Get Started for Free Contexxia identifies hard-to-find pieces of information in SEC filings. No more highlighters, no more redlining, no more poring over huge documents. ARROW FINANCIAL CORP (717538) 10-Q published on Aug 05, 2019 at 1:26 pm
Reporting Period: Jun 29, 2019
In June 2016, the FASB issued ASU 2016-13 "Financial Instruments - Credit Losses" (Topic 326) which will change the way financial entities measure expected credit losses for financial assets, primarily loans. Under this ASU, the "incurred loss" model will be replaced with an "expected loss" model which will recognize losses over the life of the instrument and requires consideration of a broader range of reasonable and supportable information. Currently, credit losses on available-for-sale securities reduce the carrying value of the instrument and cannot be reversed. Under this ASU, the amount of the credit loss is carried as a valuation allowance and can be reversed. The standard also requires expanded credit quality disclosures. In April 2019, the FASB issued ASU 2019-04 "Codification Improvements to Topic 326, Financial Instruments-Credit Losses; Topic 815, Derivatives and Hedging; and Topic 825, Financial Instruments," which clarifies that the estimate of expected credit losses should include expected recoveries of financial assets, and that contractual extension or renewal options that are not unconditionally cancellable by the lender are considered when determining the contractual term over which expected credit losses are measured. The Company's loan terms for contractual extensions and renewal options are unconditionally cancellable by the Company (that is, the Company has no obligation to extend or renew existing loans), and therefore are not considered in measuring expected credit losses.
For Arrow, the standard is effective for the first quarter of 2020 and early adoption is allowed in 2019. The Company plans on adopting the standard in the first quarter of 2020, in order to maximize the accumulation of data needed to calculate the new current expected credit loss (CECL) methodologies. The ASU describes several acceptable methodologies for calculating expected losses on a loan or a pool of loans and requires additional disclosures. The initial adjustment will not be reported in earnings, but as the cumulative effect of a change in accounting principle. The Company has continued its implementation efforts with the development and testing of various methods within its core model, and has tentatively identified the discounted cash flow method for determining losses for the commercial loan portfolios and the residential real estate portfolios, and the vintage method for the consumer indirect loan portfolio. Based on further testing, these methods may change prior to adoption. As a result of analyses performed, including the availability of future economic data, the Company plans to utilize an 18-month reasonable and supportable forecast period. The Company has identified the economic data that best correlates with expected loan losses through the use of various regression analyses of historical economic information and loan losses. The Company continues to monitor new regulatory guidance and is updating relevant internal controls and processes. The adoption of this standard will likely have the effect of increasing the allowance for loan and lease losses and reducing shareholders' equity, the extent of which will depend upon the nature and characteristics of the Company's loan portfolio and economic conditions and forecasts at the adoption date. The Company expects to remain a well-capitalized financial institution under current regulatory calculations.
Stockholders’ equity was $284.6 million at June 30, 2019, an increase of $15.1 million, or 5.6%, from the December 31, 2018 level of $269.6 million, and an increase of $25.2 million, or 9.7%, from the prior-year level. The increase in stockholders' equity over the first six months of 2019 principally reflected the following factors: (i) $17.67 million of net income for the period, plus (ii) other comprehensive income of $4.16 million, plus (iii) issuance of $2.80 million of common stock through employee benefit and dividend reinvestment plans; reduced by (iv) cash dividends of $7.53 million; and (v) repurchases of common stock of $2.04 million. The components of the change in stockholders’ equity since year-end 2018 are presented in the Consolidated Statement of Changes in Stockholders’ Equity on page 7, and are discussed in more detail in the next section.
At June 30, 2019, book value per share was $19.61, up by 9.0% over the prior-year level. Tangible book value per share (a non-GAAP measure that deducts intangible assets from stockholders' equity) was $17.99, an increase of $1.66, or 10.2%, over the level as of June 30, 2018. See the disclosure on page 44 related to the use of non-GAAP financial measures including tangible book value.
Net interest income on a GAAP basis, for the six-month period ended June 30, 2019 increased by $1.5 million, or 3.5%, over six-month period ended June 30, 2018. The largest driver of the increase in net interest margin was the $222.4 million year-over-year increase in loans. For the first six months of 2019, net interest margin decreased to 3.02% from 3.12% for the comparative period of 2018. The cost of interest-bearing liabilities to fund continued loan growth have increased to 0.96% from 0.45% for the comparable prior period due largely to the higher short-term market rates. The Company defines net interest margin as net interest income divided by average earning assets, annualized. The Company defines tax-equivalent net interest margin as net interest income on a tax-equivalent basis divided by average earning assets, annualized.Tax-equivalent net interest margin, as well as tax-equivalent net interest income, from which the margin is derived, are non-GAAP financial measures. (See the discussion under "Use of Non-GAAP Financial Measures," on page 44, and the tabular information and notes on pages 45 through 48, regarding net interest margin and tax-equivalent net interest income, which are commonly used non-GAAP financial measures.) Further detailed information is presented above under the section entitled "Average Consolidated Balance Sheets and Net Interest Income Analysis." The impact of recent interest rate changes on Arrow's deposit and loan portfolios are discussed above in this Report under the sections entitled "Deposit Trends" and "Loan Trends."
Income from fiduciary activities for the first six months of 2019 decreased by $485 thousand, or 10.0% over the first six months of 2018 primarily due to large estate settlements that occurred in the second quarter of 2018. Insurance commissions declined 10.8% to $3.7 million for the first six months of 2019, compared to $4.1 million in the first six months of 2018, due primarily to the increased competition in the property, casualty and employee benefits sectors of the business.
Noninterest expense for the first six months of 2019 was $33.6 million, an increase of $1.4 million, or 4.4%, from the expense for the first six months of 2018. The Company's efficiency ratio was 58.37% for the first six months of 2019 and 56.28% for the comparable 2018 period. This ratio (a ratio where lower is better), is a commonly used non-GAAP financial measure in the banking industry that purports to reflect operating efficiency. The Company calculates the efficiency ratio as the ratio of noninterest expense (excluding, under the Company's definition, intangible asset amortization) to (i) net interest income (on a tax-equivalent basis) plus (ii) noninterest income (excluding net securities gains or losses). See the discussion on this non-GAAP measure on page 44 of this Report under the heading "Use of Non-GAAP Financial Measures" and the related tabular information and notes on pages 45 through 48 of this Report.