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



$