TO: All Media
DATE: Friday, April 17, 2009

Arrow Reports Strong First Quarter Operating Results

Arrow Financial Corporation (NasdaqGS® – AROW) announced operating results for the quarter ended March 31, 2009.  Net income for the first quarter of 2009 was $6.7 million, representing diluted earnings per share (EPS) of $.63, or $.16 above the diluted per share amount of $.47 earned in the first quarter of 2008, when net income was $5.0 million.  Return on average equity for the 2009 quarter was 21.09%, up from 16.07% for the quarter ended March 31, 2008.  The results for both periods include certain non-recurring transactions which positively impacted earnings and are discussed further in this release. The cash dividend paid to shareholders in the first quarter of 2009 was $.25, or 4.2% higher than the $.24 paid in 2008.

Thomas L. Hoy, Chairman, President and CEO stated, “We are pleased to report strong earnings for the first quarter of 2009, especially in light of the financial challenges confronting our national and local economies. Although net income for each period was significantly affected by certain non-recurring transactions, the underlying operating results reflect a favorable comparison. This performance was driven by an increase in the average level of earning assets and a widening of the net interest margin, which together led to a substantial increase in net interest income.

Average assets grew to $1.681 billion in the first quarter of 2009 versus $1.606 billion for the same quarter last year, an increase of 4.7%.  The growth in average assets was focused in the loan portfolio as average loans increased to $1.104 billion for the first quarter of 2009 from $1.039 billion in the 2008 first quarter, up 6.3%. Net interest income was favorably impacted by a rising net interest margin, which increased 34 basis points to 3.90% for the first quarter of 2009 from 3.56% for the comparable quarter of 2008.  Federal Reserve Bank actions to lower the targeted federal funds rate 400 basis points since December 2007 have led to significant reductions in short-term funding costs.  This effect was the principal factor leading to the margin expansion as the volume of short-term sources of funds that repriced downward in the quarter significantly exceeded the volume of earning assets that repriced downward in the quarter.

During the first quarter of 2009, we recognized a net gain of $1.63 million after-tax, or a $.15 increase in diluted earnings per share, on the transfer of our merchant bank card processing to TransFirst LLC. In connection with this transfer, the Company and its subsidiary banks have entered into a relationship with TransFirst under which TransFirst will provide merchant bank card processing to merchant customers of the Company’s subsidiary banks.  This new arrangement with TransFirst provides an opportunity for the Company’s subsidiary banks to develop new business through referrals, while eliminating the cost, responsibility and associated risks of administering a highly specialized processing service.

As 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. The gain on the Visa stock redemption together with other previously disclosed non-recurring transactions resulted in a positive impact on our net income of $385 thousand after-tax, or a $.04 increase in diluted earnings per share, in the first quarter of 2008. 

Excluding these non-recurring transactions described in the preceding paragraphs, diluted earnings per share for the first quarter of 2009 would have equaled $.48 per share versus $.43 for the comparative 2008 quarter, an increase $.05 per share, or 11.6%.

Total assets at March 31, 2009 reached a record high of $1.713 billion, up $84.1 million, or 5.2%, over the March 31, 2008 balance of $1.629 billion.  Deposit balances at March 31, 2009 reached a record $1.324 billion, representing an increase of $82.7 million, or 6.7%, from the March 31, 2008 level of $1.241 billion.  Loan balances outstanding were $1.099 billion at March 31, 2009, representing an increase of $55.1 million, or 5.3%, from the balance at March 31, 2008, although down $11.0 million, or 1.0%, from year-end 2008.

Although business and consumer, primarily automobile, loan demand has softened in recent periods due to the recession, we continue to lend to credit qualified businesses and individuals within our market area.  Demand for residential financings, however, intensified during the first quarter of 2009 and we originated $16.3 million of residential mortgages, or an increase of $5.5 million from the first quarter 2008 originations. However, many of these very low rate residential mortgage loans originated in the first quarter of 2009 were sold in the secondary market because of interest rate risk considerations and as a result were not reflected in outstanding loan balances at quarter end.

Our capital ratios remain strong and increased from year-end 2008.  Total shareholders’ equity rose $6.7 million since year-end 2008 to a record level of $132.5 million, our Tier 1 leverage ratio increased 34 basis points to 8.79% and our total risk-based capital ratio increased to 14.84%. The capital ratios of the Company and each subsidiary bank significantly exceeded the “well capitalized” regulatory standard. As previously disclosed, we elected to decline the offer from the U.S. Treasury to participate in the Troubled Asset Relief Program (TARP) Capital Purchase Program (CPP) given Arrow’s strong financial and liquidity positions.

The ongoing deterioration of the real estate markets and increasing levels of unemployment nationally 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 significant deterioration at quarter-end, although the communities we serve, like all areas of the U.S., have been feeling the effects of the recession.

Despite the significant troubles affecting the U.S. economy generally, asset quality remained high as of March 31, 2009, with nonperforming loans of $3.8 million, which represented .35% of period-end loans, the same ratio as of December 31, 2008.  Nonperforming assets were $4.6 million at March 31, 2009, representing .27% of period-end assets, down three basis points from year-end 2008.  Net loan losses for the 2009 period, expressed as an annualized percentage of average loans outstanding, were .12%, still low by industry averages but up from .08% for the 2008 period.  Arrow’s allowance for loan losses amounted to $13.5 million at March 31, 2009, which represented 1.22% of loans outstanding, an increase of two basis points from our year-end 2008 ratio.

As of March 31, 2009, assets under trust administration and investment management were $707.3 million, a 6.4% decrease from December 31, 2008 and a decrease of 22.8% from March 31, 2008.  This decrease was the result of a general decline in the equity markets and led to a 13.0% decrease in fee income from fiduciary activities for the first quarter of 2009 compared to the first quarter of 2008.  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 total assets of $180.7 million at March 31, 2009, down 8.9% from the balance a year ago.

In recent periods, many of our operating ratios have compared very 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 ‘Bank Holding Company Performance Report.’ The most current peer data available is for December 31, 2008.  Most notably, our year-to-date return on average equity (ROE) for December 31, 2008 and March 31, 2009 (as adjusted for the net gain on the transfer of merchant bank card processing) was 16.26% and 15.94%, respectively, as compared to 3.18% for our peer group.  The ratio of nonperforming loans to total loans was .35% for both December 31, 2008 and March 31, 2009, compared to the most recent ratio of 2.36% for our peer group.  We also have maintained a higher total risk-based capital ratio than the average for our peer group.”

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.

Arrow Financial Corporation Consolidated Financial Information - 04.17.09