Arrow Financial Corporation — 2022 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2022; includes unaudited fourth-quarter results. The report was filed July 17, 2023, after delays in filing the 10-K and first-quarter 2023 10-Q.
Business context and financial performance
Arrow is a New York bank holding company operating Glens Falls National Bank and Saratoga National Bank, with community banking, lending, trust and wealth management, and insurance activities. It serves northeastern New York and conducts indirect auto lending in New York and Vermont.
| Metric | 2022 | Comparison / context |
|---|---|---|
| Net income | $48.8 million | Down 2.1% from $49.9 million in 2021 |
| Diluted EPS | $2.95 | Down from $3.01; per-share data restated for 3% stock dividend |
| Net interest income | $118.3 million | Up 7.2%; net interest margin 3.03%, versus 2.97% |
| Noninterest income | $30.9 million | Down 4.5% |
| Noninterest expense | $81.5 million | Up 4.5%; efficiency ratio 54.26%, versus 54.16% |
| Total assets | $3.97 billion | Down 1.5% |
| Loans | $2.98 billion | Up $315 million, or 11.8% |
| Deposits | $3.50 billion | Down $52 million, or 1.5%; declined $296.7 million during Q4 |
| Cash and cash equivalents | $64.7 million | Down from $457.7 million at prior year-end |
| Borrowings | $74.8 million | Includes $27.0 million overnight FHLBNY advances, $27.8 million term advances, and $20.0 million trust preferred obligations |
| Stockholders’ equity | $353.5 million | Down 4.8%; tangible book value per share was $19.95 |
Operating cash flow was $59.7 million. Investing activities used $393.1 million, principally reflecting loan growth and securities activity; financing activities used $59.7 million. Cash and cash equivalents fell $393.0 million during the year.
Year-end regulatory capital remained above requirements: Arrow’s CET1 ratio was 13.32%, total risk-based capital ratio 15.11%, and leverage ratio 9.80%. Arrow and both banks were classified as well-capitalized. Management reported a 19.6% basic liquidity ratio including FHLBNY collateralized borrowing capacity; the filing states no liquidity constraints occurred in 2022.
Material changes versus prior periods
- Annual net income declined despite higher net interest income. Higher interest income and loan growth were offset by a $4.5 million increase in credit-loss provision, lower PPP income, and a $2.3 million decline in loan-sale gains.
- Interest expense more than doubled to $11.3 million as market rates rose and deposit costs repriced. Q4 deposit cost reached 0.54%, compared with 0.08% in Q4 2021.
- Loan growth was broad-based: consumer loans rose 15.7%, residential real estate loans 13.2%, and commercial loans including CRE 5.7% year over year. PPP loans were fully repaid by year-end.
- Credit-loss provision increased to $4.8 million from $0.3 million; net charge-offs rose to $2.1 million from $0.9 million. Nonperforming loans were 0.40% of loans, versus 0.44% a year earlier.
- Cash declined substantially as loans expanded and deposits fell. Noninterest-bearing deposits increased to 23.9% of deposits from 22.8%, but Q4 runoff reflected consumer spending, competitive deposit pricing, and municipal-deposit seasonality.
- Other comprehensive loss was $50.0 million, largely due to interest-rate-driven securities losses and pension items. Available-for-sale securities had $65.7 million of gross unrealized losses; management attributed these primarily to rate changes, not credit deterioration, and stated it did not expect to sell the securities before recovery.
- Fourth-quarter net income was $12.1 million, up 17.2% from Q4 2021; diluted EPS was $0.73 versus $0.62. Q4 net interest margin was 3.08% versus 2.77%.
Outlook, risks, contingencies, and unusual items
- No formal financial guidance: The filing gives no specific earnings, growth, margin, or credit-loss guidance. Management said it believed Arrow was positioned for a variety of rate environments; its interest-rate simulations indicated near-term liability sensitivity and longer-term asset sensitivity, subject to model assumptions.
- Internal controls and reporting: Management concluded disclosure controls and internal control over financial reporting were ineffective at year-end due to material weaknesses involving Internal Audit monitoring and oversight, and risk assessment of the September 2022 core-system conversion. KPMG issued an adverse opinion on internal controls, while giving an unqualified opinion on the financial statements. Management reported no material misstatement and is implementing remediation; timely, effective remediation remains important.
- Core-system conversion: The new system was implemented in September 2022. The company reported continuing operational issues requiring significant resources and contributing to the control weaknesses.
- Filing delay and debt covenant exposure: Late 10-K and 10-Q filings also delayed certain regulatory reports. The company said the delay could constitute a default under trust-preferred indentures if notice is given by the trustee or qualifying holders; no notice had been given by the filing date, and a noticed default would have a 30-day cure period.
- Management transition: CEO Thomas Murphy left effective May 12, 2023; David DeMarco became CEO May 13. CFO Penko Ivanov took office in February 2023 after the prior CFO resigned in September 2022.
- Litigation: A 2020 overdraft-fee class action settled for a $1.475 million fund and was closed. A shareholder class action filed June 23, 2023 alleges misleading statements in public filings; Arrow denies wrongdoing, intends to defend the case, and had not been served by the 10-K filing date.
- Related-party project spending: Arrow paid $10.9 million in 2022 to the general contractor for its downtown headquarters renovation; a GFNB director was the contractor’s CEO. Arrow also paid approximately $175,000 to an architectural firm partly owned by a director for campus services. The company said the latter terms were no less favorable than arm’s-length terms.
- Other risks: Management highlighted inflation, rising rates, deposit competition and runoff, local economic conditions, borrower repayment capacity, securities valuation, cybersecurity, technology execution, regulatory changes, and competition. A Visa antitrust settlement appeal remained unresolved; potential value of the bank’s Visa Class B shares was not recognized.
Important facts for investors to verify
- Track remediation of the material weaknesses, auditor assessments, and any effects of the core-system conversion on operations or financial reporting.
- Reconcile deposit flows, funding costs, available liquidity, and contingent borrowing capacity in subsequent reports, particularly after the sharp Q4 deposit decline.
- Monitor loan performance—especially consumer auto delinquencies, potential problem commercial loans, charge-offs, and whether the $30.0 million allowance remains adequate as economic conditions change.
- Assess the effect of further rate changes on net interest margin, deposit pricing, and the market value or liquidity of securities with unrealized losses.
- Follow the shareholder lawsuit, any trust-preferred indenture notices, and the status of late regulatory filings.
- Check subsequent disclosures for the accuracy of the quarterly-data table: its 2022 third-quarter “Net Gain (Loss) on Securities” entry appears as “95,000,” while other filing disclosures indicate $95 thousand.