- Total loans grew by $147.7 million in the second quarter of 2020, including $140.0 million in Small Business Administration Paycheck Protection Program loans.
- Second quarter revenue increased $3.4 million, or 11.9%, over the prior year comparative quarter.
- Net income was $9.2 million and diluted earnings per share (EPS) were $0.61 for the second quarter.
- Provision for loan losses was $3.0 million in the second quarter, reflecting the continued uncertainty of the COVID-19 pandemic.
GLENS FALLS, N.Y. (July 21, 2020) – Arrow Financial Corporation (NasdaqGS® – AROW) announced operating results for the three-month period ended June 30, 2020. Net income for the second quarter of 2020 was $9.2 million, compared to $8.9 million in the second quarter of 2019. Net interest income increased to $24.8 million in the second quarter of 2020, compared to $21.7 million for the comparable quarter of 2019.
Arrow continues to manage its COVID-19 response with health and safety concerns as a top priority. In the second quarter, as COVID-19 cases regionally declined and New York State Governor Andrew Cuomo began to lift restrictions, our bank lobbies reopened with significant safety protocols in place. However, a significant portion of our workforce continues to work remotely, and the Company remains focused on providing essential banking services and meeting customer needs, while maintaining proper health and safety protocols for our employees and our customers.
Arrow remains fully engaged in its COVID-19 response, with a growing focus on hardship assistance and relief programs.
“While the full impact of COVID-19 remains to be seen, we remain committed in our mission to connect meaningfully with our customers and deliver essential financial services during this pandemic,” said Thomas J. Murphy, President and CEO. “Throughout our history, in periods of planned growth and unexpected adversity, our Company has remained true to its community banking roots. In these uncertain times, we return to those core values and enter this crisis with a strong financial position from which we will manage our response.”
The following expands on our COVID-19 response:
COVID-19 Safety Measures: In June, Arrow began to lift appointment-only restrictions for our bank lobbies and some of our insurance offices in response to the declining number of COVID-19 cases regionally and New York State's phased reopening. Lobbies were opened with robust safety measures in place, including clear shields for desks and teller lines, hand sanitizing stations, required face coverings, and social distancing markers. Traffic has returned to lobbies at a manageable pace, and we continue to promote usage of no-contact alternatives such as digital banking, drive-ins and ATMs. While some positions have returned to the office, a significant portion of the Arrow workforce remains remote as part of our risk-mitigation strategy. Additionally, employee travel remains paused, self-quarantine protocol is in place for personal travel to hot spots, in-person meetings remain minimized, social distancing is strongly enforced, and increased cleaning and sanitizing of our locations continues. We believe these measures have helped to keep our workforce healthy and has aided in community efforts to slow the spread of the COVID-19 virus in our footprint. We will continue to utilize these measures as appropriate based on public health guidance.
COVID-19 Customer Support: Another significant aspect of Arrow’s COVID-19 response has been support for customers experiencing financial hardship due to the mandated closure of non-essential businesses in New York State and the resulting rise in unemployment. Demand for the Small Business Administration’s Paycheck Protection Program was tremendous in the second quarter. Arrow assisted more than 1,400 small businesses in our communities, resulting in more than $140 million in funding in support of more than 18,000 jobs. After two waves of funding, interest in these loan programs slowed and we are now engaged in supporting borrowers with the loan forgiveness process. This all-hands-on-deck effort continues to be a significant and positive contribution to our business customers, whose businesses are essential to the health of our local economies.
In the second quarter, we also worked closely with individuals and businesses seeking temporary financial assistance. That assistance is ongoing, and we also continue to guide our customers through other stimulus programs and provided COVID-19 fraud awareness.
COVID-19 Operational Impact: While COVID-19 did not have a material adverse effect on our second quarter 2020 financial results, we are actively monitoring the impact of the pandemic on our business and results of operations. Currently, all of our banking locations and some of our insurance locations are open to the public, and through a mix of onsite and remote work amongst our team, we continue to meet customer needs and deliver high-quality service daily. The slowing economy and deteriorating economic outlook may lead to the continuation of elevated unemployment and decreased consumer and commercial spending. These factors may have adverse effects on the following: our customer deposits, the ability of our borrowers to satisfy their obligations, and the demand for loans and our other financial products and services, which may negatively impact the Company. Although Arrow has taken, and will continue to take, steps to mitigate against the impact of the pandemic on its operations, it cannot provide any assurance that these actions will be successful.
The following expands upon our second-quarter results:
Loan Growth: Total loans reached $2.6 billion as of June 30, 2020, which represents an increase of $281.6 million, or 12.3% from June 30, 2019. The consumer loan portfolio grew by $49.5 million, or 6.4%, as compared to June 30, 2019, primarily within the indirect automobile lending program. Total outstanding residential real estate loans increased $51.0 million, or 5.8%, as compared to June 30, 2019. Total outstanding commercial loans increased $181.1 million, or 28.8%, as compared to June 30, 2019. The increase in commercial loans includes $140.0 million in Small Business Administration Paycheck Protection Program loans.
Deposit Growth: At June 30, 2020, deposit balances reached $3.1 billion, up $565.0 million, or 22.6%, from the prior-year level. Noninterest-bearing deposits represented 21.8% of total deposits at June 30, 2020, compared to 18.7% of total deposits on June 30, 2019. At June 30, 2020, other time deposits were $216.6 million, a decrease of $72.7 million compared to the prior year. Municipal deposits increased $155.6 million, or 27.2% from June 30, 2019. Total combined Federal Home Loan Bank Overnight and Term Advances declined $66.6 million from June 30, 2019.
Net Interest Income: Net interest income for the second quarter increased to $24.8 million, up 14.4% from $21.7 million in the comparable quarter of 2019. The net interest margin was 3.05% for the quarter, compared to 3.04% for the second quarter of 2019. The increase in net interest margin from the prior year was primarily the result of the increase in the deposit balances as described above, combined with the decrease in market rates.
Noninterest Income: Noninterest income for the three months ended June 30, 2020 was $7.2 million, compared to $6.9 million in the comparable 2019 quarter. For the second quarter of 2020, the fair value of equity securities at June 30, 2020 decreased by $107 thousand. In addition, income of $547 thousand related to net gain on the sale of loans was recorded in the second quarter of 2020.
Noninterest Expense: Noninterest expense for the second quarter of 2020 increased 2.0% to $17.2 million, from $16.9 million for the second quarter of 2019. Salaries and benefits increased $0.5 million, which was primarily the result of increased cost of health insurance benefits.
Provision for Income Taxes: The provision for income taxes was $2.6 million for the second quarter of 2020, compared to $2.3 million for the same quarter of 2019. The effective income tax rates for the six- month periods ended June 30, 2020 and 2019 were 21.1% and 20.1%, respectively.
Asset Quality: Asset quality remained strong at June 30, 2020, with continued low levels of nonperforming loans and net charge-offs. Nonperforming loans at June 30, 2020, were $6.5 million, up
$964 thousand from the level at June 30, 2019. Net charge-offs, expressed as an annualized percentage of average loans outstanding, were 0.06% for the three-month period ended June 30, 2020, consistent with December 31, 2019, and an increase from 0.02% for the three-month period ended June 30, 2019. The allowance for loan losses was $26.3 million at June 30, 2020, which represented 1.03% of loans outstanding, as compared to 0.91% at June 30, 2019. Loan loss provision expense for the second quarter of 2020 was $3.0 million, up $2.6 million from the provision for loan losses for the comparable 2019 quarter. Although credit quality remains strong, the increase in loss provision for loan losses reflects the uncertainty resulting from the COVID-19 pandemic. In the second quarter, we continued to work closely with individuals and businesses seeking temporary financial assistance.
Liquidity: At June 30, 2020, Arrow’s liquidity position was strong, and provides flexibility to address unexpected near-term disruptions that may develop as a result of the COVID-19 pandemic, such as: reduced cash-flows from the investment and loan portfolios and aggressive funding of programs associated with response efforts, including the Small Business Administration Paycheck Protection Program. Interest-bearing cash balances at June 30, 2020 were $215.0 million compared to $28.0 million at June 30, 2019. At June 30, 2020, contingent collateralized lines of credit were established and available through the Federal Home Loan Bank of New York and Federal Reserve Bank, totaling $1.3 billion. Arrow also has additional liquidity options available to it including unsecured lines of credit, such as Fed Funds and brokered markets.
Capital: Total stockholders’ equity was $317.7 million at June 30, 2020, up $33.0 million, or 11.6%, from June 30, 2019. Arrow's capital reserves are well positioned to address the uncertainties related to the COVID-19 pandemic. Arrow's consistent earnings and measured dividend practices have created strong capital reserves. Overall regulatory capital ratios also remained strong in 2020, with Arrow's common equity tier 1 ratio estimated to be 13.07% and the total risk-based capital ratio estimated to be 15.10% at June 30, 2020. These capital levels at Arrow and both of the subsidiary banks continue to exceed the "well capitalized" regulatory standard.
Cash and Stock Dividends: On June 15, 2020, the Company distributed a cash dividend of $0.26 per share. The cash dividend was 3% higher than the cash dividend paid by the Company in the second quarter of 2019 when adjusted for the 3% stock dividend distributed on September 27, 2019.
Industry Recognition: Both of Arrow's banking subsidiaries, Glens Falls National Bank and Trust Company and Saratoga National Bank and Trust Company, continue to hold BauerFinancial, Inc. 5-Star Superior Bank rating.
About Arrow: Arrow Financial Corporation is a multi-bank holding company headquartered in Glens Falls, New York, serving the financial needs of northeastern New York. The Company is the parent of Glens Falls National Bank and Trust Company and Saratoga National Bank and Trust Company. Other subsidiaries include Upstate Agency, LLC and North Country Investment Advisers, Inc.
Non-GAAP Financial Measures Reconciliation: In addition to presenting information in conformity with accounting principles generally accepted in the United States of America (GAAP), this news release contains financial information determined by methods other than GAAP (non-GAAP). The following measures used in this release, which are commonly utilized by financial institutions, have not been specifically exempted by the Securities and Exchange Commission ("SEC") and may constitute "non- GAAP financial measures" within the meaning of the SEC's rules. Certain non-GAAP financial measures include: tangible equity, return on tangible equity, tax-equivalent adjustment and related net interest income, tax-equivalent, and the efficiency ratio. Management believes that the non-GAAP financial measures disclosed by the Company from time to time are useful in evaluating the Company's performance and that such information should be considered as supplemental in nature and not as a substitute for or superior to the related financial information prepared in accordance with GAAP. Non-GAAP financial measures may differ from similar measures presented by other companies. See the reconciliation of GAAP to non-GAAP measures in the section "Selected Quarterly Information."
Safe Harbor Statement: The information contained in this news release may contain statements that are not historical in nature but rather are based on management’s beliefs, assumptions, expectations, estimates and projections about the future, including, in particular, statements regarding the uncertainty surrounding the COVID-19 pandemic. These statements may be "forward-looking statements" within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, involving a degree of uncertainty and attendant risk. In the case of all forward-looking statements, actual outcomes and results may differ materially from what the statements predict or forecast, explicitly or by implication. The Company undertakes no obligation to revise or update these forward-looking statements to reflect the occurrence of unanticipated events. This News Release should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2019, and other filings with the Securities and Exchange Commission.
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