March 14,
1996, Exhibit 2.2.
2.6 Amendment to Service Purchasing Agreement
among Arrow Financial Corporation, Arrow
Vermont Corporation, Green Mountain Bank and
ALBANK, FSB, dated September 26, 1996
incorporated herein by reference from the
Registrant's Current Report on Form 8-K,
filed October 11, 1996, Exhibit 2.4.
2.7 Stock Purchase Agreement among Arrow
Financial Corporation, Arrow Vermont
Corporation, Green Mountain Bank and Vermont
National Bank, dated February 27, 1996
incorporated herein by reference from the
Registrant's Current Report on Form 8-K
filed March 14, 1996, Exhibit 2.3.
3.(I) Certificate of Incorporation of the
Registrant, as amended, incorporated herein
by reference from the Registrant's Annual
Report on Form 10-K for the year ended
December 31, 1990, Exhibit 3.(a).
10.1 1985 Incentive Stock Option Plan of the
Registrant, incorporated herein by reference
from Registrant's 1933 Act Registration
Statement on Form S-8 (file number 2-98736;
filed on July 1, 1985). *
10.2 1985 Non-Qualified Stock Option Plan of the
Registrant, incorporated herein by reference
from Registrant's 1933 Act Registration
Statement on Form S-8 (file number 2-98735;
filed July 1, 1985). *
10.3 Short-term Incentive Award Plan of Glens
Falls National Bank and Trust Company,
incorporated herein by reference from
Registrant's 1933 Act Registration Statement
on Form S-2 (file number 33-10109; filed
December 16, 1986). *
10.4 Employment Agreement between the Registrant
and Michael F. Massiano dated December 31,
1990, incorporated herein by reference from
Registrant's Annual Report on Form 10-K for
the year ended December 31, 1990, Exhibit
10.(k). *
10.5 Employment Agreement between the Registrant
and John J. Murphy dated December 31, 1990,
incorporated herein by reference from
Registrant's Annual Report on Form 10-K for
the year ended December 31, 1992, Exhibit
10(g)(1). *
10.6 Employment Agreement between the Registrant,
its subsidiary bank, Glens Falls National
Bank & Trust Company, and Thomas L. Hoy
dated December 31, 1990, incorporated herein
by reference from Registrant's Annual Report
on Form 10-K for the year ended December 31,
1992, Exhibit 10(j)(1). *
10.7 Select Executive Retirement Plan of the
Registrant effective January 1, 1992
incorporated herein by reference from
Registrant's Annual Report on Form 10-K for
December 31, 1992, Exhibit 10(m). *
10.8 Employee Stock Purchase Plan of the
Registrant, incorporated herein by reference
from Registrant's 1933 Act Registration
Statement on Form S-8 (File number 33-48225;
filed May 15, 1992). *
10.9 Long Term Incentive Plan of the Registrant,
incorporated herein by reference from
Registrant's 1933 Act Registration Statement
on Form S-8 (File number 33-66192; filed
July 19, 1993). *
10.10 Directors Deferred Compensation Plan of
Registrant, incorporated herein by reference
from Registrant's Annual Report on Form 10-K
for December 31, 1993, Exhibit 10(n). *
10.11 Senior Officers Deferred Compensation Plan
of the Registrant, incorporated herein by
reference from Registrant's Annual Report on
Form 10-K for December 31, 1993, Exhibit
10(o).*
10.12 Automatic Dividend Reinvestment Plan of the
Registrant incorporated herein by reference
from Registrant's Annual Report on Form 10-K
for December 31, 1995, Exhibit 10.11.*
* Management contracts or compensation plans
required to be filed as an exhibit.
The following exhibits are submitted herewith:
Exhibit
Number Exhibit
3.(ii) By-Laws of the Registrant
11 Computation of Earnings per Share
13 Annual Report to Shareholders
21 Subsidiaries of the Company
23 Consent of Independent Certified Public
Accountants
27 Financial Data Schedule (submitted with
electronic filing only)
(B) The following Current Reports on Form 8-K
were filed during the fourth quarter of 1996:
Filed October 11, 1996:
Amendment to Purchase and Assumption Agreement
among Arrow Financial Corporation, Arrow
Vermont Corporation, Green Mountain Bank and
ALBANK, FSB, dated September 26, 1996.
Filed October 11, 1996:
Amendment to Service Purchasing Agreement
among Arrow Financial Corporation, Arrow
Vermont Corporation, Green Mountain Bank and
ALBANK, FSB, dated September 26, 1996.
SIGNATURES
Pursuant to the requirements of Section 13 or
15(d) of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto
duly authorized.
ARROW FINANCIAL CORPORATION
Date: March 26, 1997
By: /s/ Thomas L. Hoy
Thomas L. Hoy
President and
Chief Executive Officer
Date: March 26, 1997
By: /s/ John J. Murphy
John J. Murphy
Executive Vice President, Treasurer and
Chief Financial Officer
(Principal Financial and Accounting Officer)
Pursuant to the requirements of the Securities
Exchange Act of 1934, this report has been signed
below on March 26, 1997 by the following persons
in the capacities indicated.
/s/ John J. Carusone,Jr.
John J. Carusone
Director
/s/ Michael B. Clarke
Michael B. Clarke
Director
/s/ George C. Frost
George C. Frost
Director
/s/ Kenneth C. Hopper, M.D.
Kenneth C. Hopper, M.D.
Director
/s/ Thomas L. Hoy
Thomas L. Hoy
Director and President
/s/ Edward F. Huntington
Edward F. Huntington
Director
/s/ David G. Kruczlnicki
David G. Kruczlnicki
Director
/s/ Michael F. Massiano
Michael F. Massiano
Director & Chairman
/s/ David L. Moynehan
David L. Moynehan
Director
/s/ Doris E. Ornstein
Doris E. Ornstein
Director
/s/ Daniel L. Robertson
Daniel L. Robertson
Director
EXHIBITS INDEX
Exhibit
Number Exhibit
3.(ii) By-Laws of the Registrant
11 Computation of Earnings per Share
13 Annual Report to Shareholders
21 Subsidiaries of the Company
23 Consent of Independent Certified
Public Accountants
27 Financial Data Schedule (submitted
with electronic filing only)