Arrow Financial Corporation — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022; comparative results are for Q1 2021. Arrow is a two-bank holding company headquartered in Glens Falls, New York. Interim financial statements are unaudited and were reviewed by KPMG.
Financial performance and condition
| Metric | Q1 2022 / March 31, 2022 | Comparable period / change |
|---|---|---|
| Interest and dividend income | $28.9 million | Up 4.5% year over year |
| Net interest income | $27.8 million | Up 6.4%; net interest margin was 2.90%, down from 2.99% |
| Noninterest income | $8.2 million | Down 5.2%, mainly reflecting lower loan-sale gains |
| Noninterest expense | $18.9 million | Up 1.4% |
| Net income / diluted EPS | $12.6 million / $0.78 | Net income down 5.3%; EPS down 6.0% |
| Operating cash flow | $16.8 million | Compared with $20.1 million in Q1 2021 |
| Total assets | $4.16 billion | Up 6.5% year over year |
| Loans / deposits | $2.74 billion / $3.72 billion | Loans up 3.7% and deposits up 7.6% year over year |
| Cash and cash equivalents | $487.6 million | Compared with $452.2 million a year earlier |
| Stockholders’ equity | $357.2 million | Down $13.9 million from year-end 2021; up $14.8 million year over year |
The $21.1 million quarterly other comprehensive loss, principally $22.3 million of after-tax unrealized losses on available-for-sale securities, drove the decline in equity from year-end. Management attributed the securities losses primarily to rising interest rates, not deterioration in credit quality; Arrow recorded no securities credit-loss allowance.
Quarter-end regulatory capital ratios were 13.48% CET1, 14.23% Tier 1 risk-based, 15.33% total risk-based, and 9.37% Tier 1 leverage at the holding company. Arrow and both subsidiary banks exceeded applicable minimums and qualified as well-capitalized. Tangible book value per share, a non-GAAP measure, was $20.83.
Material changes and management commentary
- Net interest income improved with loan growth and lower funding costs, while the net interest margin compressed as cash and investments increased and PPP-related interest and fees declined. Interest expense fell 27.1% year over year.
- Noninterest income fell largely because loan-sale gains declined $1.4 million. Arrow said it strategically retained more newly originated residential mortgages; Q1 2022 mortgage sales were $2.6 million versus $28.8 million in Q1 2021. Fiduciary income and customer service fees increased.
- Loans grew $69.3 million in Q1. Consumer loans, primarily indirect auto lending, rose $56.1 million; residential real estate loans rose $20.8 million. Commercial and commercial real estate loans declined $7.5 million, including a $24.9 million reduction in PPP loans.
- Deposits rose $164.9 million in Q1, including a $107.0 million increase in municipal deposits. Time deposits were $177.0 million, down $69.0 million year over year. Arrow prepaid $20 million of FHLB advances; $25 million remained outstanding at quarter-end.
- Credit provision was $769,000, versus a $648,000 provision credit in Q1 2021. Net charge-offs were $389,000; the allowance was $27.7 million, or 1.01% of loans. Nonperforming loans were $9.9 million (0.36% of loans), and nonperforming assets were $10.1 million (0.24% of assets).
- Liquidity: management reported no significant constraints. Arrow reported $448.6 million in interest-bearing bank balances, more than $1.3 billion in operating collateralized lines, and a 30.4% basic liquidity ratio including FHLB borrowing capacity. It also stated that the ratio was $1.1 billion above its 4% internal minimum target.
Outlook, risks and unusual items
- No specific earnings or growth guidance was provided. Management said the Federal Funds rate had begun rising and was expected to continue increasing during 2022, and described Arrow as positioned for a range of rate environments. Its model estimated net interest income changes of -0.89% in year one and +5.79% in year two under a 200-basis-point increase; a 100-basis-point decrease produced estimated changes of -0.98% and -3.05%, respectively. These are hypothetical model results, not forecasts.
- Key risks cited include interest-rate volatility, economic and market changes, COVID-19 and emerging variants, competition, regulatory changes, and borrower and collateral performance. Management noted vehicle supply constraints and inflation could limit auto-loan growth, and competition and staff retention could pressure insurance commissions.
- Arrow had $438.1 million of commitments to extend credit and $3.4 million of standby letters of credit. Management did not expect material losses from these commitments.
- A court preliminarily approved an overdraft-fee class-action settlement on April 13, 2022, after quarter-end. Arrow established an approximately $1.5 million settlement fund and denied wrongdoing.
- Visa Class B shares remain subject to unresolved appeals in a separate settlement process; Arrow has recognized no economic value for potential Visa Class A shares. Management reported routine legal matters otherwise were not expected to result in material liability.
- Arrow had repurchased $1.9 million of stock under its $5 million 2022 program by March 31. The board declared a second-quarter dividend of $0.27 per share, payable June 15, 2022.
- Arrow had stopped issuing new LIBOR-based instruments and began using Term SOFR as its primary index and BSBY as a secondary index in 2022. It expected legacy LIBOR instruments to transition before cessation by June 30, 2023.
Important facts for investors to verify
- Whether margin performance and deposit pricing respond as expected to rising rates, and how actual results compare with the filing’s interest-rate simulations.
- The extent and duration of unrealized securities losses, related liquidity implications, and any subsequent changes in interest rates or securities values.
- Loan-quality trends, especially auto delinquencies, commercial real estate exposures, nonperforming loans, and the adequacy of the credit-loss allowance under evolving economic forecasts.
- The stability and concentration of municipal and reciprocal deposits, and the continued availability of reported contingent borrowing capacity.
- The final cost and terms of the overdraft-fee settlement and the outcome of the Visa litigation appeals.