Arrow Financial Corporation
Selected Year-to-Date Information - Continued
(Dollars In Thousands, Except Per Share Amounts - Unaudited)
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Footnotes:
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1.
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Share and Per Share Data have been restated for the September 25, 2020, 3% stock dividend.
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2.
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Tangible Book Value, Tangible Equity and Return on Tangible Equity exclude goodwill and other intangible assets, net from total equity. These are non-GAAP financial measures which the Company believes provide investors with information that is useful in understanding our financial performance. See "Use of Non-GAAP Financial Measures" on page 42.
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9/30/2020
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9/30/2019
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Total Stockholders' Equity (GAAP)
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$
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325,660
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$
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292,228
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Less: Goodwill and Other Intangible assets, net
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23,662
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23,586
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Tangible Equity (Non-GAAP)
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$
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301,998
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$
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268,642
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Period End Shares Outstanding
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15,489
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15,418
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Tangible Book Value per Share (Non-GAAP)
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$
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19.50
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$
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17.42
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Net Income
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28,332
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27,735
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Return on Average Tangible Equity (Net Income/Tangible Equity - Annualized)
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12.95
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%
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14.42
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%
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3.
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Net Interest Margin is the ratio of our annualized tax-equivalent net interest income to average earning assets. This is also a non-GAAP financial measure which the Company believes provides investors with information that is useful in understanding our financial performance. See "Use of Non-GAAP Financial Measures" on page 42.
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9/30/2020
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9/30/2019
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Interest Income (GAAP)
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$
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83,524
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$
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81,392
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Add: Tax-Equivalent adjustment (Non-GAAP)
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$
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853
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$
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1,093
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Net Interest Income - Tax Equivalent (Non-GAAP)
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$
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84,377
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$
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82,485
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Net Interest Income (GAAP)
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$
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72,748
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$
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65,131
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Add: Tax-Equivalent adjustment (Non-GAAP)
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853
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1,093
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Net Interest Income - Tax Equivalent (Non-GAAP)
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$
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73,601
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$
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66,224
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Average Earning Assets
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$
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3,243,886
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$
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2,864,816
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Net Interest Margin (Non-GAAP)*
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3.03
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%
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3.09
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%
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4.
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Financial Institutions often use the "efficiency ratio", a non-GAAP ratio, as a measure of expense control. The Company believes efficiency ratio provides investors with information that is useful in understanding financial performance. Efficiency ratio is defined as the ratio of our noninterest expense to our net gross income (which equals our tax-equivalent net interest income plus noninterest income, as adjusted). See "Use of Non-GAAP Financial Measures" on page 42.
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* Year-to-date ratios have been annualized.
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Average Consolidated Balance Sheets and Net Interest Income Analysis
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(Dollars In Thousands)
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Quarter Ended September 30:
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2020
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2019
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Interest
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Rate
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Interest
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Rate
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Average
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Income/
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Earned/
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Average
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Income/
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Earned/
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Balance
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Expense
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Paid
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Balance
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Expense
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Paid
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Interest-Bearing Deposits at Banks
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$
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242,928
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$
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64
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0.10
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%
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$
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27,083
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$
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182
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2.67
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%
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Investment Securities:
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Fully Taxable
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395,349
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1,557
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1.57
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328,328
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2,018
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2.44
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Exempt from Federal Taxes
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197,108
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969
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1.96
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216,745
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1,132
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2.07
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Loans
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2,582,253
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24,706
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3.81
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2,308,879
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24,620
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4.23
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Total Earning Assets
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3,417,638
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27,296
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3.18
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2,881,035
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27,952
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3.85
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Allowance for Credit Losses
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(26,310)
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(20,617)
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Cash and Due From Banks
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37,905
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36,423
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Other Assets
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154,089
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126,202
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Total Assets
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$
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3,583,322
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$
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3,023,043
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Deposits:
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Interest-Bearing Checking Accounts
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$
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764,614
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264
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0.14
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$
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686,017
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500
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0.29
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Savings Deposits
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1,314,241
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806
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0.24
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924,868
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2,317
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0.99
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Time Deposits of $250,000 or More
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121,027
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292
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0.96
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86,018
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451
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2.08
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Other Time Deposits
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209,436
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576
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1.09
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285,448
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1,255
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1.74
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Total Interest-Bearing Deposits
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2,409,318
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1,938
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0.32
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1,982,351
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4,523
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0.91
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Short-Term Borrowings
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60,894
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17
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0.11
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176,028
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703
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1.58
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FHLBNY Term Advances & Other Long-Term Debt
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70,000
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392
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2.23
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50,000
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395
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3.13
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Finance Leases
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5,223
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49
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3.73
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5,263
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28
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2.11
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Total Interest-Bearing Liabilities
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2,545,435
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2,396
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0.37
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2,213,642
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5,649
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1.01
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Noninterest-bearing deposits
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673,181
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490,177
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Other Liabilities
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40,437
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30,208
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Total Liabilities
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3,259,053
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2,734,027
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Stockholders’ Equity
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324,269
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289,016
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Total Liabilities and Stockholders’ Equity
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$
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3,583,322
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$
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3,023,043
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Net Interest Income
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$
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24,900
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$
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22,303
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Net Interest Spread
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2.81
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%
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2.84
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%
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Net Interest Margin
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2.90
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%
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3.07
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%
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Average Consolidated Balance Sheets and Net Interest Income Analysis
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(Dollars In Thousands)
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Nine Months Ended September 30:
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2020
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2019
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Interest
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Rate
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Interest
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Rate
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Average
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Income/
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Earned/
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Average
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Income/
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Earned/
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Balance
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Expense
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Paid
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Balance
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Expense
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Paid
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Interest-Bearing Deposits at Banks
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$
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144,244
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$
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229
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0.21
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%
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$
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26,121
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$
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572
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2.93
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%
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Investment Securities:
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Fully Taxable
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399,958
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5,621
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1.88
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353,428
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6,671
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2.52
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Exempt from Federal Taxes
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201,111
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3,017
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2.00
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226,634
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3,606
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2.13
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Loans
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2,498,573
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74,657
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3.99
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2,258,633
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70,543
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4.18
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Total Earning Assets
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3,243,886
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83,524
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3.44
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2,864,816
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81,392
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3.80
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Allowance for Credit Losses
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(24,037)
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(20,352)
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Cash and Due From Banks
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34,624
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34,907
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Other Assets
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146,641
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119,983
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Total Assets
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$
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3,401,114
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$
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2,999,354
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Deposits:
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Interest-Bearing Checking Accounts
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$
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737,647
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1,061
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0.19
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$
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728,931
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|
1,435
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0.26
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Savings Deposits
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1,207,896
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|
4,450
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0.49
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879,576
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5,926
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0.90
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Time Deposits of $250,000 or More
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127,659
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1,263
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1.32
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87,714
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1,362
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2.08
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Other Time Deposits
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236,879
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2,360
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1.33
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257,044
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3,099
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|
1.61
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Total Interest-Bearing Deposits
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2,310,081
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|
9,134
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0.53
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1,953,265
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11,822
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0.81
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Short-Term Borrowings
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69,132
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|
241
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0.47
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|
212,977
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|
3,102
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|
|
1.95
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FHLBNY Term Advances and Other Long-Term Debt
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71,095
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|
1,253
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|
2.35
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|
54,469
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|
1,266
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3.11
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Finance Leases
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5,236
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|
148
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|
3.78
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|
3,752
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|
71
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|
3.72
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Total Interest-Bearing Liabilities
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2,455,544
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|
10,776
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0.59
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2,224,463
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|
16,261
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0.98
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Noninterest-bearing deposits
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592,226
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|
466,125
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Other Liabilities
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37,587
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|
27,998
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Total Liabilities
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3,085,357
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|
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|
2,718,586
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Stockholders’ Equity
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315,757
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|
280,768
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|
|
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Total Liabilities and Stockholders’ Equity
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$
|
3,401,114
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$
|
2,999,354
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|
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|
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|
|
|
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|
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|
|
|
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Net Interest Income
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|
|
$
|
72,748
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|
|
|
|
|
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$
|
65,131
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|
|
|
Net Interest Spread
|
|
|
|
|
2.85
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%
|
|
|
|
|
|
2.82
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%
|
Net Interest Margin
|
|
|
|
|
3.00
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%
|
|
|
|
|
|
3.04
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%
|
OVERVIEW
The following discussion and analysis focuses on and reviews the results of operations for the three month period ended September 30, 2020 and the financial condition as of September 30, 2020 and 2019. The discussion below should be read in conjunction with the selected quarterly and annual information set forth above and the Consolidated Financial Statements and other financial data presented elsewhere in this Report. When necessary, prior-year financial information has been reclassified to conform to the current-year presentation.
COVID-19 Pandemic:
In March 2020, the World Health Organization recognized COVID-19 as a pandemic. In response, the United States federal government and various state and local governments have, among other actions, imposed travel and business restrictions and required or advised communities in which we do business to adopt stay-at-home orders and social distancing guidelines, causing some businesses to adjust, reduce or suspend operating activities. Like many businesses, we expect the operations and financial results to continue to be adversely impacted by the COVID-19 pandemic. The severity, magnitude and duration of the current pandemic are still uncertain, rapidly changing and hard to predict.
Arrow continues to manage its COVID-19 response with health and safety concerns as a top priority. In the third quarter, the Business Continuity Task Force, representing leadership from across the organization, focused on maintaining protocols that have allowed Arrow to keep the team healthy and the branches open. Arrow actively monitors developments, and if future restrictions are imposed, is confident in its ability to continue to provide essential banking services and meet customer needs.
Throughout the third quarter, Arrow maintained open lobbies for the majority of its bank branches and insurance offices. Safety measures continue to be followed, including clear shields for desks and teller lines, hand sanitizing stations, required face coverings, and social distancing markers. Traffic to lobbies is stable, and Arrow continues to promote usage of no-contact alternatives such as digital banking, drive-ins and ATMs. While some positions have returned to the office, a significant portion of the Arrow workforce remains remote as part of our risk-mitigation strategy. Additionally, employee travel remains paused, self-quarantine protocol is in place for personal travel to areas classified as hot spots, in-person meetings are minimized, social distancing is strongly enforced, and increased cleaning and sanitizing of Arrow's locations continue. Arrow believes these measures have helped to keep the workforce healthy and has aided in community efforts to slow the spread of the COVID-19 virus. Arrow will continue to utilize these measures as appropriate based on public health guidance.
During the third quarter, support continued for customers experiencing financial hardship. Arrow worked closely with individuals and businesses seeking temporary financial assistance. On the small business side, support for Small Business Administration Paycheck Protection Program ("PPP") borrowers shifted from taking new loan applications to preparing for loan forgiveness. In total, Arrow has assisted more than 1,400 small businesses in acquiring more than $142.7 million in PPP funding. The Arrow team has engaged in regular communication concerning updates to the PPP and the start of our digital forgiveness application process.
While COVID-19 did not have a material adverse effect on third-quarter 2020 financial results, Arrow is actively monitoring the impact of the pandemic on the business and results of operations. Currently, all banking locations and a portion of insurance locations are open to the public, and through a mix of onsite and remote work amongst the Arrow team, Arrow continues to meet customer needs and deliver high-quality service daily.
As Arrow cannot predict the duration or scope of the pandemic or its impact on economic and financial markets or its impact on the business, Arrow is unable to reasonably estimate the overall impact on the Company. For further discussion of the impact COVID-19 has had and may in the future have on Arrow and its financial results and operations, please refer to the risk factor included in Item 8.01 of Arrow's Current Report on Form 8-K filed April 24, 2020.
Summary of Q3 2020 Financial Results: Net income for the third quarter of 2020 was $11.0 million, compared to $10.1 million in the third quarter of 2019. Net interest income increased to $24.9 million in the third quarter of 2020, compared to $22.3 million for the comparable quarter of 2019.
Diluted earnings per share (EPS) for the quarter was $0.71, an increase of 9.2% from the EPS of $0.65 reported for the third quarter of 2019. Return on average equity (ROE) for the third quarter of 2020 decreased to 13.55%, as compared to a ROE of 13.82% for the quarter ended September 30, 2019. Return on average assets (ROA) for the 2020 third quarter was 1.23%, a decrease from an ROA of 1.32% for the quarter ended September 30, 2019.
Total loans reached $2.6 billion as of September 30, 2020, which represented an increase of $256.9 million, or 11.0% as compared to September 30, 2019. In the third quarter, loans grew by $30.5 million. The consumer loan portfolio grew by $43.7 million, or 5.4%, as compared to September 30, 2019, primarily within the indirect automobile lending program. Total outstanding residential real estate loans increased $36.2 million, or 4.1%, as compared to September 30, 2019. Total outstanding commercial loans increased $176.9 million, or 27.6%, as compared to September 30, 2019. The increase in commercial loans includes $142.7 million of the Small Business Administration's Paycheck Protection Program loans.
At September 30, 2020, deposit balances reached $3.3 billion, up $650.3 million, or 24.9%, from the prior-year level. Deposit growth for the third quarter of 2020 was $196.1 million. Noninterest-bearing deposits represented 21.1% of total deposits at September 30, 2020, compared to 19.8% of total deposits on September 30, 2019. At September 30, 2020, other time deposits were $194.1 million, a decrease of $75.6 million compared to the prior year. Municipal deposits increased $218.8 million, or 34.6% from September 30, 2019.
Net interest income for the third quarter increased to $24.9 million, up 11.6% from $22.3 million in the comparable quarter of 2019. The net interest margin was 2.90% for the quarter, compared to 3.07% for the third quarter of 2019. The decrease in net interest margin from the prior year was due to a variety of factors, including: lower interest rates, increased cash balances and the impact of participating in the Small Business Administration Paycheck Protection Program.
Noninterest income for the three months ended September 30, 2020 was $8.7 million, compared to $7.7 million in the comparable 2019 quarter. For the third quarter of 2020, the net gain on the sale of loans was $1.4 million. In addition, income from fiduciary activities for the three months ended September 30, 2020 increased over the comparable quarter of 2019.
Noninterest expense for the third quarter of 2020 increased 4.1% to $17.5 million, from $16.8 million for the third quarter of 2019. Salaries and benefits increased $393 thousand. In the third quarter, both the Saratoga National Bank Latham branch and the Capital Region Business Development Office opened, increasing occupancy expenses for the quarter.
Asset quality remained strong at September 30, 2020, with continued low levels of nonperforming loans and net charge-offs. Nonperforming loans at September 30, 2020, were $6.3 million, up $1.6 million from the level at September 30, 2019. Net charge-offs, expressed as an annualized percentage of average loans outstanding, were 0.02% for the three month period ended September 30, 2020, a decrease from both 0.06% for the three month period ended December 31, 2019 and from 0.05% for the three month period ended September 30, 2019. The allowance for loan losses was $28.4 million at September 30, 2020, which represented 1.10% of loans outstanding, as compared to 0.90% at September 30, 2019. The loss provision expense for the third quarter of 2020 was $2.3 million, up $1.8 million from the provision expense for the comparable 2019 quarter. Although credit quality remains very strong, the increase in loss provision reflects the uncertainty resulting from the COVID-19 pandemic.
The changes in net income, net interest income and net interest margin between the three month periods are discussed in detail under the heading "RESULTS OF OPERATIONS," beginning on page 65.
Regulatory Capital and Increase in Stockholders' Equity: At September 30, 2020, Arrow continued to exceed all required minimum capital ratios under the current bank regulatory capital rules as implemented under Dodd-Frank (the "Capital Rules") at both the holding company and bank levels. At that date, both subsidiary banks, as well as the holding company, continued to qualify as "well-capitalized" under the capital classification guidelines as defined by the Capital Rules. Because of continued profitability and strong asset quality, the regulatory capital levels throughout recent years have consistently remained well in excess of the various required regulatory minimums in effect from time to time, as they do at present. Pursuant to the Capital Rules, required minimum regulatory capital levels for insured banks and their parent holding companies increased in 2019.
The federal bank regulators have issued a final rule to implement the “community bank leverage ratio”, introducing an optional simplified measure of capital adequacy for qualifying community banking organizations (the CBLR framework). To qualify for the CBLR framework, a community banking organization must satisfy certain requirements, including having a leverage ratio of greater than 9%, less than $10 billion in total consolidated assets, and limited amounts of off-balance-sheet exposures and trading assets and liabilities. A qualifying community banking organization that opts into the CBLR framework and meets all requirements under the CBLR framework will be considered to have met the well-capitalized ratio requirements under the “prompt corrective action” regulations and will not be required to report or calculate risk-based capital ratios. Subsequently, Section 4012 of the Coronavirus Aid, Relief, and Economic Security (CARES) Act required the federal banking agencies to temporarily lower the threshold for election of the CBLR framework, issuing two interim final rules to set the CLBR at 8% as of the second quarter of 2020 and then gradually re-establish the CBLR at 9%.
Under the final rule, the CBLR will remain at 8% through the end of 2020. Community banks that have a leverage ratio of 8% or greater and meet certain other criteria may elect to use the CBLR framework. Beginning in 2021, the CBLR will increase to 8.5% for the calendar year. Community banks will have until January 1, 2022, before the leverage ratio requirement to use the CBLR framework will return to 9%.
The final rule also maintains a two-quarter grace period for a qualifying community banking organization whose leverage ratio falls no more than one percentage point below the applicable CBLR requirement.
The CBLR final rule became effective as of January 1, 2020, and Arrow and both subsidiary banks have opted out of utilizing the CBLR framework. The Capital Rules promulgated under Dodd-Frank will remain applicable to Arrow.
Stockholders’ equity was $325.7 million at September 30, 2020, an increase of $23.9 million, or 7.9%, from the December 31, 2019 level of $301.7 million, and an increase of $33.4 million, or 11.4%, from the prior-year level. The increase in stockholders' equity over the first nine months of 2020 principally reflected the following factors: (i) $28.3 million of net income for the period, plus (ii) other comprehensive income of $6.1 million, plus (iii) issuance of $2.8 million of common stock through employee benefit and dividend reinvestment plans; reduced by (iv) cash dividends of $11.7 million; and (v) repurchases of common stock of $1.6 million. The components of the change in stockholders’ equity since year-end 2019 are presented in the Consolidated Statement of Changes in Stockholders’ Equity on page 6, and are discussed in more detail in the next section.
At September 30, 2020, book value per share was $21.03, up by 11.0% over the prior-year level. Tangible book value per share (a non-GAAP measure that deducts intangible assets from stockholders' equity) was $19.50, an increase of $2.08,or 11.9%, over the level as of September 30, 2019. See the disclosure on page 42 related to the use of non-GAAP financial measures including tangible book value.
On September 30, 2020, the Company's closing stock price was $29.73, representing a trading multiple of 1.52 to tangible book value. As adjusted for the 3% stock dividend distributed on September 25, 2020, in the third quarter of 2020, the Company paid a quarterly cash dividend of $0.25. Further discussion of dividends is included in the Capital Components; Stock Repurchases; Dividends section located on page 62.
Loan Quality: Net charge-offs for the third quarter of 2020 were $125 thousand as compared to $282 thousand for the comparable 2019 quarter. The ratio of net charge-offs to average loans (annualized) was 0.02% for the three month period ended September 30, 2020, a decrease from both 0.06% for the three month period ended December 31, 2019 and from 0.05% for the three month period ended September 30, 2019. At September 30, 2020, the allowance for credit losses was $28.4 million representing 1.10% of total loans, which is an increase from the September 30, 2019 ratio of 0.90%. Although credit quality remains very strong, the increase in loan loss provision expense reflects the uncertainty resulting from the COVID-19 pandemic. As permitted by the CARES Act, Arrow has elected to defer the adoption of the Current Expected Credit Losses ("CECL") methodology in determining credit losses.
Nonperforming loans were $6.3 million at September 30, 2020, representing 0.24% of period-end loans, an increase from the September 30, 2019 ratio of 0.20%. The ratio continues to compare favorably with the weighted average ratio of the peer group of 0.59% at June 30, 2020.
Loan Segments: As of September 30, 2020, total loans grew by $206.3 million, or 8.6%, as compared to the balance at December 31, 2019. The largest increase was in commercial and commercial real estate loans, which increased by $156.0 million, or 23.6%, from December 31, 2019. The majority of the increase in commercial loans resulted from the origination of approximately $142.7 million of Small Business Administration's Paycheck Protection Program loans. In addition, consumer loans expanded $38.3 million, or 4.7%. The economic factors resulting from the COVID-19 pandemic, including but not limited to restrictions on non-essential businesses, will most likely adversely impact loan growth for the remainder of the year.
•Commercial and Commercial Real Estate Loans: Combined, these loans comprise 31.5% of the total loan portfolio at period-end. Commercial property values in the Company’s region have largely remained stable year-to-date, however, there remains uncertainty surrounding market conditions due to the pandemic. Appraisals on nonperforming and watched CRE loan properties are updated as deemed necessary, usually when the loan is downgraded or when there has been significant market deterioration since the last appraisal. The temporary closure of nonessential business in New York has impacted, and may continue to impact, the Bank's customer base. Government intervention, with programs such as the Small Business Administration’s Paycheck Protection Program, may mitigate the economic risk to both Arrow and its customers, however the full impact cannot be determined at this time.
•Consumer Loans: These loans (primarily automobile loans) comprised 32.8% of the total loan portfolio at period-end. Consumer automobile loans at September 30, 2020, were $844 million, or 99.4% of this portfolio segment. In the first nine months of 2020, Arrow did not experience any significant increase in the delinquency rate or in the percentage of nonperforming loans in this segment. The vast majority of automobile loans are initiated through the purchase of vehicles by consumers with automobile dealers. The physical sale of vehicles through dealerships had been curtailed for a significant part of 2020 as part of the response to the COVID-19 pandemic in New York and Vermont, our primary dealer network. Thus, the volume of originations of consumer loans will be negatively impacted, although the magnitude of the impact cannot be determined.
•Residential Real Estate Loans: These loans, including home equity loans, made up 35.7% of the total loan portfolio at period-end. The residential real estate market in the Company's service area has been stable in recent periods. Arrow originated nearly all of the residential real estate loans currently held in the loan portfolio and applies conservative underwriting standards to loan originations. Arrow typically sells a portion of residential real estate mortgage originations into the secondary market. The ratio of the sales of originations to total originations tends to fluctuate from period to period based on market conditions. Due to the COVID-19 pandemic, it is not yet possible to determine the long term economic impact of the mandated closure of non-essential business and its resulting impact on our residential real estate loan portfolio. It should be noted, however, that in the third quarter of 2020, historically low interest rates have led to higher originations compared to the third quarter of the prior year.
Liquidity and Access to Credit Markets: The Company has not experienced any liquidity problems or special concerns in recent years or thus far in 2020. Arrow’s liquidity position provides the necessary flexibility to address any unexpected near-term disruptions that may develop as a result of the COVID-19 pandemic such as: reduced cash-flows from the investment and loan portfolios and aggressive funding of programs associated with response efforts. Interest-bearing cash balances at September 30, 2020 were $396.4 million compared to $26.4 million at September 30, 2019. Operating collateralized lines of credit are established and available through the FHLBNY and FRB, totaling $1.3 billion. The terms of Arrow's lines of credit have not changed significantly in recent periods (see the general liquidity discussion on page 62). Historically, the Company has principally relied on asset-based liquidity (i.e., funds in overnight investments and cash flow from maturing investments and loans) with liability-based liquidity as a secondary source of funds (the main liability-based sources are an overnight borrowing arrangement with correspondent banks, an arrangement for overnight borrowing and term credit advances from the FHLBNY, and an additional arrangement for short-term advances at the Federal Reserve Bank discount window). Regular liquidity stress tests and tests of the contingent liquidity plan are performed to ensure that an adequate amount of available funds can be generated to meet a wide variety of potential liquidity crises including the current COVID-19 pandemic.
Visa Class B Common Stock: Arrow's subsidiary bank, Glens Falls National, like other Visa member banks, bears some indirect contingent liability for Visa's direct liability arising out of certain antitrust claims involving merchant discounts to the extent that Visa's liability might exceed the amount funded in its litigation escrow account. On September 18, 2018, Visa issued a press release announcing that it and other defendants entered into a settlement agreement with class action plaintiffs in the related litigation case. But certain merchants opted out of the class action settlement and filed separate litigation cases. Once the class action and other merchant litigation cases are settled and the balance in the litigation escrow account is sufficient to cover the litigation claims and related expenses, Arrow could potentially realize a gain on the receipt of Visa Class A common stock. On September 27, 2019, Visa deposited $300 million into the litigation escrow account that was established pursuant to Visa’s U.S. retrospective responsibility plan, which reduces the conversion rate of Class B shares to Class A shares. This did not have a significant effect on the number of Class B shares currently convertible to Class A shares by Glens Falls National. At September 30, 2020, Glens Falls National held 27,771 shares of Visa Class B common stock, and utilizing the conversion ratio to Class A common stock at that time, these Class B shares would convert to 45,000 shares of Visa Class A common stock. Since the litigation settlement is not certain, the Company does not recognize any economic value for these shares.
CHANGE IN FINANCIAL CONDITION
Summary of Selected Consolidated Balance Sheet Data
(Dollars in Thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2020
|
|
At Period-End
December 31,
2019
|
|
September 30, 2019
|
|
$ Change
From December
|
|
$ Change
From
September
|
|
% Change
From December (not annualized)
|
|
% Change
From
September
|
Interest-Bearing Bank Balances
|
$
|
396,380
|
|
|
$
|
23,186
|
|
|
$
|
26,416
|
|
|
$
|
373,194
|
|
|
$
|
369,964
|
|
|
1,609.6
|
%
|
|
1,400.5
|
%
|
Securities Available-for-Sale
|
374,928
|
|
|
357,334
|
|
|
314,182
|
|
|
17,594
|
|
|
60,746
|
|
|
4.9
|
%
|
|
19.3
|
%
|
Securities Held-to-Maturity
|
224,799
|
|
|
245,065
|
|
|
255,095
|
|
|
(20,266)
|
|
|
(30,296)
|
|
|
(8.3)
|
%
|
|
(11.9)
|
%
|
Equity Securities
|
1,511
|
|
|
2,063
|
|
|
1,996
|
|
|
(552)
|
|
|
(485)
|
|
|
(26.8)
|
%
|
|
(24.3)
|
%
|
Loans (1)
|
2,592,455
|
|
|
2,386,120
|
|
|
2,335,591
|
|
|
206,335
|
|
|
256,864
|
|
|
8.6
|
%
|
|
11.0
|
%
|
Allowance for loan losses
|
28,446
|
|
|
21,187
|
|
|
20,931
|
|
|
7,259
|
|
|
7,515
|
|
|
34.3
|
%
|
|
35.9
|
%
|
Earning Assets (1)
|
3,595,647
|
|
|
3,024,085
|
|
|
2,939,907
|
|
|
571,562
|
|
|
655,740
|
|
|
18.9
|
%
|
|
22.3
|
%
|
Total Assets
|
$
|
3,777,684
|
|
|
$
|
3,184,275
|
|
|
$
|
3,112,822
|
|
|
$
|
593,409
|
|
|
$
|
664,862
|
|
|
18.6
|
%
|
|
21.4
|
%
|
Noninterest-Bearing Deposits
|
$
|
690,232
|
|
|
$
|
484,944
|
|
|
$
|
516,876
|
|
|
$
|
205,288
|
|
|
$
|
173,356
|
|
|
42.3
|
%
|
|
33.5
|
%
|
Interest-Bearing Checking
Accounts
|
912,980
|
|
|
689,221
|
|
|
801,446
|
|
|
223,759
|
|
|
111,534
|
|
|
32.5
|
%
|
|
13.9
|
%
|
Savings Deposits
|
1,354,956
|
|
|
1,046,568
|
|
|
929,691
|
|
|
308,388
|
|
|
425,265
|
|
|
29.5
|
%
|
|
45.7
|
%
|
Time Deposits over $250,000
|
112,555
|
|
|
123,968
|
|
|
96,770
|
|
|
(11,413)
|
|
|
15,785
|
|
|
(9.2)
|
%
|
|
16.3
|
%
|
Other Time Deposits
|
194,135
|
|
|
271,353
|
|
|
269,764
|
|
|
(77,218)
|
|
|
(75,629)
|
|
|
(28.5)
|
%
|
|
(28.0)
|
%
|
Total Deposits
|
$
|
3,264,858
|
|
|
$
|
2,616,054
|
|
|
$
|
2,614,547
|
|
|
$
|
648,804
|
|
|
$
|
650,311
|
|
|
24.8
|
%
|
|
24.9
|
%
|
Federal Funds Purchased and
Securities Sold Under
Agreements to Repurchase
|
$
|
73,949
|
|
|
$
|
51,099
|
|
|
$
|
72,869
|
|
|
$
|
22,850
|
|
|
$
|
1,080
|
|
|
44.7
|
%
|
|
1.5
|
%
|
FHLBNY Advances - Overnight
|
—
|
|
|
130,000
|
|
|
48,000
|
|
|
(130,000)
|
|
|
(48,000)
|
|
|
(100.0)
|
%
|
|
(100.0)
|
%
|
FHLBNY Advances - Term
|
50,000
|
|
|
30,000
|
|
|
30,000
|
|
|
20,000
|
|
|
20,000
|
|
|
66.7
|
%
|
|
66.7
|
%
|
Junior Subordinated Obligations Issued to Unconsolidated
Subsidiary Trusts
|
20,000
|
|
|
20,000
|
|
|
20,000
|
|
|
—
|
|
|
—
|
|
|
—
|
%
|
|
—
|
%
|
Stockholders' Equity
|
325,660
|
|
|
301,728
|
|
|
292,228
|
|
|
23,932
|
|
|
33,432
|
|
|
7.9
|
%
|
|
11.4
|
%
|
(1) Includes Nonaccrual Loans.
Changes in Earning Assets: The loan portfolio at September 30, 2020, was $2.6 billion, an increase of $206.3 million, or 8.6%, from the December 31, 2019 level and up by $256.9 million, or 11.0%, from the September 30, 2019 level. The following trends were experienced in our largest segments:
•Commercial and commercial real estate loans: This segment of the loan portfolio increased by $156.0 million, or 23.6%, during the first nine months of 2020. The majority of the increase resulted from the origination of approximately of $142.7 million of the Small Business Administration's Payroll Protection Program loans.
•Consumer loans (primarily automobile loans through indirect lending): As of September 30, 2020, these loans, primarily auto loans, increased by $38.3 million, or 4.7%, from the December 31, 2019 balance. The physical sale of vehicles through dealerships, which had been curtailed for a portion of the year as part of the New York State and Vermont response to the COVID-19 pandemic, has resumed. However, while certain restrictions and guidelines have been lifted or relaxed, they may be reinstituted in response to the continuing effects of the pandemic.
•Residential real estate loans: This segment increased during the first nine months of 2020 by $12.1 million, or 1.3%. The likely impact of the COVID-19 pandemic on the volume of residential real estate loans is difficult to determine. We expect that elevated unemployment and the temporary closure of some non-essential businesses in New York State may have an adverse impact on new originations. The rapid decline of interest rates has, however, increased near-term demand for refinancing and new purchase loans, both with existing and new customers.
Changes in Sources of Funds: Deposit balances reached $3.3 billion, up $650.3 million, or 24.9%, from the prior-year level. Deposit growth for the third quarter of 2020 was $196.1 million. Noninterest-bearing deposits represented 21.1% of total deposits at September 30, 2020, compared to 19.8% of total deposits on September 30, 2019. At September 30, 2020, other time deposits were $194.1 million, a decrease of $75.6 million compared to the prior year. Municipal deposits increased $218.8 million, or 34.6% from September 30, 2019.
Municipal Deposits: Fluctuations in balances of interest-bearing checking accounts are largely the result of timing and behavior of municipal deposits. Municipal deposits on average represent 20% to 25% of total deposits, although slightly higher at September 30, 2020. Municipal deposits are typically placed in interest-bearing checking, savings and various time deposit accounts.
In general, there is a seasonal pattern to municipal deposits which dip to a low point in August each year. Account balances tend to increase throughout the fall and into early winter from tax deposits, flatten out after the beginning of the ensuing calendar year, and increase again at the end of March from the electronic deposit of NYS Aid payments to school districts. In addition to seasonal behavior, the overall level of municipal deposit balances fluctuates from year-to-year as a result of local economic factors as well as competition from other banks and non-bank entities.
FINANCIAL CONDITION
Investment Portfolio Trends
The table below presents the changes in the period-end balances for available-for-sale, held-to-maturity and equity securities from December 31, 2019 to September 30, 2020 (in thousands).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in Thousands)
|
|
Fair Value at Period-End
|
|
Net Unrealized Gains (Losses)
For Period Ended
|
|
9/30/2020
|
|
12/31/2019
|
|
Change
|
|
9/30/2020
|
|
12/31/2019
|
|
Change
|
Securities Available-for-Sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Agency Securities
|
$
|
35,167
|
|
|
$
|
5,054
|
|
|
$
|
30,113
|
|
|
$
|
166
|
|
|
$
|
52
|
|
|
$
|
114
|
|
State and Municipal Obligations
|
593
|
|
|
764
|
|
|
(171)
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Mortgage-Backed Securities
|
338,368
|
|
|
350,716
|
|
|
(12,348)
|
|
|
8,481
|
|
|
772
|
|
|
7,709
|
|
Corporate and Other Debt Securities
|
800
|
|
|
800
|
|
|
—
|
|
|
(200)
|
|
|
(200)
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
$
|
374,928
|
|
|
$
|
357,334
|
|
|
$
|
17,594
|
|
|
$
|
8,447
|
|
|
$
|
624
|
|
|
$
|
7,823
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities Held-to-Maturity:
|
|
|
|
|
|
|
|
|
|
|
|
State and Municipal Obligations
|
$
|
203,180
|
|
|
$
|
212,319
|
|
|
$
|
(9,139)
|
|
|
$
|
7,445
|
|
|
$
|
4,076
|
|
|
$
|
3,369
|
|
Mortgage-Backed Securities
|
30,321
|
|
|
37,299
|
|
|
(6,978)
|
|
|
1,257
|
|
|
477
|
|
|
780
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
$
|
233,501
|
|
|
$
|
249,618
|
|
|
$
|
(16,117)
|
|
|
$
|
8,702
|
|
|
$
|
4,553
|
|
|
$
|
4,149
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity Securities
|
$
|
1,511
|
|
|
$
|
2,063
|
|
|
$
|
(552)
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At September 30, 2020, the Company held no investment securities in the securities portfolios that consisted of or included, directly or indirectly, obligations of foreign governments or governmental agencies of foreign issuers.
In the periods referenced above, Mortgage-Backed Securities consisted solely of mortgage pass-through securities and Collateralized Mortgage Obligations ("CMOs") issued or guaranteed by U.S. federal agencies. Mortgage pass-through securities provide to the investor monthly portions of principal and interest pursuant to the contractual obligations of the underlying mortgages. CMOs are pools of mortgage-backed securities, the repayments on which have generally been separated into two or more components (tranches), where each tranche has a separate estimated life and yield. The Company's practice has been to purchase pass-through securities and CMOs that are issued or guaranteed by U.S. federal agencies, and the tranches of CMOs purchased are generally those having shorter average lives and/or durations. As a result of payment deferrals on underlying loan collateral that make up mortgage-backed securities, some cashflows may be temporarily impacted.
Other-Than-Temporary Impairment
Each quarter all investment securities with a fair value less than amortized cost are evaluated in the available-for-sale portfolio, the held-to-maturity portfolio and the equity securities portfolio, to determine if there exists other-than-temporary impairment for any such security as defined under generally accepted accounting principles. The evaluation also examined the potential impact of the COVID-19 pandemic on other-than-temporary impairment. There were no other-than-temporary impairment losses in the first nine months of 2020.
Change in Net Unrealized Securities Gains (Losses): Nearly all of the change in net unrealized gains or losses during recent periods has been attributable to changes in the market rates during the periods in question, with no change in the credit-worthiness of the issuers.
Investment Sales, Purchases and Maturities
There were no sales of investment securities within the nine month periods ended September 30, 2020 or 2019.
The following table summarizes purchases of investment securities within the available-for-sale and held-to-maturity portfolios for the nine month periods ended September 30, 2020 and 2019, as well as proceeds from the maturity and calls of investment securities within each portfolio for the respective periods presented:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In Thousands)
|
Three Months Ended
|
|
Nine Months Ended
|
Purchases:
|
9/30/2020
|
|
9/30/2019
|
|
9/30/2020
|
|
9/30/2019
|
Available-for-Sale Portfolio
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-Backed Securities
|
$
|
30,000
|
|
|
$
|
55,028
|
|
|
$
|
86,832
|
|
|
$
|
70,418
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maturities & Calls
|
$
|
32,809
|
|
|
$
|
27,391
|
|
|
$
|
75,449
|
|
|
$
|
79,077
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
Purchases:
|
9/30/2020
|
|
9/30/2019
|
|
9/30/2020
|
|
9/30/2019
|
|
Held-to-Maturity Portfolio
|
|
|
|
|
|
|
|
|
State and Municipal Obligations
|
$
|
1,842
|
|
|
$
|
1,302
|
|
|
$
|
6,848
|
|
|
$
|
3,398
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maturities & Calls
|
$
|
10,384
|
|
|
$
|
8,553
|
|
|
$
|
26,570
|
|
|
$
|
31,161
|
|
|
Loan Trends
The following three tables present, for each of the last five quarters, the quarterly average balances by loan type, the percentage of total loans represented by each loan type and the annualized yield of each loan category. Over the last five quarters, the average balances for Commercial, Commercial Real Estate, Consumer and Residential Real Estate have steadily increased, although at different rates. As result of the economic impact of the COVID-19 pandemic, it is uncertain if this consistent growth will continue through the pandemic.
Quarterly Average Loan Balances
(Dollars in Thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended
|
|
9/30/2020
|
|
6/30/2020
|
|
3/31/2020
|
|
12/31/2019
|
|
9/30/2019
|
Commercial
|
$
|
276,296
|
|
|
$
|
234,732
|
|
|
$
|
140,486
|
|
|
$
|
133,550
|
|
|
$
|
125,498
|
|
Commercial Real Estate
|
538,914
|
|
|
530,808
|
|
|
518,931
|
|
|
505,639
|
|
|
493,819
|
|
Consumer
|
841,009
|
|
|
840,734
|
|
|
818,892
|
|
|
817,463
|
|
|
809,641
|
|
Residential Real Estate
|
926,034
|
|
|
911,924
|
|
|
916,037
|
|
|
901,458
|
|
|
879,921
|
|
Total Loans
|
$
|
2,582,253
|
|
|
$
|
2,518,198
|
|
|
$
|
2,394,346
|
|
|
$
|
2,358,110
|
|
|
$
|
2,308,879
|
|
Percentage of Total Quarterly Average Loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended
|
|
9/30/2020
|
|
6/30/2020
|
|
3/31/2020
|
|
12/31/2019
|
|
9/30/2019
|
Commercial
|
9.3
|
%
|
|
9.3
|
%
|
|
5.9
|
%
|
|
5.7
|
%
|
|
5.4
|
%
|
Commercial Real Estate
|
21.1
|
%
|
|
21.1
|
%
|
|
21.6
|
%
|
|
21.4
|
%
|
|
21.4
|
%
|
Consumer
|
33.4
|
%
|
|
33.4
|
%
|
|
34.2
|
%
|
|
34.7
|
%
|
|
35.1
|
%
|
Residential Real Estate
|
36.2
|
%
|
|
36.2
|
%
|
|
38.3
|
%
|
|
38.2
|
%
|
|
38.1
|
%
|
Total Loans
|
100.0
|
%
|
|
100.0
|
%
|
|
100.0
|
%
|
|
100.0
|
%
|
|
100.0
|
%
|
Quarterly Yield on Loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended
|
|
9/30/2020
|
|
6/30/2020
|
|
3/31/2020
|
|
12/31/2019
|
|
9/30/2019
|
Commercial
|
3.73
|
%
|
|
3.84
|
%
|
|
4.52
|
%
|
|
4.54
|
%
|
|
4.60
|
%
|
Commercial Real Estate
|
3.91
|
%
|
|
4.05
|
%
|
|
4.34
|
%
|
|
4.53
|
%
|
|
4.57
|
%
|
Consumer
|
3.89
|
%
|
|
3.90
|
%
|
|
3.97
|
%
|
|
4.01
|
%
|
|
3.95
|
%
|
Residential Real Estate
|
3.86
|
%
|
|
4.08
|
%
|
|
4.20
|
%
|
|
4.20
|
%
|
|
4.27
|
%
|
Total Loans
|
3.81
|
%
|
|
4.01
|
%
|
|
4.18
|
%
|
|
4.19
|
%
|
|
4.23
|
%
|
The average yield of the overall total loan portfolio decreased during each of the previous four quarters. The COVID-19 pandemic and the rapid decline to historically low market rates, as well as the addition of $142.7 million of Small Business Administration Paycheck Protection Program loans (as described below) will continue to negatively impact loan yields for the remainder of 2020.
Maintenance of High Quality in the Loan Portfolio: In early 2020, prior to the COVID-19 pandemic, there were no significant fluctuations in the quality of the loan portfolio or any segment thereof. In general, residential real estate loans have historically been underwritten to secondary market standards for prime loans and the Company has not engaged in subprime mortgage lending as a business line. Similarly, high underwriting standards have generally been applied to commercial and commercial real estate lending operations and generally in the indirect lending program as well. The economic events related to the COVID-19 pandemic, specifically elevated unemployment and the temporary mandated closure of nonessential business, may impact the ability of our borrowers to satisfy their obligations.
Commercial Loans and Commercial Real Estate Loans: Substantially all commercial and commercial real estate loans in the loan portfolio were extended to businesses or borrowers located in the Company's regional markets. A portion of the loans in the commercial portfolio have variable rates tied to Prime, LIBOR or FHLBNY rates.
Many of the commercial and commercial real estate loans are in industries that have been heavily impacted by the COVID-19 pandemic. In 2020, Arrow originated over 1,400 PPP loans totaling approximately $142.7 million. The PPP loans yield 1% and Arrow expects to earn approximately $5.1 million in fees related to the origination of these loans. The original term on the PPP loans is two years, however the borrower will have the option to apply for forgiveness. Subsequent to the funding of the loans, additional guidance was provided that the term of the loan may be extended to five years if both parties agree to the revised terms. Arrow is recognizing the fees earned over the life of the loan and will accelerate recognition of the fees if the loan is forgiven by the Small Business Administration. Additional government intervention, if any, may mitigate the economic risk to both Arrow and its customers, however, the extent of such intervention and its impact cannot be determined at this time.
Consumer Loans: At September 30, 2020, consumer loans (primarily automobile loans originated through dealerships located primarily in upstate New York and Vermont) continue to be a significant component of Arrow's business, comprising more than one third of this total loan portfolio. The physical sale of vehicles through dealerships had been curtailed for a portion of the year as part of the New York State and Vermont response to the COVID-19 pandemic. Accordingly, we believe, the volume of originations of consumer loans have been impacted. However, the magnitude of the impact cannot be determined.
New consumer loan volume for the first nine months of 2020 was $292.8 million, down from the $319.6 million originated in the first nine months of 2019.
For credit quality purposes, Arrow assigns potential automobile loan customers into one of four tiers, ranging from lower to higher quality in terms of anticipated credit risk. Arrow's experienced lending staff not only utilizes credit evaluation software tools but also reviews and evaluates each loan individually prior to the loan being funded. Arrow believes that this disciplined approach to evaluating risk has contributed to maintaining the strong credit quality in this portfolio. The COVID-19 pandemic has created elevated unemployment, which may impact borrowers' ability to satisfy their obligations to Arrow. Government intervention may mitigate a significant portion of the credit risk, however, the extent of such intervention and its impact cannot be determined at this time.
Residential Real Estate Loans: In recent years, residential real estate loans, including home equity loans, have represented the largest category of the total loan portfolio. Gross originations for residential real estate loans (including refinancings of mortgage loans) for the first nine months of 2020 were $157.0 million, as compared to $102.2 million for the first nine months of 2019. Arrow has also sold portions of these originations in the secondary market. In the first nine months of 2020, the Company sold $50.5 million, or 32.2%, of originations. In the first nine months of 2019, $19.0 million, or 18.6%, of originations were sold. Arrow expects to continue to sell a portion of mortgage loan originations in upcoming periods if market conditions warrant. It is not currently possible to determine the long term economic impact of the COVID-19 pandemic, which had resulted in the temporary closure of non-essential business and elevated unemployment.
Deposit Trends
The following tables provide information on trends in the balance and mix of the deposit portfolio by presenting, for each of the last five quarters, the quarterly average balances by deposit type and the percentage of total deposits represented by each deposit type. The quarterly average balances of both noninterest-bearing deposits and interest-bearing checking and savings accounts have increased significantly in the last two quarters. Time deposits, over $250,000 as well as other time deposits, have decreased over the last two quarters. Market rates, beginning to decline prior to the COVID-19 pandemic, reached historic lows in the first quarter and have remained low through the third quarter. We do not currently expect any change in the rate environment for remainder of 2020.
Quarterly Average Deposit Balances
(Dollars in Thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended
|
|
9/30/2020
|
|
6/30/2020
|
|
3/31/2020
|
|
12/31/2019
|
|
9/30/2019
|
Noninterest-Bearing Deposits
|
$
|
673,181
|
|
|
$
|
624,125
|
|
|
$
|
478,481
|
|
|
$
|
491,494
|
|
|
$
|
490,177
|
|
Interest-Bearing Checking Accounts
|
764,614
|
|
|
740,284
|
|
|
707,747
|
|
|
724,668
|
|
|
686,017
|
|
Savings Deposits
|
1,314,241
|
|
|
1,215,296
|
|
|
1,092,980
|
|
|
1,003,612
|
|
|
924,868
|
|
Time Deposits over $250,000
|
121,027
|
|
|
135,978
|
|
|
126,046
|
|
|
120,321
|
|
|
86,018
|
|
Other Time Deposits
|
209,436
|
|
|
236,749
|
|
|
264,755
|
|
|
267,326
|
|
|
285,448
|
|
Total Deposits
|
$
|
3,082,499
|
|
|
$
|
2,952,432
|
|
|
$
|
2,670,009
|
|
|
$
|
2,607,421
|
|
|
$
|
2,472,528
|
|
Percentage of Total Quarterly Average Deposits
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended
|
|
9/30/2020
|
|
6/30/2020
|
|
3/31/2020
|
|
12/31/2019
|
|
9/30/2019
|
Noninterest-Bearing Deposits
|
21.8
|
%
|
|
21.1
|
%
|
|
17.9
|
%
|
|
18.8
|
%
|
|
19.8
|
%
|
Interest-Bearing Checking Accounts
|
24.8
|
|
|
25.1
|
|
|
26.5
|
|
|
27.8
|
|
|
27.7
|
|
Savings Deposits
|
42.7
|
|
|
41.2
|
|
|
41.0
|
|
|
38.5
|
|
|
37.5
|
|
Time Deposits over $250,000
|
3.9
|
|
|
4.6
|
|
|
4.7
|
|
|
4.6
|
|
|
3.5
|
|
Other Time Deposits
|
6.8
|
|
|
8.0
|
|
|
9.9
|
|
|
10.3
|
|
|
11.5
|
|
Total Deposits
|
100.0
|
%
|
|
100.0
|
%
|
|
100.0
|
%
|
|
100.0
|
%
|
|
100.0
|
%
|
Quarterly Cost of Deposits
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended
|
|
9/30/2020
|
|
6/30/2020
|
|
3/31/2020
|
|
12/31/2019
|
|
9/30/2019
|
Demand Deposits
|
—
|
%
|
|
—
|
%
|
|
—
|
%
|
|
—
|
%
|
|
—
|
%
|
Interest-Bearing Checking Accounts
|
0.14
|
%
|
|
0.17
|
%
|
|
0.28
|
%
|
|
0.30
|
%
|
|
0.29
|
%
|
Savings Deposits
|
0.24
|
%
|
|
0.39
|
%
|
|
0.91
|
%
|
|
0.98
|
%
|
|
0.99
|
%
|
Time Deposits over $250,000
|
0.96
|
%
|
|
1.30
|
%
|
|
1.70
|
%
|
|
1.88
|
%
|
|
2.08
|
%
|
Other Time Deposits
|
1.09
|
%
|
|
1.33
|
%
|
|
1.52
|
%
|
|
1.67
|
%
|
|
1.74
|
%
|
Total Deposits
|
0.25
|
%
|
|
0.37
|
%
|
|
0.68
|
%
|
|
0.72
|
%
|
|
0.73
|
%
|
During the quarter ended September 30, 2020, the total cost of deposits continued to decrease. The Federal Reserve set the targeted short-term rates to 0.00%-0.25% in response to the economic uncertainty related to the COVID-19 pandemic. Arrow is well positioned for a variety of rate environments, see Part I, Item 3, entitled "Quantitative and Qualitative Disclosures About Market Risk," for further discussion.
Non-Deposit Sources of Funds
The Company's other sources of funds include securities sold under agreements to repurchase, overnight advances and term advances from the FHLBNY. The securities sold under agreements to repurchase are short-term in nature and are collateralized by investment securities. The term advances from the FHLBNY are fixed rate non-callable advances with original maturities of three to five years.
Arrow no longer relies on TRUPs as a source of new funds. As a result of the passage of Dodd-Frank in 2010 and its removal of Tier 1 regulatory capital treatment for TRUPs issued after Dodd-Frank's grandfathering date, the Company, like other banking organizations of Arrow's size or larger, have not issued any TRUPs since that date and are not likely to issue any TRUPs in the future. However, consistent with the grandfathering provision in Dodd-Frank, the $20 million principal amount of Junior Subordinated Obligations Issued to Unconsolidated Subsidiary Trusts listed on the consolidated balance sheet as of September 30, 2020 (i.e., previously issued TRUPs) will, subject to certain limits, continue to qualify as Tier 1 regulatory capital for Arrow until such TRUPs mature or are redeemed. This is further discussed under "Capital Resources" beginning on page 60 of this Report. These trust preferred securities are subject to early redemption by the Company if the proceeds cease to qualify as Tier 1 capital of Arrow for any reason, or if certain other unanticipated but negative events should occur. An example of such an event would be an adverse change in tax laws that might deny the Company the ability to deduct interest paid on these obligations for federal income tax purposes.
In the first quarter of 2020, Arrow entered into an interest rate swap agreement to synthetically fix the variable rate interest payments associated with $20 million in outstanding subordinated trust securities.
ASSET QUALITY
The following table presents information related to the allowance and provision for loan losses for the past five quarters.
Summary of the Allowance and Provision for Loan Losses
(Dollars in Thousands, Loans Stated Net of Unearned Income)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9/30/2020
|
|
6/30/2020
|
|
3/31/2020
|
|
12/31/2019
|
|
9/30/2019
|
Loan Balances:
|
|
|
|
|
|
|
|
|
|
Period-End Loans
|
$
|
2,592,455
|
|
|
$
|
2,561,915
|
|
|
$
|
2,414,193
|
|
|
$
|
2,386,120
|
|
|
$
|
2,335,591
|
|
Average Loans, Year-to-Date
|
2,498,573
|
|
|
2,456,272
|
|
|
2,394,346
|
|
|
2,283,707
|
|
|
2,258,633
|
|
Average Loans, Quarter-to-Date
|
2,582,253
|
|
|
2,518,198
|
|
|
2,394,346
|
|
|
2,358,110
|
|
|
2,308,879
|
|
Period-End Assets
|
3,777,684
|
|
|
3,547,177
|
|
|
3,291,332
|
|
|
3,184,275
|
|
|
3,112,822
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan losses, Year-to-Date:
|
|
|
|
|
|
|
|
|
|
Allowance for loan losses, Beginning of Period
|
$
|
21,187
|
|
|
$
|
21,187
|
|
|
$
|
21,187
|
|
|
$
|
20,196
|
|
|
20,196
|
|
Provision for Loan Losses, YTD
|
8,083
|
|
|
5,812
|
|
|
2,772
|
|
|
2,079
|
|
|
1,445
|
|
Loans Charged-off, YTD
|
(1,360)
|
|
|
(968)
|
|
|
(481)
|
|
|
(1,735)
|
|
|
(1,232)
|
|
Recoveries of Loans Previously Charged-off
|
536
|
|
|
269
|
|
|
159
|
|
|
647
|
|
|
522
|
|
Net Charge-offs, YTD
|
(824)
|
|
|
(699)
|
|
|
(322)
|
|
|
(1,088)
|
|
|
$
|
(710)
|
|
Allowance for loan losses, End of Period
|
$
|
28,446
|
|
|
$
|
26,300
|
|
|
$
|
23,637
|
|
|
$
|
21,187
|
|
|
$
|
20,931
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan losses, Quarter-to-Date:
|
|
|
|
|
|
|
|
|
|
Allowance for loan losses, Beginning of Period
|
$
|
26,300
|
|
|
$
|
23,637
|
|
|
$
|
21,187
|
|
|
$
|
20,931
|
|
|
$
|
20,695
|
|
Provision for Loan Losses, QTD
|
2,271
|
|
|
3,040
|
|
|
2,772
|
|
|
634
|
|
|
518
|
|
Loans Charged-off, QTD
|
(392)
|
|
|
(487)
|
|
|
(481)
|
|
|
(503)
|
|
|
(402)
|
|
Recoveries of Loans Previously Charged-off
|
267
|
|
|
110
|
|
|
159
|
|
|
125
|
|
|
120
|
|
Net Charge-offs, QTD
|
(125)
|
|
|
(377)
|
|
|
(322)
|
|
|
(378)
|
|
|
(282)
|
|
Allowance for loan losses, End of Period
|
$
|
28,446
|
|
|
$
|
26,300
|
|
|
$
|
23,637
|
|
|
$
|
21,187
|
|
|
$
|
20,931
|
|
|
|
|
|
|
|
|
|
|
|
Nonperforming Assets, at Period-End:
|
|
|
|
|
|
|
|
|
|
Nonaccrual Loans
|
$
|
6,004
|
|
|
$
|
5,461
|
|
|
$
|
4,943
|
|
|
$
|
4,005
|
|
|
$
|
3,465
|
|
Loans Past Due 90 or More Days
and Still Accruing Interest
|
121
|
|
|
901
|
|
|
437
|
|
|
253
|
|
|
1,066
|
|
Restructured and in Compliance with
Modified Terms
|
157
|
|
|
150
|
|
|
136
|
|
|
143
|
|
|
150
|
|
Total Nonperforming Loans
|
6,282
|
|
|
6,512
|
|
|
5,516
|
|
|
4,401
|
|
|
4,681
|
|
Repossessed Assets
|
126
|
|
|
116
|
|
|
160
|
|
|
139
|
|
|
76
|
|
Other Real Estate Owned
|
—
|
|
|
595
|
|
|
782
|
|
|
1,122
|
|
|
1,198
|
|
Total Nonperforming Assets
|
$
|
6,408
|
|
|
$
|
7,223
|
|
|
$
|
6,458
|
|
|
$
|
5,662
|
|
|
$
|
5,955
|
|
|
|
|
|
|
|
|
|
|
|
Asset Quality Ratios:
|
|
|
|
|
|
|
|
|
|
Allowance to Nonperforming Loans
|
452.82
|
%
|
|
403.87
|
%
|
|
428.52
|
%
|
|
481.41
|
%
|
|
447.15
|
%
|
Allowance to Period-End Loans
|
1.10
|
%
|
|
1.03
|
%
|
|
0.98
|
%
|
|
0.89
|
%
|
|
0.90
|
%
|
Provision to Average Loans (Quarter) (1)
|
0.35
|
%
|
|
0.49
|
%
|
|
0.47
|
%
|
|
0.11
|
%
|
|
0.09
|
%
|
Provision to Average Loans (YTD) (1)
|
0.43
|
%
|
|
0.48
|
%
|
|
0.47
|
%
|
|
0.09
|
%
|
|
0.09
|
%
|
Net Charge-offs to Average Loans (Quarter) (1)
|
0.02
|
%
|
|
0.06
|
%
|
|
0.05
|
%
|
|
0.06
|
%
|
|
0.05
|
%
|
Net Charge-offs to Average Loans (YTD) (1)
|
0.04
|
%
|
|
0.06
|
%
|
|
0.05
|
%
|
|
0.05
|
%
|
|
0.04
|
%
|
Nonperforming Loans to Total Loans
|
0.24
|
%
|
|
0.25
|
%
|
|
0.23
|
%
|
|
0.18
|
%
|
|
0.20
|
%
|
Nonperforming Assets to Total Assets
|
0.17
|
%
|
|
0.20
|
%
|
|
0.20
|
%
|
|
0.18
|
%
|
|
0.19
|
%
|
(1) Annualized
|
|
|
|
|
|
|
|
|
|
Provision for Loan Losses
Through the provision for loan losses, an allowance is maintained that reflects the Company's best estimate of probable incurred loan losses related to specifically identified impaired loans as well as the inherent risk of loss related to the remaining portfolio. Loan charge-offs are recorded to this allowance when loans are deemed uncollectible, in whole or in part. As loans become past due, consideration is given to the status of those loans and whether or not to classify them as nonaccrual loans. Any loans listed as "past due 90 or more days and still accruing interest" have been evaluated and determined to be secured and is the process of collection.
As permitted by the CARES Act, Arrow has elected to defer the adoption of the Current Expected Credit Losses ("CECL") methodology in determining credit losses.
In the third quarter of 2020, the Company made a $2.3 million provision for loan losses, compared to a provision of $518 thousand for the third quarter of 2019 and a provision of $8.1 million for the first nine months of 2020. The significant increase in the provision for loan losses reflects the uncertainty resulting from the COVID-19 pandemic despite the continued strong asset quality of Arrow. See
Note 3 to the unaudited interim consolidated financial statements for a discussion on how the Company classifies credit quality indicators as well as the balance in each category.
The ratio of the allowance for credit losses to total loans was 1.10% at September 30, 2020, an increase from 0.89% at December 31, 2019 and an increase of 20 basis points from 0.90% at September 30, 2019.
The accounting policy relating to the allowance for credit losses is considered to be a critical accounting policy, given the uncertainty involved in evaluating the level of the allowance required to cover credit losses inherent in the loan portfolio, and the material effect that such judgments may have on the results of operations. The process for determining the provision for loan losses is described in Note 3 to the unaudited interim consolidated financial statements.
Risk Elements
Nonperforming assets at September 30, 2020 amounted to $6.4 million, up from the $5.7 million total at December 31, 2019 and an increase of $0.5 million, from September 30, 2019. For the three month periods ended September 30, 2020 and 2019, ratios of nonperforming assets to total assets have remained below the average ratios for the peer group. (See page 41 for a discussion of the peer group.) At June 30, 2020, the ratio of loans past due 90 or more days plus nonaccrual loans plus other real estate owned to total assets was 0.20%, below the 0.48% ratio of the peer group at such date (the latest date for which peer group information is available). At September 30, 2020 the ratio was 0.17%, which is below the most recent ratio for the peer group.
The following table presents the balance of other non-current loans at period-end as to which interest income was being accrued (i.e. loans 30 to 89 days past due, as defined in bank regulatory guidelines). These non-current loans are not included in nonperforming assets, but entail heightened risk.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans Past Due 30-89 Days and Accruing Interest
($ in 000's)
|
|
9/30/2020
|
|
12/31/2019
|
|
9/30/2019
|
Commercial Loans
|
$
|
122
|
|
|
$
|
192
|
|
|
$
|
148
|
|
Commercial Real Estate Loans
|
85
|
|
|
266
|
|
|
30
|
|
Residential Real Estate Loans
|
1,224
|
|
|
1,960
|
|
|
1,000
|
|
Consumer Loans - Primarily Indirect Automobile
|
6,963
|
|
|
8,305
|
|
|
6,804
|
|
Total Loans Past Due 30-89 Days
and Accruing Interest
|
$
|
8,394
|
|
|
$
|
10,723
|
|
|
$
|
7,982
|
|
At September 30, 2020, the loans in the above-referenced category totaled $8.4 million, a decrease of $2.3 million, or 21.7%, from the $10.7 million of such loans at December 31, 2019. The September 30, 2020 total of non-current loans equaled 0.32% of loans then outstanding, compared to 0.49% at December 31, 2019 and 0.34% at September 30, 2019. The decrease from December 31, 2019 is primarily attributable to a decrease in delinquent automobile loans and residential real estate loans.
The number and dollar amount of performing loans that demonstrate characteristics of potential weakness from time-to-time (potential problem loans) typically is a very small percentage of the loan portfolio. See the table of Credit Quality Indicators in Note 3 to the unaudited interim consolidated financial statements. The Company considers all performing commercial and commercial real estate loans classified as substandard or lower (as reported in Note 3) to be potential problem loans. The dollar amount of such loans at September 30, 2020 was $45.0 million, up from the dollar amount of such loans at December 31, 2019, when the amount was $32.4 million. These loans will continue to be closely monitored and the Company expects to collect all payments of contractual principal and interest in full on these classified loans. Total nonperforming assets at period-end increased by $453 thousand from September 30, 2019.
The economic impact of the COVID-19 pandemic, specifically unemployment levels and the temporary mandated closure of nonessential businesses, may impact the borrowers' ability to satisfy their obligations, and may therefore result in increased delinquencies. Government interventions, on both the federal and state level, have been deployed to mitigate a significant portion of the credit risk. Arrow cannot make a determination as to the overall impact on its business of the COVID-19 pandemic at this time.
As of September 30, 2020, the Company held no property in other real estate owned. At this time, the Company does not expect to acquire a significant number of other real estate properties in the near term as a result of payment defaults or the foreclosure process.
Loan Deferrals Related to COVID-19 Pandemic
The COVID-19 pandemic has created economic uncertainty resulting in elevated unemployment as well as the temporary closure of nonessential businesses. In the table below, loans deferred by industry sector as the result of the COVID-19 pandemic are presented and compared to total loans by sector as of September 30, 2020. In accordance with the CARES Act, the deferrals listed below are not considered troubled debt restructurings. In 2020, Arrow originated $142.7 million of PPP loans. These loans are included in the loan balances by sector as listed below, however, these loans are not considered deferred as of September 30, 2020.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
COVID-19 Deferrals by Loan Category at September 30, 2020
($ in 000's)
|
|
|
|
|
|
|
|
|
|
|
|
Balances by Sector
|
|
Deferrals
|
|
|
|
|
|
Total
|
|
% of Total Loans
|
|
Balance
|
|
% of Loan Segment
|
|
% of Total Loans
|
Commercial and Commercial Real Estate Loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lessors of Non-Residential Real Estate
|
|
|
|
|
$
|
141,550
|
|
|
5.5
|
%
|
|
$
|
6,809
|
|
|
0.8
|
%
|
|
0.3
|
%
|
Health Care and Social Assistance
|
|
|
|
|
126,126
|
|
|
4.9
|
%
|
|
—
|
|
|
—
|
%
|
|
—
|
%
|
Lessors of Residential Real Estate
|
|
|
|
|
107,377
|
|
|
4.1
|
%
|
|
105
|
|
|
—
|
%
|
|
—
|
%
|
Hotels and Motels
|
|
|
|
|
105,883
|
|
|
4.1
|
%
|
|
65,304
|
|
|
8.0
|
%
|
|
2.5
|
%
|
Arts/Recreation/Restaurants/Vacation Camps
|
|
|
|
|
53,268
|
|
|
2.1
|
%
|
|
12,557
|
|
|
1.5
|
%
|
|
0.5
|
%
|
Retail
|
|
|
|
|
46,008
|
|
|
1.8
|
%
|
|
121
|
|
|
—
|
%
|
|
—
|
%
|
Construction & Related
|
|
|
|
|
36,671
|
|
|
1.4
|
%
|
|
—
|
|
|
—
|
%
|
|
—
|
%
|
Other
|
|
|
|
|
200,271
|
|
|
7.7
|
%
|
|
1,180
|
|
|
—
|
%
|
|
—
|
%
|
Total Commercial and Commercial Real Estate Loans
|
|
|
|
|
817,154
|
|
|
31.5
|
%
|
|
86,076
|
|
|
10.5
|
%
|
|
3.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer Loans
|
|
|
|
|
849,526
|
|
|
32.8
|
%
|
|
2,810
|
|
|
0.3
|
%
|
|
0.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential Real Estate Loans
|
|
|
|
|
925,775
|
|
|
35.7
|
%
|
|
11,098
|
|
|
1.2
|
%
|
|
0.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Loans
|
|
|
|
|
$
|
2,592,455
|
|
|
|
|
$
|
99,984
|
|
|
|
|
3.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CAPITAL RESOURCES
Regulatory Capital Standards
Capital Adequacy Requirements. An important area of banking regulation is the federal banking system's promulgation and enforcement of minimum capitalization standards for banks and bank holding companies.
As reported in the Regulatory Reform section above, the federal bank regulators have issued a final rule to implement the Community Bank Leverage Ratio ("CBLR"), introducing an optional simplified measure of capital adequacy for qualifying community banks that satisfy certain requirements, including having a leverage ratio of greater than 9%, less than $10 billion in total consolidated assets, and limited amounts of off-balance-sheet exposures and trading assets and liabilities. A qualifying community bank that opts into the CBLR framework and meets all requirements under the CBLR framework will be considered to have met the well-capitalized ratio requirements under the “prompt corrective action” regulations and will not be required to report or calculate risk-based capital ratios. The CBLR is calculated as the ratio of “tier 1 capital” divided by “average total consolidated assets.” This final rule was effective as of January 1, 2020, and qualifying community banks can utilize the CBLR framework for purposes of filing their call reports or Form FR Y-9C, as applicable, for the first quarter of 2020 (i.e., as of March 31, 2020). Arrow elected to opt out of utilizing the CBLR framework. The Capital Rules promulgated under Dodd-Frank will remain applicable to Arrow.
The following is a summary of certain definitions of capital under the various capital measures in the Dodd-Frank Capital Rules:
Common Equity Tier 1 Capital (CET1): Equals the sum of common stock instruments and related surplus (net of treasury stock), retained earnings, accumulated other comprehensive income (AOCI), and qualifying minority interests, minus applicable regulatory adjustments and deductions. Such deductions will include AOCI, if the organization has exercised its irrevocable option not to include AOCI in capital (the Company made such an election). Mortgage-servicing assets, deferred tax assets, and investments in financial institutions are limited to 15 percent of CET1 in the aggregate and 10 percent of CET1 for each such item individually.
Additional Tier 1 Capital: Equals the sum of noncumulative perpetual preferred stock, tier 1 minority interests, grandfathered TRUPs, and Troubled Asset Relief Program instruments, minus applicable regulatory adjustments and deductions.
Tier 2 Capital: Equals the sum of subordinated debt and preferred stock, total capital minority interests not included in Tier 1, and allowance for loan and lease losses (not exceeding 1.25% of risk-weighted assets) minus applicable regulatory adjustments and deductions.
The following table presents the minimum regulatory capital ratios applicable to the holding company and banks under the current Capital Rules:
|
|
|
|
|
|
Capital Ratio
|
2020
|
Minimum CET1 Ratio
|
4.500
|
%
|
Capital Conservation Buffer ("Buffer")
|
2.500
|
%
|
Minimum CET1 Ratio Plus Buffer
|
7.000
|
%
|
Minimum Tier 1 Risk-Based Capital Ratio
|
6.000
|
%
|
Minimum Tier 1 Risk-Based Capital Ratio Plus Buffer
|
8.500
|
%
|
Minimum Total Risk-Based Capital Ratio
|
8.000
|
%
|
Minimum Total Risk-Based Capital Ratio Plus Buffer
|
10.500
|
%
|
Minimum Leverage Ratio
|
4.000
|
%
|
These minimum capital ratios, especially the CET1 ratio (4.5%) and the enhanced Tier 1 risk-based capital ratio (6.0%), represent a heightened and more restrictive capital regime than institutions like Arrow previously had to meet under the prior capital rules.
At September 30, 2020, Arrow's holding company and both of its subsidiary banks exceeded by a substantial amount each of the applicable minimum capital ratios established under the Capital Rules, including the minimum CET1 Ratio, the minimum Tier 1 Risk-Based Capital Ratio, the minimum Total Risk-Based Capital Ratio, and the minimum Leverage Ratio, including in the case of each risk-based ratio, the capital buffer.
Prompt Corrective Action Capital Classifications. Under applicable banking law, federal banking regulators are required to take prompt corrective action with respect to depository institutions that do not meet certain minimum capital requirements. For these purposes, the regulators have established five capital classifications for banking institutions, ranging from the highest category of "well-capitalized" to the lowest category of "critically under-capitalized". Under the current capital classifications, a banking institution is considered "well-capitalized" if it meets the following capitalization standards on the date of measurement: a CET1 risk-based capital ratio of 6.50% or greater, a Tier 1 risk-based capital ratio of 8.00% or greater, a total risk-based capital ratio of 10.00% or greater, and a Tier 1 leverage ratio of 5.00% or greater, provided the institution is not subject to any regulatory order or written directive regarding capital maintenance. Federal banking law also ties the ability of banking organizations to engage in certain types of activities and to utilize certain procedures to such organizations' continuing to qualify for inclusion in one of the two highest rankings of these capitalization categories, i.e., as "well-capitalized" or "adequately capitalized."
Current Capital Ratios: The table below sets forth the regulatory capital ratios of Arrow's holding company and two subsidiary banks, Glens Falls National and Saratoga National, under the current Capital Rules, as of September 30, 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
|
|
Tier 1
|
|
Total
|
|
|
|
Equity
|
|
Risk-Based
|
|
Risk-Based
|
|
Tier 1
|
|
Tier 1 Capital
|
|
Capital
|
|
Capital
|
|
Leverage
|
|
Ratio
|
|
Ratio
|
|
Ratio
|
|
Ratio
|
Arrow Financial Corporation
|
13.20
|
%
|
|
14.06
|
%
|
|
15.28
|
%
|
|
9.17
|
%
|
Glens Falls National Bank & Trust Co.
|
13.98
|
%
|
|
13.98
|
%
|
|
15.21
|
%
|
|
8.82
|
%
|
Saratoga National Bank & Trust Co.
|
12.29
|
%
|
|
12.29
|
%
|
|
13.51
|
%
|
|
8.63
|
%
|
|
|
|
|
|
|
|
|
FDICIA's Prompt Corrective Action - "Well-Capitalized" Standard (2019)
|
6.50
|
%
|
|
8.00
|
%
|
|
10.00
|
%
|
|
5.00
|
%
|
Regulatory Minimum effective 1/1/2019
|
7.000%(1)
|
|
8.500%(1)
|
|
10.500%(1)
|
|
4.00
|
%
|
(1) Including the fully phased-in 2.50% capital conservation buffer
|
|
|
At September 30, 2020, Arrow and its subsidiary banks exceeded the minimum regulatory capital ratios established under the current Capital Rules and each also qualified as "well-capitalized", the highest category in the new capital classification scheme established by federal bank regulatory agencies under the "prompt corrective action" standards, as described above.
Capital Components; Stock Repurchases; Dividends
Stockholders' Equity: Stockholders’ equity was $325.7 million at September 30, 2020, an increase of $23.9 million, or 7.9%, from the December 31, 2019 level of $301.7 million, and an increase of $33.4 million, or 11.4%, from the prior-year level. The increase in stockholders' equity over the first nine months of 2020 principally reflected the following factors: (i) $28.3 million of net income for the
period, plus (ii) other comprehensive income of $6.1 million, plus (iii) issuance of $2.8 million of common stock through employee benefit and dividend reinvestment plans; reduced by (iv) cash dividends of $11.7 million; and (v) repurchases of common stock of $1.6 million under the Board-approved stock repurchase program described below.
Trust Preferred Securities: In each of 2003 and 2004, the Company issued $10 million of trust preferred securities (TRUPs) in a private placement. Under the Federal Reserve Board's regulatory capital rules then in effect, TRUPs proceeds typically qualified as Tier 1 capital for bank holding companies such as Arrow, but only in amounts up to 25% of Tier 1 capital, net of goodwill less any associated deferred tax liability. Under the Dodd-Frank Act, any trust preferred securities that Arrow might issue on or after the grandfathering date set forth in Dodd-Frank (May 19, 2010) would not qualify as Tier 1 capital under bank regulatory capital guidelines. For Arrow, TRUPs outstanding prior to the grandfathering cutoff date set forth in Dodd-Frank (May 19, 2010) would continue to qualify as Tier 1 capital until maturity or redemption, subject to limitations. Thus, Arrow's outstanding TRUPs continue to qualify as Tier 1 regulatory capital, subject to such limitations.
In the first quarter of 2020, Arrow entered into an interest rate swap agreement to synthetically fix the variable rate interest payments associated with $20 million in outstanding subordinated trust securities. The effective fixed rate is 3.43% until maturity. These agreements are designated as cash flow hedges.
Stock Repurchase Program: In October 2019, the Board of Directors approved a $5.0 million stock repurchase program, effective January 1, 2020 (the 2020 Repurchase Program), under which management is authorized, in its discretion, to permit the Company to repurchase up to $5 million of shares of Arrow's common stock during 2020, in the open market or in privately negotiated transactions, to the extent management believes the Company's stock is reasonably priced and such repurchases appear to be an attractive use of available capital and in the best interests of shareholders. This 2020 Repurchase Program replaced a similar repurchase program which was in effect during 2019 (the 2019 program), which also authorized the repurchase of up to $5.0 million of shares of Arrow's common stock. As of September 30, 2020 approximately $1.5 million had been used under the 2020 Repurchase Program to repurchase Arrow shares. No stock repurchases have occurred in the third quarter. This total does not include repurchases of Arrow's Common Stock other than through its 2020 Repurchase Program, i.e., repurchases of Arrow shares on the market utilizing funds accumulated under Arrow's Dividend Reinvestment Plan and the surrender or deemed surrender of Arrow stock to the Company in connection with employees' stock-for-stock exercises of compensatory stock options to buy Arrow stock.
Dividends: The Company's common stock is traded on NasdaqGS® under the symbol AROW. The high and low stock prices for the past seven quarters listed below represent actual sales transactions, as reported by NASDAQ. On October 28, 2020, the Board of Directors declared a 2020 fourth quarter cash dividend of $0.26 payable on December 15, 2020. Per share amounts and share counts in the following tables have been restated for the September 25, 2020 3% stock dividend.
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Cash
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Market Price
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Dividends
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Low
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High
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Declared
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2019
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First Quarter
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$
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28.71
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$
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34.17
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$
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0.245
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Second Quarter
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30.05
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32.94
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0.245
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Third Quarter
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29.38
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34.28
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0.245
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Fourth Quarter
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31.09
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37.19
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0.252
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2020
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First Quarter
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$
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20.18
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$
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36.93
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$
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0.252
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Second Quarter
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22.87
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30.76
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0.252
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Third Quarter
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24.58
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29.13
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0.252
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Fourth Quarter (dividend payable December 15, 2020)
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TBD
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TBD
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Quarter Ended September 30
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2020
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2019
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Cash Dividends Per Share
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$
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0.252
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$
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0.245
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Diluted Earnings Per Share
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0.71
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0.65
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Dividend Payout Ratio
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35.49
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%
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37.69
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%
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Total Equity (in thousands)
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325,660
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$
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292,228
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Shares Issued and Outstanding (in thousands)
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15,489
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15,418
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Book Value Per Share
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$
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21.03
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$
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18.95
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Intangible Assets (in thousands)
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23,662
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23,586
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Tangible Book Value Per Share
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$
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19.50
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$
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17.42
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