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ARROW FINANCIAL CORP 10-K Analysis & Summary – 3/14/2025

⚠️This is not investment advice.

⚠️ This is an experimental project and this report is for informational purposes only and should not be considered investment advice. Conduct your own thorough research and consult with a qualified financial advisor before making any investment decisions. ⚠️

StoneCastle Financial Corp

Filing date:

03/14/2025

TLDR:

ELI5:

Arrow Financial, a bank holding company, had a decent year with some growth in lending, but made slightly less money overall. They’re facing challenges like rising prices and competition, but are also working on making their business more efficient.

Accession #:

0000717538-25-000023

Published on

Analyst Summary

  • Net income saw a slight decrease, while loan growth was solid and capital ratios remained strong.
  • Net Interest Margin increased slightly from 2.65% to 2.72%, indicating improved profitability from lending activities.
  • Return on Average Assets (ROA) decreased from 0.74% to 0.70%, suggesting a slight decline in asset utilization efficiency.
  • Return on Average Equity (ROE) decreased from 8.29% to 7.72%, indicating a decrease in profitability relative to shareholder equity.
  • Efficiency Ratio improved slightly from 68.89% to 67.68%, suggesting better expense control.
  • Loan Growth increased by 5.8% in 2024, demonstrating the company’s ability to expand its lending portfolio.
  • The company repositioned its investment portfolio in the fourth quarter of 2024, selling lower-yielding investments and redeploying the proceeds into higher-yielding investments, expected to improve net interest income.
  • The company’s regulatory capital ratios significantly exceed the “well-capitalized” regulatory standards.
  • Operating profit margin decreased by 3.00% from 21.34% to 18.34%.
  • Net profit margin decreased by 2.47% from 15.78% to 13.31%.
  • Current ratio decreased by 0.02 from 0.23 to 0.21.
  • Cash ratio decreased by 0.01 from 0.18 to 0.17.
  • Debt-to-equity ratio decreased by 0.24 from 9.98 to 9.74.
  • Interest coverage ratio decreased by 0.20 from 1.65 to 1.45.
  • Asset turnover increased by 0.5% from 4.7% to 5.2%.
  • Revenue growth was 6.6%.
  • Net income growth was -1.2%.
  • EPS growth was 0.0%.
  • The efficiency ratio decreased by 1.21% from 68.89% to 67.68%.
  • The tangible book value per share increased by $1.34 from $21.06 to $22.40.
  • The Tier 1 Leverage Ratio decreased by 0.24% from 9.84% to 9.60%.
  • Net Loans Charged-off as a Percentage of Average Loans increased by 0.02% from 0.07% to 0.09%.
  • Provision for Credit Losses as a Percentage of Average Loans increased by 0.05% from 0.11% to 0.16%.
  • Allowance for Credit Losses as a Percentage of Period-End Loans increased by 0.02% from 0.97% to 0.99%.
  • Nonperforming Loans as a Percentage of Period-End Loans decreased by 0.04% from 0.66% to 0.62%.
  • Nonperforming Assets as a Percentage of Total Assets decreased by 0.01% from 0.51% to 0.50%.

Opportunities and Risks

  • Inflationary Risk: Inflation could adversely impact the company’s business and its customers.
  • Competition: The company operates in a highly competitive industry and market areas.
  • Cybersecurity Risks: The company faces continuing and growing security risks to its information base.
  • Interest Rate Risk: The company is subject to interest rate risk, which could adversely affect profitability.
  • Liquidity Risk: Changes in the company’s liquidity position could negatively impact its financial condition and results of operations.
  • Subsidiary Bank Unification: The unification of the company’s two former subsidiary banks into one bank is expected to create long-term operational efficiencies and enhance its ability to pursue its strategic growth objectives.
  • Community Commitment: The company’s commitment to social responsibility and community engagement could attract and retain customers and employees.
  • Investment Portfolio Repositioning: The repositioning of the investment portfolio is expected to improve net interest income in future periods.

Potential Implications

Company Performance

  • Strong capital ratios and loan growth are positive indicators.
  • Inflation, competition, and cybersecurity pose significant challenges.
  • Subsidiary bank unification and investment portfolio repositioning are strategies to mitigate risks and improve performance.
  • Investors should monitor the effectiveness of management’s strategies and the impact of the identified risks on its financial results.

Stock Price

  • Given the current economic environment and the identified risks, a “Hold” rating seems appropriate at this time.
  • Investors should monitor the company’s performance in the coming quarters to assess the effectiveness of management’s strategies and the impact of the identified risks on its financial results.

SEC Filing Report: Arrow Financial Corp 10-K (2024)

Executive Summary

Arrow Financial Corp’s 10-K filing for the year ended December 31, 2024, reveals a company navigating a complex economic environment. While net income saw a slight decrease, the company demonstrated solid loan growth and strong capital ratios. Key areas of focus include managing interest rate risk, maintaining asset quality, and adapting to technological advancements. The report highlights both risks (inflation, competition, cybersecurity) and opportunities (subsidiary bank unification, community commitment). Overall, the company appears financially sound, but investors should monitor the identified risks and the effectiveness of management’s strategies to mitigate them. A “Hold” rating seems appropriate at this time, pending further observation of the company’s performance in the face of these challenges.

Company Overview

Arrow Financial Corporation is a bank holding company operating primarily in upstate New York. The company’s core business revolves around its banking subsidiary, Arrow Bank National Association, which offers a range of commercial and consumer banking services. Recent significant developments include the unification of its two subsidiary banks into a single entity, the acquisition of a branch from Berkshire Bank, and the acquisition of A&B Agency, Inc. by its insurance subsidiary. The company operates in a competitive landscape, facing competition from traditional banks, credit unions, and non-bank financial institutions.

Detailed Analysis

Management’s Discussion and Analysis (MD&A)

Management’s narrative focuses on the company’s performance in 2024, highlighting loan growth, net interest income, and capital strength. The tone is cautiously optimistic, acknowledging the challenges posed by inflation and competition. The MD&A emphasizes the company’s commitment to social responsibility, community engagement, and sound risk management. Red flags include the previously disclosed material weaknesses in internal control over financial reporting, which have now been remediated. The MD&A also discusses the potential impact of cybersecurity risks and the company’s efforts to mitigate them.

Financial Statement Analysis

Key Ratios and Trends:
  • Net Interest Margin: Increased slightly from 2.65% in 2023 to 2.72% in 2024, indicating improved profitability from lending activities.
  • Return on Average Assets (ROA): Decreased from 0.74% in 2023 to 0.70% in 2024, suggesting a slight decline in asset utilization efficiency.
  • Return on Average Equity (ROE): Decreased from 8.29% in 2023 to 7.72% in 2024, indicating a decrease in profitability relative to shareholder equity.
  • Efficiency Ratio: Improved slightly from 68.89% in 2023 to 67.68% in 2024, suggesting better expense control.
  • Nonperforming Loans: Decreased slightly as a percentage of period-end loans, indicating stable asset quality.
  • Loan Growth: Increased by 5.8% in 2024, demonstrating the company’s ability to expand its lending portfolio.
Uncommon Metrics:
  • Visa Class B Common Stock Sale: The sale of Visa Class B common stock in 2023 generated a pre-tax gain of $9.3 million, which was used to offset a pre-tax loss of $9.2 million related to the sale of securities.
  • Investment Portfolio Repositioning: The company repositioned its investment portfolio in the fourth quarter of 2024, selling lower-yielding investments and redeploying the proceeds into higher-yielding investments. This is expected to improve net interest income in future periods.
Footnotes and Supplementary Disclosures:
  • Regulatory Capital: The company’s regulatory capital ratios significantly exceed the “well-capitalized” regulatory standards.
  • Legal Proceedings: The company settled a putative class action complaint, which did not have a material impact on its financial results or financial position.
  • Fair Value Measurements: The company provides detailed information on the fair value hierarchy and the valuation methods used to measure its financial instruments.

Risk and Opportunity Assessment

Risks:
  • Inflationary Risk: Inflation could adversely impact the company’s business and its customers.
  • Competition: The company operates in a highly competitive industry and market areas.
  • Cybersecurity Risks: The company faces continuing and growing security risks to its information base.
  • Interest Rate Risk: The company is subject to interest rate risk, which could adversely affect profitability.
  • Liquidity Risk: Changes in the company’s liquidity position could negatively impact its financial condition and results of operations.
Opportunities:
  • Subsidiary Bank Unification: The unification of the company’s two former subsidiary banks into one bank is expected to create long-term operational efficiencies and enhance its ability to pursue its strategic growth objectives.
  • Community Commitment: The company’s commitment to social responsibility and community engagement could attract and retain customers and employees.
  • Investment Portfolio Repositioning: The repositioning of the investment portfolio is expected to improve net interest income in future periods.

Conclusion and Actionable Insights

Arrow Financial Corp’s 10-K filing reveals a company with a solid financial foundation but facing significant challenges. The company’s strong capital ratios and loan growth are positive indicators, but investors should be aware of the risks posed by inflation, competition, and cybersecurity. Management’s strategies to mitigate these risks, such as the subsidiary bank unification and the investment portfolio repositioning, should be closely monitored. Given the current economic environment and the identified risks, a “Hold” rating seems appropriate at this time. Investors should monitor the company’s performance in the coming quarters to assess the effectiveness of management’s strategies and the impact of the identified risks on its financial results.

Commentary

Arrow Financial Corporation’s financial performance in 2024 shows a mixed picture. Net income slightly decreased compared to 2023, while key profitability ratios like ROA and ROE also experienced declines. However, net interest income increased, driven by growth in interest and dividend income, partially offset by higher interest expense. The company maintained strong capital ratios, exceeding regulatory requirements. Asset quality remained stable, with slight increases in net loan charge-offs and provision for credit losses.

Financial Ratio and Metric Analysis

Profitability

  • Gross Profit Margin: Not applicable for a financial institution.
  • Operating Profit Margin: Calculated as (Net Interest Income + Noninterest Income – Noninterest Expense) / Total Revenue.

    • Metric: ($111,732 + $28,074 – $97,268) / ($194,993 + $28,074) = 18.34%
    • Trend: In 2023, ($104,832 + $29,117 – $93,048) / ($162,564 + $29,117) = 21.34%. The operating profit margin decreased by 3.00%.
  • Net Profit Margin:

    • Metric: $29,709 / ($194,993 + $28,074) = 13.31%
    • Trend: In 2023, $30,075 / ($162,564 + $29,117) = 15.78%. The net profit margin decreased by 2.47%.
  • Return on Assets (ROA):

    • Metric: 0.70% (provided in filing)
    • Trend: In 2023, ROA was 0.74%. ROA decreased by 0.04%.
  • Return on Equity (ROE):

    • Metric: 7.72% (provided in filing)
    • Trend: In 2023, ROE was 8.29%. ROE decreased by 0.57%.
  • Earnings Per Share (EPS) – Basic:

    • Metric: $1.77 (provided in filing)
    • Trend: In 2023, EPS was $1.77. EPS remained the same.
  • Earnings Per Share (EPS) – Diluted:

    • Metric: $1.77 (provided in filing)
    • Trend: In 2023, EPS was $1.77. EPS remained the same.

Liquidity

  • Current Ratio: Calculated as Current Assets / Current Liabilities.

    • Metric: ($27,422 + $127,124 + $463,111 + $98,261 + $5,055) / ($810,834 + $1,520,024 + $191,962 + $602,132) = 0.21
    • Trend: In 2023, ($36,755 + $105,781 + $497,769 + $131,395 + $1,925) / ($799,785 + $1,466,280 + $179,301 + $483,775) = 0.23. The current ratio decreased by 0.02.
  • Quick Ratio (Acid-Test Ratio): Calculated as (Current Assets – Inventory) / Current Liabilities. Since a bank doesn’t typically have inventory, this is the same as the Current Ratio.

    • Metric: 0.21 (same as current ratio)
    • Trend: 0.23 (same as current ratio) The quick ratio decreased by 0.02.
  • Cash Ratio: Calculated as (Cash + Marketable Securities) / Current Liabilities.

    • Metric: ($27,422 + $127,124 + $463,111 + $5,055) / ($702,978 + $810,834 + $1,520,024 + $191,962 + $602,132) = 0.17
    • Trend: In 2023, ($36,755 + $105,781 + $497,769 + $1,925) / ($758,425 + $799,785 + $1,466,280 + $179,301 + $483,775) = 0.18. The cash ratio decreased by 0.01.

Solvency/Leverage

  • Debt-to-Equity Ratio: Calculated as Total Liabilities / Total Stockholders’ Equity.

    • Metric: $3,905,447 / $400,901 = 9.74
    • Trend: In 2023, $3,790,096 / $379,772 = 9.98. The debt-to-equity ratio decreased by 0.24.
  • Debt-to-Assets Ratio: Calculated as Total Liabilities / Total Assets.

    • Metric: $3,905,447 / $4,306,348 = 0.91
    • Trend: In 2023, $3,790,096 / $4,169,868 = 0.91. The debt-to-assets ratio remained the same.
  • Interest Coverage Ratio (Times Interest Earned): Calculated as EBIT / Interest Expense. EBIT is approximated by Net Income + Interest Expense + Income Tax Expense.

    • Metric: ($29,709 + $83,261 + $7,649) / $83,261 = 1.45
    • Trend: In 2023, ($30,075 + $57,732 + $7,445) / $57,732 = 1.65. The interest coverage ratio decreased by 0.20.

Activity/Efficiency

  • Inventory Turnover: Not applicable for a financial institution.
  • Days Sales Outstanding (DSO): Not directly applicable, as revenue is primarily from interest and fees, not sales.
  • Days Payable Outstanding (DPO): Not directly applicable, as expenses are not directly tied to cost of goods sold.
  • Asset Turnover: Calculated as Total Revenue / Average Total Assets. Total Revenue is approximated by Interest Income + Noninterest Income.

    • Metric: ($194,993 + $28,074) / $4,266,721 = 0.052 or 5.2%
    • Trend: In 2023, ($162,564 + $29,117) / $4,084,519 = 0.047 or 4.7%. The asset turnover increased by 0.5%.

Valuation

  • Price-to-Earnings Ratio (P/E): Calculated as Stock Price / EPS.

    • Metric: $26.30 / $1.77 = 14.86
  • Price-to-Book Ratio (P/B): Calculated as Stock Price / Book Value per Share.

    • Metric: $26.30 / $23.94 = 1.10
  • Price-to-Sales Ratio (P/S): Calculated as Market Cap / Total Revenue. Market Cap = Shares Outstanding * Stock Price.

    • Metric: (16,717,564 * $26.30) / ($194,993,000 + $28,074,000) = 1.90
  • Enterprise Value to EBITDA (EV/EBITDA): Calculated as (Market Cap + Total Debt – Cash) / EBITDA. EBITDA is approximated by Net Income + Interest Expense + Taxes + Depreciation & Amortization.

    • Metric: (($26.30 * 16,717,564) + $28,600,000 – $154,546,000) / ($29,709,000 + $83,261,000 + $7,649,000 + $5,361,000) = 2.08

Growth Rates

  • Revenue Growth:

    • Metric: ($194,993 + $28,074) / ($162,564 + $29,117) – 1 = 6.6%
  • Net Income Growth:

    • Metric: ($29,709 – $30,075) / $30,075 = -1.2%
  • EPS Growth:

    • Metric: ($1.77 – $1.77) / $1.77 = 0.0%

Other Relevant Metrics

  • Efficiency Ratio:

    • Metric: 67.68% (provided in filing)
    • Trend: In 2023, the efficiency ratio was 68.89%. The efficiency ratio decreased by 1.21%.
  • Tangible Book Value per Share:

    • Metric: $22.40 (provided in filing)
    • Trend: In 2023, the tangible book value per share was $21.06. The tangible book value per share increased by $1.34.
  • Tier 1 Leverage Ratio:

    • Metric: 9.60% (provided in filing)
    • Trend: In 2023, the Tier 1 Leverage Ratio was 9.84%. The Tier 1 Leverage Ratio decreased by 0.24%.
  • Net Loans Charged-off as a Percentage of Average Loans:

    • Metric: 0.09% (provided in filing)
    • Trend: In 2023, the percentage was 0.07%. The percentage increased by 0.02%.
  • Provision for Credit Losses as a Percentage of Average Loans:

    • Metric: 0.16% (provided in filing)
    • Trend: In 2023, the percentage was 0.11%. The percentage increased by 0.05%.
  • Allowance for Credit Losses as a Percentage of Period-End Loans:

    • Metric: 0.99% (provided in filing)
    • Trend: In 2023, the percentage was 0.97%. The percentage increased by 0.02%.
  • Nonperforming Loans as a Percentage of Period-End Loans:

    • Metric: 0.62% (provided in filing)
    • Trend: In 2023, the percentage was 0.66%. The percentage decreased by 0.04%.
  • Nonperforming Assets as a Percentage of Total Assets:

    • Metric: 0.50% (provided in filing)
    • Trend: In 2023, the percentage was 0.51%. The percentage decreased by 0.01%.

⚠️ This is an experimental project and this report is for informational purposes only and should not be considered investment advice. Conduct your own thorough research and consult with a qualified financial advisor before making any investment decisions. ⚠️