AROW — Q2 2026 Financial Report Analysis

Wider margins carried the quarter; a bankruptcy reserve and deal costs ate the gain

Arrow Financial, the Glens Falls, New York parent of Arrow Bank, earned $11.0 million, or $0.66 per diluted share, in the second quarter of 2026. That is up only 1.5% from $10.8 million ($0.65) a year earlier, even though its core lending profit grew much faster. Net interest income is what a bank earns on loans and securities minus what it pays depositors and lenders. It rose 10.4% to $35.9 million. A $2.8 million loan-loss charge, most of it tied to one bankrupt commercial borrower, and about $1.0 million of costs for the Adirondack Bancorp acquisition absorbed almost all of that gain. This is also the last quarter Arrow reports on its own: Adirondack, with $942 million of assets, joined on July 1.

At a glance

• Net interest margin 3.42%, up from 3.15%. On each dollar of loans and securities, Arrow kept 0.27 percentage points more after paying for its funding. Most of that came from paying depositors less, not from charging borrowers more.
• Pre-tax income was exactly flat at $13.9 million in both years. All of the 1.5% net income growth came from a lower tax rate (21.1% vs 22.2%), helped by tax credits Arrow bought in June.
• Deposits fell $284 million since December to $3.66 billion. This was planned: Arrow replaced $300 million of brokered CDs (deposits bought through brokers at market rates) with $300 million of cheaper Federal Home Loan Bank borrowings.

*The 10-Q compares period-end deposits with December 31, 2025, not June 30, 2025, so the year-on-year change is shown with quarterly averages instead. n/d = not disclosed for the prior-year quarter in this filing.

Margin: cheaper deposits did most of the work

The net interest margin (NIM) measures how much a bank earns on its loans and securities after paying for its deposits and borrowings, as a share of those earning assets. It is the main driver of a community bank's profit. Arrow's NIM rose 27 basis points (0.27 percentage points) to 3.42%, or 3.43% on the tax-equivalent basis Arrow also reports. The 10-Q says the improvement was "primarily the result of continued yield expansion on earning assets combined with the moderating cost of interest-bearing liabilities."

Funding costs were the bigger of the two. The average yield on earning assets rose 12 basis points to 5.11%. The average cost of interest-bearing liabilities fell 19 basis points to 2.20%. The total cost of deposits fell from 1.96% to 1.74%. Savings rates dropped from 2.51% to 2.24%, and large CDs repriced from 3.85% to 3.03%. Total interest expense fell $1.4 million (-7.1%), which the filing attributes to "active management of rates on interest-bearing deposits". Interest and fees on loans rose $1.6 million to $47.2 million, "primarily due to loan growth and higher loan yields": the average loan yield went from 5.36% to 5.46%.

Arrow also changed how it funds itself. Expensive time deposits shrank: average "other time deposits" fell from $638 million to $511 million. Low-cost savings and non-interest-bearing checking grew, so non-interest-bearing deposits are now 18.9% of the average deposit base, up from 17.9%. At June 30, the $300 million of brokered CDs had been fully replaced by $300 million of FHLB term borrowings. Interest on those borrowings ($1.0 million this quarter, versus none a year earlier) now shows up as a separate line.

Loans: slow growth, led by commercial

Period-end loans were $3.50 billion, up 2.1% from a year earlier and up 1.3% ($43.4 million) since December. Commercial and commercial real estate loans grew the most (+$26.5 million year to date). Residential mortgages rose $9.8 million and consumer loans rose $7.2 million. Consumer lending is almost entirely car loans made through dealers (99.6% of that book), and its share of average loans fell from 32.5% to 31.1%. Management warns that "inflation and the uncertain economic environment may limit the potential growth in this category." Commercial real estate exposure is local only: offices are about 2% of total loans, retail about 3%, hotels and motels about 4%, and the filing states there are no commercial real estate loans in major metropolitan areas.

Credit: one bad borrower, otherwise steady

The provision for credit losses is money set aside in advance for loans the bank expects won't be repaid. It rose to $2.8 million from $0.6 million. The 10-Q says the increase was "primarily driven by a $1.6 million specific reserve related to the non-performing commercial loan due to a sudden personal and corporate bankruptcy declared in June 2026," plus reserves for loan growth. Other credit measures were calm:

• Net charge-offs are loans actually written off, minus recoveries. They were $0.7 million, an annualized 0.08% of average loans, down from $4.2 million (0.49%) in Q2 2025.
• Nonperforming loans were $8.3 million, or 0.24% of loans. That was flat since December but up from $6.2 million (0.18%) a year earlier.
• Early-stage delinquencies (loans 30–89 days past due) fell to $23.4 million (0.67% of loans) from $28.9 million (0.84%) in December. Most of the improvement was in car loans, down from $21.0 million to $15.9 million.
• The allowance for losses rose to $36.2 million, 1.03% of loans, up from 0.99% at year-end.

What the headline numbers hide

• Core earnings grew faster than reported profit. Adding back the loan-loss provision, pre-tax income rose from $14.5 million to $16.7 million, about +15%. Two items specific to this quarter, the $1.6 million bankruptcy reserve and roughly $1.0 million of Adirondack acquisition costs, total about $2.6 million before tax, against $13.9 million of pre-tax income.
• The EPS gain came from tax, not operations. Pre-tax income was the same in both years, to the thousand dollars ($13,896K). The lower effective tax rate (21.1% vs 22.2%) reflects energy production tax credits bought in June 2026. Part of that benefit was offset by acquisition costs that can't be deducted. Do not expect this every quarter. Average diluted shares fell 0.5% (16.47M vs 16.55M), but Arrow bought back no shares in the first half of 2026, so buybacks were not a factor.
• Tangible returns fell. Return on average tangible equity dropped from 11.38% to 10.46% and ROE from 10.66% to 9.86%, because equity grew faster than earnings.
• Cash conversion is good. Operating cash flow for the first half was $31.0 million against $24.4 million of net income.
• Costs grew more slowly than revenue. Non-interest expense rose 7.1% to $27.5 million, against 10.1% revenue growth. Salaries rose $1.0 million (+7.2%), and technology costs fell $0.8 million (-14.9%) as 2025's bank-unification costs dropped out. The efficiency ratio is the share of revenue spent on running the bank, so lower is better. It improved to 62.0% from 63.4%.

Takeaway: Arrow's main earnings engine is clearly improving: the margin is up 27 basis points and net interest income up 10%, mostly because funding got cheaper. The flat bottom line comes from one borrower's bankruptcy and the cost of buying Adirondack, not from a weaker core bank. The reported numbers will look very different next quarter, because the bank becomes roughly 20% larger and the figures stop being comparable.

What comes next: Adirondack changes the comparison

The acquisition closed on July 1, 2026, so none of Adirondack is in these numbers. At December 31, 2025, Adirondack had $942 million of assets, $848 million of deposits and $624 million of loans. That adds about 18% to Arrow's loan book and about 23% to its deposits, plus 19 branches in Oneida, Herkimer, Franklin, Essex and Clinton counties. Arrow paid about $101 million: roughly 1.98 million new shares (about 12% more shares than the 16.5 million outstanding) worth about $81 million, and $19.9 million in cash. After closing, Arrow sold about $74 million of low-yielding securities it acquired with Adirondack, used the proceeds and cash to repay $125 million of borrowings, and ended $125 million of interest-rate swaps for a $1.2 million net settlement. Systems conversion is expected to finish later in 2026. Q3 will therefore include the first acquisition accounting, integration costs and the extra shares.

On interest rates, Arrow's own model shows that its earnings benefit when rates fall and suffer when they rise. A 100-basis-point drop in rates would lift net interest income by an estimated 2.3% in year one, while a 200-basis-point rise would cut it by 5.5%. The Fed cut by 25 basis points in Q4 2025 and has held since then; Arrow says "future rate cuts are difficult to determine." Our read: if rates stay put, the margin should keep improving gradually as CDs reprice lower and cheaper FHLB funding replaces brokered CDs. The bigger questions for Q3 are whether Adirondack's deposits stay at the bank after the merger and whether the bankruptcy reserve turns out to be a single case. Early delinquencies are falling, which suggests it is. Capital is ample for the deal: the holding company's CET1 ratio (its highest-quality capital as a share of risk-weighted assets) was 13.21% at June 30, against a 6.5% "well-capitalized" threshold.