TO: All Media

DATE: Tuesday, October 18, 2011

Arrow Reports Solid Third Quarter Operating Results and Strong Asset Quality Ratios

Arrow Financial Corporation (NasdaqGS® – AROW) announced operating results for the three and nine-month periods ended September 30, 2011.  Net income for the third quarter of 2011 was $5.4 million, representing diluted earnings per share (EPS) of $.46, as compared to net income of $5.6 million and $.48 diluted EPS for the third quarter of 2010, a decrease of $.02 per share or 4.2%.  The cash dividend paid to shareholders in the third quarter of 2011 was $.24 per share, or 3.0% higher than the cash dividend paid in the third quarter of 2010. All per share amounts have been adjusted to reflect the effect of the 3% stock dividend we distributed on September 29, 2011.  

Thomas L. Hoy, Chairman, President and CEO stated, “We are pleased to announce solid earnings results for the third quarter while maintaining both strong asset quality and capital adequacy ratios. Our operating results included a substantial increase in our noninterest income for the third quarter, which consisted primarily of strong growth in insurance commissions, an increase in fee income from fiduciary activities and significant net gains on securities transactions. Furthermore, our key asset quality measurements continue to be excellent. We are pleased with these results during this challenging low interest rate environment.”  

We have significantly expanded insurance commission income from $808 thousand in the third quarter of 2010 to nearly $2.0 million in the comparable 2011 quarter, primarily through our acquisition in 2011 of two strategically located insurance agencies.  On February 1, 2011 we acquired Upstate Agency and on August 1, 2011 we acquired the McPhillips Insurance Agencies, all of which are property and casualty insurance agencies with offices located within our service area.

Included in the third quarter 2011 operating results were net gains of $1.77 million generated from the sale of $20.1 million of Collateralized Mortgage Obligations (CMO’s) from our investment portfolio.  We also deleveraged our balance sheet in the third quarter of 2011 by prepaying four of our Federal Home Loan Bank (FHLB) advances totaling $40 million.  The prepayment penalties for these higher-costing advances amounted to $1.64 million which is reported as a component of noninterest expense, while no prepayment penalties were incurred during the comparable period in 2010.

Assets under trust administration and investment management at September 30, 2011 were $925.7 million, essentially unchanged from the prior year balance of $925.9 million.  However, average assets under management increased between the two periods, as average balances grew markedly in the first half of 2011 and into the third quarter only to fall back down to the year earlier level at the very end of the third quarter when the equity markets declined.  Consequently, income from fiduciary activities rose in the third quarter of 2011 to over $1.5 million, an increase of $235 thousand, or 17.9%, above the income for the 2010 comparable quarter.

Our key profitability ratios continue to be strong. Annualized return on average equity (ROE) for the 2011 period was 12.80%, although down from our ROE of 14.39% for the comparable 2010 period. Annualized return on average assets (ROA) for the 2011 period continued to be strong at 1.11%, although down from our ROA of 1.18% for the comparable 2010 period.

Our asset quality remained strong at September 30, 2011 as measured by low levels of nonperforming assets and a very low level of charge-offs. Nonperforming assets of $6.0 million represented only .31% of period-end assets, although an increase from the .20% of assets as of September 30, 2010. Net loan losses for the third quarter of 2011, expressed as an annualized percentage of average loans outstanding, were .03%, down from .05% of average loans for the 2010 comparable period.  Both asset quality ratios are not significantly different from the prior year levels and, importantly, continue to be significantly better than industry averages. At September 30, 2011, we held only three real estate properties, totaling $281 thousand, which financial institutions typically acquire through the foreclosure process. As a result of our conservative underwriting standards, within the near-term we do not expect significant losses to be incurred in our residential real estate portfolio, even though some borrowers may be experiencing stress due to the current economic environment. The Company’s allowance for loan losses amounted to $14.9 million at September 30, 2011, which represented 1.33% of loans outstanding, an increase of 6 basis points from our ratio a year ago.

During the first nine months of 2011, we originated over $35.6 million of residential real estate loans. However, for interest rate risk management purposes, due to the low interest-rate environment, during the last two quarters of 2010 and the first three quarters of 2011 we sold in the secondary market most of the residential real estate loans we originated, primarily to a government sponsored entity, Federal Home Loan Mortgage Corporation. Therefore, the outstanding balance for our residential real estate loan portfolio actually declined, both as compared to our quarter-end balances at September 30, 2010 and our year-end balance at December 31, 2010.  We continue to receive fee income from the servicing of these mortgages that were sold into the secondary market.

As a result of our deleveraging program and the sale of residential real estate loans, total assets at September 30, 2011 were $1.953 billion, down slightly from the $1.960 billion balance at September 30, 2010. Our loan portfolio was $1.121 billion, down $34 million or 3% from the September 30, 2010 level.  We also experienced a decrease in the volume of new automobile loans leading to a decline in that portfolio.  However, we did experience modest growth in our commercial loan portfolio, which partially offset these decreases.

The favorable impact from a small increase of $6.4 million, or 0.4%, in the third quarter average balance of earning assets period-to-period was more than offset by a significant decrease in our net interest margin, which fell from 3.54% in the third quarter of 2010, to 3.43% for the third quarter of 2011. This margin compression was attributable to the fact that our yield on earning assets decreased faster than the cost of our interest-bearing liabilities.  However, compared to the second quarter of 2011, net interest margin increased 8 basis points from 3.35%.  Our cost of interest-bearing deposits and other borrowings in the third quarter 2011 fell by 12 basis points, to an average cost of 1.16% compared to 1.28% in the second quarter of 2011, while our yield on earning assets in the third quarter of 2011 decreased by only 4 basis points from 4.43% in the second quarter of 2011 to 4.39%.

Total shareholders’ equity reached a record high at period-end of $168.6 million, an increase of $15.2 million, or 9.9%, above the September 30, 2010 balance. Our capital ratios remain very strong, with a Tier 1 leverage ratio at the holding company of 9.10% and a total risk-based capital ratio of 16.31%. The capital ratios of the Company and each subsidiary bank again significantly exceeded the “well capitalized” regulatory standard, which is the highest category.

We continue to believe that our conservative business model which emphasizes a strong capital position, high loan quality, knowledge of our market and responsiveness to our customers has positioned us well for the future. To date, our commercial, residential real estate and other consumer loan portfolios have not experienced significant deterioration in credit quality, even though the communities we serve, similar to other areas in the U.S., have been negatively impacted by the recession.

Many of our key operating ratios have consistently compared very favorably to our peer group, which we define as all U.S. bank holding companies having $1.0 to $3.0 billion in total assets as identified in the Federal Reserve Bank’s “Bank Holding Company Performance Report” (FRB Report). The most current peer data available in the FRB Report is for the six-month period ended June 30, 2011 in which our return on average equity (ROE) was 14.03%, as compared to 6.28% for our peer group.  Our ratio of nonperforming loans to total loans was .50% as of June 30, 2011 compared to 3.43% for our peer group, while our annualized net loan losses of .05% for the second quarter of 2011 were well below the peer result of .90%.  Our operating results and asset quality ratios have withstood the economic stress of recent years better than most banks in our national peer group.    

Arrow Financial Corporation is a multi-bank holding company headquartered in Glens Falls, NY serving the financial needs of northeastern New York.  The Company 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., three property and casualty insurance agencies: Loomis & LaPann, Inc., Upstate Agency, LLC, and McPhillips Insurance Agency, a division of Glens Falls National Insurance Agencies, LLC, 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, 2010 and our other filings with the Securities and Exchange Commission.

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