7.21.2015

Arrow's Second-Quarter Net Income Up 14.1%, Asset Quality Remains Strong



 •    Second-quarter net income rose $781 thousand, or 14.1%, year over year.
•    Diluted earnings per share (EPS) rose $0.06, or 13.6%, from the prior-year quarter.
•    Record high period-end loan portfolio balances - growth of $135.5 million, or 10.1%, year over year.
•    Continued strong ratios for asset quality and capital.



GLENS FALLS -- Arrow Financial Corporation (NasdaqGS® – AROW) announced operating results for the three-and six-month periods ended June 30, 2015. Net income for the second quarter of 2015 was $6.31 million, an increase of $781thousand, or 14.1%, from net income of $5.52 million for the second quarter of 2014.  Diluted earnings per share (EPS) for the quarterwere $0.50, a 13.6% increase from the comparable 2014 quarter, when diluted EPS was $0.44. Return on average assets was
1.09%, and return on average equity was 12.23% for the 2015 second quarter, representing increases of
7.9% and 8.4%, respectively, from the prior-year second quarter.

Arrow President and CEO Thomas J. Murphy stated, "We are pleased to report a double-digit increase in net income for the secondquarter, driven in part by continued strong loan growth. Our lending team has experienced increased activity and opportunities, especiallyin our southern market, producing results across all major loan segments: commercial, consumer, and residential real estate.  At thesame time, we have continued to maintain strong ratios for asset quality and capital. I am very proud of our team for achieving these excellent results."

The following list expands upon our second-quarter results:

Net Interest Income and Margin: In the second quarter of 2015, on a tax-equivalent basis, our net interest income increased $976thousand, or 6.0%, compared to the second quarter of 2014.  Our tax-equivalent net interest margin decreased by 2 basis points, from3.17% in the second quarter of 2014 to 3.15% for the second quarter of 2015. The decrease in net interest margin reflected the fact thatthe average yield on our loan portfolio decreased more rapidly than the average cost of our interest-bearing liabilities.

Trust Assets and Related Noninterest Income:   Assets under trust administration and investment management at June 30, 2015,were $1.25 billion, an increase of $32.0 million, or 2.6%, from the June 30,
2014, balance of $1.21 billion. The growth in asset balances was generally attributable to a rise in the equity markets between the periodsand the addition of new accounts.  Income from fiduciary activities increased by $205 thousand, or 5.4%, from $3.78 million for the firstsix months of 2014, to $3.98 million for the first six months of 2015.

Loan Growth: Over the six-month period ended June 30, 2015, our total loans increased by $66.4 million, or 4.7%, with increases in allthree of our major loan segments: commercial, consumer, and residential real estate. At June 30, 2015, our total loan balance was up 10.1% as compared to June 30, 2014.

During the second quarter of 2015, our residential real estate loan portfolio grew $21.0 million, or 3.8%. We originated approximately $34million of residential real estate loans during the quarter, nearly $6 million more than our originations in the comparable quarter of 2014.We also experienced continuing growth

during the quarter in our consumer loan portfolio, reaching a record-high balance at period-end of $454.9 million, exceeding the June 30,2014 balance, by $37.7 million, or 9.0%. This was primarily a result of our indirect automobile lending program. In the second quarter, weextended $52.7 million in new loans for new and used automobiles. Total outstanding commercial loans continued to grow, reaching abalance of $449.1 million on June 30, 2015, an increase of $15.9 million, or 3.7% from June 30, 2014.

Asset Quality and Loan Loss Provision: Asset quality remained strong at June 30, 2015, as measured by our comparatively  lowlevels of nonperforming assets and net charge-offs.  Nonperforming assets at June 30, 2015 were $9.1 million, an increase of $819thousand, or 9.9%, from the prior year level. However, our nonperforming assets represented only 0.39% of total assets at period-end, versus 0.38% at June 30,
2014.  Net loan losses expressed as an annualized percentage of average loans outstanding, were just
0.03% for the three-month period ended June 30, 2015, unchanged from the 2014 three-month period.

Our allowance for loan losses was $15.6 million at June 30, 2015, which represented 1.05% of loans outstanding, seven basis points below our ratio one year earlier and five basis points below our ratio at December 31, 2014. Our provision for loan losses for thesecond quarter of 2015 was $70 thousand, down by $435 thousand from the provision for the comparable 2014 quarter. The decreasedsize of our provision and reduction in our coverage ratio reflect the strong quality of our loan portfolio.

Cash and Stock Dividends:  We distributed a cash dividend of $0.25 per share to stockholders in the second quarter of 2015. Thecash dividend was 2% higher than the cash dividend paid in the second quarter of 2014, as adjusted for our 2% stock dividend distributed in September 2014.

Insurance Agency Operations: Insurance commission income increased from $2.3 million for the second quarter of 2014 to $2.4 million for the second quarter of 2015, or 4.3%.

Capital: Total stockholders’ equity was a record $206.9 million at period-end, an increase of $9.3 million, or 4.7%, above the June 30,2014, amount. Effective January 1, 2015, the new bank regulatory capital standards for U.S. banking organizations revised the riskweighting of certain assets and added a new risk- weighted capital measure Common Equity Tier 1 (CET1). These new regulatorystandards did not have a material impact on our capital ratios, which remained strong at quarter-end.  We estimate that Arrow's regulatory capital ratios at June 30, 2015, calculated under the new standards were as follows:  Tier 1 leverage ratio 9.41%; CET1ratio 13.12%; Tier 1 risk-based capital ratio 14.46%; and total risk-based capital ratio 15.51%.  All of our regulatory capital ratios, at theholding company and subsidiary bank levels, as calculated under the new standards, continue to significantly exceed the new regulatorythresholds for “well capitalized” institutions, which is the highest current regulatory category.

Industry Recognition: The Company was recently included on American Bankers “Midtier Performers” list, ranking 31st out of almost200 financial institutions based on three-year return on average equity (ROAE). Arrow had a three-year ROAE of 12.26% and was the onlyNew York State Capital Region bank to appear in the top 40.  The list included 191 public and private financial institutions with assets between $2 billion and $10 billion.

In addition, Arrow's two banking subsidiaries were each recognized again as a 5-Star Superior Bank by BauerFinancial, Inc., a nationalbank rating and research firm, based on March 31, 2015, financial data. Glens Falls National Bank and Trust Company and SaratogaNational Bank and Trust Company have each earned this designation for the past 33 and 25 quarters, respectively.

Arrow Financial Corporation is a multi-bank holding company headquartered in Glens Falls, New York, serving the financial needs ofnortheastern New York. The Company is the parent of Glens Falls National Bank and Trust Company and Saratoga National Bank andTrust 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.

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 inthis 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-GAAPfinancial measures include: tangible equity, return on tangible equity, tax-equivalent adjustment and related net interest income - taxequivalent, and the efficiency ratio.  Management believes that the non-GAAP financial measures disclosed by the Company from timeto time are useful in evaluating the Company's performance and that such information should be considered as supplemental in nature andnot as a substitute for or superior to the related financial information prepared in accordance with GAAP. Our non-GAAP financialmeasures may differ from similar measures presented by other companies. See the reconciliation of GAAP to non-GAAP measures in the section "Select Quarterly Information."

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