Arrow's Net Interest Margin Expansion Reverses

The Tip Desk · July 23, 2026 · 3 min read

Fully taxable-equivalent net interest margin compressed 5 bps to 3.43% after a 23 bps first-quarter expansion, as deposit mix shifted toward higher-cost interest-bearing balances.

Arrow Financial Corporation (AROW), a Glens Falls, New York regional bank, reversed a first-quarter expansion in its net interest margin as a seasonal shift toward higher-cost interest-bearing deposits and the reversal of interest income on a loan that migrated to nonperforming status offset a still-rising earning-asset yield.

Fully taxable-equivalent net interest margin compressed 5 bps to 3.43% in the three months ended June 30, 2026, from 3.48% in the first quarter, after a 23 bps expansion from 3.25% in the fourth quarter of 2025. The sequential decline was primarily the result of a seasonal change in the deposit mix toward higher-cost interest-bearing liabilities and the reversal of interest income related to a commercial loan that moved to nonperforming status.

Net interest income fell 0.6% to $35.9 million from $36.1 million in the first quarter, after a 2.8% sequential increase in that prior period. Interest expense was unchanged at $17.7 million as lower deposit costs were offset by timing and a change in the mix of deposit balances toward higher-cost deposits. Total interest and dividend income was $53.6 million, reflecting lower average earning assets throughout the quarter as well as the increase in nonperforming loans.

Against that margin reversal, the company reported a return to loan growth. Loans outstanding increased $57.6 million, or 6.7% annualized, in the second quarter, driven by commercial loans, after average loans were essentially unchanged in the first quarter. Period-end loans were $3.5 billion at June 30, 2026.

Deposit balances declined $358.7 million to $3.7 billion, as $300 million of brokered CDs were replaced by lower-cost FHLB borrowings and municipal deposits ran off seasonally. Average deposits were $3.79 billion versus $3.93 billion in the first quarter. Total assets were $4.5 billion at June 30, 2026. Cost of retail deposits decreased to 1.61% from 1.62% in the first quarter.

Credit costs were the other driver of the earnings turn. The provision for credit losses rose to $2.8 million from $0.5 million in the first quarter, including a $1.6 million specific reserve on a $3.8 million commercial loan that moved to nonperforming status after a June 2026 bankruptcy, plus an elevated allowance for loan growth. Nonperforming assets increased to $8.7 million, or 0.19% of period-end assets, from $4.9 million, or 0.11%, at March 31, 2026. Annualized net charge-offs were 0.08%. The allowance for credit losses was $36.2 million, or 1.03% of loans.

Net income declined to $11.0 million, or $0.66 a share, from $13.5 million, or $0.82, in the first quarter. Excluding about $1.0 million of merger-related expenses tied to the July 1, 2026 acquisition of Adirondack Bancorp, Inc. and Adirondack Bank, EPS was $0.71. Return on average assets was 0.99%, or 1.06% adjusted. The transaction added approximately $1.0 billion in assets and 19 new branch locations.

Non-interest income decreased to $8.3 million from $8.6 million in the first quarter, reflecting a $0.3 million property impairment and a $0.1 million seasonal insurance-premium decline, partly offset by higher interchange fees and a $0.2 million equity valuation adjustment. Non-interest expense increased to $27.5 million from $26.9 million, including about $1.0 million of merger-related expenses versus $0.8 million. The efficiency ratio was 62.02%, or 59.83% excluding merger-related expenses.

The board declared a quarterly cash dividend of $0.30 a share, payable August 25, 2026. Common Equity Tier 1 capital was 13.21% and total risk-based capital was 14.98% at June 30, 2026. President and CEO David S. DeMarco said the company expects the Adirondack transaction to provide significant EPS accretion in 2027 and beyond.