Arrow Reports a Significant Increase in Earnings and Strong Asset Quality Ratios

2008-07-15 07:37:00

    GLENS FALLS, N.Y., July 15 /EMWNews-FirstCall/ -- Arrow Financial

Corporation (Nasdaq: AROW) announced operating results for the three and

six-month periods ended June 30, 2008. Net income for the second quarter

ended June 30, 2008 was $5.4 million, representing diluted earnings per

share of $.51, up $.12 or 30.8% from $.39 per share amount earned in the

second quarter of 2007, when net income was $4.2 million. For the first six

months of 2008, net income of $10.4 million increased 25% from the $8.3

million earned for 2007. Diluted earnings per share equaled $.98 for the

first six months of 2008, up from $.77 per share earned during the

comparative period in 2007.



    Thomas L. Hoy, Chairman, President and CEO stated, "We are pleased to

report a significant increase in earnings while asset and credit quality

ratios remain strong. The favorable quarterly and six month earnings

performances were primarily attributable to significant increases in net

interest income as a result of a wider net interest margin and growth in

average earning assets.



    Average earning assets were $1.548 billion in the second quarter of

2008 versus $1.469 billion for the same quarter last year, an increase of

5.4%. Net interest income was favorably impacted by a rising net interest

margin, which increased 60 basis points to 3.92% for the second quarter of

2008 versus the 2007 comparative period and increased 36 basis points as

compared to the margin of 3.56% for the first quarter of 2008. Lower

funding costs and a more positively sloped yield curve, a result of Federal

Reserve Bank actions to lower the targeted federal funds rate 325 basis

points since the beginning of September 2007, were principally responsible

for the expansion in net interest margin. In essence, the volume of our

interest-bearing liabilities that repriced to lower rates during the

quarter significantly exceeded the volume of our earning assets that

repriced to lower yields.



    As we previously reported, Visa successfully completed an initial

public offering (IPO) during the first quarter of 2008 which included a

mandatory partial redemption of our holdings in Visa shares. This

transaction resulted in a positive impact on our net income of $637

thousand after-tax, or $.06 diluted earnings per share, both in the first

quarter of 2008 and for the six-month 2008 period.



    Total assets at June 30, 2008 reached a record high of $1.631 billion,

up $89.0 million, or 5.8%, over the June 30, 2007 balance of $1.542

billion. Loan balances outstanding reached a record level of $1.063 billion

at June 30, 2008, representing an increase of $45.0 million, or 4.4%, from

the balance at June 30, 2007. In addition, deposit balances at June 30,

2008 reached a record $1.249 billion, representing an increase of $43.9

million, or 3.6%, from the June 30, 2007 level of $1.205 billion.



    In the first half of 2008, the deterioration of the residential real

estate market nationally, and of so-called subprime mortgage loan

portfolios, continued to have a negative impact on many financial

institutions and indirectly on the national and world economies. We have

not engaged in the origination of subprime mortgage loans or in subprime

lending as a business line, nor do we hold mortgage-backed securities

backed by subprime mortgages in our investment portfolio.



    Asset quality remained high at quarter-end 2008, with nonperforming

loans of $2.5 million, which represented .24% of period-end loans, down

from .29% at the end of the first quarter. Gross loan charge-offs in the

second quarter of 2008 were fully offset by recoveries, due to an

unexpected recovery from our former Vermont operations. Expressed as an

annualized percentage of average loans outstanding, net loans charged-off

for the six months ended June 30, 2008 were a very low .04%. Arrow's

allowance for loan losses amounted to $12.7 million at June 30, 2008, which

represented 1.20% of loans outstanding, an increase from 1.19% as of

December 31, 2007.



    Many of our operating ratios in recent periods have been well above

those of our peer group, consisting of all U.S. bank holding companies

having $1.0 to $3.0 billion in assets as identified in the Federal Reserve

Bank's 'Bank Holding Company Performance Report.' Most notably, our return

on average equity (ROE) for the quarter ended March 31, 2008 was 16.07% as

compared to 8.59% for our peer group. Our ROE for the second quarter of

2008 increased to 17.33%. Our loan quality ratios also compare very

favorably to our peer group. At the end of the 2008 second quarter our

ratio of nonperforming loans to period-end loans was .24% which compares to

a ratio of 1.37% for our peer group as of March 31, 2008. The Company has

maintained a higher total risk-based capital ratio than the average for our

peer group. Arrow and our subsidiary banks continue to be

"well-capitalized" under the standards established by the FDIC Improvement

Act.



    As of June 30, 2008, assets under trust administration and investment

management were $897.7 million, a decrease of $63.6 million, or 6.6%, from

June 30, 2007. This decrease was the result of a general decline in the

equity markets, which also led to a 1.6% decrease in fee income from

fiduciary activities for the second quarter of 2008 compared to the second

quarter of 2007. Included in assets under trust administration and

investment management are our proprietary mutual funds, the North Country

Funds, advised exclusively by our subsidiary, North Country Investment

Advisers, Inc., with a combined balance of $203 million at June 30, 2008.



    Arrow was recently added to the Russell 2000(R) Index. Membership in

the Russell 2000 is based on membership in the Broad-Market Russell 3000(R)

Index, which also serves as the U.S. component to the Russell Global Index

which was launched last year. Russell indexes are widely used by investment

managers and institutional investors for index funds and as benchmarks for

both passive and active investment strategies. Membership in the Russell

Indexes, which are reconstituted annually in June, is determined based on

the company's market capitalization.



    On July 1, 2008 we acquired the key operating assets, two employees and

the trade name from U.S. Benefits, Inc., a provider of administrative and

record keeping services for more complex retirement plans. This acquisition

will allow us to offer enhanced and broadened services to retirement plan

clients and will complement the fiduciary services currently offered by the

Company through its trust administrative and investment management

activities. The acquisition reflects the Company's intent to develop new

sources of service-based revenues and to provide an expanded menu of

services to our customers.



    Arrow Financial Corporation is a multi-bank holding company

headquartered in Glens Falls, NY serving the financial needs of

northeastern New York. Arrow 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. 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, 2007.




Arrow Financial Corporation Consolidated Financial Information ($ in thousands, except per share amounts) Unaudited Three Months Six Months Ended June 30, Ended June 30, 2008 2007 2008 2007 Income Statement Interest and Dividend Income $22,115 $21,409 $44,197 $42,225 Interest Expense 7,751 9,984 17,046 19,598 Net Interest Income 14,364 11,425 27,151 22,627 Provision for Loan Losses 248 92 538 186 Net Interest Income After Provision for Loan Losses 14,116 11,333 26,613 22,441 Net Loss on Securities Transactions (35) --- (35) --- Net Gain on Sales of Loans 32 23 41 28 Gain on Sale of Premises --- --- 115 --- Gain on Visa Stock Redemption --- --- 749 --- Income From Fiduciary Activities 1,396 1,419 2,835 2,872 Fees for Other Services to Customers 2,195 2,062 4,076 3,944 Insurance Commissions 499 462 1,047 963 Other Operating Income 94 205 200 376 Total Noninterest Income 4,181 4,171 9,028 8,183 Salaries and Employee Benefits 5,996 5,439 12,028 10,756 Occupancy Expenses of Premises, Net 882 831 1,775 1,643 Furniture and Equipment Expense 765 786 1,565 1,541 Amortization of Intangible Assets 86 96 182 202 Reversal of Visa Related Litigation Exposure --- --- (306) --- Other Operating Expense 2,680 2,421 5,344 4,792 Total Noninterest Expense 10,409 9,573 20,588 18,934 Income Before Taxes 7,888 5,931 15,053 11,690 Provision for Income Taxes 2,452 1,721 4,636 3,349 Net Income $ 5,436 $ 4,210 $10,417 $ 8,341 Share and Per Share Data (1) Period End Shares Outstanding 10,516 10,689 10,516 10,689 Basic Average Shares Outstanding 10,593 10,732 10,619 10,806 Diluted Average Shares Outstanding 10,650 10,804 10,673 10,885 Basic Earnings Per Share $ 0.51 $ 0.39 $ 0.98 $ 0.77 Diluted Earnings Per Share 0.51 0.39 0.98 0.77 Cash Dividends 0.24 0.23 0.48 0.47 Book Value 11.80 10.84 11.80 10.84 Tangible Book Value (2) 10.23 9.27 10.23 9.27 Key Earnings Ratios Return on Average Assets 1.35% 1.10% 1.30% 1.10% Return on Average Equity 17.33 14.43 16.7 14.28 Return on Tangible Equity (2) 19.94 16.87 19.24 16.68 Net Interest Margin (3) 3.92 3.32 3.74 3.32 (1) Share and Per Share amounts have been restated for the September 2007 3% stock dividend. (2) Tangible Book Value and Tangible Equity excludes intangible assets from total equity. (3) Net Interest Margin includes a tax equivalent upward adjustment of 19 and 20 basis points for the respective quarterly and six-month 2008 periods and 20 basis points for the 2007 periods. Arrow Financial Corporation Consolidated Financial Information ($ in thousands) Unaudited June 30, 2008 Second Year-to- Period Quarter Date End Average Average Balance Sheet Cash and Due From Banks $39,013 $33,378 $33,105 Interest-bearing Balances --- --- 541 Federal Funds Sold --- 17,845 29,771 Securities Available-for-Sale 372,843 364,466 349,272 Securities Held-to-Maturity 111,289 113,251 113,772 Loans 1,062,999 1,052,803 1,045,857 Allowance for Loan Losses (12,725) (12,570) (12,489) Net Loans 1,050,274 1,040,233 1,033,368 Premises and Equipment, Net 16,492 16,399 16,438 Goodwill and Intangible Assets, Net 16,495 16,552 16,583 Other Assets 24,575 22,969 22,742 Total Assets $1,630,981 $1,625,093 $1,615,592 Demand Deposits $194,188 $188,949 $185,533 Nonmaturity Interest-Bearing Deposits 637,270 655,153 630,082 Time Deposits of $100,000 or More 177,472 156,850 172,230 Other Time Deposits 240,122 238,297 243,383 Total Deposits 1,249,052 1,239,249 1,231,228 Short-Term Borrowings 55,757 55,798 53,789 Federal Home Loan Bank Advances 160,000 161,949 160,975 Other Long-Term Debt 20,000 20,000 20,000 Other Liabilities 22,092 21,920 24,164 Total Liabilities 1,506,901 1,498,916 1,490,156 Common Stock 14,729 14,729 14,729 Surplus 162,085 161,946 161,847 Undivided Profits 20,675 19,385 17,848 Unallocated ESOP Shares (2,572) (2,137) (1,854) Accumulated Other Comprehensive Loss (5,936) (4,264) (4,049) Treasury Stock (64,901) (63,482) (63,085) Total Shareholders' Equity 124,080 126,177 125,436 Total Liabilities and Shareholders' Equity $1,630,981 $1,625,093 $1,615,592 Assets Under Trust Administration and Investment Management $897,729 Capital Ratios Leverage Ratio 8.45% Tier 1 Risk-Based Capital Ratio 12.77 Total Risk-Based Capital Ratio 13.96 June 30, 2007 Second Year-to- Period Quarter Date End Average Average Balance Sheet Cash and Due From Banks $33,403 $32,297 $32,183 Interest-bearing Balances --- --- --- Federal Funds Sold 2,000 18,346 18,859 Securities Available-for-Sale 333,015 327,396 322,693 Securities Held-to-Maturity 111,683 108,831 108,476 Loans 1,017,989 1,014,487 1,012,546 Allowance for Loan Losses (12,315) (12,315) (12,307) Net Loans 1,005,674 1,002,172 1,000,239 Premises and Equipment, Net 16,000 16,077 15,932 Goodwill and Intangible Assets, Net 16,808 16,871 16,911 Other Assets 23,350 17,288 17,096 Total Assets $1,541,933 $1,539,278 $1,532,389 Demand Deposits $187,306 $181,282 $180,536 Nonmaturity Interest-Bearing Deposits 563,724 574,232 567,370 Time Deposits of $100,000 or More 191,809 175,550 178,884 Other Time Deposits 262,328 265,056 262,500 Total Deposits 1,205,167 1,196,120 1,189,290 Short-Term Borrowings 49,164 49,317 47,773 Federal Home Loan Bank Advances 130,000 134,489 134,135 Other Long-Term Debt 20,000 20,000 20,000 Other Liabilities 21,691 22,354 23,430 Total Liabilities 1,426,022 1,422,280 1,414,628 Common Stock 14,300 14,300 14,300 Surplus 151,688 151,316 151,276 Undivided Profits 20,944 19,767 19,037 Unallocated ESOP Shares (2,042) (2,042) (1,486) Accumulated Other Comprehensive Loss (8,664) (7,371) (7,578) Treasury Stock (60,315) (58,972) (57,788) Total Shareholders' Equity 115,911 116,998 117,761 Total Liabilities and Shareholders' Equity $1,541,933 $1,539,278 $1,532,389 Assets Under Trust Administration and Investment Management $961,298 Capital Ratios Leverage Ratio 8.51% Tier 1 Risk-Based Capital Ratio 12.87 Total Risk-Based Capital Ratio 14.08 Arrow Financial Corporation Consolidated Financial Information ($ in thousands) Unaudited June 30, 2008 2007 Second Quarter Ended June 30: Loan Portfolio Commercial, Financial and Agricultural $86,933 $77,661 Real Estate - Commercial 195,486 181,076 Real Estate - Residential 444,259 419,750 Indirect and Other Consumer Loans 336,321 339,502 Total Loans $1,062,999 $1,017,989 Allowance for Loan Losses, Second Quarter Allowance for Loan Losses, Beginning of Quarter $12,480 $12,298 Loans Charged-off, Quarter-to-Date (268) (214) Recoveries of Loans Previously Charged-off, Quarter-to-Date 265 139 Net Loans Charged-off, Quarter-to-Date (3) (75) Provision for Loan Losses, Quarter-to-Date 248 92 Allowance for Loan Losses, End of Quarter $12,725 $12,315 Nonperforming Assets Nonaccrual Loans $1,941 $1,883 Loans Past Due 90 or More Days and Accruing 593 122 Total Nonperforming Loans 2,534 2,005 Repossessed Assets 53 62 Other Real Estate Owned 242 200 Total Nonperforming Assets $2,829 $2,267 Key Asset Quality Ratios Allowance for Loan Losses to Period-End Loans 1.20 1.21 Allowance for Loan Losses to Nonperforming Loans 502.17 614.22 Nonperforming Loans to Period-End Loans 0.24 0.20 Nonperforming Assets to Period-End Assets 0.17 0.15 June 30, Six-Month Period Ended June 30: 2008 2007 Allowance for Loan Losses, Six Months Allowance for Loan Losses, Beginning of Year $12,401 $12,278 Loans Charged-off, Year-to-Date (563) (426) Recoveries of Loans Previously Charged-off, Year-to-Date 349 277 Net Loans Charged-off, Year-to-Date (214) (149) Provision for Loan Losses, Year-to-Date 538 186 Allowance for Loan Losses, End of Period $12,725 $12,315 Key Asset Quality Ratios Net Loans Charged-off to Average Loans, Six Months Annualized 0.04% 0.03% Provision for Loan Losses to Average Loans, Six Months Annualized 0.10 0.04

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