Arrow Financial Corporation (NasdaqGS – AROW) announced operating results for the three month and nine month periods ended September 30, 2020. 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.
Arrow continues to manage its COVID-19 response with health and safety concerns as a top priority. In the third quarter, our Business Continuity Task Force focused on maintaining protocols that have allowed us to keep our team and customers healthy and our branches open. We actively monitor developments, and if future restrictions are imposed, we are confident in our ability to continue to provide essential banking services and meet our customers' needs.
"Throughout this pandemic, Arrow has remained strong, and we delivered again for our shareholders in the third quarter with solid earnings, and both a cash and stock dividend," said Thomas J. Murphy, President and CEO. "We continued to assist our customers and communities with temporary financial assistance, stimulus program support, and forgiveness assistance for our 1,400 Small Business Administration Paycheck Protection Program borrowers. As these challenging times continue, I thank our team for their commitment to safety while also demonstrating flexibility in adapting to the changing needs of our customers."
In the third quarter, Arrow opened a Saratoga National Bank Branch as well as a Capital Region Business Development Office in Latham, NY. Both locations continue our forward momentum and expansion into the Capital Region. Also in the third quarter, Arrow closed the Glens Falls National Bank Route 9 Queensbury Branch, consolidating the operations of that branch with those of other nearby branches.
The following expands on our COVID-19 response:
COVID-19 Safety Measures: 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 we continue 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 hot spots, in-person meetings are minimized, social distancing is strongly enforced, and increased cleaning and sanitizing of our locations continues. We believe these measures have helped to keep our workforce healthy and has aided in community efforts to slow the spread of the COVID-19 virus in our footprint. We will continue to utilize these measures as appropriate based on public health guidance.
COVID-19 Customer Support: During the third quarter, support continued for customers experiencing financial hardship. We worked closely with individuals and businesses seeking temporary financial assistance. On the small business side, support for Small Business Administration Paycheck Protection Program borrowers shifted from taking new applications to preparing for loan forgiveness. In total, we have assisted more than 1,400 small businesses, and more than $142.7 million in such loans have been funded. Our team has engaged in regular communication around the ever-changing guidelines and the start of our digital forgiveness application process.
COVID-19 Operational Impact: While COVID-19 did not have a material adverse effect on our third quarter 2020 financial results, we are actively monitoring the impact of the pandemic on our business and results of operations and we can make no assurance as to the future negative impact on our operations or results. Currently, all of our banking locations and some of our insurance locations are open to the public, and through a mix of onsite and remote work amongst our team, we continue to meet customer needs and deliver high-quality service daily.
The following expands upon our third quarter financial results:
Loan Growth: Total loans reached $2.6 billion as of September 30, 2020, which represents an increase of $256.9 million, or 11.0%, from September 30, 2019. Loan growth for the third quarter of 2020 was $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 in Small Business Administration Paycheck Protection Program loans.
Deposit Growth: 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: 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: 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: 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.
Provision for Income Taxes: The provision for income taxes was $2.8 million for the third quarter of 2020, compared to $2.6 million for the same quarter of 2019. The effective income tax rates for the nine month periods ended September 30, 2020 and 2019 were 20.7% and 20.3%, respectively.
Asset Quality: 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 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. Loan loss provision expense for the third quarter of 2020 was $2.3 million, up $1.8 million from the provision for loan losses for the comparable 2019 quarter. Although credit quality remains strong, the increase in provision for loan losses reflects the uncertainty resulting from the COVID-19 pandemic.
Liquidity: At September 30, 2020, Arrow's liquidity position was strong. Deposit growth for the third quarter of 2020 was $196.1 million and interest-bearing cash balances at September 30, 2020 were $396.4 million. Arrow continues to be well-prepared to address volatility due to the COVID-19 pandemic, which may affect current cash and deposit balances. At September 30, 2020, contingent collateralized lines of credit were established and available through the Federal Home Loan Bank of New York and Federal Reserve Bank, totaling $1.3 billion. Arrow also has additional liquidity options available to it including unsecured lines of credit, such as Fed Funds and brokered markets.
Capital: Total stockholders' equity was $325.7 million at September 30, 2020, up $33.4 million, or 11.4%, from September 30, 2019. Arrow's consistent earnings and measured dividend practices have created strong capital reserves, which make the company well-positioned to address the uncertainties related to the COVID-19 pandemic. Overall regulatory capital ratios also remained strong in 2020, with Arrow's common equity tier 1 ratio estimated to be 13.20% and the total risk-based capital ratio estimated to be 15.28% at September 30, 2020. These capital levels at Arrow and both of the subsidiary banks continue to exceed the "well capitalized" regulatory standard.
Cash and Stock Dividends: On September 15, 2020, the Company distributed a cash dividend of $0.26 per share. The cash dividend was 3% higher than the cash dividend paid by the Company in the third quarter of 2019 when adjusted for the 3% stock dividend distributed on September 27, 2019. Additionally, a 3% stock dividend was distributed on September 25, 2020. This is the 12th consecutive year the Company has declared a stock dividend.
Industry Recognition: Both of Arrow's banking subsidiaries, Glens Falls National Bank and Trust Company and Saratoga National Bank and Trust Company, continue to hold BauerFinancial, Inc. 5-Star Superior Bank ratings.
About Arrow: Arrow Financial Corporation is a multi-bank holding company headquartered in Glens Falls, New York, serving the financial needs of northeastern New York. The Company is the parent of Glens Falls National Bank and Trust Company and Saratoga National Bank and Trust Company. Other subsidiaries include Upstate Agency, LLC and North Country Investment Advisers, Inc.
