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Date:

January 22, 2008


Arrow Reports 5.2% Increase in 2007 Earnings per Share


Arrow Financial Corporation (NasdaqGS® – AROW) announced operating results for the quarter and year ended December 31, 2007.  Net income for the year 2007 was $17.3 million, representing diluted earnings per share of $1.61, or 5.2% above the diluted per share amount of $1.53 earned in 2006, when net income was $16.9 million. Net income for the quarter ended December 31, 2007 was $4.5 million, representing diluted earnings per share of $.42, or 7.7% above the diluted per share amount of $.39 earned in the fourth quarter of 2006, when net income was $4.3 million. Cash dividends paid to shareholders in 2007 totaled $.94, or 3.3% higher than the $.91 paid in 2006.  All per share amounts have been adjusted for the 3% stock dividend distributed on September 28, 2007.


Thomas L. Hoy, Chairman, President and CEO stated, "We are pleased to report favorable operating results and continued strong asset and credit quality as reflected in our key ratios. Return on average equity for the fourth quarter of 2007 was 14.76% and was 14.68% for the year ended December 31, 2007. Arrow’s low levels of nonperforming assets and net loan losses are key indicators that our asset and credit quality continued to remain high.  We were encouraged to have attained this level of performance even though we recorded a non-cash pre-tax charge in the fourth quarter of 2007 of $600 thousand related to our proportionate membership share of certain estimated litigation costs involving Visa U.S.A., Inc. and a number of Visa U.S.A. member banks.  Like other member financial institutions, we are obligated to indemnify Visa U.S.A. in connection with certain legal proceedings.  


In October 2007, Visa, Inc. and its affiliates (Visa) completed a restructuring and issued shares of common stock in Visa, Inc. in contemplation of an initial public offering (IPO) which Visa has indicated is planned for the first half of 2008.  While the outcome and amount of potential losses related to the Visa U.S.A. litigation is inherently uncertain, based on the settlement of litigation with American Express and our estimate of the fair value of potential losses related to the remaining litigation, we recognized a charge to fourth quarter earnings of $362 thousand after tax representing 3.4 cents diluted earnings per share for the fourth quarter and the year ended December 31, 2007.  However, Visa has indicated that it intends that payments related to these litigation matters will be funded from an escrow account to be established with a portion of the proceeds from its IPO.  We currently expect that our proportional share of the proceeds of Visa’s planned IPO in 2008 will exceed the aggregate amount of this charge.


Total assets at December 31, 2007 reached a record high of $1.585 billion, up $64.6 million, or 4.3%, over the December 31, 2006 balance of $1.520 billion.  Deposit balances at December 31, 2007 were $1.204 billion, representing an increase of $17.8 million, or 1.5%, from the December 31, 2006 level of $1.186 billion.  Loan balances outstanding reached $1.039 billion at December 31, 2007, representing an increase of $29.8 million, or 3.0%, from the balance at December 31, 2006.  


Asset quality remained high at year-end 2007, with nonperforming loans of only $2.2 million, which represented .21% of period-end loans.  Nonperforming assets were $2.3 million at December 31, 2007, representing just .15% of period-end assets.  Net loan losses for 2007, expressed as a percentage of average loans outstanding, were a low .04% compared to .08% for 2006.  Arrow's allowance for loan losses amounted to $12.4 million at December 31, 2007, which represented 1.19% of loans outstanding.  Subprime consumer real estate lending continued to have a negative impact on the national and world economies during 2007 and into 2008.  We have not engaged in subprime lending as a business line nor do we hold mortgage-backed securities backed by subprime mortgages in our investment portfolio.


Our increase in net interest income was primarily the result of an increase of $67.9 million, or 4.7%, in the level of average earning assets, from the fourth quarter of 2006 to the fourth quarter of 2007.  This was accompanied by an increase in our net interest margin, which for the fourth quarter of 2007 was 3.32%, up eight basis points from the fourth quarter of 2006 and up three basis points from the third quarter of 2007.  


The Federal Reserve Bank began to reduce the federal funds target rate on September 18, 2007. At each of the last three meetings in 2007, the Federal Open Market Committee (FOMC) made reductions in the target rate which resulted in a cumulative decrease of 100 basis points through year-end 2007.  Short-term interest rates have declined more than longer-term interest rates, resulting in positive slope of the yield curve.  Although this continues to be a volatile interest rate environment, we have followed our core banking strategy and the disciplined course we believe best serves our shareholders over time.  


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 September 30, 2007 ‘Bank Holding Company Performance Report.’  Most notably, our return on average equity for the quarter ended December 31, 2007 was 14.76%, as compared to 14.19% for the 2006 period.  The return on average equity for our peer group was 10.94% for the September 2007 nine-month period and 12.62% for the December 2006 twelve-month period.  Our loan quality ratios also compare very favorably to our peer group.  Our nonperforming loans to period-end loans was .21%, compared to a ratio of .83% for our peer group at September 30, 2007. We continue to maintain a higher total risk-based capital ratio than our peer group.  


As of December 31, 2007, assets under trust administration and investment management were $961.2 million, an increase of $54.7 million, or 6.0%, from December 31, 2006.  This increase in asset levels led to a $90 thousand, or 7.1%, increase in fee income from fiduciary activities for the fourth 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 Advisers, Inc., with a combined balance of $207 million at December 31, 2007.”


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.  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

Twelve Months

 

Ended December 31,

Ended December 31,

 

2007

2006

2007

2006

Income Statement

    

Interest and Dividend Income

$22,431

$20,831

$86,577

$80,611

Interest Expense

  10,413

   9,488

  40,283

  34,743

  Net Interest Income

12,018

11,343

46,294

45,868

Provision for Loan Losses

      191

      266

       513

       826

  Net Interest Income After Provision for Loan Losses

 11,827

 11,077

  45,781

  45,042

     

Net Gain (Loss) on Securities Transactions

---

16

--- 

(102)

Net Gain on Sales of Loans

9

11

41

74

Net Loss on the Sale of Other Real Estate Owned

(9)

---

(4)

---

Gain on Sale of Premises

---

---

---

227

Income From Fiduciary Activities

1,366

1,276

5,572

5,082

Fees for Other Services to Customers

2,089

1,978

8,130

7,954

Insurance Commissions

434

406

1,869

1,768

Other Operating Income

      127

      286

      680

      778

  Total Noninterest Income

   4,016

   3,973

 16,288

 15,781

     

Salaries and Employee Benefits

5,226

5,599

21,424

22,096

Occupancy Expenses of Premises, Net

805

726

3,198

3,058

Furniture and Equipment Expense

754

625

3,015

2,971

Amortization of Intangible Assets

96

107

394

436

Visa Related Litigation Exposure

600

---

600

---

Other Operating Expense

   2,292

   2,063

    9,299

    8,246

  Total Noninterest Expense

   9,773

   9,120

  37,930

  36,807

     

Income Before Taxes

6,070

5,930

24,139

24,016

Provision for Income Taxes

   1,589

   1,635

    6,807

    7,124

  Net Income

$ 4,481

$ 4,295

$17,332

$16,892

     

Share and Per Share Data 1

    

Period Ending Shares Outstanding

10,627

10,905

10,627

10,905

Basic Average Shares Outstanding

10,619

10,895

10,714

10,922

Diluted Average Shares Outstanding

10,682

11,021

10,786

11,067

     

Basic Earnings Per Share

$  0.42

$  0.39

$  1.62

$  1.55

Diluted Earnings Per Share

0.42

0.39

1.61

1.53

     

Cash Dividends

0.24

0.23

0.94

0.91

     

Book Value

11.50

10.83

11.50

10.83

Tangible Book Value 2

9.94

9.28

9.94

9.28

     

Key Earnings Ratios

    

Return on Average Assets

1.11%

1.11%

1.11%

1.11%

Return on Average Equity

14.76

14.19

14.68

14.38

Return on Tangible Equity

17.13

16.53

17.11

16.84

Net Interest Margin 3

3.32

3.24

3.31

3.32

     

1 Share and Per Share amounts have been restated for the September 2007 3% stock dividend.

2 Tangible Book Value per share is the ratio of Total Equity less Intangible Assets to Period End Shares Outstanding.

3 Net Interest Margin includes a tax equivalent upward adjustment for the fourth quarter of 19 basis points in 2007 and 15 basis points in 2006 and

    an upward adjustment for the twelve-month period of 20 basis points in 2007 and 16 basis points in 2006.




Arrow Financial Corporation

Consolidated Financial Information

($ in thousands)

Unaudited

    
 

December 31, 2007

 

December 31, 2006

  

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

$     35,289 

$     34,468 

$     33,180 

 

$     34,995 

$     34,018 

$     33,853 

Federal Funds Sold

16,000 

34,255 

22,022 

 

9,000 

17,951 

8,875 

Securities Available-for-Sale

338,070 

340,094 

332,187 

 

315,886 

340,686 

341,789 

Securities Held-to-Maturity

114,611 

115,138 

111,642 

 

108,498 

99,898 

104,380 

        

Loans

1,038,844 

1,036,661 

1,020,856 

 

1,008,999 

999,676 

996,611 

Allowance for Loan Losses

     (12,401)

     (12,350)

     (12,323)

 

    (12,278)

     (12,282)

     (12,263)

  Net Loans

 1,026,443 

  1,024,311 

  1,008,533 

 

   996,721 

    987,394 

    984,348 

        

Premises and Equipment, Net

16,728 

16,368 

16,118 

 

15,608 

15,854 

15,943 

Goodwill and Intangible Assets, Net

16,590 

16,653 

16,808 

 

16,925 

16,993 

17,149 

Other Assets

       21,115 

       19,766 

       17,761 

 

       22,584 

       17,772 

       15,990 

    Total Assets

$1,584,846 

$1,601,053 

$1,558,251 

 

$1,520,217 

$1,530,566 

$1,522,327 

        

Demand Deposits

$  184,273 

$  190,002 

$  186,474 

 

$  183,492 

$  184,267 

$  182,706 

Nonmaturity Interest-Bearing Deposits

590,383 

617,439 

581,621 

 

559,132 

570,705 

574,113 

Time Deposits of $100,000 or More

180,334 

174,915 

180,606 

 

187,777 

170,388 

161,729 

Other Time Deposits

    249,210 

     250,260 

     258,042 

 

    255,996 

     259,346 

     248,706 

  Total Deposits

1,204,200 

1,232,616 

1,206,743 

 

1,186,397 

1,184,706 

1,167,254 

        

Short-Term Borrowings

53,719 

51,847 

49,355 

 

48,324 

51,788 

46,044 

Federal Home Loan Bank Advances

160,000 

151,304 

140,258 

 

125,000 

131,217 

151,020 

Other Long-Term Debt

20,000 

20,000 

20,000 

 

20,000 

20,000 

20,000 

Other Liabilities

       24,671 

       24,853 

       23,813 

 

       22,366 

       22,758 

       20,543 

  Total Liabilities

  1,462,590 

  1,480,620 

  1,440,169 

 

  1,402,087 

  1,410,469 

  1,404,861 

        

Common Stock

14,729 

14,729 

14,455 

 

14,300 

14,300 

14,033 

Surplus

161,476 

161,097 

154,866 

 

150,919 

150,660 

143,680 

Undivided Profits

15,347 

14,096 

17,428 

 

17,619 

16,323 

20,751 

Unallocated ESOP Shares

(2,042)

(2,042)

(1,766)

 

(862)

(862)

(864)

Accumulated Other Comprehensive Loss

(4,890)

  (5,328)

(7,060)

 

(7,965)

  (4,645)

(5,713)

Treasury Stock

     (62,364)

     (62,119)

     (59,841)

 

     (55,881)

     (55,679)

     (54,421)

  Total Shareholders’ Equity

     122,256 

    120,433 

    118,082 

 

     118,130 

    120,097 

    117,466 

    Total Liabilities and

        Shareholders’ Equity

$1,584,846 

$1,601,053 

$1,558,251 

 

$1,520,217 

$1,530,566 

$1,522,327 

        

Assets Under Trust Administration

  And Investment Management

$961,152

   

$906,451

  
        

Capital Ratios

       

  Leverage Ratio

8.37%

   

8.63%

  

  Tier 1 Risk-Based Capital Ratio

12.89

   

13.09

  

  Total Risk-Based Capital Ratio

14.09

   

14.32

  






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Arrow Financial Corporation

Consolidated Financial Information

($ in thousands)

Unaudited

 

December 31,

 

2007

2006

Fourth Quarter Ended December 31:

  
   

Loan Portfolio

  

Commercial, Financial and Agricultural

$     79,128 

$     79,581 

Real Estate – Commercial

189,208 

192,762 

Real Estate – Residential

427,936 

399,446 

Indirect and Other Consumer Loans

     342,572 

     337,210 

  Total Loans

$1,038,844 

$1,008,999 

   

Allowance for Loan Losses, Fourth Quarter

  

Allowance for Loan Losses, Beginning of Quarter

$12,341 

$12,274 

   

Loans Charged-off, Quarter-to-Date

(220)

(353)

Recoveries of Loans Previously Charged-off, Quarter-to-Date

        89 

        91 

  Net Loans Charged-off, Quarter-to-Date

     (131)

     (262)

   

Provision for Loan Losses, Quarter-to-Date

       191 

       266 

  Allowance for Loan Losses, End of Quarter

$12,401 

$12,278 

   

Nonperforming Assets

  

Nonaccrual Loans

$1,939 

$2,038 

Loans Past Due 90 or More Days and Accruing

    245 

    739 

  Total Nonperforming Loans

2,184 

2,777 

Repossessed Assets

63 

144 

Other Real Estate Owned

       89 

     248 

  Total Nonperforming Assets

$2,336 

$3,169 

   

Key Asset Quality Ratios

  

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

0.05%

0.10%

Provision for Loan Losses to Average Loans, Fourth Quarter Annualized

0.07

0.11

Allowance for Loan Losses to Period-End Loans

1.19

1.22

Allowance for Loan Losses to Nonperforming Loans

567.81

442.12

Nonperforming Loans to Period-End Loans

0.21

0.28

Nonperforming Assets to Period-End Assets

0.15

0.21

   
 

December 31,

Year Ended December 31:

2007

2006

   

Allowance for Loan Losses, Twelve Months

  

Allowance for Loan Losses, Beginning of Year

$12,278 

$12,241 

   

Loans Charged-off, Year-to-Date

(830)

(1,137)

Recoveries of Loans Previously Charged-off, Year-to-Date

       440 

       348 

  Net Loans Charged-off, Year-to-Date

      (390)

      (789)

   

Provision for Loan Losses, Year-to-Date

       513 

       826 

  Allowance for Loan Losses, End of Year

$12,401 

$12,278 

   

Key Asset Quality Ratios

  

Net Loans Charged-off to Average Loans, Twelve Months

0.04

0.08

Provision for Loan Losses to Average Loans, Twelve Months

0.05

0.08

   




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