Arrow Financial Corporation (NASDAQ: AROW) is a two-bank holding company headquartered in Glens Falls, New York, serving the northeastern region of the state. With a strong focus on community banking, Arrow has weathered the economic storms of recent years and continues to demonstrate its resilience.
Business Overview
Arrow's banking subsidiaries, Glens Falls National Bank and Trust Company (GFNB) and Saratoga National Bank and Trust Company (SNB), provide a full range of banking services to individuals and small-to-mid-size businesses in their local markets. The company's wealth management departments also offer investment management and administrative services.In addition to its core banking operations, Arrow has several active subsidiaries, including Upstate Agency LLC, which provides insurance services, and North Country Investment Advisers, Inc., a registered investment adviser that manages the company's proprietary mutual funds. Arrow also owns two subsidiary business trusts that have issued trust preferred securities, which continue to qualify as Tier 1 regulatory capital.
Financial Performance
For the fiscal year ended December 31, 2023, Arrow reported annual net income of $30.075 million and annual revenue of $191.681 million. The company's annual operating cash flow was $20.057 million, while its annual free cash flow stood at $12.284 million.In the first quarter of 2024, Arrow's net income was $7.660 million, a slight decrease from the $8.562 million reported in the same period of the prior year. This decline was primarily driven by a $1.639 million decrease in net interest income, which was partially offset by a $1.181 million increase in non-interest income.
The company's net interest margin for the first quarter of 2024 was 2.60%, down from 2.96% in the same quarter of 2023. This contraction was largely due to higher deposit costs, as the Federal Reserve's interest rate hikes have led to a faster increase in the cost of interest-bearing liabilities compared to the yield on earning assets.
Loan Portfolio and Asset Quality
Arrow's loan portfolio has continued to grow, reaching $3.258 billion as of March 31, 2024, up from $3.005 billion a year earlier. This 8.4% increase was driven by growth across all loan segments, including commercial and commercial real estate loans, consumer loans, and residential real estate loans.The company's asset quality remains strong, with a non-performing asset ratio of 0.50% as of March 31, 2024, up from 0.27% a year earlier. The increase was primarily due to one large, well-collateralized commercial loan relationship moving into non-performing status during the fourth quarter of 2023. Arrow's allowance for credit losses stood at 0.97% of total loans as of the end of the first quarter of 2024, unchanged from the prior year-end.
Liquidity and Capital Position
Arrow maintains a robust liquidity position, with interest-bearing cash balances of $255.1 million as of March 31, 2024, up from $178.4 million a year earlier. The company also has access to additional liquidity sources, including federal funds lines of credit, advances from the Federal Home Loan Bank of New York, and the Federal Reserve Bank discount window.At the end of the first quarter of 2024, Arrow's regulatory capital ratios remained well above the required minimums, with a Common Equity Tier 1 ratio of 12.84%, a Tier 1 risk-based capital ratio of 13.50%, and a total risk-based capital ratio of 14.57%. Both of the company's subsidiary banks qualified as "well-capitalized" under the regulatory guidelines.
Risks and Challenges
Arrow, like many community banks, faces ongoing challenges in the current economic environment. The rising interest rate environment has put pressure on the company's net interest margin, and continued inflation could adversely impact its customers and the regional economy.Additionally, the financial services industry is rapidly evolving, with technological advancements and changing customer preferences posing risks to traditional banking models. Arrow must continue to invest in its digital capabilities and adapt its service offerings to meet the evolving needs of its customer base.
Guidance and Outlook
In its most recent earnings release, Arrow did not provide specific financial guidance for the remainder of 2024. However, the company's management team has emphasized its focus on prudent risk management, disciplined lending practices, and strategic investments to enhance the customer experience and drive long-term growth.Despite the challenges facing the industry, Arrow's management remains cautiously optimistic about the company's prospects. The bank's strong capital position, diversified revenue streams, and deep community ties provide a solid foundation for weathering the current economic environment and positioning the company for future success.