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Date:

July 23, 2007



Arrow Financial Corporation Announces Earnings for the Second Quarter of 2007


Arrow Financial Corporation (NasdaqGS® – AROW) announced operating results for the quarter and six-month periods ended June 30, 2007.  Net income for the quarter ended June 30, 2007 was $4.210 million, representing diluted earnings per share of $.40, the same per share amount as the second quarter of 2006, when net income was $4.277 million.  For the first six months of 2007, net income of $8.341 million was slightly ahead of the $8.336 million earned for 2006.  Diluted earnings per share of $.79 for the first six months of 2007 was 2 cents higher than the 2006 six-month period per share amount due to the impact of our share repurchases over the past twelve months.


Thomas L. Hoy, Chairman, President and CEO stated, "We are pleased to report that both total deposits and total loans outstanding reached record levels as of June 30, 2007.  Our net interest margin for the second quarter of 2007 was 3.32%, unchanged from the first quarter of 2007 and down three basis points from 3.35% for the second quarter of 2006.  Slight increases in the yield on earning assets were offset by comparable increases in the cost of paying liabilities which resulted in an unchanged net interest margin on a linked quarter-to-quarter basis. Regardless of the pressures from the interest rate environment, we have followed our core banking strategy and the disciplined course we believe best serves our shareholders over time.  


Our second quarter operating results and earnings per share were essentially unchanged from the second quarter of 2006 due to the challenging interest rate environment which has featured a flat to inverted yield curve for most of the past two years.  It was only late in the second quarter of 2007 that the yield curve developed some very modest upward slope. This margin pressure was partially offset by a 7.1% net increase in fiduciary fees, insurance commissions, fees for other services, and other operating income. For the six-month period, total noninterest income increased $405 thousand even though the six-month period for the prior year included a gain on the sale of premises of $227 thousand which was offset only in part by net losses on securities transactions of $118 thousand.


Many of our operating ratios in recent periods have compared favorably to 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 March 31, 2007 ‘Bank Holding Company Performance Report.’  Most notably, our return on average equity for the quarter ended June 30, 2007 was 14.43%.  This compares to a ratio of 11.07% for our peer group for the first quarter of 2007 and 12.62% for the year ended December 31, 2006.  We again maintained a higher total risk-based capital ratio than our peer group.  


Asset quality remained high at quarter-end, with nonperforming loans of $2.0 million at June 30, 2007, representing only .20% of period-end loans.  This compared favorably with the ratio for our peer group at March 31, 2007 which was .65%.  Nonperforming assets were $2.3 million at June 30, 2007, representing only .15% of assets.  Annualized net loan losses for the second quarter of 2007 as a percentage of average loans outstanding were a very low .03% compared to .04% for the second quarter of 2006.  Arrow's allowance for loan losses amounted to $12.3 million at June 30, 2007, which represented 1.21% of loans outstanding, essentially unchanged from year-end 2006.



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The low levels of non-performing assets and charge-offs are an indication of the high quality of loans in our loan portfolio.  We believe that our conservative underwriting standards have worked well for our shareholders over time.  Recent industry headlines have focused on subprime consumer real estate lending.  We have not engaged in this activity as a business line nor do we hold mortgage-backed securities backed by subprime mortgages in our investment portfolio.


As of June 30, 2007, assets under trust administration and investment management were $961.3 million, an increase of $114.0 million, or 13.5%, from June 30, 2006.  This increase in asset levels led to a $112 thousand increase in fee income from fiduciary activities for 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 Advisors, Inc., which recently reached a record balance of over $200 million.  


Deposit balances at June 30, 2007 were $1.205 billion, representing an increase of $54.1 million, or 4.7%, from the June 30, 2006 level of $1.151 billion.  Loan balances outstanding reached $1.018 billion at June 30, 2007, representing an increase of $23.2 million, or 2.3%, from the balance at June 30, 2006.  The balance of residential real estate loans increased $26.6 million, or 6.8%, over the past twelve months.  The balance of other consumer loans, primarily indirect automobile loans, decreased $2.1 million from the June 30, 2006 level as we elected not to compete aggressively with the extremely low rates offered by automobile manufacturers throughout 2006.  However, since year-end 2006, indirect loan balances have risen slightly.  During the first six months of 2007 we continued to experience healthy loan demand for commercial and commercial real estate credits as we have throughout the past three years.


We have opened two new branches in 2007, situated strategically in the northern and southern regions of our market area.  A new Glens Falls National Bank branch is located in South Plattsburgh, New York on the corner of U.S. Avenue and New York Road.  On April 2, 2007 we also opened a new branch of Saratoga National Bank, located on Ballard Road in Wilton, New York, an area experiencing significant residential growth and business expansion.  We continue to work diligently to ensure that these investments made in our franchise allow us to prosper along with 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.  Examples are management’s statements about continuing loan demand and the health of the local economy.  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, 2006.



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Arrow Financial Corporation

Consolidated Financial Information

($ in thousands, except per share amounts)

Unaudited

 

Three Months

Six Months

 

Ended June 30,

Ended June 30,

 

2007

2006

2007

2006

Income Statement

    

Interest and Dividend Income

$21,409 

$20,008 

$42,225 

$39,340 

Interest Expense

   9,984 

   8,512 

 19,598 

 16,362 

  Net Interest Income

11,425 

11,496 

22,627 

22,978 

Provision for Loan Losses

        92 

      101 

      186 

      374 

  Net Interest Income After Provision for Loan Losses

 11,333 

 11,395 

 22,441 

 22,604 

Net Losses on Securities Transactions

--- 

(118)

--- 

(118)

Net Gain on Sales of Loans

23 

12 

28 

55 

Gain on Sale of Premises

--- 

227 

--- 

227 

Income From Fiduciary Activities

1,419 

1,307 

2,872 

2,610 

Fees for Other Services to Customers

2,062 

2,009 

3,944 

3,813 

Insurance Commissions

462 

482 

963 

904 

Other Operating Income

       205 

       133 

      376 

      287 

  Total Noninterest Income

    4,171 

    4,052 

   8,183 

   7,778 

Salaries and Employee Benefits

5,439 

5,480 

10,756 

10,951 

Occupancy Expenses of Premises, Net

831 

815 

1,643 

1,620 

Furniture and Equipment Expense

786 

813 

1,541 

1,570 

Amortization of Intangible Assets

96 

106 

202 

223 

Other Operating Expense

   2,421 

   2,117 

   4,792 

   4,121 

  Total Noninterest Expense

   9,573 

   9,331 

 18,934 

 18,485 

Income Before Taxes

5,931 

6,116 

11,690 

11,897 

Provision for Income Taxes

   1,721 

   1,839 

   3,349 

   3,561 

  Net Income

$ 4,210 

$ 4,277 

$ 8,341 

$ 8,336 

     

Share and Per Share Data 1

    

Period End Shares Outstanding

10,377 

10,558 

10,377 

10,558 

Basic Average Shares Outstanding

10,419 

10,607 

10,492 

10,638 

Diluted Average Shares Outstanding

10,489 

10,749 

10,568 

10,787 

Basic Earnings Per Share

$  0.40 

$  0.40 

$  0.80 

$  0.78 

Diluted Earnings Per Share

0.40 

0.40 

0.79 

0.77 

Cash Dividends

0.24 

0.23 

0.48 

0.47 

Book Value

11.17 

10.87 

11.17 

10.87 

Tangible Book Value 2

9.55 

9.24 

9.55 

9.24 

     

Key Earnings Ratios

    

Return on Average Assets

1.10%

1.13%

1.10%

1.10%

Return on Average Equity

14.43

14.84

14.28

14.43

Return on Tangible Equity 2

16.87

17.43

16.68

16.93

Net Interest Margin 3

3.32

3.35

3.32

3.37

     

1 Share and Per Share amounts have been restated for the September 2006 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 20 basis points for the 2007 periods and 18 basis points for the 2006 periods.

 





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Arrow Financial Corporation

Consolidated Financial Information

($ in thousands)

Unaudited

 

June 30, 2007

 

June 30, 2006

 


Period

End

Second

Quarter

Average

Year-to-

Date

Average

 


Period

End

Second

Quarter

Average

Year-to-

Date

Average

Balance Sheet

       

Cash and Due From Banks

$    33,403 

$    32,297 

$    32,183 

 

$    38,244 

$    33,473 

$    33,656 

Federal Funds Sold

2,000 

18,346 

18,859 

 

--- 

7,077 

4,917 

Securities Available-for-Sale

333,015 

327,396 

322,693 

 

336,167 

344,275 

338,262 

Securities Held-to-Maturity

111,683 

108,831 

108,476 

 

100,432 

107,451 

111,077 

Loans

1,017,989 

1,014,487 

1,012,546 

 

994,838 

995,594 

997,566 

Allowance for Loan Losses

     (12,315)

     (12,315)

     (12,307)

 

    (12,265)

    (12,270)

    (12,249)

  Net Loans

 1,005,674 

 1,002,172 

 1,000,239 

 

   982,573 

   983,324 

   985,317 

Premises and Equipment, Net

16,000 

16,077 

15,932 

 

15,746 

16,075 

16,016 

Goodwill and Intangible Assets, Net

16,808 

16,871 

16,911 

 

17,164 

17,206 

17,247 

Other Assets

      23,350 

      17,288 

      17,096 

 

      26,008 

      14,283 

      15,004 

    Total Assets

$1,541,933 

$1,539,278 

$1,532,389 

 

$1,516,334 

$1,523,164 

$1,521,496 

Demand Deposits

$   187,306 

$   181,282 

$   180,536 

 

$   183,321 

$   181,263 

$   179,341 

Nonmaturity Interest-Bearing Deposits

563,724 

574,232 

567,370 

 

555,721 

582,777 

587,562 

Time Deposits of $100,000 or More

191,809 

175,550 

178,884 

 

159,549 

167,761 

160,785 

Other Time Deposits

    262,328 

    265,056 

    262,500 

 

    252,514 

    245,825 

    239,849 

  Total Deposits

 1,205,167 

 1,196,120 

 1,189,290 

 

 1,151,105 

 1,177,626 

 1,167,537 

Short-Term Borrowings

49,164 

49,317 

47,773 

 

49,817 

43,289 

41,081 

Federal Home Loan Bank Advances

130,000 

134,489 

134,135 

 

163,000 

147,410 

157,234 

Other Long-Term Debt

20,000 

20,000 

20,000 

 

20,000 

20,000 

20,000 

Other Liabilities

      21,691 

      22,354 

      23,430 

 

      17,666 

      19,213 

      19,116 

  Total Liabilities

 1,426,022 

 1,422,280 

 1,414,628 

 

 1,401,588 

 1,407,538 

 1,404,968 

Common Stock

14,300 

14,300 

14,300 

 

13,883 

13,883 

13,883 

Surplus

151,688 

151,316 

151,276 

 

139,952 

139,845 

139,789 

Undivided Profits

20,944 

19,767 

19,037 

 

24,800 

23,577 

22,852 

Unallocated ESOP Shares

(2,042)

(2,042)

(1,486)

 

(862)

(862)

(865)

Accumulated Other Comprehensive Loss

(8,664)

(7,371)

(7,578)

 

(7,558)

(6,689)

(5,857)

Treasury Stock

     (60,315)

     (58,972)

     (57,788)

 

     (55,469)

     (54,128)

     (53,274)

  Total Shareholders’ Equity

    115,911 

    116,998 

    117,761 

 

    114,746 

    115,626 

    116,528 

    Total Liabilities and Shareholders’ Equity

$1,541,933 

$1,539,278 

$1,532,389 

 

$1,516,334 

$1,523,164 

$1,521,496 

        

Assets Under Trust Administration

  and Investment Management

$961,298

   

$847,260

  
        

Capital Ratios

       

  Leverage Ratio

8.51%

   

8.32%

  

  Tier 1 Risk-Based Capital Ratio

12.87

   

12.63

  

  Total Risk-Based Capital Ratio

14.08

   

13.85

  



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Arrow Financial Corporation

Consolidated Financial Information

($ in thousands)

Unaudited

 

June 30,

 

2007

2006

Loan Portfolio

  

Commercial, Financial and Agricultural

$     77,661 

$  79,002 

Real Estate – Commercial

181,076 

181,062 

Real Estate – Residential

419,750 

393,149 

Indirect and  Other Consumer Loans

     339,502 

  341,625 

  Total Loans

$1,017,989 

$994,838 

   

Allowance for Loan Losses, Second Quarter

  

Allowance for Loan Losses, Beginning of Period

$12,298 

$12,253 

   

Loans Charged-off

(214)

(184)

Recoveries of Loans Previously Charged-off

      139 

        95 

  Net Loans Charged-off

       (75)

       (89)

   

Provision for Loan Losses

        92 

       101 

  Allowance for Loan Losses, End of Period

$12,315 

$12,265 

   

Allowance for Loan Losses, First Six Months

  

Allowance for Loan Losses, Beginning of Period

$12,278 

$12,241 

   

Loans Charged-off

(426)

(544)

Recoveries of Loans Previously Charged-off

       277 

       194 

  Net Loans Charged-off

      (149)

      (350)

   

Provision for Loan Losses

       186 

       374 

  Allowance for Loan Losses, End of Period

$12,315 

$12,265 

   

Nonperforming Assets

  

Nonaccrual Loans

$1,883 

$   968 

Loans Past Due 90 or More Days and Accruing

     122 

       349 

  Total Nonperforming Loans

2,005 

1,317 

Repossessed Assets

62 

54 

Other Real Estate Owned

     200 

       --- 

  Total Nonperforming Assets

$2,267 

$1,371 

   

Key Asset Quality Ratios

  

Net Loans Charged-off to Average Loans, Second Quarter Annualized

0.03%

0.04%

Net Loans Charged-off to Average Loans, First Six Months Annualized

0.03

0.07

Provision for Loan Losses to Average Loans, Second Quarter Annualized

0.04

0.04

Provision for Loan Losses to Average Loans, First Six Months Annualized

0.04

0.08

Allowance for Loan Losses to Period-End Loans

1.21

1.23

Allowance for Loan Losses to Nonperforming Loans

614.22

931.30

Nonperforming Loans to Period-End Loans

0.20

0.13

Nonperforming Assets to Period-End Assets

0.15

0.09




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