Arrow Financial Corporation (AROW) — Q3 2022 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2022. Arrow is a New York-based bank holding company operating Glens Falls National Bank and Saratoga National Bank, with related insurance and investment-advisory businesses. Dollar amounts below are in millions unless stated otherwise.
Financial performance
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Net interest income | $30.9 | $28.6 | $87.8 | $83.2 |
| Provision for credit losses | $1.7 | $0.1 | $3.4 | $(0.3) |
| Noninterest income | $7.8 | $7.7 | $23.7 | $24.8 |
| Noninterest expense | $21.4 | $19.4 | $60.7 | $57.2 |
| Net income | $12.2 | $13.0 | $36.7 | $39.5 |
| Diluted EPS | $0.74 | $0.78 | $2.22 | $2.39 |
Q3 net interest margin was 3.14%, up from 3.04% a year earlier; the nine-month margin was 3.02%, compared with 3.04%. Return on average assets and equity were 1.19% and 13.34% for Q3, versus 1.32% and 14.34%. The Q3 efficiency ratio was 55.01%, versus 52.74%.
Net cash provided by operating activities was $48.2 million for the first nine months, compared with $55.7 million. Investing used $343.5 million, principally reflecting $260.2 million of net loan growth; financing provided $211.0 million, including $244.6 million of deposit growth and $20.0 million of FHLB advance repayments. Cash and cash equivalents ended at $373.4 million, down from $457.7 million at year-end 2021.
Financial position and changes
- Total assets were $4.23 billion, up 5.1% from year-end 2021. Loans reached $2.92 billion, up 9.6% since year-end and 10.2% year over year. Growth was led by consumer and residential real estate loans; no PPP loans remained outstanding.
- Deposits were $3.80 billion, up 6.9% since year-end. Noninterest-bearing deposits were 24.0% of period-end deposits. Interest-bearing cash was $328.6 million, down from $430.7 million at year-end.
- Borrowings included $25 million of FHLB term advances and $20 million of subordinated obligations. No federal funds/repo borrowings or brokered deposits were outstanding at quarter-end.
- Stockholders’ equity was $345.6 million, down 6.9% since year-end. Accumulated other comprehensive loss was $49.1 million, largely reflecting $52.8 million of after-tax unrealized AFS securities losses amid rising rates. Management said the securities losses were primarily rate-related, not credit-related; it reported no securities credit-loss allowance.
- Regulatory capital ratios remained above required levels; the company’s estimated CET1 ratio was 13.14%, and the subsidiary banks and holding company qualified as well-capitalized.
Management commentary, outlook and risks
Management attributed lower year-over-year earnings to the wind-down of PPP income, higher credit-loss provisioning, increased operating costs and lower loan-sale gains. Higher market rates and loan growth supported interest income and Q3 margin, while deposit costs rose. The Q3 provision reflected loan growth and deterioration in forecasted economic conditions. The allowance was $29.2 million, or 1.00% of loans. Nonperforming loans were $9.4 million (0.32% of loans), while loans 30–89 days past due and accruing increased to $14.9 million from $12.2 million at year-end.
No earnings or financial guidance is provided in the filing. Management stated liquidity was sufficient: available borrowing capacity included approximately $775 million at FHLB and $651 million at the Federal Reserve; the reported basic liquidity ratio including FHLB capacity was 26.5% of assets. Interest-rate simulation estimated net interest income changes of negative 1.50% in year one and positive 11.91% in year two under a 200-basis-point increase, subject to model assumptions.
- Unusual items and events: Q3 included $550,000 of additional pension expense following lump-sum distributions exceeding a threshold, and a $536,000 indirect-loan fee amortization adjustment. A 3% stock dividend was distributed in September. The bank completed implementation of a new core banking system; management reported limited issues and effective controls but cautioned that further issues could arise.
- Contingencies: A court-approved overdraft-fee class-action settlement involved an approximately $1.5 million fund accrued in 2021, expected to be fully disbursed by April 2023. The Visa litigation appeal remained unresolved; no value was recognized for related Visa shares.
- Key risks: Interest-rate and deposit repricing, economic deterioration and credit losses, loan growth and consumer delinquencies, securities valuation and liquidity, competition, and potential core-system implementation complications. The filing also notes LIBOR-linked legacy contracts are expected to transition by June 30, 2023.
Important facts for investors to verify
- Whether loan growth, especially indirect auto lending, is accompanied by sustained credit quality; monitor past-due loans, charge-offs and provision expense.
- How quickly deposit costs reprice relative to loan and securities yields, and whether the reported margin improvement persists.
- The effect of unrealized securities losses on tangible book value and capital under changing rates or liquidity needs.
- Progress and any customer or control issues following the core banking system conversion.
- Final costs and timing of the overdraft settlement, and resolution of the Visa appeal.