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Date:

October 16, 2008



Arrow Reports 11.9% Increase in Third Quarter 2008 EPS


Arrow Financial Corporation (“Company”) (NasdaqGS® – AROW) announced operating results for the three and nine-month periods ended September 30, 2008.  Net income for the third quarter ended September 30, 2008 was $5.0 million, representing diluted earnings per share of $.47, up $.05 or 11.9% from the $.42 per share amount earned in the third quarter of 2007, when net income was $4.5 million.  For the first nine months of 2008, net income of $15.4 million increased 20.0% from the $12.9 million earned for 2007.  Diluted earnings per share for the first nine months of 2008 of $1.45 increased $.26, or 21.8%, from the $1.19 per share earned during the comparative period in 2007. Quarterly cash dividends paid to shareholders during the third quarter of 2008 increased 8.7% to $.25 per share from $.23 per share paid in the comparable 2007 period.


Thomas L. Hoy, Chairman, President and CEO stated, “We are pleased to report solid quarterly and nine-month earnings performance, primarily as a result of significant increases in net interest income through an expansion in net interest margin, and continued growth in average earning assets. Our conservative posture and underwriting practices continue to be the key drivers which have generated enhanced earnings while our balance sheet and asset quality have remained strong.  Our concentration on fundamentals has allowed the Company to achieve new records for total assets, deposits and loans outstanding in spite of historic trauma in the financial markets.  Strong capital ratios and excellent loan quality position the Company well to withstand the stress of a weak economy and financial market turmoil.”


The ongoing deterioration of the residential real estate market nationally continued to have a negative impact on many financial institutions as a result of their holding both subprime or poor-quality mortgage loans as well as investment securities backed by pools of such loans.  The impact spread to the investment banks and led to the failure of Lehman Brothers Holdings (“Lehman”) and distressed sales of Bear Stearns and Merrill Lynch.  We have not engaged in the origination of subprime mortgage loans as a business line, nor do we hold mortgage-backed securities backed by subprime mortgages in our investment portfolio. However, we do hold certain corporate bonds and other debt instruments issued by entities whose values have been negatively 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 or $.07 impact on diluted earnings per share. The remaining estimated value of our Lehman bond of $800 thousand has been included in nonperforming assets as of September 30, 2008.  The Lehman bankruptcy proceedings are ongoing and the ultimate value of our bond is subject to change.  Corporate and other debt securities represented $7.3 million, or only 1.5%, of our $482.0 million investment securities portfolio at September 30, 2008.




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Average earning assets were $1.580 billion in the third quarter of 2008 as compared to $1.495 billion for the same quarter last year, an increase of 5.7%.  Net interest income was most favorably impacted by a rising net interest margin, which increased 64 basis points to 3.93% for the third quarter of 2008 versus 3.29% for the 2007 comparative period. Lower funding costs and a more positively sloped yield curve, a result of recent Federal Reserve Bank actions to lower the targeted federal funds rate, have resulted in improvement of our net interest margin. In essence, the volume of our interest-bearing liabilities that repriced to lower rates during the last nine months significantly exceeded the volume of our earning assets that repriced to lower yields.


As we previously reported, Visa successfully completed an initial public offering (IPO) during the first quarter of 2008 which included a mandatory partial redemption of our holdings in Visa shares. This transaction resulted in a positive impact on our net income of $637 thousand after-tax, or $.06 diluted earnings per share, both in the first quarter of 2008 and for the nine-month 2008 period.


Total assets at September 30, 2008 reached a record high of $1.673 billion, up $96.0 million, or 6.1%, over the September 30, 2007 balance of $1.577 billion.  Loan balances outstanding reached a record level of $1.107 billion at September 30, 2008, representing an increase of $72.0 million, or 7.0%, from the balance at September 30, 2007. We experienced growth in all three of our major loan segments: commercial, residential real estate and indirect loans.  In addition, deposit balances at September 30, 2008 reached a record $1.272 billion, representing an increase of $54 million, or 4.4%, from the September 30, 2007 level of $1.218 billion.  


Asset quality remained high at quarter-end 2008, even with the classification of the Lehman bond as a nonperforming asset.  Nonperforming assets totaled $4.0 million, or .24% of total assets, which compared to a ratio of 1.52% for our peer group at June 30, 2008, the most recent peer data available. (Our peer group consists of all U.S. bank holding companies having $1.0 to $3.0 billion in assets as identified in the Federal Reserve Bank’s ‘Bank Holding Company Performance Report’.) Nonperforming loans totaled $2.9 million and represented .26% of period-end loans, up from .24% at the end of the second quarter of 2008. Expressed as an annualized percentage of average loans outstanding, net loans charged off for the nine months ended September 30, 2008 were a very low .05%.  Arrow’s allowance for loan losses amounted to $12.8 million at September 30, 2008, which represented 1.16% of loans outstanding, which compares with 1.19% as of September 30, 2007.


In recent periods, many of our other operating ratios have been well above those of our peer group.  Most notably, our return on average equity (ROE) for the quarter ended June 30, 2008 was 17.33% as compared to 7.08% for our peer group.  Our ROE for the third quarter of 2008 was 15.99%.  The principal reason for our superior performance is that unlike many of our peers, we have not experienced erosion in our asset quality and resulting increases in our provision for loan losses.  At the end of the 2008 third quarter our ratio of nonperforming loans to period-end loans was .26% which compares to a ratio of 1.66% for our peer group also as of June 30, 2008.  For many of the same reasons, we have maintained a higher total risk-based capital ratio than the average for our peer group.  The Company and its subsidiary banks continue to be “well-capitalized,” the highest category, under the standards established by the FDIC Improvement Act.


As of September 30, 2008, assets under trust administration and investment management were $862.6 million, a decrease of $124.8 million, or 12.6%, from September 30, 2007.  This decrease was the result of a general decline in the equity markets at the end of September 2008 which continued into early October.  We experienced a small increase in fee income of 1.1% from fiduciary activities for the third quarter of 2008 compared to the third quarter of 2007 due to the fact that the market decline occurred at the very end of the 2008 period.  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 $192 million at September 30, 2008.




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As announced on October 14, 2008, the Company’s lead subsidiary, Glens Falls National Bank and Trust Company, has executed a letter of intent to acquire Upstate Agency, Inc., an independent property and casualty insurance agency headquartered in Chestertown, New York with five offices located in northeastern New York. The acquisition is subject to the parties entering into a definitive purchase agreement, obtaining all required regulatory approvals and other terms and conditions.   Arrow anticipates that it will complete the transaction in the fourth quarter of 2008.


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, 2007.



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Arrow Financial Corporation

Consolidated Financial Information

($ in thousands, except per share amounts)

Unaudited

 

Three Months

Nine Months

 

Ended September 30,

Ended September 30,

 

2008

2007

2008

2007

Income Statement

 

 

 

 

Interest and Dividend Income

$22,592 

$21,921 

$66,789 

$64,146 

Interest Expense

   7,690 

 10,272 

 24,736 

 29,870 

  Net Interest Income

14,902 

11,649 

42,053 

34,276 

Provision for Loan Losses

      253 

      136 

      791 

      322 

  Net Interest Income After Provision for Loan Losses

 14,649 

 11,513 

 41,262 

 33,954 

Other-Than-Temporary Impairment Write-down on Securities

(1,210)

--- 

(1,210)

--- 

Gain on Visa Stock Redemption

--- 

--- 

749 

--- 

Net Gains (Losses) on Securities Transactions

6 

--- 

(29)

--- 

Net Gain on Sales of Loans

14 

4 

55 

32 

Gain on Sale of Premises

--- 

--- 

115 

--- 

Income From Fiduciary Activities

1,349 

1,334 

4,184 

4,206 

Fees for Other Services to Customers

2,242 

2,097 

6,318 

6,041 

Insurance Commissions

528 

472 

1,575 

1,435 

Other Operating Income

       160 

       182 

      360 

      558 

  Total Noninterest Income

    3,089 

    4,089 

 12,117 

 12,272 

Salaries and Employee Benefits

5,883 

5,442 

17,911 

16,198 

Occupancy Expenses of Premises, Net

841 

750 

2,616 

2,393 

Furniture and Equipment Expense

820 

720 

2,385 

2,261 

Amortization of Intangible Assets

89 

96 

271 

298 

Reversal of Visa Related Litigation Exposure

--- 

--- 

(306)

--- 

Other Operating Expense

   2,899 

   2,215 

   8,243 

   7,007 

  Total Noninterest Expense

 10,532 

   9,223 

 31,120 

 28,157 

Income Before Taxes

7,206 

6,379 

22,259 

18,069 

Provision for Income Taxes

   2,198 

   1,869 

   6,834 

   5,218 

  Net Income

$ 5,008 

$ 4,510 

$15,425 

$12,851 

 

 

 

 

 

Share and Per Share Data

 

 

 

 

Period-End Shares Outstanding

10,509 

10,612 

10,509 

10,612 

Basic Average Shares Outstanding

10,497 

10,628 

10,578 

10,746 

Diluted Average Shares Outstanding

10,559 

10,697 

10,635 

10,821 

Basic Earnings Per Share

$  0.48 

$  0.42 

$  1.46 

$  1.20 

Diluted Earnings Per Share

0.47 

0.42 

1.45 

1.19 

Cash Dividends

0.25 

0.23 

0.73 

0.70 

Book Value

11.93 

11.20 

11.93 

11.20 

Tangible Book Value 1

10.36 

9.63 

10.36 

9.63 

 

 

 

 

 

Key Earnings Ratios

 

 

 

 

Return on Average Assets

1.20%

1.14%

1.26%

1.11%

Return on Average Equity

15.99

15.38

16.46

14.65

Return on Tangible Equity 1

18.43

17.96

18.97

17.11

Net Interest Margin 2

3.93

3.29

3.81

3.31

 

 

 

 

 

 

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

2 Net Interest Margin includes a tax equivalent upward adjustment of 18 and 20 basis points for the respective 2008 and 2007 quarterly periods and 19

      and 20 basis points for the respective 2008 and 2007 nine-month periods.

 



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Arrow Financial Corporation

Consolidated Financial Information

($ in thousands)

Unaudited

 

September 30, 2008

 

September 30, 2007

 


Period

End

Third

Quarter

Average

Year-to-

Date

Average

 


Period

End

Third

Quarter

Average

Year-to-

Date

Average

Balance Sheet

 

 

 

 

 

 

 

Cash and Due From Banks

$    38,325 

$    35,673 

$    33,967 

 

$    42,219 

$    33,854 

$    32,746 

Federal Funds Sold

--- 

10,158 

23,186 

 

4,000 

16,013 

17,900 

Bank Balances at Interest

--- 

929 

672 

 

 

 

 

Securities Available-for-Sale

350,526 

363,889 

354,180 

 

336,055 

342,959 

329,523 

Securities Held-to-Maturity

131,438 

122,141 

116,582 

 

115,702 

114,373 

110,463 

Loans

1,106,506 

1,083,291 

1,058,426 

 

1,034,548 

1,021,399 

1,015,529 

Allowance for Loan Losses

     (12,785)

    (12,732)

    (12,571)

 

    (12,341)

    (12,325)

    (12,313)

  Net Loans

 1,093,721 

 1,070,559 

 1,045,855 

 

 1,022,207 

 1,009,074 

 1,003,216 

Premises and Equipment, Net

17,398 

16,951 

16,610 

 

16,385 

16,235 

16,034 

Goodwill and Intangible Assets, Net

16,457 

16,500 

16,555 

 

16,699 

16,762 

16,861 

Other Assets

      25,186 

      20,866 

      22,112 

 

      23,782 

      17,059 

      17,083 

    Total Assets

$1,673,051 

$1,657,666 

$1,629,719 

 

$1,577,049 

$1,566,329 

$1,543,826 

Demand Deposits

$   190,452 

$   200,193 

$   190,456 

 

$   191,125 

$   194,628 

$   185,285 

Nonmaturity Interest-Bearing Deposits

675,219 

641,478 

633,908 

 

607,180 

573,839 

569,550 

Time Deposits of $100,000 or More

166,124 

178,041 

174,181 

 

166,916 

189,685 

182,524 

Other Time Deposits

    240,181 

    242,069 

    242,942 

 

    252,281 

    257,056 

    260,665 

  Total Deposits

 1,271,976 

 1,261,781 

 1,241,487 

 

 1,217,502 

 1,215,208 

 1,198,024 

Short-Term Borrowings

71,064 

63,198 

56,949 

 

48,791 

49,976 

48,515 

Federal Home Loan Bank Advances

160,000 

163,405 

161,791 

 

150,000 

141,256 

136,535 

Other Long-Term Debt

20,000 

20,000 

20,000 

 

20,000 

20,000 

20,000 

Other Liabilities

      24,614 

      24,681 

      24,337 

 

      21,882 

      23,527 

      23,463 

  Total Liabilities

 1,547,654 

 1,533,065 

 1,504,564 

 

 1,458,175 

 1,449,967 

 1,426,537 

Common Stock

14,729 

14,729 

14,729 

 

14,729 

14,486 

14,362 

Surplus

162,478 

162,129 

161,942 

 

160,912 

155,697 

152,766 

Undivided Profits

23,066 

22,120 

19,283 

 

13,410 

17,594 

18,550 

Unallocated ESOP Shares

(2,572)

(2,572)

(2,095)

 

(2,042)

(2,042)

(1,673)

Accumulated Other Comprehensive Loss

(6,649)

(6,446)

(4,854)

 

(6,157)

(7,772)

(7,643)

Treasury Stock

     (65,655)

     (65,359)

     (63,850)

 

     (61,978)

     (61,601)

     (59,073)

  Total Shareholders’ Equity

    125,397 

    124,601 

    125,155 

 

    118,874 

    116,362 

    117,289 

    Total Liabilities and Shareholders’ Equity

$1,673,051 

$1,657,666 

$1,629,719 

 

$1,577,049 

$1,566,329 

$1,543,826 

 

 

 

 

 

 

 

 

Assets Under Trust Administration

  and Investment Management

$862,601

 

 

 

$987,415

 

 

 

 

 

 

 

 

 

 

Capital Ratios

 

 

 

 

 

 

 

  Leverage Ratio

8.42%

 

 

 

8.39%

 

 

  Tier 1 Risk-Based Capital Ratio

12.63

 

 

 

12.63

 

 

  Total Risk-Based Capital Ratio

13.80

 

 

 

13.82

 

 



Page 5 of 6




Arrow Financial Corporation

Consolidated Financial Information

($ in thousands)

Unaudited

 

September 30,

 

2008

2007

Third Quarter Ended September 30:

 

 

 

 

 

Loan Portfolio

 

 

Commercial, Financial and Agricultural

$     95,892 

$     79,109 

Real Estate – Commercial

199,240 

189,350 

Real Estate – Residential

454,753 

419,054 

Indirect and Other Consumer Loans

     356,621 

     347,035 

  Total Loans

$1,106,506 

$1,034,548 

 

 

 

Allowance for Loan Losses, Third Quarter

 

 

Allowance for Loan Losses, Beginning of Period

$12,725 

$12,315 

 

 

 

Loans Charged-off

(263)

(185)

Recoveries of Loans Previously Charged-off

        70 

        75 

  Net Loans Charged-off

     (193)

     (110)

 

 

 

Provision for Loan Losses

       253 

       136 

  Allowance for Loan Losses, End of Period

$12,785 

$12,341 

 

 

 

Nonperforming Assets

 

 

Nonaccrual Loans

$2,424 

$1,900 

Loans Past Due 90 or More Days and Accruing

     455 

     121 

  Total Nonperforming Loans

2,879 

2,021 

Nonaccrual Investments

800 

--- 

Repossessed Assets

61 

63 

Other Real Estate Owned

      270 

       26 

  Total Nonperforming Assets

$4,010 

$2,110 

 

 

 

Key Asset Quality Ratios

 

 

Allowance for Loan Losses to Period-End Loans

1.16%

1.19%

Allowance for Loan Losses to Period-End Nonperforming Loans

444.08

610.64

Nonperforming Loans to Period-End Loans

0.26

0.20

Nonperforming Assets to Period-End Assets

0.24

0.13

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

0.07

0.04

Provision for Loan Losses to Average Loans, Third Quarter Annualized

0.09

0.05

 

 

 

Nine-Month Period Ended September 30:

 

 

 

 

 

Allowance for Loan Losses, Nine Months

 

 

Allowance for Loan Losses, Beginning of Period

$12,401 

$12,278 

 

 

 

Loans Charged-off

(825)

(610)

Recoveries of Loans Previously Charged-off

       418 

       351 

  Net Loans Charged-off

      (407)

      (259)

 

 

 

Provision for Loan Losses

       791 

       322 

  Allowance for Loan Losses, End of Period

$12,785 

$12,341 

 

 

 

 

 

 

Key Asset Quality Ratios

 

 

Net Loans Charged-off to Average Loans, Nine Months Annualized

0.05%

0.03%

Provision for Loan Losses to Average Loans, Nine Months Annualized

0.10

0.04




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