Arrow Reports $12.0 million in Q2 Net Income, Loan Growth of $108 Million

July 27, 2022 at 7:55 AM·14 min read

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GLENS FALLS, N.Y., July 27, 2022 /PRNewswire/ -- Arrow Financial Corporation (NasdaqGS® – AROW) announced financial results for the three-month period ended June 30, 2022. Net income for the second quarter of 2022 was $12.0 million and diluted earnings per share was $0.75.

Loan growth was strong in the second quarter of 2022, with gross loans increasing by $108 million. Excluding Paycheck Protection Program (PPP) loans, which decreased by $17 million, loans grew by $125 million in the quarter.

"Arrow had a strong second quarter with total loan balances at June 30, 2022 reaching a record high," said Arrow President and CEO Thomas J. Murphy. "I commend the Arrow Team for their outstanding efforts and strong work ethic. While economic challenges are expected this year, I am confident in our direction as a Company and our ability to deliver strong results for our shareholders, our customers and our communities."

For the second quarter of 2022, net income was $12.0 million compared to $13.3 million for the second quarter of 2021. The year-over-year decline in second quarter net income was primarily due to:

An increase in the provision expense for credit losses to $905 thousand for the second quarter of 2022, as compared to $263 thousand in the second quarter of 2021.
Net gain on sale of loans was lower by $615 thousand when comparing year-over-year quarters.
A decrease of $2.6 million in income earned on PPP loans included as part of net interest income in the second quarter of 2022 compared to the second quarter of 2021.

Second Quarter Highlights

Earnings:

Net income was $12.0 million.
Net interest margin was 3.02%.
Return on average assets (ROA) was 1.20%.
Return on average equity (ROE) was 13.44%.
Diluted earnings per share (EPS) was $0.75 for the second quarter.
Second-quarter revenue was consistent to the prior-year comparative quarter.
Net charge-offs for the second quarter of 2022 were $476 thousand as compared to $93 thousand for the comparable 2021 quarter.

Balance Sheet:

Total assets were $4.0 billion as of June 30, 2022.
Total loans were $2.8 billion as of June 30, 2022, a record high for Arrow.
Total deposits were $3.5 billion as of June 30, 2022.
Loans to deposits ratio as of June 30, 2022 was 80.2%

Additional Items:

$17 million of PPP loans were forgiven in the second quarter of 2022.
$1.5 million of PPP loans remained outstanding as of June 30, 2022.
Book value per share was $22.25, up by 1.1% over the prior-year level.
Nonperforming assets of $10.0 million at June 30, 2022 represented 0.25% of period-end assets, up from 0.20% at June 30, 2021.
A core system upgrade is scheduled for the third quarter of 2022, with the first customer communications expected in early August.

Income Statement

Net Interest Income: Net interest income for the second quarter was $29.0 million, up 2.4% from $28.4 million in the comparable quarter of 2021. Interest and fees on loans were $26.9 million for the second quarter of 2022, a decrease of 0.4% from $27.0 million for the quarter ending June 30, 2021. Interest and fees related to PPP loans, included in the $26.9 million total, were $439 thousand in the second quarter of 2022, a decrease from $3.1 million for the second quarter of 2021. Interest expense for the second quarter of 2022 was $1.6 million, an increase of $0.2 million, or 16.5%, from $1.3 million in expense for the comparable quarter ending June 30, 2021.
Net Interest Margin: Net interest margin was 3.02% for the quarter, compared to 3.08% for the second quarter of 2021. The decrease in net interest margin from the prior year was primarily due to the decrease in the amount of PPP loan interest and related fees recognized in the second quarter of 2022 as compared to the comparable quarter of 2021. Net interest margin, excluding PPP income, increased from the comparable prior year quarter from 2.86% to 2.98% The cost of interest-bearing liabilities increased slightly primarily due to the repricing of municipal deposits.


	Three Months Ended
	June 30, 2022			June 30, 2021
Interest and Dividend Income	$	30,593		$	29,695
Interest Expense	1,555			1,335
Net Interest Income	29,038			28,360
Average Earning Assets⁽¹⁾	3,858,837			3,688,572
Average Interest-Bearing Liabilities	2,808,287			2,721,961

Yield on Earning Assets⁽¹⁾	3.18		%	3.23		%
Cost of Interest-Bearing Liabilities	0.22			0.20
Net Interest Spread	2.96			3.03
Net Interest Margin	3.02			3.08

Income Earned on PPP Loans included in Net Interest Income	$	438		$	3,086
Net Interest Income excluding PPP loans	28,600			25,274
Net Interest Margin excluding PPP loans	2.98		%	2.86		%

⁽¹⁾ Includes Nonaccrual Loans.

Provision for Credit Losses: For the second quarter of 2022, the provision for credit losses was $905 thousand compared to $263 thousand in provision expense in the second quarter of 2021. The key drivers for the increase were strong loan growth and a slight deterioration in forecasted economic conditions in the second quarter of 2022.
Noninterest Income: Noninterest income for the three months ended June 30, 2022 was $7.7 million, compared to $8.5 million in the comparable 2021 quarter. Income from fiduciary activities for the three months ended June 30, 2022, decreased by $72 thousand over the comparable quarter of 2021. Fees and other services to customers increased $131 thousand over the comparable quarter of 2021. Gain on sales of loans decreased $615 thousand from the second quarter of 2021 as a result of a strategic decision to retain more newly originated real estate loans. Other operating income decreased $132 thousand from the comparable quarter of 2021 due to a variety of factors, including, among others, a $99 thousand loss on the disposal of a building.
Noninterest Expense: Noninterest expense for the second quarter of 2022 was $20.3 million, an increase from $19.1 million for the second quarter of 2021. The largest component of noninterest expense was salaries and benefits paid to our employees, which totaled $11.7 million for the second quarter of 2022. The expense for estimated credit losses on off-balance sheet credit exposures included in other expenses was $110 thousand.
Provision for Income Taxes: The provision for income taxes was $3.6 million for the second quarter of 2022, compared to $4.2 million for the same quarter of 2021.

Balance Sheet

Total Assets: Total assets were $4.0 billion at June 30, 2022 an increase of $95.0 million, or 2.4%, compared to June 30, 2021 and a decrease of $165.2 million, or 4.0%, compared to March 31, 2022.
Investments: Total investments were $766.9 million as of June 30, 2022 an increase of $122.5 million, or 19.0%, compared to June 30, 2021 and a decrease of $14.1 million, or 1.8%, compared to March 31, 2022.
Loans: Total loans were $2.8 billion as of June 30, 2022. Loan growth for the second quarter of 2022 was $107.5 million and increased $200.7 million, or 7.6%, from June 30, 2021. In the second quarter, total outstanding commercial loans increased $8.0 million, or 1.0%. PPP loans, which are included in the commercial portfolio, decreased $17.2 million in the second quarter as a result of the continued loan forgiveness processed by the Small Business Administration. The consumer loan portfolio grew by $54.5 million, or 5.6% in the second quarter, primarily within the indirect automobile lending program. Total outstanding residential real estate loans increased $45.1 million, or 4.7%, for the second quarter of 2022.
Allowance for Credit Losses: The allowance for credit losses was $28.1 million on June 30, 2022, which represented 0.99% of loans outstanding, as compared to 1.02% at June 30, 2021. Asset quality remained solid at June 30, 2022. Net loan losses, expressed as an annualized percentage of average loans outstanding, were 0.07% for the three-month period ended June 30, 2022, as compared to 0.01% for the three-month period ended June 30, 2021. Nonperforming assets of $10.0 million at June 30, 2022 represented 0.25% of period-end assets, compared to 0.20% at June 30, 2021.
Deposits: At June 30, 2022, deposit balances were $3.5 billion. Deposits decreased in the second quarter of 2022 by $169.7 million and increased by $107.6 million, or 3.1%, from the prior-year level. Municipal deposits decreased $112.1 million in the second quarter and increased $4.8 million, or 0.6% from June 30, 2021. Non-municipal deposits decreased $57.6 million for the quarter and increased $102.8 million, or 4.0%, from June 30, 2021. Noninterest-bearing deposits represented 23.3% of total deposits at June 30, 2022, compared to 22.2% of total deposits at June 30, 2021. At June 30, 2022, total time deposits were $169.5 million, a decrease of $57.0 million, or 25.2%, compared to the prior year.
Capital: Total stockholders' equity was $356.5 million on June 30, 2022, up $3.5 million, or 1.0%, from June 30, 2021. Arrow's regulatory capital ratios remained strong in the second quarter of 2022. As of June 30, 2022, Arrow's Common Equity Tier 1 Capital Ratio was 13.14% and Total Risk-Based Capital Ratio was 14.93%. 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 June 15, 2022, Arrow distributed a cash dividend of $0.27 per share. The cash dividend was 7% higher than the cash dividend paid by Arrow in the second quarter of 2021 due to a one cent increase in the cash dividend rate and after adjusting for the 3% stock dividend distributed on September 24, 2021.
Industry Recognition: In the second quarter of 2022, both of Arrow's banking subsidiaries once again earned BauerFinancial, Inc. 5-Star Exceptional Performance Bank ratings.

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, tax-equivalent adjustment and related net interest income, tax-equivalent, and the efficiency ratio. 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 obliged to revise or update these statements to reflect unanticipated events. This document should be read in conjunction with Arrow's Annual Report on Form 10-K for the year ended December 31, 2021 and other filings with the SEC.

ARROW FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In Thousands, Except Per Share Amounts - Unaudited)

	Three Months Ended June 30,				Six Months Ended June 30,
	2022		2021		2022		2021
INTEREST AND DIVIDEND INCOME
Interest and Fees on Loans	$	26,906	$	27,014	$	52,645	$	52,197
Interest on Deposits at Banks	427		103		625		188
Interest and Dividends on Investment Securities:
Fully Taxable	2,444		1,671		4,633		3,177
Exempt from Federal Taxes	816		907		1,637		1,827
Total Interest and Dividend Income	30,593		29,695		59,540		57,389
INTEREST EXPENSE
Interest-Bearing Checking Accounts	199		192		362		411
Savings Deposits	892		501		1,309		1,066
Time Deposits over $250,000	26		69		54		189
Other Time Deposits	111		156		220		378
Federal Funds Purchased and Securities Sold Under Agreements to Repurchase	—		1		—		3
Federal Home Loan Bank Advances	108		196		295		389
Junior Subordinated Obligations Issued to Unconsolidated Subsidiary Trusts	171		171		340		340
Interest on Financing Leases	48		49		97		98
Total Interest Expense	1,555		1,335		2,677		2,874
NET INTEREST INCOME	29,038		28,360		56,863		54,515
Provision for Credit Losses	905		263		1,674		(385)
NET INTEREST INCOME AFTER PROVISION FOR CREDIT LOSSES	28,133		28,097		55,189		54,900
NONINTEREST INCOME
Income From Fiduciary Activities	2,517		2,589		5,113		4,967
Fees for Other Services to Customers	3,050		2,919		5,845		5,528
Insurance Commissions	1,622		1,626		3,133		3,266
Net Gain on Securities	154		196		284		356
Net Gain on Sales of Loans	10		625		62		2,040
Other Operating Income	391		523		1,469		929
Total Noninterest Income	7,744		8,478		15,906		17,086
NONINTEREST EXPENSE
Salaries and Employee Benefits	11,687		10,845		22,973		21,983
Occupancy Expenses, Net	1,602		1,484		3,200		3,077
Technology and Equipment Expense	3,974		3,710		7,753		7,169
FDIC Assessments	291		245		598		515
Other Operating Expense	2,791		2,803		4,766		5,021
Total Noninterest Expense	20,345		19,087		39,290		37,765
INCOME BEFORE PROVISION FOR INCOME TAXES	15,532		17,488		31,805		34,221
Provision for Income Taxes	3,558		4,209		7,256		7,662
NET INCOME	$	11,974	$	13,279	$	24,549	$	26,559
Average Shares Outstanding ¹:
Basic	16,014		16,024		16,022		16,009
Diluted	16,054		16,085		16,069		16,056
Per Common Share:
Basic Earnings	$	0.75	$	0.83	$	1.53	$	1.66
Diluted Earnings	0.75		0.83		1.53		1.65

¹ 2021 Share and Per Share Amounts have been restated for the September 24, 2021, 3% stock dividend.

ARROW FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In Thousands, Except Share and Per Share Amounts - Unaudited)

	June 30, 2022		December 31, 2021		June 30, 2021
ASSETS
Cash and Due From Banks	$	51,549	$	26,978	$	44,760
Interest-Bearing Deposits at Banks	165,705		430,718		433,468
Investment Securities:
Available-for-Sale at Fair Value	582,741		559,316		437,868
Held-to-Maturity (Fair Value of $180,511 at June 30, 2022; $201,292 at December 31, 2021; and $210,916 at June 30, 2021)	182,096		196,566		204,490
Equity Securities	2,031		1,747		1,992
FHLB and Federal Reserve Bank Stock	4,718		5,380		5,380
Loans	2,844,802		2,667,941		2,644,082
Allowance for Credit Losses	(28,090)		(27,281)		(27,010)
Net Loans	2,816,712		2,640,660		2,617,072
Premises and Equipment, Net	50,141		46,217		43,268
Goodwill	21,873		21,873		21,873
Other Intangible Assets, Net	1,710		1,918		2,082
Other Assets	111,929