Arrow Reports 7% Increase in Quarterly Net Income and Strong Asset Quality Ratios

GLENS FALLS, N.Y., Oct. 17, 2012 /PRNewswire/ -- Arrow Financial Corporation (NasdaqGS® – AROW) announced operating results for the three- and nine- month periods ended September 30, 2012.  Net income for the third quarter of 2012 was $5.7 million, an increase of $376 thousand or 7.0% from net income of $5.4 million for the third quarter of 2011. Diluted earnings per share (EPS) for the quarter was $0.48, an increase of 6.7% from the comparable 2011 quarter, when diluted EPS was $0.45. Diluted EPS in the 2012 third quarter increased 2.1% from the $.47 diluted EPS for the second quarter of 2012. For the nine-month period ended September 30, 2012, net income was $16.6 million as compared to net income of $16.5 million for the same period in 2011, while diluted EPS was unchanged at $1.38 for the nine-month periods ended September 30, 2012 and 2011.  Return on average assets for the third quarter of 2012 was 1.16%, up from 1.11% for the same period last year, and return on average equity for the 2012 third quarter was 13.14%, up from 12.80% for the 2011 third quarter.

Thomas L. Hoy, Chairman and CEO, stated, "Our 2012 earnings results included increases in all categories of noninterest income for the third quarter other than securities gains, reflecting primarily growth in insurance commissions and net gains on the sale of loans. 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."

The following list presents highlights of our third-quarter and year-to-date periods:

• Cash and Stock Dividends: In September 2012 we distributed a 2% stock dividend.  All prior period share and per share data have been adjusted accordingly.  The cash dividend paid to shareholders in the third quarter of 2012 was $.245 per share, or 3% higher than the cash dividend paid in the third quarter of 2011.
• Insurance Agencies Operations:  Insurance commission income rose from $2.0 million in the third quarter of 2011 to over $2.2 million in the comparable 2012 quarter. For the nine-month periods, insurance commission income rose $944 thousand, or 17.9%, from $5.3 million in 2011 to over $6.2 million in 2012.  This growth is primarily attributable to our expansion of insurance agency business. Our most recent acquisition was on August 1, 2011, when we acquired the McPhillips Insurance Agencies, two longstanding property and casualty insurance agencies located in our service area.
• Asset Quality:  Asset quality remained strong at September 30, 2012, as measured by our low level of nonperforming assets and very low level of charge-offs. Nonperforming assets of $7.6 million represented only 0.37% of period-end assets, far below industry averages, although up from our 0.31% of assets ratio as of September 30, 2011.  Net loan losses for the third quarter of 2012, expressed as an annualized percentage of average loans outstanding, were 0.04%, an increase of one basis point 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 existing residential real estate portfolio, even though some borrowers may be experiencing stress due to the continuing weakness in the regional economy. Our allowance for loan losses amounted to $15.2 million at September 30, 2012, which represented 1.32% of loans outstanding, a decrease of one basis point from our ratio one year earlier and at December 31, 2011.

• Trust Assets and Related Noninterest Income:  Assets under trust administration and investment management at September 30, 2012, rose to $1.1 billion, an increase of $125.5 million, or 13.6%, from the September 30, 2011 balance of $925.7 million.  The growth in balances was generally attributable to a favorable movement within the financial markets between the periods. Income from fiduciary activities rose by $164 thousand, or 3.5%, for the first nine months of 2012, as compared to the 2011 period.
• Securities Transactions:  Securities gains had a much smaller impact on earnings in the 2012 periods than in the 2011 periods. Included in the 2012 results of operations were net securities gains of $39 thousand for the third quarter and $428 thousand for the nine-month period, net of tax, which represented less than $.01 and $.04 per share for the respective periods. Included in the 2011 results of operations were net securities gains of $1.1 million for the second quarter and $1.7 million for the nine-month period, net of tax, which represented $.09 and $.14 per share for the respective periods.
• FHLB Debt:  In the third quarter of last year, we deleveraged our balance sheet by prepaying four of our long-term Federal Home Loan Bank (FHLB) advances totaling $40 million.  The prepayment penalties for these higher-costing advances amounted to $989 thousand, net of tax, which is reported as a component of noninterest expense, and represented $.08 per share.  No prepayment penalties were incurred during the comparable period in 2012. 
• Balance Sheet Changes:  Total assets at September 30, 2012, reached $2.041 billion, an increase of $87.5 million, or 4.5%, from the $1.953 billion balance at September 30, 2011. Our loan portfolio was $1.153 billion, up $32.3 million, or 2.9%, from the September 30, 2011 level, and $21.5 million, or 1.9%, above the level at December 31, 2011. During the first nine months of 2012, we originated over $76.6 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 September 30, 2012 is actually lower than our balance at September 30, 2011. We continue to retain servicing rights on the mortgages we sold, generating servicing fee income on these loans.  As long-term interest rates continued to decline during 2012, we sold loans during the nine-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 nine 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.
• Net Interest Income:  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 basis, our net interest income in the third quarter of 2012, as compared to the third quarter of 2011, decreased  $14 thousand, or 0.1%.  Our tax-equivalent net interest margin fell from 3.43% in the third quarter of 2011 to 3.33% for the third quarter of 2012, although net interest margin for the third quarter of 2012 increased 7 basis points from the 3.26% margin for the second quarter of 2012. Both our yield on earning assets and the cost of our interest-bearing liabilities decreased significantly from the third quarter of 2011 to the third quarter of 2012.  Likewise, our cost of funds in the third quarter of 2012 fell by 46 basis points  from 1.16% in the third quarter of 2011 to .70%, while our yield on earning assets in the third quarter of 2012 decreased by 49 basis points from 4.39% in the third quarter of 2011 to 3.90%.
• Capital:  Total shareholders' equity reached a record high level of $176.3 million at period-end, an increase of $7.7 million, or 4.6%, above the September 30, 2011 balance. Arrow's capital ratios, which were strong at the beginning of 2011, strengthened further during 2011 and through September 30, 2012.  At third quarter-end, the Tier 1 leverage ratio at the holding company level was 9.41% and total risk-based capital ratio was 16.45%, up from 9.10% and 16.31%, respectively, at September 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.
• Peer Group:  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, 2012, in which our return on average equity (ROE) was 12.88%, as compared to 7.83% for our peer group.  Our ratio of loans 90 days past due and accruing, plus nonaccrual loans to total loans was 0.64% as of June 30, 2012, as compared to 2.76% for our peer group, while our annualized net loan losses of 0.05% for the quarter ending June 30, 2012 were well below the peer result of 0.58%.  Our operating results and asset quality ratios have withstood the economic stress of recent years much better than most banks in our national peer group.

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.

In practically any endeavor, the real test of success is not how one performs in the short-term, but whether results are consistently delivered over time.  The total return performance of Arrow common stock has been superior to those of our peers for the past five- and ten-year periods."

In addition, Arrow's commitment to excellence has been acknowledged by four of the most respected organizations in the financial services industry:

• Bank Director Magazine recognized Arrow Financial Corporation in its third quarter edition as one of the leading financial institutions in the nation based on its profitability, capitalization and asset quality.  "Going for Gold: 2012 Bank Performance Scorecard" is available online at bankdirector.com.
• American Banker Magazine this year ranked Arrow Financial Corporation 11^th among a peer group of more than 1,000 institutions.  Arrow's three-year average return on equity of 14.75% was more than three times the peer group average return on equity of 4.44%.  The article, titled "Simply the Best," can be viewed at americanbanker.com/magazine.
• Bauer Financial, Inc. has awarded our banks its 5-Star Rating, touting us as "Superior" in regard to capital, asset quality, profitability and other measures of success in the banking industry.
• And finally, the highly respected independent investment and research firm Stern, Agee & Leach, Inc., reported on October 4, 2012, "The company (Arrow) remains among the Best of Breed in the Northeast due to its ability to generate consistently high returns while maintaining strong credit quality and offering a solid and sustainable yield."

"We believe that teams matter more than individuals," said Mr. Hoy.  "Our directors and senior management are very proud of the accomplishments of our dedicated staff, which is a direct result of the service we provide to customers.  I want to personally thank our employees, as well as our shareholders, for their loyalty and confidence in our ability to deliver superior performance."

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.

SOURCE Arrow Financial Corporation