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Arrow Reports 24.9% Increase in Third Quarter Net Income

Author: Shannon MacCue Kavanaugh/Monday, October 22, 2018/Categories: News Release

  • Third quarter net income increased 24.9% year-over-year to $9.3 million.
  • Third quarter diluted earnings per share (EPS) rose 23.1% year-over-year to $0.64.
  • Period-end total loans up 11.4% year-over-year.
  • Third quarter net interest income increased 6.9% over the prior-year comparable quarter.
  • New record highs for total assets, total equity and assets under management and trust administration.
  • Continued strong profitability, asset quality and capital ratios.

GLENS FALLS, N.Y. (October 22, 2018) – Arrow Financial Corporation (NasdaqGS® – AROW) announced operating results for the three-month period ended September 30, 2018. Net income for the third quarter of 2018 increased $1.8 million compared to the third quarter of 2017, mainly due to the $1.6 million increase in net interest income after the provision for loan losses as a result of strong loan growth, and a $552 thousand reduction in the provision for income taxes primarily due to lower tax rates as a result of the Tax Cuts and Jobs Act of 2017 ("Tax Act").

Annualized key profitability ratios also improved, as measured by a return on average equity (ROE) of 13.96% and a return on average assets (ROA) of 1.28% for the third quarter, compared to 12.07% and 1.08% a year earlier.

Arrow President and CEO Thomas J. Murphy said, "Third quarter results were strong, driven by new records in total assets and assets under management and trust administration. Once again, I congratulate the entire Arrow team for this exceptional performance. I am very proud of their efforts and contributions as we look forward to continuously investing in our communities and growing into new markets.”

The following expands upon third quarter results:

Loan Growth: Over the twelve months ended September 30, 2018, total loans increased $217.3 million, or 11.4%, to $2.1 billion. The consumer loan portfolio grew by $102.2 million, or 17.3%, over the balance at September 30, 2017, primarily as a result of growth in the indirect automobile lending program, while the total residential real estate loan portfolio increased $84.0 million, or 11.2%, over the balance at September 30, 2017. The total outstanding commercial loans increased $31.2 million, or 5.5% over the balance at September 30, 2017.

Deposit Growth: At September 30, 2018, deposit balances reached $2.4 billion, up $100.7 million, or 4.4%, from the prior-year level with growth in both personal and business balances. Noninterest-bearing deposits increased $42.0 million and represented 20.4% of total deposits at September 30, 2018, compared to 19.4% at September 30, 2017. As a result of higher market rates and deposit customers seeking a higher return, time deposits over $250,000 increased $47.8 million at September 30, 2018 compared to the prior year.

Net Interest Income: Driven by strong loan growth, third quarter 2018 net interest income increased to $21.0 million, up 6.9% from $19.7 million in the comparable quarter of 2017. The net interest margin was 3.02% for the quarter, compared to 3.00% for the third quarter of 2017. On a tax equivalent (non-GAAP) basis, the net interest margin was 3.08% compared to 3.15% for the prior year period.

Noninterest Income: Noninterest income for the three-month period ended June 30, 2018 increased 12.1% from the comparable 2017 quarter, mainly due to income from fiduciary activities, which increased during the quarter by $497 thousand, or 23.1%, over the amount for the second quarter of 2017. Additionally, net gain on equity securities of $223 thousand was the result of the change in fair value of marketable equity securities.

Assets Under Management: Assets under trust administration and investment management reached a record high of $1.5 billion at June 30, 2018, an increase of $123.5 million, or 9.1%, from the balance at June 30, 2017, driven by continued strength in equity markets.

Noninterest Expenses: Noninterest income for the three-month period ended September 30, 2018 increased 3.0% from the comparable 2017 quarter, due mainly to increases in service fee revenue and income from fiduciary activities. Service fee revenue increased during the quarter by $152 thousand, or 6.2%, over the amount for the third quarter of 2017, while income from fiduciary activities increased by $146 thousand, or 6.9% due to a $139.7 million, or 9.9%, increase in assets under management and trust administration. The increase in assets under management, which reached a new record high of $1.6 billion at September 30, 2018, was driven primarily by continued strength in equity markets. Additionally, the Company recorded a net gain on equity securities of $114 thousand during the third quarter of 2018. For periods prior to 2018, accounting guidance resulted in these gains being recorded as a component of accumulated comprehensive income. The aforementioned increases in noninterest income were partially offset by reductions in net gain on sales of loans and in insurance commissions.

Noninterest Expense: Noninterest expense for the third quarter of 2018 increased 3.1% to $16.0 million, from $15.5 million for the third quarter of 2017, primarily due to a 4.1% increase in salaries and employee benefits over the same 2017 quarter.

Provision for Income Taxes: The provision for income taxes was $2.5 million in the third quarter of 2018 versus $3.0 million in the same quarter of 2017. The effective income tax rates for the three-month periods ended September 30, 2018 and 2017 were 21.1% and 29.0%, respectively, which reflects the impact of the Tax Act.

Asset Quality: Asset quality remained strong at September 30, 2018, as measured by continuing low levels of nonperforming assets and net charge-offs. Nonperforming assets at September 30, 2018 were $7.0 million, down $2.0 million, or 22.4%, from the level at September 30, 2017. Net charge-offs, expressed as an annualized percentage of average loans outstanding, were 0.04% for the three-month period ended September 30, 2018, down from the prior-year comparable quarter of 0.11%. The allowance for loan losses was $20.0 million at September 30, 2018, which represented 0.94% of loans outstanding as compared to 0.93% at September 30, 2017. The loss provision expense for the third quarter of 2018 was $586 thousand, down $214 thousand from the provision for the comparable 2017 quarter.

Capital: Total stockholders’ equity was a record $264.8 million at September 30, 2018, up $20.2 million, or 8.2%, from the prior year. Overall regulatory capital ratios also remain strong in 2018, with the Company's common equity tier 1 ratio estimated to be 12.89% and the total risk-based capital ratio estimated to be 14.89% at September 30, 2018. These capital levels at the Company and both its subsidiary banks continue to significantly exceed the "well capitalized" regulatory standard.

Cash and Stock Dividends: On September 14, 2018, the Company distributed a cash dividend of $0.26 per share. This cash dividend reflected a $0.01 per share increase from the $0.25 cash dividend paid in the third quarter of 2017 and is the first increase in the Company's cash dividend rate since 2008. Additionally, a 3% stock dividend was distributed on September 27, 2018. This is the 10th consecutive year the Company declared a stock dividend. The September 14, 2018 cash dividend was 7.1% higher than the cash dividend paid by the Company in the third quarter of 2017 when adjusted for the 3% stock dividend.

Industry Recognition: Both of the Company's banking subsidiaries maintained their BauerFinancial, Inc. 5-Star Superior Bank rating. Glens Falls National Bank and Trust Company and Saratoga National Bank and Trust Company have continued to earn this designation for the last 46 and 38 quarters, respectively.

About Arrow: 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. and Upstate Agency, LLC.

Non-GAAP Financial Measures Reconciliation: 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. 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 "Selected Quarterly Information."

Safe Harbor Statement: 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, 2017, and other filings with the Securities and Exchange Commission.

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