Arrow Earnings Retreat as Credit Costs Climb
Net income fell 18.7% sequentially to $11.0 million as a commercial-credit reserve weighed on results.
Arrow Financial Corp. (AROW), the community-bank holding company, reported a second consecutive quarterly earnings decline as diluted earnings fell to $0.66 a share from $0.82 in the prior quarter.
The retreat interrupted a yearlong expansion in lending spreads. Tax-equivalent net interest margin narrowed 5 basis points sequentially to 3.43%, after rising from 3.16% a year earlier to 3.48% in the previous quarter. The compression was due to a seasonal shift toward higher-cost interest-bearing liabilities and an interest-income reversal on a commercial loan placed on nonaccrual status.
Net income remained 1.5% above the year-earlier $10.8 million, though it had declined in each quarter since reaching $14.0 million in the fourth quarter of 2023. Excluding merger-related expenses, earnings were $0.71 a share, down from $0.85 in the preceding quarter. Net interest income slipped 0.6% sequentially to $35.9 million but rose 10.4% from a year earlier.
Loans increased $57.6 million during the quarter to $3.5 billion, a 6.7% annualized pace driven by commercial lending. Deposits declined $358.7 million to $3.7 billion, largely because Arrow replaced $300 million of brokered certificates of deposit with lower-cost Federal Home Loan Bank borrowings and municipal balances fell seasonally. The cost of interest-bearing deposits eased to 2.15% from 2.20% in the prior quarter and 2.39% a year earlier.
Credit costs accounted for much of the earnings pressure. The provision for credit losses rose to $2.8 million from $0.5 million, driven by loan growth and a new $1.6 million reserve for an isolated commercial real-estate credit tied to a bankruptcy. The credit moved $3.8 million into nonperforming status and reduced earnings by an estimated $0.08 a share. Nonperforming assets increased to 0.19% of assets from 0.11%, while annualized net charge-offs improved to 0.08% of average loans from 0.10%.
Noninterest income declined to $8.3 million from $8.6 million as seasonal insurance weakness and a $0.3 million property impairment outweighed higher interchange fees and a positive equity-valuation adjustment. Noninterest expense rose to $27.5 million from $26.9 million, including about $1.0 million of merger-related costs. The reported efficiency ratio worsened sequentially to 62.02%, though it remained below the year-earlier 63.41%.
Arrow closed its acquisition of Adirondack Bancorp on July 1, adding about $1.0 billion of assets and 19 branches. The transaction is expected to deliver significant earnings accretion beginning in 2027.