Arrow Financial Corporation (AROW) Income Statement

The trajectory of net interest income (NII) has been positive through 2025 and early 2026, with growth rates accelerating from 5.4% in 2024Q2 to 20.0% by 2025Q3. However, the most recent quarter (2026Q2) reports a dramatic negative NII of -$71.5 million, which appears to be an anomaly or data error, but if accurate, it would signal a severe dislocation in the bank's core spread business. More plausibly, the data may reflect a one-time accounting adjustment or a reclassification, yet the magnitude warrants immediate scrutiny. Excluding that outlier, the underlying trend suggests that rising deposit costs are compressing the net interest margin, which has remained stagnant at 0.7-0.8% over the past year, indicating that the bank is not benefiting from higher rates as much as its asset yields would suggest.

The net interest margin (NIM) has been remarkably stable at 0.6-0.8% over the last ten quarters, which is unusually low for a regional bank and suggests a high proportion of non-earning assets or a conservative asset mix. This stagnation occurs despite a rising rate environment, implying that the bank's deposit costs are rising faster than its loan yields, a classic sign of deposit beta pressure. The efficiency ratio, however, has improved from 46.9% in 2024Q4 to 41.0% in 2025Q4, indicating that expense management has been disciplined, but the lack of NIM expansion limits the bank's ability to generate operating leverage. Investors should monitor whether the bank can reprice its loan book faster than its deposit costs, as the current trend appears unfavorable.

The provision expense has been consistently low, averaging around $0.7 million per quarter through 2024 and most of 2025, but it spiked to $5.0 million in 2025Q1 and remained elevated at $2.9 million in 2024Q4. This increase appears to be a response to a specific credit event, as indicated by the recent EPS miss and management's characterization of an isolated commercial credit reserve. The elevated provisioning in 2025Q1 and 2024Q4, relative to the prior quarters, suggests that the bank is building reserves in anticipation of potential losses, which may indicate a broader credit quality issue. The fact that the provision in 2026Q2 is only $526K, despite the negative NII, could imply that management believes the credit issues are contained, but the magnitude of the earlier spike warrants continued monitoring.

Fee income, which includes insurance commissions and wealth management fees, has been a stable contributor to revenue, averaging around 13-14% of total revenue in most quarters. However, there was a significant drop to 7.7% in 2024Q4, which may reflect seasonal or one-time factors. The diversification into fee-based businesses is a key differentiator for AROW compared to pure-play banks like TRST, and it provides a buffer against interest rate fluctuations. The stability of this income stream is crucial, especially given the recent pressure on net interest income, and it appears to be a reliable source of earnings. Investors should watch for any signs of weakness in this segment, as it may be a key support for the bank's overall profitability.

The first quarter of 2025 appears to be a turning point for AROW's income statement, as the provision for credit losses jumped to $5.0 million, a significant increase from the sub-$1 million levels seen in prior quarters. This coincided with a 15.6% year-over-year decline in EPS, suggesting that credit costs are beginning to weigh on profitability. The elevated provisioning continued into 2024Q4, indicating that the bank may be facing a broader credit cycle downturn. This inflection point is critical because it may signal the start of a period of higher credit costs, which could pressure future earnings. The bank's ability to manage this credit cycle will be a key determinant of its near-term performance.