2014

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

GLENS FALLS, N.Y., Oct. 18, 2011 /PRNewswire/ -- Arrow Financial Corporation (NasdaqGS® – AROW) announced operating results for the three and nine-month periods ended September 30, 2011.  Net income for the third quarter of 2011 was $5.4 million, representing diluted earnings per share (EPS) of $.46, as compared to net income of $5.6 million and $.48 diluted EPS for the third quarter of 2010, a decrease of $.02 per share or 4.2%.  The cash dividend paid to shareholders in the third quarter of 2011 was $.24 per share, or 3.0% higher than the cash dividend paid in the third quarter of 2010. All per share amounts have been adjusted to reflect the effect of the 3% stock dividend we distributed on September 29, 2011.  

Thomas L. Hoy, Chairman, President and CEO stated, "We are pleased to announce solid earnings results for the third quarter while maintaining both strong asset quality and capital adequacy ratios. Our operating results included a substantial increase in our noninterest income for the third quarter, which consisted primarily of strong growth in insurance commissions, an increase in fee income from fiduciary activities and significant net gains on securities transactions. Furthermore, our key asset quality measurements continue to be excellent. We are pleased with these results during this challenging low interest rate environment."  

We have significantly expanded insurance commission income from $808 thousand in the third quarter of 2010 to nearly $2.0 million in the comparable 2011 quarter, primarily through our acquisition in 2011 of two strategically located insurance agencies.  On February 1, 2011 we acquired Upstate Agency and on August 1, 2011 we acquired the McPhillips Insurance Agencies, all of which are property and casualty insurance agencies with offices located within our service area.

Included in the third quarter 2011 operating results were net gains of $1.77 million generated from the sale of $20.1 million of Collateralized Mortgage Obligations (CMO's) from our investment portfolio.  We also deleveraged our balance sheet in the third quarter of 2011 by prepaying four of our Federal Home Loan Bank (FHLB) advances totaling $40 million.  The prepayment penalties for these higher-costing advances amounted to $1.64 million which is reported as a component of noninterest expense, while no prepayment penalties were incurred during the comparable period in 2010.

Assets under trust administration and investment management at September 30, 2011 were $925.7 million, essentially unchanged from the prior year balance of $925.9 million.  However, average assets under management increased between the two periods, as average balances grew markedly in the first half of 2011 and into the third quarter only to fall back down to the year earlier level at the very end of the third quarter when the equity markets declined.  Consequently, income from fiduciary activities rose in the third quarter of 2011 to over $1.5 million, an increase of $235 thousand, or 17.9%, above the income for the 2010 comparable quarter.

Our key profitability ratios continue to be strong. Annualized return on average equity (ROE) for the 2011 period was 12.80%, although down from our ROE of 14.39% for the comparable 2010 period. Annualized return on average assets (ROA) for the 2011 period continued to be strong at 1.11%, although down from our ROA of 1.18% for the comparable 2010 period.

Our asset quality remained strong at September 30, 2011 as measured by low levels of nonperforming assets and a very low level of charge-offs. Nonperforming assets of $6.0 million represented only .31% of period-end assets, although an increase from the .20% of assets as of September 30, 2010. Net loan losses for the third quarter of 2011, expressed as an annualized percentage of average loans outstanding, were .03%, down from .05% of average loans for the 2010 comparable period.  Both asset quality ratios are not significantly different from the prior year levels and, importantly, continue to be significantly better than industry averages. At September 30, 2011, we held only three real estate properties, totaling $281 thousand, which financial institutions typically acquire through the foreclosure process. As a result of our conservative underwriting standards, within the near-term we do not expect significant losses to be incurred in our residential real estate portfolio, even though some borrowers may be experiencing stress due to the current economic environment. The Company's allowance for loan losses amounted to $14.9 million at September 30, 2011, which represented 1.33% of loans outstanding, an increase of 6 basis points from our ratio a year ago.

During the first nine months of 2011, we originated over $35.6 million of residential real estate loans. However, for interest rate risk management purposes, due to the low interest-rate environment, during the last two quarters of 2010 and the first three quarters of 2011 we sold in the secondary market most of the residential real estate loans we originated, primarily to a government sponsored entity, Federal Home Loan Mortgage Corporation. Therefore, the outstanding balance for our residential real estate loan portfolio actually declined, both as compared to our quarter-end balances at September 30, 2010 and our year-end balance at December 31, 2010.  We continue to receive fee income from the servicing of these mortgages that were sold into the secondary market.

As a result of our deleveraging program and the sale of residential real estate loans, total assets at September 30, 2011 were $1.953 billion, down slightly from the $1.960 billion balance at September 30, 2010. Our loan portfolio was $1.121 billion, down $34 million or 3% from the September 30, 2010 level.  We also experienced a decrease in the volume of new automobile loans leading to a decline in that portfolio.  However, we did experience modest growth in our commercial loan portfolio, which partially offset these decreases.

The favorable impact from a small increase of $6.4 million, or 0.4%, in the third quarter average balance of earning assets period-to-period was more than offset by a significant decrease in our net interest margin, which fell from 3.54% in the third quarter of 2010, to 3.43% for the third quarter of 2011. This margin compression was attributable to the fact that our yield on earning assets decreased faster than the cost of our interest-bearing liabilities.  However, compared to the second quarter of 2011, net interest margin increased 8 basis points from 3.35%.  Our cost of interest-bearing deposits and other borrowings in the third quarter 2011 fell by 12 basis points, to an average cost of 1.16% compared to 1.28% in the second quarter of 2011, while our yield on earning assets in the third quarter of 2011 decreased by only 4 basis points from 4.43% in the second quarter of 2011 to 4.39%.

Total shareholders' equity reached a record high at period-end of $168.6 million, an increase of $15.2 million, or 9.9%, above the September 30, 2010 balance. Our capital ratios remain very strong, with a Tier 1 leverage ratio at the holding company of 9.10% and a total risk-based capital ratio of 16.31%. The capital ratios of the Company and each subsidiary bank again significantly exceeded the "well capitalized" regulatory standard, which is the highest category.

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. To date, our commercial, residential real estate and other consumer loan portfolios have not experienced significant deterioration in credit quality, even though the communities we serve, similar to other areas in the U.S., have been negatively impacted by the recession.

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 six-month period ended June 30, 2011 in which our return on average equity (ROE) was 14.03%, as compared to 6.28% for our peer group.  Our ratio of nonperforming loans to total loans was .50% as of June 30, 2011 compared to 3.43% for our peer group, while our annualized net loan losses of .05% for the second quarter of 2011 were well below the peer result of .90%.  Our operating results and asset quality ratios have withstood the economic stress of recent years better than most banks in our national peer group.    

Arrow Financial Corporation is a multi-bank holding company headquartered in Glens Falls, NY 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, 2010 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

Nine Months


Ended September 30,

Ended September 30,


2011

2010

2011

2010

INTEREST AND DIVIDEND INCOME





Interest and Fees on Loans

$14,548

$16,090

$44,277

$48,546

Interest on Deposits at Banks

22

33

66

107

Interest and Dividends on Investment Securities:





  Fully Taxable

3,034

3,482

9,707

11,343

  Exempt from Federal Taxes

1,393

1,392

4,394

4,330

     Total Interest and Dividend Income

18,997

20,997

58,444

64,326

INTEREST EXPENSE





NOW Accounts

1,071

1,216

3,763

4,093

Savings Deposits

483

523

1,489

1,633

Time Deposits of $100,000 or More

659

737

1,990

2,180

Other Time Deposits

1,274

1,482

3,918

4,448

Federal Funds Purchased and Securities Sold Under Agreements to Repurchase

18

33

65

95

Federal Home Loan Bank Advances

696

1,679

2,998

4,898

Junior Subordinated Obligations Issued to Unconsolidated Subsidiary Trusts

144

159

434

445

Total Interest Expense

4,345

5,829

14,657

17,792

NET INTEREST INCOME

14,652

15,168

43,787

46,534

Provision for Loan Losses

175

375

565

1,125

NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES

14,477

14,793

43,222

45,409






NONINTEREST INCOME





Income From Fiduciary Activities

1,550

1,315

4,622

4,043

Fees for Other Services to Customers

2,092

2,021

6,065

5,874

Insurance Commissions

1,994

808

5,275

2,157

Net Gain on Securities Transactions

1,771

618

2,795

1,496

Net Gain on Sales of Loans

219

472

437

527

Other Operating Income

255

71

535

254

 Total Noninterest Income

7,881

5,305

19,729

14,351

NONINTEREST EXPENSE





Salaries and Employee Benefits

7,927

7,120

22,362

20,775

Occupancy Expenses, Net

1,859

1,787

5,671

5,336

FDIC Assessments

260

486

1,040

1,472

Prepayment Penalty on FHLB Advances

1,638

---

1,638

---

Other Operating Expense

2,919

2,713

8,382

8,065

 Total Noninterest Expense

14,603

12,106

39,093

35,648

INCOME BEFORE PROVISION FOR INCOME TAXES

7,755

7,992

23,858

24,112

Provision for Income Taxes

2,383

2,417

7,356

7,408

NET INCOME

$5,372

$5,575

$16,502

$16,704

Average Shares Outstanding:





Basic

11,754

11,595

11,719

11,613

Diluted

11,776

11,598

11,747

11,641






Per Common Share:





Basic Earnings

$   .46

$    .48

$  1.41

$   1.44

Diluted Earnings

.46

.48

1.40

1.43





ARROW FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Dollars in Thousands)

Unaudited


September 30,

December 31,

September 30,


2011

2010

2010

ASSETS




Cash and Due From Banks

$43,631

$25,961

$  40,608

Interest-Bearing Deposits at Banks

94,159

5,118

83,122

Investment Securities:




Available-for-Sale

472,340

517,364

468,941

Held-to-Maturity (Approximate Fair Value of $151,131 at September
30, 2011, $162,713 at December 31, 2010 and $165,070 at
September 30, 2010)

146,416

159,938

158,106

Other Investments

4,760

8,602

9,474





Loans

1,120,691

1,145,508

1,154,676

Allowance for Loan Losses

(14,920)

(14,689)

(14,629)

 Net Loans

1,105,771

1,130,819

1,140,047

Premises and Equipment, Net

20,725

18,836

19,138

Other Real Estate and Repossessed Assets, Net

321

58

32

Goodwill

21,960

15,783

15,783

Other Intangible Assets, Net

4,828

1,458

1,426

Accrued Interest Receivable

6,508

6,512

6,959

Other Assets

31,559

17,887

16,658

   Total Assets

$1,952,978

$1,908,336

$1,960,294





LIABILITIES




Noninterest-Bearing Deposits

$232,044

$214,393

$217,855

NOW Accounts

633,857

569,076

578,674

Savings Deposits

419,470

382,130

367,581

Time Deposits of $100,000 or More

128,080

120,330

129,635

Other Time Deposits

235,888

248,075

252,850

 Total Deposits

1,649,339

1,534,004

1,546,595





Federal Funds Purchased and Securities Sold Under Agreements to
   Repurchase

47,644

51,581

67,336

Other Short-Term Borrowings

2,023

1,633

1,842

Federal Home Loan Bank Advances

40,000

130,000

150,000

Junior Subordinated Obligations Issued to Unconsolidated Subsidiary
   Trusts

20,000

20,000

20,000

Accrued Interest Payable

1,210

1,957

2,122

Other Liabilities

24,138

16,902

18,942

 Total Liabilities

1,784,354

1,756,077

1,806,837





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 September 30, 2011 and
  15,625,512 Shares Issued at December 31, 2010 and September
  30, 2010)

16,094

15,626

15,626

Additional Paid-in Capital

206,880

191,068

190,227

Retained Earnings

21,452

24,577

22,184

Unallocated ESOP Shares (117,502 Shares at September 30, 2011
   and 132,296 Shares at December 31, 2010 and September 30,
   2010)

(2,500)

(2,876)

(2,876)

Accumulated Other Comprehensive Loss

(2,805)

(6,423)

(2,326)

Treasury Stock, at Cost (4,180,557 Shares at September 30, 2011,
   4,237,435  at December 31, 2010, and 4,258,791 Shares at
   September 30, 2010)

(70,497)

(69,713)

(69,378)

   Total Stockholders' Equity

168,624

152,259

153,457

     Total Liabilities and Stockholders' Equity

$1,952,978

$1,908,336

$1,960,294





















Selected Quarterly Information - Unaudited

(Dollars in Thousands)



Sep 2011

Jun 2011

Mar 2011

Dec 2010

Sep 2010

Net Income

$5,372

$5,849

$5,281

$5,188

$5,575







Transactions Recorded in Net Income (Net of Tax):






Net Gain on Securities Transactions

1,069

291

327

7

373

Net Gain on Sales of Loans

132

101

31

299

285

Prepayment Penalty on FHLB Advances

(989)

---

---

---

---







Share and Per Share Data:(1)






Period End Shares Outstanding

11,796

11,696

11,745

11,593

11,571

Basic Average Shares Outstanding

11,754

11,729

11,675

11,576

11,595

Diluted Average Shares Outstanding

11,776

11,741

11,698

11,630

11,598

Basic Earnings Per Share

$.46

$.50

$.45

$.45

$.48

Diluted Earnings Per Share

.46

.50

.45

.45

.48

Cash Dividend Per Share

.24

.24

.24

.24

.24







Selected Quarterly Average Balances:






Interest-Bearing Deposits at Banks

$32,020

$31,937

$35,772

$76,263

$49,487

Investment Securities

646,542

697,796

683,839

672,071

594,738

Loans

1,119,384

1,128,006

1,130,539

1,147,889

1,148,196

Deposits

1,554,349

1,596,876

1,564,677

1,568,466

1,466,541

Other Borrowed Funds

164,850

179,989

193,960

223,425

236,115

Shareholders' Equity

166,514

161,680

155,588

154,677

153,653

Total Assets

1,911,853

1,961,908

1,935,409

1,970,085

1,880,099







Return on Average Assets

1.11%

1.20%

1.11%

1.04%

1.18%

Return on Average Equity

12.80

14.51

13.77

13.31

14.39

Return on Tangible Equity(2)

15.19

17.61

16.07

14.97

16.21







Average Earning Assets

$1,798,781

$1,857,739

$1,850,150

$1,884,402

$1,792,421

Average Paying Liabilities

1,487,923

1,559,014

1,546,849

1,579,765

1,485,639

Interest Income, Tax-Equivalent

19,884

20,500

20,821

21,554

21,829

Interest Expense

4, 345

4,975

5,336

5,903

5,829

Net Interest Income, Tax-Equivalent

15,539

15,525

15,485

15,651

16,000

Tax-Equivalent Adjustment

887

944

931

908

832

Net Interest Margin (3)

3.43%

3.35%

3.39%

3.30%

3.54%

Efficiency Ratio Calculation:






Noninterest Expense

$14,603

$12,171

$12,319

$11,770

$12,106

Less: Intangible Asset Amortization

(136)

(134)

(100)

(66)

(67)

         Prepayment Penalty on FHLB Advances

(1,638)

---

---

---

---

  Net Noninterest Expense

$12,829

$12,037

$12,219

$11,704

$12,039

Net Interest Income, Tax-Equivalent

$15,539

$15,525

$15,485

$15,651

$16,000

Noninterest Income

7,881

6,228

5,620

4,738

5,305

Less: Net Securities Gains

(1,771)

(482)

(542)

(11)

(618)

  Net Gross Income

$21,649

$21,271

$20,563

$20,378

$20,687

Efficiency Ratio

59.26%

56.59%

59.42%

57.43%

58.20%

Period-End Capital Information:






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

$168,624

$163,589

$159,188

$152,259

$153,457

Book Value per Share

14.29

13.99

13.55

13.13

13.26

Intangible Assets

26,788

25,044

24,900

17,241

17,209

Tangible Book Value per Share (2)

12.02

11.85

11.43

11.65

11.77

Capital Ratios:






Tier 1 Leverage Ratio

9.10%

8.67%

8.66%

8.53%

8.79%

Tier 1 Risk-Based Capital Ratio

15.06

14.76

14.37

14.50

14.16

Total Risk-Based Capital Ratio

16.31

16.02

15.63

15.75

15.41

Assets Under Trust Administration

 and Investment Management

$925,671

$1,017,091

$1,011,618

$984,394

$925,940







(1) Share 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

($ in thousands)

Unaudited



Quarter Ended:

9/30/2011

12/31/2010

9/30/2010

Loan Portfolio




Commercial Loans

$97,031

$97,621

$93,769

Commercial Construction Loans

8,642

7,090

14,519

Commercial Real Estate Loans

228,608

214,291

200,873

Other Consumer Loans

6,080

6,482

6,644

Consumer Automobile Loans

315,225

334,656

342,522

Residential Real Estate Loans

465,105

485,368

496,349

 Total Loans

$1,120,691

$1,145,508

$1,154,676





Allowance for Loan Losses




Allowance for Loan Losses, Beginning of Quarter

$14,820

$14,629

$14,411





Loans Charged-off

(135)

(182)

(217)

Recoveries of Loans Previously Charged-off

60

65

60

 Net Loans Charged-off

(75)

(117)

(157)





Provision for Loan Losses

175

177

375

 Allowance for Loan Losses, End of Quarter

$14,920

$14,689

$14,629





Nonperforming Assets




Nonaccrual Loans

$4,265

$4,061

$3,713

Loans Past Due 90 or More Days and Accruing

826

810

244

Loans Restructured and in Compliance with Modified Terms

601

16

---

 Total Nonperforming Loans

5,692

4,887

3,957

Repossessed Assets

41

58

32

Other Real Estate Owned

281

---

---

 Total Nonperforming Assets

$6,014

$4,945

$3,989





Key Asset Quality Ratios




Net Loans Charged-off to Average Loans, Quarter-to-date

  Annualized

0.03%

0.04%

0.05%

Provision for Loan Losses to Average Loans, Quarter-to-date

  Annualized

0.06

0.06

0.13

Allowance for Loan Losses to Period-End Loans

1.33

1.28

1.27

Allowance for Loan Losses to Period-End Nonperforming Loans

262.14

300.57

369.69

Nonperforming Loans to Period-End Loans

0.51

0.43

0.34

Nonperforming Assets to Period-End Assets

0.31

0.26

0.20









Nine-Month Period Ended:

9/30/2011


9/30/2010

Allowance for Loan Losses, Nine Months




Allowance for Loan Losses, Beginning of Year

$14,689


$14,014





Loans Charged-off

(523)


(712)

Recoveries of Loans Previously Charged-off

189


202

 Net Loans Charged-off

(334)


(510)





Provision for Loan Losses

565


1,125

 Allowance for Loan Losses, End of Period

$14,920


$14,629





Key Asset Quality Ratios




Net Loans Charged-off to Average Loans, Nine Months Annualized

0.04%


0.06%

Provision for Loan Losses to Average Loans, Nine Months Annualized

0.07


0.13




SOURCE Arrow Financial Corporation



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