Add
AROW to Portfolio
Set Alert
Email to a
Friend
| |||
|
|
Quotes & Info
|
| AROW > SEC Filings for AROW > Form 10-Q on 4-Nov-2008 | All Recent SEC Filings |
4-Nov-2008
Quarterly Report
Note on Terminology - In this Quarterly Report on Form 10-Q, the terms "Arrow," "the registrant," "the company," "we," "us," and "our" generally refer to Arrow Financial Corporation and its subsidiaries as a group, except where the context indicates otherwise. Arrow is a two-bank holding company headquartered in Glens Falls, New York. Our banking subsidiaries are Glens Falls National Bank and Trust Company (Glens Falls National) whose main office is located in Glens Falls, New York, and Saratoga National Bank and Trust Company (Saratoga National) whose main office is located in Saratoga Springs, New York. Our non-bank subsidiaries include Capital Financial Group, Inc. (an insurance agency specializing in selling and servicing group health care policies), North Country Investment Advisers, Inc. (a registered investment adviser that provides investment advice to our proprietary mutual funds), Arrow Properties, Inc. (a real estate investment trust, or REIT) and U.S. Benefits, Inc. (a provider of administrative and recordkeeping services for more complex retirement plans), all of which are subsidiaries of Glens Falls National.
At certain points in this Report, our performance is compared with that of our "peer group" of financial institutions. Unless otherwise specifically stated, this peer group is comprised of the group of 278 domestic bank holding companies with $1 to $3 billion in total consolidated assets as identified in the Federal Reserve Board's "Bank Holding Company Performance Report" for June 2008 (the most recent such Report currently available), and peer group data has been derived from such Report.
Forward Looking Statements - The information contained in this Quarterly Report on Form 10-Q contains statements that are not historical in nature but rather are based on our beliefs, assumptions, expectations, estimates and projections about the future. These statements are "forward-looking statements" within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, and involve a degree of uncertainty and attendant risk. Words such as "expects," "believes," "anticipates," "estimates" and variations of such words and similar expressions are intended to identify such forward-looking statements. Some of these statements, such as those included in the interest rate sensitivity analysis in Item 3, entitled "Quantitative and Qualitative Disclosures About Market Risk," are merely presentations of what future performance or changes in future performance would look like based on hypothetical assumptions and on simulation models. Other forward-looking statements are based on our general perceptions of market conditions and trends in business activity, both our own and in the banking industry generally, as well as current management strategies for future operations and development.
Certain forward-looking statements in this Report are referenced in the table below:
Topic Page Location
Impact of market rate structure on net
interest margin,
loan yields and deposit rates 23 4th paragraph
1st, 3rd and 4th
25 paragraphs
27 Last paragraph
41 Last paragraph
Change in the level of loan losses and 1st paragraph under
nonperforming loans and assets "Provision for Loan
29 Losses"
30 1st paragraph
31 4th paragraph
Estimated provision and allowance for loan 29 Last paragraph
losses
Future level of residential real estate loans 27 1st paragraph
Impact of competition for indirect loans 27 3rd paragraph
Liquidity 21 Last bullet under
"Financial Market
Turmoil"
33 Last paragraph
Intent to acquire Upstate Agency, Inc. 22 7th paragraph
|
These statements are not guarantees of future performance and involve certain
risks and uncertainties that are difficult to quantify or, in some cases, to
identify. In the case of all forward-looking statements, actual outcomes and
results may differ materially from what the statements predict or forecast.
Factors that could cause or contribute to such differences include, but are not
limited to, rapid and dramatic changes in economic and market conditions, such
as the U.S. economy is currently experiencing, including sharp fluctuations in
interest rates, economic activity, and consumer spending patterns; sudden
changes in the market for products we provide, such as real estate loans; new
developments in state and federal regulation; enhanced competition from
unforeseen sources; new emerging technologies; unexpected loss of key personnel;
unanticipated business opportunities; and similar uncertainties inherent in
banking operations or business generally. In the current environment of
substantial economic turmoil affecting all sectors of business in the U.S.,
including the financial sector, all forward-looking statements should be
understood as embracing a substantial degree of uncertainty far exceeding that
accompanying such statements under normal economic conditions.
Readers are cautioned not to place undue reliance on any forward-looking statements in this Report, which speak only as of the date hereof. We undertake no obligation to revise or update these forward-looking statements to reflect future occurrences, including unanticipated events. This Quarterly Report should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2007.
The Securities and Exchange Commission (SEC) has adopted Regulation G, which
applies to all public disclosures, including earnings releases, made by
registered companies that contain "non-GAAP financial measures." GAAP is
generally accepted accounting principles in the United States of America. Under
Regulation G, companies making public disclosures containing non-GAAP financial
measures must also disclose, along with each non-GAAP financial measure, certain
additional information, including a reconciliation of the non-GAAP financial
measure to the closest comparable GAAP financial measure and a statement of the
Company's reasons for utilizing the non-GAAP financial measure as part of its
financial disclosures. As a parallel measure with Regulation G, the SEC
stipulated in Item 10 of its Regulation S-K that public companies must make the
same types of supplemental disclosures whenever they include non-GAAP financial
measures in their filings with the SEC. The SEC has exempted from the
definition of "non-GAAP financial measures" certain commonly used financial
measures that are not based on GAAP. When these exempted measures are included
in public disclosures or SEC filings, supplemental information is not required.
The following measures used in this Report, which although commonly utilized by
financial institutions have not been specifically exempted by the SEC, may
constitute "non-GAAP financial measures" within the meaning of the SEC's new
rules, although we are unable to state with certainty that the SEC would so
regard them.
Tax-Equivalent Net Interest Income and Net Interest Margin: Net interest income, as a component of the tabular presentation by financial institutions of Selected Financial Information regarding their recently completed operations, is commonly presented on a tax-equivalent basis. That is, to the extent that some component of the institution's net interest income which is presented on a before-tax basis, is exempt from taxation (e.g., is received by the institution as a result of its holdings of state or municipal obligations), an amount equal to the tax benefit derived from that component is added back to the net interest income total. This adjustment is considered helpful in comparing one financial institution's net interest income to that of another institution, to correct any distortion that might otherwise arise from the fact that the two institutions typically will have different proportions of tax-exempt items in their portfolios. Moreover, net interest income is itself a component of a second financial measure commonly used by financial institutions, net interest margin, which is the ratio of net interest income to average earning assets. For purposes of this measure as well, tax-equivalent net interest income is generally used by financial institutions, again to provide a better basis of comparison from institution to institution. We follow these practices.
The Efficiency Ratio: Financial institutions often use an "efficiency ratio" as a measure of expense control. The efficiency ratio typically is defined as the ratio of noninterest expense to net interest income and noninterest income. Net interest income as utilized in calculating the efficiency ratio is typically expressed on a tax-equivalent basis. Moreover, most financial institutions, in calculating the efficiency ratio, also adjust both noninterest expense and noninterest income to exclude from these items (as calculated under GAAP) certain component elements, such as intangible asset amortization (deducted from noninterest expense) and securities gains or losses (excluded from noninterest income). We follow these practices.
Tangible Book Value per Share: Tangible equity is total shareholders' equity less intangible assets. Tangible book value per share is tangible equity divided by total shares issued and outstanding. Tangible book value per share is often regarded as a more meaningful comparative ratio than book value per share as calculated under GAAP, that is, total shareholders' equity including intangible assets divided by total shares issued and outstanding. Intangible assets as a category of assets includes many items, such as goodwill.
Selected Quarterly Information:
(Dollars In Thousands, Except Per Share Amounts)
Sep 2008 Jun 2008 Mar 2008 Dec 2007 Sep 2007
Net Income $5,008 $5,436 $4,981 $4,481 $4,510
Transactions Recorded in Net Income
(Net of Tax):
Visa Litigation1 $ --- $ --- $185 $(362) $---
Gain on Redemption of Visa Inc. 452 --- ---
Class B Shares1 --- ---
Other-Than-Temporary Impairment --- --- --- ---
(OTTI) (731)
Net Securities Gains (Losses) 4 (21) --- --- ---
Net Gain on the Sale of Premises --- --- 69 --- ---
Net Gain on Sales of Loans 8 19 5 5 2
Net Loss on the Sale of Other Real
Estate Owned --- --- --- (5) ---
Period End Shares Outstanding 10,509 10,516 10,637 10,627 10,612
Basic Average Shares Outstanding 10,497 10,593 10,645 10,619 10,628
Diluted Average Shares Outstanding 10,559 10,650 10,694 10,682 10,697
Basic Earnings Per Share .48 .51 $.47 $.42 $.42
Diluted Earnings Per Share .47 .51 .47 .42 .42
Cash Dividends Per Share .25 .24 .24 .24 .23
Stock Dividends/Splits --- --- --- --- 3%
Average Assets $1,657,666 $1,625,093 $1,606,082 $1,601,053 $1,566,329
Average Equity 124,601 126,177 124,686 120,433 116,362
Return on Average Assets 1.20% 1.35% 1.25% 1.11% 1.14%
Return on Average Equity 15.99 17.33 16.07 14.76 15.38
Average Earning Assets $1,580,408 $1,548,365 $1,530,061 $1,526,148 $1,494,744
Average Paying Liabilities 1,308,191 1,288,047 1,272,871 1,265,765 1,231,812
Interest Income, Tax-Equivalent 1 23,302 22,861 22,832 23,171 22,669
Interest Expense 7,690 7,751 9,295 10,413 10,272
Net Interest Income, Tax-Equivalent 15,612 15,110 13,537 12,758 12,397
1
Tax-Equivalent Adjustment 710 746 750 740 748
Net Interest Margin 1 3.93% 3.92% 3.56% 3.32% 3.29%
Efficiency Ratio Calculation:1
Noninterest Expense $10,532 $10,409 $10,179 $ 9,773 $ 9,223
Less: Intangible Asset Amortization (89) (86) (96) (96) (96)
Net Noninterest Expense 10,443 $10,323 $10,083 $ 9,677 $ 9,127
Net Interest Income, Tax-Equivalent
1 15,612 $15,110 $13,537 $12,758 $12,397
Noninterest Income 3,089 4,181 4,847 4,016 4,089
Less: Net Securities Losses & OTTI 1,204 35 (749) --- ---
(Gains)
Net Gross Income 19,905 $19,326 $17,635 $16,774 $16,486
Efficiency Ratio 1 52.46% 53.42% 57.18% 57.69% 55.36%
Period-End Capital Information:
Tier 1 Leverage Ratio 8.32% 8.45% 8.54% 8.37% 8.39%
Total Shareholders' Equity (i.e. $125,397 $124,080 $127,051 $122,256 $118,874
Book Value)
Book Value per Share 11.93 11.80 11.94 11.50 11.20
Intangible Assets 16,457 16,495 16,593 16,590 16,699
Tangible Book Value per Share1 10.36 10.23 10.38 9.94 9.63
Asset Quality Information:
Net Loans Charged-off as a
Percentage of Average Loans,
Annualized .07% .00% .08% .05% .04%
Provision for Loan Losses as a
Percentage of Average Loans,
Annualized .09 .09 .11 .07 .05
Allowance for Loan Losses as a
Percentage of Loans, Period-end 1.16 1.20 1.20 1.19 1.19
Allowance for Loan Losses as a
Percentage of Nonperforming Loans,
Period-end 444.08 502.17 407.05 567.81 610.64
Nonperforming Loans as a
Percentage of Loans, Period-end .26 .24 .29 .21 .20
Nonperforming Assets as a
Percentage of Total Assets,
Period-end .24 .17 .20 .15 .13
|
1 See "Use of Non-GAAP Financial Measures" on page 16.
Selected Nine-Month Period Information:
(Dollars In Thousands, Except Per Share Amounts)
Sep 2008 Sep 2007
Net Income $15,425 $12,851
Transactions Recorded in Net Income (Net of Tax):
Visa Litigation1 $ 185 $---
Gain on Redemption of Visa Inc. Class B Shares1 452 ---
Other-Than-Temporary Impairment (OTTI) (731) ---
Net Securities Losses (17) ---
Net Gain on the Sale of Premises 69 ---
Net Gain on Sales of Loans 32 19
Net Gain on the Sale of Other Real Estate Owned --- 3
Period End Shares Outstanding 10,509 10,612
Basic Average Shares Outstanding 10,578 10,746
Diluted Average Shares Outstanding 10,635 10,821
Basic Earnings Per Share 1.46 1.20
Diluted Earnings Per Share 1.45 1.19
Cash Dividends .73 .70
Average Assets $1,629,719 $1,543,826
Average Equity 125,155 117,289
Return on Average Assets 1.26% 1.11%
Return on Average Equity 16.46 14.65
Average Earning Assets $1,553,046 $1,473,415
Average Paying Liabilities 1,289,771 1,217,789
Interest Income, Tax-Equivalent 1 68,995 66,325
Interest Expense 24,736 29,870
Net Interest Income, Tax-Equivalent 1 44,259 36,455
Tax-Equivalent Adjustment 2,206 2,179
Net Interest Margin 1 3.81% 3.31%
Efficiency Ratio Calculation 1
Noninterest Expense $31,120 $28,157
Less: Intangible Asset Amortization (271) (299)
Net Noninterest Expense 1 30,849 27,858
Net Interest Income, Tax-Equivalent 44,259 36,455
Noninterest Income 12,117 12,272
Less Net Securities Losses & OTTI 490 ---
Net Gross Income, Adjusted 1 56,866 48,727
Efficiency Ratio 1 54.25% 57.17%
Period-End Capital Information:
Tier 1 Leverage Ratio 8.32% 8.39%
Total Shareholders' Equity (i.e. Book Value) $125,397 $118,874
Book Value per Share 11.93 11.20
Intangible Assets 16,457 16,699
Tangible Book Value per Share 10.36 9.63
Net Loans Charged-off as a
Percentage of Average Loans, Annualized .05% .03%
Provision for Loan Losses as a
Percentage of Average Loans, Annualized .10 .04
Allowance for Loan Losses as a
Percentage of Period-end Loans 1.16 1.19
Allowance for Loan Losses as a
Percentage of Nonperforming Loans 444.08 610.64
Nonperforming Loans as a
Percentage of Period-end Loans .26 .20
Nonperforming Assets as a
Percentage of Period-end Total Assets .24 .13
|
1 See "Use of Non-GAAP Financial Measures" on page 16
Average Consolidated Balance Sheets and Net Interest Income Analysis
(see "Use of Non-GAAP Financial Measures" on page 16)
(Tax-equivalent Basis using a marginal tax rate of 35%)
(Dollars In Thousands)
Quarter Ended September 30, 2008 2007
Interest Rate Interest Rate
Average Income/ Earned/ Average Income/ Earned/
Balance Expense Paid Balance Expense Paid
Federal Funds Sold $ 10,158 $ 49 1.92% $ 16,013 $ 211 5.23%
Bank Balances at Interest 929 4 1.71 --- --- ---
Securities Available-for-Sale:
Taxable 345,281 4,224 4.87 317,111 3,682 4.611
Non-Taxable 18,608 249 5.32 25,848 387 5.94
Securities Held-to-Maturity:
Taxable 272 3 4.39 308 4 5.15
Non-Taxable 121,869 1,622 5.29 114,065 1,630 5.67
Loans 1,083,291 17,151 6.30 1,021,399 16,755 6.51
Total Earning Assets 1,580,408 23,302 5.87 1,494,744 22,669 6.02
Allowance For Loan Losses (12,732) (12,325)
Cash and Due From Banks 35,673 33,854
Other Assets 54,317 50,056
Total Assets $1,657,666 $1,566,329
Deposits:
Interest-Bearing NOW Deposits $ 353,171 1,167 1.31 $ 310,219 1,687 2.16
Regular and Money Market 288,307 863 1.19 263,620 1,006 1.51
Savings
Time Deposits of $100,000 or 178,041 1,291 2.88 189,685 2,333 4.88
More
Other Time Deposits 242,069 1,965 3.23 257,056 2,857 4.41
Total Interest-Bearing Deposits 1,061,588 5,286 1.98 1,020,580 7,883 3.06
Short-Term Borrowings 63,198 222 1.40 49,976 363 2.88
Long-Term Debt 183,405 2,182 4.73 161,256 2,026 4.98
Total Interest-Bearing 1,308,191 7,690 2.34 1,231,812 10,272 3.31
Liabilities
Demand Deposits 200,193 194,628
Other Liabilities 24,681 23,527
Total Liabilities 1,533,065 1,449,967
Shareholders' Equity 124,601 116,362
Total Liabilities and $1,657,666 $1,566,329
Shareholders' Equity
Net Interest Income 15,612 12,397
(Tax-equivalent Basis)
Net Interest Spread 3.53 2.71
Net Interest Margin 3.93 3.29
Reversal of Tax-Equivalent (710) (.18) (748) (.20)
Adjustment
Net Interest Income, As Reported $14,902 $11,649
|
Average Consolidated Balance Sheets and Net Interest Income Analysis
(see "Use of Non-GAAP Financial Measures" on page 16)
(Tax-equivalent Basis using a marginal tax rate of 35%)
(Dollars In Thousands)
Nine Months Ended September 30, 2008 2007
Interest Rate Interest Rate
Average Income/ Earned/ Average Income/ Earned/
Balance Expense Paid Balance Expense Paid
Federal Funds Sold $ 23,186 $ 463 2.67% $ 17,900 $ 703 5.25%
Bank Balances at Interest 672 11 2.19 --- --- ---
Securities Available-for-Sale:
Taxable 331,027 12,151 4.90 305,722 10,566 4.62
Non-Taxable 23,153 993 5.73 23,801 1,085 6.09
Securities Held-to-Maturity:
Taxable 279 10 4.79 314 12 5.11
Non-Taxable 116,303 4,867 5.59 110,149 4,724 5.73
Loans 1,058,426 50,500 6.37 1,015,529 49,235 6.48
Total Earning Assets 1,553,046 68,995 5.93 1,473,415 66,325 6.02
Allowance For Loan Losses (12,571) (12,313)
Cash and Due From Banks 33,967 32,746
Other Assets 55,277 49,978
Total Assets $1,629,719 $1,543,826
Deposits:
Interest-Bearing NOW Deposits $ 354,305 3,865 1.46 $ 302,794 4,778 2.11
Regular and Money Market 279,603 2,667 1.27 266,756 2,959 1.48
Savings
Time Deposits of $100,000 or 174,181 4,395 3.37 182,524 6,599 4.83
More
Other Time Deposits 242,942 6,632 3.65 260,665 8,605 4.41
Total Interest-Bearing Deposits 1,051,031 17,559 2.23 1,012,739 22,941 3.03
Short-Term Borrowings 56,949 671 1.57 48,515 1,044 2.88
Long-Term Debt 181,791 6,506 4.78 156,535 5,885 5.03
Total Interest-Bearing 1,289,771 24,736 2.56 1,217,789 29,870 3.28
Liabilities
Demand Deposits 190,456 185,285
Other Liabilities 24,337 23,463
Total Liabilities 1,504,564 1,426,537
Shareholders' Equity 125,155 117,289
Total Liabilities and $1,629,719 $1,543,826
Shareholders' Equity
Net Interest Income 44,259 36,455
(Tax-equivalent Basis)
Net Interest Spread 3.37 2.74
Net Interest Margin 3.81 3.31
Reversal of Tax-Equivalent (2,206) (.19) (2,179) (.20)
Adjustment
Net Interest Income, As Reported $42,053 $34,276
|
Financial Market Turmoil: (the following discussion provides the information required under Part II, Item 1.A "Risk Factors.") Over the past twelve months, the Dow Jones Industrial Average (Dow Jones) slid from a high of over 14,000 to a low of under 8,000, with the most dramatic change occurring during October 2008, after the close of the third quarter of 2008. The financial markets and particularly financial entities have felt the impact of losses on subprime mortgages and loss of short-term liquidity, including the September 2008 failure of Lehman Brothers Holdings (Lehman) and the distressed sales of Bear Stearns and Merrill Lynch. In addition, the number of bank failures, while not at historic highs, have risen to levels not seen for several years. Many community banks that were not underwriting subprime residential real estate loans, like our company, have not experienced the significant losses in their loan or investment portfolios or the liquidity concerns that our larger contemporaries have experienced. However, the magnitude of turmoil in the markets does or may have an impact on our operations in the following areas:
·
Investment Securities: We do not hold mortgage-backed securities backed by
subprime mortgages in our investment portfolio or collateralized debt
obligations backed directly or indirectly by such mortgage-backed securities or
other low-quality loans. However, we do hold certain corporate bonds and other
debt instruments issued by entities whose values have been impacted by the
deterioration of the financial markets. The Company holds a $2.0 million senior
unsecured bond issued by Lehman. On September 15, 2008, Lehman declared
bankruptcy resulting in a significant decline in the market value of the Lehman
bond. Management has deemed the decline to be other-than-temporary and,
accordingly, recognized a non-cash other-than-temporary impairment charge to
third quarter earnings of $731 thousand net of tax (a $.07 reduction in diluted
earnings per share). The remaining estimated value of our Lehman bond of $800
thousand has been included in non-performing assets as of September 30, 2008.
The Lehman bankruptcy proceedings are ongoing and ultimate value of our bond is
subject to further change. Corporate bonds and other debt securities
represented only $7.3 million, or 1.5%, of our $482.0 million investment
securities portfolio at September 30, 2008. We did not hold any preferred or
common stock of Fannie Mae or Freddie Mac.
·
Income from Fiduciary Activities: Our fees in this area generally bear a direct relationship to the fair value of the assets under management. The market value of assets under trust administration and investment management at September 30, . . .
|
|