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Earnings of Arrow Financial Corporation (NASDAQ:AROW) will benefit from decent credit growth this year. On the other hand, the acceleration in loan growth this year compared to last year will result in higher net provisioning expense, which will weigh on results. Meanwhile the network The interest margin should remain stable this year as the benefits of rate hikes will materialize with a lag. Overall, I expect Arrow Financial to report earnings of $3.00 per share in 2022, down 3% year over year. Compared to my last report on Arrow Financial, I have revised my earnings estimate down slightly. The year-end price target indicates a moderately high upside potential compared to the current market price. Consequently, I maintain my Buy recommendation on Arrow Financial Corporation.
Credit growth should remain strong
Arrow’s loan portfolio grew an impressive 2.6%, or 10.4% annualized, in the first quarter of 2022, which beat my expectations. As noted in the first-quarter earnings release, growth was primarily driven by auto loans and home loans. While the impressive growth seen in the first quarter is unlikely to be repeated, credit growth is likely to remain strong in the coming year.
Arrow Financial operates out of New York and focuses primarily on consumer and residential mortgage lending, which accounted for 70% of total lending last quarter. As such, I believe the New York state unemployment rate is a good predictor of future product demand. Although the state’s unemployment rate lags behind the national average, it has still recovered significantly from the pandemic. As shown below, the unemployment rate is now back to where it was at the end of 2018.

Mainly due to the low unemployment rate and hence the apparent financial strength of consumers, I believe credit growth can remain strong for the remainder of the year. Overall, I expect the loan portfolio to grow 7% by the end of 2022 compared to the end of 2021. Meanwhile, other balance sheet items are likely to grow roughly in line with credit. The table below shows my balance sheet estimates.
FY17 | FY18 | FY19 | FY20 | FY21 | GJ22E | ||||
Financial position | |||||||||
net loan | 1,932 | 2.176 | 2,365 | 2,566 | 2,641 | 2,833 | |||
net loan growth | 11.3% | 12.6% | 8.7% | 8.5% | 2.9% | 7.3% | |||
Other earnings | 676 | 646 | 638 | 930 | 1,194 | 1,253 | |||
insoles | 2,245 | 2,346 | 2,616 | 3,235 | 3,550 | 3,885 | |||
Borrowing and Subordination | 245 | 354 | 231 | 88 | 70 | 49 | |||
General market value | 250 | 270 | 302 | 334 | 371 | 380 | |||
Book value per share ($) | 16.8 | 18.1 | 20.1 | 21.6 | 23.1 | 23.6 | |||
Concrete BVPS ($) | 15.2 | 16.5 | 18.6 | 20.1 | 21.6 | 22.2 | |||
Source: SEC filings, author’s estimates (USD millions unless otherwise noted) |
Margin is inversely proportional to interest rates in the short term
The topline’s immediate reaction to a rate hike is negative due to the mismatch between asset and liability repricing. The liability side is quickly reassessed because the savings account is full of interest-bearing current and savings accounts. These rapidly revalued deposits accounted for 73% of total deposits at the end of March 2022. On the other hand, asset repricing is slower Financially due to the high concentration in residential mortgages, Arrow’s largest credit class. Residential real estate loans accounted for 36% of total loans in the first quarter of 2022, according to the latest 10-Q filing.
Management’s interest rate sensitivity analysis in the 10-Q filing shows that a 200 basis point increase in interest rates can reduce net interest income by 0.89% in the first year of the rate hike. In the second year, net interest income can increase by 5.79%.

1Q2022 10-Q filing
Given these factors, I expect margin to remain broadly stable through the remaining nine months of 2022 from 2.90% in the first quarter of the year.
Commission expenses should normalize this year
After remaining subdued in 2021, net loan loss provisions returned to more normal levels in the first quarter of 2022. As loan growth is likely to be higher this year compared to last year (see above), allowance for expected credit losses will also be higher.
Unlike last year, when releases were at elevated levels, I expect releases to normalize this year as the level of reserves is relative to the credit risk of the portfolio. The ratio of allowances to total non-performing loans decreased from 318.3% at the end of March 2021 to 280.0% at the end of March 2022.
Overall, I expect the provision expense net of releases to return to normal levels this year. I expect Arrow Financial to report a net provisioning expense of 0.12% of total loans in 2022, which is in line with the 2017-2019 average.
Earnings expected to fall 3%
Higher net provisioning expense is likely to weigh on earnings this year compared to last year. On the other hand, expected credit growth will limit the decline in earnings. Overall, I expect Arrow Financial to report earnings of $3.00 per share in 2022, down 3% year over year. The table below shows my estimates of the income statement.
FY17 | FY18 | FY19 | FY20 | FY21 | GJ22E | ||||
income statement | |||||||||
interest income | 78 | 84 | 88 | 99 | 110 | 114 | |||
Provision for Loan Losses | 3 | 3 | 2 | 9 | 0 | 3 | |||
Non-Interest Related Income | 28 | 29 | 29 | 33 | 32 | 32 | |||
Interest-free expense | 63 | 65 | 67 | 71 | 78 | 81 | |||
Net Income – Common Sh. | 29 | 36 | 37 | 41 | 50 | 48 | |||
EPS – Diluted ($) | 1.98 | 2.43 | 2.50 | 2.64 | 3.10 | 3.00 | |||
Source: SEC filings, author’s estimates (USD millions unless otherwise noted) |
In my last report on Arrow Financial, I estimated earnings per share at $3.07. I have trimmed my earnings estimate slightly as I have downgraded my margin estimate in light of recent inflation reports and Fed forecasts. (Please note that margin is inversely proportional to interest rates in the short term.)
Actual returns could differ materially from estimates due to the risks and uncertainties associated with inflation and, consequently, the timing and magnitude of interest rate increases.
High price upside justifies a buy recommendation
Arrow Financial offers a 3.2% dividend yield at the current quarterly dividend rate of $0.27 per share. Earnings and dividend estimates point to a 36% payout ratio for 2022, below the five-year average of 41%. Therefore, the dividend appears safe.
I use historical price-to-trade (“P/TB”) and price-to-earnings (“P/E”) ratios to evaluate Arrow Financial. The stock has historically traded at an average P/TB ratio of 1.73, as shown below.
FY18 | FY19 | FY20 | FY21 | Average | ||
T. Book value per share ($) | 16.5 | 18.6 | 20.1 | 21.6 | ||
Average Market Price ($) | 34.0 | 33.3 | 29.3 | 34.9 | ||
Historical P/TB | 2.06x | 1.79x | 1.46x | 1.61x | 1.73x | |
Source: Corporate Finance, Yahoo Finance, author’s estimates |
Multiplying the average P/TB multiple by the projected tangible book value per share of $22.2 gives a price target of $38.4 by the end of 2022. This price target implies a 15.3% increase from the June 2 close . The table below shows the sensitivity of price target to P/TB ratio.
P/TB multiple | 1.53x | 1.63x | 1.73x | 1.83x | 1.93x |
TBVPS – Dec 2022 ($) | 22.2 | 22.2 | 22.2 | 22.2 | 22.2 |
Target price ($) | 33.9 | 36.2 | 38.4 | 40.6 | 42.8 |
Market price ($) | 33.3 | 33.3 | 33.3 | 33.3 | 33.3 |
Up down) | 1.9% | 8.6% | 15.3% | 21.9% | 28.6% |
Source: Author’s estimates |
The stock has historically traded at an average P/E of around 12.4x, as shown below.
FY18 | FY19 | FY20 | FY21 | Average | ||
Earnings Per Share ($) | 2.43 | 2.50 | 2.64 | 3.10 | ||
Average Market Price ($) | 34.0 | 33.3 | 29.3 | 34.9 | ||
Historical P/E | 14.0x | 13.3x | 11.1x | 11.3x | 12.4x | |
Source: Corporate Finance, Yahoo Finance, author’s estimates |
Multiplying the average P/E multiple by the projected earnings per share of $3.00 gives a price target of $37.3 by the end of 2022. This price target implies an increase of 11.9% from the closing price on March 2. June. The following table shows the sensitivity of the target price to the P/E ratio.
P/E multiple | 10.4x | 11.4x | 12.4x | 13.4x | 14.4x |
Earnings per share 2022 ($) | 3.00 | 3.00 | 3.00 | 3.00 | 3.00 |
Target price ($) | 31.3 | 34.3 | 37.3 | 40.3 | 43.3 |
Market price ($) | 33.3 | 33.3 | 33.3 | 33.3 | 33.3 |
Up down) | (6.1)% | 2.9% | 11.9% | 21.0% | 30.0% |
Source: Author’s estimates |
The same weighting of the price targets from the two evaluation methods results in a combination Price target of $37.8, which is a 13.6% increase from the current market price. Adding the expected dividend yield gives an expected total return of 16.8%. Therefore, I maintain my buy recommendation for Arrow Financial.