Arrow Financial Corporation (AROW) Q3 2026 earnings review
Arrow's underlying profit jumps on cheaper deposits, while deal costs cut net income
Arrow Financial's purchase of Adirondack Bancorp lifted its lending spread and underlying profit, while one-time deal bills cut reported earnings. Excluding $16 million of merger charges, profit per share rose 21% from a year ago to $0.97 as cheap acquired deposits pushed the tax-equivalent net interest margin up 0.38 percentage points from last quarter to 3.81%. Chief executive David S. DeMarco said the New York bank remains on track to capture 95% of its planned cost savings by the first quarter of 2027.
| Profit per share, excluding one-offs | $0.97 +21% from a year ago (+37% from Q2) |
|---|---|
| Reported profit per share | $0.31 -60% from a year ago (on $15.6M merger costs) |
| Net interest margin, tax-equivalent | 3.81% up 0.38 percentage points from Q2 |
| Cost savings plan | On track 95% in place by Q1 2027 |
⚖️ Verdict: 🟢 Bullish
The story got better because the merger immediately widened the lending spread without relying on accounting boosts. Even stripping out merger accounting gains, the lending margin beat the company's standalone target by our math, and third-quarter profit had not yet benefited from shutting down duplicate computer systems. One caution: absorbing Adirondack cut tangible book value per share by 9% from last quarter to $23.03 and increased non-performing loans by half.
The question now is how much profit rises once the bank shuts down Adirondack's separate computer network in November. If duplicate technology and staffing bills drop out cleanly, the efficiency ratio will fall below its pre-merger level; if seasonal municipal deposit outflows force funding costs up, margin pressure will offset those savings. First-quarter 2027 operating expenses and deposit costs will settle it.
🐂 Bull Case
Cheaper Acquired Deposits Lifted the Lending Spread
Arrow Financial, a commercial bank and insurance group in upstate New York, closed its purchase of Adirondack Bancorp on July 1. The deal brought in about $900 million of low-cost customer deposits, which immediately widened the bank's net interest margin (NIM), the gap between what it earns on loans and pays on deposits.
On a tax-equivalent basis, which puts tax-free municipal bonds on the same footing as taxable loans, NIM rose 0.38 percentage points from last quarter to 3.81%. Arrow said the margin expanded because the deal "included lower costing deposit balances, while loan yields continued to expand".
- Underlying NIM: 3.67% by our math, stripping out 0.14 percentage points of merger accounting gains
- Retail deposit cost: 1.45%, down from 1.74% last quarter
- New loan yields: 6.44% on third-quarter originations, above the 5.62% existing portfolio rate
This matters because the wider spread does not rely on accounting adjustments. Even without the $1.8 million of merger accounting income, the bank beat its standalone 3.50% margin target. Furthermore, $486 million of existing loans will reprice over the next twelve months at higher rates.
What to watch: fourth-quarter deposit costs. Arrow noted a "negative impact of seasonal change in municipal deposit mix toward higher-costing deposits" late in the quarter, which would trim the margin if it persists.
Underlying Profit Jumped Before Cost Cuts Arrive
President and chief executive David S. DeMarco said the combined bank is already delivering with "core earnings of $0.97 per share and core ROA growth". Excluding one-offs from the merger, profit per share rose 36.6% from last quarter and 21.3% from a year ago, while return on average assets (ROA) reached 1.33%.
Arrow achieved that profit growth while still paying for two separate back-office operations. Operating expenses excluding merger charges rose by $9.7 million from last quarter, driven by $3 million in added payroll and the "temporary cost of two operating systems and duplicate IT (Network) charges".
Because the bank has not yet cut those duplicate costs, third-quarter earnings understate the deal's run-rate profit. DeMarco said the teams "remain on track to realize approximately 95 percent of the anticipated cost savings by the first quarter of 2027", starting with the computer system conversion on November 7.
What to watch: non-interest expense excluding one-offs in the first quarter of 2027. A drop in technology and staffing costs after the November system conversion will confirm that the promised savings reached the bottom line.
Loan Growth Accelerated Alongside Insurance Expansion
Alongside the bank merger, Arrow grew its existing loan book and bought an independent insurance firm, Skene Valley Agency, in Washington County, New York. Loans from businesses it owned before the merger grew by $60 million, or an annualized rate of 6.8%, picking up from a 4.0% annualized pace over the first nine months.
Non-interest income — fees from wealth management, insurance and customer accounts — rose 31.0% from a year ago to $11.4 million. Customer service fees jumped 48.5% to $4.2 million on the larger customer base, while insurance commissions rose 8.0% to $2.15 million, aided by one month of revenue from Skene Valley.
What to watch: fourth-quarter underlying loan growth. By our math, Arrow needs about 7.8% annualized loan growth in the fourth quarter to reach its full-year mid-single-digit target.
🐻 Bear Case
Deal Costs Cut Reported Profit in Half
While DeMarco highlighted that "Arrow is already delivering on expected benefits from the strategic acquisition", actual bottom-line profit fell sharply. Reported net income dropped 55.6% from a year ago to $5.7 million, and diluted profit per share fell from $0.77 to $0.31 — barely covering the $0.30 quarterly cash dividend.
The drop came from $15.6 million in one-time merger charges, which pushed other operating expenses up by 27.8 percentage points of net revenue from a year ago, to 36.2%. That spike drove the bank's efficiency ratio — non-interest expenses as a share of net revenue — from 59.6% a year ago to 84.8%.
Even after the one-time deal bills end, the merger leaves behind permanent new costs. Arrow recorded $16.4 million of core deposit intangibles, an accounting asset for the value of acquired customer accounts, which reduced third-quarter profit by $745 thousand and will amortize over the next ten years.
What to watch: merger-related expenses in the fourth quarter. Because the core computer system conversion takes place in November and another branch closes that month, additional integration bills could weigh on reported fourth-quarter profit.
The Merger Added Problem Loans and Cut Capital
Absorbing Adirondack weakened Arrow's balance-sheet cushions and added non-performing loans (NPLs), which are loans 90 days past due or no longer accruing interest. Total NPLs rose 50.6% from last quarter to $12.5 million, or 0.30% of total loans, with half of that ratio coming directly from the acquired Adirondack loan book.
- Tangible book value per share: $23.03, down 9.5% from $25.44 last quarter
- Tangible common equity ratio: 7.82% of tangible assets, down from 9.44% in Q2
- Net charge-offs: 0.21% of average loans annualized, up from 0.08% in Q2 after writing off a $1.6 million commercial loan
Buying Adirondack created $44.7 million of goodwill and intangibles, which cut tangible book value — net worth excluding intangible assets — by $2.39 per share. That leaves the bank with a smaller capital buffer while integrating a loan book with higher defaults, reducing reserve coverage of bad loans from 406% at year-end to 329%.
What to watch: fourth-quarter early loan delinquencies (30 to 89 days past due). Arrow warned that it expects a seasonal increase in fourth-quarter delinquencies from the current 0.59% rate.
👓 Other Themes
Rising Interest Rates Cut Book Value
Higher market interest rates during the third quarter lowered the resale value of Arrow's bond portfolio. Total unrealized bond losses reached $39.6 million, or about 5.6% of the $712.5 million portfolio, "driven by rising rates/shift in interest rate environment in 3Q". Those paper losses reduced stockholders' equity by $12.9 million, trimming tangible book value by $0.69 per share and the tangible common equity ratio by 0.24 percentage points.
💲 Other KPIs
Total deposits rose by $1.08 billion from last quarter to $4.74 billion, adding about $900 million from Adirondack and $155 million from seasonal municipal inflows by our math. Arrow also sold $73 million of acquired bonds to pay down expensive wholesale borrowings, cutting total borrowings by $111.9 million from last quarter to $218.3 million.
Diluted average shares rose 12.5% from a year ago and 12.1% from last quarter to 18.46 million. The US bank issued 1.98 million common shares worth about $81 million on July 1 to pay for Adirondack Bancorp, and maintained its quarterly cash dividend at $0.30 per share.
🔮 Guidance
Unchanged. Arrow plans to capture 95% of its targeted merger cost savings by the first quarter of 2027, following the November 7 computer system conversion. The lender closed one branch in the third quarter, will close another in November, and is reviewing two more for the first half of 2027.
New. The regional bank expects its third-quarter merger accounting run-rate — $1.8 million of quarterly net interest income accretion and $700 thousand of intangible amortization expense — to continue into 2027. At quarter-end, $19.1 million of loan rate discounts and $15.6 million of deposit intangibles remained on the books.
New. Following the purchase of Skene Valley Agency in September, which added $50 thousand to third-quarter insurance commissions, the group expects the agency to add about $150 thousand of revenue in the fourth quarter.
❓ Key Questions
What is the dollar target for annual merger cost savings?
DeMarco stated that 95% of anticipated cost savings will be in place by the first quarter of 2027, and noted $3 million in added payroll plus duplicate IT costs this quarter, but did not disclose the exact dollar amount of expenses that will be cut.
How much more in merger expenses will hit Q4?
Arrow booked $15.6 million of merger charges in Q3, bringing the nine-month total to $17.4 million. With the computer system conversion and a branch closure happening in November, investors need to know how much one-time cost remains for Q4.
What caused the gain on cash flow hedge terminations?
Other operating income jumped from $620 thousand a year ago to $2.12 million, partly because the merger allowed Arrow to terminate cash flow hedges at a gain. Disclosing the exact size of that one-time gain would clarify the true fee run-rate.