Arrow Reports Record Net Income for 2016, Continued Strong Loan Growth

Author: Shannon MacCue Kavanaugh/Friday, January 20, 2017/Categories: News Release

  • Net income for 2016 reached a record high of $26.5 million, up 7.6% over 2015.
  • Diluted Earnings Per Share (EPS) grew 6.5% to a record $1.97 for the year.
  • Period-end total loan balances reached a new record with double-digit growth for the third consecutive year.
  • Record highs also achieved for year-end total assets and total equity, as well as assets under trust administration and investment management.
  • Continued strong ratios for profitability, asset quality and capital.

GLENS FALLS, N.Y. (January 20, 2017) – Arrow Financial Corporation (NasdaqGS® – AROW) announced operating results for the three- and 12-month periods ended December 31, 2016. For the year ended December 31, 2016, net income was a record $26.5 million, up 7.6% over net income of $24.7 million for 2015. Diluted EPS was a record $1.97 up 6.5% from $1.85 in 2015. Return on average equity (ROE) and return on average assets (ROA) were 11.79% and 1.06%, respectively, for the year, as compared to 11.86% and 1.05%, respectively, for 2015. Net income for the fourth quarter of 2016 was $6.6 million, an increase of $31 thousand, or 0.5%, from the fourth quarter of 2015. Diluted EPS of $0.49 for the quarter was unchanged from the comparable 2015 quarter.

Arrow President and CEO Tom Murphy stated, "Arrow's excellent results for 2016 demonstrates the strength of our Company and its commitment to community banking. We grew our loan portfolio 11.4% last year to a new record high, driven in large part by the consumer lending division. We also reported records for net income, total equity and assets under trust administration and investment management at year-end. I thank the entire team for their hard work to deliver value to our customers, communities and shareholders."

The following expands upon our fourth-quarter and year-to-date results:

Net Interest Income: Our net interest income, on a tax-equivalent basis (a non-GAAP financial measure), increased by $1.1 million, or 6.0%, in the fourth quarter of 2016, as compared to the fourth quarter of 2015, due to a similar increase in the level of our interest-earning assets between the periods and our continued repositioning of our asset portfolio in favor of loans versus investment securities. Our tax-equivalent net interest margin (NIM), also a non-GAAP measure, was 3.17% for the fourth quarter of 2016, up slightly from 3.15% for the fourth quarter of 2015. While our continued loan growth has been the primary driver for maintaining a stable NIM for the past three years, our increased ratio of non-interest-bearing demand deposits to total deposits has helped limit the increase in our cost of funds.

Loan Growth: At December 31, 2016, our loan portfolio reached a record high of $1.8 billion, up $179.3 million, or 11.4%, from the prior-year level. We experienced growth in all three of our major segments: commercial, consumer and residential real estate. This represents our third consecutive year of double-digit loan growth.

Consumer loans, primarily indirect automobile loans, led the way with 15.7% growth during 2016 to $537.4 million. We maintain an extensive network of automobile dealer relationships throughout Upstate New York and Vermont. Indirect loan originations have increased significantly over the past two years and the average maturities of these originations have continued to rise slowly. In the most recent quarters, average yields on indirect originations have slowly begun to increase. Residential real estate loans were up $57.2 million, or 9.2%, at year-end compared to the prior year-end. The outstanding balance at December 31, 2016, of $679.1 million represented 38.7% of the loan portfolio. During 2016, we originated $153.6 million of residential real estate loans, up 6.6% from approximately $144.2 million million of originations in 2015. With the increase in longer-term interest rates, our gain on the sale of residential real estate loan originations declined in the fourth quarter of 2016 compared to the same quarter of 2015. The decline was attributable to both a decrease in the amount of loans sold and a narrowing of the premium received on these sales. Commercial and commercial real estate loan growth remained strong throughout 2016 with the portfolio increasing by $49.3 million, or 10.1%, to $536.8 million.

Deposit Growth: At December 31, 2016, our deposit balances reached $2.1 billion, up by $86.1 million, or 4.2%, from the prior-year level. Noninterest-bearing deposits grew by $28.5 million or 8.0% during 2016, and represented 18.3% of total deposits at year-end, up from the prior-year level of 17.7%. This increase positively impacted our net interest margin.

Assets Under Management and Related Noninterest Income: Assets under trust administration and investment management at December 31, 2016, rose to a record $1.3 billion, an increase of 5.6%, from the December 31, 2015, balance of $1.2 billion. The growth in balances was generally attributable to a net gain in market value of assets under management as well as the addition of new accounts. For the 2016 fourth quarter, income from fiduciary activities was $1.9 million, up 4% from the same period in 2015.

Insurance Agency Operations: Insurance income for the year ended December 31, 2016, declined by $300 thousand, or 3.3%, to $8.67 million from $8.97 million in 2015. This decrease was primarily attributable to our October 2015 sale to an unrelated third party of one of our wholly owned insurance subsidiaries that engaged in offering insurance services to out-of-market amateur sports management associations.

Securities Transactions: Late in the fourth quarter, yields on fixed income securities increased significantly causing the U.S. Treasury yield curve to steepen. As part of ongoing balance sheet management, we executed security transactions where we sold U.S. Agency debentures and U.S. Agency issued mortgage-backed securities with short maturities from our available-for-sale portfolio, realizing a $166 thousand loss on sale. Utilizing the sales proceeds, we purchased U.S. Treasury Notes and U.S. Agency issued mortgage-backed securities in the three to five year maturity range, which were allocated to the available-for-sale portfolio.

Asset Quality: Asset quality remained strong, as measured by our low levels of nonperforming assets and charge-offs. Net loan losses for the fourth quarter of 2016, expressed as an annualized percentage of average loans outstanding, were 0.10%. Our net loan losses for the full year 2016 were 0.06% of average loans outstanding, unchanged from the 2015 ratio. Nonperforming assets of $7.2 million at December 31, 2016, represented only 0.28% of period-end assets, down from the 2015 year-end ratio of 0.36%.

Our allowance for loan losses was $17.0 million at December 31, 2016, which represented 0.97% of loans outstanding, a decrease of five basis points from our ratio of 1.02% at year-end 2015. This decrease was primarily driven by continued strong asset quality indicators. However, the year-over-year provision for loan losses increased by 50.9% primarily driven by strong double-digit loan growth.

Cash and Stock Dividends: The cash dividend of $0.25 per share paid to our shareholders in the 2016 fourth quarter represented a 3% increase in the cash dividend paid by us in the 2015 quarter, as adjusted for (and reflecting) the 3% stock dividend distributed by us on September 29, 2016. This was our 23rd consecutive year of increased cash dividends. All prior-period per share data have been adjusted to reflect our September 29, 2016 stock dividend.

Capital: Total shareholders’ equity grew to a record of $232.9 million at period-end, an increase of $18.9 million, or 8.8%, above the year-end 2015 balance. This rate of increase exceeded our rate of growth in total assets for the year. Arrow's regulatory capital ratios remained strong in 2016. At December 31, 2016, the company's Common Equity Tier 1 Capital Ratio was 12.97% and total risk-based capital ratio was 15.15%. The capital ratios of the company and both its subsidiary banks continued to significantly exceed the “well capitalized” regulatory standards, the highest category.

Peer Group: Many of our key operating ratios have consistently compared 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 as of and for the period ended September 30, 2016. For that period, our return on average equity (ROE) was 11.91%, as compared to 8.54% for our peer group.

As of December 31, 2016, our ratio of loans 90 days past due and accruing plus nonaccrual loans to total loans was 0.31%, as compared to the 0.83% ratio achieved by our peer group as of September 30, 2016 (as identified in the most recent FRB Report), while our net loan losses of 0.06% for the year ended December 31, 2016, were slightly below the peer result for the period ended September 30, 2016 (as identified in the most recent FRB Report), of 0.07% (annualized).

Industry Recognition: In 2016 Arrow received various industry recognitions. Arrow was named one of "America's 50 Most Trustworthy Financial Companies" by Forbes for the fifth consecutive year. Arrow appeared in Bank Director Magazine’s annual “Bank Performance Scorecard” as one of the top-performing banks in the country. And Arrow received the Raymond James Community Bankers Cup for its "superior financial performance."

Finally, both of the Company's two banking subsidiaries also maintained their 5-Star Superior Bank Rating by BauerFinancial, Inc. Glens Falls National Bank and Trust Company and Saratoga National Bank and Trust Company have each earned this designation for the past 39 and 31 quarters, respectively.


Arrow Financial Corporation is a multi-bank holding company headquartered in Glens Falls, New York, 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.; two property and casualty insurance agencies: 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.

In addition to presenting information in conformity with accounting principles generally accepted in the United States of America (GAAP), this news release contains financial information determined by methods other than GAAP (non-GAAP). The following measures used in this release, which are commonly utilized by financial institutions, have not been specifically exempted by the Securities and Exchange Commission ("SEC") and may constitute "non-GAAP financial measures" within the meaning of the SEC's rules. Certain non-GAAP financial measures include: tangible equity, return on tangible equity, tax-equivalent adjustment and related net interest income - tax equivalent, and the efficiency ratio. Management believes that the non-GAAP financial measures disclosed by the Company from time to time are useful in evaluating the Company's performance and that such information should be considered as supplemental in nature and not as a substitute for or superior to the related financial information prepared in accordance with GAAP. Our non-GAAP financial measures may differ from similar measures presented by other companies. See the reconciliation of GAAP to non-GAAP measures in the section "Select Quarterly Information."

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, 2015, and our other filings with the Securities and Exchange Commission.

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