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Date:

January 25, 2006




Arrow Reports Results of Operations for 2005


Arrow Financial Corporation announced operating results for the quarter and year ended December 31, 2005.  Net income for the quarter ended December 31, 2005 was $4.7 million, representing diluted earnings per share of $.45, or 2.2% below the diluted per share amount of $.46 earned in the fourth quarter of 2004, when net income was $4.9 million. Net income for the year 2005 was $18.6 million, representing diluted earnings per share of $1.76, or 3.3% below the diluted per share amount of $1.82 earned in 2004, when net income was $19.5 million. Cash dividends paid to shareholders in 2005 totaled $.92, or 6.4% higher than the $.86 paid in 2004.


Thomas L. Hoy, President and CEO stated, "The year was certainly challenging as well as eventful.  The Federal Reserve Bank, through eight increases in the targeted federal funds rate during the year, pushed short-term interest rates much higher.  We closed a branch purchase transaction with HSBC Bank, USA in April, which added three offices to our branch network.  Our acquisition, in November 2004, of the Capital Financial Group, Inc., a regional agency which specializes in the sale of group health insurance, proved very successful as commission income in 2005 considerably exceeded projections.  Loan growth was quite strong while asset quality and loan loss ratios remained at very low levels.  Total assets, total loans and total deposits all reached new year-end records and our capital adequacy ratios continued at very strong levels.  Thus, we view 2005 in a positive light despite earnings not reaching expectations."


Mr. Hoy added, "Our earnings were substantially impacted by a narrowing of the net interest margin, which, in turn, reflected the effects of a significant increase in prevailing short-term interest rates and a flattening of the yield curve.  In effect, the cost of our deposits, which tend to respond to changes in short-term rates, rose significantly.  However, our earning asset yield, which tends to follow longer-term market rates, did not rise commensurately and led to the compression of the net interest margin and reduced earnings.  For the year, net interest margin was 3.64% for 2005 which compares with 3.93% for 2004, while margin for the fourth quarter of 2005 was 3.46% versus 3.91% for the 2004 comparison period."


Arrow's key profitability ratios, return on average assets and return on average equity, remained strong in 2005, but were down from 2004 levels.  Return on average assets for the year of 2005 was 1.28%, which compares with 1.40% for the prior year, while return on average equity for 2005 was 15.94% versus 17.54% for 2004.  For the quarter ended December 31, 2005, the return on average assets was 1.23% and compares with 1.42% for the same quarter in 2004 whereas return on average equity was 16.04% for the 2005 quarter as compared with 17.07% for 2004.  Arrow has now exceeded a 15% return on average equity for 34 consecutive quarters.



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Mr. Hoy further added, "Total assets at year-end were $1.520 billion, up $142 million, or 10.3%, from the December 31, 2004 amount of $1.378 billion.  Deposit balances at December 31, 2005 were $1.166 billion, representing an increase of $134 million, or 12.9% from the prior year-end balance of $1.032 billion.  Loans outstanding nearly reached one billion dollars at year-end 2005, ending at $997 million.  Loan growth totaled $121 million in the 12-month period and represented a 13.9% increase.  Much of the loan growth was focused in the indirect consumer loan portfolio.  This category, which essentially represents loans to finance motor vehicles, increased $51 million or 17.1% to $352 million from $301 million at December 31, 2004.  Volume increased significantly following a sharp curtailment by the auto manufacturers of their highly subsidized financing programs, beginning in the first quarter of the year.  The relatively strong demand for commercial and commercial real estate credit experienced in 2004 continued throughout 2005.  These loans to small businesses totaled $252 million at December 31, 2005, up $39 million or 18.2% from $213 million one year earlier.  Residential mortgage balances rose $36 million or 10.3% to $387 million from $351 million at December 31, 2004.  The volume of new residential mortgage originations increased over the 2004 total as attractive financing rates during 2005 continued to spur demand.”


Mr. Hoy said, "Asset quality remained very high.  At December 31, 2005, nonperforming loans totaled $2.2 million, and represented just .23% of year-end loan outstandings, down from .24% one year earlier. Nonperforming assets were $2.4 million at December 31, 2005, equaling .16% of assets - or the same ratio as one year earlier. Net loan losses, expressed as a percentage of average loans outstanding, were a low .09% for both 2005 and for 2004.  Arrow's allowance for loan losses amounted to $12.2 million at December 31, 2005 and equaled 1.23% of loans outstanding."


“Other highlights included the distribution of a 3% stock dividend in September, two increases in the quarterly cash dividend and the opening of our 31st office, located at Jones Road, Saratoga Springs on January 2, 2006.  We have also executed agreements to acquire property in South Plattsburgh for development of a branch in the very successful PARC economic development zone.  The vibrant greater Plattsburgh area economy has been the source of significant new business and we expect the new office will be very successful.  The North Country Funds, which are advised exclusively by our subsidiary, North Country Investment Advisors, Inc., continued to grow, reaching a record combined balance of $153 million at year-end.”


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.


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 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.  In the case of all forward-looking statements, actual outcomes and results may differ materially from what the statements predict or forecast. 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, 2004.





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Arrow Financial Corporation

Consolidated Financial Information

($ in thousands, except per share amounts)

Unaudited

 

Three Months

Twelve Months

 

Ended December 31,

Ended December 31,

 

2005

2004

2005

2004

Income Statement

    

Interest and Dividend Income

$19,190

$17,041

$72,127

$68,443

Interest Expense

   7,272

   4,721

  24,114

  19,206

  Net Interest Income

11,918

12,320

48,013

49,237

Provision for Loan Losses

      404

      276

    1,030

    1,020

  Net Interest Income After Provision for Loan Losses

 11,514

 12,044

  46,983

  48,217

     

Net Gain on Securities Transactions

24

161

364

362

Net Gain on Sales of Loans

14

152

122

336

Recovery from Former Vermont Operations

---

---

---

77

Net Gains on the Sales of Other Real Estate Owned

29

---

57

---

Income From Fiduciary Activities

1,241

999

4,676

4,226

Fees for Other Services to Customers

1,811

1,753

7,371

7,251

Insurance Commissions

351

242

1,683

261

Other Operating Income

      220

      261

      675

      679

  Total Other Income

   3,690

   3,568

 14,948

 13,192

     

Salaries and Employee Benefits

5,155

5,182

20,693

19,824

Occupancy Expenses of Premises, Net

689

627

2,914

2,695

Furniture and Equipment Expense

604

604

2,875

2,648

Amortization of Intangible Assets

127

14

385

41

Foreclosed Property Expense

---

---

---

---

Other Operating Expense

   1,953

   1,956

    8,322

    7,764

  Total Other Expense

   8,528

   8,383

  35,189

  32,972

     

Income Before Taxes

6,676

7,229

26,742

28,437

Provision for Income Taxes

   1,986

   2,281

    8,103

    8,959

  Net Income

$ 4,690

$ 4,948

$18,639

$19,478

     

Share and Per Share Data 1

    

Period Ending Shares Outstanding

10,366

10,502

10,366

10,502

Basic Average Shares Outstanding

10,362

10,444

10,420

10,426

Diluted Average Shares Outstanding

10,519

10,696

10,596

10,675

     

Basic Earnings Per Share

$  0.45

$  0.47

$  1.79

$  1.87

Diluted Earnings Per Share

0.45

0.46

1.76

1.82

     

Cash Dividends

0.24

0.22

0.92

0.86

     

Book Value

11.33

11.24

11.33

11.24

Tangible Book Value 2

9.66

10.12

9.66

10.12

     

Key Earnings Ratios

    

Return on Average Assets

1.23%

1.42%

1.28%

1.40%

Return on Average Equity

16.04

17.07

15.94

17.54

Net Interest Margin 3

3.46

3.91

3.64

3.93

     

1 Share and Per Share amounts have been restated for the September 2005 three percent stock dividend.

2 Tangible Book Value excludes from total equity intangible assets, primarily goodwill.

3 Net Interest Margin includes a tax equivalent upward adjustment for the fourth quarter of 18 basis points in 2005 and 19 basis points in 2004 and

    an upward adjustment for the twelve-month period of 18 basis points in 2005 and 19 basis points in 2004.





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Arrow Financial Corporation

Consolidated Financial Information

($ in thousands)

Unaudited

    
 

December 31, 2005

 

December 31, 2004

  

Fourth

Year-to-

  

Fourth

Year-to-

 

Period

Quarter

Date

 

Period

Quarter

Date

 

End

Average

Average

 

End

Average

Average

Balance Sheet

       

Cash and Due From Banks

$     35,558 

$     36,075 

$     36,312 

 

$     29,805 

$     36,974 

$     35,940 

Federal Funds Sold

 --- 

4,842 

3,060 

 

 7,000 

15,641 

11,068 

Securities Available-for-Sale

326,363 

331,251 

328,404 

 

325,248 

318,048 

334,521 

Securities Held-to-Maturity

118,123 

118,814 

112,735 

 

108,117 

108,235 

106,808 

        

Loans

996,545 

988,567 

942,286 

 

875,311 

876,616 

866,690 

Allowance for Loan Losses

    (12,241)

     (12,216)

     (12,136)

 

    (12,046)

     (12,055)

     (11,961)

  Net Loans

   984,304 

    976,351 

    930,150 

 

   863,265 

    864,561 

    854,729 

        

Premises and Equipment, Net

15,884 

15,491 

15,225 

 

14,939 

14,903 

14,559 

Goodwill and Intangible Assets, Net

17,337 

17,361 

15,907 

 

11,736 

10,131 

9,639 

Other Assets

       22,034 

       15,844 

       16,923 

 

       17,839 

       20,537 

       20,661 

    Total Assets

$1,519,603 

$1,516,029 

$1,458,716 

 

$1,377,949 

$1,389,030 

$1,387,925 

        

Demand Deposits

$  179,441 

$  179,555 

$  174,762 

 

$  167,667 

$  166,433 

$  163,029 

Nonmaturity Interest-Bearing Deposits

610,524 

622,108 

610,995 

 

607,820 

642,678 

640,399 

Time Deposits of $100,000 or More

154,626 

136,703 

126,919 

 

85,906 

73,775 

69,431 

Other Time Deposits

    221,172 

     214,330 

     198,130 

 

    170,887 

     170,857 

     174,887 

  Total Deposits

1,165,763 

1,152,696 

1,110,806 

 

1,032,280 

1,053,743 

1,047,746 

        

Short-Term Borrowings

43,054 

57,817 

49,493 

 

43,976 

53,812 

47,433 

Federal Home Loan Bank Advances

157,000 

149,120 

143,889 

 

150,000 

132,493 

149,665 

Other Long-Term Debt

20,000 

20,000 

20,000 

 

20,000 

15,380 

15,096 

Other Liabilities

       16,365 

       20,389 

       17,572 

 

       13,659 

       18,315 

       16,925 

  Total Liabilities

  1,402,182 

  1,400,022 

  1,341,760 

 

  1,259,915 

  1,273,743 

  1,276,865 

        

Common Stock

13,883 

13,883 

13,623 

 

13,479 

13,479 

13,224 

Surplus

139,442 

139,233 

131,974 

 

127,312 

125,963 

118,062 

Undivided Profits

21,402 

20,007 

23,845 

 

23,356 

22,005 

25,542 

Unallocated ESOP Shares

(1,163)

(1,181)

(1,183)

 

(1,358)

(1,497)

(1,502)

Accumulated Other Comprehensive

   Income

(4,563)

  (4,415)

(2,281)

 

429 

  709 

600 

Treasury Stock

     (51,580)

     (51,520)

     (49,022)

 

     (45,184)

     (45,372)

     (44,866)

  Total Shareholders’ Equity

     117,421 

    116,007 

    116,956 

 

     118,034 

    115,287 

    111,060 

    Total Liabilities and

        Shareholders’ Equity

$1,519,603 

$1,516,029 

$1,458,716 

 

$1,377,949 

$1,389,030 

$1,387,925 

        

Assets Under Trust Administration

  And Investment Management

$813,693

   

$801,714

  
        

Capital Ratios

       

  Leverage Ratio

8.33%

   

9.23%

  

  Tier 1 Risk-Based Capital Ratio

12.56

   

14.52

  

  Total Risk-Based Capital Ratio

13.79

   

15.77

  






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Arrow Financial Corporation

Consolidated Financial Information

($ in thousands)

Unaudited

 

December 31,

 

2005

2004

Loan Portfolio

  

Commercial, Financial and Agricultural

$  84,300 

$  76,379 

Real Estate – Commercial

168,101 

137,107 

Real Estate – Residential

376,820 

342,957 

Real Estate – Construction

10,082 

7,868 

Indirect Consumer Loans

352,014 

300,672 

Other Loans to Individuals

      5,228 

    10,328 

  Total Loans

$996,545 

$875,311 

   

Allowance for Loan Losses, Fourth Quarter

  

Allowance for Loan Losses, Beginning of Period

$12,211 

$12,056 

   

Loans Charged-off

(437)

(336)

Recoveries of Loans Previously Charged-off

        63 

        50 

  Net Loans Charged-off

     (374)

     (286)

   

Provision for Loan Losses

       404 

       276 

  Allowance for Loan Losses, End of Period

$12,241 

$12,046 

   

Allowance for Loan Losses, Twelve Months

  

Allowance for Loan Losses, Beginning of Period

$12,046 

$11,842 

   

Loans Charged-off

(1,128)

(1,062)

Recoveries of Loans Previously Charged-off

      293 

      246 

  Net Loans Charged-off

     (835)

     (816)

   

Provision for Loan Losses

    1,030 

    1,020 

  Allowance for Loan Losses, End of Period

$12,241 

$12,046 

   

Nonperforming Assets

  

Nonaccrual Loans

$1,875 

$2,103 

Loans Past Due 90 or More Days and Accruing

373 

6 

Restructured Loans

       --- 

       --- 

  Total Nonperforming Loans

2,248 

2,109 

Repossessed Assets

124 

136 

Other Real Estate Owned

       --- 

       --- 

  Total Nonperforming Assets

$2,372 

$2,245 

   

Key Asset Quality Ratios

  

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

0.15%

0.13%

Net Loans Charged-off to Average Loans, Twelve Months

0.09

0.09

   

Provision for Loan Losses to Average Loans, Fourth Quarter Annualized

0.16

0.13

Provision for Loan Losses to Average Loans, Twelve Months

0.11

0.12

   

Allowance for Loan Losses to Period-End Loans

1.23

1.38

Allowance for Loan Losses to Nonperforming Loans

544.55

571.18

Nonperforming Loans to Period-End Loans

0.23

0.24

Nonperforming Assets to Period-End Assets

0.16

0.16




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