Arrow Reports Solid Second Quarter Operating Results and Strong Asset Quality Ratios

GLENS FALLS, N.Y., July 20, 2012 /PRNewswire/ -- Arrow Financial Corporation (NasdaqGS® – AROW) announced operating results for the three- and six-month periods ended June 30, 2012.  Net income for the second quarter of 2012 was $5.6 million, a decrease of $255 thousand or 4.4% from net income of $5.8 million for the second quarter of 2011. Diluted earnings per share (EPS) for the quarter was $.48, down 4% for the comparable 2011 quarter, when diluted EPS was $.50. However, diluted EPS in the 2012 second quarter increased 6.7% from the $.45 diluted EPS for the first quarter of 2012. For the six-month period ended June 30, 2012, net income was $10.9 million and diluted EPS was $.92, as compared to net income of $11.1 million and diluted EPS of $.95 for the six-month period ended June 30, 2011. The comparative results for the three- and six-month periods were affected by certain net gains recognized on securities transactions, which were greater in the 2011 three-month and six-month periods than the comparable 2012 periods, as discussed further in this release. The cash dividend paid to shareholders in the second quarter of 2012 was $.25 per share, or 3% higher than the cash dividend paid in the second quarter of 2011. All per share amounts have been adjusted to reflect the effect of the 3% stock dividend distributed on September 29, 2011.

Thomas L. Hoy, Chairman and CEO stated, "Our 2012 earnings results featured an increase in our noninterest income for the second quarter, reflecting primarily growth in insurance commissions, net gains on the sale of loans and an increase in fee income from fiduciary activities. We experienced modest growth in both loan and deposit balances since year-end 2011. More importantly, our key asset quality measurements continue to be excellent and shareholders' equity grew to a record high. We are pleased with these results during this extended and challenging low interest rate environment."

As noted above, securities transactions in the 2012 and 2011 periods had an impact on earnings comparisons. Included in the 2012 results of operations were net securities gains of $86 thousand for the second quarter and $389 thousand for the six-month period, net of tax, which represented $.01 and $.03 per share for the respective periods. Included in the 2011 results of operations were net securities gains of $291 thousand for the second quarter and $618 thousand for the six-month period, net of tax, which represented $.03 and $.05 per share for the respective periods. Thus, $.02 of the decline in diluted EPS for the three-month and six-month periods between 2011 and 2012 is directly attributable to a decline in net gains from securities transactions.

Insurance commission income rose from $1.8 million in the second quarter of 2011 to nearly $2.1 million in the comparable 2012 quarter. Between the six-month periods, insurance commission income rose $715 thousand, or 21.8%, from $3.3 million in the 2011 six-month period to nearly $4.0 million in the 2012 six-month period.  This growth is primarily attributable to our expansion of insurance agency business. On August 1, 2011, we acquired the McPhillips Insurance Agencies, longstanding property and casualty insurance agencies located in our service area, which was our most recent in a series of strategic insurance agency acquisitions.

Assets under trust administration and investment management at June 30, 2012 rose to $1.020 billion, an increase of $2.6 million, or 0.3%, from the June 30, 2011 balance of $1.017 billion.  Over 60% of these assets are equity investments and the growth in balances was generally attributable to a recovery within the equity markets during the first half of 2012. Income from fiduciary activities rose in the second quarter of 2012 by $75 thousand, or 4.9%, above the income from the 2011 comparable second quarter.

The Company's key profitability ratios continue to be strong. Annualized return on average assets (ROA) for the 2012 second quarter was 1.13%, a decrease from our ROA of 1.20% for the comparable 2011 period.  Annualized return on average equity (ROE) for the 2012 second quarter was 13.22%.  Although this was down from a ROE of 14.51% for the comparable 2011 period, the decrease was primarily impacted by the increased level of shareholders' equity maintained by the Company during the 2012 three-month period.  

Asset quality remained strong at June 30, 2012, as measured by our low level of nonperforming assets and very low level of charge-offs. Nonperforming assets of $8.7 million represented only 0.44% of period-end assets, far below industry averages, although up from our 0.31% of assets ratio as of June 30, 2011. Nonperforming assets included $510 thousand in loans that have been recently restructured and are in compliance with modified terms. Net loan losses for the second quarter of 2012, expressed as an annualized percentage of average loans outstanding, were 0.03%, unchanged from the 2011 comparable period.  These asset quality ratios continue to significantly outperform recently reported industry averages.

Overall loan delinquency rates remain very low and, unlike many of our peers, we have not and do not expect to incur significant losses in our residential real estate portfolio within the near-term, even though some borrowers may be experiencing stress due to the continuing weakness in the regional and the national economies. Our allowance for loan losses amounted to $15.2 million at June 30, 2012, which represented 1.33% of loans outstanding, unchanged from our year-end 2011 ratio and an increase of one basis point from our ratio one year earlier.

Total assets at June 30, 2012 reached $1.967 billion, an increase of $65.2 million, or 3.4%, from the $1.902 billion balance at June 30, 2011. Our loan portfolio was $1.147 billion, up $26.5 million, or 2.4%, from the June 30, 2011 level, and $15.2 million, or 1.3%, above the level at December 31, 2011. During the first six months of 2012, we originated over $51.3 million of residential real estate loans. However, for interest rate risk management purposes, we continued to follow the practice we have adopted in recent years of selling most of the residential real estate loans we originate to the secondary market, primarily to a government-sponsored entity, the Federal Home Loan Mortgage Corporation. Therefore, the outstanding balance for our residential real estate loan portfolio at June 30, 2012 is actually lower than our balance at June 30, 2011. We continue, however, to retain servicing rights on the mortgages that we sold, generating servicing fee income on these loans.  As long-term interest rates continued to decline during 2012, we sold loans during the six-month period at significantly higher gains than the comparable 2011 period. We experienced an increase in the volume of new automobile loans in the first six months of 2012.  We also experienced modest growth in our commercial loan portfolio which, combined with the increase in automobile loans, more than offset the decrease in our residential real estate loan portfolio.

Similar to most institutions within the banking industry, the Company has experienced decreases in its net interest margin in recent periods as a result of operating in this historically low interest rate environment. On a tax-equivalent ("TE") basis, our net interest income in the second quarter of 2012, as compared to the second quarter of 2011, decreased $296 thousand, or 1.9%.  Our TE net interest margin fell from 3.35% in the second quarter of 2011 to 3.26% for the second quarter of 2012. Both our yield on earning assets and the cost of our interest-bearing liabilities decreased significantly from the second quarter of 2011 to the second quarter of 2012.  Our cost of funds in the second quarter of 2012 fell by 38 basis points  from 1.08% in the second quarter of 2011 to .70%, while our yield on earning assets in the second quarter of 2012 decreased by 47 basis points from 4.43% in the second quarter of 2011 to 3.96%.

Total shareholders' equity reached a record high level of $171.9 million at period-end, an increase of $8.4 million, or 5.1%, above the June 30, 2011 balance. Arrow's capital ratios, which were strong at the beginning of 2011, strengthened further during 2011 and through June 30, 2012.  At quarter-end, the Tier 1 leverage ratio at the holding company level was 9.09% and total risk-based capital ratio was 16.34%, up from 8.67% and 16.02%, respectively, at June 30, 2011. The capital ratios of the Company and its subsidiary banks continue to significantly exceed the "well capitalized" regulatory standard, which is the highest category.

Many of our key operating ratios have consistently compared very favorably to our peer group, which we define as all U.S. bank holding companies having $1.0 to $3.0 billion in total assets as identified in the Federal Reserve Bank's "Bank Holding Company Performance Report" (FRB Report). The most current peer data available in the FRB Report is for the three-month period ended March 31, 2012, in which our return on average equity (ROE) was 12.67%, as compared to 7.49% for our peer group.  Our ratio of loans 90 days past due and accruing plus nonaccrual loans to total loans was 0.49% as of March 31, 2012 compared to 3.04% for our peer group, while our annualized net loan losses of 0.08% for the quarter ending March 31, 2012 were well below the peer result of 0.52%.  Our operating results and asset quality ratios have withstood the economic stress of recent years better than most banks in our national peer group.

In July 2012, Visa and MasterCard entered into a Memorandum of Understanding (MOU) with class plaintiffs to resolve certain merchant discount antitrust litigation. As a result of recent developments in this antitrust litigation involving alleged unlawful merchant practices, our subsidiary, Glens Falls National Bank and Trust Company, formerly a Visa member bank that is obligated with other member financial institutions to indemnify Visa in connection with certain legal proceedings, reversed litigation-related accruals of $294 thousand pre-tax that the Company had previously recognized in the fourth quarter of 2007. This reversal reduced our other operating expenses for the three-month and the six-month periods ending June 30, 2012. The Company has not recognized any economic benefits for its remaining shares of Visa Class B common stock.

Mr. Hoy further added, "We continue to believe that our conservative business model which emphasizes a strong capital position, high loan quality, knowledge of our market and responsiveness to our customers has positioned us well for the future. Nonetheless, we, like all banks, face challenges, particularly the threat to earnings posed by the Federal Reserve's determination to maintain interest rates at historically low levels for an extended period of time."

Arrow Financial Corporation is a multi-bank holding company headquartered in Glens Falls, New York, serving the financial needs of northeastern New York.  The Company is the parent of Glens Falls National Bank and Trust Company and Saratoga National Bank and Trust Company. Other subsidiaries include North Country Investment Advisers, Inc.; three property and casualty insurance agencies: Loomis & LaPann, Inc., Upstate Agency, LLC, and McPhillips Insurance Agency, a division of Glens Falls National Insurance Agencies, LLC; and Capital Financial Group, Inc., an insurance agency specializing in the sale and servicing of group health plans.

The information contained in this News Release may contain 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 may be "forward-looking statements" within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, involving a degree of uncertainty and attendant risk.  In the case of all forward-looking statements, actual outcomes and results may differ materially from what the statements predict or forecast, explicitly or by implication.  The Company undertakes no obligation to revise or update these forward-looking statements to reflect the occurrence of unanticipated events.  This News Release should be read in conjunction with the Company's Annual Report on Form 10-K for the year ended December 31, 2011, and our other filings with the Securities and Exchange Commission.

 


ARROW FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

(In Thousands, Except Per Share Amounts - Unaudited)

 

 



Three Months Ended June 30,


Six Months Ended June 30,



2012


2011


2012


2011

INTEREST AND DIVIDEND INCOME









Interest and Fees on Loans


$

13,628



$

14,714



$

27,586



$

29,729


Interest on Deposits at Banks


36



22



57



44


Interest and Dividends on Investment Securities:









Fully Taxable


2,480



3,323



5,118



6,673


Exempt from Federal Taxes


1,389



1,497



2,710



3,001


Total Interest and Dividend Income


17,533



19,556



35,471



39,447


INTEREST EXPENSE









NOW Accounts


976



1,361



2,035



2,692


Savings Deposits


329



503



686



1,006


Time Deposits of $100,000 or More


569



664



1,177



1,331


Other Time Deposits


1,074



1,292



2,220



2,644


Federal Funds Purchased and

  Securities Sold Under Agreements to Repurchase


5



23



11



47


Federal Home Loan Bank Advances


172



986



369



2,302


Junior Subordinated Obligations Issued to Unconsolidated Subsidiary Trusts


154



146



313



290


Total Interest Expense


3,279



4,975



6,811



10,312


NET INTEREST INCOME


14,254



14,581



28,660



29,135


Provision for Loan Losses


240



170



520



390


NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES


14,014



14,411



28,140



28,745


NONINTEREST INCOME









Income From Fiduciary Activities


1,601



1,526



3,223



3,072


Fees for Other Services to Customers


2,054



2,058



4,014



3,973


Insurance Commissions


2,107



1,815



3,996



3,281


Net Gain on Securities Transactions


143



482



645



1,024


Net Gain on Sales of Loans


537



167



894



218


Other Operating Income


366



180



595



280


Total Noninterest Income


6,808



6,228



13,367



11,848


NONINTEREST EXPENSE









Salaries and Employee Benefits


7,794



7,233



15,697



14,435


Occupancy Expenses, Net


1,970



1,894



3,994



3,812


FDIC Assessments


256



267



511



780


Other Operating Expense


2,631



2,777



5,595



5,463


Total Noninterest Expense


12,651



12,171



25,797



24,490


INCOME BEFORE PROVISION FOR INCOME TAXES


8,171



8,468



15,710



16,103


Provision for Income Taxes


2,577



2,619



4,828



4,973


NET INCOME


$

5,594



$

5,849



$

10,882



$

11,130


Average Shares Outstanding 1:









Basic


11,759



11,729



11,765



11,702


Diluted


11,773



11,741



11,784



11,719


Per Common Share:









Basic Earnings


$

0.48



$

0.50



$

0.92



$

0.95


Diluted Earnings


0.48



0.50



0.92



0.95


1 Share and per share data have been restated for the September 29, 2011 3% stock dividend.



ARROW FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(In Thousands, Except Share and Per Share Amounts - Unaudited)


June 30,

2012


December 31,
2011


June 30,

 2011

ASSETS






Cash and Due From Banks

$

31,391



$

29,598



$

33,202


Interest-Bearing Deposits at Banks

26,360



14,138



24,118


Investment Securities:






Available-for-Sale

431,010



556,538



511,094


Held-to-Maturity (Approximate Fair Value of $261,574 at June 30, 2012, $159,059 at December 31, 2011 and $143,327 at June 30, 2011)

252,902



150,688



138,334


Other Investments

4,479



6,722



7,019


Loans

1,146,641



1,131,457



1,120,096


Allowance for Loan Losses

(15,211)



(15,003)



(14,820)


Net Loans

1,131,430



1,116,454



1,105,276


Premises and Equipment, Net

24,823



22,629



19,490


Other Real Estate and Repossessed Assets, Net

837



516



31


Goodwill

22,003



22,003



20,823


Other Intangible Assets, Net

4,608



4,749



4,221


Accrued Interest Receivable

5,712



6,082



6,689


Other Assets

31,421



32,567



31,477


Total Assets

$

1,966,976



$

1,962,684



$

1,901,774


LIABILITIES






Noninterest-Bearing Deposits

$

248,224



$

232,038



$

219,403


NOW Accounts

691,001



642,521



545,022


Savings Deposits

437,568



416,829



414,487


Time Deposits of $100,000 or More

108,277



123,668



123,640


Other Time Deposits

219,813



228,990



239,307


Total Deposits

1,704,883



1,644,046



1,541,859


Federal Funds Purchased and Securities Sold Under Agreements to Repurchase

16,097



26,293



60,361


Other Short-Term Borrowings





2,211


Federal Home Loan Bank Overnight Advances



42,000




Federal Home Loan Bank Term Advances

30,000



40,000



90,000


Junior Subordinated Obligations Issued to Unconsolidated Subsidiary Trusts

20,000



20,000



20,000


Accrued Interest Payable

898



1,147



1,549


Other Liabilities

23,158



22,813



22,205


Total Liabilities

1,795,036



1,796,299



1,738,185


STOCKHOLDERS' EQUITY






Preferred Stock, $5 Par Value; 1,000,000 Shares Authorized






Common Stock, $1 Par Value; 20,000,000 Shares Authorized (16,094,277 Shares Issued at June 30, 2012 and at December 31, 2011, and 15,625,512 Shares Issued at June 30, 2011)

16,094



16,094



15,626


Additional Paid-in Capital

209,354



207,600



194,276


Retained Earnings

28,951



23,947



30,039


Unallocated ESOP Shares (105,211 Shares at June 30, 2012, 117,502 shares at December 31, 2011, and 118,292 Shares at June 30, 2011)

(2,250)



(2,500)



(2,600)


Accumulated Other Comprehensive Loss

(6,289)



(6,695)



(2,983)


Treasury Stock, at Cost (4,223,388 Shares at June 30, 2012, 4,213,470 shares at December 31, 2011, and 4,152,043 shares at June 30, 2011)

(73,920)



(72,061)



(70,769)


Total Stockholders' Equity

171,940



166,385



163,589


Total Liabilities and Stockholders' Equity

$

1,966,976



$

1,962,684



$

1,901,774
















Arrow Financial Corporation

Selected Quarterly Information

(Dollars In Thousands, Except Per Share Amounts - Unaudited)

Quarter Ended

6/30/2012


3/31/2012


12/31/2011


9/30/2011


6/30/2011

Net Income

$

5,594



$

5,288



$

5,431



$

5,372



$

5,849


Transactions Recorded in Net Income (Net of Tax):










Net Gain on Securities Transactions

86



303





1,069



291


Net Gain on Sales of Loans

324



216



259



132



101


Reversal of VISA Litigation Reserve

178










Prepayment Penalty on FHLB Advances







(989)




Share and Per Share Data:1










Period End Shares Outstanding

11,766



11,761



11,763



11,796



11,696


Basic Average Shares Outstanding

11,759



11,770



11,782



11,754



11,729


Diluted Average Shares Outstanding

11,773



11,794



11,788



11,776



11,741


Basic Earnings Per Share

$

0.48



$

0.45



$

0.46



$

0.46



$

0.50


Diluted Earnings Per Share

0.48



0.45



0.46



0.46



0.50


Cash Dividend Per Share

0.25



0.25



0.24



0.24



0.24


Selected Quarterly Average Balances:










Interest-Bearing Deposits at Banks

$

55,023



$

30,780



$

49,101



$

32,855



$

31,937


Investment Securities

682,589



678,474



674,338



646,542



697,796


Loans

1,143,666



1,136,322



1,126,452



1,119,384



1,128,006


Deposits

1,733,320



1,683,781



1,668,062



1,554,349



1,596,876


Other Borrowed Funds

66,022



83,055



101,997



164,850



179,989


Shareholders' Equity

170,199



167,849



168,293



166,514



161,680


Total Assets

1,994,883



1,959,741



1,963,915



1,911,853



1,961,908


Return on Average Assets

1.13

%


1.09

%


1.10

%


1.11

%


1.20

%

Return on Average Equity

13.22

%


12.67

%


12.80

%


12.80

%


14.51

%

Return on Tangible Equity2

15.67

%


15.07

%


15.22

%


15.19

%


17.16

%

Average Earning Assets

$

1,881,278



$

1,845,576



$

1,849,891



$

1,798,781



$

1,857,739


Average Paying Liabilities

1,565,692



1,545,098



1,547,071



1,487,923



1,559,014


Interest Income, Tax-Equivalent

18,508



18,810



19,179



19,884



20,500


Interest Expense

3,279



3,532



4,022



4,345



4,975


Net Interest Income, Tax-Equivalent

15,229



15,278



15,157



15,539



15,525


Tax-Equivalent Adjustment

975



872



832



887



944


Net Interest Margin 3

3.26

%


3.33

%


3.25

%


3.43

%


3.35

%

Efficiency Ratio Calculation:










Noninterest Expense

$

12,651



$

13,146



$

12,455



$

14,603



$

12,171


Less: Intangible Asset Amortization

(127)



(138)



(142)



(135)



(134)


Prepayment Penalty on FHLB Advances







(1,638)




Net Noninterest Expense

$

12,524



$

13,008



$

12,313



$

12,830



$

12,037


Net Interest Income, Tax-Equivalent

$

15,229



$

15,278



$

15,157



$

15,539



$

15,525


Noninterest Income

6,808



6,559



6,199



7,881



6,228


Less: Net Securities Gains

(143)



(502)





(1,771)



(482)


Net Gross Income

$

21,894



$

21,335



$

21,356



$

21,649



$

21,271


Efficiency Ratio

57.20

%


60.97

%


57.66

%


59.26

%


56.59

%

Period-End Capital Information:










Total Stockholders' Equity (i.e. Book Value)

$

171,940



$

168,466



$

166,385



$

168,624



$

163,589


Book Value per Share

14.61



14.32



14.14



14.30



13.99


Intangible Assets

26,611



26,653



26,752



26,788



25,044


Tangible Book Value per Share 2

12.35



12.06



11.87



12.02



11.85


Capital Ratios:










Tier 1 Leverage Ratio

9.09

%


9.10

%


8.95

%


9.10

%


8.67

%

Tier 1 Risk-Based Capital Ratio

15.08

%


14.84

%


14.71

%


15.06

%


14.76

%

Total Risk-Based Capital Ratio

16.34

%


16.10

%


15.96

%


16.31

%


16.02

%

Assets Under Trust Administration

and Investment Management

$

1,019,702



$

1,038,186



$

973,551



$

925,671



$

1,017,091


1Share and Per Share Data have been restated for the September 29, 2011 3% stock dividend.

2 Tangible Book Value and Tangible Equity exclude intangible assets from total equity.  These are non-GAAP financial measures which we believe   provide investors with information that is useful in understanding our financial performance.

3 Net Interest Margin is the ratio of our annualized tax-equivalent net interest income to average earning assets.  This is also a non-GAAP financial measure which we believe provides investors with information that is useful in understanding our financial performance.


Arrow Financial Corporation

Consolidated Financial Information

(Dollars in Thousands - Unaudited)

 

Quarter Ended:

6/30/2012


12/31/2011


6/30/2011

Loan Portfolio






Commercial Loans

$

101,294



$

99,791



$

97,201


Commercial Construction Loans

17,628



11,083



6,907


Commercial Real Estate Loans

235,861



232,149



228,542


Other Consumer Loans

6,543



6,318



5,981


Consumer Automobile Loans

334,098



322,375



316,692


Residential Real Estate Loans

451,217



459,741



464,773


Total Loans

$

1,146,641



$

1,131,457



$

1,120,096


Allowance for Loan Losses






Allowance for Loan Losses, Beginning of Quarter

$

15,053



$

14,921



$

14,745


Loans Charged-off

136



251



150


Less Recoveries of Loans Previously Charged-off

54



53



55


Net Loans Charged-off

82



198



95


Provision for Loan Losses

240



280



170


Allowance for Loan Losses, End of Quarter

$

15,211



$

15,003



$

14,820


Nonperforming Assets






Nonaccrual Loans

$

6,822



$

4,528



$

4,990


Loans Past Due 90 or More Days and Accruing

504



1,662



555


Loans Restructured and in Compliance with Modified Terms

510



1,422



306


Total Nonperforming Loans

7,836



7,612



5,851


Repossessed Assets

25



56



18


Other Real Estate Owned

812



460



13


Total Nonperforming Assets

$

8,673



$

8,128



$

5,882


Key Asset Quality Ratios






Net Loans Charged-off to Average Loans,

   Quarter-to-date Annualized

0.03

%


0.07

%


0.03

%

Provision for Loan Losses to Average Loans,

  Quarter-to-date Annualized

0.08

%


0.10

%


0.06

%

Allowance for Loan Losses to Period-End Loans

1.33

%


1.33

%


1.32

%

Allowance for Loan Losses to Period-End Nonperforming Loans

194.11

%


197.10

%


253.30

%

Nonperforming Loans to Period-End Loans

0.68

%


0.67

%


0.52

%

Nonperforming Assets to Period-End Assets

0.44

%


0.41

%


0.31

%

Six-Month Period Ended:






Allowance for Loan Losses






Allowance for Loan Losses, Beginning of Year

$

15,003





$

14,689


Loans Charged-off

433





388


Less Recoveries of Loans Previously Charged-off

121





129


Net Loans Charged-off

312





259


Provision for Loan Losses

520





390


Allowance for Loan Losses, End of Year

$

15,211





$

14,820


Key Asset Quality Ratios






Net Loans Charged-off to Average Loans, Annualized

0.06

%




0.05

%

Provision for Loan Losses to Average Loans, Annualized

0.09

%




0.07

%

 

SOURCE Arrow Financial Corporation



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