Arrow Reports Record Net Income for 2017; Continues Double-Digit Loan Growth

Author: Shannon MacCue Kavanaugh/Tuesday, January 30, 2018/Categories: News Release

  • Net income for 2017 reached a record high of $29.3 million, up 10.5% year-over-year.
  • Diluted Earnings Per Share (EPS) grew 9.9% to a record $2.10 for the year.
  • The Tax Cuts and Jobs Act of 2017 ("Tax Act") required revaluation of net deferred tax assets and liabilities, resulting in a one-time tax benefit of $1.1 million, or $0.08 per fully diluted share.
  • Net interest margin reached 3.23%, up from 3.14% in the fourth quarter of 2016.
  • Period-end total loan balances reached a new record of $1.95 billion, achieving double-digit growth for the fourth 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 30, 2018) – Arrow Financial Corporation (NasdaqGS® – AROW) announced operating results for the three- and twelve-month periods ended December 31, 2017. For the year ended December 31, 2017, net income was a record $29.3 million, up 10.5% over net income of $26.5 million for 2016. Diluted EPS was a record $2.10 up 9.9% from $1.91 in 2016 while return on average equity (ROE) and return on average assets (ROA) were 12.14% and 1.09%, respectively, for the year, as compared to 11.79% and 1.06%, respectively, for 2016. Excluding the one-time benefit resulting from the Tax Act, net income increased $1.7 million, up 6.3% year-over-year with diluted EPS of $2.02.

Net income for the fourth quarter of 2017 was $8.1 million, an increase of $1.5 million, or 22.3%, from the fourth quarter of 2016, with diluted EPS of $0.58 for the quarter, an increase of 23.4% from the comparable 2016 quarter. Excluding the one-time benefit resulting from the Tax Act, quarterly net income was $7.0 million, an increase of 5.4% from the fourth quarter of 2016 and quarterly diluted EPS was $0.50, a 6.4% increase from the comparable 2016 quarter.

"Arrow has continued its steady growth, with solid performance in 2017," said Arrow President and CEO Tom Murphy. "The Company was able to achieve record net income for the fourth consecutive year. On top of that, the favorable one-time adjustment to the valuation of the deferred tax liability resulting from the Tax Act further increased our net income. Overall, our success can be attributed to our talented and hard-working team whose efforts led to another year of double-digit loan growth and the ability to maintain our strong asset quality

"In addition to the one-time tax benefit realized in the fourth quarter, we expect that tax reform will have an ongoing positive impact on our Company," Murphy continued. "This is a unique opportunity, so we are carefully evaluating how to strategically utilize the expected tax savings to deliver value to our customers, employees, communities and shareholders."

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

Tax Reform: The Tax Act enacted on December 22, 2017, reduced the corporate Federal income tax rate from 35% to 21%, effective January 1, 2018. Generally Accepted Accounting Principles (GAAP) requires that the impact of the provisions of the Tax Act be accounted for in the period of enactment. As a result of revaluing the net deferred tax liability to the lower statutory tax rate of 21%, Arrow's provision for income taxes for the fourth quarter and full year 2017 reflects a $1.1 million benefit, representing $0.08 of diluted earnings per share.

Net Interest Income: Net interest income, on a tax-equivalent basis (a non-GAAP financial measure), increased by $1.3 million, or 7.0%, in the fourth quarter of 2017, as compared to the fourth quarter of 2016, due to an increase of $179.1 million, or 7.5%, in the level of average earning assets between the periods and an increase in tax-equivalent net interest margin, (also a non-GAAP measure) to 3.23% for the fourth quarter of 2017, up significantly from 3.14% for the fourth quarter of 2016. Continued strong loan growth was the primary driver of the increase in average earning assets, while the increase in non-interest bearing demand deposits and low deposit rate betas allowed us to maintain a relatively low cost of funds.

Loan Growth: At December 31, 2017, total loan balances reached a record high of $1.95 billion, up $197.5 million, or 11.3%, from the prior-year level. The Company experienced growth in all three major segments: commercial, consumer, and residential real estate. This represents the fourth consecutive year of double-digit loan growth.

Residential real estate loans increased $95.3 million, or 14.0%, to $774.4 million, at year-end compared to the prior year-end. During 2017, Arrow originated $178.9 million of residential real estate loans, up 16.5% from the $153.6 million of originations in 2016. Consumer loans increased $65.5 million, or 12.2% during 2017 to $602.8 million, mainly due to an increase in indirect loan originations. Commercial and commercial real estate loan growth remained strong throughout 2017 with the portfolio increasing by $36.7 million, or 6.8%, to $573.5 million.

Deposit Growth: At December 31, 2017, total deposit balances reached $2.2 billion, up by $128.6 million, or 6.1%, from the prior-year level. Noninterest-bearing deposits grew by $54.7 million or 14.1% during 2017, and represented 19.7% of total deposits at year-end, up from the prior-year level of 18.3%. Higher levels of noninterest-bearing deposits positively impacted net interest margin.

Assets Under Management and Related Noninterest Income: Assets under trust administration and investment management at December 31, 2017, rose to a record $1.5 billion, an increase of 11.6%, from the December 31, 2016, balance of $1.3 billion. The growth in balances was primarily due to the performance of the equity markets. For the 2017 fourth quarter, income from fiduciary activities was $2.1 million, up 11% from the same period in 2016.

Securities Transactions: As part of the Company's balance sheet management process, the Company executed securities transactions, primarily late in the fourth quarter, pursuant to which the Company sold U.S. Treasury Notes, U.S. Agency debentures and U.S. Agency issued mortgage-backed securities from its available-for-sale portfolio, realizing a $458 thousand net loss on sale. Utilizing the sale proceeds, Arrow purchased U.S. Agency issued mortgage-backed securities and U.S. Agency collateralized mortgage obligations with fixed rate and floating rate coupon structures, which were allocated to the available-for-sale portfolio.

Asset Quality: Asset quality remained strong, as evidenced by low levels of nonperforming assets and charge-offs. Net loan losses for the fourth quarter of 2017, expressed as an annualized percentage of average loans outstanding, were 0.05%. Net loan losses for the full year 2017 were 0.06% of average loans outstanding, unchanged from the 2016 ratio. Nonperforming assets of $7.8 million at December 31, 2017, represented only 0.28% of period-end assets, unchanged from the 2016 year-end ratio.

The Company's allowance for loan losses was $18.6 million at December 31, 2017, which represented 0.95% of loans outstanding, a decrease of two basis points from the ratio of 0.97% at year-end 2016. This decrease was primarily driven by continued strong asset quality indicators. However, the year-over-year provision for loan losses increased by $703 thousand, primarily driven by strong double-digit loan growth.

Cash and Stock Dividends: The cash dividend of $0.25 per share paid to shareholders in the 2017 fourth quarter represented a 3% increase in the cash dividend paid by us in the 2016 quarter, as adjusted for (and reflecting) the 3% stock dividend distributed by us on September 28, 2017. This was the Company's 24th consecutive year of increased cash dividends. All prior-period per share data have been adjusted to reflect the September 28, 2017 stock dividend.

Capital: Total shareholders’ equity grew to a record of $249.6 million at period-end, an increase of $16.8 million, or 7.2%, above the year-end 2016 balance. This rate of increase exceeded the rate of growth in total assets for the year. The Company's regulatory capital ratios remained strong in 2017. At December 31, 2017, the Company's Common Equity Tier 1 Capital Ratio was 12.89% and total risk-based capital ratio was 14.98%. 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 the Company's key operating ratios have consistently compared favorably to its peer group, defined 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, 2017. For that period, the peer group's return on average equity (ROE) was 9.19% compared to the Company's ROE of 12.07% for the fourth quarter of 2017.

As of December 31, 2017, the Company's ratio of loans 90 days past due and accruing plus nonaccrual loans to total loans was 0.31%, as compared to the 0.73% ratio achieved by the peer group as of September 30, 2017 (as identified in the most recent FRB Report), while net loan losses of 0.06% for the year ended December 31, 2017, were slightly below the peer result for the period ended September 30, 2017 (as identified in the most recent FRB Report), of 0.08% (annualized).

Industry Recognition: In 2017 Arrow received various industry recognitions. The Company was named one of "America's 50 Most Trustworthy Financial Companies" by Forbes for the sixth consecutive year. Arrow also appeared in Bank Director Magazine's annual "Bank Performance Scorecard" as one of the top-performing banks in the country for the third year in a row.

Finally, both of the Company's banking subsidiaries 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 43 and 35 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.; Upstate Agency, LLC, specializing in property and casualty insurance; 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, 2016, and our other filings with the Securities and Exchange Commission.

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