Arrow Financial Corporation — Q1 2024 Form 10-Q
Reporting period: Three months ended March 31, 2024; comparisons are primarily with Q1 2023. Arrow is a bank holding company serving individuals and businesses in northeastern New York through two banks and related wealth-management and insurance businesses. Amounts below are in U.S. dollars; “million” and “billion” are used for readability.
Financial results and condition
- Earnings: Net income was $7.7 million, down 10.5% from $8.6 million; diluted EPS was $0.45 versus $0.50. Annualized return on average assets declined to 0.73% from 0.87%, and return on average equity to 8.12% from 9.66%.
- Net interest and margins: Net interest income was $26.5 million, down 5.8%. Interest income rose 29.3% to $46.7 million, but interest expense increased 152.3% to $20.2 million, largely reflecting higher deposit rates and a shift toward higher-cost deposits. Net interest margin was 2.60%, down from 2.96% a year earlier (2.62% tax-equivalent).
- Other income and costs: Non-interest income increased 17.7% to $7.9 million, including higher fiduciary income, insurance commissions, and other operating income. Non-interest expense rose 7.7% to $24.0 million, including higher salaries, technology and FDIC assessments. The reported efficiency ratio was 69.54%, compared with 63.43%.
- Loans and credit: Period-end loans were $3.26 billion, up 8.4% year over year and 1.4% from year-end. The allowance for credit losses was $31.6 million, or 0.97% of loans. Net charge-offs were $321,000; nonperforming loans were $21.4 million (0.66% of loans), and nonperforming assets were $21.8 million (0.50% of assets). A roughly $15 million commercial real estate relationship that became nonperforming in Q4 2023 was the main reason nonperforming loans exceeded the prior-year level.
- Cash flow and liquidity: Operating activities provided $10.3 million, compared with $13.2 million in Q1 2023; investing activities used $37.7 million and financing activities provided $167.3 million. Cash and cash equivalents increased $139.9 million to $282.5 million. Management reported a primary liquidity ratio of approximately 10.4% of assets, above its 5% internal limit, and approximately $450 million of primary liquidity. It also cited about $1.3 billion of available contingent borrowing capacity.
- Deposits, debt and capital: Deposits were $3.78 billion, up $232.7 million year over year. Borrowings were $106.5 million, including a new $100 million Bank Term Funding Program advance taken in Q1, due January 2025 at a 4.76% weighted-average rate. Arrow’s CET1, total risk-based capital and leverage ratios were 12.84%, 14.57% and 9.63%, respectively; both subsidiary banks were reported as well-capitalized.
- Shareholder returns and equity: Stockholders’ equity was $378.0 million. Arrow paid a $0.27-per-share dividend and repurchased about $6.0 million of stock during Q1. Tangible book value per share, a non-GAAP measure, was $21.25.
Material changes and notable items
- Higher loan yields and loan growth lifted interest income, but deposit-cost increases more than offset this benefit year over year. Compared with Q4 2023, net interest income and margin improved modestly.
- Total assets increased 5.3% year over year, driven mainly by loan growth and higher cash balances. Investment securities declined 16.8% year over year, partly reflecting a Q4 2023 portfolio repositioning.
- Available-for-sale securities had $44.5 million of gross unrealized losses at quarter-end; held-to-maturity securities had $3.2 million. Management attributed the losses primarily to interest rates, reported no securities credit-loss allowance, and stated it did not intend, and was not more likely than not required, to sell before recovery of amortized cost.
- The credit-loss allowance included a $0.7 million specific reserve related to overdraft balances from an instance of check fraud involving one customer relationship. Management also recorded a $466,000 credit for estimated losses on off-balance-sheet exposures.
- On March 4, 2024, GFNB agreed to acquire Berkshire Bank’s Whitehall, New York branch, including approximately $39 million of deposits and $3 million of loans. Completion was targeted by the end of Q3 2024, subject to regulatory approvals.
Outlook, risks and contingencies
- The filing provides no numerical earnings or revenue guidance. Management describes continued sensitivity to deposit pricing, interest rates, deposit mix and loan demand. It notes that inflation and elevated rates could constrain consumer-auto and residential mortgage demand, while regional economic conditions may affect commercial lending.
- Interest-rate simulations estimate net interest income changes of -3.4% in year one and +16.4% in year two under a 200-basis-point increase; under a 100-basis-point decrease, the estimates are +1.0% and +14.5%. These are model-based scenarios, not forecasts, and depend on assumptions about customer behavior, repricing and prepayments.
- Management reported two unremediated material weaknesses in internal control over financial reporting: monitoring of internal audit/control testing and related Audit Committee oversight, and risk assessment of the core banking system conversion. Remediation actions were underway, but had not operated long enough to be considered effective at March 31, 2024. Management said substantive procedures supported preparation of the interim statements in accordance with GAAP and that the weaknesses had not resulted in a material misstatement.
- The Ashe shareholder class action alleges misleading statements in prior company filings. After quarter-end, on April 22, 2024, the parties reached an agreement in principle to settle, subject to final documentation and court approval; management expects no material adverse financial impact. A related shareholder derivative case was stayed pending disposition of the motion to dismiss in the Ashe case; Arrow intends to defend it.
- Other stated risks include credit losses, liquidity and deposit runoff, interest-rate exposure, securities valuation, cybersecurity, competition, regulatory requirements, and execution of technology and management transitions.
Key facts for investors to verify
- Whether deposit costs moderate enough to support net interest margin and earnings, and how funding mix evolves.
- Performance and collateral coverage of the approximately $15 million nonperforming commercial real estate relationship, along with trends in delinquencies and credit-loss reserves.
- Availability and cost of liquidity, including use and repayment of the $100 million BTFP advance and the stability of brokered and uninsured deposits.
- Progress in remediating the disclosed internal-control material weaknesses and any related future filing disclosures.
- Final terms and court approval of the Ashe settlement, status of the derivative action, and regulatory approval and completion of the Whitehall branch acquisition.
- Interest-rate and securities exposure, including the assumptions behind management’s simulation scenarios and recovery of unrealized securities losses.