Arrow Reports 4th Quarter Net Income of $4.5 Million or $0.27 per Share and $29.7 Million or $1.77 per Share for 2024. Declares first quarter dividend of $0.28 per share.

The reported results included several non-core items that impacted the fourth quarter and the 2024 full year results. As previously disclosed in our Form 8-K filed December 26, 2024, the fourth quarter included the following pre-tax non-core items:

• $3.0 million, or $0.15 per share, loss on sale of repositioning of the securities portfolio
• $0.7 million, or $0.03 per share, write-off related to legacy branding items
• $0.5 million, or $0.02 per share, in expenses (legal, consulting, compliance) related to the unification of our two bank subsidiaries into Arrow Bank National Association ("Arrow Bank")

Prior to the fourth quarter, Arrow recognized the following pre-tax non-core/non-recurring items:

• $0.4 million, or $0.02 per share, in expenses related to the acquisition of the Whitehall branch and the assets of A&B Agency, Inc. completed during the third quarter
• $1.2 million, or $0.06 per share, in residual expenses related to the 2022 Form 10-K filing delay

This Earnings Release and related commentary should be read in conjunction with our Form 8-K filed January 30, 2025 and related Fourth Quarter 2024 Investor Presentation, which can also be found on our website: arrowfinancial.com/documents/investor-presentations. 

Arrow President and CEO David S. DeMarco: 

"Arrow just completed a transformational year. We completed the unification of our two subsidiary banks under one brand, Arrow Bank. Our exceptional team continues to serve our customers and communities in the same way they have come to expect from us. In addition, we also acquired a bank branch in Whitehall, New York as well the assets of a local insurance agency. We made significant contributions to the communities we serve, both financially and through volunteer efforts, continuing our commitment to giving back. In 2024, we delivered for our shareholders, growing loans by mid-single digits, expanding our net interest margin and actively managing our balance sheet, positioning the Bank for increased profitability in 2025."

Fourth-Quarter Highlights and Key Metrics

• Reported Net Income of $4.5 million or $0.27 EPS
• Core Net Income of $7.8 million or $0.47 EPS
• Results included approximately $4.2 million of non-core charges and expenses related to the repositioning of the securities portfolio and efforts related to bank unification
• Net Interest Margin improved to 2.83% (2.85% FTE¹) versus 2.78% (2.79% FTE) in the prior quarter
• Loan growth of $59 million² (7.0% annualized) for the quarter
• Record loan balances — reaching $3.4 billion
• Provision for Credit Losses was $2.9 million on strong loan growth and changes in portfolio composition
• Net Charge-Offs remained low at 0.06% (annualized) for the quarter
• Tangible Book Value improved to $22.40, an increase from $21.06 from the prior year
• Return on Average Assets 0.41% impacted by 31bps from non-core items as well as 21bps from the provision for credit losses
• Other Comprehensive Income improved $5.3 million, or 20%, from the prior-quarter, excluding realized loss on the repositioning of the investment portfolio
• Legal bank unification of our bank subsidiaries completed
• Increased quarterly dividend by 3.7% to $0.28 per share

Select 2024 Highlights and Key Metrics

• Reported Net Income of $29.7 million or $1.77 EPS
• Core Net Income of $34.4 million or $2.05 EPS
• Results included approximately $5.8 million of pre-tax non-core charges and expenses related to the repositioning of the securities portfolio, bank unification, acquisition of the Whitehall branch and A&B Agency, Inc. as well as residual costs related to 2022 Form 10-K filing delay
• Loan growth of $185 million³, or 5.8%.
• Net Interest Margin improved to 2.72% (2.74% FTE⁴), up from 2.65% (2.67% FTE) in the prior year
• Return on Average Assets of 0.70% reduced by 11bps from non-core items and the provision for credit losses
• Net Charge-Offs were 0.09% for the year
• Whitehall branch and A&B Agency, Inc. acquisitions in 3Q24
• Enhanced shareholder value via share repurchases and increased cash dividend
• Named to the prestigious Piper Sandler Sm-All Stars: Class of 2024 list

Income Statement

• Net Income: Net income for the fourth quarter of 2024 was $4.5 million, decreasing from $9.0 million in the third quarter of 2024. Net income for 2024 was $29.7 million, down from $30.1 million for 2023.
  • Compared to the prior quarter, net income benefited from an increase of $1.2 million in net interest income, offset by an increase in non-interest expense of $1.7 million, a decrease in non-interest income of $3.9 million and an increase in the provision for credit losses of $1.9 million. The remaining change was related to the tax impact.
  • Compared to the prior year, the decrease in net income was primarily the result of an increase in net interest income of $6.9 million offset by an increase of non-interest expense of $4.2 million and a $1.8 million increase in the provision for credit losses. The remaining change was related to the tax impact.
    
    
• Net Interest Income: Net interest income for the fourth quarter of 2024 was $29.7 million, an increase of $1.2 million compared to the third quarter of 2024. Net interest income for the year ended December 31, 2024 was $111.7 million, an increase of $6.9 million, or 6.6%, from the prior year.
  • Compared to the prior quarter, interest income increased $1.5 million while interest expense increased by only $0.2 million as a result of reduced deposits and continued pricing discipline.
  • Compared to the prior year, the increase was primarily due to interest income outpacing growth in interest expense. Interest and fees on loans were $171.3 million for the year ended December 31, 2024, an increase of 20.6% from the $142.0 million for the year ended December 31, 2023. The increase was primarily driven by loan growth and higher loan rates. Interest expense for the year ended December 31, 2024 was $83.3 million. This represents an increase of $25.5 million, or 44.2%, from the $57.7 million in interest expense for the prior-year period. The increase in the interest expense was driven primarily by higher deposit rates and changes in deposit composition.
    
    
• Net Interest Margin: Net interest margin was 2.72% (2.74% FTE⁵) for the year ended December 31, 2024, as compared to 2.65% (2.67% FTE) for the year ended December 31, 2023. In the fourth quarter of 2024, the net interest margin was 2.83% (2.85% FTE), as compared to 2.53% (2.55% FTE) for the fourth quarter of 2023. The increase in net interest margin compared to the third quarter of 2024 was primarily the result of continued yield expansion on earning assets combined with the moderating cost of interest-bearing liabilities. The increase in net interest margin from the previous year was primarily the result of yield on average earning assets increasing at a faster pace than costs of interest-bearing liabilities. Net interest margin was affected by deposits migrating to higher costing products, such as money market savings and time deposits.

• Provision for Credit Losses: For the year ended December 31, 2024, the provision for credit losses related to the loan portfolio was $5.2 million, compared to $3.4 million in the prior year. The key drivers for the provision for credit losses in 2024 were loan growth, charge-offs, and changes to the portfolio mix/age, due to fourth-quarter commercial loan growth, partially offset by changes to the economic forecast factors embedded in the credit loss allowance model, as well as qualitative factors relating to local and Arrow-specific conditions.
  
  
• Non-Interest Income: Non-interest income was $4.2 million for the fourth quarter of 2024, a decrease from $8.1 million for the previous quarter. Non-interest income was $28.1 million for the year ended December 31, 2024, a decrease of 3.6%, as compared to $29.1 million for the year ended December 31, 2023. The decreases were primarily attributable to the $3.0 million pre-tax loss related to the investment portfolio repositioning as well as the $0.7 million pre-tax charge related to legacy branding, both recognized in the fourth quarter of 2024. Revenue from fee businesses, including wealth management and insurance, both increased compared to the prior year.
  
  
• Non-Interest Expense: Non-interest expense for the year ended December 31, 2024 increased by $4.2 million, or 4.5%, to $97.3 million, as compared to $93.0 million in 2023. The largest component of non-interest expense is salaries and benefits paid to our employees, which totaled $52.7 million in 2024 and increased $5.0 million, or 10.6%, from the prior year. The increase was related to headcount increases to support additional control and compliance initiatives and our growing organization. Salaries and benefits were also impacted by inflation-driven wage increases and rising benefit costs.
  
  
• Provision for Income Taxes: The provision for income taxes for 2024 was $7.6 million, compared to $7.4 million for 2023. The effective income tax rates for 2024 and 2023 were 20.5% and 19.8%, respectively. The increase in the effective tax rate was primarily the result of reduced tax exempt income in 2024.

Balance Sheet

• Total Assets: Total assets were $4.3 billion at December 31, 2024, an increase of $136.5 million, or 3.3%, compared to December 31, 2023 and a decrease of $105.1 million, or 2.4%, from September 30, 2024. The increase over the prior year was primarily driven by loan growth. The decrease in the fourth quarter was primary driven by decreases in municipal cash balances due to seasonality.
  
  
• Investments: Total investments were $570.8 million at December 31, 2024, a decrease of $65.4 million, or 10.3%, compared to December 31, 2023. The decrease was driven primarily by paydowns and maturities, the proceeds of which were used to fund loan growth in 2024. The repositioning of the investment portfolio in the fourth quarter did not materially impact the overall investment balance. There were no credit quality issues related to the investment portfolio.
  
  
• Loans⁶: At December 31, 2024, total loan balances reached $3.4 billion. Loan growth for the fourth quarter was $59 million. Loan growth for the year was $185 million or 5.8%. Loan growth was spread across all loan products. Please see the loan detail included in the Consolidated Financial Information table on page 14.
  
  
• Allowance for Credit Losses: The allowance for credit losses was $33.6 million at December 31, 2024, an increase of $2.3 million from December 31, 2023. The allowance for credit losses at year-end 2024 represented 0.99% of loans outstanding, an increase from 0.97% at year-end 2023. Asset quality remained solid at December 31, 2024. Net loan charge-offs, expressed as an annualized percentage of average loans outstanding, were 0.09% for the year ended December 31, 2024, as compared to 0.07% for the prior year. Nonperforming assets of $21.5 million at December 31, 2024, represented 0.50% of period-end assets, compared to $21.5 million or 0.51% at December 31, 2023.
  
  
• Deposits: At December 31, 2024, total deposit balances were $3.8 billion, an increase of $140.4 million, or 3.8%, from the prior-year level. Deposits decreased in the fourth quarter by $9.5 million. In the fourth quarter, $95 million of borrowings were replaced with callable brokered CDs with a lower cost of funds. The increase was offset in part by the seasonal behavior of municipal deposits. Non-municipal deposits, excluding brokered CDs, decreased by $57.6 million and municipal deposits decreased by $12.2 million, each as compared to December 31, 2023. Non-interest bearing deposits decreased by $55.4 million, or 7.3%, during 2024, and represented 18.4% of total deposits at year-end, as compared to the prior-year level of 20.6%. At December 31, 2024, total time deposits, excluding brokered CDs, increased $36.0 million from the prior-year level. The change in composition of deposits was primarily due to pressure from competitive rate pricing and the migration from low to higher costing products.
  
  
• Capital: Total shareholders' equity was $400.9 million at December 31, 2024, an increase of $21.1 million, or 5.6%, from December 31, 2023 and an increase of $7.6 million in the fourth quarter. The increase from the third quarter was primarily attributable to net income of $4.5 million, other comprehensive income of $7.5 million and various capital items of $0.3 million, partially offset by dividends of $4.7 million. The increase in stockholders' equity from December 31, 2023 was primarily attributable to net income of $29.7 million, other comprehensive income of $15.0 million and various capital items of $1.5 million partially offset by dividends of $18.3 million and stock repurchases of $6.8 million. The changes to other comprehensive income stem primarily from fair value adjustments relating to the Company's cash flow hedges as well as its available for sale investment portfolio. Arrow's regulatory capital ratios remained strong in 2024. At December 31, 2024, Arrow's Common Equity Tier 1 Capital Ratio was 12.71% and Total Risk-Based Capital Ratio was 14.47%. The capital ratios of Arrow and its subsidiary bank, Arrow Bank, continued to significantly exceed the "well capitalized" regulatory standards.

Additional Commentary

• Piper Sandler Sm-All Stars: In 2024, Arrow was named to the prestigious Piper Sandler Sm-All Stars: Class of 2024, a list of 30 top-performing small-cap banks and thrifts in the country. Arrow is one of just three New York financial institutions on the list and the only bank in Upstate New York. Piper Sandler, an independent investment bank and research firm, evaluated more than 300 institutions that trade on a major exchange, narrowing the field to the top 30.
  
  
• Bauer Financial Ratings: Prior to unification, Arrow's subsidiary banks, continued to maintain their 5-Star Exceptional Performance ratings from Bauer Financial for the 70th and 62nd quarters.

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About Arrow:  Arrow Financial Corporation is a holding company headquartered in Glens Falls, New York, serving the financial needs of northeastern New York. The Company is the parent of Arrow Bank National Association, a full-service commercial bank, and Upstate Agency, LLC, a comprehensive insurance agency. Other subsidiaries include North Country Investment Advisers, Inc.

Non-GAAP Financial Measures Reconciliation:  In addition to presenting information in conformity with accounting principles generally accepted in the United States of America (GAAP), this news release contains financial information determined by methods other than GAAP (non-GAAP). The following measures used in this release, which are commonly utilized by financial institutions, have not been specifically exempted by the Securities and Exchange Commission ("SEC") and may constitute "non-GAAP financial measures" within the meaning of the SEC's rules. Certain non-GAAP financial measures include: tangible book value, tangible equity, return on tangible equity, tax-equivalent adjustment and related net interest income, tax-equivalent net interest margin and the efficiency ratio. Management believes that the non-GAAP financial measures disclosed by Arrow from time to time are useful in evaluating Arrow's 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. See the reconciliation of GAAP to non-GAAP measures in the section "Selected Quarterly Information."

Safe Harbor Statement:  The information contained in this news release may contain statements that are not historical in nature but rather are based on management's beliefs, assumptions, expectations, estimates and projections about the future. These statements may be "forward-looking statements" within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, involving a degree of uncertainty and attendant risk. In the case of all forward-looking statements, actual outcomes and results may differ materially from what the statements predict or forecast, explicitly or by implication. Arrow undertakes no obligation to revise or update these forward-looking statements to reflect the occurrence of unanticipated events. This News Release should be read in conjunction with Arrow's Annual Report on Form 10-K for the year ended December 31, 2023, and other filings with the SEC.