Arrow Financial Corporation (NASDAQ: AROW) — Q3 2021 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2021. Arrow is a New York-based bank holding company with two banking subsidiaries and related insurance, investment-advisory, and trust businesses. Dollar amounts below are in millions unless otherwise noted.
Financial performance
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Net interest income | $28.6 | $24.9 | $83.2 | $72.7 |
| Noninterest income | $7.7 | $8.7 | $24.8 | $23.6 |
| Noninterest expense | $19.4 | $17.5 | $57.2 | $52.5 |
| Net income | $13.0 | $11.0 | $39.5 | $28.3 |
| Diluted EPS | $0.81 | $0.69 | $2.46 | $1.78 |
| Net interest margin | 3.04% | 2.90% | 3.04% | 3.00% |
Q3 net income rose 17.6% year over year; nine-month net income rose 39.6%. Q3 return on average assets/equity was 1.32%/14.34%, versus 1.23%/13.55%. Nine-month figures were 1.38%/15.10%, versus 1.11%/11.99%. The efficiency ratio was 52.74% for Q3 (51.34% prior year) and 52.56% year to date (53.54% prior year).
Financial position, cash flow, and capital
- At September 30, 2021, total assets were $4,071.1; loans were $2,654.8, net loans $2,627.8, and deposits $3,605.6. Compared with September 2020, assets increased 7.8%, loans 2.4%, and deposits 10.4%.
- Cash and cash equivalents were $598.4, including $548.9 of interest-bearing bank deposits, versus $450.7 a year earlier. Nine-month operating cash flow was $55.7; investing cash outflow was $182.5 and financing cash inflow was $344.2.
- Borrowings included $45.0 of FHLB term advances, $20.0 of junior subordinated obligations, and $2.4 of federal funds/repo borrowings. Shareholders’ equity was $360.2, up 10.6% year over year. The company and both banks were reported well-capitalized; holding-company CET1 was 13.71%.
- Available liquidity included approximately $731 of unused FHLB borrowing capacity and $641 available through Federal Reserve facilities; there were no advances outstanding under the latter. Management reported a 32.3% basic liquidity ratio including FHLB borrowing capacity.
Material changes and notable items
- Lower funding costs supported margin and earnings: Q3 interest expense fell 51.2% year over year to $1.2, while net interest income increased 15.0%. The deposit cost was 0.09% in Q3 versus 0.25% a year earlier.
- PPP lending contributed $2.5 of Q3 income and $7.0 year to date, including accelerated fee recognition as loans were forgiven. Outstanding PPP loans were $60.1 at quarter-end.
- Q3 noninterest income decreased 11.5%, largely because loan-sale gains fell $1.2 as Arrow chose to retain more residential mortgage originations. Fiduciary income and customer-service fees increased. Q3 expenses rose 11.1%, partly reflecting an approximately $0.5 employee recognition bonus and higher technology costs.
- Loans grew $10.7 in Q3. Consumer loans, mainly indirect auto, increased; commercial loans declined, including as PPP balances ran off. Vehicle supply constraints may limit auto-loan growth.
- Net charge-offs were $0.153 in Q3. Nonperforming loans increased to $11.3, or 0.43% of loans, from 0.24% a year earlier, primarily because two commercial real estate loans became nonaccrual. The allowance for credit losses was $27.0, or 1.02% of loans, versus $28.4 and 1.10% a year earlier.
Outlook, risks, and contingencies
- The filing provides no specific earnings or financial guidance. Management said it could not reasonably estimate the overall effect of COVID-19, including emerging variants, and continued to monitor effects on customers, operations, and economic conditions.
- Management described liquidity and capital as strong. Its modeled interest-rate sensitivity estimated net interest income changes of +1.38% in year one and +6.35% in year two under a 200-basis-point increase; under a 100-basis-point decrease, estimates were -2.19% and -13.02%. These are hypothetical model results, not forecasts, and depend on assumptions about rates and customer behavior.
- Credit-loss estimates are sensitive to economic forecasts and other assumptions. Arrow adopted CECL on January 1, 2021; adoption increased retained earnings by $0.12 and reduced the loan allowance by $1.3, while adding $1.1 to the reserve for off-balance-sheet exposures.
- A customer putative class action alleges inadequate disclosure of certain overdraft-fee practices at Glens Falls National. Arrow denies wrongdoing; mediation had begun and settlement discussions were ongoing. Management did not identify other material pending proceedings.
- Arrow was preparing for U.S. dollar LIBOR cessation after June 30, 2023 and said it expected an orderly transition without material financial-statement or operational impact. A Visa antitrust settlement appeal remained unresolved; no value was recognized for the bank’s Visa Class B shares.
- The board declared a $0.26 per-share fourth-quarter cash dividend payable December 15, 2021. A 3% stock dividend was distributed September 24, 2021. A $5.0 repurchase authorization remained in effect through year-end 2021.
Important facts for investors to verify
- Whether nonperforming commercial real estate loans, delinquencies, and the allowance develop as expected, including the effect of CECL assumptions.
- How quickly PPP fee income runs off and whether underlying net interest income and margin remain resilient as rates and deposit balances change.
- Whether rapid deposit growth—particularly municipal deposits—and elevated cash balances persist, and how they affect funding costs and asset yields.
- The status and potential financial consequences of the overdraft-fee lawsuit, and the outcome of the Visa settlement appeal.
- The assumptions behind the reported interest-rate sensitivity and liquidity measures; both are management estimates and may differ from actual outcomes.