Arrow Financial Corporation — Q2 2021 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2021. Arrow is a New York-based bank holding company operating Glens Falls National Bank and Saratoga National Bank. Amounts below are in U.S. dollars; financial statement amounts are in millions unless noted.
Financial performance and condition
| Metric | Q2 2021 | Comparable period | Change |
|---|---|---|---|
| Net income | $13.3 | $9.2 in Q2 2020 | Up 45.0% |
| Diluted EPS | $0.85 | $0.59 in Q2 2020 | Up 44.1% |
| Net interest income | $28.4 | $24.8 in Q2 2020 | Up 14.2% |
| Net interest margin | 3.08% | 3.05% in Q2 2020 | Up 3 basis points |
| Noninterest income | $8.5 | $7.2 in Q2 2020 | Up 18.3% |
| Noninterest expense | $19.1 | $17.2 in Q2 2020 | Up 10.7% |
- For the first six months, net income was $26.6 million, up 53.6%; diluted EPS was $1.70 versus $1.12. Net interest income rose 13.9% to $54.5 million, while reported net interest margin was 3.04%, versus 3.05%.
- Q2 return on average assets was 1.38% and return on average equity was 15.21%. The quarterly efficiency ratio was 51.53% (a non-GAAP measure).
- At June 30, total assets were $3.90 billion, loans $2.64 billion, deposits $3.44 billion, and stockholders’ equity $353.0 million. Compared with June 30, 2020, assets rose 9.8%, loans 3.2%, deposits 12.0%, and equity 11.1%.
- Six-month cash flows: operating activities provided $40.1 million; investing activities used $125.2 million; financing activities provided $182.3 million. Cash and cash equivalents increased $97.2 million to $478.2 million.
- Liquidity included $433.5 million of interest-bearing bank deposits, $437.9 million of available-for-sale securities, and substantial contingent borrowing capacity. Arrow reported a 32.7% basic liquidity ratio including FHLB collateralized capacity. FHLBNY unused capacity was approximately $780 million; Federal Reserve discount-window capacity was approximately $629 million; and correspondent-bank lines totaled $52 million.
- Borrowings included $45 million of FHLB term advances, $20 million of junior subordinated obligations, and $3.1 million of federal funds and repurchase agreements. The company reported no brokered deposits outstanding at June 30.
- Regulatory capital ratios remained above minimums; the holding-company CET1 ratio was 13.79%, and Arrow and both subsidiary banks qualified as well-capitalized.
Material changes and drivers
- Lower funding costs were a major earnings driver: Q2 interest expense fell 57.8% year over year to $1.3 million. Average earning assets grew 12.4%, while their yield declined 20 basis points.
- PPP loans contributed $3.1 million of Q2 income, including $2.7 million of recognized fees; six-month PPP income was $4.4 million. Outstanding PPP loans were $116.8 million at quarter-end.
- Q2 noninterest income benefited from fiduciary income and customer service fees, including higher debit-card interchange fees. Technology and equipment expense rose 15.0%; management cited increased use of consumer banking technology. A $501,000 expense for expected losses on off-balance-sheet credit exposures was included in Q2 noninterest expense.
- Loans grew $49.1 million from year-end, led by consumer loans and commercial/commercial real estate lending. Deposits increased $203.3 million from year-end, though they declined $15.6 million during Q2, partly reflecting seasonal municipal deposit movements.
- Asset quality remained comparatively strong, but nonperforming loans were $7.8 million, or 0.29% of loans, versus 0.25% a year earlier. Nonperforming assets were $8.0 million, or 0.20% of assets. The allowance for credit losses was $27.0 million, 1.02% of loans.
Outlook, risks and unusual items
- The filing provides no specific earnings or revenue guidance. Management said it could not reasonably estimate the pandemic’s overall business impact and continued monitoring COVID-19 recovery and potential setbacks, including variants.
- Arrow adopted CECL on January 1, 2021. The transition increased retained earnings by $120,000, including a $1.3 million reduction in the loan allowance and a $1.1 million increase in the liability for off-balance-sheet credit exposures. Management cautioned that CECL may increase quarter-to-quarter allowance volatility as forecasts, portfolio volumes, and credit quality change.
- Interest-rate sensitivity modeling estimated net interest income changes of +0.28% in year one and +1.93% in year two under a 200-basis-point increase; under a 100-basis-point decrease, modeled changes were -2.28% and -14.96%. These are hypothetical model results and depend on assumptions about rates, customer behavior, and balance-sheet repricing.
- Key risks include pandemic effects, economic and market changes, interest-rate volatility, credit quality, competition, and regulatory or policy changes. The filing also discusses LIBOR transition; management expected transition to be timely and not materially affect operations or financial statements.
- A customer putative class action alleges inadequate disclosure of overdraft-fee practices at Glens Falls National. Arrow denies wrongdoing and is defending the case; court-ordered mediation was to be completed by October 29, 2021. Management did not identify other material pending legal proceedings.
- The Board declared a $0.26 per-share third-quarter dividend payable September 15, 2021. A $5 million repurchase authorization was in effect through year-end; no shares had been repurchased under that program by June 30.
Important facts for investors to verify
- Whether loan performance and nonperforming balances remain stable, particularly the commercial real estate exposure newly classified as nonaccrual and pandemic-affected borrowers.
- How CECL forecasts, PPP forgiveness and fees, and the $1.1 million off-balance-sheet credit-loss liability affect future provisions and earnings.
- Whether deposit growth and elevated cash balances persist, and how funding costs and asset yields affect net interest margin.
- Whether the overdraft-fee litigation, municipal deposit seasonality, or interest-rate sensitivity produces material changes.
- Capital ratios, liquidity capacity, dividend payments, and any use of the stock repurchase authorization. The financial statements were subject to an independent accountant’s interim review, not an audit.