Arrow Financial (US:AROW)2025-08-08 14:50PART I - FINANCIAL INFORMATION Item 1. Financial Statements This section presents the unaudited interim consolidated financial statements for Arrow Financial Corporation as of June 30, 2025, including balance sheets, income statements, and cash flows, with detailed notes explaining accounting policies and financial data Consolidated Balance Sheets Total assets grew to $4.41 billion as of June 30, 2025, from $4.31 billion at year-end 2024, driven by an increase in net loans and cash equivalents, while total deposits increased to $3.93 billion and total stockholders' equity rose to $408.5 million Consolidated Balance Sheet Highlights (in Thousands) | Account | June 30, 2025 | December 31, 2024 | | :--- | :--- | :--- | | Total Assets | $4,414,719 | $4,306,348 | | Net Loans | $3,390,563 | $3,360,943 | | Total Investment Securities | $528,395 | $570,780 | | Total Liabilities | $4,006,213 | $3,905,447 | | Total Deposits | $3,929,330 | $3,827,930 | | Total Stockholders' Equity | $408,506 | $400,901 | Consolidated Statements of Income For the second quarter of 2025, net income was $10.8 million, a 25.6% increase year-over-year, driven by a 19.8% rise in net interest income to $32.5 million, while for the six months ended June 30, 2025, net income was $17.1 million, up 5.2% from the prior year period, with diluted EPS increasing to $1.03 from $0.97 Income Statement Summary (in Thousands, Except Per Share Data) | Metric | Q2 2025 | Q2 2024 | 6 Months 2025 | 6 Months 2024 | | :--- | :--- | :--- | :--- | :--- | | Net Interest Income | $32,533 | $27,152 | $63,890 | $53,607 | | Provision for Credit Losses | $594 | $775 | $5,613 | $1,392 | | Non-Interest Income | $7,609 | $7,856 | $15,448 | $15,714 | | Non-Interest Expense | $25,652 | $23,318 | $51,697 | $47,330 | | Net Income | $10,805 | $8,604 | $17,115 | $16,264 | | Diluted EPS | $0.65 | $0.52 | $1.03 | $0.97 | Consolidated Statements of Cash Flows For the six months ended June 30, 2025, net cash provided by operating activities was $20.3 million, investing activities provided $11.6 million, a significant shift from a $31.5 million use of cash in the prior year period, and financing activities provided $81.9 million, primarily from a net increase in deposits Cash Flow Summary for Six Months Ended June 30 (in Thousands) | Activity | 2025 | 2024 | | :--- | :--- | :--- | | Net Cash Provided By Operating Activities | $20,348 | $19,428 | | Net Cash Provided (Used) By Investing Activities | $11,647 | $(31,529) | | Net Cash Provided By Financing Activities | $81,907 | $69,763 | | Net Increase in Cash and Cash Equivalents | $113,902 | $57,662 | Notes to Interim Consolidated Financial Statements The notes provide detailed explanations of accounting policies and financial data, covering operations concentrated in upstate New York, the CECL methodology for Allowance for Credit Losses (ACL), breakdowns of investment securities and loan portfolios, debt structure, and derivative activities - The company's operations are concentrated in upstate New York, with a loan portfolio diversified but subject to the economic impact of tourism in the region18 - The Allowance for Credit Losses (ACL) is estimated using the CECL model, which incorporates a six-quarter reasonable and supportable forecast of economic factors like national unemployment, GDP, and the Case-Shiller Home Price Index2731 - As of June 30, 2025, gross unrealized losses in the Available-for-Sale securities portfolio were $26.2 million, primarily attributed to changes in interest rates rather than credit quality deterioration, and the company does not intend to sell these securities before recovery4550 - Total loans reached $3.42 billion, and nonaccrual loans decreased significantly to $5.3 million at June 30, 2025, from $20.6 million at year-end 20245658 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) Management discusses the financial results for Q2 2025, highlighting a net income of $10.8 million, driven by increased net interest income and a lower provision for credit losses compared to Q1 2025, covering financial condition, asset quality, capital resources, liquidity, and a detailed analysis of the results of operations for the three and six-month periods ended June 30, 2025, compared to the prior year Q2 2025 Financial Highlights | Metric | Q2 2025 | Q1 2025 | | :--- | :--- | :--- | | Net Income | $10.8 million | $6.3 million | | Net Interest Income | $32.5 million | $31.3 million | | Net Interest Margin (FTE) | 3.16% | 3.08% | | Provision for Credit Losses | $0.6 million | $5.0 million | - The significant decrease in the Q2 provision for credit losses reflects the recognition of a specific reserve in Q1 related to a Commercial Real Estate (CRE) participation loan that was subsequently charged off in Q2178191 - Total assets were $4.4 billion at June 30, 2025, with loan growth of $7.9 million in Q2, driven by residential real estate loans181183 - The company remains 'well-capitalized' under all regulatory definitions, with a tangible book value per share of $23.23, up 3.71% from year-end 2024185187 Financial Condition As of June 30, 2025, total assets increased by 2.5% to $4.41 billion from year-end 2024, net loans grew by 0.9% to $3.42 billion, led by residential real estate, and total deposits increased by 2.6% to $3.93 billion, partly due to the addition of $125 million in brokered CDs used to reduce overall funding costs Change in Financial Condition (June 30, 2025 vs. Dec 31, 2024) | Account (in thousands) | Change $ | Change % | | :--- | :--- | :--- | | Total Assets | $108,371 | 2.5% | | Net Loans | $30,213 | 0.9% | | Total Deposits | $101,400 | 2.6% | | Stockholders' Equity | $7,605 | 1.9% | - Loan growth was driven by a $24.9 million (1.9%) increase in residential real estate loans, while consumer loans decreased by $9.7 million (0.9%)205 - The increase in deposits was supported by the addition of $125 million in brokered CDs, which are part of a cash flow hedge strategy202 - Uninsured deposits represented less than 30% of the total deposit base as of June 30, 2025207 Asset Quality Asset quality improved significantly, with nonperforming assets decreasing to $6.8 million (0.15% of total assets) at June 30, 2025, from $21.5 million (0.50% of total assets) at year-end 2024, and the allowance for credit losses was $34.2 million, or 1.00% of total loans, with the decrease from Q1 driven by the charge-off of a previously reserved CRE participation loan Asset Quality Ratios | Ratio | June 30, 2025 | Dec 31, 2024 | | :--- | :--- | :--- | | Nonperforming Assets to Total Assets | 0.15% | 0.50% | | Nonperforming Loans to Total Loans | 0.18% | 0.62% | | Allowance to Period-End Loans | 1.00% | 0.99% | - The provision for credit losses in Q2 2025 was $0.6 million, and the allowance for credit losses decreased from $37.8 million at the end of Q1 to $34.2 million at the end of Q2, primarily due to a $4.2 million net charge-off, which included the previously reserved CRE participation loan232 - The remaining balance of the charged-off CRE participation loan has been reclassified to Other Assets, with the underlying properties held in an unconsolidated LLC where Arrow has an ownership interest232 Capital Resources The company remains well-capitalized, with all regulatory capital ratios exceeding minimum requirements, as the CET1 capital ratio was 12.73% as of June 30, 2025, stockholders' equity increased by $7.6 million in the first half of 2025, and the company repurchased $5.1 million of its common stock in Q2 2025 and paid a quarterly dividend of $0.28 per share Regulatory Capital Ratios (Arrow Financial Corp.) - June 30, 2025 | Ratio | Company Ratio | Regulatory Minimum (with buffer) | | :--- | :--- | :--- | | Common Equity Tier 1 (CET1) | 12.73% | 7.00% | | Tier 1 Risk-Based Capital | 13.37% | 8.50% | | Total Risk-Based Capital | 14.51% | 10.50% | | Tier 1 Leverage | 9.64% | 4.00% | - In Q2 2025, Arrow repurchased approximately 196,000 shares for $5.1 million, and the Board authorized an additional $5 million for repurchases on April 30, 2025, and another $5 million on July 23, 2025246247 - A quarterly cash dividend of $0.28 per share was paid in Q2 2025, representing a payout ratio of 43.08%, and a dividend of $0.29 per share was declared for Q3 2025249250 Liquidity Arrow maintains a strong liquidity position with sufficient capacity to meet obligations, with primary liquidity sources including cash, cash flow from securities and loans, and a stable core deposit base, and as of June 30, 2025, the company had $227.5 million in interest-bearing cash balances and significant unused borrowing capacity of approximately $657 million from the FHLBNY and $762 million from the FRB - Total primary liquidity was approximately $442 million, comprising $227 million of unencumbered cash and $215 million in unencumbered securities256 - Unused borrowing capacity totaled over $1.4 billion from the FHLBNY, FRB, and correspondent banks253254 - Uninsured deposits were less than 30% of the total deposit base at June 30, 2025, and the company performs regular liquidity stress tests255 Results of Operations This section provides a comparative analysis of operating results, showing that for Q2 2025 versus Q2 2024, net income rose 25.6% to $10.8 million, driven by a 19.8% increase in net interest income, and for the first six months of 2025, net income grew 5.2% to $17.1 million, with net interest income up 19.2%, while non-interest expense increased primarily due to bank unification costs and inflation-driven wage increases Comparison of Results (Q2 2025 vs Q2 2024) | Metric (in thousands) | Q2 2025 | Q2 2024 | % Change | | :--- | :--- | :--- | :--- | | Net Interest Income | $32,533 | $27,152 | 19.8% | | Non-Interest Income | $7,609 | $7,856 | (3.1)% | | Non-Interest Expense | $25,652 | $23,318 | 10.0% | | Net Income | $10,805 | $8,604 | 25.6% | Comparison of Results (6 Months 2025 vs 6 Months 2024) | Metric (in thousands) | 6M 2025 | 6M 2024 | % Change | | :--- | :--- | :--- | :--- | | Net Interest Income | $63,890 | $53,607 | 19.2% | | Non-Interest Income | $15,448 | $15,714 | (1.7)% | | Non-Interest Expense | $51,697 | $47,330 | 9.2% | | Net Income | $17,115 | $16,264 | 5.2% | - The increase in non-interest expense for the first six months of 2025 was driven by $1.7 million in bank unification expenses, primarily related to project management and IT costs for the July 2025 system conversion272 Item 3. Quantitative and Qualitative Disclosures About Market Risk Arrow's primary market risk is interest rate volatility, managed by the Asset/Liability Committee (ALCO), with simulation models showing the balance sheet has an inverse relationship to rate changes in the near term (liability sensitive) but becomes asset sensitive over a longer horizon, and the projected impact on net interest income from various rate shocks is within policy limits Net Interest Income Sensitivity Analysis (as of June 30, 2025) | Change in Interest Rate | Calculated change in NII - Year 1 | Calculated change in NII - Year 2 | | :--- | :--- | :--- | | -200 basis points | +1.1% | +5.6% | | -100 basis points | +0.7% | +7.0% | | +200 basis points | (2.5)% | +3.3% | - The analysis indicates that in the short term (Year 1), net interest income would decrease if rates rise and increase if rates fall, suggesting liabilities reprice faster than assets281 - Over a longer term (Year 2), the balance sheet shows a more neutral to asset-sensitive profile, where rising rates would eventually increase net interest income281 Item 4. Controls and Procedures Management, including the CEO and CFO, evaluated the company's disclosure controls and procedures and concluded they were effective as of June 30, 2025, with no changes in internal control over financial reporting during the quarter that materially affected, or are reasonably likely to materially affect, these controls - Management concluded that the company's internal control over financial reporting was effective as of June 30, 2025287 - No material changes to internal controls over financial reporting occurred during the second quarter of 2025289 PART II - OTHER INFORMATION Item 1. Legal Proceedings The company reports on two legal matters: the 'Ashe Lawsuit,' a putative class action which was settled and approved by the court in February 2025, and the 'Shareholder Derivative Complaint,' for which a settlement is pending preliminary approval, with neither settlement expected to have a material impact on the company's financial results or position - The Ashe Lawsuit, a class action alleging false and misleading statements, was settled and approved by the court on February 13, 2025, with no material financial impact292 - A Shareholder Derivative Complaint, related to the same allegations as the Ashe Lawsuit, has reached a settlement pending court approval, which involves adjustments to governance structure and is not expected to have a material financial impact293 Item 1.A. Risk Factors There have been no modifications or amendments to the risk factors previously identified in the company's 2024 Annual Report on Form 10-K - The Risk Factors identified in the 2024 Form 10-K remain the most significant risks to the company's future operations and financial condition294 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds The company did not have any unregistered sales of equity securities, and during the second quarter of 2025, Arrow repurchased 196,497 shares of its common stock for approximately $5.2 million, with $1.5 million remaining available under the repurchase authorization as of June 30, 2025, which was subsequently increased by an additional $5 million in July 2025 Issuer Purchases of Equity Securities (Q2 2025) | Month | Total Shares Purchased | Average Price Paid Per Share | | :--- | :--- | :--- | | April | 0 | N/A | | May | 119,671 | $26.48 | | June | 76,826 | $26.03 | | Total | 196,497 | $26.31 | - On July 23, 2025, the Board increased the share repurchase authorization by $5 million, bringing the total available authorization to approximately $6.5 million as of that date297 Item 3. Defaults Upon Senior Securities None reported - There were no defaults upon senior securities during the reporting period300 Item 4. Mine Safety Disclosures Not applicable - The company has no mine safety disclosures to report300 Item 5. Other Information During the second quarter of 2025, no director or officer of the company adopted or terminated a Rule 10b5-1 trading arrangement or a non-Rule 10b5-1 trading arrangement - No director or officer adopted or terminated a Rule 10b5-1 trading plan during the three months ended June 30, 2025301 Item 6. Exhibits This section lists the exhibits filed with the Form 10-Q, including certifications by the CEO and CFO as required by the Sarbanes-Oxley Act, and XBRL data files