News
April 21, 2016Arrow Reports 11.9% Net Income Increase, Continued Strong Loan Growth
Arrow Financial Corporation (NasdaqGS® – AROW) announced operating results for the three-month period ended March 31, 2016. Net income for the first quarter of 2016 was $6.5 million, an increase of $694 thousand, or 11.9%, from net income of $5.9 million for the first quarter of 2015. Our key profitability ratios continue to remain strong as measured by a return on average equity (ROE) of 12.07% and a return on average assets (ROA) of 1.07% for the first quarter of 2016, up from 11.72% and 1.06%, respectively, from the prior-year first quarter.
Diluted earnings per share (EPS) for the first quarter was $0.50, an increase of 11.1% from the 2015 comparable quarter, when EPS was $0.45. Historical share and per share amounts have been restated to reflect our 2% stock dividend distributed on September 28, 2015.
Arrow President and CEO Thomas J. Murphy stated, “The first quarter of 2016 continued to build upon our record performance in 2015. We once again reported a double-digit increase in our loan portfolio, which was a key driver for strong net income growth, as compared to the first quarter last year. We also reached record highs at the end of the quarter for total assets, deposits and equity. We continued to expand our presence in the Capital District market, while maintaining high-performing long-term profitability objectives. Our dedicated team worked hard to deliver these results and I am pleased with our excellent performance.”
The following expands upon our first-quarter results:
Net Interest Income: In the first quarter of 2016, on a tax-equivalent basis, our net interest income increased by $1.5 million, or 8.8%, compared to the first quarter of 2015, even though our tax-equivalent net interest margin decreased between the two quarters by 5 basis points. It decreased from 3.24% in the 2015 quarter to 3.19% in the 2016 quarter. The general decrease in net interest margin in recent periods reflected the fact that the average yield on our loan portfolio decreased more rapidly than the average cost of our interest- bearing liabilities. Intermediate and long-term interest rates remain very low and volatile. We expect this low interest rate environment to persist in upcoming periods, which will continue to place downward pressure on our net interest margins.
Loan Growth: Over the three-month period ended March 31, 2016, total loans increased by $48.8 million, or 3.1%, with increases in all three of our major loan segments: commercial, consumer, and residential real estate. At March 31, 2016, our total loan balance was up 13.1% to a record high as compared to March 31, 2015.
During the first quarter of 2016, we experienced an increase of $25 million, or 5.4%, in our consumer loan portfolio, which reached a record-high balance at period-end of $490 million, exceeding the March 31, 2015, balance by $48.6 million, or 11%. This increase was primarily a result of growth in our indirect automobile lending program. In the first quarter, we extended $76.1 million in new loans for new and used automobiles.
Additionally, total outstanding commercial loans increased 4.6% during the quarter, reaching a balance of $509.9 million on March 31, 2016, up $70.7 million, or 16.1%, from March 31, 2015. And finally, our residential real estate loan portfolio increased $1.4 million, or 0.2%. We originated approximately $24.2 million of residential real estate loans during the quarter, a decrease of $2.5 million from our originations in the comparable quarter of 2015.
Deposit Growth: At March 31, 2016, our deposit balances reached a record $2.1 billion, an increase of $96.4 million, or 4.8%, from the prior-year level. Successful execution of our strategic objective to expand our branch network in the Capital District in recent years has been effective in raising new deposits, as well as new loan opportunities. Noninterest-bearing deposits increased more rapidly than total deposits; at period- end, they were up $41.7 million, or 13.4%, from the prior-year level, which has positively impacted net interest margin. Noninterest-bearing demand deposits represent 16.7% of total deposits at March 31, 2016, an increase from 15.4% as of the prior-year level.
Assets Under Management and Related Noninterest Income: Assets under trust administration and investment management at March 31, 2016, decreased by $23.7 million, or 1.9%, from the total at March 31, 2015, primarily due to the performance of the equity markets. However, the related income from fiduciary activities between the respective three-month periods decreased only $2 thousand, or 0.1%.
Insurance Agency Operations: Insurance commission income increased 3.2% from $2.1 million for the first quarter of 2015 to $2.2 million for the first quarter of 2016. The increase was primarily attributable to an increase in the level of annual contingent commission income received from certain insurance carriers.
Asset Quality: Asset quality remained strong at March 31, 2016, as measured by our comparatively low levels of nonperforming assets and net charge-offs. Nonperforming assets at March 31, 2016, of $10.1 million were up $1.7 million from the prior-year level and up $1.2 million since year-end 2015. However, our nonperforming assets still represented only 0.41% of total assets at period-end, versus 0.36% at March 31, 2015. Net loan losses expressed as an annualized percentage of average loans outstanding were just 0.04% for the three-month period ended March 31, 2016, compared to 0.06% for the same period a year ago.
Our allowance for loan losses was $16.3 million at March 31, 2016, which represented 1% of loans outstanding, 9 basis points below our ratio one year earlier and 2 basis points below our ratio at December 31, 2015. Our provision for loan losses for the first quarter of 2016 was $401 thousand, an increase of $126 thousand from the provision for the comparable 2015 quarter. The increased size of our provision resulted from a combination of strong loan growth and a modest decrease in net charge-offs between the periods. Our coverage ratio at period-end continued to reflect the strong quality of our loan portfolio.
Cash and Stock Dividends: We distributed a cash dividend of $0.25 per share to shareholders in the first quarter of 2016. The cash dividend was 2% higher than the cash dividend paid in the first quarter of 2015 when adjusted for our 2% stock dividend distributed on September 28, 2015.
Capital: Total stockholders’ equity was a record $220.7 million at period-end, an increase of $15.7 million, or 7.7%, above the March 31, 2015, amount. Arrow’s capital grew at a faster pace than asset growth, and the capital ratios remained strong in 2016. At March 31, 2016, the Company’s CET1 ratio was estimated to be 12.84% and total risk-based capital ratio was estimated to be 15.09%. The capital ratios of the Company and both its subsidiary banks continue to significantly exceed the “well capitalized” regulatory standards, which places us in the highest current regulatory category.
Peer Group: Many of our key operating ratios have consistently compared favorably to our peer group, which we define as all U.S. bank holding companies having $1 billion to $3 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 12-month period ended December 31, 2015, in which our return on average equity (ROE) was 11.86%, as compared to 8.54% for our peer group.
As of December 31, 2015, our ratio of loans 90 days past due and accruing, plus nonaccrual loans to total loans was 0.42%, as compared to 0.83% for our peer group, while our annualized ratio of net loan losses of 0.06% were below the peer result of 0.09%.
Industry Recognition: For the second consecutive year, the Company was awarded the Raymond James Community Bankers Cup for “superior financial performance.” Arrow was evaluated alongside 301 community banks with assets between $500 million and $10 billion based on various profitability, operational efficiency and balance sheet metrics. The Community Bankers Cup was awarded to the top 10% of banks for their exceptional performance during 2015, as well as over time. Arrow was one of only two New York State financial institutions recognized.
In addition, the Company’s two banking subsidiaries were each recognized as a 5-Star Superior Bank by BauerFinancial, Inc. based on the most recently available financial data. Glens Falls National Bank and Trust Company and Saratoga National Bank and Trust Company have each earned this designation for the past 36 and 28 quarters, respectively.
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.; two property and casualty insurance agencies: 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.
In addition to presenting information in conformity with accounting principles generally accepted in the United States of America (GAAP), this news release contains financial information determined by methods other than GAAP (non-GAAP). The following measures used in this release, which are commonly utilized by financial institutions, have not been specifically exempted by the Securities and Exchange Commission (“SEC”) and may constitute “non-GAAP financial measures” within the meaning of the SEC’s rules. Certain non-GAAP financial measures include: tangible equity, return on tangible equity, tax-equivalent adjustment and related net interest income – tax equivalent, and the efficiency ratio. Management believes that the non- GAAP financial measures disclosed by the Company from time to time are useful in evaluating the Company’s performance and that such information should be considered as supplemental in nature and not as a substitute for or superior to the related financial information prepared in accordance with GAAP. Our non- GAAP financial measures may differ from similar measures presented by other companies. See the reconciliation of GAAP to non-GAAP measures in the section “Select Quarterly Information.”
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, 2015, and our other filings with the Securities and Exchange Commission.
