Arrow Financial Corporation — Q1 2021 Form 10-Q
Business context and period. Arrow is a New York-based bank holding company operating Glens Falls National Bank and Saratoga National Bank, with insurance, investment-advisory and other subsidiaries. This unaudited quarterly report covers the three months ended March 31, 2021; financial results are compared with Q1 2020 unless noted. The interim financial statements were reviewed, not audited.
Key financial results and condition
| Metric | Q1 2021 / March 31, 2021 | Comparable period / change |
|---|---|---|
| Net income; diluted EPS | $13.28 million; $0.85 | $8.13 million; $0.53; net income +63.4%, EPS +60.4% |
| Net interest income | $26.16 million | $23.01 million; +13.7% |
| Net interest margin | 2.99% | 3.05%; down 6 basis points |
| Noninterest income / expense | $8.61 million / $18.68 million | Income +11.9%; expense +5.2% |
| Credit-loss provision | $(648) thousand benefit | $2.77 million expense |
| Loans / deposits | $2.64 billion / $3.45 billion | Loans +9.3% and deposits +22.9% year over year |
| Cash and cash equivalents | $452.21 million | $138.53 million at March 31, 2020 |
| Total assets / stockholders’ equity | $3.90 billion / $342.41 million | Assets +18.6% and equity +10.7% year over year |
| Capital | CET1 13.56%; total risk-based 15.55%; leverage 9.37% | Arrow and both subsidiary banks reported well-capitalized status |
Net interest income benefited from balance-sheet growth, sharply lower funding costs and a more favorable funding mix. Interest expense fell 70.5%, while interest and dividend income declined 1.9%. Average earning assets grew 17.0%; average earning-asset yield fell 58 basis points. Q1 return on average assets was 1.45% and return on average equity was 15.81%.
Operating cash flow was $20.12 million; investing cash flow was $(153.76) million, including $130.48 million of available-for-sale security purchases and $51.87 million of net loan growth. Financing cash flow was $204.86 million, largely reflecting $218.86 million of deposit growth. Cash and cash equivalents increased $71.22 million during the quarter.
Period-end borrowings included $6.80 million of federal funds and repurchase agreements, $45.00 million of FHLB term advances, and $20.00 million of junior subordinated obligations. The company reported $406.61 million of interest-bearing bank deposits, no brokered deposits, and substantial unused contingent borrowing capacity, including approximately $838 million at the FHLB and $615 million through Federal Reserve facilities.
Material changes versus prior periods
- Net income and diluted EPS increased substantially, helped by lower funding costs, stronger noninterest income and a credit-loss provision benefit instead of the prior-year provision expense.
- Loan balances rose $44.2 million in Q1 and $225.1 million year over year. Commercial loans increased notably, including $162.8 million of outstanding PPP loans; total PPP originations to date were $212.8 million.
- Deposits rose $218.9 million in Q1 and $642.6 million year over year. Noninterest-bearing deposits were 21.8% of deposits versus 17.4% a year earlier.
- Net interest margin declined to 2.99% from 3.05%, reflecting lower rates and elevated cash balances. Noninterest income rose, chiefly due to loan-sale gains, while noninterest expense also increased.
- Nonperforming loans increased to $8.43 million from $5.52 million a year earlier; nonperforming assets were $8.67 million, or 0.22% of assets. Management attributed much of the increase from year-end to a commercial real estate loan moving to nonaccrual.
Outlook, risks, contingencies and unusual items
- Outlook: The filing provides no specific earnings or financial guidance. Management said the pandemic’s duration, scope and overall effect could not be reasonably estimated; it expected operations and results to remain exposed to adverse COVID-19 effects.
- COVID-19 and credit: Management cited uncertainty for borrowers and local economic conditions. COVID-related loan deferrals totaled $14.9 million, or 0.6% of loans, at March 31, 2021. The allowance for credit losses was $26.84 million, or 1.02% of loans. Net charge-offs were $444 thousand for the quarter.
- CECL adoption: Arrow adopted the expected-credit-loss standard on January 1, 2021. Adoption increased retained earnings by $120 thousand, including a $1.30 million decrease in the loan allowance and establishment of approximately $1.1 million of estimated losses on off-balance-sheet exposures. The new method and prior-period accounting differ, limiting direct comparison.
- PPP: Q1 PPP loan interest and fee income was $1.34 million, including $1.00 million of fees recognized. The company expects approximately $2.3 million of fees related to the additional 2021 PPP round, subject to recognition over loan lives or acceleration upon forgiveness.
- Interest-rate risk: Model scenarios estimated year-one net interest income declines of 0.73% for a 200-basis-point increase and 1.49% for a 100-basis-point decrease; the modeled year-two decline in the latter scenario was 14.24%. Management cautioned that assumptions and actual results may differ, and pandemic effects may alter behavior and markets.
- Legal matter: A putative class action alleges insufficient disclosure of overdraft-fee practices by Glens Falls National Bank. Arrow denies wrongdoing and is defending the case; the filing does not quantify a potential loss.
- Other: The board authorized a $5 million share-repurchase program for 2021; no program purchases had occurred by March 31. A $0.26-per-share second-quarter dividend was declared April 28. Management reported no material change to the risk factors in its 2020 Form 10-K.
Important facts for investors to verify
- How PPP forgiveness, fee recognition and loan runoff affect future interest income, loan growth and reported results.
- Whether rising nonperforming loans—particularly the commercial real estate exposure—and COVID-related borrower risks lead to higher credit costs or allowance needs.
- How CECL forecasts and assumptions evolve, including the off-balance-sheet credit-loss estimate and comparability with prior periods.
- Whether deposit growth and liquidity remain durable, and how the changing cash and securities mix affects net interest margin.
- The progress and potential financial effect of the overdraft-fee class action; management currently reports no expected material liability for routine claims, but does not quantify this case.