# Arrow Financial Corp: Form 10-Q for the period ended Jun 30, 2025 - Company: [Arrow Financial Corp](/companies/arow.md) (CIK 717538) - Form: 10-Q - Filed: 2025-08-08 - Accepted by EDGAR: Aug 8, 2025, 10:50 ET - Period: 2025-06-30 - Accession: 0000717538-25-000079 - Inline XBRL: yes - Main document: https://www.sec.gov/Archives/edgar/data/717538/000071753825000079/arow-20250630.htm - All documents and exhibits: https://www.sec.gov/Archives/edgar/data/717538/000071753825000079/ ## Figures reported in this filing Standardized XBRL line items for the period ended 2025-06-30. | Line item | Period | Value | XBRL concept | | --- | --- | ---: | --- | | Interest expense | 3 months, 2025-04-01 to 2025-06-30 | $19.0m | us-gaap:InterestExpense | | Interest expense | 6 months, 2025-01-01 to 2025-06-30 | $38.0m | us-gaap:InterestExpense | | Income tax | 3 months, 2025-04-01 to 2025-06-30 | $3.1m | us-gaap:IncomeTaxExpenseBenefit | | Income tax | 6 months, 2025-01-01 to 2025-06-30 | $4.9m | us-gaap:IncomeTaxExpenseBenefit | | Net income | 3 months, 2025-04-01 to 2025-06-30 | $10.8m | us-gaap:NetIncomeLoss | | Net income | 6 months, 2025-01-01 to 2025-06-30 | $17.1m | us-gaap:NetIncomeLoss | | Diluted EPS | 3 months, 2025-04-01 to 2025-06-30 | $0.65 | us-gaap:EarningsPerShareDiluted | | Diluted EPS | 6 months, 2025-01-01 to 2025-06-30 | $1.03 | us-gaap:EarningsPerShareDiluted | | Basic EPS | 3 months, 2025-04-01 to 2025-06-30 | $0.65 | us-gaap:EarningsPerShareBasic | | Basic EPS | 6 months, 2025-01-01 to 2025-06-30 | $1.03 | us-gaap:EarningsPerShareBasic | | Diluted shares (weighted) | 3 months, 2025-04-01 to 2025-06-30 | 16,551,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding | | Diluted shares (weighted) | 6 months, 2025-01-01 to 2025-06-30 | 16,618,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding | | Operating cash flow | 6 months, 2025-01-01 to 2025-06-30 | $20.3m | us-gaap:NetCashProvidedByUsedInOperatingActivities | | Capital expenditure | 6 months, 2025-01-01 to 2025-06-30 | $3.3m | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment | | Share repurchases | 6 months, 2025-01-01 to 2025-06-30 | $8.7m | us-gaap:PaymentsForRepurchaseOfCommonStock | | Total assets | at 2025-06-30 | $4.41bn | us-gaap:Assets | | Total liabilities | at 2025-06-30 | $4.01bn | us-gaap:Liabilities | | Short-term borrowings | at 2025-06-30 | $8.6m | us-gaap:ShortTermBorrowings | | Shareholders' equity | at 2025-06-30 | $408.5m | us-gaap:StockholdersEquity | ## Management's discussion and analysis As filed, 80,929 characters. ### MANAGEMENT'S DISCUSSION AND ANALYSIS OF ### FINANCIAL CONDITION AND RESULTS OF OPERATIONS ### June 30, 2025 ### NOTE ON TERMINOLOGY In this Report, the terms "Arrow," "the registrant," "the Company," "we," "us," and "our" generally refer to Arrow Financial Corporation and its subsidiaries as a group, except where the context indicates otherwise. At certain points in this Report, Arrow's performance is compared with that of the Company's "peer group" of financial institutions. Unless otherwise specifically stated, the peer group for the purposes of this Report is comprised of the group of 191 domestic bank holding companies with $3 to $10 billion in total consolidated assets as identified in the FRB’s "Bank Holding Company Performance Report" for March 31, 2025 (the most recent such report currently available), and peer group data contained herein has been derived from such report. ### THE COMPANY AND ITS SUBSIDIARIES Effective December 31, 2024, the Company unified its former subsidiary banks, Glens Falls National Bank and Trust Company and Saratoga National Bank and Trust Company, and became a single bank holding company headquartered in Glens Falls, New York. The post-unification banking subsidiary is Arrow Bank National Association®, or Arrow Bank™, whose main office is located in Glens Falls, New York. Active subsidiaries of Arrow Bank include Upstate Agency, LLC (an insurance agency that sells property and casualty insurance and also specializes in selling and servicing group health care policies and life insurance), North Country Investment Advisers, Inc. (a registered investment adviser that provided investment advice to Arrow's proprietary mutual fund until the fund was transferred to a new investment advisor in the first half of 2025) and Arrow Properties, Inc. (a real estate investment trust, or REIT). Arrow also owns directly two subsidiary business trusts, organized in 2003 and 2004 to issue trust preferred securities (TRUPs), which are still outstanding. ### FORWARD-LOOKING STATEMENTS This Quarterly Report on Form 10-Q (this "Report") contains statements that are not historical in nature but rather are based on Arrow's beliefs, assumptions, expectations, estimates and projections about the future. These statements are "forward-looking statements" within the meaning of Section 21E of the Securities Exchange Act of 1934 ("Exchange Act"), as amended, and involve a degree of uncertainty and attendant risk. Words such as "may," "will," "expect," "believe," "anticipate," "estimate," "continue," and variations of such words and similar expressions are intended to identify such forward-looking statements. Examples of forward-looking statements include statements regarding Arrow's asset quality, the level of allowance for credit losses, the sufficiency of liquidity sources, interest rate change exposure, changes in accounting standards, and Arrow's tax plans and strategies. Some of these statements, such as those included in the interest rate sensitivity analysis in Part I, Item 3, entitled "Quantitative and Qualitative Disclosures About Market Risk," are merely presentations of what future performance or changes in future performance would look like based on hypothetical assumptions and on simulation models. Other forward-looking statements are based on Arrow's general perceptions of market conditions and trends in business activity, both Arrow's and in the banking industry generally, as well as current management strategies for future operations and development. These forward-looking statements may not be exhaustive, are not guarantees of future performance and involve certain risks and uncertainties that are difficult to quantify or, in some cases, to identify. You should not place undue reliance on any such forward-looking statements. In the case of all forward-looking statements, actual outcomes and results may differ materially from what the statements predict or forecast. Factors that could cause or contribute to such differences include, but are not limited to the following: - Arrow remains subject to inflationary risk which could adversely impact our business and our customers. - Market conditions could present significant challenges to the U.S. commercial banking industry and its core business of making and servicing loans. Any substantial downturn in the regional markets in which Arrow operates or in the U.S. economy generally could adversely affect Arrow's ability to maintain and/or grow earnings. - Any future economic or financial downturn, including any significant correction in the equity markets, could adversely affect Arrow's volume of income attributable to, and demand for, fee-based services of Arrow Bank, including the Company's fiduciary business, which could negatively impact Arrow's financial condition and results of operations. - Arrow operates in a highly competitive industry and market areas that could negatively affect growth and profitability. - The financial services industry is faced with technological advances and changes on a continuing basis, and failure to adapt to these advances and changes could have a material adverse impact on Arrow's business. - Problems encountered by other financial institutions could adversely affect Arrow. - Arrow faces continuing and growing security risks to its information base including the information maintained relating to customers, and any breaches in the security systems implemented to protect this information could have a material negative effect on Arrow's business operations and financial condition. - Business could suffer if Arrow loses key personnel unexpectedly. - Health emergencies may adversely affect Arrow’s business activities, financial condition and results of operations. - Arrow may not realize the anticipated benefits of unifying its two former subsidiary banks into one bank. - Arrow is subject to interest rate risk, which could adversely affect profitability. - Arrow Bank's allowance for credit losses may be insufficient, and an increase in the allowance would reduce earnings. - The increasing complexity of Arrow's operations presents varied risks that could affect earnings and financial condition. - Arrow’s financial condition and the results of its operations could be negatively impacted by changes in its liquidity position. - Arrow could recognize losses on securities held in its securities portfolio, particularly if interest rates increase or economic and market conditions deteriorate. - The Company relies on the operations of its subsidiaries to provide liquidity, which, if limited, could impact Arrow's ability to pay dividends to its shareholders or to repurchase its common stock. - Federal banking statutes and regulations could change in the future, which may adversely affect Arrow. - Capital and liquidity standards require banks and bank holding companies to maintain more and higher quality capital and greater liquidity than has historically been the case. - Non-compliance with the Patriot Act, Bank Secrecy Act, or other anti-money laundering laws and regulations could result in fines or sanctions and restrictions on conducting acquisitions or establishing new branches. - Arrow, through Arrow Bank, is subject to the CRA and fair lending laws, and failure to comply with these laws could lead to material penalties. Arrow is under no duty to update any of the forward-looking statements after the date of this Report to conform such statements to actual results. All forward-looking statements, express or implied, included in this Report and the documents incorporated by reference and that are attributable to Arrow are expressly qualified in their entirety by this cautionary statement. This cautionary statement should also be considered in connection with any subsequent written or oral forward-looking statements that Arrow or any persons acting on its behalf may issue. This Report should be read in conjunction with the 2024 Form 10-K and our other filings with the Securities and Exchange Commission ("SEC"). ### USE OF NON-GAAP FINANCIAL MEASURES The SEC has adopted Regulation G, which applies to all public disclosures, including earnings releases, made by registered companies that contain “non-GAAP financial measures.” GAAP is generally accepted accounting principles in the United States of America. Under Regulation G, companies making public disclosures containing non-GAAP financial measures must also disclose, along with each non-GAAP financial measure, certain additional information, including a reconciliation of the non-GAAP financial measure to the closest comparable GAAP financial measure and a statement of the Company’s reasons for utilizing the non-GAAP financial measure as part of its financial disclosures. The SEC has exempted from the definition of “non-GAAP financial measures” certain commonly used financial measures that are not based on GAAP. When these exempted measures are included in public disclosures, supplemental information is not required. The following measures used in this Report, which are commonly utilized by financial institutions, have not been specifically exempted by the SEC and may constitute "non-GAAP financial measures" within the meaning of the SEC's rules. **Tax-Equivalent Net Interest Income and Net Interest Margin:** Net interest income, as a component of the tabular presentation by financial institutions of Selected Financial Information regarding their recently completed operations, as well as disclosures based on that tabular presentation, is commonly presented on a tax-equivalent basis. That is, to the extent that some component of the institution's net interest income, which is presented on a before-tax basis, is exempt from taxation (e.g., is received by the institution as a result of its holdings of state or municipal obligations), an amount equal to the tax benefit derived from that component is added to the actual before-tax net interest income total. This adjustment is considered helpful in comparing one financial institution's net interest income to that of another institution or in analyzing any institution’s net interest income trend line over time, to correct any analytical distortion that might otherwise arise from the fact that financial institutions vary widely in the proportions of their portfolios that are invested in tax-exempt securities. Moreover, net interest income is itself a component of a second financial measure commonly used by financial institutions, net interest margin, which is the ratio of net interest income to average earning assets. For purposes of this measure as well, tax-equivalent net interest income is generally used by financial institutions, again to provide a better basis of comparison from institution to institution and to better demonstrate a single institution’s performance over time. The Company follows these practices. **The Efficiency Ratio:** Financial institutions often use an "efficiency ratio" as a measure of expense control. The efficiency ratio typically is defined as the ratio of non-interest expense to net interest income and non-interest income. Net interest income as utilized in calculating the efficiency ratio is typically the same as the net interest income presented in Selected Financial Information table discussed in the preceding paragraph, i.e., it is expressed on a tax-equivalent basis. Moreover, many financial institutions, in calculating the efficiency ratio, also adjust both non-interest expense and non-interest income to exclude from these items (as calculated under GAAP) certain recurring component elements of income and expense, such as intangible asset amortization (which is included in non-interest expense under GAAP but may not be included therein for purposes of calculating the efficiency ratio) and securities gains or losses (which are reflected in the calculation of non-interest income under GAAP but may be ignored for purposes of calculating the efficiency ratio). The Company makes these adjustments. **Tangible Book Value per Share:** Tangible equity is total stockholders’ equity less intangible assets. Tangible book value per share is tangible equity divided by total shares issued and outstanding. Tangible book value per share is often regarded as a more meaningful comparative ratio than book value per share as calculated under GAAP, that is, total stockholders’ equity including intangible assets divided by total shares issued and outstanding. **Adjustments for Certain Items of Income or Expense:** In addition to our regular utilization in our public filings and disclosures of the various non-GAAP measures commonly utilized by financial institutions discussed above, we also may elect from time to time, in connection with our presentation of various financial measures prepared in accordance with GAAP, such as net income, earnings per share (i.e., EPS), return on average assets (i.e., ROA), and return on average equity (i.e., ROE), to additionally provide certain comparative disclosures that adjust these GAAP financial measures, typically by removing therefrom the impact of certain transactions or other material items of income or expense that are unusual or unlikely to be repeated. The Company does so only if it believes that inclusion of the resulting non-GAAP financial measures may improve the average investor's understanding of Arrow's results of operations by separating out items that have a disproportional positive or negative impact on the particular period in question or by otherwise permitting a better comparison from period-to-period in the results of operations with respect to the Company's fundamental lines of business, including the commercial banking business. Arrow believes that the non-GAAP financial measures disclosed from time-to-time are useful in evaluating our performance and that such information should be considered as supplemental in nature, and not as a substitute for, or superior to, the related financial information prepared in accordance with GAAP. Non-GAAP financial measures may differ from similar measures presented by other companies. ### OVERVIEW The following discussion and analysis focuses on and reviews the results of operations for the three-month period ended June 30, 2025 and the financial conditions as of June 30, 2025 and December 31, 2024. The discussion below should be read in conjunction with the selected quarterly and annual information set forth above and the Unaudited Interim Consolidated Financial Statements and other financial data presented elsewhere in this Report. When necessary, prior-year financial information has been reclassified to conform to the current-year presentation. ***Summary of Q2 2025 Financial Results:*** Net income for the second quarter of 2025 was $10.8 million, increasing from $6.3 million in the first quarter of 2025. Compared to the prior quarter, net income benefited from an increase of $1.2 million in net interest income, a decrease in the provision for credit losses of $4.4 million and a slight decrease in non-interest expense of $0.4 million. Net interest income for the second quarter of 2025 was $32.5 million, increasing 3.8% from the first quarter of 2025. Total interest and dividend income was $51.6 million for the second quarter of 2025, an increase from $50.4 million in the first quarter of 2025. Interest expense for the second quarter of 2025 was $19.0 million, consistent with the first quarter of 2025. Net interest margin, on an fully taxable-equivalent basis, for the second quarter of 2025 increased to 3.16%, compared to 3.08% for the first quarter of 2025. The increase in net interest margin compared to the first quarter of 2025 was primarily the result of continued yield expansion on earning assets combined with the moderating cost of interest-bearing liabilities. See the disclosure on page 41 related to the use of non-GAAP financial measures. For the second quarter of 2025, the provision for credit losses was $0.6 million compared to $5.0 million in the first quarter of 2025. The sizeable quarter-over-quarter decrease in the second quarter provision reflects the recognition of a specific reserve related to the CRE Participation that was charged off in the second quarter of 2025 and moved to other assets. Non-interest income for the three months ended June 30, 2025, was $7.6 million, a decrease from $7.8 million in the first quarter of 2025. Revenue related to wealth management decreased from the prior quarter primarily as a result of weaker overall market performance. Interchange fees improved in the second quarter from the linked quarter. Other operating income was negatively affected by small valuation adjustments to Other Assets. Non-interest expense for the second quarter of 2025 was $25.7 million, a decrease from $26.0 million in the first quarter of 2025. The second quarter of 2025 included unification expenses of approximately $1.1 million as compared to $0.6 million in the first quarter of 2025. The unification expenses were primarily comprised of project management and information technology costs related to the July 2025 system conversion. Arrow continues to focus on overall expense management. The provision for income taxes and effective tax rate were $3.1 million and 22.2%, respectively, for the second quarter of 2025, and $1.8 million and 22.4%, respectively, for the first quarter of 2025. Total assets were $4.4 billion at June 30, 2025, a decrease of $34.2 million, or 0.8%, as compared to March 31, 2025. For the second quarter of 2025, overall change in the balance sheet was primarily attributable to fluctuations in cash balances, maturities of investments and growth in the loan portfolio. Total investments were $528.4 million as of June 30, 2025, a decrease of $24.6 million, or 4.4%, compared to March 31, 2025. The decrease from March 31, 2025 was driven primarily by paydowns and maturities. There were no credit quality issues related to the investment portfolio. Total loans1 were $3.4 billion as of June 30, 2025. Loan growth for the second quarter of 2025 was $7.9 million. Loan growth was primarily driven by an increase in residential real estate loans and to a lesser extent by commercial loan relationships. At June 30, 2025, deposit balances were $3.9 billion, a decrease of $38.8 million from March 31, 2025. The change from March 31, 2025 was primarily attributable to the seasonality of municipal deposits. The changes in net income, net interest income and net interest margin between the three-month are discussed in detail under the heading "RESULTS OF OPERATIONS," beginning on page 57. ***Regulatory Capital and Change in Stockholders' Equity:*** At June 30, 2025, Arrow continued to exceed all required minimum capital ratios under the current bank regulatory capital rules as implemented under Dodd-Frank (the "Capital Rules") at both the holding company and bank levels. At that date, Arrow Bank continues to qualify as "well-capitalized" under the capital classification guidelines as defined by the Capital Rules. Because of continued profitability and strong asset quality, the regulatory capital levels throughout recent years have consistently remained well in excess of the various required regulatory minimums in effect. Stockholders’ equity was $408.5 million at June 30, 2025, an increase of $7.6 million, or 1.9%, from the December 31, 2024 level of $400.9 million. The increase in stockholders' equity over the first six months of 2025 principally reflected the following factors: the addition of (i) $17.1 million of net income for the period, (ii) other comprehensive gain of $7.6 million, and (iii) the issuance of $0.9 million of common stock through employee benefit and dividend reinvestment plans, reduced by (iv) cash dividends of $9.4 million and (v) repurchases of common stock of $8.7 million. The components of the change in stockholders’ equity since year-end 2024 are presented in the Consolidated Statements of Changes in Stockholders’ Equity on page 6, and are discussed in more detail in the next section. At June 30, 2025, book value per share was $24.78, up 3.5% from year-end 2024. Tangible book value per share was $23.23, an increase of $0.83, or 3.71%, over December 31, 2024. See the disclosure on page 41 related to the use of non-GAAP financial measures. On June 30, 2025, Arrow's closing stock price was $26.42 per share, representing a trading multiple of 1.14 to tangible book value per share. In the second quarter of 2025, Arrow paid a quarterly cash dividend of $0.28 per share. Further discussion of dividends is included in the Capital Components; Stock Repurchases; Dividends section located on page 55. 1 Excludes both $3.2 million fair value hedge adjustment at June 30, 2025 and $3.3 million fair value hedge adjustment at March 31, 2025 ***Loan Quality:*** Net charge-offs, expressed as an annualized percentage of average loans outstanding, were 0.49% for the three-month period ended June 30, 2025, as compared to 0.10% for the three-month period ended March 31, 2025. The increase was the result of the charge-off of the previously reserved CRE Participation. For the second quarter of 2025, the provision for credit losses was $0.6 million compared to $5.0 million in the first quarter of 2025. The quarter-over-quarter decrease in the second quarter provision reflects the recognition of the specific reserve on the CRE Participation in the first quarter of 2025. Arrow recorded a decrease for estimated credit losses on off-balance sheet credit exposures in other liabilities of $38 thousand in the second quarter of 2025. The allowance for credit losses was $34.2 million as of June 30, 2025, which represented 1.00% of loans outstanding, as compared to $37.8 million, or 1.11%, at March 31, 2025 and $33.6 million, or 0.99% at December 31, 2024 . The decrease in the allowance for credit losses was primarily driven by the recognition of a specific reserve of $3.75 million in the first quarter of 2025 and subsequent charge-off of the reserved loan balances during the second quarter. The remaining loan balance has been reclassified to Other Assets after the participating banks assumed control of the collateral properties. The participating banks have appointed a property manager to manage the day-to-day activities while exploring further options. The properties itself are being held in an unconsolidated LLC in which Arrow has an ownership interest equivalent to its rights under the former loan participation. As previously disclosed, the properties are generating positive cash flow and a majority is tenant occupied. Nonperforming loans were $6.2 million at June 30, 2025, representing 0.18% of period-end loans, a decrease from the December 31, 2024 of 0.62%. The ratio compares favorably with the weighted average ratio of the peer group of 0.61% at March 31, 2025. Nonperforming assets of $6.8 million at June 30, 2025 represented 0.15% of period-end assets, down from 0.50% at December 31, 2024. ***Loan Segments:*** As of June 30, 2025, including the fair value marks associated with derivatives, total loans grew by $30.2 million, or 0.9%, as compared to the balance at December 31, 2024. The largest increase was in the residential real estate loan portfolio which increased $24.9 million, or 1.9%. Consumer loans, primarily comprised of automobile loans, decreased $9.7 million. Commercial and commercial real estate loans increased by $15.0 million, or 1.6%, from December 31, 2024. - **Commercial and Commercial Real Estate Loans:** Combined, these loans comprise 28.3% of the total loan portfolio at period-end. Commercial loans are extended to businesses primarily located in Arrow's regional market area. There are no commercial real estate loans in major metropolitan areas. In addition, only approximately 2% of the total loan portfolio is composed of office related property. Retail loans were approximately 3% of the total loan portfolio and hotels and motels were approximately 4% of the total loan portfolio. Commercial property values in Arrow's region have largely remained stable. Appraisals on nonperforming and watched commercial real estate loan properties are updated as necessary, usually when the loan is downgraded or when there has been significant market deterioration since the last appraisal. - **Consumer Loans:** These loans comprised 32.4% of the total loan portfolio at period-end. Consumer automobile loans at June 30, 2025, were 99.6% of this portfolio segment. The vast majority of automobile loans are initiated through automobile dealers. Inflation and the uncertain economic environment may limit the potential growth in this category. - **Residential Real Estate Loans:** These loans, including home equity loans, made up 39.3% of the total loan portfolio at period-end. Demand for residential real estate has continued to remain strong. Arrow originated nearly all of the residential real estate loans currently held in the loan portfolio and applies conservative underwriting standards. Arrow may sell a portion of the residential real estate mortgage originations into the secondary market. The ratio of the sales of originations to total originations tends to fluctuate from period to period based on market conditions and other factors such as prevailing mortgage rates, other lending opportunities, capital and liquidity needs, and the availability of a market for such transactions. ***Liquidity and Access to Credit Markets:*** Arrow has not, nor is it currently, experiencing any liquidity events. Arrow’s liquidity position should provide the necessary flexibility to address any unexpected near-term liquidity needs. Interest-bearing cash balances at June 30, 2025 were $227.5 million compared to $127.1 million at December 31, 2024. Contingent lines of credit are also available. Operating collateralized lines of credit are established and available through the FHLBNY, FRB and other bank lines totaling approximately $1.4 billion. The general terms of Arrow's lines of credit have not changed significantly in recent periods (see the general liquidity discussion on page 56). Historically, Arrow has principally relied on asset-based liquidity (i.e., funds in overnight investments and cash flow from maturing investments and loans) with liability-based liquidity as a secondary source of funds (the main liability-based sources are an overnight borrowing arrangement with correspondent banks, an arrangement for overnight borrowing and term credit advances from the FHLBNY, and an additional arrangement for short-term advances at the FRB discount window). Regular liquidity stress tests and tests of the contingent liquidity plan are performed to ensure that an adequate amount of available funds can be generated to meet a wide variety of potential liquidity crises. *Average Consolidated Balance Sheets and Net Interest Income Analysis* *(GAAP Basis)* *(Dollars In Thousands)* | Quarter Ended: | June 30, 2025 Average Balance | Interest Income/ Expense | Rate Earned/ Paid | March 31, 2025 Average Balance | Interest Income/ Expense | Rate Earned/ Paid | | --- | ---: | ---: | ---: | ---: | ---: | ---: | | Interest-Bearing Deposits at Banks | $145,473 | $1,622 | 4.47% | $146,023 | $1,621 | 4.50% | | Investment Securities: | | | | | | | | Fully Taxable | 496,614 | 3,790 | 3.06 | 499,903 | 3,608 | 2.93 | | Exempt from Federal Taxes | 85,766 | 561 | 2.62 | 91,938 | 587 | 2.59 | | Loans (1) | 3,415,140 | 45,600 | 5.36 | 3,406,075 | 44,550 | 5.30 | | Total Earning Assets (1) | 4,142,993 | 51,573 | 4.99 | 4,143,939 | 50,366 | 4.93 | | Allowance for Credit Losses | (35,238) | | | (33,691) | | | | Cash and Due From Banks | 29,267 | | | 31,515 | | | | Other Assets | 195,317 | | | 183,154 | | | | Total Assets | $4,332,339 | | | $4,324,917 | | | | Deposits: | | | | | | | | Interest-Bearing Checking Accounts | $845,041 | 1,941 | 0.92 | $840,571 | 1,803 | 0.87 | | Savings Deposits | 1,494,930 | 9,367 | 2.51 | 1,515,961 | 9,483 | 2.54 | | Time Deposits of $250,000 or More | 179,980 | 1,726 | 3.85 | 186,159 | 1,811 | 3.95 | | Other Time Deposits | 638,376 | 5,793 | 3.64 | 593,130 | 5,529 | 3.78 | | Total Interest-Bearing Deposits | 3,158,327 | 18,827 | 2.39 | 3,135,821 | 18,626 | 2.41 | | Borrowings | 8,601 | — | — | 23,378 | 167 | 2.90 | | Junior Subordinated Obligations Issued to Unconsolidated Subsidiary Trusts | 20,000 | 171 | 3.43 | 20,000 | 169 | 3.43 | | Finance Leases | 4,978 | 42 | 3.38 | 4,997 | 47 | 3.81 | | Total Interest-Bearing Liabilities | 3,191,906 | 19,040 | 2.39 | 3,184,196 | 19,009 | 2.42 | | Noninterest-Bearing Deposits | 690,766 | | | 689,303 | | | | Other Liabilities | 43,138 | | | 47,024 | | | | Total Liabilities | 3,925,810 | | | 3,920,523 | | | | Stockholders’ Equity | 406,529 | | | 404,394 | | | | Total Liabilities and Stockholders’ Equity | $4,332,339 | | | $4,324,917 | | | | Net Interest Income | | $32,533 | | | $31,357 | | | Net Interest Spread | | | 2.60% | | | 2.51% | | Net Interest Margin | | | 3.15% | | | 3.07% | 45 *Average Consolidated Balance Sheets and Net Interest Income Analysis* *(GAAP Basis)* *(Dollars In Thousands)* | Quarter Ended: | June 30, 2025 Average Balance | Interest Income/ Expense | Rate Earned/ Paid | June 30, 2024 Average Balance | Interest Income/ Expense | Rate Earned/ Paid | | --- | ---: | ---: | ---: | ---: | ---: | ---: | | Interest-Bearing Deposits at Banks | $145,473 | $1,622 | 4.47% | $159,336 | $2,185 | 5.52% | | Investment Securities: | | | | | | | | Fully Taxable | 496,614 | 3,790 | 3.06 | 530,869 | 3,009 | 2.28 | | Exempt from Federal Taxes | 85,766 | 561 | 2.62 | 113,323 | 637 | 2.26 | | Loans (1) | 3,415,140 | 45,600 | 5.36 | 3,280,285 | 42,141 | 5.17 | | Total Earning Assets (1) | 4,142,993 | 51,573 | 4.99 | 4,083,813 | 47,972 | 4.72 | | Allowance for Credit Losses | (35,238) | | | (31,459) | | | | Cash and Due From Banks | 29,267 | | | 28,611 | | | | Other Assets | 195,317 | | | 156,394 | | | | Total Assets | $4,332,339 | | | $4,237,359 | | | | Deposits: | | | | | | | | Interest-Bearing Checking Accounts | $845,041 | 1,941 | 0.92 | $832,087 | 1,903 | 0.92 | | Savings Deposits | 1,494,930 | 9,367 | 2.51 | 1,487,062 | 10,571 | 2.86 | | Time Deposits of $250,000 or More | 179,980 | 1,726 | 3.85 | 172,655 | 1,869 | 4.35 | | Other Time Deposits | 638,376 | 5,793 | 3.64 | 504,076 | 5,074 | 4.05 | | Total Interest-Bearing Deposits | 3,158,327 | 18,827 | 2.39 | 2,995,880 | 19,417 | 2.61 | | Borrowings | 8,601 | — | — | 106,502 | 1,186 | 4.48 | | Junior Subordinated Obligations Issued to Unconsolidated Subsidiary Trusts | 20,000 | 171 | 3.43 | 20,000 | 170 | 3.42 | | Finance Leases | 4,978 | 42 | 3.38 | 5,035 | 47 | 3.75 | | Total Interest-Bearing Liabilities | 3,191,906 | 19,040 | 2.39 | 3,127,417 | 20,820 | 2.68 | | Noninterest-Bearing Deposits | 690,766 | | | 683,077 | | | | Other Liabilities | 43,138 | | | 48,609 | | | | Total Liabilities | 3,925,810 | | | 3,859,103 | | | | Stockholders’ Equity | 406,529 | | | 378,256 | | | | Total Liabilities and Stockholders’ Equity | $4,332,339 | | | $4,237,359 | | | | Net Interest Income | | $32,533 | | | $27,152 | | | Net Interest Spread | | | 2.60% | | | 2.04% | | Net Interest Margin | | | 3.15% | | | 2.67% | 46 *Average Consolidated Balance Sheets and Net Interest Income Analysis* *(GAAP Basis)* *(Dollars In Thousands)* | Year to Date Period Ended: | June 30, 2025 Average Balance | Interest Income/ Expense | Rate Earned/ Paid | June 30, 2024 Average Balance | Interest Income/ Expense | Rate Earned/ Paid | | --- | ---: | ---: | ---: | ---: | ---: | ---: | | Interest-Bearing Deposits at Banks | $145,746 | $3,243 | 4.49% | $168,894 | $4,632 | 5.52% | | Investment Securities: | | | | | | | | Fully Taxable | 498,250 | 7,398 | 2.99 | 540,704 | 6,195 | 2.30 | | Exempt from Federal Taxes | 88,835 | 1,148 | 2.61 | 116,945 | 1,305 | 2.24 | | Loans (1) | 3,410,632 | 90,150 | 5.33 | 3,258,063 | 82,517 | 5.09 | | Total Earning Assets (1) | 4,143,463 | 101,939 | 4.96 | 4,084,606 | 94,649 | 4.66 | | Allowance for Credit Losses | (34,469) | | | (31,437) | | | | Cash and Due From Banks | 30,385 | | | 29,207 | | | | Other Assets | 189,269 | | | 159,046 | | | | Total Assets | $4,328,648 | | | $4,241,422 | | | | Deposits: | | | | | | | | Interest-Bearing Checking Accounts | $842,818 | 3,744 | 0.90 | $831,502 | 3,544 | 0.86 | | Savings Deposits | 1,505,387 | 18,850 | 2.53 | 1,484,031 | 20,801 | 2.82 | | Time Deposits of $250,000 or More | 183,053 | 3,537 | 3.90 | 174,991 | 3,842 | 4.42 | | Other Time Deposits | 615,878 | 11,322 | 3.71 | 500,444 | 10,157 | 4.08 | | Total Interest-Bearing Deposits | 3,147,136 | 37,453 | 2.40 | 2,990,968 | 38,344 | 2.58 | | Borrowings | 15,949 | 167 | 2.11 | 101,743 | 2,262 | 4.47 | | Junior Subordinated Obligations Issued to Unconsolidated Subsidiary Trusts | 20,000 | 340 | 3.43 | 20,000 | 341 | 3.43 | | Finance Leases | 4,987 | 89 | 3.60 | 5,042 | 95 | 3.79 | | Total Interest-Bearing Liabilities | 3,188,072 | 38,049 | 2.41 | 3,117,753 | 41,042 | 2.65 | | Noninterest-Bearing Deposits | 690,039 | | | 695,171 | | | | Other Liabilities | 45,069 | | | 49,648 | | | | Total Liabilities | 3,923,180 | | | 3,862,572 | | | | Stockholders’ Equity | 405,468 | | | 378,850 | | | | Total Liabilities and Stockholders’ Equity | $4,328,648 | | | $4,241,422 | | | | Net Interest Income | | $63,890 | | | $53,607 | | | Net Interest Spread | | | 2.55% | | | 2.01% | | Net Interest Margin | | | 3.11% | | | 2.64% | (1) Includes Nonaccrual Loans. ### CHANGE IN FINANCIAL CONDITION ### Summary of Selected Consolidated Balance Sheet Data (Dollars in Thousands) | | At Period-End 6/30/2025 | 12/31/2024 | $ Change From December | % Change From December (not annualized) | | --- | ---: | ---: | ---: | ---: | | Interest-Bearing Bank Balances | $227,472 | $127,124 | $100,348 | 78.9% | | Securities Available-for-Sale | 447,678 | 463,111 | (15,433) | (3.3)% | | Securities Held-to-Maturity | 70,828 | 98,261 | (27,433) | (27.9)% | | Equity Securities | 5,332 | 5,055 | 277 | 5.5% | | Loans (1) | 3,424,754 | 3,394,541 | 30,213 | 0.9% | | Allowance for Credit Losses | 34,191 | 33,598 | 593 | 1.8% | | Earning Assets (1) | 4,180,621 | 4,092,445 | 88,176 | 2.2% | | Total Assets | $4,414,719 | $4,306,348 | $108,371 | 2.5% | | Noninterest-Bearing Deposits | $736,535 | $702,978 | $33,557 | 4.8% | | Interest-Bearing Checking Accounts | 884,130 | 810,834 | 73,296 | 9.0% | | Savings Deposits | 1,484,666 | 1,520,024 | (35,358) | (2.3)% | | Time Deposits over $250,000 | 179,254 | 191,962 | (12,708) | (6.6)% | | Other Time Deposits | 644,745 | 602,132 | 42,613 | 7.1% | | Total Deposits | $3,929,330 | $3,827,930 | $101,400 | 2.6% | | Borrowings | $8,600 | $8,600 | $— | —% | | Junior Subordinated Obligations Issued to Unconsolidated Subsidiary Trusts | 20,000 | 20,000 | — | —% | | Stockholders' Equity | 408,506 | 400,901 | 7,605 | 1.9% | (1) Includes Nonaccrual Loans. ***Changes in Earning Assets:*** The loan portfolio at June 30, 2025, was $3.4 billion, an increase of $30.2 million, or 0.9%, from the December 31, 2024 level. The following trends were experienced in our largest segments: - **Commercial and commercial real estate loans:** This segment of the loan portfolio increased by $15.0 million, or 1.6%, during the first six months of 2025. In the first six months of 2025, loan growth was negatively impacted as loan pay-off activity accelerated. In addition, approximately $10.6 million of the previously reserved commercial real estate loans have been reclassified to Other Assets after the participating banks assumed control of the collateral properties related to the CRE Participation. The participating banks have appointed a property manager to manage the day-to-day activities while exploring further options. The properties are being held in an unconsolidated LLC in which Arrow has an ownership interest equivalent to its rights under the former CRE Participation. As previously disclosed, the properties are generating positive cash flow and a majority is tenant occupied. - **Consumer loans:** As of June 30, 2025, these loans, primarily auto loans originated through dealerships in New York and Vermont, decreased by $9.7 million, or 0.9%, from the December 31, 2024 balance. Inflation, high interest rates and prepayment/refinancing activity may continue to slow demand. - **Residential real estate loans:** This segment increased during the first six months of 2025 by $24.9 million, or 1.9%. Loan origination activity continued to be strong through the end of the second quarter. Overall economic conditions, including the level of interest rates may impact future origination levels. ***Changes in Sources of Funds:*** Deposit balances reached $3.9 billion, an increase of $101.4 million. or 2.6% from December 31, 2024. The increase from December 31, 2024 was primarily attributable to the additional of $125 million of brokered CDs. The brokered CDs partially replaced previous wholesale funding sources and are part of a cash flow hedge using interest rate swaps to reduce overall funding costs. Noninterest-bearing deposits represented 18.7% of total deposits at June 30, 2025, compared to 18.4% of total deposits on December 31, 2024. At June 30, 2025, total time deposits were $824.0 million. Municipal deposits increased $117.4 million, or 14.5% from December 31, 2024. ***Municipal Deposits:*** Municipal deposits have historically averaged between 20% to 30% of total deposits. Municipal deposits are typically placed in interest-bearing checking, savings and various time deposit accounts. In general, there is a seasonal pattern to municipal deposits which dip to a low point in August each year. Account balances tend to increase throughout the fall and into early winter from tax deposits, flatten out after the beginning of the ensuing calendar year, and increase again at the end of March from the electronic deposit of NYS aid payments to school districts. In addition to seasonal patterns, the overall level of municipal deposit balances fluctuates from year-to-year as a result of local economic factors as well as competition from other banks and non-bank entities. Arrow uses reciprocal deposits for a select group of municipalities to reduce the amount of investment securities required to be pledged as collateral for municipal deposits where municipal deposits in excess of the FDIC insurance coverage limits were transferred to other participating banks, divided into portions so as to qualify for FDIC insurance coverage at each transferee bank. In return, reciprocal amounts are transferred to Arrow in equal amounts of deposits from the participant banks. The balances of reciprocal deposits were $650.0 million and $648.5 million at June 30, 2025 and December 31, 2024, respectively. ***Uninsured Deposits***: Arrow's deposit base includes both insured and uninsured deposits. Arrow continually monitors levels and composition of uninsured deposits. Uninsured deposit balances at June 30, 2025 were less than 30% of the total deposit base. ### FINANCIAL CONDITION ### Investment Portfolio Trends The table below presents the changes in the period-end balances for AFS and HTM securities from December 31, 2024 to June 30, 2025 (in thousands): *(Dollars in Thousands)* | Securities Available-for-Sale: | Fair Value at Period-End 6/30/2025 | 12/31/2024 | Change | Net Unrealized Gains (Losses) For Period Ended 6/30/2025 | 12/31/2024 | Change | | --- | ---: | ---: | ---: | ---: | ---: | ---: | | U.S. Treasury Securities | $100,113 | $98,070 | $2,043 | $1,934 | $85 | $1,849 | | U.S. Agency Securities | 24,620 | 69,214 | (44,594) | (380) | (786) | 406 | | State and Municipal Obligations | 200 | 240 | (40) | — | — | — | | Mortgage-Backed Securities | 316,728 | 294,608 | 22,120 | (25,101) | (35,840) | 10,739 | | Corporate and Other Debt Securities | 6,017 | 979 | 5,038 | 17 | (21) | 38 | | Total | $447,678 | $463,111 | $(15,433) | $(23,530) | $(36,562) | $13,032 | | Securities Held-to-Maturity: | | | | | | | | State and Municipal Obligations | $64,937 | $90,373 | $(25,436) | $(664) | $(1,456) | $792 | | Mortgage-Backed Securities | 5,090 | 6,213 | (1,123) | (137) | (219) | 82 | | Total | $70,027 | $96,586 | $(26,559) | $(801) | $(1,675) | $874 | The table below presents the weighted average yield for AFS and HTM securities, at amortized cost, as of June 30, 2025 (in thousands). | Securities Available-for-Sale: | June 30, 2025 Within One Year Amount | Yield | After One But Within Five Years Amount | Yield | After Five But Within Ten Years Amount | Yield | After Ten Years Amount | Yield | Total Amount | Yield | | --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: | | U.S. Treasury Securities | $24,980 | 4.7% | $48,762 | 4.4% | $24,437 | 4.5% | $— | —% | $98,179 | 4.5% | | U.S. Agency Securities | — | —% | 25,000 | 2.9% | — | —% | — | —% | 25,000 | 2.9% | | State and Municipal Obligations | — | —% | 200 | 6.8% | — | —% | — | —% | 200 | 6.8% | | Mortgage-Backed Securities | 1,843 | 2.3% | 184,422 | 2.2% | 155,564 | 3.0% | — | —% | 341,829 | 2.6% | | Corporate and Other Debt Securities | — | —% | 1,000 | 7.3% | 5,000 | 8.0% | — | —% | 6,000 | 7.8% | | Total | $26,823 | 4.5% | $259,384 | 2.7% | $185,001 | 3.3% | $— | —% | $471,208 | 3.1% | | Securities Held-to-Maturity: | | | | | | | | | | | | State and Municipal Obligations | $43,149 | 3.5% | $20,911 | 3.2% | $1,541 | 4.5% | $— | —% | $65,601 | 3.4% | | Mortgage-Backed Securities | 536 | 2.8% | 4,691 | 2.4% | — | —% | — | —% | 5,227 | 2.5% | | Total | $43,685 | 3.5% | $25,602 | 3.0% | $1,541 | 4.5% | $— | —% | $70,828 | 3.4% | At June 30, 2025, Arrow's securities portfolios did not include, directly or indirectly, obligations of foreign governments or governmental agencies of foreign issuers. In the periods referenced above, mortgage-backed securities consisted solely of mortgage pass-through securities and collateralized mortgage obligations (CMOs) issued or guaranteed by U.S. federal agencies or by government-sponsored enterprises (GSEs). Mortgage pass-through securities provide the investor monthly portions of principal and interest pursuant to the contractual obligations of the underlying mortgages. CMOs are pools of mortgage-backed securities, the repayments on which have generally been separated into two or more components (tranches), where each tranche has a separate estimated life and yield. Arrow's practice has been to purchase pass-through securities and CMOs that are issued or guaranteed by U.S. federal agencies or GSEs, and the tranches of CMOs purchased generally have shorter average lives and/or durations. Lower market interest rates and/or payment deferrals on underlying loans that make up mortgage-backed security collateral may impact cashflows. U.S. Government & Agency Obligations consisted solely of agency bonds issued by GSEs. These securities generally pay fixed semi-annual coupons with principal payments at maturity. For some, callable options are included that may impact the timing of these principal payments. Arrow's practice has been to purchase agency securities that are issued or guaranteed by GSEs with limited embedded optionality (call features). Final maturities are generally less than 5 years. Changes in net unrealized gains or losses during recent periods have been primarily attributable to changes in market rates during the periods in question and not due to the credit-worthiness of the issuers. ### Investment Sales, Purchases and Maturities There were no sales of investment securities within the six month periods ended June 30, 2025 or 2024. The following table summarizes purchases of investment securities within the AFS and HTM portfolios for the three and six month periods ended June 30, 2025 and 2024, as well as proceeds from the maturity and calls of investment securities within each portfolio for the respective periods presented: *(In Thousands)* | Purchases: Available-for-Sale Portfolio | Three Months Ended 6/30/2025 | 6/30/2024 | Six Months Ended 6/30/2025 | 6/30/2024 | | --- | ---: | ---: | ---: | ---: | | U.S. Agency Securities | $— | $— | $— | $— | | Mortgage-Backed Securities | 34,623 | — | 34,623 | — | | Other | 5,000 | — | 5,000 | — | | Total Purchases | $39,623 | $— | $39,623 | $— | | **Maturities & Calls** | $42,265 | $35,936 | $68,437 | $46,298 | *(In Thousands)* | Purchases: Held-to-Maturity Portfolio | Three Months Ended 6/30/2025 | 6/30/2024 | Six Months Ended 6/30/2025 | 6/30/2024 | | --- | ---: | ---: | ---: | ---: | | State and Municipal Obligations | $3,671 | $447 | $6,570 | $1,197 | | **Maturities & Calls** | $30,303 | $29,073 | $33,932 | $33,076 | ### Loan Trends The following three tables present the quarterly average balances by loan type, the percentage of total loans represented by each loan type and the annualized yield of each loan category for each specified period: ### Quarterly Average Loan Balances (Dollars in Thousands) | | Quarter Ended 6/30/2025 | 12/31/2024 | | --- | ---: | ---: | | Commercial | $160,330 | $158,991 | | Commercial Real Estate | 801,445 | 796,365 | | Consumer | 1,111,187 | 1,118,981 | | Residential Real Estate | 1,342,178 | 1,320,204 | | Total Loans | $3,415,140 | $3,394,541 | ### Percentage of Total Quarterly Average Loans | | Quarter Ended 6/30/2025 | 12/31/2024 | | --- | ---: | ---: | | Commercial | 4.7% | 4.7% | | Commercial Real Estate | 23.5% | 23.4% | | Consumer | 32.5% | 33.0% | | Residential Real Estate | 39.3% | 38.9% | | Total Loans | 100.0% | 100.0% | 50 ### Quarterly Yield on Loans | | Quarter Ended 6/30/2025 | 12/31/2024 | | --- | ---: | ---: | | Commercial | 5.74% | 5.88% | | Commercial Real Estate | 5.26% | 5.18% | | Consumer | 6.17% | 6.08% | | Residential Real Estate | 4.70% | 4.66% | | Total Loans | 5.36% | 5.30% | Market rates have fluctuated which impacts new loan yields for fixed rate loans, and variable loan yields as these loans reach their repricing dates. The table below shows the maturity schedule of loans outstanding as of June 30, 2025 classified according to fixed interest rates and variable interest rates (in thousands): | | June 30, 2025 Within One Year | After One But Within Five Years | After Five But Within 15 Years | After 15 Years | Total | | --- | ---: | ---: | ---: | ---: | ---: | | Commercial | $42,223 | $79,527 | $40,357 | $96 | $162,203 | | Commercial Real Estate | 229,844 | 339,576 | 232,281 | 6,465 | 808,166 | | Consumer | 10,058 | 614,610 | 484,164 | 440 | 1,109,272 | | Residential Real Estate | 140,406 | 120,172 | 387,797 | 696,738 | 1,345,113 | | Total | $422,531 | $1,153,885 | $1,144,599 | $703,739 | $3,424,754 | | | | After One But Within Five Years | After Five But Within 15 Years | After 15 Years | Total | | Loans maturing with: | | | | | | | Fixed Interest Rates | | $747,407 | $826,094 | $699,845 | $2,273,346 | | Variable Interest Rates | | 406,478 | 318,505 | 3,894 | 728,877 | | Total | | $1,153,885 | $1,144,599 | $703,739 | $3,002,223 | **Maintenance of High Quality Credit in the Loan Portfolio:** The allowance for credit losses was impacted in 2025 by the recognition of a specific reserve of $3.75 million in the first quarter of 2025 related to the CRE Participation and the subsequent charge-off of the reserved loan balances during the second quarter. The remaining loan balance has been reclassified to Other Assets after the participating banks assumed control of the collateral properties and appointed a property manager to manage the day-to-day activities while exploring further options. The properties are being held in an unconsolidated LLC in which Arrow has an ownership interest equivalent to its rights under the former loan participation. As previously disclosed, the properties are generating positive cash flow and a majority is tenant occupied. Overall, there have been no other material fluctuations in the quality of the loan portfolio. In general, residential real estate loans have historically been underwritten to secondary market standards and Arrow has not engaged in subprime mortgage lending. Similarly, high underwriting standards have been applied to the commercial, commercial real estate and indirect lending program as well. **Commercial Loans and Commercial Real Estate Loans:** Commercial and commercial real estate loans in the loan portfolio were extended to businesses or borrowers primarily located in Arrow's regional markets. There are no commercial real estate loans in major metropolitan areas. Approximately 2% of the loan portfolio are comprised of office related property. Retail loans were approximately 3% of the loan portfolio and hotels and motels were approximately 4% of the portfolio. A portion of the loans in the commercial portfolio have variable rates tied to market indices, such as Prime, SOFR or FHLBNY. **Consumer Loans:** At June 30, 2025, consumer loans continue to be a significant component of Arrow's business, comprising approximately one third of the total loan portfolio. For credit quality purposes, Arrow assigns automobile loan customers into one of four tiers, ranging from lower to higher quality in terms of anticipated credit risk. Arrow's experienced lending staff not only utilizes credit evaluation software tools but also reviews and evaluates each loan individually prior to the loan being funded. Arrow believes that this disciplined approach to evaluating credit risk has contributed to maintaining the strong credit quality in this portfolio. **Residential Real Estate Loans:** Demand for residential real estate has continued to remain strong. Arrow may sell a portion of its residential real estate originations into the secondary market. Overall economic conditions, including the level of interest rates, can impact future origination levels. ### Deposit Trends The following tables provide information on trends in the quarterly average balances and mix of the deposit portfolio by deposit type and the percentage of total deposits represented by each deposit type. *Quarterly Average Deposit Balances* *(Dollars in Thousands)* | | Quarter Ended 6/30/2025 | 12/31/2024 | | --- | ---: | ---: | | Noninterest-Bearing Deposits | $690,766 | $711,566 | | Interest-Bearing Checking Accounts | 845,041 | 802,808 | | Savings Deposits | 1,494,930 | 1,567,455 | | Time Deposits over $250,000 | 179,980 | 183,325 | | Other Time Deposits | 638,376 | 582,537 | | Total Deposits | $3,849,093 | $3,847,691 | | | Quarter Ended 6/30/2025 | 12/31/2024 | | --- | ---: | ---: | | Non-Municipal Deposits | $2,979,700 | $2,954,292 | | Municipal Deposits | 869,393 | 893,399 | | Total Deposits | $3,849,093 | $3,847,691 | ### Percentage of Total Quarterly Average Deposits | | Quarter Ended 6/30/2025 | 12/31/2024 | | --- | ---: | ---: | | Noninterest-Bearing Deposits | 17.9% | 18.5% | | Interest-Bearing Checking Accounts | 22.0% | 20.9% | | Savings Deposits | 38.8% | 40.7% | | Time Deposits over $250,000 | 4.7% | 4.8% | | Other Time Deposits | 16.6% | 15.1% | | Total Deposits | 100.0% | 100.0% | ### Quarterly Cost of Deposits | | Quarter Ended 6/30/2025 | 12/31/2024 | | --- | ---: | ---: | | Demand Deposits | —% | —% | | Interest-Bearing Checking Accounts | 0.92% | 0.96% | | Savings Deposits | 2.51% | 2.83% | | Time Deposits over $250,000 | 3.85% | 3.94% | | Other Time Deposits | 3.64% | 4.03% | | Total Deposits | 1.96% | 2.15% | In the second half of 2024, the targeted Federal Funds rate fell 100 basis points and rate decreases later in 2025 are possible. Arrow is well positioned for a variety of rate environments, see Part I, Item 3, entitled "Quantitative and Qualitative Disclosures About Market Risk," on page 61 for further discussion. ### Non-Deposit Sources of Funds $20 million of Junior Subordinated Obligations Issued to Unconsolidated Subsidiary Trusts listed on the consolidated balance sheet as of June 30, 2025 (i.e., previously issued TRUPs) will, subject to certain limits, continue to qualify as Tier 1 regulatory capital for Arrow until such TRUPs mature or are redeemed. This is further discussed under "Capital Resources" beginning on page 54 of this Report. ### ASSET QUALITY The following table presents information related to the allowance and provision for credit losses: ### Summary of the Allowance and Provision for Credit Losses (Dollars in Thousands, Loans Stated Net of Unearned Income) | Loan Balances: | 6/30/2025 | 12/31/2024 | 6/30/2024 | | --- | ---: | ---: | ---: | | Period-End Loans | $3,424,754 | $3,394,541 | $3,315,523 | | Average Loans, Year-to-Date | 3,410,632 | 3,300,346 | 3,258,063 | | Average Loans, Quarter-to-Date | 3,415,140 | 3,354,463 | 3,280,285 | | Period-End Assets | 4,414,719 | 4,306,348 | 4,244,407 | | Allowance for Credit Losses, Year-to-Date: | | | | | Allowance for Credit Losses, Beginning of Period | $33,598 | $31,265 | $31,265 | | Provision for Credit Losses, YTD | 5,613 | 5,180 | 1,392 | | Loans Charged-off, YTD | (6,613) | (5,895) | (3,133) | | Recoveries of Loans Previously Charged-off | 1,593 | 3,048 | 1,485 | | Net Charge-offs, YTD | (5,020) | (2,847) | (1,648) | | Allowance for Credit Losses, End of Period | $34,191 | $33,598 | $31,009 | | Nonperforming Assets, at Period-End: | | | | | Nonaccrual Loans | $5,275 | $20,621 | $20,118 | | Loans Past Due 90 or More Days and Still Accruing Interest | 940 | 398 | 915 | | Restructured and in Compliance with Modified Terms | 12 | 20 | 36 | | Total Nonperforming Loans | 6,227 | 21,039 | 21,069 | | Repossessed Assets | 590 | 382 | 239 | | Other Real Estate Owned | — | 76 | 34 | | Total Nonperforming Assets | $6,817 | $21,497 | $21,342 | | Asset Quality Ratios: | | | | | Allowance to Nonperforming Loans | 549.08% | 159.69% | 147.18% | | Allowance to Period-End Loans | 1.00% | 0.99% | 0.94% | | Provision to Average Loans (Quarter) (1) | 0.07% | 0.34% | 0.10% | | Provision to Average Loans (YTD) (1) | 0.33% | 0.16% | 0.09% | | Net Charge-offs to Average Loans (Quarter) (1) | 0.49% | 0.06% | 0.16% | | Net Charge-offs to Average Loans (YTD) (1) | 0.30% | 0.09% | 0.10% | | Nonperforming Loans to Total Loans | 0.18% | 0.62% | 0.64% | | Nonperforming Assets to Total Assets | 0.15% | 0.50% | 0.50% | | (1) Annualized | | | | ### Provision for Credit Losses The allowance for credit losses was $34.2 million as of June 30, 2025, which represented 1.00% of loans outstanding, as compared to $37.8 million, or 1.11%, at March 31, 2025 and $33.6 million, or 0.99%, at December 31, 2024. The provision for credit losses for the second quarter of 2025 was $0.6 million compared to $5.0 million in the first quarter of 2025. The primary driver of the decrease was Arrow's recognition of a specific reserve in the first quarter of 2025 related to the CRE Participation. Factors that impact the provision for credit losses in the second quarter of 2025 were charge-offs, growth in loan balances and changes to the economic forecast factors embedded in the credit loss allowance model. In addition, Arrow recorded an increase for estimated credit losses on off-balance sheet credit exposures in other liabilities of $38 thousand in the second quarter of 2025. The overall change in the allowance from March 31, 2025 was primarily driven by the following factors: net loan growth contributed $457 thousand, changes in macro economic conditions decreased the allowance by $587 thousand, net charge-offs of $4.2 million, and a specific reserve of $300 thousand. The specific reserve of $3.75 million in the first quarter of 2025 related to a large commercial loan participation (the "CRE Participation") was subsequently charged-off during the second quarter and the remaining loan balance has been reclassified to Other Assets after the participating banks assumed control of the collateral properties and appointed a property manager to manage the day-to-day activities while exploring further options. The properties itself are being held in an unconsolidated limited liability company (LLC) in which Arrow has an ownership interest equivalent to its rights under the former CRE Participation. As previously disclosed, the properties are generating positive net operating income and the majority is tenant occupied. See Note 2 to the unaudited interim consolidated financial statements for additional discussion related to CECL. ### Risk Elements Nonperforming assets at June 30, 2025 amounted to $6.8 million, a decrease from the $21.5 million at December 31, 2024 and from $21.3 million at June 30, 2024. Historically, ratios of nonperforming assets to total assets have remained fairly consistent to the average ratios for our peer group (see page 40 for a discussion of the peer group). At March 31, 2025, the ratio of loans past due 90 or more days plus nonaccrual loans plus other real estate owned to total assets was 0.44% as compared to the 0.49% ratio of the peer group (the latest date for which peer group information is available). At December 31, 2024 the ratio was 0.50% and at June 30, 2025 the ratio was 0.15%. The following table presents the balance of other non-current loans at period-end as to which interest income was being accrued (i.e., loans 30 to 89 days past due, as defined in bank regulatory guidelines). These non-current loans are not included in nonperforming assets, but entail heightened risk: *Loans Past Due 30-89 Days and Accruing Interest ($ in 000's)* | | 6/30/2025 | 12/31/2024 | | --- | ---: | ---: | | Commercial Loans | $745 | $511 | | Commercial Real Estate Loans | 312 | 318 | | Residential Real Estate Loans | 3,421 | 3,076 | | Consumer Loans - Primarily Indirect Automobile | 16,126 | 16,620 | | Total Loans Past Due 30-89 Days and Accruing Interest | $20,604 | $20,525 | At June 30, 2025, the loans in the above-referenced category totaled $20.6 million, an increase from the $20.5 million of such loans at December 31, 2024. The June 30, 2025 total of non-current loans equaled 0.60% of loans then outstanding, compared to 0.60% at December 31, 2024. The number and dollar amount of performing loans that demonstrate characteristics of potential weakness from time-to-time (potential problem loans) typically is a very small percentage of the loan portfolio. See the table of Credit Quality Indicators in Note 5 to the unaudited interim consolidated financial statements. Arrow considers all performing commercial and commercial real estate loans classified as substandard or lower (as reported in Note 5) to be potential problem loans. These loans will continue to be closely monitored and Arrow currently expects to collect all contractual principal and interest payments in full on these classified loans. As of June 30, 2025, Arrow held no other real estate owned properties. ### CAPITAL RESOURCES ### Regulatory Capital Standards Capital Adequacy Requirements. An important area of banking regulation is the federal banking system's promulgation and enforcement of minimum capitalization standards for banks and bank holding companies. The banking regulators have established guidelines for capital requirements, expressed in terms of Tier 1, or core capital, as a percentage of average assets, to measure the financial health of the institution. Banking regulators have also established risk-based capital guidelines for U.S. banking organizations. | Capital Ratio | 2025 | | --- | ---: | | Minimum CET1 Ratio | 4.500% | | Capital Conservation Buffer ("Buffer") | 2.500% | | Minimum CET1 Ratio Plus Buffer | 7.000% | | Minimum Tier 1 Risk-Based Capital Ratio | 6.000% | | Minimum Tier 1 Risk-Based Capital Ratio Plus Buffer | 8.500% | | Minimum Total Risk-Based Capital Ratio | 8.000% | | Minimum Total Risk-Based Capital Ratio Plus Buffer | 10.500% | | Minimum Leverage Ratio | 4.000% | Current Capital Ratios: The table below sets forth the regulatory capital ratios of Arrow and Arrow Bank under the current Capital Rules, as of June 30, 2025: | | Common Equity Tier 1 Capital Ratio | Tier 1 Risk-Based Capital Ratio | Total Risk-Based Capital Ratio | Tier 1 Leverage Ratio | | --- | ---: | ---: | ---: | ---: | | Arrow Financial Corporation | 12.73% | 13.37% | 14.51% | 9.64% | | Arrow Bank | 12.93% | 12.93% | 14.07% | 9.26% | | FDICIA's Prompt Corrective Action - "Well-Capitalized" Standard (2019) | 6.50% | 8.00% | 10.00% | 5.00% | | Regulatory Minimum | 7.00% | 8.50% | 10.50% | 4.00% | At June 30, 2025, Arrow Bank exceeded the minimum regulatory capital ratios established under the current Capital Rules and qualified as "well-capitalized", the highest category in the capital classification scheme established by federal bank regulatory agencies under the "prompt corrective action" standards, as described above. ### Capital Components; Stock Repurchases; Dividends *Stockholders' Equity:* Stockholders’ equity was $408.5 million at June 30, 2025, an increase of $7.6 million, or 1.9%, from the December 31, 2024 level of $400.9 million. The increase in stockholders' equity over the first six months of 2025 principally reflected the following factors: the addition of (i) $17.1 million of net income for the period, (ii) other comprehensive gain of $7.6 million, and (iii) the issuance of $0.9 million of common stock through employee benefit plans, reduced by (iv) cash dividends of $9.4 million and (v) repurchases of common stock of $8.7 million. *Trust Preferred Securities:* In each of 2003 and 2004, Arrow issued $10 million of TRUPs in a private placement. Under the FRB's regulatory capital rules then in effect, TRUPs proceeds qualified as Tier 1 capital for bank holding companies such as Arrow, but only in amounts up to 25% of Tier 1 capital, net of goodwill less any associated deferred tax liability. For Arrow, TRUPs outstanding prior to the grandfathering cutoff date set forth in Dodd-Frank (May 19, 2010) would continue to qualify as Tier 1 capital until maturity or redemption, subject to limitations. In the first quarter of 2020, Arrow entered into interest rate swap agreements to synthetically fix the variable rate interest payments associated with $20 million in outstanding subordinated trust securities. The effective fixed rate is 3.43% until maturity. These agreements are designated as cash flow hedges. #### Stock Repurchases: On April 24, 2024, the Board authorized management, in its discretion, to repurchase from time to time, in the open market or in privately negotiated transactions, up to $5 million of Arrow common stock. In addition, on April 30, 2025, the Board authorized management, in its discretion, to repurchase from time to time, in the open market or in privately negotiated transactions, an additional $5 million of Arrow common stock. In the second quarter of 2025, Arrow repurchased approximately $5.1 million (approximately 196 thousand shares of its common stock) under this authorization. On July 23, 2025, the Board increased management's share repurchase authority by another $5 million. From time to time, Arrow may establish a written trading plan in accordance with Rule 10b5-1 of the Exchange Act, pursuant to which it may repurchase shares of its common stock. Arrow currently does not have a Rule 10b5-1 plan in place. Repurchases may be made by Arrow, at times and in amounts as it deems appropriate, and may be made through open market transactions in compliance with Rule 10b-18 of the Exchange Act, subject to market conditions, applicable legal requirements, and other factors. *Dividends:* Arrow's common stock is traded on NasdaqGS® under the symbol AROW. The high and low stock prices for the past five quarters listed below represent actual stock trades, as reported by NASDAQ. | 2024 | Market Price Low | High | Cash Dividends Declared | | --- | ---: | ---: | ---: | | First Quarter | $23.11 | $28.62 | $0.27 | | Second Quarter | 21.50 | 26.14 | 0.27 | | Third Quarter | 25.17 | 32.92 | 0.27 | | Fourth Quarter | 27.15 | 34.63 | 0.28 | | **2025** | | | | | First Quarter | $25.10 | $29.87 | $0.28 | | Second Quarter | 22.72 | 27.42 | 0.28 | | Third Quarter (dividend paid August 25, 2025) | TBD | TBD | 0.29 | 55 | | Quarter Ended June 30 2025 | 2024 | | --- | ---: | ---: | | Cash Dividends Per Share | $0.280 | $0.270 | | Diluted Earnings Per Share | 0.65 | 0.52 | | **Dividend Payout Ratio** | **43.08%** | **51.92%** | | Total Equity (in thousands) | 408,506 | $383,018 | | Shares Issued and Outstanding (in thousands) | 16,484 | 16,723 | | **Book Value Per Share** | **$24.78** | **$22.90** | | Intangible Assets (in thousands) | 25,659 | 22,800 | | **Tangible Book Value Per Share** | **$23.23** | **$21.54** | ### LIQUIDITY The objective of effective liquidity management is to ensure that Arrow has the ability to raise cash when needed at a reasonable cost. This includes the capability of meeting expected and unexpected obligations to Arrow's customers at any time. Given the uncertain nature of customer demands and the need to maximize earnings, Arrow maintains reasonably priced sources of funds, both on- and off-balance sheet, that can be accessed quickly in times of need. Arrow’s liquidity position provides the Company with the necessary flexibility to address any unexpected near-term disruptions such as reduced cash flows from the investment and loan portfolio, unexpected deposit runoff, or increased loan originations. Arrow's primary sources of available liquidity are overnight investments in federal funds sold, interest-bearing bank balances at the FRBNY, and cash flow from investment securities and loans. Certain investment securities are categorized as available-for-sale at time of purchase. The available-for-sale portfolio was $447.7 million at June 30, 2025, a decrease of $15.4 million, from the year-end 2024 level. Due to the potential for volatility in market values, Arrow may not always be able to sell securities on short notice at their carrying value, even to provide needed liquidity. Arrow also held interest-bearing cash balances at June 30, 2025 of $227.5 million compared to $127.1 million at December 31, 2024. In addition to liquidity from cash, short-term investments, investment securities and loans, Arrow has supplemented available operating liquidity with additional off-balance sheet sources such as a federal funds lines of credit with correspondent banks and credit lines with the FHLBNY. The federal funds lines of credit are with two correspondent banks totaling $23 million which were not drawn on during 2024 or the six months ended June 30, 2025. To support the borrowing relationship with the FHLBNY, Arrow has pledged collateral, including residential mortgage, home equity and commercial real estate loans. At June 30, 2025, Arrow had outstanding collateralized obligations with the FHLBNY of $9 million; as of that date, the unused borrowing capacity at the FHLBNY was approximately $657 million. Brokered deposits are another source of funding accessible in a relatively short time period. At June 30, 2025, there were $300 million in brokered CD deposits. In addition, Arrow Bank has established a borrowing facility with the FRBNY, pledging certain consumer loans as collateral for potential "discount window" advances, which are maintained for contingency liquidity purposes. At June 30, 2025, the amount available under this facility was approximately $762 million in the aggregate, and there were no advances outstanding. Arrow performs regular liquidity stress tests and tests of the contingent liquidity plan to ensure that an adequate amount of available funds can be generated to meet a wide variety of potential liquidity events. Additionally, Arrow continually monitors levels and composition of uninsured deposits. Uninsured deposit balances in excess of the FDIC insurance limit at June 30, 2025, were less than 30% of the total deposit base. Arrow measures and monitors basic liquidity as a ratio of liquid assets to total short-term liabilities, both with and without the availability of borrowing arrangements. Based on the level of overnight investments, available liquidity from the investment securities portfolio, cash flows from the loan portfolio, the stable core deposit base and the significant borrowing capacity, Arrow believes that the available liquidity is sufficient to meet all reasonably likely events. At June 30, 2025, Arrow's primary liquidity ratio was approximately 10.6% of total assets, well in excess of the internal policy limit of 5%. Total primary liquidity was approximately $442 million, comprised of $227 million of unencumbered cash and $215 million in unencumbered securities. Arrow did not experience any liquidity constraints in the six month period ended June 30, 2025, in 2024 or in any recent prior period. Arrow has not at any time during such periods been forced to pay above-market rates to obtain retail deposits or other funds from any source. ### RESULTS OF OPERATIONS ### Three Months Ended June 30, 2025 Compared With ### Three Months Ended June 30, 2024 ### Summary of Earnings Performance (Dollars in Thousands, Except Per Share Amounts) | | Three Months Ended June 30, 2025 | June 30, 2024 | Change | % Change | | --- | ---: | ---: | ---: | ---: | | Net Income | $10,805 | $8,604 | $2,201 | 25.6% | | Diluted Earnings Per Share | 0.65 | 0.52 | 0.13 | 25.0% | | Return on Average Assets | 1.00% | 0.82% | 0.18% | 22.0% | | Return on Average Equity | 10.66% | 9.15% | 1.51% | 16.5% | The following narrative discusses the quarter-to-quarter changes in net interest income, non-interest income, non-interest expense and income taxes: ### Net Interest Income ### Summary of Net Interest Income (Dollars in Thousands) | | Three Months Ended June 30, 2025 | June 30, 2024 | Change | % Change | | --- | ---: | ---: | ---: | ---: | | Interest and Dividend Income | $51,573 | $47,972 | $3,601 | 7.5% | | Interest Expense | 19,040 | 20,820 | (1,780) | (8.5)% | | Net Interest Income | 32,533 | 27,152 | 5,381 | 19.8% | | Average Earning Assets(1) | 4,142,993 | 4,083,813 | 59,180 | 1.4% | | Average Interest-Bearing Liabilities | 3,191,906 | 3,127,417 | 64,489 | 2.1% | | Yield on Earning Assets(1) | 4.99% | 4.72% | 0.27% | 5.7% | | Cost of Interest-Bearing Liabilities | 2.39 | 2.68 | (0.29) | (10.8)% | | Net Interest Spread | 2.60 | 2.04 | 0.56 | 27.5% | | Net Interest Margin | 3.15 | 2.67 | 0.48 | 18.0% | | (1) Includes Nonaccrual Loans. | | | | | Net interest income for the quarter increased by $5.4 million, or 19.8%, from the second quarter of 2024. Interest and fees on loans were $45.6 million for the second quarter of 2025, an increase from $42.1 million for the quarter ending June 30, 2024, primarily due to loan growth and higher loan rates. Interest expense for the second quarter of 2025 was $19.0 million, a decrease of $1.8 million versus the comparable quarter ending June 30, 2024, primarily due to active management of deposit rates. Net interest margin increased 48 basis points in the second quarter of 2025 to 3.15%, from 2.67% during the second quarter of 2024. Average earning asset yields were 27 basis points higher as compared to the second quarter of 2024. The cost of interest-bearing liabilities decreased 29 basis points from the quarter ended June 30, 2024. Arrow defines net interest margin as net interest income divided by average earning assets, annualized. Further detailed information is presented above under the section entitled "Average Consolidated Balance Sheets and Net Interest Income Analysis" on page 45 to 47 The impact of recent interest rate changes on Arrow's deposit and loan portfolios are discussed above in this Report under the sections entitled "Deposit Trends" on page 52 and "Loan Trends" on page 50. As discussed previously under the heading "Asset Quality" beginning on page 53, the provision for loan losses for the second quarter of 2025 was $594 thousand, compared to a provision of $775 thousand for the second quarter of 2024. ### Non-interest Income ### Summary of Non-interest Income (Dollars in Thousands) | | Three Months Ended June 30, 2025 | June 30, 2024 | Change | % Change | | --- | ---: | ---: | ---: | ---: | | Income From Fiduciary Activities | $2,398 | $2,451 | $(53) | (2.2)% | | Fees for Other Services to Customers | 2,787 | 2,706 | 81 | 3.0% | | Insurance Commissions | 1,804 | 1,662 | 142 | 8.5% | | Net Gain on Securities | (40) | 54 | (94) | (174.1)% | | Net Gain on the Sale of Loans | 213 | 5 | 208 | 4,160.0% | | Other Operating Income | 447 | 978 | (531) | (54.3)% | | Total Non-interest Income | $7,609 | $7,856 | $(247) | (3.1)% | Total non-interest income in the current quarter was $7.6 million, a decrease of $247 thousand from the second quarter of 2024. The increase in insurance commissions was primarily attributable to the A&B Acquisition which occurred in the third quarter of 2024. Net loss on security transactions of $40 thousand for the three months ending June 30, 2025 was the result of the decrease in the fair value of equity securities. Other operating income decreased from the prior year comparable quarter as a result of gains recognized in 2024 on Other Assets. ### Non-interest Expense ### Summary of Non-interest Expense (Dollars in Thousands) | | Three Months Ended June 30, 2025 | June 30, 2024 | Change | % Change | | --- | ---: | ---: | ---: | ---: | | Salaries and Employee Benefits | $14,086 | $13,036 | $1,050 | 8.1% | | Occupancy Expense of Premises, Net | 1,952 | 1,774 | 178 | 10.0% | | Technology and Equipment Expense | 5,589 | 4,734 | 855 | 18.1% | | FDIC and FICO Assessments | 649 | 698 | (49) | (7.0)% | | Amortization | 80 | 40 | 40 | 100.0% | | Other Operating Expense | 3,296 | 3,036 | 260 | 8.6% | | Total Non-interest Expense | $25,652 | $23,318 | $2,334 | 10.0% | | Efficiency Ratio | 63.41% | 66.29% | (2.9)% | (4.4)% | Non-interest expense for the second quarter of 2025 was $25.7 million, an increase of $2.3 million, or 10.0%, from the second quarter of 2024. Salaries and benefit expenses increased $1.1 million, or 8.1%, from the prior year comparable quarter. Technology expenses in the second quarter increased $855 thousand, or 18.1%, from the second quarter of 2024. The second quarter of 2025 included Unification expenses of approximately $1.1 million. The Unification expenses were primarily comprised of project management and information technology costs related to the July 2025 system conversion. ### Income Taxes ### Summary of Income Taxes (Dollars in Thousands) | | Three Months Ended June 30, 2025 | June 30, 2024 | Change | % Change | | --- | ---: | ---: | ---: | ---: | | Provision for Income Taxes | $3,091 | $2,311 | $780 | 33.8% | | Effective Tax Rate | 22.2% | 21.2% | 1.0% | 4.7% | The increase in the effective tax rate for the three months ended June 30, 2025 compared to the three months ended June 30, 2024 was primarily due to an increase in forecasted pre-tax income combined with a decrease in the forecasted amount of tax exempt income. ### RESULTS OF OPERATIONS ### Six Months Ended June 30, 2025 Compared With ### Six Months Ended June 30, 2024 ### Summary of Earnings Performance (Dollars in Thousands, Except Per Share Amounts) | | Six Months Ended June 30, 2025 | June 30, 2024 | Change | % Change | | --- | ---: | ---: | ---: | ---: | | Net Income | $17,115 | $16,264 | $851 | 5.2% | | Diluted Earnings Per Share | 1.03 | 0.97 | 0.06 | 6.2 | | Return on Average Assets | 0.80% | 0.77% | 0.03% | 3.9 | | Return on Average Equity | 8.51% | 8.63% | (0.12)% | (1.4) | The following narrative discusses the period-to-period changes in net interest income, non-interest income, non-interest expense and income taxes: ### Net Interest Income ### Summary of Net Interest Income (Dollars in Thousands) | | Six Months Ended June 30, 2025 | June 30, 2024 | Change | % Change | | --- | ---: | ---: | ---: | ---: | | Interest and Dividend Income | $101,939 | $94,649 | $7,290 | 7.7% | | Interest Expense | 38,049 | 41,042 | (2,993) | (7.3)% | | Net Interest Income | 63,890 | 53,607 | 10,283 | 19.2% | | Average Earning Assets (1) | 4,143,463 | 4,084,606 | 58,857 | 1.4% | | Average Interest-Bearing Liabilities | 3,188,072 | 3,117,753 | 70,319 | 2.3% | | Yield on Earning Assets (1) | 4.96% | 4.66% | 0.30% | 6.4% | | Cost of Interest-Bearing Liabilities | 2.41 | 2.65 | (0.24) | (9.1)% | | Net Interest Spread | 2.55 | 2.01 | 0.54 | 26.9% | | Net Interest Margin | 3.11 | 2.64 | 0.47 | 17.8% | | (1) Includes Nonaccrual Loans. | | | | | Net interest margin for the first six months of 2025 increased 47 basis point to 3.11%, from 2.64% for the first six months of 2024. Average earning asset yields were 30 basis points higher as compared to the first six months of 2024, primarily due to higher market rates. The cost of interest-bearing liabilities decreased 24 basis points from the first six months of 2024. Further detailed information is presented above under the section entitled "Average Consolidated Balance Sheets and Net Interest Income Analysis." The impact of recent interest rate changes on Arrow's deposit and loan portfolios are discussed above in this Report under the sections entitled "Deposit Trends" on page 52 and "Loan Trends" on page 50. As previously discussed under the heading "Asset Quality" beginning on page 53, the provision for loan losses for the first six months of 2025 was $5.6 million, compared to $1.4 million for the first six months of 2024. ### Non-interest Income ### Summary of Non-interest Income (Dollars in Thousands) | | Six Months Ended June 30, 2025 | June 30, 2024 | Change | % Change | | --- | ---: | ---: | ---: | ---: | | Income From Fiduciary Activities | 4,933 | 4,908 | $25 | 0.5% | | Fees for Other Services to Customers | 5,387 | 5,249 | 138 | 2.6 | | Insurance Commissions | 3,630 | 3,344 | 286 | 8.6 | | Net Gain (Loss) on Securities | 277 | 71 | 206 | 290.1 | | Net Gain on the Sale of Loans | 314 | 9 | 305 | 3,388.9 | | Other Operating Income | 907 | 2,133 | (1,226) | (57.5) | | Total Non-interest Income | $15,448 | $15,714 | $(266) | (1.7)% | Total non-interest income for the first six months of 2025 was $15.4 million, a decrease of $266 thousand from the first six months of 2024. The increase in insurance commissions was primarily attributable to the acquisition of assets of A&B Agency, Inc. (the "A&B Acquisition"). Net gain on security transactions of $277 thousand for the first six months of 2025 resulting from the increase in the fair value of equity securities. Other operating income decreased from the prior year comparable quarter as a result of gains recognized in 2024 on Other Assets. ### Non-interest Expense ### Summary of Non-interest Expense (Dollars in Thousands) | | Six Months Ended June 30, 2025 | June 30, 2024 | Change | % Change | | --- | ---: | ---: | ---: | ---: | | Salaries and Employee Benefits | $27,641 | $25,929 | $1,712 | 6.6% | | Occupancy Expense of Premises, Net | 3,974 | 3,545 | 429 | 12.1 | | Technology and Equipment Expense | 10,676 | 9,554 | 1,122 | 11.7 | | FDIC and FICO Assessments | 1,319 | 1,413 | (94) | (6.7) | | Amortization | 161 | 80 | 81 | 101.3 | | Other Operating Expense | 7,926 | 6,809 | 1,117 | 16.4 | | Total Non-interest Expense | $51,697 | $47,330 | $4,367 | 9.2 | | Efficiency Ratio | 64.94% | 67.90% | (2.96)% | (4.4)% | Non-interest expense for the first six months of 2025 was $51.7 million, an increase of $4.4 million, or 9.2%, from the first six months of 2024. Salaries and benefit expenses increased $1.7 million, or 6.6%, from the comparable period in 2024 primarily driven by the overall growth in organization and inflation driven wage increases. Technology expenses increased $1.1 million, or 11.7%, from the first six months of 2024. Other non-interest expense increased $1.1 million for the first six months of 2025, as compared to the first six months of 2024. The first six months of 2025 included Unification expenses of approximately $1.7 million. The Unification expenses were primarily comprised of project management and information technology costs related to the July 2025 system conversion. ### Income Taxes ### Summary of Income Taxes (Dollars in Thousands) | | Three Months Ended June 30, 2025 | June 30, 2024 | Change | % Change | | --- | ---: | ---: | ---: | ---: | | Provision for Income Taxes | $4,913 | $4,335 | $578 | 13.3% | | Effective Tax Rate | 22.3% | 21.0% | 1.3% | 6.2% | The increase in the effective tax rate for the six months ended June 30, 2025 compared to the six months ended June 30, 2024 was primarily due to an increase in forecasted pre-tax income combined with a decrease in the forecasted amount of tax exempt income. ## Market risk As filed, 4,712 characters. ### QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK In addition to credit risk in the loan portfolio and liquidity risk, discussed earlier, Arrow's business activities also generate market risk. Market risk is the possibility that changes in future market rates (interest rates) or prices (market value of financial instruments) will make Arrow's position (i.e., assets and operations) less valuable. Arrow's primary market risk is interest rate volatility. The ongoing monitoring and management of interest rate risk is an important component of the asset/liability management process, which is governed by policies that are reviewed and approved annually by the Board of Directors. The Board of Directors delegates responsibility for carrying out asset/liability oversight and control to management's Asset/Liability Committee (ALCO). In this capacity ALCO develops guidelines and strategies impacting the asset/liability profile based upon estimated market risk sensitivity, policy limits and overall market interest rate levels and trends. Changes in market interest rates, whether increases or decreases, can trigger repricing and changes in the pace of payments for both assets and liabilities (prepayment risk). This may individually or in combination affect net interest income, net interest margin, and ultimately net income, either positively or negatively. ALCO utilizes the results of a detailed and dynamic simulation model to quantify this interest rate risk by projecting net interest income in various interest rate scenarios. Arrow's standard simulation model applies a parallel shift in interest rates, ramped over a 12-month period, to capture the impact of changing interest rates on net interest income. The results are compared to ALCO policy limits which specify a maximum tolerance level for net interest income exposure over a one-year horizon, assuming no balance sheet growth and a 100 and 200 basis point downward and a 200 basis point upward shift in interest rates. Additional tools to monitor potential longer-term interest rate risk, including periodic stress testing involving hypothetical sudden and significant interest rate spikes, are also evaluated. The following table summarizes the percentage change in net interest income as compared to the base scenario, which assumes no change in market interest rates as generated from the standard simulation model. The results are presented for each of the first two years of the simulation period for the 100 and 200 basis point decreases in interest rate scenario and the 200 basis point increase in interest rate scenario. These results are well within the ALCO policy limits. As of June 30, 2025: | Change in Interest Rate | Calculated change in Net Interest Income - Year 1 | Calculated change in Net Interest Income - Year 2 | | --- | ---: | ---: | | - 200 basis points | 1.1% | 5.6% | | - 100 basis points | 0.7% | 7.0% | | +200 basis points | (2.5)% | 3.3% | The balance sheet shows an inverse relationship between changes in prevailing rates and Arrow's net interest income in the near term, suggesting that liabilities and sources of funds generally reprice more quickly than earning assets. However, when net interest income is simulated over a longer time frame, the balance sheet shows a relatively neutral profile with long-term asset sensitivity, as asset yields continue to reprice while the cost of funding reaches assumed ceilings or floors. The hypothetical estimates underlying the sensitivity analysis are based upon numerous assumptions, including: the nature and timing of changes in interest rates including yield curve shape, prepayments on loans and securities, deposit decay rates, pricing decisions on loans and deposits, reinvestment/replacement of asset and liability cash flows, and others. While assumptions are developed based upon current economic and local market conditions, Arrow cannot make any assurance as to the predictive nature of these assumptions including how customer preferences or competitor influences might change. Also, as market conditions vary from those assumed in the sensitivity analysis, actual results will differ due to: prepayment/refinancing levels likely deviating from those assumed, the varying impact of interest rate changes on caps or floors on adjustable rate assets, the potential effect of changing debt service levels on customers with adjustable rate loans, depositor early withdrawals and product preference changes, unanticipated shifts in the yield curve and other internal/external variables. Furthermore, the sensitivity analysis does not reflect actions that ALCO might take in responding to or anticipating changes in interest rates. ## Controls and procedures As filed, 1,523 characters. ### CONTROLS AND PROCEDURES Management, under the supervision and with the participation of the Chief Executive Officer ("CEO") (who is our principal executive officer) and Chief Financial Officer ("CFO") (who is our principal financial officer), evaluated the effectiveness of our disclosure controls and procedures, as defined in Rule 13a-15(e) and 15d15(e) of the Exchange Act, as of June 30, 2025. Disclosure controls and procedures are controls and other procedures of a company that are designed to ensure the information required to be disclosed in the reports that the Company files or submits under the Exchange Act with the SEC (1) is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms; and (2) is accumulated and communicated to management, including the principal executive and principal financial officers, or persons and committees performing similar functions, such as the Audit Committee, as appropriate to allow timely decisions regarding required disclosure. Based on this evaluation, management concluded that our internal control over financial reporting was effective as of June 30, 2025. ### Changes in Internal Control Over Financial Reporting There were no changes in our internal control over financial reporting, as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act, during the quarter ended June 30, 2025 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. Filed Aug 8, 2025. Source: SEC EDGAR, the filing index for accession 0000717538-25-000079. Last ingested by Listed: Oct 29, 2026, 08:06 ET. No prices; not investment advice.