Arrow Financial Corporation — 2018 Form 10-K Summary
Business context and reporting period
Arrow is a bank holding company operating Glens Falls National Bank and Saratoga National Bank, primarily in northeastern New York. Its business includes community banking, trust and wealth management, insurance, and indirect auto lending. This filing covers the fiscal year ended December 31, 2018; financial comparisons are principally with 2017.
Financial and operating metrics
| Metric | 2018 | 2017 |
|---|---|---|
| Net income | $36.3 million | $29.3 million |
| Diluted EPS | $2.50 | $2.04 |
| Net interest income (GAAP) | $84.0 million | $77.7 million |
| Net interest margin (GAAP) | 3.07% | 3.02% |
| Noninterest income | $28.9 million | $27.6 million |
| Noninterest expense | $65.1 million | $62.7 million |
| Provision for loan losses | $2.6 million | $2.7 million |
| Return on average assets / equity | 1.27% / 13.96% | 1.09% / 12.14% |
Total assets were $2.99 billion, loans $2.20 billion, deposits $2.35 billion, and stockholders’ equity $269.6 million at year-end. Net cash provided by operating activities was $42.0 million; investing activities used $227.8 million and financing activities provided $197.2 million. Year-end cash and cash equivalents were $84.2 million.
Year-end borrowings included $288.7 million of short-term borrowings, $45.0 million of FHLB term advances, and $20.0 million of junior subordinated obligations. Arrow reported a 9.6% Tier 1 leverage ratio and 12.9% CET1 ratio; Arrow and both banks qualified as well-capitalized. Management reported no liquidity constraints. Available facilities included approximately $242 million of unused FHLB borrowing capacity and $490 million under Federal Reserve discount-window facilities; these are contingent sources, not cash on hand.
Material changes versus 2017
- Net income rose 23.7% and diluted EPS increased 22.5%. Loan growth and higher market rates drove interest and fee income on loans up $11.4 million. Average loans increased 10.8%; year-end loans rose 12.6%.
- Interest expense increased 78.2% to $12.5 million, reflecting higher rates, deposit growth, and a funding mix shift. Tax-equivalent net interest margin declined from 3.17% to 3.14%, although GAAP margin improved.
- Noninterest income grew 4.7%, helped by fiduciary fees and customer service fees; insurance commissions and gains on loan sales declined. Noninterest expense rose 3.7%, including higher employee benefits, technology spending, and legal and professional fees.
- The effective tax rate fell to 19.9% from 26.4%, primarily following the Tax Act’s reduction in the federal corporate tax rate. The 2017 comparison included a $1.1 million deferred-tax remeasurement benefit.
- Loans past due or otherwise nonperforming remained low overall: nonperforming loans were $5.5 million, or 0.25% of loans, versus $6.0 million, or 0.31%, in 2017. The allowance rose to $20.2 million, but declined as a share of loans from 0.95% to 0.92%.
Outlook, risks, contingencies, and unusual items
No specific earnings or revenue guidance was provided. Management described local economic growth as modest and labor markets as tight. It expected loan yields could continue to rise if market rates remained elevated, while noting that results depend on Federal Reserve actions, the yield curve, funding costs, and borrower demand. Deposit competition and faster repricing of liabilities could pressure margins.
Principal risks include regional economic or real estate weakness, credit losses and the adequacy of the allowance, interest-rate and liquidity risk, competition, cybersecurity and third-party service disruptions, and regulatory changes. The filing estimates that a parallel +200-basis-point rate shock would change net interest income by -3.29% in year one and +2.81% in year two; a -100-basis-point shock would produce +0.70% and +0.40%, respectively. These modeled results depend on assumptions and are not forecasts.
Potentially material items include the expected adoption of the CECL credit-loss standard in 2020, which management said could increase the allowance and reduce equity, with the amount dependent on conditions at adoption. Lease accounting adoption in 2019 was expected to add approximately $8 million to assets and liabilities, with no material income-statement impact expected. A proposed community bank leverage ratio rule was not final at filing. Glens Falls National held Visa Class B shares linked to pending litigation; no value was recognized because settlement approval and adequacy of the litigation escrow were uncertain. The filing reports no material pending litigation or material off-balance-sheet arrangements, though it discloses $321.1 million of unfunded loan commitments and $4.5 million of standby letters of credit.
Arrow paid $1.00 per share in cash dividends in 2018 and declared a $0.26-per-share dividend for first-quarter 2019. In January 2019, the board authorized a new stock repurchase program of up to $5 million through year-end 2019. The auditors gave unqualified opinions on the financial statements and internal control over financial reporting; management also concluded controls were effective.
Important facts for investors to verify
- Whether loan growth—particularly indirect auto lending—continues without deterioration in delinquencies, charge-offs, or underwriting quality; also monitor the $33.8 million of identified potential problem commercial loans.
- Whether deposit costs continue to rise faster than asset yields, and how short-term borrowing reliance and the changing funding mix affect net interest margin and liquidity.
- The adequacy of the $20.2 million loan-loss allowance relative to portfolio growth, collateral values, and the anticipated CECL transition impact.
- Final community bank leverage ratio rules, CECL implementation estimates, and the actual balance-sheet effects of lease accounting adoption.
- Whether Visa litigation produces a settlement or recoverable value for the Class B shares, and whether dividends or repurchases remain supportable under regulatory and subsidiary-bank constraints.