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Arrow Reports Strong Second Quarter Operating Results

GLENS FALLS, N.Y., July 13 /PRNewswire-FirstCall/ -- Arrow Financial Corporation (Nasdaq: AROW) announced operating results for the three and six-month periods ended June 30, 2010.  Net income for the second quarter of 2010 was $5.7 million, representing diluted earnings per share (EPS) of $.52, as compared to net income of $4.9 million and $.45 diluted EPS for the second quarter of 2009, an increase of $.07 per share or 15.5%.  The Company's returns on average assets and average equity were 1.22% and 15.38%, respectively, for the second quarter of 2010, as compared to 1.15% and 14.79% for the second quarter of 2009. The results for both periods include certain significant transactions, discussed further in this release, which impacted operating results.  The cash dividend paid to shareholders in the second quarter of 2010 was $.25, or 4.2% higher than the $.24 paid in the second quarter of 2009. All per share amounts have been adjusted to reflect the effect of the 3% stock dividend we distributed on September 29, 2009.

For the six-month period ending June 30, 2010, our net income was $11.1 million, representing diluted EPS of $1.01.  For the comparable 2009 six-month period, net income was $11.6 million and diluted EPS equaled $1.06. As we previously reported, our 2009 six-month results included a net gain of $1.79 million, or $.16 per share, net of tax, recognized on the sale of our merchant bank card processing line of business to TransFirst LLC. Excluding this transaction, adjusted net income for the 2009 period was $9.8 million, and adjusted diluted EPS was $.90.  Compared to this adjusted EPS for the 2009 period, diluted EPS for the 2010 six-month period increased $.11 per share, or 12.2%.  Return on average equity (ROE) for the 2010 six-month period continued to be very strong at 15.32%.  The ROE for the 2009 period was 17.86%.  Excluding the sale transaction in 2009 referenced above, ROE for the first six months of 2009, as adjusted, was 15.11%.  The adjusted net income, adjusted EPS and adjusted ROE measures for the 2009 period are non-GAAP financial measures.  On page 3 of this press release, we have provided a tabular reconciliation of these 2009 non-GAAP measures to the related 2009 GAAP measures.  

Thomas L. Hoy, Chairman, President and CEO stated, "We are pleased to report continued growth in operating earnings while maintaining both very strong asset quality and capital adequacy ratios. Our performance was led by a substantial increase in net interest income, resulting from an increase in the average level of earning assets but partially offset by a slight narrowing of our net interest margin. Our ratio of nonperforming assets to assets was only .24% at June 30, 2010 and our annualized net loan losses represented only .05% for the quarter just ended. "

Certain significant transactions occurring in the just-completed three and six-month periods as well as the comparable prior-year periods impacted earnings in, and comparative earnings between, the periods.  During the second quarter of 2010 we sold $10 million par value of collateralized mortgage obligations (CMO) from our available-for-sale portfolio to provide additional liquidity to offset the seasonal low point in municipal deposit balances which occurs each year at June 30. The sale of these CMO's, which were identified and sold as a strategy for interest rate risk purposes, resulted in an after-tax net gain of $520 thousand or nearly $.05 per share.  

The Company's subsidiary banks, like all FDIC insured financial institutions, recognized an FDIC special assessment in the second quarter of 2009. We expensed $475 thousand, net of tax, in the second quarter of 2009 for this assessment.  Also during the second quarter of 2009, we received an unexpected court-ordered restitution payment of $272 thousand, net of tax, from a former customer of our now-dissolved Vermont subsidiary bank. Taken together, these two transactions resulted in a $.02 decrease in EPS in the second quarter of 2009.

Total assets at June 30, 2010 reached a record high of $1.846 billion, up $127.5 million, or 7.4% over the $1.719 billion for the same quarter last year. The growth in assets was focused primarily in our available-for-sale securities portfolio, which increased $81.4 million from June 30, 2009.  Our loan portfolio also reached a record high of $1.145 billion, an increase of 4.7% from the June 30, 2009 balance of $1.094 billion as we continue to lend to credit qualified business and individuals. The growth in the loan portfolio was experienced in the residential real estate category where loan demand responded very well to exceptionally attractive financing rates and improved affordability. Outstanding loan balances within the small business and consumer indirect loan categories were largely unchanged from the levels reported at June 30, 2009.

Net interest income increased $870 thousand in the second quarter of 2010 versus the second quarter of 2009, primarily as a result of an increase of $136.9 million, or 8.3%, in average earning assets period to period. Our net interest margin for the second quarter of 2010 was 3.70%, down from 3.77% for the second quarter of 2009 which is primarily attributable to the yield on our interest-bearing assets decreasing at a rate faster than the rate paid on our deposits and borrowed funds.

Total shareholders' equity at period-end increased $18.1 million, or 13.5%, above the June 30, 2009 balance to a record level of $152.7 million.  Our capital ratios remain strong, with a Tier 1 leverage ratio of 8.71% and a total risk-based capital ratio of 15.50%. The capital ratios of the Company and each subsidiary bank significantly exceeded the "well capitalized" regulatory standard.

The number of failed financial institutions continues to grow and bank balance sheets generally remain under pressure. However, we believe that our strong capital position, traditionally high loan quality and fundamentally sound management approach to providing financial services to our customers have positioned us well to continue to serve our customers. Our commercial, residential real estate and indirect consumer loan portfolios have not experienced significant deterioration during 2009 and in 2010 to date, even though the communities we serve, similar to other areas in the U.S., have been negatively impacted by the recession. If the weak economic conditions persist or worsen, we may be unfavorably impacted in the future.

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