GLENS FALLS, N.Y. (October 24, 2023) – Arrow Financial Corporation (NasdaqGS® – AROW) announced financial results for the three-month period ended September 30, 2023. Net income for the third quarter of 2023 was $7.7 million and fully diluted earnings per share was $0.46. Nonperforming assets decreased $0.2 million in the third quarter to 0.16% of assets, with the allowance for credit losses reaching 491% of nonperforming loans.
Arrow President and CEO David S. DeMarco:
"This quarter, we continued to experience substantial loan growth with asset and deposit balances at or near record highs. We also continued our pattern of issuing cash and stock dividends, underscoring our dedication to creating value for our shareholders. As we move ahead, Arrow expects to restart our Dividend Reinvestment Plan.
We were proud to officially open our renovated downtown Glens Falls campus and Main Office branch this summer. Glens Falls has been our home for much of our 172-year history, and we are excited about the positive impact this will have on all our stakeholders. As always, we are focused on enhancing the customer experience and optimizing our operations while supporting our exceptional team."
This Earnings Release and related commentary should be read in conjunction with our October 24, 2023 Form 8-K and related Third Quarter 2023 Investor Presentation, which can also be found on our website: arrowfinancial.com/investor-presentations.
Third-Quarter Highlights and Key Metrics
- Record high loans of $3.1 billion, growing at an annualized rate of 9%, or $68.7 million
- Nonperforming assets decreased to $6.9 million, representing 0.16% of period-end assets
- Net charge-offs to average loans were 0.05% as compared to 0.07% for the previous quarter
- Allowance for credit losses to nonperforming loans coverage of 491%
- Deposit balances increased to $3.7 billion, growing $164.3 million, or 4.7%
- Loan-to-deposit ratio was 86%
- Net interest margin was 2.53%
- Arrow entered into two pay-fixed portfolio layer method fair value swaps, with total notional amounts of $250 million and $50 million, respectively. The transactions are accretive to net interest income, adding more than $2 million annually in the current “higher for longer” rate environment
- Strong on-balance sheet liquidity of $334 million, or 8% of total assets
- Liquidity and available borrowing capacity provide two times coverage of uninsured deposits
- Non-interest expenses included $1.1 million in incremental expenses related to the delay in filing the 2022 Form 10-K and the first quarter Form 10-Q
- Return on average assets (ROA) was 0.75%; incremental expenses related to the delayed filings depressed ROA by 9 basis points
- Return on average equity (ROE) was 8.47%; incremental expenses related to the delayed filings impacted ROE by almost 100 basis points
Income Statement
- Net Income: Net income for the third quarter of 2023 was $7.7 million, increasing from $6.0 million in the second quarter of 2023, and decreasing from $12.2 million in the third quarter of 2022. The increase from the second quarter of 2023 was primarily due to an increase in interest and dividend income of $2.1 million, an increase of $1.1 million in non-interest income and a decrease in non-interest expense of $0.6 million, partially offset by an increase of $2.5 million in interest expense. The decline from the same period in the prior year was primarily due to an increase of $13.5 million in interest expense partially offset by an increase in interest and dividend income of $7.9 million.
- Net Interest Income: Net interest income for the third quarter of 2023 was $25.4 million, decreasing 1.6% from $25.8 million in the second quarter of 2023 and 18.0% from $30.9 million in the comparable quarter of 2022. Total interest and dividend income was $42.1 million for the third quarter of 2023, an increase from $40.0 million in the second quarter of 2023 and from $34.2 million for the third quarter of 2022. These increases were primarily driven by loan growth and higher loan rates. Interest expense for the third quarter of 2023 was $16.8 million, an increase from $14.2 million for the second quarter of 2023 and from $3.3 million for the comparable quarter ended 2022. The increases for both comparison periods were driven primarily by higher deposit rates and changes in deposit composition.
- Net Interest Margin: Net interest margin was 2.53% for the third quarter of 2023, compared to 2.61% for the second quarter of 2023 and 3.14% for the third quarter of 2022. The decrease in net interest margin compared to the second quarter in 2023 as well as the third quarter of 2022 was primarily the result of the cost of interest-bearing liabilities increasing at a faster pace than the yield on average earning assets. In addition, deposits have continued to migrate to higher costs products, such as money market savings and time deposits.
| |
Three Months Ended |
| |
(Dollars in Thousands) |
| |
September 30, 2023 |
June 30, 2023 |
September 30, 2022 |
| Interest and Dividend Income |
$ 42,117 |
$ 40,013 |
$ 34,207 |
| Interest Expense |
16,764 |
14,241 |
3,306 |
| Net Interest Income |
25,353 |
25,772 |
30,901 |
| Average Earning Assets(1) |
3,973,747 |
3,953,642 |
3,902,119 |
| Average Interest Bearing Liabilities |
2,920,518 |
2,924,743 |
2,781,985 |
| |
|
|
|
| Yield on Earning Assets(1) |
4.20% |
4.06% |
3.48% |
| Cost of Interest Bearing Liabilities |
2.28 |
1.95 |
0.47 |
| Net Interest Spread |
1.92 |
2.11 |
3.01 |
| Net Interest Margin |
2.53 |
2.61 |
3.14 |
| |
|
|
|
| Income Earned on PPP Loans included in Net Interest Income |
$ — |
$ — |
$ 70 |
| Net Interest Income excluding PPP loans |
$ 25,353 |
$ 25,772 |
$ 30,831 |
| Net Interest Margin excluding PPP loans |
2.53% |
2.61% |
3.14% |
| |
|
|
|
| (1) Includes Nonaccrual Loans. |
|
|
|
- Provision for Credit Losses: For the third quarter of 2023, the provision for credit losses was $354 thousand compared to $948 thousand in the second quarter of 2023 and $1.7 million in the prior-year quarter. The key drivers for the provision for credit losses in the third quarter of 2023 were loan growth and charge-offs, partially offset by changes to the economic forecast factors embedded in the credit loss allowance model. The provision was favorably impacted by the qualitative factors related to the residential loan portfolio, which continue to indicate local market conditions performing well above the Case-Shiller U.S. National Home Price Index, which is utilized in the economic forecast.
- Non-interest Income: Non-interest income for the three months ended September 30, 2023, was $8.1 million, compared to $6.9 million in the second quarter of 2023 and $7.8 million in the third quarter of 2022. Income from fiduciary activities, which includes Wealth Management services, was fairly consistent to the comparable prior-year quarter. Fees and other services to customers were consistent with the linked quarter, however declined compared to the third quarter of 2022, primarily due to lower interchange fees. Other income increased from both the second quarter and the previous year, primarily as a result of bank-owned life insurance proceeds.
- Non-interest Expense: Non-interest expense for the third quarter of 2023 was $23.5 million, a decrease from $24.1 million in the second quarter of 2023 and an increase from $21.4 million for the third quarter of 2022. The increase from the prior year was in large part related to $1.1 million of additional legal and professional fees incurred in the third quarter of 2023 associated with the delay in the filing of the 2022 Form 10-K and the First Quarter Form 10-Q, as well as an increase in costs related to technology and FDIC insurance. Total year-to-date expenses related to the delayed filings were $4.1 million.
- Provision for Income Taxes: The provision for income taxes was $1.8 million for the third quarter of 2023, $1.6 million for the second quarter of 2023 and $3.4 million for the third quarter of 2022. The year-to-date effective tax rate as of September 30, 2023 was 20.6%.
Balance Sheet
- Total Assets: Total assets were $4.3 billion at September 30, 2023, an increase of $169.3 million, or 4.1%. as compared to June 30, 2023 and an increase of $303.4 million, or 7.6%, as compared to December 31, 2022. For the third quarter 2023, overall balance sheet growth is in line with growth in the loan portfolio and higher cash balances.
- Investments: Total investments were $666.9 million as of September 30, 2023, a decrease of $27.1 million, or 3.9%, compared to June 30, 2023 and a decrease of $90.2 million, or 11.9%, compared to December 31, 2022. The decrease for both periods was driven primarily by paydowns and maturities (net of purchases) of $19.0 million and $83.9 million, respectively. The proceeds were primarily used to fund loan growth and for general corporate purposes. There were no credit quality issues related to the investment portfolio. The rising rate environment led to unrealized losses of $7.8 million within the available-for-sale portfolio in the third quarter of 2023.
- Loans: Total loans reached a record high of $3.1 billion as of September 30, 2023. Loan growth for the third quarter of 2023 was $68.7 million, and was $155.4 million year-to-date. Loan growth was spread across all segments. Please see the loan detail included in the consolidated financial information table on page 11.
- Balance Sheet Management: In September 2023, Arrow entered into two pay-fixed portfolio layer method fair value swaps, with total notional amounts of $250 million and $50 million, respectively. The transactions are accretive to interest income, adding more than $2 million annually. Going forward, rising interest rates will increase the net interest income benefit, while falling rates will reduce the net interest income benefit.
- Allowance for Credit Losses: The allowance for credit losses was $31.1 million as of September 30, 2023, which represented 0.99% of loans outstanding, as compared to $31.2 million, or 1.02%, at June 30, 2023 and $30.0 million, or 1.00%, at December 31, 2022. Asset quality improved at September 30, 2023. Net charge-offs, expressed as an annualized percentage of average loans outstanding, were 0.05% for the three-month period ended September 30, 2023, as compared to 0.07% for the three-month period ended June 30, 2023 and 0.09% for the threemonth period ended December 31, 2022. Nonperforming assets decreased to $6.9 million as of September 30, 2023, representing 0.16% of period-end assets, compared to $7.1 million, or 0.17%, at June 30, 2023 and $12.6 million, or 0.32%, at December 31, 2022.
- Deposits: At September 30, 2023, deposit balances were $3.7 billion, an increase of $164.3 million from June 30, 2023 and $168.1 million from December 31, 2022. Overall in 2023, the deposit mix has continued to shift from non-interest bearing accounts to higher cost money market and time deposit accounts. Seasonal municipal deposits helped drive an increase in demand deposits of $38.9 million in the third quarter. Please refer to page 6 for further details related to deposits.
- Capital: Total stockholders’ equity was $360.0 million at September 30, 2023, a decrease of $1.4 million, or 0.4%, from the June 30, 2023 level of $361.4 million, and an increase of $6.5 million, or 1.8%, from December 31, 2022. Arrow's regulatory capital ratios remained strong. As of September 30, 2023, Arrow's Common Equity Tier 1 Capital Ratio was 13.17% and Total Risk- Based Capital Ratio was 14.94%. The capital ratios of Arrow and both its subsidiary banks, Glens Falls National Bank and Trust Company and Saratoga National Bank and Trust Company, continued to exceed the “well capitalized” regulatory standards.
Additional Commentary
- Cash and Stock Dividends: On September 15, 2023, Arrow distributed a cash dividend of $0.27 per share. Additionally, on September 26, 2023, Arrow distributed a 3% stock dividend. This is the 15th consecutive year Arrow has declared a stock dividend.
- Bauer Financial Ratings: Both Glens Falls National Bank and Trust Company and Saratoga National Bank and Trust Company continued to maintain their 5-Star Exceptional Performance ratings from Bauer Financial, for the 66th and 58th quarters, respectively.
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. Arrow 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). Some 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. These non-GAAP financial measures include: tangible equity, return on tangible equity, taxequivalent adjustment and related net interest income, tax-equivalent, the efficiency ratio and net interest margin. Management believes that the non-GAAP financial measures disclosed by Arrow are useful in evaluating Arrow'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 in this document may contain statements based on management’s beliefs, assumptions, expectations, estimates and projections about the future. Such "forward-looking statements," as defined in Section 21E of the Securities Exchange Act of 1934, as amended, involve a degree of uncertainty and attendant risk. Actual outcomes and results may differ, explicitly or by implication. We are not obligated to revise or update these statements to reflect unanticipated events. This document should be read in conjunction with Arrow's 2022 Form 10-K and other filings with the SEC.
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