Arrow reports record high net income of $24.7 million for 2015

•       Net income for 2015 reached a record high of $24.7 million.

•       Diluted EPS was a record $1.91 for the full year and increased to $0.51 in the fourth quarter.
•       Fourth-quarter net interest income rose 8.2% year over year on a tax-equivalent basis.
•       Period-end loan portfolio balances hit a record high; increased 11.4% since prior year-end.
•       Total deposit balances increased 6.7% to $2.03 billion at year-end.

GLENS FALLS - Arrow Financial Corporation (NasdaqGS® – AROW) announced operating results for the three- and twelve-month periods ended December 31, 2015. Net income for the fourth quarter of 2015 was $6.6 million, an increase of $200 thousand, or 3.1%, from net income of $6.4 million for the fourth quarter of 2014. Diluted earnings per share (EPS) for the quarter was $0.51, an increase of 4.1% from the comparable 2014 quarter, when diluted EPS was $0.49. For the year ended December 31, 2015, net income was a record $24.7 million, up 5.6% over net income of $23.4 million for 2014, while diluted EPS was a record $1.91, up 5.4% over $1.81 in 2014. Return on average equity (ROE) and return on average assets (ROA) were 11.86% and 1.05%, respectively, for the year, as compared to 11.79% and 1.07%, respectively, for 2014.

Arrow President and CEO Tom Murphy stated, "Arrow delivered excellent results in 2015, thanks to the combined efforts of our dedicated team. A major highlight for the year was the double-digit growth of our loan portfolio, which reached a new record high at year-end, while maintaining our commitment to strong asset quality. We also set new records for net income and total equity at year-end, and our profitability measurements remained strong."

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

Net Interest Income: Our net interest income, on a tax-equivalent basis, increased $1.4 million, or 8.2%, in the fourth quarter of 2015, as compared to the fourth quarter of 2014, due primarily to an increase in the average level of interest-earning assets between the periods and a decrease in our cost of funds. Our tax-equivalent net interest margin was 3.15% for the fourth quarter of 2015, down from 3.17% in the fourth quarter of 2014, and up slightly from 3.14% in the third quarter of 2015. While the yield on earning assets decreased slightly compared to the prior-year period, the cost of our interest-bearing liabilities decreased even more as these liabilities have continued to reprice downward in this historically low interest rate environment. Our average cost of funds in the fourth quarter of 2015, as compared to the prior-year period, fell six basis points from 0.32% to 0.26%; while our average yield on earning assets decreased by three basis points.

Loan Growth: At December 31, 2015, our loan portfolio reached a record high of $1.574 billion, up $160.7 million, or 11.4%, from the prior-year level, due to growth in all three of our major segments: commercial, consumer and residential real estate.

The outstanding balance of our residential real estate loan portfolio at December 31, 2015, was 15.9% higher than at year-end 2014. During 2015, we originated $144.2 million of residential real estate loans, up 9.9% from approximately $131.2 million in 2014. We retained a higher percentage of our residential real estate loan originations in 2015 than in 2014 as yields began to rise. Our gain on the sale of residential

real estate loan originations in 2015 was less than our gain on the sale of originations in 2014 due both to a decrease in the amount of loans sold and a narrowing of the premium received on these sales.

Deposit Growth: At December 31, 2015, our deposit balances reached $2.03 billion, up $127.5 million, or 6.7%, from the prior-year level. Noninterest-bearing deposits grew $58.0 million or 19.3% from the prior- year level, which has positively impacted net interest margin. Noninterest-bearing demand deposits represent 17.7% of total deposits at year-end, up from 15.8% as of the prior-year level.

Assets Under Management and Related Noninterest Income: Assets under trust administration and investment management at December 31, 2015, rose to $1.233 billion, a slight increase of $6 million, or 0.5%, from the December 31, 2014, balance of $1.227 billion. The growth in balances was generally attributable to a net gain in market value of accounts, which has since declined in 2016, as well as the addition of new accounts. For the 2015 fourth quarter, income from fiduciary activities of $1.9 million was up 1.5% from the same period in 2014.

Insurance Agency Operations: Insurance income for the fourth quarter of 2015 declined $149 thousand, or 6.6%, to $2.12 million from $2.27 million in 2014. This decrease was primarily attributable to the October 2015 sale of our wholly-owned subsidiary specializing in offering insurance services to out-of-market amateur sports management associations.

Asset Quality: Asset quality remained strong, as measured by our low level of nonperforming assets and charge-offs. Nonperforming assets of $8.9 million at December 31, 2015, represented only 0.36% of period-end assets, a ratio that is below industry averages and below 0.37% from the prior year-end. Our net loan losses for the full year were 0.06% of average loans outstanding for 2015 and 0.05% for 2014. Net loan losses for the fourth quarter of 2015, expressed as an annualized percentage of average loans outstanding, were 0.05%. These asset quality ratios continue to be significantly lower than our peer group and industry averages.

Our allowance for loan losses was $16.0 million at December 31, 2015, which represented 1.02% of loans outstanding, a decrease of eight basis points from our ratio of 1.10% at year-end 2014.

Cash and Stock Dividends: A cash dividend of $0.25 per share was paid to our shareholders in the fourth quarter of 2015, 2% higher than the cash dividend paid in the 2014 quarter. This represents the 22nd consecutive year of an increased cash dividend. In September 2015, we distributed a 2% stock dividend. All prior-period and per share data have been adjusted accordingly.

Capital: Total shareholders’ equity grew to a record $214.0 million at period-end, an increase of $13.0 million, or 6.5%, above the year-end 2014 balance. Arrow's capital ratios remained strong in 2015. At December 31, 2015, the Company's CET1 ratio was 9.59% and total risk-based capital ratio was 15.54%. The capital ratios of the Company and both its subsidiary banks continue to significantly exceed the “well capitalized” regulatory standards, which places us in the highest current regulatory 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 for the nine-month period ended September 30, 2015, in which our return on average equity (ROE) was 11.70%, as compared to 8.61% for our peer group.

As of September 30, 2015, our ratio of loans 90 days past due and accruing, plus nonaccrual loans to total loans was 0.57%, as compared to 0.87% for our peer group, while our annualized net loan losses of 0.06% for the year-to-date period ending September 30, 2015, were below the peer result of 0.08%.

Industry Recognition: In the fourth quarter, Arrow was named to Bank Director Magazine’s annual “Bank Performance Scorecard” list of the top-performing banks in the country. This follows other recognitions in 2015, including being named one of “America’s 50 Most Trustworthy Companies” by Forbes; appearing on the American Banker Magazine top-performer list; and receiving the Raymond James Community Bankers Cup for our 2014 financial performance.

In addition, the Company's two banking subsidiaries were each recognized as a 5-Star Superior Bank by BauerFinancial, Inc., a nationwide bank rating and research firm, based on September 30, 2015, financial data. Glens Falls National Bank and Trust Company and Saratoga National Bank and Trust Company have each earned this designation for the past 35 and 27 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.


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