Arrow Reports Increased Quarterly Earnings, Continued Strong Asset Quality Ratios

-- Second-quarter diluted earnings per share increased 7.1% over the 2013 quarter.

-- Second-quarter net interest income on a tax-equivalent basis rose $1.5 million or 10.3%.

-- Continued growth in insurance commission income and income from fiduciary activities.

-- Record high at quarter-end for total loans; rose $139.4 million or 11.6% from June 30, 2013.

News provided by

Jul 21, 2014, 10:14 ET

GLENS FALLS, N.Y., July 21, 2014 /PRNewswire/ -- Arrow Financial Corporation (NasdaqGS: AROW) announced operating results for the three- and six-month periods ended June 30, 2014. Net income for the second quarter of 2014 was $5.52 million, an increase of $317 thousand, or 6.1%, from net income of $5.21 million for the second quarter of 2013. Diluted earnings per share (EPS) for the quarter was $0.45, a 7.1% increase from the comparable 2013 quarter, when diluted EPS was $0.42. Return on average assets for the 2014 second quarter was 1.01%, and return on average equity for the 2014 second quarter was 11.28%. Net income for the first six months of 2014 was $10.8 million, an increase of $456 thousand, or 4.4%, from net income of $10.4 million for the first six months of 2013. Diluted EPS for the six-month period was $0.88, a 3.5% increase from the comparable 2013 period, when diluted EPS was $0.85.

Our regional footprint continued to expand in the second-quarter with the opening of a new full-service Saratoga National Bank and Trust Company banking branch in Colonie, New York -- the Bank's first location in Albany County. Also in the second quarter, both Arrow banking subsidiaries expanded their mobile banking services with the addition of mobile check deposit, which has been well-received by customers.

Arrow President and CEO Thomas J. Murphy stated, "Arrow ended the quarter with strong results, including increased earnings per share, net income and net interest margin. In addition, we delivered solid ratios for return on average assets and return on average equity, record highs in several key balance sheet categories, and continued excellent asset quality and strong capital."

The following list expands on the highlights of our second-quarter results:

Net Interest Income and Margin: In the second quarter of 2014, on a tax-equivalent basis, our net interest income increased $1.5 million, or 10.3%, compared to the second quarter of 2013, while our tax-equivalent net interest margin increased by 18 basis points from 2.99% in the second quarter of 2013 to 3.17% for the second quarter of 2014. This principally reflected the impact of an increased level of average loans outstanding between the periods.

Insurance Agency Operations: Insurance commission income rose from $2.2 million for the second quarter of 2013 to $2.3 million for the second quarter of 2014, an increase of $117 thousand, or 5.4%. This improvement was primarily attributable to an increase in the annual contingent commission income received from certain insurance carriers.

Trust Assets and Related Noninterest Income: Assets under trust administration and investment management at June 30, 2014 were a record $1.215 billion, an increase of $141.3 million, or 13.2%, from the June 30, 2013 balance of $1.074 billion. The growth in balances was generally attributable to a significant rise in the equity markets between the periods and the addition of new accounts. Income from fiduciary activities increased by $447 thousand, or 13.4%, from $3.3 million for the first six months of 2013, to $3.8 million for the six months of 2014.

Balance Sheet Changes: Total assets at June 30, 2014 reached $2.153 billion, an increase of $69.9 million, or 3.4%, from the $2.083 billion balance at June 30, 2013, although a slight decline of 0.5% from total assets of $2.164 billion at December 31, 2013. Our loan portfolio also rose to a record high of $1.3 billion, up $139.4 million, or 11.6%, from the June 30, 2013 level, and an increase of $77.7 million, or 6.1%, from the level at December 31, 2013. All major categories within our loan portfolio grew during the second quarter of 2014.

During the first six months of 2014, we originated approximately $55 million of residential real estate loans, a decrease of 11.6% from approximately $62 million of residential real estate loans originated in the comparable period for 2013. Over the preceding 12 months, our management strategy shifted from selling most of our originations into the secondary market to retaining most of them. As a result, the outstanding balance of our residential real estate loan portfolio at June 30, 2014 was higher than the outstanding balance at both June 30, 2013 and December 31, 2013. Since we elected to retain most mortgage originations, our gain on the sale of residential real estate loan originations in the second quarter of 2014 was significantly less than our gain on the sale of such originations in the comparable 2013 quarter.

Asset Quality: Asset quality remained strong at June 30, 2014, as measured by our low level of nonperforming assets and the low level of net charge-offs. Nonperforming assets of $8.3 million at June 30, 2014, represented only 0.38% of period-end assets, an increase of one basis point from our 0.37% ratio as of December 31, 2013. Net loan losses for the second quarter of 2014, expressed as an annualized percentage of average loans outstanding, were just 0.03% and only .06% for the six month period ended June 30, 2014. All of our asset quality ratios continue to be significantly better than recently reported industry-wide averages.

Our allowance for loan losses was $15.0 million at June 30, 2014, which represented 1.12% of loans outstanding, ten basis points below our ratio one year earlier and two basis points below our ratio at December 31, 2013.

Capital: Total stockholders' equity was a record $197.6 million at period-end, an increase of $20.0 million, or 11.3%, above the June 30, 2013, amount. Arrow's capital ratios remain strong, as reflected by a Tier 1 leverage ratio of 9.39% at second quarter-end, up from 9.19% a year ago. Arrow's total risk-based capital ratio was 15.57%, down from 15.96% a year ago. The capital ratios of the Company and its subsidiary banks continue to significantly exceed the "well capitalized" regulatory standard, which is the highest current regulatory 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 billion 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, 2014, in which our return on average equity (ROE) was 10.96%, as compared to 7.85% for our peer group. Our ratio of loans 90 days past due and accruing plus nonaccrual loans to total loans was 0.51% as of March 31, 2014, as compared to 1.40% for our peer group. Our annualized ratio of net loan losses for the quarter ending March 31, 2014 was 0.08%, well below the peer result of 0.14%.

Cash and Stock Dividends: We distributed a cash dividend of $.25 per share to stockholders in the second quarter of 2014. The cash dividend was 2% higher than the cash dividend paid in the second quarter of 2013, adjusted for our 2% stock dividend in September 2013. This quarter's cash dividend, based on our $25.94 closing stock price at June 30, 2014, represented an annualized yield of 3.86%.

Industry Recognition: Arrow was recently included on the ABA Banking Journal's annual list of "top-performing midsize banks," ranking 33rd out of the top 100 public banks and thrifts with $1 billion to $10 billion in assets based on 2013 return on average equity. In addition, Arrow's banking subsidiaries were again recognized as a 5-Star Superior bank by BauerFinancial, Inc., a national bank rating and research firm, based on March 31, 2014 financial data. Glens Falls National Bank and Trust Company has earned this designation for the past 29 consecutive quarters; Saratoga National Bank has earned it the past 21 quarters.

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, 2013, 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,
	2014		2013		2014		2013
INTEREST AND DIVIDEND INCOME
Interest and Fees on Loans	$	13,202	$	12,650	$	25,976	$	25,433
Interest on Deposits at Banks	16		19		29		46
Interest and Dividends on Investment Securities:
Fully Taxable	2,041		1,639		4,049		3,435
Exempt from Federal Taxes	1,436		1,501		2,907		2,891
Total Interest and Dividend Income	16,695		15,809		32,961		31,805
INTEREST EXPENSE
NOW Accounts	495		786		959		1,564
Savings Deposits	226		277		445		545
Time Deposits of $100,000 or More	201		305		431		624
Other Time Deposits	359		505		750		1,059
Federal Funds Purchased and Securities Sold Under Agreements to Repurchase	5		6		9		9
Federal Home Loan Bank Advances	127		199		272		372
Junior Subordinated Obligations Issued to Unconsolidated Subsidiary Trusts	142		145		283		289
Total Interest Expense	1,555		2,223		3,149		4,462
NET INTEREST INCOME	15,140		13,586		29,812		27,343
Provision for Loan Losses	505		100		963		200
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES	14,635		13,486		28,849		27,143
NONINTEREST INCOME
Income From Fiduciary Activities	1,906		1,758		3,779		3,332
Fees for Other Services to Customers	2,377		2,371		4,571		4,653
Insurance Commissions	2,293		2,176		4,737		4,204
Net (Loss) Gain on Securities Transactions	(27)		13		(27)		540
Net Gain on Sales of Loans	166		498		289		1,105
Other Operating Income	304		255		556		411
Total Noninterest Income	7,019		7,071		13,905		14,245
NONINTEREST EXPENSE
Salaries and Employee Benefits	7,880		7,637		15,522		15,258
Occupancy Expenses, Net	2,316		2,119		4,657		4,395
FDIC Assessments	282		267		555		531
Other Operating Expense	3,259		3,251		6,469		6,501
Total Noninterest Expense	13,737		13,274		27,203		26,685
INCOME BEFORE PROVISION FOR INCOME TAXES	7,917		7,283		15,551		14,703
Provision for Income Taxes	2,393		2,076		4,707		4,315
NET INCOME	$	5,524	$	5,207	$	10,844	$	10,388
Average Shares Outstanding ¹:
Basic	12,348		12,261		12,351		12,267
Diluted	12,369		12,279		12,373		12,285
Per Common Share:
Basic Earnings	$	0.45	$	0.42	$	0.88	$	0.85
Diluted Earnings	0.45		0.42		0.88		0.85

¹ Share and per share data have been restated for the September 27, 2013, 2% stock dividend.

ARROW FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (In Thousands, Except Share and Per Share Amounts - Unaudited)

	June 30, 2014		December 31, 2013		June 30, 2013
ASSETS
Cash and Due From Banks	$	35,351	$	37,275	$	32,706
Interest-Bearing Deposits at Banks	16,459		12,705		11,894
Investment Securities:
Available-for-Sale	366,848		457,606		501,574
Held-to-Maturity (Approximate Fair Value of $304,259 at June 30, 2014; $302,305 at December 31, 2013; and $252,691 at June 30, 2013)	297,437		299,261		248,914
Other Investments	4,583		6,281		6,136
Loans	1,344,124		1,266,472		1,204,734
Allowance for Loan Losses	(15,036)		(14,434)		(14,678)
Net Loans	1,329,088		1,252,038		1,190,056
Premises and Equipment, Net	28,465		29,154		29,301
Goodwill	22,003		22,003		22,003
Other Intangible Assets, Net	3,865		4,140		4,384
Other Assets	48,952		43,235		36,201
Total Assets	$	2,153,051	$	2,163,698	$	2,083,169
LIABILITIES
Noninterest-Bearing Deposits	$	286,735	$	278,958	$	261,910
NOW Accounts	820,589		817,366		754,371
Savings Deposits	523,626		498,779		494,586
Time Deposits of $100,000 or More	70,600		78,928		87,369
Other Time Deposits	159,116		168,299		181,669
Total Deposits	1,860,666		1,842,330		1,779,905
Federal Funds Purchased and Securities Sold Under Agreements to Repurchase	16,896		11,777		14,738
Federal Home Loan Bank Overnight Advances	24,000		53,000		40,000
Federal Home Loan Bank Term Advances	10,000		20,000		30,000
Junior Subordinated Obligations Issued to Unconsolidated Subsidiary Trusts	20,000		20,000		20,000
Other Liabilities	23,873		24,437		20,919
Total Liabilities	1,955,435		1,971,544		1,905,562
STOCKHOLDERS' EQUITY
Preferred Stock, $5 Par Value; 1,000,000 Shares Authorized			—		—
Common Stock, $1 Par Value; 20,000,000 Shares Authorized (16,744,486 Shares Issued at June 30, 2014, and December 31, 2013; and 16,416,163 Shares Issued at March 31, 2013)	16,744		16,744		16,416
Additional Paid-in Capital	230,131		229,290		219,772
Retained Earnings	32,132		27,457		30,625
Unallocated ESOP Shares (74,845 Shares at June 30, 2014; 87,641 Shares at December 31, 2013; and 95,172 Shares at June 30, 2013)	(1,550)		(1,800)		(1,900)
Accumulated Other Comprehensive Loss	(3,489)		(4,373)		(11,739)
Treasury Stock, at Cost (4,319,587 Shares at June 30, 2014; 4,296,723 Shares at December 31, 2013; and 4,277,680 Shares at June 30, 2013)	(76,352)		(75,164)		(75,567)
Total Stockholders' Equity	197,616		192,154		177,607
Total Liabilities and Stockholders' Equity	$	2,153,051	$	2,163,698	$	2,083,169

Arrow Financial Corporation Selected Quarterly Information (Dollars In Thousands, Except Per Share Amounts - Unaudited)

Quarter Ended	6/30/2014			3/31/2014			12/31/2013			9/30/2013			6/30/2013
Net Income	$	5,524		$	5,320		$	5,784		$	5,623		$	5,207
Transactions Recorded in Net Income (Net of Tax):
Net (Loss) Gain on Securities Transactions	(16)			—			—			—			8
Net Gain on Sales of Loans	100			74			114			100			301
Share and Per Share Data:¹
Period End Shares Outstanding	12,350			12,350			12,360			12,329			12,284
Basic Average Shares Outstanding	12,348			12,354			12,339			12,308			12,261
Diluted Average Shares Outstanding	12,369			12,378			12,387			12,344			12,279
Basic Earnings Per Share	$	0.45		$	0.43		$	0.47		$	0.46		$	0.42
Diluted Earnings Per Share	0.45			0.43			0.47			0.46			0.42
Cash Dividend Per Share	0.25			0.25			0.25			0.25			0.25
Selected Quarterly Average Balances:
Interest-Bearing Deposits at Banks	22,486			17,184			46,853			14,096			26,632
Investment Securities	712,088			755,008			762,768			744,928			771,018
Loans	1,328,639			1,284,649			1,254,957			1,224,840			1,185,041
Deposits	1,900,399			1,887,589			1,904,922			1,800,181			1,801,346
Other Borrowed Funds	60,900			68,375			62,038			92,073			94,596
Shareholders' Equity	196,478			194,127			184,506			179,634			178,867
Total Assets	2,183,611			2,176,038			2,176,264			2,095,017			2,099,138
Return on Average Assets	1.01		%	0.99		%	1.05		%	1.06		%	0.99		%
Return on Average Equity	11.28		%	11.11		%	12.44		%	12.42		%	11.68		%
Return on Tangible Equity²	12.99		%	12.84		%	14.50		%	14.55		%	13.70		%
Average Earning Assets	$	2,063,213		$	2,056,841		$	2,064,578		$	1,983,864		$	1,982,691
Average Paying Liabilities	1,680,149			1,678,080			1,686,993			1,614,873			1,641,300
Interest Income, Tax-Equivalent	17,837			17,439			17,633			17,032			16,989
Interest Expense	1,555			1,594			1,713			1,747			2,223
Net Interest Income, Tax-Equivalent	16,282			15,845			15,920			15,285			14,766
Tax-Equivalent Adjustment	1,142			1,173			1,174			1,158			1,180
Net Interest Margin³	3.17		%	3.12		%	3.06		%	3.06		%	2.99		%
Efficiency Ratio Calculation:
Noninterest Expense	$	13,737		$	13,466		$	13,385		$	13,133		$	13,274
Less: Intangible Asset Amortization	(94)			(106)			(108)			(108)			(112)
Net Noninterest Expense	$	13,643		$	13,360		$	13,277		$	13,025		$	13,162
Net Interest Income, Tax-Equivalent	$	16,282		$	15,845		$	15,920		$	15,285		$	14,766
Noninterest Income	7,019			6,886			6,877			6,939			7,071
Less: Net Securities (Gain) Loss	27			—			—			—			(13)
Net Gross Income	$	23,328		$	22,731		$	22,797		$	22,224		$	21,824
Efficiency Ratio	58.48		%	58.77		%	58.24		%	58.61		%	60.31		%
Period-End Capital Information:
Total Stockholders' Equity (i.e. Book Value)	$	197,616		$	194,491		$	192,154		$	182,683		$	177,607
Book Value per Share	16.00			15.75			15.55			14.82			14.46
Intangible Assets	25,868			25,999			26,143			26,273			26,387
Tangible Book Value per Share ²	13.91			13.64			13.43			12.69			12.31
Capital Ratios:
Tier 1 Leverage Ratio	9.39		%	9.30		%	9.19		%	9.37		%	9.19		%
Tier 1 Risk-Based Capital Ratio	14.49		%	14.55		%	14.70		%	14.59		%	14.82		%
Total Risk-Based Capital Ratio	15.57		%	15.62		%	15.77		%	15.69		%	15.96		%
Assets Under Trust Administration and Investment Management	$	1,214,841		$	1,182,661		$	1,174,891		$	1,111,085		$	1,073,523

¹Share and Per Share Data have been restated for the September 27, 2013, 2% stock dividend.

²Tangible 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.

³Net 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 (Dollars in Thousands - Unaudited)

Quarter Ended:	6/30/2014			12/31/2013			6/30/2013
Loan Portfolio
Commercial Loans	$	93,890		$	87,893		$	87,549
Commercial Construction Loans	29,702			27,815			30,980
Commercial Real Estate Loans	309,646			288,119			259,799
Other Consumer Loans	7,863			7,649			7,456
Consumer Automobile Loans	409,301			394,204			375,060
Residential Real Estate Loans	493,722			460,792			443,890
Total Loans	$	1,344,124		$	1,266,472		$	1,204,734
Allowance for Loan Losses
Allowance for Loan Losses, Beginning of Quarter	$	14,636		$	14,584		$	14,603
Loans Charged-off	168			246			92
Less Recoveries of Loans Previously Charged-off	63			96			67
Net Loans Charged-off	105			150			25
Provision for Loan Losses	505			—			100
Allowance for Loan Losses, End of Quarter	$	15,036		$	14,434		$	14,678
Nonperforming Assets
Nonaccrual Loans	$	6,185		$	6,479		$	5,591
Loans Past Due 90 or More Days and Accruing	1,325			652			760
Loans Restructured and in Compliance with Modified Terms	398			641			461
Total Nonperforming Loans	7,908			7,772			6,812
Repossessed Assets	40			63			34
Other Real Estate Owned	326			81			1,141
Total Nonperforming Assets	$	8,274		$	7,916		$	7,987
Key Asset Quality Ratios
Net Loans Charged-off to Average Loans, Quarter-to-date Annualized	0.03		%	0.05		%	0.01		%
Provision for Loan Losses to Average Loans, Quarter-to-date Annualized	0.15		%	—		%	0.03		%
Allowance for Loan Losses to Period-End Loans	1.12		%	1.14		%	1.22		%
Allowance for Loan Losses to Period-End Nonperforming Loans	190.14		%	185.71		%	215.47		%
Nonperforming Loans to Period-End Loans	0.59		%	0.61		%	0.57		%
Nonperforming Assets to Period-End Assets	0.38		%	0.37		%	0.38		%
Six Month Period Ended
Allowance for Loan Losses
Allowance for Loan Losses, Beginning of Year	$	14,434					$	15,298
Loans Charged-off	504						982
Less Recoveries of Loans Previously Charged-off	143						162
Net Loans Charged-off	361						820
Provision for Loan Losses	963						200
Allowance for Loan Losses, End of Period	$	15,036					$	14,678
Key Asset Quality Ratios
Net Loans Charged-off to Average Loans, Annualized	0.06		%				0.14		%
Provision for Loan Losses to Average Loans, Annualized	0.15		%				0.03		%