TO: All Media
DATE: Monday, July 23, 2007

Arrow Financial Corporation Announces Earnings for the Second Quarter of 2007

Arrow Financial Corporation (NasdaqGS® – AROW) announced operating results for the quarter and six-month periods ended June 30, 2007.  Net income for the quarter ended June 30, 2007 was $4.210 million, representing diluted earnings per share of $.40, the same per share amount as the second quarter of 2006, when net income was $4.277 million.  For the first six months of 2007, net income of $8.341 million was slightly ahead of the $8.336 million earned for 2006.  Diluted earnings per share of $.79 for the first six months of 2007 was 2 cents higher than the 2006 six-month period per share amount due to the impact of our share repurchases over the past twelve months.

Thomas L. Hoy, Chairman, President and CEO stated, "We are pleased to report that both total deposits and total loans outstanding reached record levels as of June 30, 2007.  Our net interest margin for the second quarter of 2007 was 3.32%, unchanged from the first quarter of 2007 and down three basis points from 3.35% for the second quarter of 2006.  Slight increases in the yield on earning assets were offset by comparable increases in the cost of paying liabilities which resulted in an unchanged net interest margin on a linked quarter-to-quarter basis. Regardless of the pressures from the interest rate environment, we have followed our core banking strategy and the disciplined course we believe best serves our shareholders over time. 

Our second quarter operating results and earnings per share were essentially unchanged from the second quarter of 2006 due to the challenging interest rate environment which has featured a flat to inverted yield curve for most of the past two years.  It was only late in the second quarter of 2007 that the yield curve developed some very modest upward slope. This margin pressure was partially offset by a 7.1% net increase in fiduciary fees, insurance commissions, fees for other services, and other operating income. For the six-month period, total noninterest income increased $405 thousand even though the six-month period for the prior year included a gain on the sale of premises of $227 thousand which was offset only in part by net losses on securities transactions of $118 thousand.

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 March 31, 2007 ‘Bank Holding Company Performance Report.’  Most notably, our return on average equity for the quarter ended June 30, 2007 was 14.43%.  This compares to a ratio of 11.07% for our peer group for the first quarter of 2007 and 12.62% for the year ended December 31, 2006.  We again maintained a higher total risk-based capital ratio than our peer group. 

Asset quality remained high at quarter-end, with nonperforming loans of $2.0 million at June 30, 2007, representing only .20% of period-end loans.  This compared favorably with the ratio for our peer group at March 31, 2007 which was .65%.  Nonperforming assets were $2.3 million at June 30, 2007, representing only .15% of assets.  Annualized net loan losses for the second quarter of 2007 as a percentage of average loans outstanding were a very low .03% compared to .04% for the second quarter of 2006.  Arrow's allowance for loan losses amounted to $12.3 million at June 30, 2007, which represented 1.21% of loans outstanding, essentially unchanged from year-end 2006.

The low levels of non-performing assets and charge-offs are an indication of the high quality of loans in our loan portfolio.  We believe that our conservative underwriting standards have worked well for our shareholders over time.  Recent industry headlines have focused on subprime consumer real estate lending.  We have not engaged in this activity as a business line nor do we hold mortgage-backed securities backed by subprime mortgages in our investment portfolio.

As of June 30, 2007, assets under trust administration and investment management were $961.3 million, an increase of $114.0 million, or 13.5%, from June 30, 2006.  This increase in asset levels led to a $112 thousand increase in fee income from fiduciary activities for the second 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 Advisors, Inc., which recently reached a record balance of over $200 million. 

Deposit balances at June 30, 2007 were $1.205 billion, representing an increase of $54.1 million, or 4.7%, from the June 30, 2006 level of $1.151 billion.  Loan balances outstanding reached $1.018 billion at June 30, 2007, representing an increase of $23.2 million, or 2.3%, from the balance at June 30, 2006.  The balance of residential real estate loans increased $26.6 million, or 6.8%, over the past twelve months.  The balance of other consumer loans, primarily indirect automobile loans, decreased $2.1 million from the June 30, 2006 level as we elected not to compete aggressively with the extremely low rates offered by automobile manufacturers throughout 2006.  However, since year-end 2006, indirect loan balances have risen slightly.  During the first six months of 2007 we continued to experience healthy loan demand for commercial and commercial real estate credits as we have throughout the past three years.

We have opened two new branches in 2007, situated strategically in the northern and southern regions of our market area.  A new Glens Falls National Bank branch is located in South Plattsburgh, New York on the corner of U.S. Avenue and New York Road.  On April 2, 2007 we also opened a new branch of Saratoga National Bank, located on Ballard Road in Wilton, New York, an area experiencing significant residential growth and business expansion.  We continue to work diligently to ensure that these investments made in our franchise allow us to prosper along with our customers."

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 - 7.23.07