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SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d) of
The Securities Exchange Act of 1934
For the fiscal year ended December 31, 1998
Commission file number 0-12507
ARROW FINANCIAL
CORPORATION
(Exact name of registrant as specified in its charter)
NEW YORK 22-2448962
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
250 GLEN STREET, GLENS FALLS, NEW YORK 12801
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (518)
745-1000
___________________________
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF
THE ACT - NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF
THE ACT
Common stock, Par Value $1.00
(Title of Class)
Indicate by checkmark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K.
Indicate by checkmark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such
shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90
days.
Yes X No
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practicable date.
Class Outstanding at February 26, 1999
Common stock, Par Value $1.00 Per Share 6,207,753
State the aggregate market value of the voting stock held by
non-affiliates of registrant.
Aggregate market value Based upon the average of the closing bid
of voting stock and closing asked prices on the NASDAQ Exchange
$171,489,000 February 26, 1999
DOCUMENTS INCORPORATED BY REFERENCE
Portions of Registrant's Proxy Statement for the Annual Meeting of
Shareholders to be held April 14, 1999 (Part III)
ARROW FINANCIAL CORPORATION
FORM 10-K
INDEX
Cautionary Statement under Federal Securities Laws
PART I
Item 1. Business
A. General
B. Lending Activities
C. Supervision and Regulation
D. Competition
E. Statistical Disclosure (Guide 3)
F. Legislative Developments
G. Executive Officers of the Registrant
Item 2. Properties
Item 3. Legal Proceedings
Item 4. Submission of Matters to a Vote of Security Holders
PART II
Item 5. Market for the Registrant's Common
Equity and
Related Stockholder Matters
Item 6. Selected Financial Data
Item 7. Management's Discussion and Analysis of
Financial
Condition and Results of Operations
A. Overview
B. Results of Operations
I. Net Interest Income
II. Provision for Loan Losses and
Allowance for Loan Losses
III. Other Income
IV. Other Expense
V. Income Taxes
C. Financial Condition
I. Investment Portfolio
II. Loan Portfolio
a. Distribution of Loans and Leases
b. Risk Elements
III. Summary of Loan Loss Experience
IV. Deposits
V. Time Certificates of $100,000 or More
D. Liquidity
E. Capital Resources and Dividends
F. Fourth Quarter Results
G. Year 2000 Readiness Disclosure
Item 7A. Quantitative and Qualitative Disclosures
About Market Risk
Item 8. Financial Statements and Supplementary
Data
Item 9. Changes in and Disagreements with
Accountants
on Accounting and Financial Disclosure
PART III
Item 10. Directors and Executive Officers of the Registrant
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial
Owners and Management
Item 13. Certain Relationships and Related Transactions
PART IV
Item 14. Exhibits, Financial Statement Schedules and
Reports on Form 8-K
Signatures
Exhibits Index
Cautionary Statement under Federal Securities
Laws: The information contained in this Annual
Report on Form 10-K contains statements that are
not historical in nature but rather are based on
management's beliefs, assumptions, expectations,
estimates and projections about the future.
These statements are "forward-looking statements"
within the meaning of Section 21E of the
Securities Exchange Act of 1934, as amended, and
involve a degree of uncertainty and attendant
risk. Words such as "expects," "believes,"
"should," "plans," "will," "estimates," and
variations of such words and similar expressions
are intended to identify such forward-looking
statements. Some of these statements, such as
those included in the interest rate sensitivity
analysis in section 7A, below, entitled
"Quantitative and Qualitative Disclosures About
Market Risk," are merely presentations of what
future performance or changes in future
performance would look like based on hypothetical
assumptions and on simulation models. Other
forward-looking statements, such as those in
Section G of "Management's Discussion and
Analysis" below, dealing with the Company's
program to deal with the so-called "Year 2000
Readiness" problem, involve speculation about a
broad range of factors, many of which are beyond
the Company's control or its ability to evaluate
with any degree of precision. These statements
are not guarantees of future performance and
involve certain risks and uncertainties that are
difficult to quantify or, in some cases, to
identify. In the case of all forward-looking
statements, actual outcomes and results may
differ materially from what the statements
predict or forecast. Factors that could cause or
contribute to such differences include, but are
not limited to, changes in economic and market
conditions, including unanticipated fluctuations
in interest rates, effects of state and federal
regulation, prevailing levels of competition,
emerging technologies and the Company's ability
to adapt thereto, and risks inherent in banking
operations. Readers are cautioned not to place
undue reliance on these forward-looking
statements, which speak only as of the date
hereof. The Company undertakes no obligation to
revise or update these forward-looking statements
to reflect the occurrence of unanticipated
events.
PART I
Item 1: Business
A. GENERAL
Arrow Financial Corporation (the "Company"), a
New York corporation, was incorporated on March
21, 1983 and is registered as a bank holding
company within the meaning of the Bank Holding
Company Act of 1956. The Company owns two
nationally chartered banks in New York, Glens
Falls National Bank and Trust Company, Glens
Falls, New York ("GFNB") and Saratoga National
Bank and Trust Company, Saratoga Springs, New
York ("SNB"), as well as one non-bank subsidiary,
the operations of which are not significant. The
Company previously owned a bank in Vermont but
sold all of its Vermont operations in 1996 in
three separate transactions and liquidated its
Vermont bank charter in 1997. The Company owns
directly or indirectly all voting stock of all
its subsidiaries.
The business of the Company consists primarily of
the ownership, supervision and control of its
bank subsidiaries. The Company provides its
subsidiaries with various advisory and
administrative services and coordinates the
general policies and operation of the subsidiary
banks. There were 366 full-time equivalent
employees of the Company and the subsidiary banks
at December 31, 1998.
SUBSIDIARY BANKS: GLENS
(Dollars in Thousands) FALLS SARATOGA
NATIONAL NATIONAL
BANK & BANK &
TRUST CO. TRUST CO.
("GFNB") ("SNB")
Total Assets at Year-End $850,481 $96,328
Trust Assets Under Management at
Year-End (Not Included in Total Assets) $593,164 $ 5,592
Date Organized 1851 1988
Employees 344 22
State of Headquarters New York New York
Offices 21 2
Counties of Operation Warren Saratoga
Washington
Saratoga
Essex
Clinton
Main Office 250 Glen St. 137 So. Broadway
Glens Falls, Saratoga Springs,
New York New York
The Company through its subsidiary banks offers a
full range of commercial and consumer financial
products. The banks' deposit base consists of
core deposits derived principally from the
communities which the banks serve. The banks
target their lending activities to consumers and
small and mid-sized companies in the banks'
immediate geographic areas. In addition to
traditional banking services, the Company offers
credit card processing services for other
financial institutions and, through its banks'
trust departments, provides retirement planning,
trust and estate administration services for
individuals and pension, profit-sharing and
employee benefit plan administration for
corporations.
B. LENDING ACTIVITIES
The Company's subsidiary banks engage in a wide
range of lending activities, including commercial
and industrial lending primarily to small and
mid-sized companies; mortgage lending for the
purchase of residential and commercial
properties; and consumer installment, credit card
and home equity financing. The Company also
maintains an active indirect lending program
through its sponsorship of dealer programs, under
which it purchases dealer paper from automobile
and other dealers meeting pre-established
specifications. Historically, the Company has
sold a portion of its residential real estate
loan originations into the secondary market,
primarily to Freddie Mac and state housing
agencies, while retaining the servicing rights.
Loan sales into the secondary market have
diminished in the past three years, however, as
the banks have sought to increase their own
portfolios. In addition to interest earned on
loans, the banks receive facility fees for
various types of commercial and industrial
credits, and commitment fees for extension of
letters of credit and certain types of loans.
Generally, the Company continues to implement
conservative lending strategies and policies that
are intended to protect the quality of the loan
portfolio. These include stringent underwriting
and collateral control procedures and credit
review systems through which intensive reviews
are conducted. It is the Company's policy to
discontinue the accrual of interest on loans when
the payment of interest and/or principal is due
and unpaid for a designated period (generally 90
days) or when the likelihood of repayment is, in
the opinion of management, uncertain. Income on
such loans is thereafter recognized only upon
receipt (see Part II, Item 7.C.II.b., "Risk
Elements").
The banks lend primarily to borrowers within the
geographic areas served by the banks. The banks'
combined loan portfolios do not include any
foreign loans or any significant industry
concentrations except as described in Note 24 to
the Consolidated Financial Statements in Part II,
Item 8 of this report. Except for credit card
loans, the portfolios generally are fully
collateralized, and many commercial loans are
further secured by personal guarantees.
C. SUPERVISION AND REGULATION
The following generally describes the regulation
to which the Company and its banks are subject.
Bank holding companies and banks are extensively
regulated under both federal and state law. To
the extent that the following information
summarizes statutory or regulatory provisions, it
is qualified in its entirety by reference to the
particular law or regulation. Any change in
applicable law or regulation may have a material
effect on the business and prospects of the
Company and the banks.
The Company is a legal entity separate and
distinct from its subsidiaries. Most of the
Company's revenues, on a parent company only
basis, result from management fees, dividends and
undistributed earnings from the subsidiary banks.
The right of the Company, and consequently the
right of creditors and shareholders of the
Company, to participate in any distribution of
the assets or earnings of the banks through the
payment of such dividends or otherwise is
necessarily subject to the prior claims of
creditors of the banks, except to the extent that
claims of the Company in its capacity as a
creditor of the banks also may be recognized.
Moreover, there are various legal and regulatory
limitations applicable to the payment of
dividends to the Company by its subsidiaries as
well as the payment of dividends by the Company
to its shareholders. (See "Capital Resources and
Dividends" in Part II, Item 7.E of this report).
The ability of the Company and the banks to pay
dividends in the future is, and is expected to
continue to be, influenced by regulatory policies
and capital guidelines.
The Company is a registered bank holding company
within the meaning of the Bank Holding Company
Act of 1956 (BHC Act) and is subject to
regulation by the Board of Governors of the
Federal Reserve System (Federal Reserve Board).
Additionally, as a "bank holding company" under
New York State Law, the Company is subject to
regulation by the New York State Banking
Department. The subsidiary banks are nationally
chartered banks and are subject to the
supervision of and examination by the Office of
the Comptroller of the Currency ("OCC"). The
banks are members of the Federal Reserve System
and the deposits of each subsidiary bank are
insured by the Bank Insurance Fund of the Federal
Deposit Insurance Corporation ("FDIC"). The BHC
Act prohibits the Company, with certain
exceptions, from engaging, directly or
indirectly, in non-bank activities and restricts
loans by the banks to the Company or other non-bank
affiliates. Under the BHC Act, a bank
holding company must obtain Federal Reserve Board
approval before acquiring, directly or
indirectly, 5% or more of the voting shares of
another bank or bank holding company (unless it
already owns a majority of such shares). Under
the 1994 Riegle-Neal Act, bank holding companies
are now able to acquire banks or other bank
holding companies located in all 50 states (see
Item 1.F. "Legislative Developments".)
During 1997 and 1998 banking regulators developed
guidelines that financial institutions follow to
ensure that their computer applications will
operate properly for all dates after December 31,
1999. Additionally, the SEC prescribed
disclosures for all publicly traded corporations,
such as the Company, related to year 2000
preparedness. Those disclosures are located in
section G of Item 7, "Management's Discussion and
Analysis of Financial Condition and Results of
Operations."
The Federal Reserve Board has adopted various
"capital adequacy guidelines" for use in the
examination and supervision of bank holding
companies. One set of guidelines is the
risk-based capital guidelines, which assign risk
weightings to all assets and certain off-balance
sheet items and establish an 8% minimum ratio of
qualified total capital to the aggregate dollar
amount of risk-weighted assets (which is almost
always less than the dollar amount of such assets
without risk weighting). At least half of total
capital must consist of "Tier 1" capital, which
comprises common equity, retained earnings and a
limited amount of permanent preferred stock, less
goodwill. Up to half of total capital may
consist of so-called "Tier 2" capital, comprising
a limited amount of subordinated debt, other
preferred stock, certain other instruments and a
limited amount of the allowance for loan losses.
The Federal Reserve Board's other important
guideline for measuring a bank holding company's
capital is the leverage ratio standard, which
establishes minimum limits on the ratio of a bank
holding company's "Tier 1" capital to total
tangible assets (not risk-weighted). For
top-rated holding companies, the minimum leverage
ratio is 3%, but lower-rated companies may be
required to meet substantially greater minimum
ratios. The subsidiary banks are subject to
similar capital requirements adopted by their
primary federal regulators. The year-end 1998
capital ratios of the Company and its subsidiary
banks are set forth in Part II, Item 7.E.
"Capital Resources and Dividends." A holding
company's ability to pay dividends, repurchase
its outstanding stock or expand its business
through acquisitions of new subsidiaries can be
restricted if capital falls below these capital
adequacy guidelines or other informal capital
guidelines or ratios that bank regulators may
apply from time to time to specific banking
organizations.
In cases where banking regulators have
significant concerns regarding the financial
condition, assets or operations of a bank or bank
holding company, the regulators may take
enforcement action or impose enforcement orders,
formal or informal, against the organization.
Neither the Company nor any of its subsidiaries
is now, or has been within the past year, subject
to any formal or informal regulatory enforcement
action or order.
D. COMPETITION
The Company and its subsidiaries face intense
competition in all markets that they serve.
Traditional competitors are other local
commercial banks, savings banks, savings and loan
institutions and credit unions, as well as local
offices of major regional and money center banks.
Also, non-banking organizations, such as consumer
finance companies, insurance companies,
securities firms, money market and mutual funds
and credit card companies, which are not subject
to the same regulatory restrictions and capital
requirements that apply to the Company and its
subsidiary banks, offer substantive equivalents
of transaction accounts, credit cards and various
other loan and financial products.
E. STATISTICAL DISCLOSURE
Statistical disclosure required by Securities Act
Guide 3 to be set forth herein is found in Part
II, Item 7 of this report, "Management's
Discussion and Analysis of Financial Condition
and Results of Operations," and in Part II, Item
8, "Financial Statements and Supplementary Data."
INDEX TO SECURITIES ACT GUIDE 3, STATISTICAL
DISCLOSURE BY BANK HOLDING COMPANIES
Required Information Location
Distribution of Assets, Liabilities
and Stockholders' Equity; Interest
Rates and Interest Differential Part II, Item 7.B.I.
Investment Portfolio Part II, Item 7.C.I.
Loan Portfolio Part II, Item 7.C.II.
Summary of Loan Loss Experience Part II, Item 7.C.III.
Deposits Part II, Item 7.C.IV.
Return on Equity and Assets Part II, Item 6.
Short-Term Borrowings Part II, Item 8. Note 9.
F. LEGISLATIVE DEVELOPMENTS
In 1994, Congress enacted the Riegle-Neal
Interstate Banking and Branching Efficiency Act.
Under the Act, as of September 29, 1995, bank
holding companies were authorized as a matter of
federal law to acquire banks located in any of
the 50 states, notwithstanding any state laws to
the contrary, provided all required regulatory
and other approvals are obtained. Also, under
the Act, effective June 1, 1997, banks
headquartered in any state were permitted to
branch into any other state, except for those
states which enacted legislation prior to June 1,
1997 "opting out" of interstate branching. Only
Colorado and Montana elected to "opt out" of
interstate branching; thus, the Company's banks
may branch into all other states, including all
states adjacent to New York, upon receipt of all
required approvals and subject to certain
conditions of state law.
In 1995, the federal bank regulatory authorities
promulgated a set of revised regulations
addressing the responsibilities of banking
organizations under the Community Reinvestment
Act ("CRA"). The revised regulations place
additional emphasis on the actual experience of a
bank in making loans in low- and moderate-income
areas within its service area as a key
determinant in evaluation of the bank's
compliance with the statute. As in the prior
regulations, bank regulators are authorized to
bring enforcement actions against banks under the
CRA only in the context of bank expansion or
acquisition transactions.
In 1991, the Federal Deposit Insurance
Corporation Improvement Act of 1991 ("FDICIA")
was enacted. Among other things, FDICIA requires
the federal banking regulators to take prompt
corrective action with respect to depository
institutions that do not meet minimum capital
requirements. FDICIA established five capital
classifications for banking institutions, the
highest being "well capitalized." Under
regulations adopted by the federal bank
regulators, a banking institution is considered
"well capitalized" if it has a total
risk-adjusted capital ratio of 10% or greater, a
Tier 1 risk-adjusted capital ratio of 6% or
greater and a leverage ratio of 5% or greater and
is not subject to any regulatory order or written
directive regarding capital maintenance. The
Company and each of its subsidiary banks meet all
these conditions and thus are classified as "well
capitalized."
FDICIA also imposed expanded accounting and audit
reporting requirements for depository
institutions whose total assets exceed $500
million. These requirements became effective for
Glens Falls National Bank and Trust Company
beginning in 1996.
The FDIC levies assessments on various deposit
obligations of the Company's banking
subsidiaries. During 1995, the FDIC reduced the
premium paid by the best-rated banks (including
the Company's subsidiary banks) from $.23 per
$100 of insured deposits to $.04. In 1996, the
FDIC insurance premium was further reduced to a
flat charge of $2 thousand per year for the
highest-rated banks, including the Company's
subsidiary banks. In 1996, Congress enacted the
Deposit Insurance Funds Act, under which deposits
insured by the Bank Insurance Fund ("BIF") are
subject to assessment for payment on the
Financing Corporation ("FICO") bond obligation at
1/5 the rate of the Savings Association Insurance
Fund ("SAIF") assessable deposits. Accordingly,
BIF-assessable deposits (like the deposits of the
Company's banks) were assessed an additional
1.220 cents per $100 of insured deposits in 1998
and an additional 1.256 cents in 1997.
Various other federal bills that would
significantly affect banks, including proposals
to permit banks to affiliate with full-service
securities underwriting firms or non-financial
organizations (Glass-Steagall Reform) have been
introduced in Congress from time to time. The
Company cannot estimate the likelihood of any
such bills being enacted into law, or the
ultimate effect that any such potential
legislation, if enacted, would have upon its
financial condition or operations.
G. EXECUTIVE OFFICERS OF THE REGISTRANT
The names and ages of the principal executive
officers of the Company and positions held are
presented in the following table. The officers
are elected annually by the Board of Directors.
Name Age Positions Held and Years from Which Held
Thomas L. Hoy 50 President and CEO since January 1, 1997 and
President and COO of Glens Falls National Bank
since 1995. Mr. Hoy was Executive Vice President
of Glens Falls National Bank prior to 1995. Mr.
Hoy has been with the Company since 1974.
John J. Murphy 47 Executive Vice President, Treasurer and CFO since
1993. Mr. Murphy has served as Senior Vice
President, Treasurer and CFO of the Company since
1983. Mr. Murphy has been with the Company since
1973.
Gerard R. Bilodeau 51 Senior Vice President and Secretary since 1994.
Mr. Bilodeau was Vice President and Secretary
from 1993 to 1994 and was Director of Personnel
prior to 1993. Mr. Bilodeau has been with the
Company since 1969.
John C. Van Leeuwen 55 Senior Vice President and Chief Credit Officer
since 1995. Prior to 1995, Mr. Van Leeuwen
served as Vice President and Loan Review Officer.
Mr. Van Leeuwen has been with the Company since
1985.
Item 2: Properties
The Company is headquartered at 250 Glen Street,
Glens Falls, New York. The building is owned by
Glens Falls National Bank and serves as its main
office. Glens Falls National Bank owns eighteen
additional offices and leases two, at market
rates. Saratoga National Bank owns both of its
offices. The Company continues to own the
building in Rutland, Vermont, that served as
headquarters for the Company's Vermont bank prior
to the divestiture of those operations in 1996.
The building was under contract for sale at
December 31, 1998. Rental costs of premises did
not exceed 5% of operating costs in 1998.
In the opinion of management of the Company, the
physical properties of the Company and the
subsidiary banks are suitable and adequate.
Item 3: Legal Proceedings
The Company is not the subject of any material
pending legal proceedings, other than ordinary
routine litigation occurring in the normal course
of its business.
The Company's subsidiary banks are the subjects
of or parties to various legal claims which arise
in the normal course of their business. For
example, from time to time, the banks have
encountered claims against them grounded in
lender liability, of the sort often asserted
against financial institutions. These lender
liability claims normally take the form of
counterclaims to lawsuits filed by the banks for
collection of past due loans. The various pending
legal claims against the Company's current or
former subsidiary banks, including lender
liability claims, will not, in the opinion of
management, result in any material liability.
Item 4: Submission of Matters to a Vote of
Security Holders
None in the fourth quarter of 1998.
PART II
Item 5: Market for the Registrant's Common
Equity and Related Stockholder Matters
The common stock of Arrow Financial Corporation
is traded on The Nasdaq Stock MarketSM under the
symbol AROW.
The high and low prices listed below represent
actual sales transactions, as reported by Nasdaq,
rounded to the nearest 1/8 point.
Per share amounts and market prices have been
adjusted for the August 1998 ten percent and the
November 1997 five percent stock dividends.
Cash
Sales Price Dividends
High Low Declared
1997 1st Quarter $21.875 $20.125 $.173
2nd Quarter 24.500 21.250 .173
3rd Quarter 26.125 22.150 .173
4th Quarter 31.755 26.255 .191
1998 1st Quarter $31.250 $26.875 $.191
2nd Quarter 32.750 27.755 .191
3rd Quarter 32.750 24.000 .210
4th Quarter 29.125 24.500 .220
The payment of dividends by the Company is at the
discretion of the Board of Directors and is
dependent upon, among other things, the Company's
earnings, financial condition and other factors,
including applicable governmental regulations and
restrictions. See "Capital Resources and
Dividends" in Part II, Item 7.E. of this report.
There were approximately 2,697 holders of record
of common stock at December 31, 1998.
Item 6: Selected Financial Data
FIVE YEAR SUMMARY OF SELECTED DATA
Arrow Financial Corporation and Subsidiaries
(Dollars In Thousands, Except Per Share Data)
1998 1997 1996 1995 1994
Consolidated Statements of Income Data:
Interest and Dividend Income $63,033 $54,861 $54,875 $60,718 $52,514
Less: Interest Expense 28,142 23,887 21,826 24,865 18,202
Net Interest Income 34,891 30,974 33,049 35,853 34,312
Less: Provision for Loan Losses 1,386 1,303 896 1,170 (950)
Net Interest Income After Provision
for Loan Losses 33,505 29,671 32,153 34,683 35,262
Other Income 8,172 8,109 23,804 14,473 9,049
Net Gains (Losses) on Securities
Transactions 408 74 (101) 23 (481)
Less: Other Expense 24,506 21,702 24,774 29,769 31,374
Income Before Income Taxes 17,579 16,152 31,082 19,410 12,456
Provision for Income Taxes 5,744 5,155 10,822 6,986 1,131
Net Income $11,835 $10,997 $20,260 $12,424 $11,325
Earnings Per Common Share1:
Basic $ 1.88 $ 1.71 $ 2.98 $ 1.72 $ 1.55
Diluted 1.85 1.69 2.95 1.71 1.50
Per Common Share1:
Cash Dividends $ .81 $ .71 $ .57 $ .45 $ .28
Book Value 12.39 11.65 11.17 9.45 8.03
Tangible Book Value2 10.32 9.46 10.89 9.15 7.79
Consolidated Year-End Balance
Sheet Data:
Total Assets $939,029 $831,559 $652,603 $789,790 $746,431
Securities Available-for-Sale 267,731 221,837 171,743 178,645 53,868
Securities Held-to-Maturity 63,016 44,082 30,876 13,921 129,735
Loans and Leases, Net of
Unearned Income 546,126 485,810 393,511 517,787 507,553
Nonperforming Assets 3,592 3,999 2,754 6,765 7,825
Deposits 775,597 720,915 541,747 694,453 650,485
Other Borrowed Funds 24,032 24,755 22,706 15,297 24,865
Long-Term Debt 45,000 --- --- --- 5,007
Shareholders' Equity 77,146 73,871 74,296 67,504 58,405
Selected Key Ratios:
Return on Average Assets 1.36% 1.49% 2.86% 1.60% 1.52%
Return on Average Equity 15.51 15.19 8.78 19.45 20.79
Dividend Payout 43.78 41.49 19.47 25.89 19.08
Average Equity to Average Assets 8.74 9.80 9.95 8.22 7.34
1 Per share amounts have been adjusted for the 1998
ten percent, the 1997 five percent, the 1996 ten
percent and the 1995 four percent stock dividends.
2 Tangible book value excludes from total equity
intangible assets, primarily goodwill associated with
branch purchases.
Item 7: Management's Discussion and Analysis of
Financial Condition and Results of Operations
The following discussion and analysis focuses on
and reviews the Company's results of operations
for each of the years in the three-year period
ended December 31, 1998 and the financial
condition of the Company as of December 31, 1998
and 1997. Per share amounts have been restated
to reflect the ten percent stock dividend paid in
August 1998 and the five percent stock dividend
paid in November 1997. The discussion below
should be read in conjunction with the
consolidated financial statements and other
financial data presented elsewhere herein.
A. OVERVIEW
The Company reported net income of $11.8 million
for 1998 compared to net income of $11.0 million
for 1997 and $20.3 million for 1996. As
indicated in the following table "Summary of Core
Earnings," net income from each year included
nonrecurring items. For 1997, the principal
nonrecurring item was a favorable tax settlement
with New York State over a combined reporting
issue. For 1996 the major item was the $10.3
million in net after-tax gains from the sale of
the Company's Vermont bank. Net income, on a
recurring basis, increased $1.5 million, or 15.2%
from 1997 to 1998 after increasing by $157
thousand, or 1.6% from 1996 to 1997. Diluted
earnings per share (stated on a recurring basis)
increased $.27, or 17.5%, from 1997 to 1998, and
by $.10, or 6.9%, from 1996 to 1997.
The following analysis adjusts net income for
nonrecurring items to arrive at a comparative
presentation of the Company's "core" earnings.
Also presented are "cash" earnings per share,
which adds-back to recurring net income the
amortization of goodwill, net of tax, associated
with branch purchases.
SUMMARY OF CORE EARNINGS
(In Thousands, Except Per Share Data)
1998 1997 1996
Net Income, as Reported $11,835 $10,997 $20,260
Nonrecurring Items, Net of Tax:
Divestiture of Vermont Banking Operations --- --- (10,267)
State Tax Settlement --- (464) ---
OREO Transactions (10) (70) 174
Net Securities Transactions (241) (44) 57
Other --- (361) (323)
Recurring Net Income $11,584 $10,058 $ 9,901
Recurring Diluted Earnings Per Share $ 1.81 $ 1.54 $ 1.44
Recurring "Cash" Diluted Earnings Per Share 1.90 1.59 1.44
Diluted Earnings Per Share, as Reported 1.85 1.69 2.95
Return on Average Assets 1.36% 1.49% 2.86%
Return on Average Assets,
Based on Recurring Net Income 1.33 1.36 1.41
Return on Average Equity 15.51% 15.19% 28.78%
Return on Average Equity,
Based on Recurring Net Income 15.20 14.02 15.46
At the end of the second quarter of 1997, the
Company completed the acquisition of six branches
from Fleet Bank, extending the Company's market
area northward to Plattsburgh, New York. Effects
of the acquisition are discussed in various
sections of this "Management's Discussion and
Analysis" and in Note 25 to the Consolidated
Financial Statements.
At December 31, 1998, the Company's tangible book
value per share (shareholders' equity reduced by
intangible assets including goodwill, mortgage
servicing rights and intangible pension plan
assets) amounted to $10.32, an increase of $.86,
or 9.1%, from the prior year-end. The increase
was primarily attributable to retained current
year earnings. At year-end, the average of the
Company's bid and asked stock price was $26.125,
resulting in a trading multiple of 2.53 to
tangible book value.
The Company's cash dividend for the first two
quarters of 1998, as restated for the August 1998
10% stock dividend, was $.19. The Company
increased its quarterly cash dividend to $.21 for
the third quarter and again to $.22 for the
fourth quarter of 1998. On an annual basis, cash
dividends of $.81 for 1998 increased $.10, or
14.1%, from cash dividends of $.71 in 1997.
Nonperforming assets amounted to $3.6 million at
December 31, 1998, a decrease of $485 thousand
from the prior year-end. At year-end, the
allowance for loan losses, at $6.7 million,
represented 230% of nonperforming loans.
Acquisition of Six Fleet Branches
On June 27, 1997, the Company completed the
acquisition of six branches in upstate New York
from Fleet Bank, a subsidiary of Fleet Financial
Group, Hartford, CT. The branches, located in
the towns of Plattsburgh (2), Lake Luzerne, Port
Henry, Ticonderoga and Warrensburg, became
branches of Glens Falls National Bank. Glens
Falls National Bank acquired substantially all
deposits at the branches and most of the loans
held by Fleet Bank related to the branches.
Total deposit liabilities at the branches assumed
by Glens Falls National Bank were approximately
$140 million and the total amount of branch-related
loans acquired was approximately $34
million. Under the purchase agreement, Glens
Falls National Bank also acquired from Fleet an
additional $10 million of residential real estate
loans not related to the branches.
Divestiture of Vermont Operations
During 1996, in three separate transactions, the
Company completed the divestiture of its Vermont
subsidiary, Green Mountain Bank ("GMB"). In
January, the Company sold eight branches of GMB,
with related deposits and loans, to Mascoma
Savings Bank, Lebanon, NH. In August, the
Company sold GMB's trust business to Vermont
National Bank, Brattleboro, VT. In September, the
Company sold the remaining branches of GMB, with
related deposits and loans, to ALBANK, FSB,
Albany, NY. The charter of GMB was liquidated in
1997 and remaining net assets distributed to the
Company. All significant assets relating to the
business or operations of GMB have been sold,
except for the building which served as GMB's
main office in Rutland, VT, which was held for
sale at December 31, 1998.
Total loans and deposits transferred in the three
Vermont sale transactions amounted to
approximately $148 million and $208 million,
respectively. These and other changes are more
fully described in the following analysis of the
results of operations and changes in financial
condition. The net gain realized on these sale
transactions in 1996, net of tax, was
approximately $10.3 million.
B. RESULTS OF OPERATIONS
The following analysis of net interest income,
the provision for loan losses, noninterest
income, noninterest expense and income taxes,
presents the factors that are primarily
responsible for the Company's results of
operations for 1998 and the prior two years.
I. NET INTEREST INCOME (Fully Taxable Basis)
Net interest income represents the difference
between interest and dividends earned on loans,
securities and other earning assets and interest
paid on deposits and other sources of funds.
Changes in net interest income result from
changes in the level and mix of earning assets
and sources of funds (volume) and changes in the
yields earned and costs paid (rate). Net
interest margin is the ratio of net interest
income to average earning assets. Net interest
income may also be described as the product of
earning assets and the net interest margin.
COMPARISON OF NET INTEREST INCOME
(Dollars In Thousands) (Fully Taxable Basis)
Years Ended December 31, Change From Prior Year
1998 1997 1996 1998 1997
Amount Percent Amount Percent
Interest and
Dividend Income $64,131 $55,705 $55,517 $ 8,426 15.1% $ 188 .3%
Interest Expense 28,142 23,887 21,826 4,255 17.8 2,061 9.4
Net Interest Income $35,989 $31,818 $33,691$ 4,171 13.1 $(1,873) (5.6)
On a tax-equivalent basis, net interest income
was $36.0 million in 1998, an increase of $4.2
million, or 13.1% from $31.8 million in 1997.
Factors contributing to the $4.2 million increase
in net interest income are discussed in the
following section.
ANALYSIS OF CHANGES IN NET INTEREST INCOME
The following table presents net interest income
components on a tax-equivalent basis and reflects
changes between periods attributable to movement
in either the average daily balances or average
rates for both earning assets and
interest-bearing liabilities. Changes
attributable to both volume and rate have been
allocated proportionately between the categories.
CHANGE IN NET INTEREST INCOME
(In Thousands) (Fully Taxable Basis)
1998 Compared to 1997 1997 Compared to 1996
Change in Net Interest IncomeChange in Net Interest Income
Due to: Due to:
Volume Rate Total Volume Rate Total
Interest and Dividend Income:
Federal Funds Sold $ (404) $ (23) $ (427) $ 363 $ 30 $ 393
Securities Available-for-Sale
Taxable 2,788 (464) 2,324 626 493 1,119
Non-Taxable 529 3 532 60 --- 60
Securities Held-to-Maturity:
Taxable 167 (71) 96 1,394 9 1,403
Non-Taxable 772 (161) 611 517 (27) 490
Loans and Leases 6,524 (1,234) ,290 (1,882) (1,395) (3,277)
Total Interest and Dividend Income 10,376 (1,950) 8,426 1,078 (890) 188
Interest Expense:
Deposits:
Interest-Bearing Demand Deposits 794 (328) 466 383 297 680
Regular and Money Market Savings 418 (350) 68 (326) (108) (434)
Time Deposits of $100,000 or More 1,313 28 1,341 426 110 536
Other Time Deposits 1,287 43 1,330 848 204 1,052
Total Deposits 3,812 (607) 3,205 1,331 503 1,834
Short-Term Borrowings 262 (61) 201 196 31 227
Long-Term Debt 849 --- 849 --- --- ---
Total Interest Expense 4,923 (668) 4,255 1,527 534 2,061
Net Interest Income $ 5,453 $(1,282) $4,171 $ (449) $(1,424) $(1,873)
The following table reflects the components of
the Company's net interest income, setting forth,
for years ended December 31, 1998, 1997 and 1996
(I) average balances of assets, liabilities and
shareholders' equity, (II) interest and dividend
income earned on earning assets and interest
expense incurred on interest-bearing liabilities,
(III) average yields earned on earning assets and
average rates paid on interest-bearing
liabilities, (IV) the net interest spread
(average yield less average cost) and (V) the net
interest margin (yield) on earning assets. Rates
are computed on a tax-equivalent basis. The
yield on securities available-for-sale is based
on the amortized cost of the securities.
Nonaccrual loans are included in average loans
and leases, while unearned income has been
eliminated.
AVERAGE CONSOLIDATED BALANCE SHEETS AND NET INTEREST INCOME ANALYSIS
Arrow Financial Corporation and Subsidiaries
(Fully Taxable Basis using a marginal tax rate of 35%)
(Dollars In Thousands)
Years Ended December 31, 1998 1997 1996
Interest Rate Interest Rate Interest Rate
Average Income/ Earned/ Average Income/ Earned/ Average Income/ Earned/
Balance Expense Paid Balance Expense Paid Balance Expense Paid
Federal Funds Sold $ 11,280 $ 609 5.40% $ 18,752 $ 1,035 5.52% $ 12,150 $ 642 5.28%
Securities Available-
for-Sale: (1)
Taxable 226,447 14,542 6.42 183,261 12,219 6.67 173,703 1,100 6.39
Non-Taxable 10,005 597 5.97 1,142 65 5.73 80 5 5.75
Securities Held-to-
Maturity:
Taxable 22,825 1,560 6.84 20,413 1,464 7.17 959 61 6.36
Non-Taxable 32,988 2,445 7.41 22,713 1,834 8.08 16,316 1,344 8.24
Loans & Leases 514,348 44,378 8.63 439,103 39,088 8.90 459,946 42,365 9.21
otal Earning Assets 817,893 64,131 7.84 685,384 55,705 8.13 663,154 55,517 8.37
Allowance For Loan
Losses (6,514) (6,021) (10,102)
Cash and Due
From Banks 22,891 26,341 25,303
Other Assets 39,101 32,732 28,975
Total Assets $873,371 $738,436 $707,330
Deposits:
Interest-Bearing
Demand Deposits $171,209 4,933 2.88 $144,204 4,467 3.10 $131,438 3,787 2.88
Regular and Money
Market Savings 161,874 4,251 2.63 146,529 4,183 2.85 157,892 4,617 2.92
Time Deposits of
$100,000 or More 112,226 6,075 5.41 87,956 4,734 5.38 79,996 4,198 5.25
Other Time Deposits 195,283 10,715 5.49 171,820 9,385 5.46 156,236 8,333 5.33
Total Interest-
Bearing Deposits 640,592 25,974 4.05 550,509 22,769 4.14 525,562 20,935 3.98
Short-Term Borrowings 28,001 1,319 4.71 22,491 1,118 4.97 18,524 891 4.81
Long-Term Debt. 16,548 849 5.13 --- --- --- --- --- ---
Total Interest-
Bearing Funds 685,141 28,142 4.11 573,000 23,887 4.17 544,086 21,826 4.01
Demand Deposits 96,149 78,704 77,479
Other Liabilities 15,752 14,339 15,374
Total Liabilities 797,042 666,043 636,939
Shareholders' Equity 76,329 72,393 70,391
Total Liabilities
and Shareholders'
Equity $873,371 $738,436 $707,330
Net Interest Income
(Fully Taxable Basis) 35,989 31,818 33,691
Reversal of Tax
Equivalent
Adjustment (1,098) (844) (642)
Net Interest Income $34,891 $30,974 $33,049
Net Interest Spread 3.73% 3.96% 4.36%
Net Interest Margin 4.40% 4.64% 5.08%
CHANGES IN NET INTEREST INCOME DUE TO RATE
YIELD ANALYSIS December 31,
1998 1997 1996
Yield on Earning Assets 7.84% 8.13% 8.37%
Cost of Interest-Bearing Liabilities 4.11 4.17 4.01
Net Interest Spread 3.73% 3.96% 4.36%
Net Interest Margin 4.40% 4.64% 5.08%
The following items have a major impact on
changes in net interest income due to rate:
general interest rate changes, the ratio of the
Company's rate sensitive assets to rate sensitive
liabilities (interest rate sensitive gap) during
periods of interest rate changes and the level of
nonperforming loans. The change in net interest
income due to changes in rate was a decrease of
$1.3 million in 1998 and a decrease of $1.4
million in 1997.
The Federal Reserve Board attempts to influence
prevailing federal funds and prime interest rates
and sets changes to the Federal Reserve Bank
discount rate. The following chart presents
recent changes:
Key Interest Rate Changes 1996 - 1998
Federal
Discount Funds Prime
Date Rate Rate Rate
November 17, 1998 4.50% 4.75% 7.75%
October 8, 1998 4.75 5.00 8.00
September 29, 1998 4.75 5.25 8.25
March 26, 1997 4.75 5.50 8.50
January 31, 1996 5.00 5.25 8.00
In the fall of 1998, after 18 months of relative
interest rate stability, the Federal Reserve
Board took steps in its open market operations
leading to three 25 basis point decreases in the
federal funds target rate, which led to parallel
changes in the prime rate.
Net interest margin for 1998, at 4.40%,
represented a 24 basis point decrease from the
net interest margin of 4.64% in 1997. This
reflects a 29 basis point decrease in the yield
on earning assets and a 6 basis point decrease in
the cost of paying liabilities from 1997 to 1998.
The decrease in net interest margin was primarily
attributable to three factors: (i) The lack of
any significant slope to the yield curve (the
normal slope of the yield curve is caused by
higher yields for instruments with longer
maturities) was the most significant factor
leading to the decrease in net interest margin
from 1997 to 1998, since the Company was unable
to obtain the same spread as in prior periods
between longer-term interest bearing liabilities
and earning assets as those items repriced. (ii)
The fact that the decrease in the yield on
earning assets was greater than the decrease in
the cost of paying liabilities from 1997 to 1998
reflected the competitive environment for loan
products in the Company's market area. (iii) The
Company took advantage of its borrowing
arrangement with the Federal Home Loan Bank
("FHLB") during 1998. These FHLB borrowings,
amounting to $45 million by year-end, were
primarily secured by 1-4 family residential real
estate loans. The spread that the Company was
able to earn on the difference between the rates
on the FHLB advances and in invested funds, was
less than the Company's total net interest
spread. However, there was a positive increase
to net interest income, even though there was a
negative impact on net interest margin.
In the 1996 to 1997 analysis, the negative impact
on net interest income attributable to rate
changes was $1.4 million.
Although the Federal Reserve Board did not raise
the discount rate during 1997, its open market
operations early in 1997 led directly to a 25
basis point increase in the federal funds
overnight rate. This increase in the cost of
federal funds was mirrored in an overall increase
in the cost of funds to the Company, while at the
same time its yield on earning assets decreased.
The net interest margin for 1997, at 4.64%,
represented a 44 basis point decrease from the
net interest margin of 5.08% in 1996. This
reflected a 24 basis point decrease in the yield
on earning assets and a 16 basis point increase
in the cost of paying liabilities from 1996 to
1997. A significant shift in the mix of earning
assets between the two periods accounted for most
of the decrease in the yield on earning assets.
After the sale of the remaining Vermont branches
at the end of September 1996, and particularly
after the June 1997 acquisition of the six Fleet
branches, the Company maintained a significantly
larger portion of its earning assets in
securities and federal funds sold, which were at
lower yields than the Company's loan portfolio.
This was due to the fact that the Vermont banking
operations maintained a high loan to deposit
ratio during the 1996 period whereas the loan to
deposit ratio of the Fleet branches acquired was
much lower; the lower-yielding liquid assets
received from Fleet were only gradually
reinvested in securities and loans. The 1996 to
1997 change was further exasperated by the fact
that, in the 1996 period, the yield on loans in
the Vermont portfolio was temporarily boosted as
a result of unexpected payments on certain
restructured loans reported in that period as
interest income. Also contributing to the 1996
to 1997 decline in net interest margin was a
shift in the New York based loan portfolio of
loan products between the years favoring lower
yielding indirect loans.
A discussion of the impact on net interest income
resulting from changes in interest rates vis a
vis the repricing patterns of the Company's
earning assets and interest-bearing liabilities
is included later in this report under Item 7A
"Quantitative and Qualitative Disclosures About
Market Risk."
CHANGES IN NET INTEREST INCOME DUE TO VOLUME
AVERAGE BALANCES
(Dollars in Thousands)
Change % Change
1998 1997 1996 1998 1997 1998 1997
Earning Assets $817,893 $685,384 $663,154 $132,509 $ 22,230 19.3% 3.4%
Interest-Bearing
Liabilities 685,141 573,000 544,086 112,141 28,914 19.6 5.3
Demand Deposits 96,149 78,704 77,479 17,445 1,225 22.2 1.6
Total Assets 873,371 738,436 707,330 134,935 31,106 18.3 4.4
Earning Assets to
Total Assets 93.65% 92.82% 93.75% .83% (.94)% 0.9 (1.0)
In general, changes in the volume of earning
assets and paying liabilities will result in
corresponding changes in net interest income.
However, changes due to volume can be enhanced or
restricted by shifts within the relative mix of
earning assets or interest-bearing liabilities
between instruments of different rates. The
change in net interest income due to changes in
volume was an increase of $5.5 million in 1998
and a decrease of $449 thousand in 1997.
Average earning assets increased by $132.5
million, or 19.3%, between 1997 and 1998.
Average interest-bearing liabilities increased
similarly, by 19.6%, between the two years. This
increase in volume led to a $5.5 million increase
in net interest income from 1997 to 1998. While
the Fleet branch acquisition had a significant
impact on the increase in average earning assets
between 1997 and 1998, due to the fact that the
average balances in 1997 only had a six month
impact on average earning assets in that year,
the chief factor was the internal asset growth in
1998 itself. From year-end 1997 to year-end 1998
earning assets increased $108.6 million. Of that
increase, $60.3 million occurred within the loan
portfolio, with nearly all of the increases
attributable to indirect automobile loans and
residential real estate loans. During 1998 the
Company took advantage of its borrowing agreement
with the FHLB accepting advances of $45 million
by year-end. The remaining increase in earning
assets was essentially funded primarily by
deposit growth.
Average earning assets increased by $22.2
million, or 3.4%, between 1996 and 1997.
However, average interest-bearing liabilities
increased even more, by 5.3%, between the two
years. The negative impact of faster growth in
interest-bearing liabilities than in earning
assets was exacerbated by shifts within average
earning assets between the two years. The
disposition of the Vermont bank in 1996 involved
the sale of an operation with a relatively high
loan-to-deposit ratio. The acquisition of six
branches from Fleet Bank in June 1997, on the
other hand, involved the acquisition of a
relatively small percentage of loans
(approximately $44 million) and a relatively high
level of lower-yielding liquid assets
(approximately $80 million in cash) with the
latter initially being invested in federal funds
and only gradually being reinvested in higher-yielding
securities and loans.
Increases in the volume of loans and deposits, as
well as yields and costs by type, for the
continuing New York operations are discussed
later in this report under Item 7.C. "Financial
Condition."
II. PROVISION FOR LOAN LOSSES AND ALLOWANCE FOR
LOAN LOSSES
Through the provision for loan losses, an
allowance (reserve) is maintained for estimated
loan losses. Actual loan losses are charged
against this allowance when they are identified.
In evaluating the adequacy of the allowance for
loan losses, management considers various risk
factors influencing asset quality. The analysis
is performed on a loan by loan basis for impaired
and large balance loans, and by portfolio type
for smaller balance homogeneous loans. This
analysis is based on judgments and estimates and
may change in response to economic developments
or other conditions that may influence borrowers'
economic outlook.
The provision for loan losses was largely
influenced by the level of nonperforming loans,
the expected future levels of nonperforming
loans, by the level of loans actually charged-off
against the allowance for loan losses during the
year and by the change in the mix of loan
categories within the loan portfolio.
At December 31, 1998, nonperforming loans
amounted to $2.9 million, a decrease of 20.5%
from the balance at December 31, 1997. The
decrease was primarily attributable to one large
commercial loan, placed on nonaccrual status
during 1997, which fully paid-off in 1998.
At December 31, 1998 the allowance for loan
losses was $6.7 million. The allowance for loan
losses was 230% of the amount of nonperforming
loans at that date.
During 1998, loan losses charged against the
allowance, net of recoveries, were $835 thousand,
or .16% of average loans for the period. The
provision for loan losses charged to expense for
1998 was $1.4 million, or .27% of average loans
for the period.
At December 31, 1997, nonperforming loans
amounted to $3.7 million, an increase of 40.7%
from the balance at December 31, 1996. The
increase was primarily attributable to a large
commercial loan placed on nonaccrual status
during 1997, the same loan discussed above that
was fully paid off in 1998.
At December 31, 1997 the allowance for loan
losses was $6.2 million. The allowance for loan
losses was 168% of the amount of nonperforming
loans at that date.
During 1997, loan losses charged against the
allowance, net of recoveries, were $1.4 million,
or .32% of average loans for the period. The
provision for loan losses charged to expense for
1997 was $1.3 million, or .30% of average loans
for the period. In addition, in mid-1997, the
Company made a purchase acquisition adjustment to
the allowance of $700 thousand for loans acquired
in the Fleet branch transaction. This adjustment
represented the allowance for inherent risk of
loss in the loans acquired.
During 1996, loan losses charged against the
allowance, net of recoveries, were $580 thousand,
or .13% of average loans for the period.
However, the allowance for loan losses was
significantly reduced during the year by $6.8
million. This was the amount of the reserve
attributable to loans transferred in the
divestiture of the Vermont banking operations.
These reductions in the allowance for loan losses
were offset in part by a provision for loan
losses of $896 thousand, or .19% of average loans
for the year.
At December 31, 1996 the allowance for loan
losses was $5.6 million. The allowance for loan
losses was 213% of the amount of nonperforming
loans at that date.
During 1995, nonperforming assets continued the
steady decline begun in 1991. The primary
portion of the decrease in nonperforming assets
in 1995 came from the sale of OREO out of the
Vermont banking operations. Nonaccrual loans
increased $626 thousand or 17.3% from the year-end
1994 balance. The increase in nonaccrual
loans was due primarily to the aggregate
borrowing of one large commercial borrower,
which was placed on nonaccrual status in 1995.
That loan was accounted for under SFAS No. 114
and was being carried at its estimated fair
value. Loans reported as troubled debt
restructures at December 31, 1994, were
classified as performing in 1995.
Net loan losses for 1995 were $1.4 million.
These losses compare to net loan losses of $2.8
million for the year ended December 31, 1994. As
a ratio to average loans, the net loan losses
were .27% and .56%, for the same respective
periods.
The provision for loan losses in 1994 was
actually a credit to the consolidated statement
of income resulting in a reduction in the
allowance for loan losses. During the second
quarter of 1994, with nonperforming assets at
significantly reduced levels and a substantial
sale of OREO from the Company's Vermont
operations having been completed, the Company
reduced the allowance for loan losses by $1.5
million. This reduction was effected by means of
a credit to the provision for loan losses. As a
result, for the twelve month period ended
December 31, 1994, the Company's net provision
for loan losses was a net credit of $950 thousand
and as a ratio of average loans, the provision
was (.19)% in 1994.
SUMMARY OF THE ALLOWANCE AND PROVISION FOR LOAN LOSSES
(Dollars In Thousands) (Loans and Leases, Net of Unearned Income)
Years-Ended December 31, 1998 1997 1996 1995 1994
Loans and Leases at End of Period $546,126 $485,810 $393,511 $517,787 $507,553
Average Loans and Leases 514,348 439,103 459,946 513,266 502,224
Total Assets at End of Period 939,029 831,599 652,603 789,790 746,431
Nonperforming Assets:
Nonaccrual Loans:
Construction and Land Development $ --- $ --- $ --- $ 104 $ 327
Commercial Real Estate 191 119 83 1,299 1,050
Commercial Loans 671 1,951 1,487 1,979 1,017
Other 1,408 1,251 727 862 1,224
Total Nonaccrual Loans 2,270 3,321 2,297 4,244 3,618
Loans Past Due 90 or More Days and
Still Accruing Interest 657 363 321 111 231
Restructured Loans in Compliance with
Modified Terms --- --- --- --- 580
Total Nonperforming Loans 2,927 3,684 2,618 4,355 4,429
Repossessed Assets 38 78 45 25 1
Other Real Estate Owned 627 315 136 2,410 3,396
Total Nonperforming Assets $3,592 $ 4,077 $ 2,799 $ 6,790 $ 7,826
Allowance for Loan Losses:
Balance at Beginning of Period $6,191 $ 5,581 $12,106 $12,338 $16,078
Allowance Acquired (Transferred) --- 700 (6,841) --- ---
Loans Charged-off:
Commercial, Financial
and Agricultural (166) (596) (185) (579) (997)
Real Estate - Commercial (43) --- (104) (369) (689)
Real Estate - Construction --- --- (2) (101) (1,181)
Real Estate - Residential (133) (121) (57) (160) (143)
Installment Loans to Individuals (836) (881) (598) (562) (476)
Lease Financing Receivables --- --- --- --- ---
Total Loans Charged-off (1,178) (1,598) (946) (1,771) 3,486)
Recoveries of Loans Previously
Charged-off:
Commercial, Financial
and Agricultural 19 27 84 76 260
Real Estate - Commercial --- 2 48 104 35
Real Estate - Construction --- --- --- 10 68
Real Estate - Residential 23 3 12 8 143
Installment Loans to Individuals 301 173 222 171 188
Lease Financing Receivables --- --- --- --- 2
Total Recoveries of Loans
Previously Charged-off 343 205 366 369 696
Net Loans Charged-off (835) (1,393) (580) (1,402) (2,790)
Provision for Loan Losses
Charged to Expense 1,386 1,303 896 1,170 (950)
Balance at End of Period $6,742 $ 6,191 $ 5,581 $12,106 $12,338
Nonperforming Asset Ratio Analysis:
Net Loans Charged-off as a Percentage
of Average Loans .16% .32% .13% .27% .56%
Provision for Loan Losses
as a Percentageof Average Loans .27 .30 .19 .23 (.19)
Allowance for Loan Losses
as a Percentage of Period-end Loans 1.23 1.27 1.42 2.34 2.43
Allowance for Loan Losses
as a Percentage of
Nonperforming Loans 230.32 168.05 213.18 277.98 278.57
Nonperforming Loans as a Percentage
of Period-end Loans .54 .76 .67 .84 .87
Nonperforming Assets as a Percentage
of Period-end Total Assets .38 .49 .43 .86 1.05
III. OTHER INCOME
The majority of other (i.e., noninterest) income
is derived from fees and commissions from
fiduciary services, deposit account service
charges, computer processing fees to
correspondents and other "core" or recurring
sources. Net gains or losses on the sale of
securities available-for-sale is another category
of other income.
ANALYSIS OF OTHER INCOME
(Dollars In Thousands) Change
December 31, Amount Percent
1998 1997 1996 1998 1997 1998 1997
Income from Fiduciary
Activities $ 3,025 $ 2,672 $ 3,458 $ 353 $ (786) 13.2% (22.7)%
Fees for Other Services 4,236 3,723 3,959 513 (236) 13.8 (6.0)
Net Securities
Gains (Losses) 408 74 (101) 334 175 51.4 ---
Net Gain on Divestiture of
Vermont Operations --- --- 15,330 --- (15,330) --- ---
Other Operating Income 911 1,714 1,057 (803) 657 (46.8) 62.2
Total Other Income $ 8,580 $ 8,183 $23,703 $ 397 $(15,520) 4.9 (65.5)
Total other income increased $397 thousand, or
4.9%, from 1997 to 1998. Without regard to net
securities transactions and one-time nonrecurring
items, total other income was $8.2 million for
1998 and $7.4 million for 1997, an increase of
$738 thousand, or 9.9%.
For 1998, income from fiduciary activities
increased $353 thousand, or 13.2%, from 1997.
The increase was in large part attributable to an
increase in fees from processing estates, a
source of fee income which is not consistent from
year to year. At year-end, trust assets under
management amounted to $598.8 million, an
increase of $71.9 million, or 13.6%, from year-end
1997, with a modest increase in the total
number of accounts under administration.
Fees for other services include deposit service
charges, credit card merchant processing fees,
safe deposit box fees and loan servicing fees.
These fees amounted to $4.2 million in 1998, an
increase of $513 thousand, or 13.8%, from 1997.
The increase in 1998 was primarily attributable
to increased deposit service charges (largely
traceable to the deposit accounts acquired in the
Fleet transaction which were only held for six
months in the 1997 period) and increased fee
income from processing merchant credit card
transactions.
Other operating income includes, as a primary
component, fees earned on servicing credit card
portfolios for correspondent banks. This category
of noninterest income also includes net gains on
the sale of loans and other real estate owned, if
any, as well as other miscellaneous revenues.
For 1998, other operating income, on a recurring
basis, amounted to $895 thousand, a decrease of
$127 thousand, or 12.4%, from $1.022 million in
1997. The decrease was primarily attributable to
a decrease in fees from servicing credit card
portfolios for correspondent banks.
During 1998, the Company realized net securities
gains of $408 thousand on the sale of $41.0
million from its available-for-sale portfolio.
The primary purpose of these sales was to extend
the weighted average maturity of the investments
in that portfolio.
For the 1996 to 1997 comparison, without regard
to the $15.3 million net pre-tax gain on the
divestiture of the Vermont operations in 1996 and
the impact of net securities transactions in both
years, other income for 1997 decreased $365
thousand, or 4.3%, from the 1996 period.
Income from fiduciary activities decreased $786
thousand, or 22.7%, from 1996 to 1997. The
Vermont trust business, which was sold in August
1996, had represented approximately one half of
the Company's income from fiduciary activities.
The Company did not acquire any trust business
from Fleet in the June 1997 branch acquisition.
Income from the New York based trust business
increased by $249 thousand, or 10.3% from 1996 to
1997, but this was not enough to offset the
decrease in trust income resulting from the
Vermont sale. Trust assets under management were
$526.9 million at December 31, 1997, an increase
of $92.3 million, or 21.2%, from December 31,
1996.
Fees for other services amounted to $3.7 million
in 1997, a decrease of $236 thousand, or 6.0%,
from 1996. The decrease was primarily
attributable to loan servicing fees related to
serviced loans transferred in the disposition of
Vermont operations in September 1996. To a
lesser extent, the decrease was attributable to
the fact that the Company sold deposit balances
in 1996 of $108 million, which contributed fee
income for nine months in that period, and
purchased $140 million of deposit balances from
Fleet in June 1997, which contributed service fee
income for only six months in that year.
Other operating income for 1997 amounted to $1.7
million, an increase of $657 thousand, or 62.2%,
from 1996. The increase was primarily
attributable to one-time receipts in 1996
relating to an insurance settlement and
unexpected payments related to the former Vermont
operations. Without regard to these two items,
the period-to-period change would have been an
increase of $126 thousand, or 11.9%, from 1996,
and was attributable to an increase in
miscellaneous other revenues.
During 1997, the Company realized net gains of
$74 thousand on the sale of securities classified
as available-for-sale. Proceeds from these sales
amounted to $37.0 million with gross gains of
$137 thousand, offset in part by gross losses of
$63 thousand. The primary purpose of the sales
was to extend the average maturity of the
portfolio.
During 1996, the Company recognized net losses of
$101 thousand on the sale of $51.1 million of
securities classified as available-for-sale.
Most of the sales were made for the purpose of
extending the term of the securities at higher
yields.
IV. OTHER EXPENSE
Other (i.e., noninterest) expense is a means of
measuring the delivery cost of services, products
and business activities of the Company. The key
components of other expense are presented in the
following table.
ANALYSIS OF OTHER EXPENSE
(Dollars In Thousands)
Change
December 31, Amount Percent
1998 1997 1996 1998 1997 1998 1997
Salaries and Benefits $13,810 $12,726 $14,971 $1,084 $(2,245) 8.5% (15.0)%
Net Occupancy Expense 1,674 1,561 1,790 113 (229) 7.2 (12.8)
Furniture and Equipment 2,190 1,792 1,677 398 115 22.2 6.9
Other Operating Expense 6,832 5,623 6,336 1,209 (713) 21.5 (11.3)
Total Other Expense $24,506 $21,702 $24,774 $2,804 $(3,072) 12.9 (12.4)
Other expense for 1998 amounted to $24.5 million,
an increase of $2.8 million, or 12.9%, from 1997.
The most significant factor in the year-to-year
increase was the June 1997 Fleet branch
acquisition, which had a full twelve month impact
on 1998 but only a six month impact on 1997.
Upon acquisition of the Fleet branches in June
1997, the Company retained all 34 employees (32
full-time equivalent). Total full-time
equivalent staff at the end of 1998 was 366, an
increase of 16, or 4.6%, from year-end 1997. The
8.5% period-to-period increase in salary and
benefit expenses also included normal salary
raises.
Occupancy expense increased by 7.2% from 1997 to
1998. The increase, again, was primarily
attributable to the acquisition of six Fleet
branches in June 1997.
The increase in furniture and equipment expense
of $398 thousand, or 22.2%, from 1997 to 1998 was
affected by the branch acquisition and also by
the increased depreciation expense resulting from
a significant investment in software and hardware
for servicing the Company's and correspondent
banks' credit card portfolios.
Other operating expense increased $1.2 million,
or 21.5% from 1997 to 1998. This category of
expense includes the amortization of goodwill
associated with branch acquisitions. The 1997
period included only six months of expense for
the branches acquired from Fleet in mid-1997,
whereas the 1998 period included a full year.
Total goodwill amortization expense for 1998 was
$944, an increase of $451 thousand from 1997.
The Company also devoted significant resources
towards establishing a marketing presence in the
Plattsburgh, New York area. The Company's costs
to implement its year 2000 preparedness program
are reported in section G of "Management's
Discussion and Analysis of Financial Condition
and Results of Operations."
In the prior year comparison, other expense for
1997 amounted to $21.7 million, a decrease of
$3.1 million, or 12.4%, from 1996. Most of the
decrease was in the area of employee salaries and
benefits. With the sale of the Vermont
operations in 1996, the Company reduced the
number of its employees by 83 (71 full-time
equivalent), most of whom continued as employees
of the purchasers. Upon acquisition of the Fleet
branches in June 1997, the Company retained all
34 employees (32 full-time equivalent). The net
reduction in staff was primarily responsible for
the $2.2 million decrease in salaries and
benefits, offset in part by normal salary
increases.
Occupancy expenses and other operating expenses
decreased by 12.8% and 11.3%, respectively, from
1996 to 1997. The decreases, again, were
primarily attributable to the fact that the
decrease in expenses resulting from the sale of
the Vermont operations in 1996 outweighed the
increase in expenses resulting from the
acquisition of six Fleet branches in June 1997.
Furniture and equipment expense increased by $115
thousand, or 6.9%, from 1996 to 1997, primarily
due to an investment in data processing equipment
at the end of 1996.
V. INCOME TAXES
The following table sets forth the Company's
provision for income taxes and effective tax
rates for the periods presented.
INCOME TAXES AND EFFECTIVE RATES
(Dollars in Thousands) Years Ended December 31,
1998 1997 1996
Provision for Income Taxes $5,744 $5,155 $10,822
Effective Tax Rate 32.7% 31.9% 34.8%
The provisions for federal and state income taxes
amounted to $5.7 million, $5.2 million and $10.8
million for 1998, 1997 and 1996, respectively.
The effective income tax rates for 1998, 1997 and
1996 were 32.7%, 31.9% and 34.8%, respectively.
The increase in the effective income tax rate
from 1997 to 1998, as well as the decrease in the
effective income tax rate from 1996 to 1997 was
primarily attributable to a favorable settlement
with the New York State Department of Taxation
and Finance over a combined reporting issue in
the first quarter of 1997. Adjusting for the
effects of the 1997 settlement, the effective
rate for 1997 was 34.8%. As adjusted for 1997,
the decrease in the effective rate from 1997 to
1998 was primarily attributable to the
implementation of certain tax planning
strategies.
C. FINANCIAL CONDITION
I. INVESTMENT PORTFOLIO
Investment securities are classified as held-to-
maturity, trading, or available-for-sale,
depending on the purposes for which such
securities were acquired or are being held.
Securities held-to-maturity are debt securities
that the Company has both the positive intent and
ability to hold to maturity; such securities are
stated at amortized cost. Debt and equity
securities that are bought and held principally
for the purpose of sale in the near term are
classified as trading securities and are reported
at fair value with unrealized gains and losses
included in earnings. Debt and equity securities
not classified as either held-to-maturity or
trading securities are classified as available-for-sale
and are reported at fair value with
unrealized gains and losses excluded from
earnings and reported net of taxes in accumulated
other comprehensive income. At December 31,
1998, the Company held no trading securities.
Securities Available-for-Sale:
The following table sets forth the carrying value
of the Company's securities available-for-sale
portfolio, at year-end 1998, 1997 and 1996.
SECURITIES AVAILABLE-FOR-SALE
(In Thousands) December 31,
1998 1997 1996
U.S. Treasury and Agency Obligations $ 30,134 $ 76,006 $ 95,733
State and Municipal Obligations 9,240 2,999 ---
Collateralized Mortgage Obligations 69,257 67,207 42,894
Other Mortgage-Backed Securities 120,104 64,057 21,732
Corporate and Other Debt Securities 34,953 9,145 9,184
Mutual Funds and Equity Securities 4,043 2,423 2,200
Total $267,731 $221,837 $171,743
Other mortgage-backed securities principally
consisted of agency mortgage pass-through
securities. Pass-through securities provide to
the investor monthly portions of principal and
interest pursuant to the contractual obligations
of the underlying mortgages. Collateralized
mortgage obligations ("CMOs") separate the
repayments into two or more components
(tranches), where each tranche has a separate
estimated life and yield. The Company's
practice is to purchase pass-through securities
guaranteed by federal agencies and tranches of
CMOs with shorter maturities. Included in
corporate and other debt securities are highly
rated corporate bonds.
The following table sets forth the maturities of
the Company's securities available-for-sale
portfolio as of December 31, 1998. CMO's and
other mortgage-backed securities are included in
the table based on their expected average lives.
MATURITIES OF SECURITIES AVAILABLE-FOR-SALE
(In Thousands) After After
Within 1 But 5 But After
One Within Within 10
Year 5 Years 10 Years Years Total
U.S. Treasury and
Agency Obligations $ 1,513 $ 13,317 $15,304 $ -- $ 30,134
State and Municipal
Obligations 7,240 --- --- 2,000 9,240
Collateralized Mortgage
Obligations 25,865 43,392 --- --- 69,257
Other Mortgage-Backed
Securities 728 114,332 5,044 --- 120,104
Corporate and
Other Debt Securities 30,869 3,084 --- 1,000 34,953
Mutual Funds and
Equity Securities --- --- --- 4,043 4,043
Total $66,215 $174,215 $20,348 $7,043 $267,731
The following table sets forth the tax-equivalent
yields of the Company's securities available-for-
sale portfolio at December 31, 1998.
YIELDS ON SECURITIES AVAILABLE-FOR-SALE
(Fully Tax-Equivalent Basis) After After
Within 1 But 5 But After
One Within Within 10
Year 5 Years 10 Years Years Total
U.S. Treasury and
Agency Obligations 6.66% 5.94% 6.46% ---% 6.24%
State and Municipal
Obligations 5.99 --- --- 8.65 6.56
Collateralized Mortgage
Obligations 6.52 6.32 --- --- 6.40
Other Mortgage-Backed
Securities 6.85 6.44 6.14 --- 6.43
Corporate and
Other Debt Securities 5.88 7.32 --- 9.90 6.12
Mutual Funds and
Equity Securities --- --- --- 6.88 6.88
Total 6.19 6.39 6.37 7.81 6.37
The yields on debt securities shown in the table
above are calculated by dividing annual interest,
including accretion of discounts and amortization
of premiums, by the carrying value of the
securities at December 31, 1998. Yields on
obligations of states and municipalities exempt
from federal taxation were computed on a fully
tax-equivalent basis using a marginal tax rate of
35%. Dividend earnings derived from equity
securities were adjusted to reflect applicable
federal income tax exclusions.
During 1998, the Company realized net securities
gains of $408 thousand on the sale of $41.0
million from its available-for-sale portfolio.
The primary purpose of the sales was to extend
the weighted average maturity of investments in
the portfolio, by reinvesting in securities with
later expected maturities.
During 1997, the Company realized net gains of
$74 thousand on the sale of securities available-
for-sale. Proceeds from these sales amounted to
$37.0 million with gross gains of $137 thousand,
offset in part by gross losses of $63 thousand.
Proceeds were reinvested in available-for-sale
securities having later maturities than the
securities sold.
During 1996, the Company realized net losses of
$101 thousand on the sale of $51.1 million of
securities from the available-for-sale portfolio.
Proceeds from sales early in the year were used
to provide funds required in completing the sale
of eight branches of the Vermont bank to Mascoma
Savings Bank, a transaction in which the deposit
liabilities assumed by the purchaser
substantially exceeded the loans and other
branch-related assets acquired including the
deposit premium. Other sales of securities from
the available-for-sale portfolio were used to
extend the average maturity and increase the
yield on the portfolio.
At December 31, 1998 and 1997, the weighted
average maturity was 2.6 and 2.4 years,
respectively, for debt securities in the
available-for-sale portfolio.
At December 31, 1998 the net unrealized gain on
securities available-for-sale amounted to $1.1
million. The net unrealized gain or loss, net of
tax, is reflected in accumulated other
comprehensive income.
Securities Held-to-Maturity:
The following table sets forth the book value of
the Company's portfolio of securities held-to-
maturity for each of the last three years.
SECURITIES HELD-TO-MATURITY
(In Thousands) December 31,
1998 1997 1996
U.S. Treasury and Agency Obligations $ 3,989 $ --- $ ---
State and Municipal Obligations 42,458 24,800 19,765
Other Mortgage-Backed Securities 16,569 19,282 11,111
Total $63,016 $44,082 $30,876
For information regarding the fair value of the
Company's portfolio of securities held-to-maturity,
see Note 3 to the Consolidated
Financial Statements in Part II, Item 8 of this
report.
The following table sets forth the maturities of
the Company's portfolio of securities held-to-
maturity, as of December 31, 1998. Other
mortgage-backed securities are allocated to
maturity periods based on final maturity date.
MATURITIES OF SECURITIES HELD-TO-MATURITY
(In Thousands)
After After
Within 1 But 5 But After
One Within Within 10
Year 5 Years 10 Years Years Total
U.S. Treasury and Agency Obligations $ --- $ --- $ 3,989 $ --- $ 3,989
State and Municipal Obligations. . 4,055 3,874 17,208 17,321 42,458
Other Mortgage-Backed Securities --- --- --- 16,569 16,569
Total Securities Held-to-
Maturity $4,055 $3,874 $21,197 $33,890 $63,016
The following table sets forth the tax-equivalent
yields of the Company's portfolio of securities
held-to-maturity at December 31, 1998.
YIELDS ON SECURITIES HELD-TO-MATURITY
(Fully Tax-Equivalent Basis)
After After
Within 1 But 5 But After
One Within Within 10
Year 5 Years 10 Years Years Total
U.S. Treasury & Agency Obligations ---% ---% 6.24% ---% 6.24%
State and Municipal Obligations 6.40 7.90 7.35 6.90 7.13
Other Mortgage-Backed Securities --- --- --- 6.77 6.77
Total Securities Held-to-
Maturity 6.40 7.90 7.35 6.84 7.03
The yields for debt securities shown in the
tables above are calculated by dividing annual
interest, including accretion of discounts and
amortization of premiums, by the carrying value
of the securities at December 31, 1998. Yields
on obligations of states and municipalities
exempt from federal taxation were computed on a
fully tax-equivalent basis using a marginal tax
rate of 35%.
During 1998, 1997 and 1996, the Company sold no
securities from the held-to-maturity portfolio.
The weighted-average maturity of the held-to-
maturity portfolio was 6.4 years and 5.7 years at
December 31, 1998 and 1997, respectively.
II. LOAN PORTFOLIO
The amounts and respective percentages of loans
and leases outstanding represented by each
principal category on the dates indicated were as
follows:
a. DISTRIBUTION OF LOANS AND LEASES
(Dollars In Thousands) December 31,
1998 1997 1996 1995 1994
Amount % Amount % Amount % Amount % Amount %
Commercial, Financial
and Agricultural $ 35,961 6 $ 46,124 9 $ 48,372 12 $ 79,993 15 $ 74,455 15
Real Estate - Commercial 58,420 11 50,680 10 36,302 9 71,622 14 81,704 16
Real Estate - Construction 3,406 1 2,072 1 971 1 2,051 1 5,136 1
Real Estate - Residential 238,425 44 208,258 43 168,429 43 238,298 46 230,943 45
Installment Loans to
Individuals 209,914 38 178,676 37 139,437 35 125,823 24 115,315 23
Total Loans and Leases 546,126 100 485,810 100 393,511 100 17,787 100 507,553 100
Allowance for Loan Losses (6,742) (6,191) (5,581) (12,106) (12,338)
Total Loans and Leases,
Net $539,384 $479,619 $387,930 $505,681 $495,215
Compared to prior years, the Company experienced
a significant increase in originations for
residential real estate loans during 1998. The
majority of the residential loan originations
represented new-money mortgages, rather than the
refinancing of existing loans. The Company
closed nearly 700 residential loans during the
year, amounting to $59.0 million of loan
originations. Unlike 1998, the increase in
residential real estate loans in 1997 was
primarily attributable to the acquisition of such
loans incident to the purchase of the branches
from Fleet Bank.
In 1998, the Company also continued to expand its
indirect automobile lending program, which is the
primary factor in the $31.2 million increase in
installment loans to individuals from 1997 to
1998. Indirect loans are vehicle acquisition
loans to consumers financed through local
dealerships where, by prior arrangement, the
Company acquires the dealer paper. The Company
also experienced an increase in consumer
installment loans in 1997 with most of the
increase attributable to the Fleet Branch
acquisition and the remainder principally due to
steady growth of the indirect loan program.
Although the yields on the consumer portfolios
(other than credit card loans) typically are
lower than on the commercial portfolios, the
Company has historically experienced fewer loan
losses in consumer loans than commercial loans,
in proportion to outstanding average loan
balances.
Overall, the Company experienced a slight shift
during the year in the mix within the loan
categories above, with a small percentage
increase in residential real estate loans and
installment loans to individuals and a small
decrease in commercial loans.
In the Fleet branch acquisition completed on June
27, 1997, the Company acquired $44.2 million of
loans (consumer loans - $16.6 million, home
equity loans - $7.1 million, commercial loans -
$5.6 million, commercial real estate loans - $4.8
million, and residential real estate loans -
$10.1 million). The communities served by the
acquired branches have contributed to the
internal loan growth experienced by the Company
since the closing of the branch acquisition.
During 1996, the Company transferred
substantially all of the loans in its Vermont
banking operation in two branch sale
transactions, the sale of eight branches to
Mascoma Savings Bank in January 1996 and the sale
of the Company's remaining six Vermont branches
to ALBANK in September 1996. The Vermont loan
portfolio had a higher percentage of commercial
loans than the loan portfolios of the Company's
New York banks. Consequently, the divestiture of
the Vermont banking operations is largely
responsible for the shift in the mix of the loan
portfolio from commercial to consumer loans
between year-end 1995 and year-end 1996. This
shift was augmented by the Company's
concentration in its New York residential real
estate loans and installment loans to individuals
(primarily automobile loans).
The following table indicates the changing mix in
the Company's loan portfolio by presenting the
quarterly average balances for the Company's
significant loan products for the past five
quarters. The ensuing tables present the
percentage of total loans represented by each
category as well as the annualized tax-equivalent
yield.
LOAN PORTFOLIO
Quarterly Average Loan Balances
(Dollars In Thousands)
Quarter Ending
Dec 1998 Sep 1998 Jun 1998 Mar 1998 Dec 1997
Commercial and
Commercial Real Estate $ 99,718 $ 98,177 $103,805 $102,983 $100,604
Residential Real Estate 181,211 173,598 162,071 151,417 147,928
Home Equity 32,782 33,474 35,331 36,593 36,601
Indirect Consumer Loans 172,921 161,508 151,603 143,495 139,401
Direct Consumer Loans 46,033 46,253 46,495 49,047 49,747
Credit Card Loans 6,841 6,855 7,138 7,413 7,602
Total Loans $539,506 $519,865 $506,443 $490,948 $481,883
Percentage of Total
Quarterly Average Loans
Commercial and
Commercial Real Estate 18.5% 18.9% 20.5% 21.0% 20.9%
Residential Real Estate 33.6 33.4 32.0 30.8 30.7
Home Equity 6.1 6.4 7.0 7.5 7.6
Indirect Consumer Loans 32.0 31.1 29.9 29.2 28.9
Direct Consumer Loans 8.5 8.9 9.2 10.0 10.3
Credit Card Loans 1.3 1.3 1.4 1.5 1.6
Total Loans 100.0% 100.0% 100.0% 100.0% 100.0%
Quarterly Tax-Equivalent
Yield on Loans
Commercial and
Commercial Real Estate 9.22% 9.50% 10.24% 9.60% 9.62%
Residential Real Estate 7.77 7.86 8.13 8.34 8.23
Home Equity 8.78 9.00 9.10 9.07 9.10
Indirect Consumer Loans 8.11 8.13 8.16 8.17 8.24
Direct Consumer Loans 8.72 8.55 9.00 9.18 9.18
Credit Card Loans 15.02 15.51 16.34 16.41 16.07
Total Loans 8.38 8.51 8.83 8.82 8.81
During the quarter ending June 1998, the Company
received a payoff on a loan which had been on
nonaccrual status. Otherwise the yield on
commercial and commercial real estate would have
been 9.46% for that quarter, rather than 10.24%.
The following table indicates the respective
maturities and repricing structure of the
Company's commercial, financial and agricultural
loans and its real estate - construction loans at
December 31, 1998. For purposes of determining
relevant maturities, loans are assumed to mature
at (but not before) their scheduled repayment
dates as required by contractual terms. Demand
loans and overdrafts are included in the "Within
1 Year" maturity category.
MATURITY AND REPRICING OF COMMERCIAL LOANS
(In Thousands) After 1 After
WithinBut Within Five
1 Year 5 Years Years Total
Commercial, Financial and Agricultural $17,552 $10,280 $ 8,129 $35,961
Real Estate - Construction 410 819 2,177 3,406
Total $17,962 $11,099 $10,306 $39,367
Fixed Interest Rates $ 2,656 $ 8,788 $ 9,635 $21,079
Variable Interest Rates 15,306 2,311 671 18,288
Total $17,962 $11,099 $10,306 $39,367
During 1998, the Company borrowed funds from the
FHLB. The borrowings, which equaled $45 million
at December 31, 1998, were used to finance
expansion in the Company's loan and investment
portfolios. The borrowings were collateralized
with approximately $152.6 million in 1-4 family
residential real estate loans.
COMMITMENTS AND LINES OF CREDIT
Letters of credit represent extensions of credit
granted in the normal course of business which
are not reflected in the financial statements
because they were not yet funded. As of December
31, 1998, the total contingent liability for
standby letters of credit amounted to $723
thousand. In addition to these instruments, the
Company has issued lines of credit to customers,
including home equity lines of credit, credit
card lines of credit, commitments for residential
and commercial construction loans and other
personal and commercial lines of credit, which
also may be unfunded or only partially funded
from time to time. Commercial lines, generally
issued for a period of one year, are usually
extended to provide for the working capital
requirements of the borrower. At December 31,
1998, the Company had outstanding unfunded loan
commitments in the aggregate amount of
approximately $92.8 million.
b. RISK ELEMENTS
NONACCRUAL, PAST DUE AND RESTRUCTURED LOANS
The Company designates loans as nonaccrual when
the payment of interest and/or principal is due
and unpaid for a designated period (generally 90
days) or when the likelihood of the full
repayment of principal and interest is, in the
opinion of management, uncertain. Upon reaching
120 days delinquent, loans are charged-off
against the allowance for loan losses in an
amount equal to unpaid principal and accrued
interest minus the fair value of collateral plus
estimated costs to sell. There were no material
commitments to lend additional funds on
outstanding nonaccrual loans at December 31,
1998.
Loans and leases past due 90 days or more and
still accruing interest, as identified in the
following table, are those loans and leases which
were contractually past due 90 days or more but
because of expected repayments, were still
accruing interest.
Loans classified as "restructured" are reported
in accordance with SFAS No. 15, "Accounting by
Debtors and Creditors for Troubled Debt
Restructurings," as amended by SFAS No. 114 and
118. The standard requires that impaired loans,
except for large groups of smaller-balance
homogeneous loans, be measured based on (I) the
present value of expected future cash flows
discounted at the loan's effective interest rate,
(II) the loan's observable market price or (III)
the fair value of the collateral if the loan is
collateral dependent. The Company applies the
provisions of SFAS No. 114 to all impaired
commercial and commercial real estate loans over
$250,000, and to all restructured loans.
Reserves for losses for the remaining smaller-
balance loans are evaluated under SFAS No. 5.
Under the provisions of SFAS No. 114, the Company
determines impairment for collateralized loans
based on fair value of the collateral less
estimated cost to sell. For other loans,
impairment is determined by comparing the
recorded value of the loan to the present value
of the expected cash flows, discounted at the
loan's effective interest rate. The Company
determines the interest income recognition method
on a loan by loan basis. Based upon the
borrowers' payment histories and cash flow
projections, interest recognition methods include
full accrual, cash basis and cost recovery.
The Company's nonaccrual, past due and
restructured loans and leases were as follows:
SCHEDULE OF NONPERFORMING LOANS
(Dollars In Thousands) December 31,
1998 1997 1996 1995 1994
Nonaccrual Loans:
Construction and Land Development $ --- $ --- $ --- $ 104 $ 327
Commercial Real Estate 191 119 83 1,299 1,050
Commercial Loans 671 1,951 1,487 1,979 1,017
Other 1,408 1,251 727 862 1,224
Total Nonaccrual Loans 2,270 3,321 2,297 4,244 3,618
Loans Past Due 90 Days or More
and Still Accruing Interest 657 363 321 111 231
Restructured Loans in Compliance
with Modified Terms --- --- --- --- 580
Total Nonperforming Loans $2,927 $3,684 $2,618 $4,355 $4,429
Total Nonperforming Loans
as a Percentage of Period-End Loans .54% .76% .67% .84% .87%
The following table presents additional
disclosures required by SFAS No. 114 relating to
impaired loans accounted for under SFAS No. 114.
All loans reported in the schedule below are
included in nonaccrual loans in the schedule of
nonperforming loans above. The reserves for
loans accounted for under SFAS No. 114 in the
schedule below are a component of the allowance
for loan losses discussed earlier in this report
under Item 7.B.II., "Provision for Loan Losses
and Allowance for Loan Losses."
SCHEDULE OF IMPAIRED LOANS ACCOUNTED FOR UNDER SFAS NO. 114
(In Thousands)
December 31, 1998
Recorded Allowance for Carrying
Investment Loan Losses Amount
Measured at the Present Value
of Expected Cash Flows:
Commercial Loans $ 671 $ 201 $ 470
December 31, 1997
Measured at the Present Value
of Expected Cash Flows:
Commercial Loans $1,935 $ 225 $1,710
At December 31, 1998, nonaccrual loans amounted
to $2.3 million, a decrease of $1.1 million from
December 31, 1997. The decrease was primarily
attributable to one large commercial loan placed
on nonaccrual status during 1997 which was fully
paid-off in 1998. Loans past due 90 or more days
and still accruing interest amounted to $657
thousand at December 31, 1998, an increase of
$294 thousand from December 31, 1997. Total
nonperforming loans, at year-end 1998,
represented .54% of period-end loans, a decrease
from .76% at year-end 1997.
During 1998 income recognized on year-end
balances of nonaccrual loans was $76 thousand.
Income that would have been recognized during
that period on nonaccrual loans if all such had
been current in accordance with their original
terms and had been outstanding throughout the
period (or since origination if held for part of
the period) was $208 thousand.
At December 31, 1997, nonaccrual loans amounted
to $3.3 million, an increase of $1.0 million from
December 31, 1996. The increase was primarily
attributable to one large commercial loan placed
on nonaccrual status during 1997, the same loan
referenced above that was paid off in 1998.
Loans past due 90 or more days and still accruing
interest amounted to $363 thousand at December
31, 1997, an increase of $42 thousand from
December 31, 1996. Total nonperforming loans, at
year-end 1997, represented .76% of period-end
loans, an increase from .67% at year-end 1996.
During 1997 income recognized on year-end
balances of nonaccrual loans was $90 thousand.
Income that would have been recognized during
that period on nonaccrual loans if all such had
been current in accordance with their original
terms and had been outstanding throughout the
period (or since origination if held for part of
the period) was $246 thousand.
At December 31, 1996, nonaccrual loans amounted
to $2.3 million, a decrease of $1.9 million from
the year-end 1995 total. During 1996, nearly all
of the nonaccrual loans in the Vermont portfolio
were transferred in connection with the sale of
the Vermont operations that year. The New York
based nonaccrual loans at December 31, 1996 were
virtually unchanged from the level at the prior
year-end. Over one-half of the nonaccrual
balance at December 31, 1996 was attributable to
one borrower whose loan was restructured in 1996.
Payments on that loan were current in accordance
with the restructured terms as of December 31,
1996 and all payments in 1996 were used to reduce
the carrying amount of the loan.
During 1996 income recognized on year-end
balances of nonaccrual loans was $48 thousand.
Income that would have been recognized during
that period on nonaccrual loans if all such had
been current in accordance with their original
terms and had been outstanding throughout the
period (or since origination if held for part of
the period) was $232 thousand.
Nonperforming loans amounted to $4.4 million at
December 31, 1995, $74 thousand below the
balance at year-end 1994. The increase in
nonaccrual commercial loans between year-end 1994
and 1995 was primarily attributable to the
aggregate borrowing of one commercial borrower,
which was placed on nonaccrual status during
1995. Otherwise, nonaccrual loans at December
31, 1995 would have decreased from the prior
year-end balance. All loans reported as
restructured and in compliance with modified
terms at December 31, 1994 were still in
compliance with modified terms at year-end 1995
and thus classified as performing at that date.
During 1995, income recognized on year-end
balances of nonaccrual loans was $116 thousand.
Income that would have been recognized during
that period on nonaccrual loans if such had been
current in accordance with their original terms
and had been outstanding throughout the period
(or since origination if held for part of the
period) was $435 thousand.
POTENTIAL PROBLEM LOANS
On at least a quarterly basis, the Company
applies an internal credit quality rating system
to past due commercial loans. Loans are placed
on nonaccrual status when the likely amount of
future principal and interest payments are
expected to be less than the contractual amounts.
Because of its aggressive approach toward placing
commercial loans on nonaccrual status, the
Company has not separately identified any
potential problem loans in this report not
included in the classifications discussed above.
The level of problem loans is for the most part
dependent on economic conditions in northeastern
New York State. In general, the economy in the
Company's geographic market area is quite strong.
In the "capital district" in and around Albany,
unemployment is significantly below the national
average, and north of the capital district, the
total number of jobs has held steady over recent
periods with nominal growth in the job rate.
However, unemployment remains above the national
average in the Glens Falls and Plattsburgh areas.
FOREIGN OUTSTANDINGS - None
LOAN CONCENTRATIONS
The loan portfolio is well diversified. There
are no concentrations of credit that exceed 10%
of the portfolio, other than the general
categories reported in the preceding Section
II.a. of this report. For a further discussion,
see Note 23 to the Consolidated Financial
Statements in Part II, Item 8 of this report.
OTHER REAL ESTATE OWNED
Other real estate owned (OREO) consists of real
property acquired in foreclosure. OREO is
carried at the lower of fair value less estimated
cost to sell or cost in accordance with Statement
of Position (SOP) 92-3 "Accounting for Foreclosed
Assets." Also, in compliance with SOP 92-3, the
Company's subsidiary banks have established
allowances for OREO losses. The allowances are
established and monitored on a property by
property basis and reflect management's ongoing
estimate of the difference between the property's
carrying amount and cost, when the carrying
amount is less than cost. For all periods, all
OREO was held for sale.
DISTRIBUTION OF OTHER REAL ESTATE OWNED
(Net of Allowance) (In Thousands) December 31,
1998 1997 1996 1995 1994
Single Family 1 - 4 Units $ 540 $ 227 $ --- $ 82 $1,073
Commercial Real Estate 86 86 86 2,328 2,128
Construction & Land Development 1 2 50 --- 195
Other Real Estate Owned, Net $ 627 $ 315 $ 136 $2,410 $3,396
The following table summarizes changes in the
net carrying amount of other real estate owned
at December 31 for each of the periods
presented.
SCHEDULE OF CHANGES IN OTHER REAL ESTATE OWNED
(Net of Allowance) (In Thousands)
1998 1997 1996 1995 1994
Balance at Beginning of Year $ 315 $ 136 $2,410 $ 3,396 $ 7,506
Properties Acquired Through Foreclosure 679 307 302 642 2,493
Adjustment for Change in Fair Value --- --- (85) (161) (398)
Sale (367) (128) (2,491) (1,467) (6,205)
Balance at End of Year $ 627 $ 315 $ 136 $ 2,410 $ 3,396
The following is a summary of changes in the
allowance for OREO losses:
ALLOWANCE FOR OTHER REAL ESTATE OWNED LOSSES
(In Thousands) 1998 1997 1996 1995 1994
Balance at Beginning of Year $ 65 $ 108 $ 370 $ 369 $ 1,150
Additions --- --- 85 161 398
Charge-Offs (6) (43) (347) (160) (1,179)
Balance at End of Year $ 59 $ 65 $ 108 $ 370 $ 369
During 1998, the Company acquired eleven
properties totaling $679 thousand through
foreclosure. Also during the year, the Company
sold ten properties with a carrying amount of
$367 thousand for net gains of $38 thousand.
During 1997, the Company acquired six properties
totaling $307 thousand through foreclosure. Also
during the year, the Company sold properties with
a carrying amount of $128 thousand for net gains
of $110 thousand.
During 1996, the Company acquired five properties
totaling $302 thousand through foreclosure. Also
during the year, the Company recognized losses of
$330 thousand on the sale of OREO properties with
a carrying amount of $2.5 million (including OREO
disposed of in the Vermont branch sale
transactions) and further reduced the carrying
amount of the two properties remaining in OREO at
December 31, 1996 by $85 thousand.
During 1995, the Company acquired $642 thousand
of OREO through foreclosure. The Company
recognized losses of $48 thousand on the sale of
OREO properties carried on the books at $1.5
million.
During 1994, the Company acquired $2.5 million of
OREO through foreclosure. The Company recognized
losses of $1.4 million on the sale of OREO
properties carried on the books at $6.2 million.
Approximately 65% of the sales took place at an
auction of OREO properties held during the second
quarter of 1994.
III. SUMMARY OF LOAN LOSS EXPERIENCE
The Company monitors credit quality through a
continuous review of the entire loan portfolio.
All significant loans (primarily commercial and
commercial real estate) are reviewed at least
semi-annually, and those under special
supervision are reviewed at least quarterly. The
boards of directors of the Company's subsidiary
banks, upon recommendations from management,
determine the extent of charge-offs and have the
final decision-making r