Arrow Financial (AROW) - 2024 Q4 - Annual Report

Financial Performance - Net income for 2024 was $29.7 million, down from $30.1 million for 2023, with diluted earnings per share remaining unchanged at $1.77[145] - Return on average equity (ROE) and return on average assets (ROA) were 7.72% and 0.70%, respectively, compared to 8.29% and 0.74% for 2023[145] - Total shareholders' equity increased by $21.1 million or 5.6% to $400.9 million, with a net income of $29.7 million for the year[159] - Non-interest income for 2024 was $28.1 million, a decrease of $1.0 million or 3.6% from $29.1 million in 2023[196] - The provision for income taxes for 2024 was $7.6 million, with an effective tax rate of 20.5%, an increase of 0.7% from 2023[204] Interest Income and Expense - Net interest income increased by $6.9 million, or 6.6%, to $111.7 million for the year ended December 31, 2024, primarily due to a 20.6% increase in interest and fees on loans[146] - Interest expense rose by $25.5 million, or 44.2%, to $83.3 million in 2024, driven by higher deposit rates and changes in deposit composition[146] - Net interest income was $111.7 million, an increase of $6.9 million or 6.6% from 2023, following a decrease of 11.4% from 2022 to 2023[171] - The yield on earning assets improved to 4.75% in 2024, up from 4.12% in 2023, indicating a positive trend in asset performance[178] - The cost of interest-bearing liabilities rose to 2.66% in 2024, compared to 1.99% in 2023, reflecting increased funding costs[178] - The net interest margin for 2024 was 2.72%, slightly up from 2.65% in 2023, showing effective management of interest income and expenses[178] Loan and Asset Growth - As of December 31, 2024, total loan balances reached $3.4 billion, with loan growth of $185 million or 5.8% for the year[153] - Total assets reached $4.3 billion at December 31, 2024, an increase of $136.5 million, or 3.3%, primarily due to loan growth[150] - Total loans at period-end increased to $3,394.5 million in 2024 from $3,212.9 million in 2023, representing a growth of 5.6%[182] - Loans increased to $3,300,346,000 in 2024, up from $3,074,261,000 in 2023, reflecting a growth of 7.4% in the loan portfolio[173] - Total deposit balances were $3.8 billion, an increase of $140.4 million or 3.8% from the prior year, with non-interest bearing deposits decreasing by $55.4 million or 7.3%[154] Credit Quality and Losses - The provision for credit losses was $5.2 million in 2024, compared to $3.4 million in the prior year, influenced by loan growth and charge-offs[147] - The allowance for credit losses was $33.6 million, representing 0.99% of total loans, an increase from 0.97% at year-end 2023[162] - Nonperforming loans decreased by $0.1 million or 0.5% to $21.0 million, with a ratio of nonperforming loans to total loans at 0.62%[160] - The provision for credit losses charged to expense in 2024 was $5.2 million, compared to $3.4 million in 2023, indicating an increase of 53.1%[193] - Nonperforming loans decreased slightly to 0.62% of period-end loans in 2024 from 0.66% in 2023[192] Non-Interest Expense - Non-interest expense increased by $4.2 million, or 4.5%, to $97.3 million, with salaries and benefits rising by $5.0 million, or 10.6%[148] - Salaries and employee benefits increased by $5.0 million or 10.6% from 2023, primarily due to headcount increases and inflation-driven wage increases[201] - Technology expenses rose by $1.8 million, or 10.0%, reflecting continued investment in innovation and infrastructure[202] - Other operating expenses decreased by $4.0 million, or 21.0%, primarily due to additional legal and professional fees incurred in 2023[203] Investments and Securities - Total investments decreased by $65.4 million, or 10.3%, to $570.8 million, mainly due to paydowns and maturities used to fund loan growth[151] - The fair value of available-for-sale securities decreased to $463.1 million in 2024, down $34.7 million from 2023[206] - The total carrying value of held-to-maturity securities decreased from $131,395,000 in 2023 to $98,261,000 in 2024, a decline of about 25.2%[215] - The weighted average yield for available-for-sale securities was 2.9% as of December 31, 2024[208] - Gross unrealized losses on the investment portfolio were $36.6 million as of December 31, 2024, primarily due to changes in interest rates[212] Mergers and Acquisitions - Arrow Bank completed the acquisition of the Whitehall Branch from Berkshire Bank on August 2, 2024, enhancing its market presence[166] - On December 31, 2024, Arrow merged its two subsidiary banks into one, expected to create long-term operational efficiencies[167] Liquidity and Capital - Arrow's liquidity position remained strong, with interest-bearing cash balances increasing to $127.1 million from $105.8 million at year-end 2023[164] - The total risk-based capital ratio for Arrow was 14.5% at year-end 2024, well above the minimum required level of 8.0%[254] - Arrow's primary liquidity ratio was 10.2% of total assets at December 31, 2024, well above the internal policy limit of 5%[250] - Uninsured deposit balances in excess of the FDIC insurance limit were less than 30% of the total deposit base at December 31, 2024[249] Interest Rate Management - In Q3 2023, Arrow entered into two pay-fixed portfolio layer method fair value swaps with a total notional amount of $300 million ($250 million and $50 million) designated as hedging instruments[267] - In Q4 2023, Arrow entered into two interest rate swaps with notional amounts of $100 million and $75 million to manage interest expense variability[268] - Arrow has a forward interest rate swap agreement of $125 million commencing in Q1 2025 to stabilize interest expense[269] - Arrow's interest rate swaps synthetically fix variable rate interest payments associated with $20 million in outstanding subordinated trust securities, designated as cash flow hedges[270] - As of December 31, 2024, a 200 basis point decrease in interest rates is projected to increase net interest income by 1.8% in Year 1 and 7.1% in Year 2[278] Regulatory and Compliance - The FASB issued ASU 2023-09, effective after December 15, 2024, requiring additional disclosures related to income taxes, which Arrow is currently evaluating[272]