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Date:

January 21, 2009


Arrow Reports Record Earnings for 2008


Arrow Financial Corporation (“Company”) (NasdaqGS® – AROW) announced operating results for the three and twelve-month periods ended December 31, 2008.  Net income for the quarter ended December 31, 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 fourth quarter of 2007, when net income was $4.5 million.  For the 2008 year, net income was $20.4 million, an increase of 17.9% over the $17.3 million earned for 2007, and represented a new record high for the Company in its 157 year history of providing banking services in the northeastern region of New York State.  Diluted earnings per share for 2008 of $1.92 increased $.31, or 19.3%, from the $1.61 per share earned in 2007. Quarterly cash dividends paid to shareholders during the fourth quarter of 2008 increased 4.2% to $.25 per share from $.24 per share paid in the fourth quarter of 2007. For the year, cash dividends were $.98 per share, up 4.3% from $.94 per share for 2007.


Thomas L. Hoy, Chairman, President and CEO stated, “We are pleased to report solid quarterly and annual earnings performances, 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. During this recessionary period, our conservative loan underwriting and investment practices continue to be key drivers which have generated earnings growth while our balance sheet and asset quality have remained strong.  Our concentration on fundamentals has allowed the Company to achieve record levels for total deposits and loans outstanding in spite of the trauma currently being experienced in the banking and financial markets.  We believe our strong capital position and traditionally high loan quality have us well positioned to withstand the stresses of a weak economy and financial market turmoil.


The ongoing deterioration of the real estate markets nationally and increasing levels of unemployment have continued to negatively impact many financial institutions, primarily as a result of their holdings of subprime or poor-quality mortgage loans, as well as investment securities backed by pools of such loans.  Moreover, in recent periods many banks have begun to experience sudden and significant deterioration in all loan categories with sharp increases in delinquencies and charge-offs.  To date, we have not been significantly affected by such trends.  We have never 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.  Our commercial, residential real estate and indirect consumer loan portfolios had experienced no material deterioration at year-end, although the communities we serve, like all areas of the U.S., have undoubtedly begun to feel the effects of the recession.


Net interest income increased 26.3%, or $3.2 million, during the fourth quarter to $15.2 million as a result of both an increase in average earning assets and rising net interest margin. Average earning assets in the fourth quarter of 2008 were $1.615 billion as compared to $1.526 billion for the same quarter in 2007, an increase of 5.8%.  Net interest margin increased 60 basis points to 3.92% for the fourth quarter of 2008 versus 3.32% for the 2007 comparative period. Lower overall funding costs and a more positively sloped yield curve, a result of recent Federal Reserve Bank actions to lower the targeted federal funds rate, drove the improvement in our margin. In essence, the volume of our interest-bearing liabilities that repriced to lower rates during the last twelve months significantly exceeded the volume of our earning assets that repriced to lower yields.






The economic downturn will most likely lead to a further softening in the local economies in which we operate and may result in increased credit losses which are inherent within our existing loan portfolio. Accordingly, during 2008, we prudently increased the provision for loan losses to reflect our best estimate of probable incurred loan losses.


We hold certain corporate debt instruments issued by entities whose values have been negatively impacted by the deterioration of the financial markets.  We hold a $2.0 million par value senior unsecured bond issued by Lehman Brothers that was purchased prior to the Lehman bankruptcy filing in September 2008. By December 31, 2008 we had recognized a non-cash other-than-temporary impairment charge to earnings on this bond of $1.6 million, or $972 thousand, net of tax, representing a $.09 impact on diluted earnings per share. The remaining fair value of our Lehman bond of $400 thousand has been included in nonperforming assets as of December 31, 2008.  The Lehman bankruptcy proceedings are ongoing and the ultimate value of our bond is subject to change.  Corporate debt securities represented only $7.4 million, or 1.6%, of our $459.1 million investment securities portfolio at December 31, 2008 and were performing in accordance with their contractual terms aside from the Lehman security.


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 twelve-month 2008 period.


Total assets at December 31, 2008 were $1.665 billion, just slightly below the record level at September 30, 2008.  The December level was up $80.2 million, or 5.1%, over the December 31, 2007 balance of $1.585 billion.  Loan balances outstanding reached a record level of $1.110 billion at December 31, 2008, representing an increase of $71.0 million, or 6.8%, from the balance at December 31, 2007. During 2008, we experienced growth in all three of our major loan segments: commercial, residential real estate, and indirect consumer loans.  In addition, deposit balances at December 31, 2008 reached a Company high with a record balance of $1.275 billion, representing an increase of $70.9 million, or 5.9%, from the December 31, 2007 level of $1.204 billion.  We continue to rely on our traditional funding sources, that is, deposits generated by our retail branch network plus cash flows from maturing loans and investments.


Despite the significant troubles affecting the U.S. economy generally, asset quality remained strong at year-end 2008. Nonperforming assets totaled $5.0 million, or .30% of total assets, up slightly from our September 30, 2008 ratio of .24%.  By comparison, the nonperforming asset ratio for our peer group was 1.77% at September 30, 2008, the most recent data for which peer data is 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’.) Our nonperforming loans at year-end 2008 totaled $3.9 million and represented .35% of period-end loans, up from $2.2 million as of December 31, 2007, which represented .21%  of period-end loans. Expressed as a percentage of average loans outstanding, net loans charged off for the year ended December 31, 2008 were a low .07% as compared to a very low .04% for the 2007 year.  Arrow’s allowance for loan losses amounted to $13.3 million at December 31, 2008, which represented 1.20% of loans outstanding, which compares with 1.19% as of December 31, 2007.


In recent periods, many of our other operating ratios have been well above those of our peer group.  Most notably, our year-to-date return on average equity (ROE) through September 30, 2008 was 16.46% as compared to 5.69% for our peer group.  As of September 30, 2008 our ratio of nonperforming loans to total loans was .26%, compared to the most recent ratio of 1.88% for our peer group.  We also have maintained a higher total risk-based capital ratio than the average for our peer group.  









As a result of the tumult in the financial markets, we experienced an $8.3 million decline in the market value of plan assets within the Company sponsored defined benefit pension plan.  While our pension plan is estimated to be fully funded at year-end 2008, the actual loss on plan assets was the primary factor which resulted in recognizing a charge to equity of $6.5 million, net of tax, as of December 31, 2008. There was no impact on net income or earnings per share for 2008 from recognizing this accumulated other comprehensive loss. However, even after recognizing this charge, the Company and its subsidiary banks continue to be “well-capitalized,” the highest category, under the standards established by the FDIC Improvement Act.  Our total shareholders’ equity at year-end 2008 was $125.8 million, up $3.5 million, or 2.9%, from year-end 2007. Total risk-based capital ratio of 14.27% as of year-end 2008 had increased from 14.09% as of December 31, 2007.


As of December 31, 2008, assets under trust administration and investment management were $755.4 million, a decrease of $205.8 million, or 21.4%, from December 31, 2007.  This decrease was the direct result of a general decline in the equity markets during 2008 and particularly the fourth quarter.  We also experienced a 6.4% decrease in fee income from fiduciary activities for the fourth quarter of 2008 compared to 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 $180 million at December 31, 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 our most current Quarterly Report on Form 10-Q for the quarter ended September 30, 2008 and our 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

Twelve Months

 

Ended December 31,

Ended December 31,

 

2008

2007

2008

2007

Income Statement

 

 

 

 

Interest and Dividend Income

$22,719

$22,431

$89,508

$86,577

Interest Expense

   7,541

  10,413

  32,277

  40,283

  Net Interest Income

15,178

12,018

57,231

46,294

Provision for Loan Losses

      880

      191

   1,671

       513

  Net Interest Income After Provision for Loan Losses

 14,298

 11,827

 55,560

  45,781

 

 

 

 

 

Other-Than-Temporary Impairment Write-down on Securities

(400)

--- 

(1,610)

--- 

Gain on Visa Stock Redemption

--- 

--- 

749

--- 

Net Gain on Securities Transactions

412

---

383

--- 

Net Gain on Sales of Loans

51

9

106

41

Net Gain (Loss) on the Sale of Other Real Estate Owned

30 

(9)

30

(4)

Gain on Sale of Premises

--- 

--- 

115

--- 

Income From Fiduciary Activities

1,279

1,366

5,463

5,572

Fees for Other Services to Customers

2,244

2,089

8,562

8,130

Insurance Commissions

491

434

2,066

1,869

Other Operating Income

        45

      127

      405

      680

  Total Noninterest Income

   4,152

   4,016

 16,269

 16,288

 

 

 

 

 

Salaries and Employee Benefits

6,640

5,226

24,551

21,424

Occupancy Expenses of Premises, Net

863

805

3,479

3,198

Furniture and Equipment Expense

826

754

3,211

3,015

Amortization of Intangible Assets

89

96

360

394

Recognition (Reversal) of Visa Related Litigation Exposure

---

600

(306)

600

Other Operating Expense

   2,855

   2,292

   11,098

    9,299

  Total Noninterest Expense

 11,273

   9,773

  42,393

  37,930

 

 

 

 

 

Income Before Taxes

7,177

6,070

29,436

24,139

Provision for Income Taxes

   2,165

   1,589

    8,999

    6,807

  Net Income

$ 5,012

$ 4,481

$20,437

$17,332

 

 

 

 

 

Share and Per Share Data

 

 

 

 

Period Ending Shares Outstanding

10,546

10,627

10,546

10,627

Basic Average Shares Outstanding

10,524

10,619

10,565

10,714

Diluted Average Shares Outstanding

10,588

10,682

10,622

10,786

 

 

 

 

 

Basic Earnings Per Share

$  0.48

$  0.42

$  1.93

$  1.62

Diluted Earnings Per Share

0.47

0.42

1.92

1.61

 

 

 

 

 

Cash Dividends

0.25

0.24

0.98

0.94

 

 

 

 

 

Book Value

11.93

11.50

11.93

11.50

Tangible Book Value 1

10.38

9.94

10.38

9.94

 

 

 

 

 

Key Earnings Ratios

 

 

 

 

Return on Average Assets

1.18%

1.11%

1.24%

1.11%

Return on Average Equity

15.68

14.76

16.26

14.68

Return on Tangible Equity

18.01

17.13

18.73

17.11

Net Interest Margin 2

3.92

3.32

3.84

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 for the fourth quarter of 18 basis points in 2008 and 19 basis points in 2007 and

    an upward adjustment for the twelve-month period of 19 basis points in 2008 and 20 basis points in 2007.




Arrow Financial Corporation

Consolidated Financial Information

($ in thousands)

Unaudited

 

 

 

 

 

December 31, 2008

 

December 31, 2007

 

 

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

$     37,239 

$     28,149 

$     32,505 

 

$     35,289 

$     34,468 

$     33,180 

Federal Funds Sold

--- 

457 

17,472 

 

16,000 

34,255 

22,022 

Bank Balances at Interest

21,099 

21,859 

5,997 

 

--- 

--- 

--- 

Securities Available-for-Sale

325,090 

351,938 

353,616 

 

338,070 

340,094 

332,187 

Securities Held-to-Maturity

133,976 

131,008 

120,208 

 

114,611 

115,138 

111,642 

 

 

 

 

 

 

 

 

Loans

1,109,812 

1,109,978 

1,071,384 

 

1,038,844 

1,036,661 

1,020,856 

Allowance for Loan Losses

     (13,272)

     (12,921)

     (12,658)

 

     (12,401)

     (12,350)

     (12,323)

  Net Loans

 1,096,540 

  1,097,057 

  1,058,726 

 

 1,026,443 

  1,024,311 

  1,008,533 

 

 

 

 

 

 

 

 

Premises and Equipment, Net

17,602 

17,440 

16,819 

 

16,728 

16,368 

16,118 

Goodwill and Intangible Assets, Net

16,378 

16,416 

16,520 

 

16,590 

16,653 

16,808 

Other Assets

       17,162 

       23,042 

       22,347 

 

       21,115 

       19,766 

       17,761 

    Total Assets

$1,665,086 

$1,687,366 

$1,644,210 

 

$1,584,846 

$1,601,053 

$1,558,251 

 

 

 

 

 

 

 

 

Demand Deposits

$  182,613 

$  188,638 

$  189,999 

 

$  184,273 

$  190,002 

$  186,474 

Nonmaturity Interest-Bearing Deposits

688,752 

692,192 

648,559 

 

590,383 

617,439 

581,621 

Time Deposits of $100,000 or More

157,187 

165,725 

172,055 

 

180,334 

174,915 

180,606 

Other Time Deposits

    246,511 

     244,155 

     243,247 

 

    249,210 

     250,260 

     258,042 

  Total Deposits

1,275,063 

1,290,710 

1,253,860 

 

1,204,200 

1,232,616 

1,206,743 

 

 

 

 

 

 

 

 

Short-Term Borrowings

59,956 

63,011 

58,473 

 

53,719 

51,847 

49,355 

Federal Home Loan Bank Advances

160,000 

160,261 

161,406 

 

160,000 

151,304 

140,258 

Other Long-Term Debt

20,000 

20,000 

20,000 

 

20,000 

20,000 

20,000 

Other Liabilities

       24,265 

       26,248 

       24,818 

 

       24,671 

       24,853 

       23,813 

  Total Liabilities

  1,539,284 

  1,560,230 

  1,518,557 

 

  1,462,590 

  1,480,620 

  1,440,169 

 

 

 

 

 

 

 

 

Common Stock

14,729 

14,729 

14,729 

 

14,729 

14,729 

14,455 

Surplus

163,215 

162,665 

162,124 

 

161,476 

161,097 

154,866 

Undivided Profits

25,454 

24,540 

20,604 

 

15,347 

14,096 

17,428 

Unallocated ESOP Shares

(2,572)

(2,572)

(2,215)

 

(2,042)

(2,042)

(1,766)

Accumulated Other Comprehensive Loss

(9,404)

  (6,624)

(5,299)

 

(4,890)

  (5,328)

(7,060)

Treasury Stock

     (65,620)

     (65,602)

     (64,290)

 

     (62,364)

     (62,119)

     (59,841)

  Total Shareholders’ Equity

     125,802 

    127,136 

    125,653 

 

     122,256 

    120,433 

    118,082 

    Total Liabilities and

        Shareholders’ Equity

$1,665,086 

$1,687,366 

$1,644,210 

 

$1,584,846 

$1,601,053 

$1,558,251 

 

 

 

 

 

 

 

 

Assets Under Trust Administration

  And Investment Management

$755,378

 

 

 

$961,152

 

 

 

 

 

 

 

 

 

 

Capital Ratios

 

 

 

 

 

 

 

  Leverage Ratio

8.45%

 

 

 

8.37%

 

 

  Tier 1 Risk-Based Capital Ratio

13.05

 

 

 

12.89

 

 

  Total Risk-Based Capital Ratio

14.27

 

 

 

14.09

 

 






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Arrow Financial Corporation

Consolidated Financial Information

($ in thousands)

Unaudited

 

December 31,

 

2008

2007

Fourth Quarter Ended December 31:

 

 

 

 

 

Loan Portfolio

 

 

Commercial, Financial and Agricultural

$     86,872 

$     79,128 

Real Estate – Commercial

202,812 

189,208 

Real Estate – Residential

459,947 

427,936 

Indirect and Other Consumer Loans

     360,181 

     342,572 

  Total Loans

$1,109,812 

$1,038,844 

 

 

 

Allowance for Loan Losses, Fourth Quarter

 

 

Allowance for Loan Losses, Beginning of Period

$12,785 

$12,341 

 

 

 

Loans Charged-off

(466)

(220)

Recoveries of Loans Previously Charged-off

        73 

        89 

  Net Loans Charged-off

     (393)

     (131)

 

 

 

Provision for Loan Losses

       880 

       191 

  Allowance for Loan Losses, End of Period

$13,272 

$12,401 

 

 

 

Nonperforming Assets

 

 

Nonaccrual Loans

$3,469 

$1,939 

Loans Past Due 90 or More Days and Accruing

    457 

    245 

  Total Nonperforming Loans

3,926 

2,184 

Repossessed Assets

64 

63 

Other Real Estate Owned

581 

89 

Nonaccrual Investments

      400 

       --- 

  Total Nonperforming Assets

$4,971 

$2,336 

 

 

 

Key Asset Quality Ratios

 

 

Allowance for Loan Losses to Period-End Loans

1.20%

1.19%

Allowance for Loan Losses to Period-End Nonperforming Loans

338.05

567.81

Nonperforming Loans to Period-End Loans

0.35

0.21

Nonperforming Assets to Period-End Assets

0.30

0.15

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

0.14

0.05

       Provision for Loan Losses to Average Loans, Fourth Quarter Annualized

0.32

0.07


 

 

 

December 31,

Year Ended December 31:

2008

2007

 

 

 

Allowance for Loan Losses, Twelve Months

 

 

Allowance for Loan Losses, Beginning of Year

$12,401 

$12,278 

 

 

 

Loans Charged-off

(1,291)

(830)

Recoveries of Loans Previously Charged-off

       491 

       440 

  Net Loans Charged-off

      (800)

      (390)

 

 

 

Provision for Loan Losses

    1,671 

       513 

  Allowance for Loan Losses, End of Year

$13,272 

$12,401 

 

 

 

Key Asset Quality Ratios

 

 

Net Loans Charged-off to Average Loans, Twelve Months

0.07%

0.04%

Provision for Loan Losses to Average Loans, Twelve Months

0.16

0.05

 

 

 




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