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

GLENS FALLS, N.Y., April 19, 2011 /PRNewswire/ -- Arrow Financial Corporation (NasdaqGS® – AROW) announced operating results for the three month period ended March 31, 2011.  Net income for the first quarter of 2011 was $5.3 million, representing diluted earnings per share (EPS) of $.47, as compared to net income of $5.4 million and $.48 diluted EPS for the first quarter of 2010, a decrease of $.01 per share or 2.1%.  The cash dividend paid to shareholders in the first quarter of 2011 was $.25 per share, or 3.0% higher than the $.24 cash dividend paid in the first quarter of 2010. All per share amounts have been adjusted to reflect the effect of the 3% stock dividend we distributed on September 29, 2010.

Thomas L. Hoy, Chairman, President and CEO stated, "We are pleased to announce solid earnings results for the first quarter while maintaining both strong asset quality and capital adequacy ratios. Our operating results included a substantial increase in our noninterest income for the quarter, which consisted primarily of growth in fee income from fiduciary activities, insurance commissions and net gains on the sale of investment securities. The Company grew in several key balance sheet categories, resulting in record levels in period-end amounts for total assets, deposits, and assets under trust administration and investment management. Furthermore, our key credit quality measurements continue to be excellent."  

Assets under trust administration and investment management at March 31, 2011 rose to a record level of $1.012 billion, an increase of 11.5% from the prior year balance of $908.0 million.  The growth was primarily attributable to a general recovery in the equity markets.  As a result of the growth in this asset base, income from fiduciary activities rose in the first quarter of 2011 to over $1.5 million, an increase of $140 thousand, or 10.0%, above the income from the 2010 comparable quarter.

We have significantly expanded fee income from insurance commissions from $621 thousand in the first quarter of 2010 to nearly $1.5 million in the comparable 2011 period, primarily through the acquisition of two property and casualty insurance agencies: Loomis & LaPann, Inc. on April 1, 2010 and more recently, Upstate Agency, Inc. on February 1, 2011.  During the first quarter of 2011, certain legal and other related acquisition costs were incurred in closing the Upstate transaction and have been recognized in other operating expenses.

Our asset quality remained strong as measured by low levels of nonperforming assets, representing only .24% of total assets at March 31, 2011, and our annualized net loan losses represented only .06% for the first quarter of 2011.  Both measures are not significantly different from the prior year levels and, importantly, continue to significantly outperform industry averages.  Return on average equity (ROE) for the 2011 period continued to be very strong at 13.77%, although down from our ROE of 15.25% for the 2010 period.

Total assets at March 31, 2011 reached a record high of $1.978 billion, up $117.1 million, or 6.3% over the $1.861 billion at March 31, 2010. Our loan portfolio increased by $14.6 million reaching $1.136 billion, an increase of 1.3% over the March 31, 2010 balance of $1.121 billion, but down slightly from the year-end 2010 balance of $1.146 billion. Originations of indirect loans, comprised primarily of automobile loans originated through dealerships located in the eastern region of upstate New York, were $29.7 million in the first quarter of 2011, compared to $41.2 million for the first quarter of 2010, a decrease of $11.5 million, or 27.9%.  

During the first quarter of 2011 we originated over $20.0 million of residential real estate loans, nearly the same level as the first quarter of 2010. However, for interest rate risk management purposes, due to the historically low interest-rate environment, during the last two quarters of 2010 and the first quarter of 2011 we sold most of the residential real estate loans we originated in the secondary market, 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 March 31, 2010 and our year-end balance at December 31, 2010.  Commercial loan outstanding balances at March 31, 2011 increased $23.3 million, or 7.4%, as compared to the March 31, 2010 balances.

The favorable impact from an increase of $87.7 million, or 5.0%, in the average balance of earning assets period-to-period was offset by a significant decrease in our net interest margin, which fell from 3.81% for the first quarter of 2010, to 3.39% for the first quarter of 2011. This margin compression was attributable to the fact that our yield on the earning assets decreased faster than the cost of our interest-bearing liabilities.  However, compared to the fourth quarter of 2010, net interest margin increased 9 basis points from 3.30%.  Our cost of interest-bearing deposits and other borrowings in the first quarter 2011 continue to trend lower, falling 8 basis points, with an average cost of 1.40% compared to 1.48% in the fourth quarter of 2010.

Total shareholders' equity at period-end of $159.2 million increased $13.4 million, or 9.2%, above the March 31, 2010 balance. Our capital ratios remain very strong, with a Tier 1 leverage ratio of 8.66% and a total risk-based capital ratio of 15.63%. 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 a 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.

Our asset quality continues to be strong at March 31, 2011 with nonperforming assets of $4.8 million, representing .24% of period-end assets, an increase from the .20% percentage of assets as of March 31, 2010, but down slightly from our December 31, 2010 ratio. As of March 31, 2011, we did not own any real estate properties 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 from residential real estate borrowers who are experiencing stress due to the current economic environment.

Net loan losses for the first quarter of 2011, expressed as an annualized percentage of average loans outstanding, were .06%, very low compared to industry averages, and down from .08% of average loans for the 2010 comparable period.  The Company's allowance for loan losses amounted to $14.7 million at March 31, 2011, which represented 1.30% of loans outstanding, an increase of 3 basis points from our ratio a year ago.

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 period ended December 31, 2010 in which our return on average equity (ROE) was 14.56%, as compared to 1.35% for our peer group.  Our ratio of nonperforming loans to total loans was .43% as of December 31, 2010, compared to 3.53% for our peer group, while our annualized net loan losses of .06% for 2010 were well below the peer result of 1.27%.  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., two property and casualty insurance agencies: Loomis & LaPann, Inc. and Upstate Agency, 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.

SOURCE Arrow Financial Corporation