Arrow Financial Corporation — FY2020 Form 10-K
Business and reporting period. Arrow is a New York bank holding company operating Glens Falls National Bank and Saratoga National Bank, primarily serving northeastern New York. This annual filing covers the fiscal year ended December 31, 2020; fourth-quarter results are also noted below. Amounts are in U.S. dollars.
Key financial results
- Earnings: Net income was $40.8 million, up 8.9% from $37.5 million in 2019. Diluted EPS was $2.64 versus $2.43. Return on average assets was 1.17% (1.24% in 2019); return on average equity was 12.77% (13.17%).
- Income and margins: Net interest income rose 12.7% to $99.2 million, while net interest margin declined to 2.99% from 3.05%. Noninterest income increased 14.4% to $32.7 million, including $3.9 million of gains on loan sales. Noninterest expense rose 4.8% to $70.7 million; the efficiency ratio improved to 55.69% from 57.09%.
- Credit costs and quality: Provision for loan losses increased to $9.3 million from $2.1 million. The allowance was $29.2 million, or 1.13% of loans, compared with $21.2 million, or 0.89%, a year earlier. Nonperforming loans were 0.25% of loans versus 0.18%; net charge-offs remained 0.05% of average loans.
- Balance sheet and funding: Total assets were $3.69 billion, up from $3.18 billion. Loans increased 8.8% to $2.60 billion; deposits rose 23.6% to $3.23 billion. Noninterest-bearing deposits were 21.7% of deposits at year-end. Total stockholders’ equity was $334.4 million, and tangible book value per share was $20.02.
- Liquidity: Cash and cash equivalents were $381.0 million, including $338.9 million of interest-bearing bank deposits, versus $70.2 million in cash and equivalents at year-end 2019. Management reported $1.5 billion of contingent collateralized credit lines and a 32.1% basic liquidity ratio including FHLB borrowing capacity.
- Debt: Year-end balances included $45 million of FHLB term advances, $17.5 million of repurchase-agreement borrowings, $20 million of junior subordinated obligations, and $5.2 million of finance leases. The company reduced short-term borrowings substantially during the year.
- Cash flow: Operating activities provided $42.3 million; investing activities used $187.3 million; financing activities provided $455.8 million. Cash and cash equivalents increased by $310.8 million.
- Fourth quarter: Net income was $12.5 million and diluted EPS was $0.81, compared with $9.7 million and $0.63 in Q4 2019. Quarterly net interest margin was 2.96%, versus 3.06% a year earlier.
Material changes versus 2019
- Net interest income benefited from loan and deposit growth and a 41.5% reduction in interest expense, while lower rates and higher cash balances compressed net interest margin.
- Loan growth included PPP lending; Arrow originated approximately $142.7 million in 2020, with $114.6 million outstanding at year-end. Commercial and commercial real estate loans increased 22.9%.
- Mortgage loan-sale gains rose to $3.9 million from $0.6 million, reflecting strong demand, market conditions, and balance-sheet management.
- The loan-loss provision rose sharply amid pandemic uncertainty, although management described overall asset quality as strong. Nonperforming assets remained 0.18% of total assets.
- Cash dividends were $1.02 per share for the year, compared with $0.99 in 2019. A 3% stock dividend was distributed in September 2020.
Outlook, risks and unusual items
- Management said COVID-19 had not materially adversely affected 2020 results, but could not estimate the pandemic’s future overall impact. At year-end, $15.3 million of loans, or 0.6% of the portfolio, remained under pandemic-related deferrals. Management warned that economic conditions could affect borrowers, loan growth, credit costs, and operations.
- Arrow adopted the CECL expected-credit-loss standard on January 1, 2021. Before adoption, management did not expect a material adjustment to stockholders’ equity, but future credit-loss estimates remain sensitive to economic assumptions.
- Arrow remained well-capitalized: its year-end CET1 ratio was 13.4%, total risk-based capital ratio 15.5%, and leverage ratio 9.1%. The board authorized a new 2021 share repurchase program of up to $5 million.
- Key risks include regional economic and real-estate weakness, interest-rate and margin sensitivity, loan-loss estimation, competition and technology, cybersecurity, regulatory requirements, and the transition from LIBOR. Management’s rate simulations showed net interest income changes of -0.41% and +0.46% in year one under +200 and -100 basis-point scenarios, respectively; estimates rely on assumptions and are not forecasts.
- A customer filed a putative class action in July 2020 alleging inadequate disclosure of overdraft-fee practices. Arrow denied wrongdoing and said it was defending the case. The filing also describes a contingent Visa-related matter; no economic value was recognized for the shares pending resolution of an appeal.
- The financial-statement audit received an unqualified opinion, and the auditor also concluded internal control over financial reporting was effective. The allowance for loan losses was identified as a critical audit matter.
Investor facts to verify
- Track post-adoption CECL allowance levels, provision expense, and any disclosed transition adjustment.
- Monitor PPP forgiveness, remaining balances, fee recognition, and the quality of non-PPP commercial exposures.
- Assess deposit growth and composition, cash deployment, borrowing levels, and continued availability of contingent liquidity.
- Review changes in nonperforming loans, criticized or potential problem loans, deferrals, and allowance coverage.
- Follow net interest margin and interest-rate sensitivity as rates and balance-sheet mix change.
- Check the progress and potential financial exposure of the overdraft-fee litigation and Visa-related contingency.