10-K: Arrow Financial Corporation Reports Mixed Results for 2024; Unification Complete

Arrow Financial Corporation's net income dipped slightly in 2024 despite loan growth and a bank unification, highlighting both progress and challenges.

Summary

• Arrow Financial Corporation reported a net income of $29.7 million for 2024, a slight decrease from $30.1 million in 2023.
• Diluted earnings per share remained unchanged at $1.77.
• Return on average equity (ROE) decreased to 7.72% from 8.29%, and return on average assets (ROA) fell to 0.70% from 0.74%.
• Net interest income increased by 6.6% to $111.7 million, driven by loan growth and higher loan rates.
• Interest expense rose by 44.2% to $83.3 million due to higher deposit rates and changes in deposit composition.
• The net interest margin increased slightly to 2.72% from 2.65%.
• The provision for credit losses increased to $5.2 million from $3.4 million.
• Non-interest expense increased by 4.5% to $97.3 million, primarily due to higher salaries and benefits.
• Total assets increased by 3.3% to $4.3 billion, driven by loan growth.
• Total investments decreased by 10.3% to $570.8 million as proceeds were used to fund loan growth.
• Loan growth for the year was $185 million, or 5.8%.
• Deposits increased by 3.8% to $3.8 billion, with a shift from non-interest-bearing to interest-bearing accounts.
• The company completed the unification of its two subsidiary banks, Glens Falls National Bank and Saratoga National Bank, into Arrow Bank on December 31, 2024.
• The company repurchased $6.8 million of its common stock during the year.
• Regulatory capital ratios remained strong, exceeding well-capitalized regulatory standards.

Sentiment

Score: 6

Explanation: The document presents a mixed picture. While there's loan growth and a bank unification, there are also declines in net income, ROE, and ROA, along with increased expenses. The outlook is cautiously optimistic.

Positives

• Net interest income increased by 6.6% to $111.7 million, driven by loan growth and higher loan rates.
• Loan growth for the year was $185 million, or 5.8%.
• Total assets increased by 3.3% to $4.3 billion, driven by loan growth.
• The company completed the unification of its two subsidiary banks into Arrow Bank on December 31, 2024, which is expected to create long term operational efficiencies.
• Regulatory capital ratios remained strong, exceeding well-capitalized regulatory standards.

Negatives

• Net income for 2024 was $29.7 million, slightly down from $30.1 million in 2023.
• Return on average equity (ROE) decreased to 7.72% from 8.29%, and return on average assets (ROA) fell to 0.70% from 0.74%.
• Interest expense rose by 44.2% to $83.3 million due to higher deposit rates and changes in deposit composition.
• Non-interest expense increased by 4.5% to $97.3 million, primarily due to higher salaries and benefits.

Risks

• Inflationary pressures could adversely impact the business and customers.
• Market conditions could present challenges to the commercial banking industry.
• Economic downturns could affect fee-based service income.
• Intense competition in the market areas could negatively affect growth and profitability.
• Failure to adapt to technological advances could have a material adverse impact.
• Security risks to the information base, including customer information, could have a material negative effect.
• The company may not realize the anticipated benefits of unifying its two former subsidiary banks into one bank.
• Interest rate risk could adversely affect profitability.
• The allowance for possible credit losses may be insufficient.
• Changes in liquidity position could negatively impact financial condition and results of operations.
• Potential losses on securities held in the securities portfolio could occur.
• Federal banking statutes and regulations could change in the future, which may adversely affect the company.
• Non-compliance with the Patriot Act, Bank Secrecy Act, or other anti-money laundering laws and regulations could result in fines or sanctions.
• Failure to comply with the CRA and fair lending laws could lead to material penalties.

Future Outlook

Based on current market interest rates, the investment portfolio repositioning is expected to improve Arrow's net interest income by approximately $2.7 million for 2025 and beyond.

Management Comments

• Management believes the current and past compensation practices of the Company do not encourage excessive risk taking or undermine the safety and soundness of the organization.
• Management's evaluation considers the allowance for credit losses for loans to be appropriate as of December 31, 2024.
• Arrow believes it is well positioned for a variety of rate environments.
• Based on the level of overnight investments, available liquidity from the investment securities portfolio, cash flows from the loan portfolio, the stable core deposit base and the significant borrowing capacity, Arrow believes that the available liquidity is sufficient to meet all reasonably likely events or occurrences.

Industry Context

Arrow faces intense competition in all markets served from traditional banks, credit unions, and non-traditional internet-based lending alternatives, as well as local offices of major regional and money center banks.

Comparison to Industry Standards

• The document compares Arrow's performance to a peer group of 190 domestic (U.S.-based) bank holding companies with $3 to $10 billion in total consolidated assets as identified in the Federal Reserve Board's most recent Bank Holding Company Performance Report.
• The document also compares Arrow's stock performance to the Russell 2000 Index, the ABA NASDAQ Community Bank TRBanks Index, the Zacks $1B-$5B Bank Assets Index, the KBW Bank Index, the KBW Regional Bank Index and the NASDAQ Composite Index for the five-year period from December 31, 2019 to December 31, 2024.

Corporate Governance

Legal Proceedings

• A settlement was reached in the Robert C. Ashe putative class action lawsuit, which did not have a material impact on the Company's financial results or financial position.
• The parties have reached a settlement in principle in the Stephen Bull Shareholder Derivative Complaint, which is not expected to have a material impact on the Company's financial results or position.

Related Party Transactions

• Arrow leases three of its branch offices, at market rates, from Stewarts Shops Corp.
• Arrow entered into a sale-leaseback agreement with Stewart's Shops Corp. for a bank branch location.
• Mr. Gary C. Dake, President of Stewarts Shops Corp., serves as a director on the board of directors for Arrow and Arrow Bank.

Stakeholder Impact

• Shareholders: The company's performance impacts shareholder value and dividend payments.
• Employees: The company's financial health affects employee compensation, benefits, and job security.
• Customers: The company's ability to provide financial services is crucial for customers.
• Communities: The company's community development efforts and charitable contributions impact the well-being of the communities it serves.

Next Steps

• The company will continue to monitor and manage interest rate risk.
• The company will continue to assess and test security systems and disaster preparedness.
• The company will continue to enhance controls and processes to protect its systems, data and networks from attacks or unauthorized access.

Key Dates