arow-20240331

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended March 31, 2024

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number: 0-12507

ARROW FINANCIAL CORPORATION

(Exact name of registrant as specified in its charter)


New York						22-2448962
(State or other jurisdiction of incorporation or organization)						(I.R.S. Employer Identification No.)

250 Glen Street

Glens Falls

New York

12801

(Address of principal executive offices)

(Zip Code)

Registrant’s telephone number, including area code:

518

745-1000

Securities registered pursuant to Section 12(b) of the Act:


Title of Each Class	Trading Symbol	Name of Each Exchange on Which Registered
Common Stock, Par Value $1.00 per share	AROW	NASDAQ Global Select Market

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. ☑ Yes ☐ No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). ☑ Yes ☐ No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.


Large accelerated filer	☐	Accelerated filer	☑
Non-accelerated filer	☐	Smaller reporting company	☐
		Emerging growth company	☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standard provided pursuant to Section 13(a) of the Exchange Act. __			☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ☐ Yes ☑ No

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.


Class						Outstanding as of April 30, 2024
Common Stock, par value $1.00 per share						16,698,141

ARROW FINANCIAL CORPORATION

FORM 10-Q

TABLE OF CONTENTS


			Page
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements			3
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations			44
Item 3. Quantitative and Qualitative Disclosures About Market Risk			68
Item 4. Controls and Procedures			68


PART II - OTHER INFORMATION
Item 1. Legal Proceedings			70
Item 1.A. Risk Factors			70
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			70
Item 3. Defaults Upon Senior Securities			71
Item 4. Mine Safety Disclosures			71
Item 5. Other Information			71
Item 6. Exhibits			71

SIGNATURES			73

PART I - FINANCIAL INFORMATION

Item 1. FINANCIAL STATEMENTS

ARROW FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(In Thousands, Except Share and Per Share Amounts)

(Unaudited)


	March 31, 2024		December 31, 2023		March 31, 2023
ASSETS
Cash and Due From Banks	$	27,356	$	36,755	$	25,107
Interest-Bearing Deposits at Banks	255,109		105,781		178,365
Investment Securities:
Available-for-Sale at Fair Value	485,833		497,769		565,693
Held-to-Maturity (Fair Value of $124,861 at March 31, 2024; $128,837 at December 31, 2023; and $164,439 at March 31, 2023)	128,051		131,395		167,347
Equity Securities	1,942		1,925		2,070
Other Investments	4,208		5,049		10,027
Loans	3,258,758		3,212,908		3,005,352
Allowance for Credit Losses	(31,561)		(31,265)		(30,784)
Net Loans	3,227,197		3,181,643		2,974,568
Premises and Equipment, Net	59,494		59,642		58,233
Goodwill	21,873		21,873		21,873
Other Intangible Assets, Net	1,018		1,110		1,400
Other Assets	121,542		126,926		109,947
Total Assets	$	4,333,623	$	4,169,868	$	4,114,630
LIABILITIES
Noninterest-Bearing Deposits	$	696,519	$	758,425	$	788,690
Interest-Bearing Checking Accounts	908,453		799,785		958,490
Savings Deposits	1,497,466		1,466,280		1,497,326
Time Deposits over $250,000	173,976		179,301		122,827
Other Time Deposits	502,607		483,775		179,016
Total Deposits	3,779,021		3,687,566		3,546,349
Borrowings	106,500		26,500		142,800


Junior Subordinated Obligations Issued to Unconsolidated Subsidiary Trusts	20,000		20,000		20,000
Finance Leases	5,053		5,066		5,106
Other Liabilities	45,063		50,964		37,004
Total Liabilities	3,955,637		3,790,096		3,751,259
STOCKHOLDERS’ EQUITY
Preferred Stock, $1 Par Value and 1,000,000 Shares Authorized at March 31, 2024, December 31, 2023 and March 31, 2023	—		—		—
Common Stock, $1 Par Value; 30,000,000 Shares Authorized (22,066,559 Shares Issued at March 31, 2024 and December 31, 2023 and 21,423,992 Shares Issued at March 31, 2023)	22,067		22,067		21,424
Additional Paid-in Capital	412,823		412,551		400,944
Retained Earnings	68,887		65,792		69,499

Accumulated Other Comprehensive Loss	(32,714)		(33,416)		(43,983)
Treasury Stock, at Cost (5,356,335 Shares at March 31, 2024; 5,124,073 Shares at December 31, 2023 and 4,870,935 Shares at March 31, 2023)	(93,077)		(87,222)		(84,513)
Total Stockholders’ Equity	377,986		379,772		363,371
Total Liabilities and Stockholders’ Equity	$	4,333,623	$	4,169,868	$	4,114,630

See Notes to Unaudited Interim Consolidated Financial Statements.

ARROW FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

(In Thousands, Except Per Share Amounts)

(Unaudited)


	Three Months Ended March 31
	2024		2023
INTEREST AND DIVIDEND INCOME
Interest and Fees on Loans	$	40,376	$	31,886
Interest on Deposits at Banks	2,447		479
Interest and Dividends on Investment Securities:
Fully Taxable	3,186		2,948
Exempt from Federal Taxes	668		797
Total Interest and Dividend Income	46,677		36,110
INTEREST EXPENSE
Interest-Bearing Checking Accounts	1,641		370
Savings Deposits	10,230		5,587
Time Deposits over $250,000	1,973		574
Other Time Deposits	5,083		474

Borrowings	1,076		793
Junior Subordinated Obligations Issued to Unconsolidated Subsidiary Trusts	171		169
Interest on Financing Leases	48		49
Total Interest Expense	20,222		8,016
NET INTEREST INCOME	26,455		28,094
Provision for Credit Losses	617		1,554
NET INTEREST INCOME AFTER PROVISION FOR CREDIT LOSSES	25,838		26,540
NON-INTEREST INCOME
Income From Fiduciary Activities	2,457		2,275
Fees for Other Services to Customers	2,543		2,595
Insurance Commissions	1,682		1,520
Net Gain (Loss) on Securities	17		(104)
Net Gain on Sales of Loans	4		4
Other Operating Income	1,155		387
Total Non-Interest Income	7,858		6,677
NON-INTEREST EXPENSE
Salaries and Employee Benefits	12,893		11,947
Occupancy Expenses, Net	1,771		1,628
Technology and Equipment Expense	4,820		4,417
FDIC Assessments	715		479
Other Operating Expense	3,813		3,825
Total Non-Interest Expense	24,012		22,296
INCOME BEFORE PROVISION FOR INCOME TAXES	9,684		10,921
Provision for Income Taxes	2,024		2,359
NET INCOME	$	7,660	$	8,562
Average Shares Outstanding 1:
Basic	16,865		17,048
Diluted	16,867		17,060
Per Common Share:
Basic Earnings	$	0.45	$	0.50
Diluted Earnings	0.45		0.50

1 2023 Share and Per Share Amounts have been restated for the September 26, 2023 3% stock dividend.

See Notes to Unaudited Interim Consolidated Financial Statements.

ARROW FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In Thousands)

(Unaudited)


	Three Months Ended March 31:
	2024		2023
Net Income	$	7,660	$	8,562
Other Comprehensive (Loss) Income, Net of Tax:
Net Unrealized Securities Holding (Loss) Gain Arising During the Period	(1,530)		6,099

Net Unrealized Gain (Loss) on Cash Flow Hedge Agreements	2,390		(593)
Reclassification of Net Unrealized (Gain) Loss on Cash Flow Hedge Agreements to Interest Expense	(158)		147


Amortization of Net Retirement Plan Actuarial Gain	(50)		(18)
Amortization of Net Retirement Plan Prior Service Cost	50		37
Other Comprehensive Income	702		5,672
Comprehensive Income	$	8,362	$	14,234

See Notes to Unaudited Interim Consolidated Financial Statements.

ARROW FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

(In Thousands, Except Share and Per Share Amounts)

(Unaudited)


























	Three Month Period Ended March 31, 2024
	Common Stock		Additional Paid-In Capital		Retained Earnings		Accumu-lated Other Com- prehensive Loss		Treasury Stock		Total
Balance at December 31, 2023	$	22,067	$	412,551	$	65,792	$	(33,416)	$	(87,222)	$	379,772


Net Income	—		—		7,660		—		—		7,660
Other Comprehensive Income	—		—		—		702		—		702



Cash Dividends Paid, $.27 per Share	—		—		(4,565)		—		—		(4,565)
Stock Options Exercised, Net (6,060 Shares)	—		67		—		—		49		116
Shares Issued Under the Directors’ Stock Plan (4,887 Shares)	—		89		—		—		39		128
Shares Issued Under the Employee Stock Purchase Plan (2,271 Shares)	—		33		—		—		18		51
Compensation expense related to Employee Stock purchase Plan	—		5		—		—		—		5

Stock-Based Compensation Expense	—		78		—		—		—		78

Purchase of Treasury Stock (245,480 Shares)	—		—		—		—		(5,961)		(5,961)



Balance at March 31, 2024	$	22,067	$	412,823	$	68,887	$	(32,714)	$	(93,077)	$	377,986

	Three Month Period Ended March 31, 2023
	Common Stock		Additional Paid-In Capital		Retained Earnings		Accumu-lated Other Com- prehensive Loss		Treasury Stock		Total
Balance at December 31, 2022	$	21,424	400,270		65,401		$	(49,655)	$	(83,902)	$	353,538


Net Income	—		—		8,562		—		—		8,562
Other Comprehensive Income	—		—		—		5,672		—		5,672



Cash Dividends Paid, $.262 per Share 1	—		—		(4,464)		—		—		(4,464)
Stock Options Exercised, Net (3,772 Shares)	—		50		—		—		33		83
Shares Issued Under the Directors’ Stock Plan (3,418 Shares)	—		85		—		—		29		114
Shares Issued Under the Employee Stock Purchase Plan (3,872 Shares)	—		87		—		—		33		120
Shares Issued for Dividend Reinvestment Plans (17,753 Shares)	—		330		—		—		142		472
Stock-Based Compensation Expense	—		122		—		—		—		122

Purchase of Treasury Stock (27,395 Shares)	—		—		—		—		(848)		(848)


Balance at March 31, 2023	$	21,424	$	400,944	$	69,499	$	(43,983)	$	(84,513)	$	363,371

1 Cash dividends paid per share have been adjusted for the September 26, 2023 3% stock dividend.

See Notes to Unaudited Interim Consolidated Financial Statements.

ARROW FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollars in Thousands)


	Three Months Ended March 31
Cash Flows from Operating Activities:	2024		2023
Net Income	$	7,660	$	8,562

Provision for Credit Losses	617		1,554
Depreciation and Amortization	1,394		1,738





Net (Gain) Loss on Securities Transactions	(17)		104
Loans Originated and Held-for-Sale	(50)		239
Proceeds from the Sale of Loans Held-for-Sale	4		4
Net Gain on the Sale of Loans	(4)		(4)
Net Loss on the Sale of Premises and Equipment, Other Real Estate Owned and Repossessed Assets	27		37
Contributions to Retirement Benefit Plans	(154)		(143)
Deferred Income Tax (Benefit) Expense	(259)		891
Shares Issued Under the Directors’ Stock Plan	128		114
Stock-Based Compensation Expense	83		122
Tax Benefit from Exercise of Stock Options	6		11

Net Decrease in Other Assets	(269)		1,792
Net Decrease in Other Liabilities	1,183		(1,801)
Net Cash Provided By Operating Activities	10,349		13,220
Cash Flows from Investing Activities:

Proceeds from the Maturities and Calls of Securities Available-for-Sale	10,083		15,669


Proceeds from the Maturities and Calls of Securities Held-to-Maturity	4,003		9,328
Purchases of Securities Held-to-Maturity	(750)		(1,448)

Net Increase in Loans	(51,352)		(23,479)
Proceeds from the Sales of Premises and Equipment, Other Real Estate Owned and Repossessed Assets	637		785
Purchase of Premises and Equipment	(1,155)		(2,635)

Net Decrease (Increase) in FHLB and Federal Reserve Bank Stock	841		(3,963)

Net Cash Used By Investing Activities	(37,693)		(5,743)
Cash Flows from Financing Activities:
Net Increase in Deposits	91,455		47,985
Net (Decrease) Increase in Short-Term Federal Home Loan Bank Borrowings	(20,000)		8,000

Finance Lease Payments	(13)		(13)
Other Borrowings - Advances	100,000		100,000
Other Borrowings - Paydowns	—		(20,000)
Net Cash Collateral Received from Derivative Counterparties	6,190		—
Purchase of Treasury Stock	(5,961)		(848)
Stock Options Exercised, Net	116		83
Shares Issued Under the Employee Stock Purchase Plan	51		120

Shares Issued for Dividend Reinvestment Plans	—		472

Cash Dividends Paid	(4,565)		(4,464)
Net Cash Provided By Financing Activities	167,273		131,335
Net Increase in Cash and Cash Equivalents	139,929		138,812
Cash and Cash Equivalents at Beginning of Period	142,536		64,660
Cash and Cash Equivalents at End of Period	$	282,465	$	203,472

Supplemental Disclosures to Statements of Cash Flow Information:
Interest on Deposits and Borrowings	$	18,513	$	7,200
Income Taxes	953		1,069

Transfer of Loans to Other Real Estate Owned and Repossessed Assets	624		373

See Notes to Unaudited Interim Consolidated Financial Statements.

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 1.RISKS AND UNCERTAINTIES

Nature of Operations - Arrow Financial Corporation, a New York corporation ("Arrow," the "Company," "we," or "us"), was incorporated on March 21, 1983 and is registered as a bank holding company within the meaning of the Bank Holding Company Act of 1956. The banking subsidiaries are Glens Falls National Bank and Trust Company ("GFNB") whose main office is located in Glens Falls, New York, and Saratoga National Bank and Trust Company ("SNB") whose main office is located in Saratoga Springs, New York. The two subsidiary banks provide a full range of services to individuals and small to mid-size businesses in northeastern New York State from Albany, the State's capitol, to the Canadian border. Both banks have wealth management departments which provide investment management and administrative services. An active subsidiary of GFNB is Upstate Agency LLC, offering insurance services including property and casualty insurance, group health insurance and individual life insurance products. North Country Investment Advisers, Inc., a registered investment adviser that provides investment advice to our proprietary mutual fund, and Arrow Properties, Inc., a real estate investment trust (REIT), are subsidiaries of GFNB. Arrow also owns directly two subsidiary business trusts, organized in 2003 and 2004 to issue trust preferred securities (TRUPs), which are still outstanding.

Concentrations of Credit - With the exception of some indirect auto lending, Arrow's loans are primarily with borrowers in upstate New York. Although the loan portfolios of the subsidiary banks are well diversified, tourism has a substantial impact on the northeastern New York economy. The commitments to extend credit are fairly consistent with the distribution of loans presented in Note 5, "Loans," generally have the same credit risk and are subject to normal credit policies. Generally, the loans are secured by assets and are expected to be repaid from cash flow or the sale of selected assets of the borrowers. Arrow evaluates each customer's creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by Arrow upon extension of credit, is based upon Management's credit evaluation of the counterparty. The nature of the collateral varies with the type of loan and may include: residential real estate, cash and securities, inventory, accounts receivable, property, plant and equipment, income producing commercial properties and automobiles.

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 must have available reasonably priced sources of funds, both on- and off-balance sheet, that can be accessed quickly in times of need. Arrow’s liquidity position should provide 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 Federal Reserve Bank of New York ("FRBNY"), advances from the FRBNY Bank Term Funding Program ("BTFP") and cash flow from investment securities and loans.

Note 2. ACCOUNTING POLICIES

In the opinion of the management of Arrow, the accompanying unaudited interim consolidated financial statements contain all of the adjustments necessary to present fairly the financial position as of March 31, 2024, December 31, 2023 and March 31, 2023; the results of operations for the three month periods ended March 31, 2024 and 2023; the consolidated statements of comprehensive income for the three month periods ended March 31, 2024 and 2023; the changes in stockholders' equity for the three month periods ended March 31, 2024 and 2023; and the cash flows for the three month periods ended March 31, 2024 and 2023. All such adjustments are of a normal recurring nature. The unaudited interim consolidated financial statements should be read in conjunction with the audited annual consolidated financial statements of Arrow for the year ended December 31, 2023 included in Arrow's Annual Report on Form 10-K for the year ended December 31, 2023 (the "2023 Form 10-K").

Management’s Use of Estimates

The preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the United States of America (GAAP) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of income and expenses during the reporting period. Management utilized estimates and assumptions in its evaluation of potential impairment of Arrow's right-of-use lease assets, goodwill and intangible assets. Our most significant estimate is the allowance for credit losses. Other estimates include the fair value of financial instruments, evaluation of pension and other post-retirement liabilities, an analysis of a need for a valuation allowance for deferred tax assets and a reserve for unfunded loan commitments recorded as an other liability. Actual results could differ from those estimates.

A material estimate that is particularly susceptible to significant change in the near term is the allowance for credit losses. In connection with the determination of the allowance for credit losses management obtains economic forecasts from reliable sources and appraisals for properties. The allowance for credit losses is management’s best estimate of the life of loan losses as of the balance sheet date. While management uses available information to recognize losses on loans, future adjustments to the allowance for credit losses may be necessary based on changes in economic conditions.

Allowance for Credit Losses – Loans - Accounting Standards Update (ASU) 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (CECL) approach requires an estimate of the credit losses expected over the life of a loan (or pool of loans). It replaces the incurred loss approach’s threshold that required the recognition of a

credit loss when it was probable that a loss event was incurred. The allowance for credit losses is a valuation account that is deducted from, or added to, the loans’ amortized cost basis to present the net lifetime amount expected to be collected on the loans. Credit losses are charged off against the allowance when management believes a loan balance is confirmed to be uncollectible. Expected recoveries do not exceed the aggregate of amounts previously charged off and expected to be charged off.

Management estimates the allowance using relevant available information from internal and external sources related to past events, current conditions, and a reasonable and supportable single economic forecast. Historical credit loss experience provides the basis for the estimation of expected credit losses. Arrow's historical loss experience was supplemented with peer information when there was insufficient loss data for Arrow. Peer selection was based on a review of institutions with comparable loss experience as well as loan yield, bank size, portfolio concentration and geography. Adjustments to historical loss information are made for differences in current loan-specific risk characteristics such as differences in credit concentrations, delinquency level, collateral values and underwriting standards as well as changes in economic conditions or other relevant factors. Management judgment is required at each point in the measurement process.

Portfolio segment is defined as the level at which an entity develops and documents a systematic methodology to determine its allowance for credit losses. Management developed portfolio segments for estimating loss based on type of borrower and collateral as follows:

Commercial Loans

Commercial Real Estate Loans

Consumer Loans

Residential Loans

Further details related to loan portfolio segments is included in Note 5 Loans.

Historical credit loss experience for both Arrow and segment-specific peers provides the basis for the estimation of expected credit losses. Arrow utilized regression analyses of peer data, of which Arrow is included, where observed credit losses and selected economic factors were utilized to determine suitable loss drivers for modeling lifetime probability of default (PD) rates. Arrow uses the discounted cash flow (DCF) method to estimate expected credit losses for the commercial, commercial real estate, and residential segments. For each of these loan segments, Arrow generates cash flow projections at the instrument level wherein payment expectations are adjusted for estimated prepayment speed, curtailments, time to recovery, PD, and segment-specific loss given default (LGD) risk factors. The modeling of expected prepayment speeds, curtailment rates, and time to recovery are based on historical internal data and adjusted, if necessary, based on the reasonable and supportable forecast of economic conditions.

For the loan segments utilizing the DCF method, (commercial, commercial real estate, and residential) management utilizes externally developed economic forecast of the following economic factors as loss drivers: national unemployment, gross domestic product and Case-Shiller U.S. National Home Price Index ("HPI"). The economic forecast is applied over a reasonable and supportable forecast period. Arrow utilizes a six quarter reasonable and supportable forecast period with an eight quarter reversion to the historic mean on a straight-line basis.

The combination of adjustments for credit expectations (default and loss) and timing expectations (prepayment, curtailment, and time to recovery) produces an expected cash flow stream at the instrument level. Instrument effective yield is calculated, net of the impacts of prepayment assumptions, and the instrument expected cash flows are then discounted at that effective yield to produce an instrument-level net present value of expected cash flows (NPV). An allowance for credit loss is established for the difference between the instrument’s NPV and amortized cost basis.

Arrow uses the vintage analysis method to estimate expected credit losses for the consumer loan segment. The vintage method was selected since the loans within the consumer loan segment are homogeneous, not just by risk characteristic, but by loan structure. Under the vintage analysis method, a loss rate is calculated based on the quarterly net charge-offs to the outstanding loan balance for each vintage year over the lookback period. Once this periodic loss rate is calculated for each quarter in the lookback period, the periodic rates are averaged into the loss rate. The loss rate is then applied to the outstanding loan balances based on the loan's vintage year. Arrow maintains, over the life of the loan, the loss curve by vintage year. If estimated losses computed by the vintage method need to be adjusted based on current conditions and the reasonable and supportable economic forecast, these adjustments would be incorporated over a six quarter reasonable and supportable forecast period, reverting to historical losses using a straight-line method over an eight quarter period. Based on current conditions and the reasonable and supportable economic forecast, no adjustment to the loss rate for each vintage is currently required.

The vintage and DCF models also consider the need to qualitatively adjust expected loss estimates for information not already captured in the quantitative loss estimation process. Qualitative considerations include limitations inherent in the quantitative model; trends experienced in nonperforming and delinquent loans; changes in value of underlying collateral; changes in lending policies and procedures; nature and composition of loans; portfolio concentrations that may affect loss experience across one or more components or the portfolio; the experience, ability and depth of lending management and staff; Arrow's credit review system; and the effect of external factors such as competition, legal and regulatory requirements. These qualitative factor adjustments may increase or decrease Arrow's estimate of expected credit losses so that the allowance for credit loss is reflective of the estimate of lifetime losses that exist in the loan portfolio at the balance sheet date.

All loans not included in the vintage analysis method that exceed $250,000 which are on nonaccrual, are evaluated on an individual basis. For collateral dependent financial assets where Arrow has determined that foreclosure of the collateral is probable, or where the borrower is experiencing financial difficulty and Arrow expects repayment of the financial asset to be provided substantially through the operation or sale of the collateral, Arrow has elected a practical expedient to measure the allowance for credit loss as the difference between the fair value of the collateral less cost to sell, and the amortized cost basis of the asset as of the measurement date. In the event the repayment of a collateral dependent financial asset is expected to be provided substantially through the operating of the collateral, Arrow will use fair value of the collateral at the reporting date when recording the net carrying amount of the asset and

determining the allowance for credit losses. When repayment is expected to be from the sale of the collateral, expected credit losses are calculated as the amount by which the amortized cost basis of the financial asset exceeds the fair value of the underlying collateral less estimated cost to sell. The allowance for credit losses may be zero if the fair value of the collateral at the measurement date exceeds the amortized cost basis of the financial asset.

As part of ASU No. 2022-02, Arrow evaluates whether the modification represents a new loan or a continuation of an existing loan, consistent with the current GAAP treatment for other loan modifications. In addition, Arrow evaluates and if necessary, discloses if loan modifications made to borrowers experiencing financial difficulty contain a financial concession.

Estimated Credit Losses on Off-Balance Sheet Credit Exposures Recognized as Other Liabilities - Arrow estimates expected credit losses over the contractual period in which Arrow has exposure to credit risk via a contractual obligation to extend credit, unless that obligation is unconditionally cancellable by Arrow. The allowance for credit losses on off-balance sheet credit exposures recognized in other liabilities, is adjusted as an expense in other non-interest expense. The estimate includes consideration of the likelihood that funding will occur and an estimate of expected credit losses on commitments expected to be funded over their estimated lives. Estimating credit losses on unfunded commitments requires Arrow to consider the following categories of off-balance sheet credit exposure: unfunded commitments to extend credit, unfunded lines of credit, and standby letters of credit. Each of these unfunded commitments is then analyzed for a probability of funding to calculate a probable funding amount. The life of loan loss factor by related portfolio segment from the loan allowance for credit loss calculation is then applied to the probable funding amount to calculate the estimated credit losses on off-balance sheet credit exposures recognized as other liabilities.

Accrued Interest Receivable - Arrow has made the following elections regarding accrued interest receivable: (1) presented accrued interest receivable balances separately within the other assets balance sheet line item; (2) excluded interest receivable that is included in amortized cost of financing receivables from related disclosures requirements and (3) continued its policy to write off accrued interest receivable by reversing interest income. For loans, write off typically occurs upon becoming over 90 to 120 days past due and therefore the amount of such write offs are immaterial. Historically, Arrow has not experienced uncollectible accrued interest receivable on investment securities.

Allowance for Credit Losses – Held-to-Maturity (HTM) Debt Securities - Arrow's HTM debt securities are also required to utilize the CECL approach to estimate expected credit losses. Management measures expected credit losses on HTM debt securities on a collective basis by major security types that share similar risk characteristics, such as financial asset type and collateral type adjusted for current conditions and reasonable and supportable forecasts. Management classifies the HTM portfolio into the following major security types: U.S. government agency or U.S. government sponsored mortgage-backed and collateralized mortgage obligations securities, and state and municipal debt securities.

The mortgage-backed and collateralized mortgage obligations HTM securities are issued by U.S. government entities and agencies. These securities are either explicitly or implicitly guaranteed by the U.S. government as to timely repayment of principal and interest, are highly rated by major rating agencies, and have a long history of no credit losses. Therefore, Arrow did not record a credit loss for these securities.

State and municipal bonds carry an investment grade from an accredited ratings agency, primarily with an investment grade rating. In addition, Arrow has a limited amount of New York state local municipal bonds that are not rated. The estimate of expected credit losses on the HTM portfolio is based on the expected cash flows of each individual CUSIP over its contractual life and utilized a municipal loss forecast model for determining PD and LGD rates. Management may exercise discretion to make adjustments based on environmental factors. A calculated expected credit loss for individual securities was determined using the PD and LGD rates. Arrow determined that the expected credit loss on its municipal bond portfolio was de minimis, and therefore, an allowance for credit losses was not recorded.

Allowance for Credit Losses – Available-for-Sale (AFS) Debt Securities - The impairment model for AFS debt securities differs from the CECL approach utilized by HTM debt securities since AFS debt securities are measured at fair value rather than amortized cost. For AFS debt securities in an unrealized loss position, Arrow first assesses whether it intends to sell, or it is more likely than not that it will be required to sell the security before recovery of its amortized cost basis. If either of the criteria regarding intent or requirement to sell is met, the security’s amortized cost basis is written down to fair value through income. For AFS debt securities that do not meet the aforementioned criteria, in making this assessment, management considers the extent to which fair value is less than amortized cost, any changes to the rating of the security by a rating agency, adverse conditions specifically related to the security, failure of the issuer of the debt security to make scheduled interest or principal payments, among other factors. If this assessment indicates that a credit loss exists, the present value of cash flows expected to be collected from the security are compared to the amortized cost basis of the security. The cash flows are estimated using information relevant to the collectability of the security, including information about past events, current conditions and reasonable and supportable forecasts. If the present value of cash flows expected to be collected is less than the amortized cost basis, a credit loss exists and an allowance for credit losses is recorded for the credit loss, limited by the amount that the fair value is less than the amortized cost basis. Any impairment that has not been recorded through an allowance for credit losses is recognized in other comprehensive income.

Investments in Federal Reserve Bank ("FRB") and Federal Home Loan Bank ("FHLB") stock are required for membership in those organizations and are carried at cost since there is no market value available. The FHLB New York ("FHLBNY") continues to pay dividends and repurchase stock. As such, the Company has not recognized any impairment on its holdings of FRB and FHLB stock.

Cybersecurity Risk Management, Strategy, Governance and Incident Disclosure:

In July 2023, the SEC adopted amendments intended to enhance and standardize disclosures related to cybersecurity. The amendments became effective December 18, 2023 and require timely disclosure of material cybersecurity incidents and annual disclosures related to cybersecurity risk management, strategy, and governance. Under the new rules, a material cybersecurity incident

is required to be disclosed on a Form 8-K within four business days after the learning of a material incident. The SEC has defined a cybersecurity incident to mean “an unauthorized occurrence, or a series of related unauthorized occurrences, on or conducted through a registrant’s information systems that jeopardizes the confidentiality, integrity, or availability of a registrant’s information systems or any information residing therein.”

Risk management and strategy - Annually, Registrants are required to describe the processes, if any, for assessing, identifying,and managing material risks from cybersecurity threats in sufficient detail for a reasonable investor to understand those processes.

The registrant must also describe whether and how any risks from cybersecurity threats, including as a result of any previous cybersecurity incidents, have materially affected or are reasonably likely to materially affect the registrant, including its business strategy, results of operations, or financial condition.

Governance - Disclosure is required about management’s and the board of directors’ oversight of cybersecurity risk, including a description of the board of directors’ oversight of risks from cybersecurity threats and a description of management’s role in assessing and managing the registrant’s material risks from cybersecurity threats.

The annual disclosure requirements became effective for the Company beginning with the 2023 Form 10-K.

Note 3. CASH AND CASH EQUIVALENTS (In Thousands)


The following table is the schedule of Cash and Cash Equivalents at March 31, 2024, December 31, 2023 and March 31, 2023:
	March 31, 2024		December 31, 2023		March 31, 2023
Cash and Due From Banks	$	27,356	$	36,755	$	25,107
Interest-bearing Deposits at Banks	255,109		105,781		178,365
Total Cash and Cash Equivalents	$	282,465	142,536		203,472

Note 4. INVESTMENT SECURITIES (In Thousands)

The following table is the schedule of Available-For-Sale Securities at March 31, 2024, December 31, 2023 and March 31, 2023:


Available-For-Sale Securities
	U.S. Treasuries		U.S. Government & Agency Obligations		State and Municipal Obligations		Mortgage- Backed Securities		Corporate and Other Debt Securities		Total Available- For-Sale Securities
March 31, 2024
Available-For-Sale Securities, at Amortized Cost	$	74,190	$	160,000	$	280	$	294,858	$	1,000	$	530,328
Gross Unrealized Gains	4		39		—		13		—		56
Gross Unrealized Losses	(42)		(7,290)		—		(37,154)		(65)		(44,551)
Available-For-Sale Securities, at Fair Value	74,152		152,749		280		257,717		935		485,833
Available-For-Sale Securities, Pledged as Collateral, at Fair Value											310,587

Maturities of Debt Securities, at Amortized Cost:
Within One Year	$	49,263	$	30,000	$	—	$	2,555	$	—	$	81,818
From 1 - 5 Years	24,927		130,000		—		152,490		—		307,417
From 5 - 10 Years	—		—		280		139,813		1,000		141,093
Over 10 Years	—		—		—		—		—		—

Maturities of Debt Securities, at Fair Value:
Within One Year	$	49,260	$	29,498	$	—	$	2,491	$	—	$	81,249
From 1 - 5 Years	24,892		123,251		—		137,632		—		285,775
From 5 - 10 Years	—		—		280		117,594		935		118,809
Over 10 Years	—		—		—		—		—		—

Securities in a Continuous Loss Position, at Fair Value:
Less than 12 Months	$	49,287	$	—	$	—	$	71	$	—	$	49,358
12 Months or Longer	—		137,710		—		252,064		935		390,709
Total	$	49,287	$	137,710	$	—	$	252,135	$	935	$	440,067
Number of Securities in a Continuous Loss Position	2		19		—		98		1		120

Unrealized Losses on Securities in a Continuous Loss Position:
Less than 12 Months	$	42	$	—	$	—	$	—	$	—	$	42
12 Months or Longer	—		7,290		—		37,154		65		44,509
Total	$	42	$	7,290	$	—	$	37,154	$	65	$	44,551

Disaggregated Details:
US Treasuries, at Amortized Cost	$	74,190
US Treasuries, at Fair Value	74,152
US Agency Obligations, at Amortized Cost			$	160,000
US Agency Obligations, at Fair Value			152,749
Local Municipal Obligations, at Amortized Cost					$	280
Local Municipal Obligations, at Fair Value					280
US Government Agency Securities, at Amortized Cost							$	7,180


Available-For-Sale Securities
	U.S. Treasuries		U.S. Government & Agency Obligations		State and Municipal Obligations		Mortgage- Backed Securities		Corporate and Other Debt Securities		Total Available- For-Sale Securities
US Government Agency Securities, at Fair Value							6,843
Government Sponsored Entity Securities, at Amortized Cost							287,678
Government Sponsored Entity Securities, at Fair Value							250,874
Corporate Trust Preferred Securities, at Amortized Cost									$	1,000
Corporate Trust Preferred Securities, at Fair Value									935

December 31, 2023
Available-For-Sale Securities, at Amortized Cost	$	73,761	$	160,000	$	280	$	305,161	$	1,000	$	540,202
Gross Unrealized Gains	243		51		—		6		—		300
Gross Unrealized Losses	—		(7,126)		—		(35,407)		(200)		(42,733)
Available-For-Sale Securities, at Fair Value	74,004		152,925		280		269,760		800		497,769
Available-For-Sale Securities, Pledged as Collateral, at Fair Value											242,938

Securities in a Continuous Loss Position, at Fair Value:
Less than 12 Months	$	—	$	—	$	—	$	—	$	—	$	—
12 Months or Longer	—		137,874		—		269,286		800		407,960
Total	$	—	$	137,874	$	—	$	269,286	$	800	$	407,960
Number of Securities in a Continuous Loss Position	—		19		—		97		1		117

Unrealized Losses on Securities in a Continuous Loss Position:
Less than 12 Months	$	—	$	—	$	—	$	—	$	—	$	—
12 Months or Longer	—		7,126		—		35,407		200		42,733
Total	$	—	$	7,126	$	—	$	35,407	$	200	$	42,733

Disaggregated Details:


US Treasuries, at Amortized Cost	$	73,761
US Treasuries, at Fair Value	74,004
US Agency Obligations, at Amortized Cost			$	160,000
US Agency Obligations, at Fair Value			152,925
Local Municipal Obligations, at Amortized Cost					$	280
Local Municipal Obligations, at Fair Value					280
US Government Agency Securities, at Amortized Cost							$	7,291
US Government Agency Securities, at Fair Value							6,864
Government Sponsored Entity Securities, at Amortized Cost							297,870
Government Sponsored Entity Securities, at Fair Value							262,896
Corporate Trust Preferred Securities, at Amortized Cost									$	1,000


Available-For-Sale Securities
	U.S. Treasuries		U.S. Government & Agency Obligations		State and Municipal Obligations		Mortgage- Backed Securities		Corporate and Other Debt Securities		Total Available- For-Sale Securities
Corporate Trust Preferred Securities, at Fair Value									800



March 31, 2023
Available-For-Sale Securities, at Amortized Cost	$	—	$	190,000	$	320	$	431,754	$	1,000	$	623,074
Gross Unrealized Gains	—		—		—		160		—		160
Gross Unrealized Losses	—		(12,415)		—		(44,926)		(200)		(57,541)
Available-For-Sale Securities, at Fair Value	—		177,585		320		386,988		800		565,693
Available-For-Sale Securities, Pledged as Collateral, at Fair Value											360,153

Securities in a Continuous Loss Position, at Fair Value:
Less than 12 Months	$	—	$	54,058	$	—	$	27,106	$	—	$	81,164
12 Months or Longer	—		123,526		—		346,733		800		471,059
Total	$	—	$	177,584	$	—	$	373,839	$	800	$	552,223
Number of Securities in a Continuous Loss Position	—		25		—		150		1		176

Unrealized Losses on Securities in a Continuous Loss Position:
Less than 12 Months	$	—	$	942	$	—	$	891	$	—	$	1,833
12 Months or Longer	—		11,473		—		44,035		200		55,708
Total	$	—	$	12,415	$	—	$	44,926	$	200	$	57,541

Disaggregated Details:
US Treasury Obligations, at Amortized Cost	$	—
US Treasury Obligations, at Fair Value	—
US Agency Obligations, at Amortized Cost			$	190,000
US Agency Obligations, at Fair Value			177,585
Local Municipal Obligations, at Amortized Cost					$	320
Local Municipal Obligations, at Fair Value					320
US Government Agency Securities, at Amortized Cost							$	7,782
US Government Agency Securities, at Fair Value							7,321
Government Sponsored Entity Securities, at Amortized Cost							423,972
Government Sponsored Entity Securities, at Fair Value							379,667
Corporate Trust Preferred Securities, at Amortized Cost									$	1,000
Corporate Trust Preferred Securities, at Fair Value									800

At March 31, 2024, there was no allowance for credit losses for the AFS debt securities portfolio.

The following table is the schedule of Held-To-Maturity Securities at March 31, 2024, December 31, 2023 and March 31, 2023:


Held-To-Maturity Securities
	State and Municipal Obligations		Mortgage- Backed Securities		Total Held-To Maturity Securities
March 31, 2024
Held-To-Maturity Securities, at Amortized Cost	$	119,742	$	8,309	$	128,051

Gross Unrealized Losses	(2,794)		(396)		(3,190)
Held-To-Maturity Securities, at Fair Value	116,948		7,913		124,861
Held-To-Maturity Securities, Pledged as Collateral, at Carrying Value					112,135
Held-To-Maturity Securities, Pledged as Collateral, at Fair Value					108,945

Maturities of Debt Securities, at Amortized Cost:
Within One Year	$	47,680	$	—	$	47,680
From 1 - 5 Years	69,839		8,309		78,148
From 5 - 10 Years	2,217		—		2,217
Over 10 Years	6		—		6

Maturities of Debt Securities, at Fair Value:
Within One Year	$	47,387	$	—	$	47,387
From 1 - 5 Years	67,392		7,913		75,305
From 5 - 10 Years	2,163		—		2,163
Over 10 Years	6		—		6

Securities in a Continuous Loss Position, at Fair Value:
Less than 12 Months	$	1,143	$	—	$	1,143
12 Months or Longer	98,954		7,913		106,867
Total	$	100,097	$	7,913	$	108,010

Number of Securities in a Continuous Loss Position	308		16		324

Unrealized Losses on Securities in a Continuous Loss Position:
Less than 12 Months	$	17	$	—	$	17
12 Months or Longer	2,777		396		3,173
Total	$	2,794	$	396	$	3,190

Disaggregated Details:
Municipal Obligations, at Amortized Cost	$	119,742
Municipal Obligations, at Fair Value	116,948
US Government Agency Securities, at Amortized Cost			$	2,911


Held-To-Maturity Securities
	State and Municipal Obligations		Mortgage- Backed Securities		Total Held-To Maturity Securities
US Government Agency Securities, at Fair Value			2,766
Government Sponsored Entity Securities, at Amortized Cost			5,398
Government Sponsored Entity Securities, at Fair Value			5,147

December 31, 2023
Held-To-Maturity Securities, at Amortized Cost	$	122,450	$	8,945	$	131,395

Gross Unrealized Losses	(2,157)		(401)		(2,558)
Held-To-Maturity Securities, at Fair Value	120,293		8,544		128,837
Held-To-Maturity Securities, Pledged as Collateral, at Carrying Value					115,030
Held-To-Maturity Securities, Pledged as Collateral, at Fair Value					112,472

Securities in a Continuous Loss Position, at Fair Value:
Less than 12 Months	$	1,472	$	—	$	1,472
12 Months or Longer	102,839		8,544		111,383
Total	$	104,311	$	8,544	$	112,855
Number of Securities in a Continuous Loss Position	319		16		335

Unrealized Losses on Securities in a Continuous Loss Position:
Less than 12 Months	$	14	$	—	$	14
12 Months or Longer	2,143		402		2,545
Total	$	2,157	$	402	$	2,559

Disaggregated Details:
Municipal Obligations, at Amortized Cost	$	122,450
Municipal Obligations, at Fair Value	120,293
US Government Agency Securities, at Amortized Cost			$	3,114
US Government Agency Securities, at Fair Value			2,954
Government Sponsored Entity Securities, at Amortized Cost			5,831
Government Sponsored Entity Securities, at Fair Value			5,589

March 31, 2023
Held-To-Maturity Securities, at Amortized Cost	$	156,314	$	11,033	$	167,347
Gross Unrealized Gains	2		—		2
Gross Unrealized Losses	(2,421)		(489)		(2,910)
Held-To-Maturity Securities, at Fair Value	153,895		10,544		164,439


Held-To-Maturity Securities
	State and Municipal Obligations		Mortgage- Backed Securities		Total Held-To Maturity Securities
Held-To-Maturity Securities, Pledged as Collateral, at Carrying Value					149,810
Held-To-Maturity Securities, Pledged as Collateral, at Fair Value					146,902

Securities in a Continuous Loss Position, at Fair Value:
Less than 12 Months	$	43,121	$	—	$	43,121
12 Months or Longer	90,439		10,544		100,983
Total	$	133,560	$	10,544	$	144,104
Number of Securities in a Continuous Loss Position	386		16		402

Unrealized Losses on Securities in a Continuous Loss Position:
Less than 12 Months	$	496	$	—	$	496
12 Months or Longer	1,925		489		2,414
Total	$	2,421	$	489	$	2,910


Disaggregated Details:
Municipal Obligations, at Amortized Cost	$	156,314
Municipal Obligations, at Fair Value	153,895
US Government Agency Securities, at Amortized Cost			$	3,699
US Government Agency Securities, at Fair Value			3,522
Government Sponsored Entity Securities, at Amortized Cost			7,334
Government Sponsored Entity Securities, at Fair Value			7,022

In the tables above, maturities of mortgage-backed securities are included based on their contractual lives. Actual maturities will differ because issuers may have the right to call or prepay obligations with or without prepayment penalties.

Arrow's investment policy requires that investments held in our portfolio be investment grade or better at the time of purchase. Arrow performs an analysis of the creditworthiness of municipal obligations to determine if a security is of investment grade. The analysis may include but may not solely rely upon credit analysis conducted by external credit rating agencies.

Arrow evaluates AFS debt securities in unrealized loss positions at each measurement date to determine whether the decline in the fair value below the amortized cost basis (impairment) is due to credit-related factors or non-credit-related factors. Any impairment that is not credit related is recognized in other comprehensive income, net of applicable taxes. Credit-related impairment is recognized within the allowance for credit losses on the balance sheet, limited to the amount by which the amortized cost basis exceeds the fair value, with a corresponding adjustment to earnings via credit loss expense. Arrow determined that at March 31, 2024, gross unrealized losses were primarily attributable to changes in interest rates, relative to when the investment securities were purchased, and not due to the credit quality of the investment securities. Arrow does not intend to sell, nor is it more likely than not that Arrow will be required to sell any securities before recovery of its amortized cost basis, which may be at maturity. Therefore, Arrow carried no allowance for credit loss at March 31, 2024 and there was no credit loss expense recognized by Arrow with respect to the securities portfolio during the three months ended March 31, 2024.

Arrow's HTM debt securities are comprised of U.S. government-sponsored enterprises (GSEs) or state and municipal obligations. GSE securities carry the explicit and/or implicit guarantee of the U.S. government, are widely recognized as “risk free,” and have a long history of zero credit loss. Arrow determined that the expected credit loss on its HTM debt portfolio was immaterial and therefore no allowance for credit loss was recorded as of March 31, 2024.

The following table is the schedule of Equity Securities at March 31, 2024, December 31, 2023 and March 31, 2023:

Equity Securities

March 31, 2024

December 31, 2023

March 31, 2023

Equity Securities, at Fair Value

$1,942

$1,925

$2,070

The following is a summary of realized and unrealized gains and losses recognized in net income on equity securities during the three and three month periods ended March 31, 2024 and 2023:


	For the Three Months Ended March 31,
	2024		2023
Net Gain (Loss) on Equity Securities	$	17	$	(104)
Less: Net gain recognized during the reporting period on equity securities sold during the period	—		—
Unrealized net gain (loss) recognized during the reporting period on equity securities still held at the reporting date	$	17	$	(104)

Note 5. LOANS (In Thousands)

Loan Categories and Past Due Loans

The following two tables present loan balances outstanding as of March 31, 2024, December 31, 2023 and March 31, 2023 and an analysis of the recorded investment in loans that are past due at these dates. Generally, Arrow considers a loan past due 30 or more days when the borrower is two payments past due. Loans held-for-sale of $215, $165 and $417 as of March 31, 2024, December 31, 2023 and March 31, 2023, respectively, are included in the residential real estate balances for current loans.


Schedule of Past Due Loans by Loan Category
			Commercial
	Commercial		Real Estate		Consumer		Residential		Total
March 31, 2024
Loans Past Due 30-59 Days	$	419	$	494	$	12,140	$	2,215	$	15,268
Loans Past Due 60-89 Days	24		—		2,600		409		3,033
Loans Past Due 90 or more Days	35		15,148		1,429		3,506		20,118
Total Loans Past Due	478		15,642		16,169		6,130		38,419
Current Loans	161,911		735,327		1,109,585		1,213,516		3,220,339
Total Loans	$	162,389	$	750,969	$	1,125,754	$	1,219,646	$	3,258,758

December 31, 2023
Loans Past Due 30-59 Days	$	298	$	—	$	13,511	$	3,715	$	17,524
Loans Past Due 60-89 Days	21		636		5,579		861		7,097
Loans Past Due 90 or more Days	30		15,308		1,801		3,140		20,279
Total Loans Past Due	349		15,944		20,891		7,716		44,900
Current Loans	155,875		729,543		1,090,776		1,191,814		3,168,008
Total Loans	$	156,224	$	745,487	$	1,111,667	$	1,199,530	$	3,212,908

March 31, 2023
Loans Past Due 30-59 Days	$	62	$	—	$	11,237	$	1,593	$	12,892
Loans Past Due 60-89 Days	47		—		4,439		—		4,486
Loans Past Due 90 or more Days	—		—		3,005		3,143		6,148
Total Loans Past Due	109		—		18,681		4,736		23,526
Current Loans	135,808		715,357		1,054,688		1,075,973		2,981,826
Total Loans	$	135,917	$	715,357	$	1,073,369	$	1,080,709	$	3,005,352


Schedule of Non Accrual Loans by Category
			Commercial
March 31, 2024	Commercial		Real Estate		Consumer		Residential		Total
Loans 90 or More Days Past Due and Still Accruing Interest	$	—	$	—	$	13	$	1,134	$	1,147
Nonaccrual Loans	35		15,148		1,525		3,536		20,244
Nonaccrual With No Allowance for Credit Loss	35		15,148		1,525		3,536		20,244
Interest Income on Nonaccrual Loans	—		—		—		—		—

December 31, 2023
Loans 90 or More Days Past Due and Still Accruing Interest	$	—	$	—	$	6	$	446	$	452
Nonaccrual Loans	30		15,308		1,877		3,430		20,645

March 31, 2023
Loans 90 or More Days Past Due and Still Accruing Interest	$	—	$	—	$	—	$	241	$	241
Nonaccrual Loans	8		3,085		3,123		4,636		10,852

Arrow disaggregates its loan portfolio into the following four categories:

Commercial - Arrow offers a variety of loan options to meet the specific needs of our commercial customers including term loans, time notes and lines of credit. Such loans are made available to businesses for working capital needs such as inventory and receivables, business expansion and equipment purchases. Generally, a collateral lien is placed on equipment or other assets owned by the borrower. Generally, these loans carry a higher risk than commercial real estate loans due to the nature of the underlying collateral, which can be business assets such as equipment and accounts receivable and generally have a lower liquidation value than real estate. In the event of default by the borrower, Arrow may be required to liquidate collateral at deeply discounted values. To reduce the risk, management usually obtains personal guarantees to support the borrowing, as permitted by applicable law.

Commercial Real Estate - Arrow offers commercial real estate loans to finance real estate purchases, refinancings, expansions and improvements to commercial properties. Commercial real estate loans are made to finance the purchases of real property which generally consists of real estate with completed structures. These commercial real estate loans are typically secured by first liens on the real estate, which may include apartments, commercial structures, housing businesses, healthcare facilities, and both owner- and non-owner-occupied facilities. These loans are typically less risky than commercial loans, since they are secured by real estate and buildings, and are generally originated in amounts of no more than 80% of the appraised value of the property. However, Arrow also offers commercial construction and land development loans to finance projects. Many projects will ultimately be used by the borrowers' businesses, while others are developed for resale. These real estate loans are also typically secured by first liens on the real estate, which may include apartments, commercial structures, housing businesses, healthcare facilities and both owner-occupied and non-owner-occupied facilities. There is enhanced risk during the construction period, since the loan is secured by an incomplete project. Arrow’s Commercial Real Estate loans are primarily located within the footprint of the Company’s branch network, with some loans extending into the greater upstate New York area. Arrow does not provide Commercial Real Estate loans in major metropolitan areas such as New York City, Boston, etc

Consumer Loans - This category is primarily comprised of automobile loans. Arrow primarily finances the purchases of automobiles indirectly through dealer relationships located throughout upstate New York and Vermont. Most automobile loans carry a fixed rate of interest with principal repayment terms typically ranging from three to seven years. Automobile loans are underwritten on a secured basis using the underlying collateral being financed. Arrow also offers a variety of consumer installment loans to finance personal expenditures. Most of these loans carry a fixed rate of interest with principal repayment terms typically ranging from one to five years, based upon the nature of the collateral and the size of the loan. In addition to installment loans, Arrow also offers personal lines of credit and overdraft protection. Several of these consumer loans are unsecured, which carry a higher risk of loss.

Residential - Residential real estate loans consist primarily of loans secured by first or second mortgages on primary residences. Arrow originates fixed-rate and adjustable-rate one-to-four-family residential real estate loans for the construction, purchase of real estate or refinancing of an existing mortgage. These loans are collateralized primarily by owner-occupied properties generally located in Arrow's market area. Loans on one-to-four-family residential real estate are generally originated in amounts of no more than 80% of the purchase price or appraised value (whichever is lower), or have private mortgage insurance. Arrow’s underwriting analysis for residential mortgage loans typically includes credit verification, independent appraisals, and a review of the borrower’s financial condition. Mortgage title insurance and hazard insurance are normally required. It is Arrow's general practice to underwrite residential real estate loans to secondary market standards. Construction loans have a unique risk, because they are secured by an incomplete dwelling. This risk is reduced through periodic site inspections, including one at each loan draw period. In addition, Arrow offers fixed home equity loans, as well as home equity lines of credit to consumers to finance home improvements, debt consolidation, education and other uses. Arrow's policy allows for a maximum loan to value ratio of 80%, although periodically higher advances are allowed. Arrow originates home equity lines of credit and second mortgage loans (loans secured by a second junior lien position on one-to-four-family residential real estate). Risk is generally reduced through underwriting criteria, which include credit verification, appraisals, a review of the borrower's financial condition, and personal cash flows. A security interest, with title insurance when necessary, is taken in the underlying real estate.

Allowance for Credit Losses

Loan segments were selected by class code and application code to ensure each segment is comprised of loans with homogenous loan characteristics and similar risk profiles. The resulting loan segments are commercial, commercial real estate, consumer and residential real estate loans. The consumer segment is mainly comprised of automobile loans, and since they are relatively short-term in nature, with similar dollar amounts and collateral, the vintage analysis method was selected to determine the credit loss reserve. The vintage method utilizes Arrow loan data exclusively as the method calculates a loss rate based on the total origination balance of the loans by year and the charge-off and recovery rate of the same origination year. Arrow maintains, over the life of the loan, the loss curve by vintage year. The discounted cash flow method (DCF) is used to calculate the reserve for credit losses for the commercial, commercial real estate and residential real estate segments.

The March 31, 2024 allowance for credit losses calculation incorporated a reasonable and supportable forecast period to account for economic conditions utilized in the measurement. The quantitative model utilized an economic forecast sourced from reputable third-parties that reflects the economic conditions with a slight improvement in the national unemployment rate of approximately 0.32% during the six-quarter forecast period and forecasted gross domestic product projected to improve by approximately 0.65%. The home price index (HPI) forecast increased approximately 0.03% from the previous quarter level. The overall change in the allowance from December 31, 2023 was primarily driven by the following factors: net loan growth contributed $0.4 million, changes in macro economic conditions reduced the allowance by $1.8 million, qualitative factors increased the allowance by $0.9 million, and a specific reserve of $0.7 million tied to overdraft balances from an instance of check fraud related to one customer relationship. The first quarter provision

for credit losses was $617 thousand. In addition, Arrow recorded a credit for estimated credit losses on off-balance sheet credit exposures in other liabilities of $466 thousand in the first quarter of 2024. Management's evaluation considers the allowance for credit losses for loans to be appropriate as of March 31, 2024.

The following table details activity in the allowance for credit losses on loans for the three ended March 31, 2024 and March 31, 2023:


Allowance for Credit Losses
	Commercial		Commercial Real Estate		Consumer		Residential		Total
Rollforward of the Allowance for Credit Losses for the Quarterly Period:








December 31, 2023	$	1,958	$	15,521	$	2,566	$	11,220	$	31,265
Charge-offs	$	(9)	$	—	$	(1,274)	$	—	$	(1,283)
Recoveries	$	—	$	—	$	962	$	—	$	962
Provision	$	893	$	(1,353)	$	502	$	575	$	617
March 31, 2024	$	2,842	$	14,168	$	2,756	$	11,795	$	31,561











December 31, 2022	$	1,961	$	15,213	$	2,585	$	10,193	$	29,952
Charge-offs	$	—	$	—	$	(1,328)	$	—	$	(1,328)
Recoveries	$	—	$	—	$	606	$	—	$	606
Provision	$	(224)	$	289	$	1,000	$	489	$	1,554
March 31, 2023	$	1,737	$	15,502	$	2,863	$	10,682	$	30,784

Estimated Credit Losses on Off-Balance Sheet Credit Exposures Recognized as Other Liabilities

Financial instrument credit losses apply to off-balance sheet credit exposures such as unfunded loan commitments and standby letters of credit. A liability for expected credit losses for off-balance sheet exposures is recognized if the entity has a present contractual obligation to extend the credit and the obligation is not unconditionally cancellable by the entity. Changes in this allowance are reflected in other operating expenses within the non-interest expense category. As of March 31, 2024, the total unfunded commitment off-balance sheet credit exposure was $1.1 million.

Individually Evaluated Loans

All loans not included in the vintage analysis method that exceed $250,000, which are on nonaccrual status, are evaluated on an individual basis. Arrow made the policy election to apply a practical expedient for collateral dependent financial assets when the borrower is experiencing financial difficulty and the repayment is expected through the sale of the collateral. This allows Arrow to use fair value of the collateral at the reporting date adjusted for estimated cost to sell when recording the net carrying amount of the asset and determining the allowance for credit losses for a financial asset. In the event where the repayment of a collateral dependent financial asset is expected to be provided substantially through the operating of the collateral, Arrow will use fair value of the collateral at the reporting date when recording the net carrying amount of the asset and determining the allowance for credit losses. As of March 31, 2024, there were five total relationships identified to be evaluated for loss on an individual basis which had an amortized cost basis of $17.1 million and none had an allowance for credit loss.

The following tables present the amortized cost basis of collateral-dependent loans by class of loans as of March 31, 2024, December 31, 2023 and March 31, 2023:


March 31, 2024	Collateral Type -Residential Real Estate		Collateral Type - Commercial Real Estate		Total Loans
Commercial	$	—	$	—	$	—
Commercial Real Estate	—		15,179		15,179
Consumer	—		—		—
Residential	1,886		—		1,886
Total	$	1,886	$	15,179	$	17,065


December 31, 2023	Collateral Type -Residential Real Estate		Collateral Type - Commercial Real Estate		Total Loans
Commercial	$	—	$	—	$	—
Commercial Real Estate	—		15,308		15,308
Consumer	—		—		—
Residential	1,446		—		1,446
Total	$	1,446	$	15,308	$	16,754


March 31, 2023	Collateral Type -Residential Real Estate		Collateral Type - Commercial Real Estate		Total Loans
Commercial	$	—	$	—	$	—
Commercial Real Estate	—		3,027		3,027
Consumer	—		—		—
Residential	1,949		—		1,949
Total	$	1,949	$	3,027	$	4,976


Allowance for Credit Losses - Collectively and Individually Evaluated
	Commercial		Commercial Real Estate		Consumer		Residential		Total
March 31, 2024
Ending Loan Balance - Collectively Evaluated	$	160,894	$	735,821	$	1,125,754	$	1,217,758	$	3,240,227
Allowance for Credit Losses - Loans Collectively Evaluated	2,110		14,168		2,756		11,795		30,829

Ending Loan Balance - Individually Evaluated	1,495		15,148		—		1,888		18,531
Allowance for Credit Losses - Loans Individually Evaluated	732		—		—		—		732

December 31, 2023
Ending Loan Balance - Collectively Evaluated	$	156,224	$	730,179	$	1,111,667	$	1,198,084	$	3,196,154
Allowance for Credit Losses - Loans Collectively Evaluated	1,958		15,521		2,566		11,220		31,265
Ending Loan Balance - Individually Evaluated	—		15,308		—		1,446		16,754
Allowance for Credit Losses - Loans Individually Evaluated	—		—		—		—		—

March 31, 2023
Ending Loan Balance - Collectively Evaluated	$	135,917	$	712,330	$	1,073,369	$	1,078,760	$	3,000,376
Allowance for Credit Losses - Loans Collectively Evaluated	1,737		15,502		2,863		10,682		30,784
Ending Loan Balance - Individually Evaluated	—		3,027		—		1,949		4,976
Allowance for Credit Losses - Loans Individually Evaluated	—		—		—		—		—

Through the provision for credit losses, an allowance for credit losses is maintained that reflects the best estimate of the calculated expected credit losses in Arrow's loan portfolio as of the balance sheet date. Additions are made to the allowance for credit losses through a periodic provision for credit losses. Actual credit losses are charged against the allowance for credit losses when loans are deemed uncollectible and recoveries of amounts previously charged off are recorded as credits to the allowance for credit losses.

Arrow's loan officers and risk managers meet at least quarterly to discuss and review the conditions and risks associated with certain criticized and classified commercial-related relationships. In addition, the independent internal loan review department performs periodic reviews of the credit quality indicators on individual loans in the commercial loan portfolio.

Arrow considers the need to qualitatively adjust expected credit loss estimates for information not already captured in the loss estimation process. These qualitative factor adjustments may increase or decrease management’s estimate of expected credit losses. Adjustments are not made for information that has already been considered and included in the loss estimation process.

Arrow considers the qualitative factors that are relevant as of the reporting date, which may include, but are not limited to the following factors:

•The nature and volume of Arrow's financial assets;

•The existence, growth, and effect of any concentrations of credit;

•The volume and severity of past due loans, the volume of nonaccrual loans, and the volume and severity of adversely classified or graded loans;

•The value of the underlying collateral for loans that are not collateral-dependent;

•Arrow's lending policies and procedures, including changes in underwriting standards and practices for collections, write-offs, and recoveries;

•The quality of Arrow's loan review function;

•The experience, ability, and depth of Arrow's lending, investment, collection, and other relevant management/staff;

•The effect of other external factors such as the regulatory, legal and technological environments; competition; and events such as natural disasters;

•Actual and expected changes in international, national, regional, and local economic and business conditions and developments in which the institution operates that affect the collectability of financial assets; and,

•Other qualitative factors not reflected in quantitative loss rate calculations.

Loan Credit Quality Indicators and Modification

In 2023 and the first quarter of 2024, no loans met the criteria for disclosure as part of ASU 2022-02. Any modifications of loans were either immaterial in natural or were made for competitive purposes, i.e., the borrowers were not experiencing financial hardship.

The following tables present credit quality indicators by total loans amortized cost basis by origination year as of March 31, 2024, December 31, 2023 and March 31, 2023:


	Term Loans Amortized Cost Basis by Origination Year												Revolving Loans Amortized Cost Basis		Revolving Loan Converted to Term		Total
March 31, 2024	2024		2023		2022		2021		2020		Prior
Commercial:
Risk rating
Satisfactory	$	8,925	$	25,424	$	18,661	$	17,276	$	5,645	$	69,588	$	9,915	$	—	$	155,434
Special mention	—		—		—		—		106		—		—		—		106
Substandard	—		—		—		—		—		3,129		3,720		—		6,849
Doubtful	—		—		—		—		—		—		—		—		—
Total Commercial Loans	$	8,925	$	25,424	$	18,661	$	17,276	$	5,751	$	72,717	$	13,635	$	—	$	162,389

Current-period gross charge-offs	$	—	$	—	$	—	$	—	$	9	$	—	$	—	$	—	$	9

Commercial Real Estate:
Risk rating
Satisfactory	$	9,548	$	50,480	$	109,750	$	60,070	$	84,319	$	368,036	$	1,885	$	—	$	684,088
Special mention	—		—		3,092		—		—		15,380		—		—		18,472
Substandard	—		149		9,038		1,670		2,328		35,102		122		—		48,409
Doubtful	—		—		—		—		—		—		—		—		—
Total Commercial Real Estate Loans	$	9,548	$	50,629	$	121,880	$	61,740	$	86,647	$	418,518	$	2,007	$	—	$	750,969

Current-period gross charge-offs	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—

Consumer:
Risk rating
Performing	$	83,515	$	261,853	$	208,788	$	110,546	$	50,713	$	407,586	$	459	$	—	$	1,123,460
Nonperforming	—		136		291		182		64		1,611		10		—		2,294
Total Consumer Loans	$	83,515	$	261,989	$	209,079	$	110,728	$	50,777	$	409,197	$	469	$	—	$	1,125,754

Current-period gross charge-offs	$	583	$	150	$	248	$	177	$	104	$	12	$	—	$	—	$	1,274

Residential:
Risk rating
Performing	$	12,555	$	82,726	$	185,667	$	166,141	$	86,843	$	564,901	$	115,104	$	—	$	1,213,937
Nonperforming	—		189		442		1,654		—		3,094		330		—		5,709
Total Residential Loans	$	12,555	$	82,915	$	186,109	$	167,795	$	86,843	$	567,995	$	115,434	$	—	$	1,219,646

Current-period gross charge-offs	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—

Total Loans	$	114,543	$	420,957	$	535,729	$	357,539	$	230,018	$	1,468,427	$	131,545	$	—	$	3,258,758


	Term Loans Amortized Cost Basis by Origination Year												Revolving Loans Amortized Cost Basis		Revolving Loan Converted to Term		Total
December 31, 2023	2023		2022		2021		2020		2019		Prior
Commercial:
Risk rating
Satisfactory	$	54,584	$	34,047	$	23,470	$	9,655	$	4,107	$	13,360	$	8,586	$	—	$	147,809
Special mention	—		—		—		117		—		—		—		—		117
Substandard	—		—		—		—		—		3,199		5,099		—		8,298
Doubtful	—		—		—		—		—		—		—		—		—
Total Commercial Loans	$	54,584	$	34,047	$	23,470	$	9,772	$	4,107	$	16,559	$	13,685	$	—	$	156,224

Commercial Real Estate:
Risk rating
Satisfactory	$	81,582	$	151,818	$	105,365	$	120,845	$	41,406	$	174,516	$	1,667	$	—	$	677,199
Special mention	—		10,439		—		—		—		4,084		—		—		14,523
Substandard	150		9,169		1,670		2,533		791		38,955		497		—		53,765
Doubtful	—		—		—		—		—		—		—		—		—
Total Commercial Real Estate Loans	$	81,732	$	171,426	$	107,035	$	123,378	$	42,197	$	217,555	$	2,164	$	—	$	745,487

Consumer:
Risk rating
Performing	$	405,099	$	355,217	$	195,799	$	93,708	$	44,206	$	15,252	$	—	$	—	$	1,109,281
Nonperforming	208		783		551		210		81		85		468		—		2,386
Total Consumer Loans	$	405,307	$	356,000	$	196,350	$	93,918	$	44,287	$	15,337	$	468	$	—	$	1,111,667

Residential:
Risk rating
Performing	$	161,878	$	231,365	$	192,588	$	116,451	$	73,875	$	296,935	$	122,573	$	—	$	1,195,665
Nonperforming	—		—		444		666		127		2,268		360		—		3,865
Total Residential Loans	$	161,878	$	231,365	$	193,032	$	117,117	$	74,002	$	299,203	$	122,933	$	—	$	1,199,530

Total Loans	$	703,501	$	792,838	$	519,887	$	344,185	$	164,593	$	548,654	$	139,250	$	—	$	3,212,908


	Term Loans Amortized Cost Basis by Origination Year												Revolving Loans Amortized Cost Basis		Revolving Loan Converted to Term		Total
March 31, 2023	2023		2022		2021		2020		2019		Prior
Commercial:
Risk rating
Satisfactory	$	4,727	$	35,164	$	26,254	$	12,765	$	6,830	$	35,014	$	8,095	$	—	$	128,849
Special mention	—		—		—		150		—		26		26		—		202
Substandard	—		—		—		230		420		3,420		2,796		—		6,866
Doubtful	—		—		—		—		—		—		—		—		—
Total Commercial Loans	$	4,727	$	35,164	$	26,254	$	13,145	$	7,250	$	38,460	$	10,917	$	—	$	135,917

Commercial Real Estate:
Risk rating
Satisfactory	$	12,605	$	157,534	$	115,019	$	122,364	$	42,710	$	212,115	$	1,679	$	—	$	664,026
Special mention	—		—		—		—		—		5,043		—		—		5,043
Substandard	—		10,150		—		5,472		806		29,832		28		—		46,288
Doubtful	—		—		—		—		—		—		—		—		—
Total Commercial Real Estate Loans	$	12,605	$	167,684	$	115,019	$	127,836	$	43,516	$	246,990	$	1,707	$	—	$	715,357

Consumer:
Risk rating
Performing	$	71,838	$	379,339	$	261,675	$	138,034	$	75,650	$	143,190	$	—	$	—	$	1,069,726
Nonperforming	—		1,030		1,090		434		261		371		457		—		3,643
Total Consumer Loans	$	71,838	$	380,369	$	262,765	$	138,468	$	75,911	$	143,561	$	457	$	—	$	1,073,369

Residential:
Risk rating
Performing	$	15,565	$	219,336	$	197,436	$	124,992	$	80,986	$	323,945	$	113,220	$	—	$	1,075,480
Nonperforming	—		550		435		939		636		2,462		207		—		5,229
Total Residential Loans	$	15,565	$	219,886	$	197,871	$	125,931	$	81,622	$	326,407	$	113,427	$	—	$	1,080,709

Total Loans	$	104,735	$	803,103	$	601,909	$	405,380	$	208,299	$	755,418	$	126,508	$	—	$	3,005,352

For the purposes of the table above, nonperforming consumer and residential loans were those loans on nonaccrual status or were 90 days or more past due and still accruing interest.

As of March 31, 2024, the amortized cost of consumer mortgage loans secured by residential real estate properties for which formal foreclosure proceedings are in process is $2.5 million.

For the allowance calculation, an internally developed system of five credit quality indicators is used to rate the credit worthiness of each commercial loan defined as follows:

1) Satisfactory - "Satisfactory" borrowers have acceptable financial condition with satisfactory record of earnings and sufficient historical and projected cash flow to service the debt. Borrowers have satisfactory repayment histories and primary and secondary sources of repayment can be clearly identified;

2) Special Mention - Loans in this category have potential weaknesses that deserve management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the asset or in the institution’s credit position at some future date. "Special mention" assets are not adversely classified and do not expose an institution to sufficient risk to warrant adverse classification. Loans which might be assigned this credit quality indicator include loans to borrowers with deteriorating financial strength and/or earnings record and loans with potential for problems due to weakening economic or market conditions;

3) Substandard - Loans classified as “substandard” are inadequately protected by the current sound net worth or paying capacity of the borrower or the collateral pledged, if any. Loans in this category have well defined weaknesses that jeopardize the repayment. They are characterized by the distinct possibility that Arrow will sustain some loss if the deficiencies are not corrected. “Substandard” loans may include loans which are likely to require liquidation of collateral to effect repayment, and other loans where character or ability to repay has become suspect. Loss potential, while existing in the aggregate amount of substandard assets, does not have to exist in individual assets classified substandard;

4) Doubtful - Loans classified as “doubtful” have all of the weaknesses inherent in those classified as “substandard” with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of current existing facts, conditions, and values, highly questionable and improbable. Although possibility of loss is extremely high, classification of these loans as “loss” has been deferred due to specific pending factors or events which may strengthen the value (e.g. possibility of additional collateral, injection of

capital, collateral liquidation, debt restructure, economic recovery, etc). Loans classified as “doubtful” need to be placed on non-accrual; and

5) Loss - Loans classified as “loss” are considered uncollectible with collateral of such little value that their continuance as bankable assets is not warranted. As of the date of the balance sheet, all loans in this category have been charged-off to the allowance for loan losses.

Commercial loans are generally evaluated on an annual basis depending on the size and complexity of the loan relationship, unless the credit related quality indicator falls to a level of "special mention" or below, when the loan is evaluated quarterly. The credit quality indicator is one of the factors used in assessing the level of incurred risk of loss in our commercial related loan portfolios.

Note 6. DEBT (Dollars in Thousands)

Schedule of Borrowings:


	March 31, 2024		December 31, 2023		March 31, 2023
Balance:
BTFP Advances	$	100,000	$	—	$	—
FHLBNY Overnight Advances	—		20,000		35,000
FHLBNY Term Advances	6,500		6,500		107,800

Total Borrowings	$	106,500	$	26,500	$	142,800

Maximum Borrowing Capacity:
Federal Funds Purchased	$	28,000	$	28,000	$	52,000
Federal Home Loan Bank of New York	604,729		576,602		778,368
Federal Reserve Bank of New York	851,886		738,511		689,883

Available Borrowing Capacity:
Federal Funds Purchased	$	28,000	$	28,000	$	52,000
Federal Home Loan Bank of New York	553,229		550,102		535,568
Federal Reserve Bank of New York	751,886		738,511		689,883

Arrow's subsidiary banks have in place unsecured federal funds lines of credit with two correspondent banks. As a member of the FHLBNY, Arrow participates in the advance program which allows for overnight and term advances up to the limit of pledged collateral, including FHLBNY stock and any loans secured by real estate such as commercial real estate, residential real estate and home equity loans (see Notes 4: Investment Securities, and 5: Loans to the Consolidated Financial Statements). The maximum borrowing capacities at the FHLBNY and FRB are determined based on the fair value of the collateral pledged, subject to discounts determined by the respective lenders. As of March 31, 2024, the carrying cost for the FHLBNY collateral was approximately $875 million and approximately $1.1 billion for the FRB. As of March 31, 2024, the fair value for the FHLBNY collateral was approximately $737 million and approximately $1.1 billion for the FRB. The investment in FHLBNY stock is proportional to the total of Arrow's overnight and term advances (see the Schedule of FFRB and FHLB Stock in Note 4, Investment Securities, to the Consolidated Financial Statements). Arrow's bank subsidiaries have also established borrowing facilities with the FRB of New York for potential “discount window” advances, pledging certain consumer loans as collateral (see Note 5, Loans, to the Consolidated Financial Statements).

Debt Maturities

BTFP Advances - The BTFP was created to support American businesses and households by making additional funding available to eligible depository institutions to help assure banks have the ability to meet the needs of all their depositors. In the first quarter of 2024, Arrow borrowed $100 million pursuant to the BTFP. The BTFP Advances mature in January 2025 and have a weighted average interest rate of 4.76%.

Maturity Schedule of FHLBNY Term Advances:


	Balances						Weighted Average Rate

Final Maturity	3/31/2024		12/31/2023		3/31/2023		3/31/2024		12/31/2023		3/31/2023
First Year	$	4,250	$	4,250	$	107,800	5.80	%	5.80	%	5.29	%
Second Year	2,250		2,250		—		5.38	%	5.38	%	—	%
Total	$	6,500	$	6,500	$	107,800	5.66	%	5.66	%	5.29	%

Long Term Debt - Guaranteed Preferred Beneficial Interests in Corporation's Junior Subordinated Debentures

At March 31, 2024, there were outstanding two classes of financial instruments issued by two separate subsidiary business trusts of Arrow, Arrow Capital Statutory Trust II ("ACST II") and Arrow Capital Statutory Trust III ("ACST III" and, together with ACST II, the "Trusts"), identified as “Junior Subordinated Obligations Issued to Unconsolidated Subsidiary Trusts” on the Consolidated Balance Sheets and the Consolidated Statements of Income.

The first of the two classes of trust-issued instruments outstanding at year-end was issued by ACST II, a Delaware business trust established on July 16, 2003, upon the filing of a certificate of trust with the Delaware Secretary of State. In July 2003, ACST II issued all of its voting (common) stock to Arrow and issued and sold to an unaffiliated purchaser 30-year guaranteed preferred beneficial interests in the trust's assets ("ACST II TRUPS"). The rate on the securities is variable, previously adjusting quarterly to the now discontinued 3-month London Inter-Bank Offered Rate ("LIBOR") plus 3.15%. Arrow designated the Secured Overnight Financing Rate ("SOFR") as the replacement index for financial instruments. The rate on the securities are tied to the 3-month SOFR plus 3.15% post-conversion. ACST II used the proceeds of the sale of the ACST II TRUPS to purchase an identical amount of junior subordinated debentures issued by Arrow that bear an interest rate identical at all times to the rate payable on the ACST II TRUPS. The ACST II TRUPS became redeemable after July 23, 2008 and mature on July 23, 2033.

The second of the two classes of trust-issued instruments outstanding at year-end was issued by ACST III, a Delaware business trust established on December 23, 2004, upon the filing of a certificate of trust with the Delaware Secretary of State. On December 28, 2004, the ACST III issued all of its voting (common) stock to Arrow and issued and sold to an unaffiliated purchaser 30-year guaranteed preferred beneficial interests in the trust's assets ("ACST III TRUPS"). The rate on the ACST III TRUPS is a variable rate, adjusting quarterly to the 3-month SOFR plus 2.00%. The rate previously adjusted quarterly to the now discontinued 3-month LIBOR plus 2.00% pre-conversion. ACST III used the proceeds of the sale of the ACST III TRUPS to purchase an identical amount of junior subordinated debentures issued by Arrow that bear an interest rate identical at all times to the rate payable on the ACST III TRUPS. The ACST III TRUPS became redeemable on or after March 31, 2010 and mature on December 28, 2034.

Arrow has entered into interest rate swaps to synthetically fix the variable rate interest payments associated with $20 million in outstanding subordinated trust securities attributable to the Trusts. These agreements are designated as cash flow hedges.

The primary assets of the Trusts are Arrow's junior subordinated debentures discussed above, and the sole revenues of the Trusts are payments received by them from Arrow with respect to the junior subordinated debentures. The trust preferred securities issued by the Trusts are non-voting. All common voting securities of the Trusts are owned by Arrow. Arrow used the net proceeds from its sale of junior subordinated debentures to the Trusts, facilitated by the Trusts' sale of their trust preferred securities to the purchasers thereof, for general corporate purposes. The trust preferred securities and underlying junior subordinated debentures, with associated expense that is tax deductible, qualify as Tier I capital under regulatory definitions.

Arrow's primary source of funds to pay interest on the debentures that are held by the Trusts are current dividends received by Arrow from its subsidiary banks. Accordingly, Arrow's ability to make payments on the debentures, and the ability of the Trusts to make payments on their trust preferred securities, are dependent upon the continuing ability of Arrow's subsidiary banks to pay dividends to Arrow. Since the trust preferred securities issued by the subsidiary trusts and the underlying junior subordinated debentures issued by Arrow at March 31, 2024, December 31, 2023, and March 31, 2023 are classified as debt for financial statement purposes, the expense associated with these securities is recorded as interest expense in the Consolidated Statements of Income for the three years.

Schedule of Guaranteed Preferred Beneficial Interests in Corporation's Junior Subordinated Debentures


	March 31, 2024			December 31, 2023			March 31, 2023
ACST II
Balance	$	10,000		$	10,000		$	10,000
Period End:
Variable Interest Rate	8.71		%	8.74		%	8.31		%
Fixed Interest Rate resulting from cash flow hedge agreement	4.00		%	4.00		%	4.00		%

ACST III
Balance	$	10,000		$	10,000		$	10,000
Period End:
Variable Interest Rate	7.56		%	7.59		%	7.16		%
Fixed Interest Rate resulting from cash flow hedge agreement	2.86		%	2.86		%	2.86		%

Note 7. COMMITMENTS AND CONTINGENCIES (In Thousands)

The following table presents the notional amount and fair value of Arrow's off-balance sheet commitments to extend credit and commitments under standby letters of credit as of March 31, 2024, December 31, 2023 and March 31, 2023:


Commitments to Extend Credit and Letters of Credit
	March 31, 2024		December 31, 2023		March 31, 2023
Notional Amount:
Commitments to Extend Credit	$	443,960	$	444,256	$	478,253
Standby Letters of Credit	3,401		3,824		3,424
Fair Value:
Commitments to Extend Credit	$	—	$	—	$	—
Standby Letters of Credit	2		—		6

Arrow is party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit. Commitments to extend credit include home equity lines of credit, commitments for residential and commercial construction loans and other personal and commercial lines of credit. Those instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the consolidated balance sheets. The contract or notional amounts of those instruments reflect the extent of the involvement Arrow has in particular classes of financial instruments.

Arrow's exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby letters of credit is represented by the contractual notional amount of those instruments. Arrow uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments.

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are not expected to be fully drawn upon, the total commitment amounts do not necessarily represent future cash requirements. Arrow evaluates each customer's creditworthiness on a case-by-case basis. Home equity lines of credit are secured by residential real estate. Construction lines of credit are secured by underlying real estate. For other lines of credit, the amount of collateral obtained, if deemed necessary by Arrow upon extension of credit, is based on management's credit evaluation of the counterparty. Collateral held varies, but may include accounts receivable, inventory, property, plant and equipment, and income-producing commercial properties. Most of the commitments are variable rate instruments.

Arrow does not issue any guarantees that would require liability-recognition or disclosure, other than its standby letters of credit. Arrow has issued conditional commitments in the form of standby letters of credit to guarantee payment on behalf of a customer and guarantee the performance of a customer to a third party. Standby letters of credit generally arise in connection with commercial lending relationships. The credit risk involved in issuing these instruments is essentially the same as that involved in extending loans to customers. Contingent obligations under standby letters of credit at March 31, 2024, December 31, 2023 and March 31, 2023 represent the maximum potential future payments Arrow could be required to make. Typically, these instruments have terms of 12 months or less and expire unused; therefore, the total amounts do not necessarily represent future cash requirements. Each customer is evaluated individually for creditworthiness under the same underwriting standards used for commitments to extend credit and on-balance sheet instruments. Arrow's policies governing loan collateral apply to standby letters of credit at the time of credit extension. Loan-to-value ratios will generally range from 50% for movable assets, such as inventory, to 100% for liquid assets, such as bank CD's. Fees for standby letters of credit range from 1% to 3% of the notional amount. Fees are collected upfront and amortized over the life of the commitment. The carrying amount and fair value of Arrow's standby letters of credit at March 31, 2024, December 31, 2023 and March 31, 2023, were insignificant. The fair value of standby letters of credit is based on the fees currently charged for similar agreements or the cost to terminate the arrangement with the counterparties.

The fair value of commitments to extend credit is determined by estimating the fees to enter into similar agreements, taking into account the remaining terms and present creditworthiness of the counterparties, and for fixed rate loan commitments, the difference between the current and committed interest rates. Arrow provides several types of commercial lines of credit and standby letters of credit to its commercial customers. The pricing of these services is not isolated as Arrow considers the customer's complete deposit and borrowing relationship in pricing individual products and services. The commitments to extend credit also include commitments under home equity lines of credit, for which Arrow charges no fee. The carrying value and fair value of commitments to extend credit are not material and Arrow does not expect to incur any material loss as a result of these commitments.

Except as noted below, Arrow, including its subsidiary banks, is not currently the subject of any material pending legal proceedings, other than ordinary routine litigation occurring in the normal course of their business. On an ongoing basis, Arrow is often the subject of, or a party to, various legal claims by other parties against Arrow, by Arrow against other parties, or involving Arrow, which arise in the normal course of business. Except as noted below, the various pending legal claims against Arrow will not, in the opinion of management based upon consultation with counsel, result in any material liability. Legal expenses incurred in connection with loss contingencies are expensed as incurred.

As previously disclosed in certian of the Company's filings with the SEC, on June 23, 2023, Robert C. Ashe filed a putative class action complaint (the "Ashe Lawsuit") against the Company in the United States District Court for the Northern District of New York. In addition to the Company, the complaint names as defendants Thomas J. Murphy, the Company’s former CEO and from September 30, 2022 to February 20, 2023, its interim CFO, Edward J. Campanella, the Company’s former CFO, and Penko Ivanov, the Company’s current CFO (“Individual Defendants” and, together with the Company, the "Defendants"). The complaint alleges that the Defendants made materially false and misleading statements regarding the Company’s business, operations and compliance policies in the

Company’s public filings between March 12, 2022 and May 12, 2023. The complaint further alleges that the Individual Defendants are liable for these materially false and misleading statements as "controlling persons" of the Company. Based on these allegations, the complaint brings two claims for violations of Section 10(b) of the Exchange Act and Rule 10b-5 promulgated thereunder and of Section 20(a) of the Exchange Act. Mr. Ashe, on behalf of a purported class of shareholders, seeks compensatory damages as well as recovery of the costs and fees associated with the litigation. On December 5, 2023, plaintiff Ashe filed an amended complaint that changed the putative class period to the period from August 5, 2022 through May 12, 2023, but challenged substantially the same statements on the same basis. On February 9, 2024, the Company moved to dismiss the action in its entirety. On April 22, 2024, the parties reached an agreement in principle to settle the matter, subject to final documentation and court approval. Management believes that the terms of the proposed settlement will not have a material adverse impact on the Company's financial results. In the event that the parties are not able to finalize a settlement, the Company intends to continue to vigorously defend against the claims asserted in the Ashe Lawsuit.

On December 12, 2023 the Company become aware that Stephen Bull filed a complaint (the "Shareholder Derivative Complaint") on behalf of Arrow against the three individual defendants in the Ashe Lawsuit as well as against all members of Arrow’s board of directors during the class period in Ashe. The Company is named solely as a nominal defendant in the action and would be the beneficiary of any recovery. The Shareholder Derivative Complaint alleges breaches of fiduciary duty (i) by the Ashe individual defendants based on substantially the same allegedly misleading statements pleaded in the Ashe complaint; and (ii) the director defendants by failing adequately to oversee the individual defendants and maintain internal and disclosure controls. Plaintiffs seek (i) unspecified damages (which would be payable to the Company) for costs incurred as a result of the alleged misstatements, including costs of investigation, remediation, and litigation, (ii) repayment of the director defendants’ compensation on an unjust enrichment theory, and (iii) an order directing the Company to take all necessary actions to reform and improve its corporate governance, and (iv) the recovery of costs and fees associated with the litigation. The Shareholder Derivative Complaint also asserts various federal securities claims based on the same alleged misrepresentations as set forth in the Ashe Lawsuit. On March 5, 2024, the parties filed a stipulation under which the defendants accepted service and the case will be stayed pending disposition of the motion to dismiss filed in the Ashe Lawsuit.

The Company intends to continue to vigorously defend itself against the Shareholder Derivative Complaint.

Note 8. COMPREHENSIVE INCOME (In Thousands)

The following table presents the components of other comprehensive income for the three month periods ended March 31, 2024 and 2023:


Schedule of Comprehensive Income
	Three Months Ended March 31
			Tax
	Before-Tax		Benefit		Net-of-Tax
	Amount		(Expense)		Amount
2024
Net Unrealized Securities Holding Loss on Securities Available-for-Sale Arising During the Period	$	(2,062)	$	532	$	(1,530)
Net Unrealized Gain on Cash Flow Swap	3,221		(831)		2,390



Reclassification of Net Unrealized Gain on Cash Flow Hedge Agreements to Interest Expense	(213)		55		(158)
Amortization of Net Retirement Plan Actuarial Gain	(66)		16		(50)
Amortization of Net Retirement Plan Prior Service Cost	69		(19)		50
Other Comprehensive Income	$	949	$	(247)	$	702

2023
Net Unrealized Securities Holding Gain on Securities Available-for-Sale Arising During the Period	$	8,219	$	(2,120)	$	6,099
Net Unrealized Loss on Cash Flow Swap	(800)		207		(593)
Reclassification of Net Unrealized Loss on Cash Flow Hedge Agreements to Interest Expense	198		(51)		147


Amortization of Net Retirement Plan Actuarial Gain	(25)		7		(18)
Amortization of Net Retirement Plan Prior Service Cost	52		(15)		37
Other Comprehensive Income	$	7,644	$	(1,972)	$	5,672

The following table presents the changes in accumulated other comprehensive (loss) income by component:


Changes in Accumulated Other Comprehensive (Loss) Income by Component (1)

	Unrealized Loss on Available-for-Sale Securities		Unrealized Gain on Cash Flow Swap		Defined Benefit Plan Items				Total
					Net Actuarial Loss		Net Prior Service Cost


For the quarter-to-date periods ended:
December 31, 2023	$	(31,648)	$	1,711	$	(2,839)	$	(640)	$	(33,416)
Other comprehensive income or loss before reclassifications	(1,530)		2,390		—		—		860
Amounts reclassified from accumulated other comprehensive income or loss	—		(158)		(50)		50		(158)
Net current-period other comprehensive income or loss	(1,530)		2,232		(50)		50		702

March 31, 2024	$	(33,178)	$	3,943	$	(2,889)	$	(590)	$	(32,714)


December 31, 2022	$	(48,841)	$	4,054	$	(4,467)	$	(401)	$	(49,655)
Other comprehensive income or loss before reclassifications	6,099		(593)		—		—		5,506
Amounts reclassified from accumulated other comprehensive income or loss	—		147		(18)		37		166
Net current-period other comprehensive income or loss	6,099		(446)		(18)		37		5,672

March 31, 2023	$	(42,742)	$	3,608	$	(4,485)	$	(364)	$	(43,983)

(1) All amounts are net of tax.

The following table presents the reclassifications out of accumulated other comprehensive income or loss:


Reclassifications Out of Accumulated Other Comprehensive Income or Loss

Details about Accumulated Other Comprehensive Income or Loss Components	Amounts Reclassified from Accumulated Other Comprehensive Income or Loss			Affected Line Item in the Statement Where Net Income Is Presented

For the quarter-to-date periods ended:

March 31, 2024





Reclassification of Net Unrealized Gain on Cash Flow Hedge Agreements to Interest Expense	$	213		Interest expense
Amortization of defined benefit pension items:
Prior-service costs	(69)		(1)	Salaries and Employee Benefits
Actuarial gain	66		(1)	Salaries and Employee Benefits
	210			Total before Tax
	(52)			Provision for Income Taxes
Total reclassifications for the period	$	158		Net of Tax



March 31, 2023
Reclassification of Net Unrealized Loss on Cash Flow Hedge Agreements to Interest Expense	$	(198)		Interest expense
Amortization of defined benefit pension items:
Prior-service costs	$	(52)	(1)	Salaries and Employee Benefits
Actuarial gain	25		(1)	Salaries and Employee Benefits
	(225)			Total before Tax
	59			Provision for Income Taxes
Total reclassifications for the period	$	(166)		Net of Tax



































(1) These accumulated other comprehensive gain or loss components are included in the computation of net periodic pension cost.

Note 9. STOCK-BASED COMPENSATION (Dollars In Thousands, Except Share and Per Share Amounts)

Arrow has established three stock-based compensation plans: a Long Term Incentive Plan, an Employee Stock Purchase Plan (ESPP) and an Employee Stock Ownership Plan (ESOP). All share and per share data have been adjusted for the September 26, 2023 3% stock dividend.

Long Term Incentive Plan

The Long Term Incentive Plan provides for the grant of incentive stock options, non-qualified stock options, restricted stock, restricted stock units, performance units and performance shares. The Compensation Committee of the Board of Directors administers the Long Term Incentive Plan.

Stock Options - Options may be granted at a price no less than the greater of the par value or fair market value of such shares on the date on which such option is granted, and generally expire ten years from the date of grant. The options usually vest over a four-year period.

The following table summarizes information about stock option activity for the year to date period ended March 31, 2024:


	Shares	Weighted Average Exercise Price

Outstanding at January 1, 2024	305,308	$	28.96

Exercised	(6,060)	18.97
Forfeited	(7,979)	25.81
Outstanding at March 31, 2024	291,269	29.25

Vested at Period-End	230,561	28.65
Expected to Vest	60,708	31.54

The following table presents information on the amounts expensed related to stock options for the three month periods ended March 31, 2024 and 2023:


	For the Three Months Ended March 31,
	2024		2023
Amount expensed	$	78	$	85

Restricted Stock Units - Historically, the Company has granted restricted stock units which give the recipient the right to receive shares of Company stock upon vesting. The fair value of each restricted stock unit is the market value of Company stock on the date of grant. 100% of the restricted stock unit awards vest three years from the grant date, unless vested or forfeited prior to vesting in accordance with the terms of the award. Once vested, the restricted stock units are no longer forfeitable. Vested units settle upon retirement, as defined in the Arrow retirement plan, of the recipient. Unvested restricted stock unit awards will generally be forfeited if the recipient ceases to be employed by the Company, with limited exceptions.

There was no RSU activity for the three month period ended March 31, 2024 and there were no non-vested restricted stock units at any time during the three month period ended March 31, 2024. The following table summarizes information about restricted stock unit activity for the three month period ended March 31, 2023:


	Restricted Stock Units	Weighted Average Grant Date Fair Value






Non-vested at January 1, 2023	13,925	30.47
Granted	5,164	31.47
Vested	(4,307)	31.35

Non-vested at March 31, 2023	14,782	30.56

The following table presents information on the amounts expensed related to restricted stock units for the periods ended March 31, 2024 and 2023:


	For the Three Months Ended March 31,
	2024		2023
Amount expensed	$	—	$	37

Employee Stock Purchase Plan

In April 2023, Arrow suspended the operation of the prior ESPP (the "Prior ESPP") as a result of the now resolved delay in filing the Annual Report on Form 10-K for the year ended December 21, 2022 (the "2022 Form 10-K") and the Quarterly Report on Form 10-Q for the quarter ended March 31, 2023 (the "2023 Q1 Form 10-Q") and the related effects under applicable securities laws. In October 2023, the Board of Directors approved the adoption of a new ESPP intended to satisfy the requirements of Section 423 of the Internal Revenue Code, which was effective January 1, 2024 (the "Qualified ESPP"). Under the Qualified ESPP, the amount of the discount is 10%. Under the Prior ESPP, participating employees purchased Arrow's common stock at a 5% discount below market price. Under current accounting guidance, a stock purchase plan with a discount of 5% or less is not considered a compensatory plan. The Qualified ESPP is considered a compensatory plan. The Qualified ESPP will be submitted to the Arrow shareholders for approval at the next annual meeting of shareholders on June 5, 2024. In the event the shareholders of the Company do not approve the Qualified ESPP at the annual meeting: (i) the Qualified ESPP shall immediately terminate; (ii) all amounts contributed by each participant in the Qualified ESPP which have not been used to purchase shares of the Company's common stock will be returned to such participant as soon as practicable; and (iii) purchases under the Qualified ESPP made from the January 1, 2024 inception date through the date of termination of the Qualified ESPP shall not be treated as purchased pursuant to an employee stock purchase plan that satisfies Section 423 of the Code and participants would not qualify for favorable tax treatment of such purchases.

Employee Stock Ownership Plan

Arrow maintains an ESOP, pursuant to which substantially all employees of Arrow and its subsidiaries are eligible to participate upon satisfaction of applicable service requirements. The Company may make, and historically has made, an cash contribution to the ESOP each year.

Note 10. RETIREMENT BENEFIT PLANS (Dollars in Thousands)

Arrow sponsors qualified and non-qualified defined benefit pension plans and other postretirement benefit plans for its employees. Arrow maintains a non-contributory pension plan, which covers substantially all employees. Effective December 1, 2002, all active participants in the qualified defined benefit pension plan were given a one-time irrevocable election to continue participating in the traditional plan design, for which benefits were based on years of service and the participant’s final compensation (as defined), or to begin participating in the new cash balance plan design. All employees who first participate in the plan after December 1, 2002 automatically participate in the cash balance plan design. The interest credits under the cash balance plan are based on the 30-year U.S. Treasury rate in effect for November of the prior year with a minimum interest credit of 3%. The service credits under the cash balance plan are equal to 6.0% of eligible salaries for employees who become participants on or after January 1, 2003. For employees in the plan prior to January 1, 2003, the service credits are scaled based on the age of the participant, and range from 6.0% to 12.0%. The funding policy is to contribute up to the maximum amount that can be deducted for federal income tax purposes and to make all payments required under The Employee Retirement Income Security Act (ERISA). Arrow also maintains a supplemental non-qualified unfunded retirement plan to provide eligible employees of Arrow and its subsidiaries with benefits in excess of qualified plan limits imposed by federal tax law.

Arrow has multiple non-pension postretirement benefit plans. The health care, dental and life insurance plans are contributory, with participants’ contributions adjusted annually. Arrow’s policy is to fund the cost of postretirement benefits based on the current cost of the underlying policies. However, the health care plan provision allows for grandfathered participants to receive automatic increases of Company contributions each year based on the increase in inflation, limited to a maximum of 5%.

As of December 31, 2023, Arrow uses the sex-distinct Amount-Weighted Pri-2012 Mortality Tables for employees, healthy retirees and contingent survivors, with mortality improvements projected using Scale MP-2021 on a generational basis for the Pension Plan and the sex-distinct Amount-Weighted White Collar Pri-2012 Mortality Tables for employees, healthy retirees and contingent survivors, with mortality improvements projected using Scale MP-2021 on a generational basis for the Select Executive Retirement Plan (the "SERP").

Segment interest rates of 5.50%, 5.76%, 5.83% were used in determining the present value of a lump sum payment/annuitizing cash balance accounts as of December 31, 2023.

Effective January 1, 2021, GFNB amended the Arrow Financial Corporation Employees' Pension Plan (the "Plan"). The Plan change was adopted January 1, 2021 and the amendment was valued as of December 31, 2020. The Plan amendment was as follows:

Effective January 1, 2021, the benefit payable to or on behalf of each participant:

• whose employment with the Employer (or any predecessor Employer, except as noted below) terminated on or before
January 1, 2016;

• who satisfied the requirements for early, normal, or late retirement as of such termination;

• who never participated in the United Vermont Bancorporation Plan; and

• who is, or whose beneficiary is, receiving monthly benefit payments from the Plan as of January 1, 2021 (including a
participant or beneficiary who shall commence receiving benefits from the Plan as of January 1, 2021), shall be increased
by 3%.

The foregoing increase was applied to the monthly benefit actually payable to the participant, or to the participant's beneficiary, as of January 1, 2021, determined after all applicable adjustments, regardless of whether such benefit had been determined under the Company's plan or the plan of a predecessor employer that had been merged into the Plan.

The plan amendment caused a $351,638 increase in the projected benefit obligation, creating a positive service cost which will be amortized over 9.70 years (the average expected future service of active plan participants.)

Effective January 1, 2021, GFNB amended the Arrow Financial Corporation Employees' SERP. The plan change was adopted January 1, 2021 and the amendment was valued as of December 31, 2020. The plan amendment provides a special adjustment to the monthly benefit payment for certain retirees. The plan amendment caused a $122,797 increase in the projected benefit obligation, creating a positive prior service cost which will be amortized over 12.5 years.

Settlement accounting is required when lump sum payments during a fiscal year exceed that fiscal year's Service Cost plus Interest Cost components of the Net Periodic Pension Cost. For 2022, the sum of the Service Cost and Interest Cost was $3.3 million and the 2022 total lump sum payments exceeded that amount. The Plan therefore recognized in the 2022 Net Periodic Pension Cost a portion of the Unamortized Net (Gain)/Loss equal to the ratio of the projected benefit obligation for the participants that received a lump sum to the total projected benefit obligation. As of December 31, 2022, the Unamortized Net Loss prior to reflecting settlement accounting was $7.2 million. The ratio of the projected benefit obligation for participants that received a lump sum to the total projected benefit obligation was 8.06%. The effect of the settlement that was recognized in the 2022 Net Periodic Pension Cost was $577 thousand, which was fully reflected in the 2022 Net Periodic Cost. Settlement accounting was not required for the the year ended December 31, 2023 or for the three-month period ended March 31, 2024.

The following tables provide the components of net periodic benefit costs for the three-month periods ended March 31, 2024 and 2023:


	Employees'		Select Executive		Postretirement
	Pension		Retirement		Benefit
	Plan		Plan		Plans
Net Periodic Benefit Cost
For the Three Months Ended March 31, 2024:
Service Cost 1	$	466	$	17	$	15
Interest Cost 2	525		158		81
Expected Return on Plan Assets 2	(932)		—		—
Amortization of Prior Service Cost 2	33		10		26
Amortization of Net Loss (Gain) 2	—		21		(87)
Net Periodic Cost	$	92	$	206	$	35

Plan Contributions During the Period	$	—	$	127	$	27

For the Three Months Ended March 31, 2023:
Service Cost 1	$	413	$	163	$	18
Interest Cost 2	530		62		87
Expected Return on Plan Assets 2	(857)		—		—
Amortization of Prior Service Cost 2	16		10		26
Amortization of Net Loss (Gain) 2	36		18		(79)
Net Periodic Cost	$	138	$	253	$	52

Plan Contributions During the Period	$	—	$	116	$	27












Estimated Future Contributions in the Current Fiscal Year	$	—	$	382	$	82

Footnotes:

1. Included in Salaries and Employee Benefits on the Consolidated Statements of Income

2. Included in Other Operating Expense on the Consolidated Statements of Income

A contribution to the qualified pension plan was not required during the period ended March 31, 2024 and currently, additional contributions in 2024 are not expected. Arrow makes contributions to its other post-retirement benefit plans in an amount equal to benefit payments for the year.

Note 11. EARNINGS PER COMMON SHARE (In Thousands, Except Per Share Amounts)

The following table presents a reconciliation of the numerator and denominator used in the calculation of basic and diluted earnings per common share (EPS) for periods ended March 31, 2024 and 2023. When applicable, share and per share amounts have been adjusted for the September 26, 2023, 3% stock dividend.


Earnings Per Share
	Three Months Ended
	March 31, 2024		March 31, 2023
Earnings Per Share - Basic:
Net Income	$	7,660	$	8,562
Weighted Average Shares - Basic	16,865		17,048
Earnings Per Share - Basic	$	0.45	$	0.50

Earnings Per Share - Diluted:
Net Income	$	7,660	$	8,562
Weighted Average Shares - Basic	16,865		17,048
Dilutive Average Shares Attributable to Stock Options	2		12
Weighted Average Shares - Diluted	16,867		17,060
Earnings Per Share - Diluted	$	0.45	$	0.50

Note 12. FAIR VALUES (Dollars In Thousands)

Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) Subtopic 820-10 defines fair value, establishes a framework for measuring fair value in GAAP and requires certain disclosures about fair value measurements. There are no nonfinancial assets or liabilities measured at fair value on a recurring basis. The only assets or liabilities that Arrow measured at fair value on a recurring basis at March 31, 2024, December 31, 2023 and March 31, 2023 were AFS securities, equity securities and derivatives. Arrow held no securities or liabilities for trading on such dates.

The table below presents the financial instrument's fair value and the amounts within the fair value hierarchy based on the lowest level of input that is significant to the fair value measurement:


Fair Value of Assets and Liabilities Measured on a Recurring and Nonrecurring Basis
			Fair Value Measurements at Reporting Date Using:
	Fair Value		Quoted Prices In Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)

Fair Value of Assets and Liabilities Measured on a Recurring Basis:
March 31, 2024
Assets:
Securities Available-for Sale:
U.S. Treasuries	$	74,152	$	—	$	74,152	$	—
U.S. Government & Agency Obligations	152,749		—		152,749		$	—
State and Municipal Obligations	280		—		280		—
Mortgage-Backed Securities	257,717		—		257,717		—
Corporate and Other Debt Securities	935		—		935		—
Total Securities Available-for-Sale	485,833		—		485,833		—
Equity Securities	1,942		—		1,942		—
Total Securities Measured on a Recurring Basis	487,775		—		487,775		—
Derivative Assets	12,747		—		12,747		—
Total Measured on a Recurring Basis	$	500,522	$	—	$	500,522	$	—
Liabilities:
Derivative Liabilities	7,317		—		7,317		—
Total Measured on a Recurring Basis	$	7,317	$	—	$	7,317	$	—
December 31, 2023
Assets:
Securities Available-for Sale:
U.S. Treasuries	$	74,004	$	—	$	74,004	$	—
U.S. Government & Agency Obligations	$	152,925	$	—	$	152,925	$	—
State and Municipal Obligations	280		—		280		—
Mortgage-Backed Securities	269,760		—		269,760		—
Corporate and Other Debt Securities	800		—		800		—


Fair Value of Assets and Liabilities Measured on a Recurring and Nonrecurring Basis
			Fair Value Measurements at Reporting Date Using:
	Fair Value		Quoted Prices In Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Total Securities Available-for-Sale	497,769		—		497,769		—
Equity Securities	1,925		—		1,925		—
Total Securities Measured on a Recurring Basis	499,694		—		499,694		—
Derivative Assets	12,057		—		12,057		—
Total Measured on a Recurring Basis	$	511,751	$	—	$	511,751	$	—
Liabilities:
Derivative Liabilities	$	9,598	—		$	9,598	—
Total Measured on a Recurring Basis	$	9,598	$	—	$	9,598	$	—
March 31, 2023
Assets:
Securities Available-for Sale:
U.S. Government & Agency Obligations	$	177,585	$	—	$	177,585	$	—
State and Municipal Obligations	320		—		320		—
Mortgage-Backed Securities	386,988		—		386,988		—
Corporate and Other Debt Securities	800		—		800		—
Total Securities Available-for-Sale	565,693		—		565,693		—
Equity Securities	2,070		—		2,070		—
Total Securities Measured on a Recurring Basis	567,763		—		567,763		—
Derivative Assets	6,206		—		6,206		—
Total Measured on a Recurring Basis	$	573,969	$	—	$	573,969	$	—
Liabilities:
Derivative Liabilities	6,206		—		6,206		—
Total Measured on a Recurring Basis	$	6,206	$	—	$	6,206	$	—


	Fair Value		Quoted Prices In Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Gains (Losses) Recognized in Earnings
Fair Value of Assets and Liabilities Measured on a Nonrecurring Basis:
March 31, 2024
Collateral Dependent Evaluated Loans	$	—	$	—	$	—	$	—
Other Real Estate Owned and Repossessed Assets, Net	312		—		—		312		—
December 31, 2023
Collateral Dependent Impaired Loans	$	—	$	—	$	—	$	—
Other Real Estate Owned and Repossessed Assets, Net	312		—		—		312		—
March 31, 2023
Collateral Dependent Impaired Loans	$	—	$	—	$	—	$	—
Other Real Estate Owned and Repossessed Assets, Net	144		—		—		144		—

The fair value of financial instruments is determined under the following hierarchy:

•Level 1 - Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities;

•Level 2 - Quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, or inputs that are observable, either directly or indirectly, for substantially the full term of the asset or liability; and,

•Level 3 - Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (i.e., supported by little or no market activity).

Fair Value Methodology for Assets and Liabilities Measured on a Recurring Basis

The fair value of Level 1 AFS securities are based on unadjusted, quoted market prices from exchanges in active markets. The fair value of Level 2 AFS securities are based on an independent bond and equity pricing service for identical assets or significantly similar securities and an independent equity pricing service for equity securities not actively traded. The pricing services use a variety of techniques to arrive at fair value including market maker bids, quotes and pricing models. Inputs to the pricing models include recent trades, benchmark interest rates, spreads and actual and projected cash flows. The fair value of Level 2 equities are based on the last observable price in open markets. The fair value of Level 2 equities are based on the last observable price in open markets. The fair value of Level 2 derivatives is determined using inputs that are observable in the market place obtained from third parties including yield curves, publicly available volatilities, and floating indexes.

Fair Value Methodology for Assets and Liabilities Measured on a Nonrecurring Basis

The fair value of collateral dependent evaluated loans and other real estate owned was based on third-party appraisals less estimated cost to sell. The appraisals may be adjusted by management for qualitative factors such as economic conditions and estimated liquidation expenses. Other assets which might have been included in this table include mortgage servicing rights, goodwill and other intangible assets. Arrow evaluates each of these assets for impairment at least annually, with no impairment recognized for these assets at March 31, 2024, December 31, 2023 and March 31, 2023.

Fair Value by Balance Sheet Grouping

The following table presents a summary of the carrying amount, the fair value (exit price) or an amount approximating fair value and the fair value hierarchy of Arrow’s financial instruments:


Schedule of Fair Values by Balance Sheet Grouping
					Fair Value Hierarchy
	Carrying Value		Fair Value		Level 1		Level 2		Level 3
March 31, 2024
Cash and Cash Equivalents	$	282,465	$	282,465	$	282,465	$	—	$	—
Securities Available-for-Sale	485,833		485,833		—		485,833		—
Securities Held-to-Maturity	128,051		124,861		—		124,861		—
Equity Securities	1,942		1,942		—		1,942		—
Federal Home Loan Bank and Federal Reserve Bank Stock	4,208		4,208		—		4,208		—
Net Loans	3,227,197		2,978,789		—		—		2,978,789
Accrued Interest Receivable	12,754		12,754		—		12,754		—
Derivative Assets	12,747		12,747				12,747
Deposits	3,779,021		3,774,378		—		3,774,378		—


Borrowings	106,500		105,941		—		105,941		—
Junior Subordinated Obligations Issued to Unconsolidated Subsidiary Trusts	20,000		20,000		—		20,000		—
Accrued Interest Payable	7,996		7,996		—		7,996		—
Derivative Liabilities	7,317		7,317		—		7,317		—


Schedule of Fair Values by Balance Sheet Grouping
					Fair Value Hierarchy
	Carrying Value		Fair Value		Level 1		Level 2		Level 3

December 31, 2023
Cash and Cash Equivalents	$	142,536	$	142,536	$	142,536	$	—	$	—
Securities Available-for-Sale	497,769		497,769		—		497,769		—
Securities Held-to-Maturity	131,395		128,837		—		128,837		—
Equity Securities	1,925		1,925				1,925
Federal Home Loan Bank and Federal Reserve Bank Stock	5,049		5,049		—		5,049		—
Net Loans	3,181,643		2,940,318		—		—		2,940,318
Accrued Interest Receivable	11,076		11,076		—		11,076		—
Derivative Assets	12,057		12,057		—		12,057		—
Deposits	3,687,566		3,683,122		—		3,683,122		—

Borrowings	26,500		26,189		—		26,189		—

Junior Subordinated Obligations Issued to Unconsolidated Subsidiary Trusts	20,000		20,000		—		20,000		—
Accrued Interest Payable	6,289		6,289		—		6,289		—
Derivative Liabilities	9,598		9,598		—		9,598		—

March 31, 2023
Cash and Cash Equivalents	$	203,472	$	203,472	$	203,472	$	—	$	—
Securities Available-for-Sale	565,693		565,693		—		565,693		—
Securities Held-to-Maturity	167,347		164,439		—		164,439		—
Equity Securities	2,070		2,070		—		2,070
Federal Home Loan Bank and Federal Reserve Bank Stock	10,027		10,027		—		10,027		—
Net Loans	2,974,568		2,705,312		—		—		2,705,312
Accrued Interest Receivable	9,857		9,857		—		9,857		—
Derivative Assets	6,206		6,206		—		6,206		—
Deposits	3,546,349		3,540,854		—		3,540,854		—


Borrowings	107,800		107,830		—		107,830		—
Junior Subordinated Obligations Issued to Unconsolidated Subsidiary Trusts	20,000		20,000		—		20,000		—
Accrued Interest Payable	1,170		1,170		—		1,170		—
Derivative Liabilities	6,206		6,206		—		6,206		—

Note 13. LEASES (Dollars In Thousands)

Arrow is a lessee in its leases, which are mainly for financial services locations in addition to leases for corporate vehicles. These leases generally require Arrow to pay third-party expenses on behalf of the Lessor, which are referred to as variable payments. Under some leases, Arrow pays the variable payments to the lessor, and in other leases, Arrow pays the variable payments directly to the applicable third party. None of Arrow's current leases include any residual value guarantees or any subleases, and there are no significant rights and obligations of Arrow for leases that have not commenced as of the reporting date.

Arrow leases two of its branch offices, at market rates, from Stewart’s Shops Corp. Mr. Gary C. Dake, President of Stewart’s Shops Corp., serves as a Director on the Board of Directors of Arrow and its two subsidiary banks.

The following includes quantitative data related to Arrow's leases as of and for the three months ended March 31, 2024 and March 31, 2023:


		Three Months Ended
Finance Lease Amounts:	Classification	March 31, 2024			March 31, 2023
Right-of-Use Assets	Premises and Equipment, Net	$	4,416		$	4,593
Lease Liabilities	Finance Leases	5,053			5,106

Operating Lease Amounts:
Right-of-Use Assets	Other Assets	$	4,790		$	5,388
Lease Liabilities	Other Liabilities	4,997			5,584

Other Information:

Cash Paid For Amounts Included In The Measurement Of Lease Liabilities:
Operating Outgoing Cash Flows From Finance Leases		$	48		$	49
Operating Outgoing Cash Flows From Operating Leases		155			257
Financing Outgoing Cash Flows From Finance Leases		13			13
Right-of-Use Assets Obtained In Exchange For New Finance Lease Liabilities		—			—
Right-of-Use Assets Obtained In Exchange For New Operating Lease Liabilities		—			19
Weighted-average Remaining Lease Term - Finance Leases (Yrs.)		26.04			27.00
Weighted-average Remaining Lease Term - Operating Leases (Yrs.)		11.06			11.45
Weighted-average Discount Rate—Finance Leases		3.75		%	3.75		%
Weighted-average Discount Rate—Operating Leases		3.10		%	2.97		%


Lease cost information for Arrow's leases is as follows:
	Three Months Ended
	March 31, 2024		March 31, 2023
Lease Cost:
Finance Lease Cost:
Reduction of Right-of-Use Assets	$	44	$	44
Interest on Lease Liabilities	48		49
Operating Lease Cost	195		298
Short-term Lease Cost	10		14
Variable Lease Cost	75		73
Total Lease Cost	$	372	$	478


Future Lease Payments at March 31, 2024 are as follows:
	Operating Leases		Financing Leases
Twelve Months Ended:
3/31/2025	$	720	$	254
3/31/2026	671		264
3/31/2027	607		268
3/31/2028	537		268
3/31/2029	489		268
Thereafter	2,967		6,929
Total Undiscounted Cash Flows	$	5,991	$	8,251
Less: Net Present Value Adjustment	994		3,198
Lease Liability	$	4,997	$	5,053

Note 14. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES (In Thousands)

Arrow is exposed to certain risks arising from both its business operations and economic conditions. Arrow principally manages its exposures to a wide variety of business and operational risks through management of its core business activities. Arrow manages economic risks, including interest rate, primarily by managing the amount, sources and duration of its assets and liabilities and through the use of derivative instruments. Specifically, Arrow enters into derivative financial instruments to manage exposures that arise from business activities that result in the receipt or payment of future known and uncertain cash amounts, the value of which are determined by interest rates. Arrow's derivative financial instruments are used to manage differences in the amount, timing and duration of known or expected cash receipts and its known or expected cash payments principally related to certain fixed rate borrowings. Arrow also has interest rate derivatives that result from a service provided to certain qualifying customers and, therefore, are not used to manage interest rate risk in Arrow's assets or liabilities. Arrow's goal is to have a matched book with respect to its derivative instruments in order to minimize its net risk exposure resulting from such transactions.

Derivatives Not Designated as Hedging Instruments

Arrow enters into interest rate swap agreements with its commercial customers to provide them with a long-term fixed rate, while simultaneously entering into offsetting interest rate swap agreements with a counterparty to swap the fixed rate to a variable rate to manage interest rate exposure.

These interest rate swap agreements are not designated as a hedge for accounting purposes. As the interest rate swap agreements have substantially equivalent and offsetting terms, they do not present material exposure to Arrow's consolidated statements of income. Arrow records its interest rate swap agreements at fair value and is presented on a gross basis within other assets and other liabilities on the consolidated balance sheets. Changes in the fair value of assets and liabilities arising from these derivatives are included, net, in other income in the consolidated statement of income.

The following table depicts the fair value adjustment recorded related to the notional amount of derivatives, not designated as hedging instruments, outstanding as well as the notional amount of the interest rate swap agreements:


Derivatives Not Designated as Hedging Instruments - Interest Rate Swap Agreements
	March 31, 2024		December 31, 2023		March 31, 2023
Fair value adjustment included in other assets	$	6,111	$	6,208	$	6,206
Fair value adjustment included in other liabilities	6,111		6,208		6,206
Notional amount	107,991		123,197		126,637

Derivatives Designated as Hedging Instruments

Arrow entered into two pay-fixed portfolio layer method ("PLM") fair value swaps, designated as hedging instruments, with a total notional amount of $250 million and $50 million, respectively, in the third quarter of 2023. Arrow is designating the fair value swaps under PLM. Under PLM, the hedged items are designated as hedged layers of a closed portfolio of financial loans that are anticipated to remain outstanding for the designated hedged period. Adjustments will be made to record the swaps at fair value on the Consolidated Balance Sheets, with changes in fair value recognized in interest income. The carrying value of the fair value swaps on the Consolidated Balance Sheets will also be adjusted through interest income, based on changes in fair value attributable to changes in the hedged risk.

The following table depicts the fair value adjustment recorded related to the notional amount of derivatives, designed as hedging instruments, outstanding as well as the notional amount of the interest rate swap agreements:


Derivatives Designated as Hedging Instruments - Fair Value Agreements
	March 31, 2024		December 31, 2023		March 31, 2023
Fair value adjustment included in other assets	$	—	$	—	$	—
Fair value adjustment included in other liabilities	1,109		5,678		—
Notional amount	300,000		300,000		—

The following table summarizes the effect of the fair value hedging relationship recognized on the unaudited interim consolidated statement of income:


Derivatives Designated as Hedging Instruments - Fair Value Agreements
	Three Months Ended		Twelve Months Ended		Three Months Ended
	March 31, 2024		December 31, 2023		March 31, 2023
Hedged Asset	$	1,243	$	5,849	$	—
Fair value derivative designated as hedging instrument	(1,255)		(5,828)		—
Total (loss) gain recognized in the consolidated statements of income with interest and fees on loans	(12)		21		—

The following table represents the carrying value of the PLM hedged assets and the cumulative fair value hedging adjustment included in the carrying value of the hedged asset:


Derivatives Designated as Hedging Instruments - Fair Value Swap Agreements
	March 31, 2024		December 31, 2023		March 31, 2023
Carrying Value of Portfolio Layer Method Hedged Asset	$	301,243	$	305,849	$	—
Cumulative Fair Value Hedging Adjustment	1,243		5,849		—

In the fourth quarter of 2023, Arrow entered into two interest rate swaps, designated as hedging instruments, to add stability to interest expense and to manage its exposure to the variability of the future cash flows attributable to the contractually specified interest rates. The notional amounts were $100 million and $75 million, respectively. Arrow entered into pay-fixed interest rate swaps to convert rolling 90 days brokered deposits.

For derivatives that qualify as cash flow hedges of interest rate risk, the gain or loss on the derivative is recorded in Accumulated Other Comprehensive Income ("AOCI") and subsequently reclassified into interest expense in the same period during which the hedge transaction affects earnings.

The following table indicates the effect of cash flow hedge accounting on AOCI and on the consolidated statement of income.


Derivatives Designated as Hedging Instruments - Cash Flow Hedge Agreements
	March 31, 2024		December 31, 2023		March 31, 2023
Fair value adjustment included in other liabilities	$	97	$	2,710	$	—
Amount of gain (loss) recognized in AOCI	3,068		(2,553)		—
Amount of gain reclassified from AOCI interest expense	455		157		—

In addition, Arrow has entered into interest rate swaps to synthetically fix the variable rate interest payments associated with $20 million in outstanding subordinated trust securities. These agreements are designated as cash flow hedges.

For derivatives that qualify as cash flow hedges of interest rate risk, the gain or loss on the derivative is recorded in AOCI and subsequently reclassified into interest expense in the same period during which the hedge transaction affects earnings. Amounts reported in AOCI related to derivatives will be reclassified to interest expense as interest payments are made on Arrow's Junior Subordinated Obligations Issued to Unconsolidated Subsidiary Trusts borrowings.

The following table indicates the effect of cash flow hedge accounting on AOCI and on the consolidated statement of income.


Derivatives Designated as Hedging Instruments - Cash Flow Hedge Agreements
	Three Months Ended		Twelve Months Ended		Three Months Ended
	March 31, 2024		December 31, 2023		March 31, 2023
Fair value adjustment included in other assets	$	5,393	$	4,998	$	4,843
Amount of gain (loss) recognized in AOCI	$	153	$	(1,355)	$	(800)
Amount of loss reclassified from AOCI to interest expense	(242)		(907)		(198)

Item 2.

ARROW FINANCIAL CORPORATION AND SUBSIDIARIES

MANAGEMENT'S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

March 31, 2024

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 180 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 December 31, 2023 (the most recent such report currently available), and peer group data contained herein has been derived from such report.

THE COMPANY AND ITS SUBSIDIARIES

Arrow is a two-bank holding company headquartered in Glens Falls, New York. The banking subsidiaries are GFNB, whose main office is located in Glens Falls, New York, and SNB, whose main office is located in Saratoga Springs, New York. Active subsidiaries of GFNB 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 provides investment advice to Arrow's proprietary mutual funds) and Arrow Properties, Inc. (a real estate investment trust, or REIT). Arrow also owns directly two subsidiary business trusts, organized in 2003 and 2004, which issued 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, 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, our 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:

•Market conditions could present significant challenges to the U.S. commercial banking industry and its core business of making and servicing loans and 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 steady growth in the loan portfolio and earnings.

•A continued period of high inflation could adversely impact our business and our customers.

•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.

•Any future economic or financial downturn, including any significant correction in the equity markets, may negatively affect the volume of income attributable to, and demand for, fee-based services of banks such as Arrow, including the Company's fiduciary business, which could negatively impact Arrow's financial condition and results of operations.

•Potential complications with the implementation of our new core banking system could adversely impact our business and operations.

•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 or if employee wages increase significantly.

•Arrow is subject to interest rate risk, which could adversely affect profitability.

•Arrow could recognize losses on securities held in our securities portfolio, particularly if interest rates increase or economic and market conditions deteriorate.

•Arrow's allowance for possible credit losses may be insufficient, and an increase in the allowance would reduce earnings.

•Arrow’s financial condition and the results of its operations could be negatively impacted by liquidity management.

•The increasing complexity of Arrow's operations presents varied risks that could affect earnings and financial condition.

•We have identified material weaknesses in our internal control over financial reporting which could, if not remediated, result in a material misstatement of our financial statements.

•The Company relies on the operations of its banking subsidiaries to provide liquidity, which, if limited, could impact Arrow's ability to pay dividends to its shareholders or to repurchase its common stock.

•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.

•Federal banking statutes and regulations could change in the future, which may adversely affect Arrow.

•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 its banking subsidiaries, is subject to the Community Reinvestment Act and fair lending laws, and failure to comply with these laws could lead to material penalties.

•Disruption in the continuity, timing and effectiveness of the recent transition in executive management could adversely affect Arrow's business activities, financial conditional and results of operations.

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 2023 Form 10-K and our other filings with the SEC.

USE OF NON-GAAP FINANCIAL MEASURES

The SEC has adopted Regulation G, which applies to certain 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 Arrow'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, although Arrow is unable to state with certainty that the SEC would so regard them.

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, and from the fact that even a single institution may significantly alter over time the proportion of its own portfolio that is invested in tax-exempt obligations. 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. Arrow 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 be excluded therefrom 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 excluded therefrom for purposes of calculating the efficiency ratio). Arrow 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. Intangible assets include many items, but in Arrow's case, essentially represents goodwill.

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, Arrow may also elect from time to time, in connection with our presentation of various financial measures prepared in accordance with GAAP, such as net income, EPS, return on average assets (ROA), and return on average equity (ROE), to provide as well certain comparative disclosures that adjust these GAAP financial measures, typically by removing them from the impact of certain transactions or other material items of income or expense that are unusual or unlikely to be repeated. Arrow will do so only if it believes that provision of the resulting non-GAAP financial measures may improve the average investor's understanding of our 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 our results of operations with respect to our 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.

Arrow Financial Corporation

Selected Quarterly Information

(Dollars In Thousands, Except Per Share Amounts - Unaudited)


Quarter Ended	3/31/2024			12/31/2023			9/30/2023			6/30/2023			3/31/2023
Net Income	$	7,660		$	7,723		$	7,743		$	6,047		$	8,562
Transactions in Net Income (Net of Tax):

Net Changes in Fair Value of Equity Investments	13			90			52			(133)			(76)


Share and Per Share Data:1
Period End Shares Outstanding	16,710			16,942			17,049			17,050			17,050
Basic Average Shares Outstanding	16,865			17,002			17,050			17,050			17,048
Diluted Average Shares Outstanding	16,867			17,004			17,050			17,050			17,060
Basic Earnings Per Share	$	0.45		$	0.46		$	0.46		$	0.35		$	0.50
Diluted Earnings Per Share	0.45			0.46			0.46			0.35			0.50
Cash Dividend Per Share	0.270			0.270			0.262			0.262			0.262

Selected Quarterly Average Balances:
Interest-bearing Deposits at Banks	$	178,452		$	136,026		$	131,814		$	130,057		$	40,436
Investment Securities	671,105			713,144			745,693			787,175			813,461
Loans	3,235,841			3,170,262			3,096,240			3,036,410			2,991,928
Deposits	3,693,325			3,593,949			3,491,028			3,460,711			3,480,279
Other Borrowed Funds	122,033			149,507			208,527			220,616			100,596
Stockholders’ Equity	379,446			363,753			362,701			365,070			359,556
Total Assets	4,245,484			4,159,313			4,109,995			4,087,653			3,978,851
Return on Average Assets, annualized	0.73		%	0.74		%	0.75		%	0.59		%	0.87		%
Return on Average Equity, annualized	8.12		%	8.42		%	8.47		%	6.64		%	9.66		%
Return on Average Tangible Equity, annualized 2	8.64		%	8.99		%	9.05		%	7.10		%	10.33		%
Average Earning Assets	$	4,085,398		$	4,019,432		$	3,973,747		$	3,953,642		$	3,845,825
Average Paying Liabilities	3,108,093			2,985,717			2,920,518			2,924,743			2,782,299
Interest Income	46,677			44,324			42,117			40,013			36,110
Tax-Equivalent Adjustment 3	176			184			183			196			202
Interest Income, Tax-Equivalent 3	46,853			44,508			42,117			40,013			36,110
Interest Expense	20,222			18,711			16,764			14,241			8,016
Net Interest Income	26,455			25,613			25,353			25,772			28,094
Net Interest Income, Tax-Equivalent 3	26,631			25,797			25,536			25,968			28,296
Net Interest Margin, annualized	2.60		%	2.53		%	2.53		%	2.61		%	2.96		%
Net Interest Margin, Tax Equivalent, annualized 3	2.62		%	2.55		%	2.55		%	2.63		%	2.98		%

Efficiency Ratio Calculation: 4
Non-Interest Expense	$	24,012		$	23,190		$	23,479		$	24,083		$	22,296
Less: Intangible Asset Amortization	41			43			43			44			45
Net Non-Interest Expense	$	23,971		$	23,147		$	23,436		$	24,039		$	22,251
Net Interest Income, Tax-Equivalent 3	$	26,631		$	25,797		$	25,536		$	25,968		$	28,296
Non-Interest Income	7,858			7,484			8,050			6,906			6,677

Less: Net Changes in Fair Value of Equity Invest.	17			122			71			(181)			(104)
Net Gross Income	$	34,472		$	33,159		$	33,515		$	33,055		$	35,077
Efficiency Ratio 4	69.54		%	69.81		%	69.93		%	72.72		%	63.43		%

Period-End Capital Information:
Total Stockholders’ Equity (i.e. Book Value)	$	377,986		$	379,772		$	360,014		$	361,443		$	363,371
Book Value per Share 1	22.62			22.42			21.12			21.20			21.31
Goodwill and Other Intangible Assets, net	22,891			22,983			23,078			23,175			23,273
Tangible Book Value per Share 1,2	21.25			21.06			19.76			19.84			19.95

Capital Ratios:5

Tier 1 Leverage Ratio	9.63		%	9.84		%	9.94		%	9.92		%	10.13		%
Common Equity Tier 1 Capital Ratio	12.84		%	13.00		%	13.17		%	13.27		%	13.34		%
Tier 1 Risk-Based Capital Ratio	13.50		%	13.66		%	13.84		%	13.96		%	14.03		%
Total Risk-Based Capital Ratio	14.57		%	14.74		%	14.94		%	15.08		%	15.15		%

Assets Under Trust Admin. & Investment Mgmt.	$	1,829,266		$	1,763,194		$	1,627,522		$	1,711,460		$	1,672,117

Arrow Financial Corporation

Selected Quarterly Information - Continued

(Dollars In Thousands, Except Per Share Amounts - Unaudited)


Footnotes:

1.	Share and Per Share Data have been restated for the September 26, 2023, 3% stock dividend.

2.	Non-GAAP Financial Measures Reconciliation: Tangible Book Value, Tangible Equity and Return on Tangible Equity exclude goodwill and other intangible assets, net from total equity. These are non-GAAP financial measures which Arrow believes provide investors with information that is useful in understanding our financial performance. See "Use of Non-GAAP Financial Measures" on page 46.
		3/31/2024			12/31/2023			9/30/2023			6/30/2023			3/31/2023
	Total Stockholders' Equity (GAAP)	$	377,986		$	379,772		$	360,014		$	361,443		$	363,371
	Less: Goodwill and Other Intangible assets, net	22,891			22,983			23,078			23,175			23,273
	Tangible Equity (Non-GAAP)	$	355,095		$	356,789		$	336,936		$	338,268		$	340,098

	Period End Shares Outstanding	16,710			16,942			17,049			17,050			17,050
	Tangible Book Value per Share (Non-GAAP)	$	21.25		$	21.06		$	19.76		$	19.84		$	19.95
	Net Income	7,660			7,723			7,743			6,047			8,562
	Return on Average Tangible Equity (Net Income/Tangible Equity - Annualized)	8.64		%	8.99		%	9.05		%	7.10		%	10.33		%

3.	Non-GAAP Financial Measures Reconciliation: Net Interest Margin, Tax-Equivalent is the ratio of our annualized tax-equivalent net interest income to average earning assets. This is also a non-GAAP financial measure which Arrow believes provides investors with information that is useful in understanding our financial performance. See "Use of Non-GAAP Financial Measures" on page 46.
		3/31/2024			12/31/2023			9/30/2023			6/30/2023			3/31/2023
	Interest Income (GAAP)	$	46,677		$	44,324		$	42,117		$	40,013		$	36,110
	Add: Tax-Equivalent adjustment (Non-GAAP)	176			184			183			196			202
	Interest Income - Tax Equivalent (Non-GAAP)	$	46,853		$	44,508		$	42,300		$	40,209		$	36,312
	Net Interest Income (GAAP)	$	26,455		$	25,613		$	25,353		$	25,772		$	28,094
	Add: Tax-Equivalent adjustment (Non-GAAP)	176			184			183			196			202
	Net Interest Income - Tax Equivalent (Non-GAAP)	$	26,631		$	25,797		$	25,536		$	25,968		$	28,296
	Average Earning Assets	$	4,085,398		$	4,019,432		$	3,973,747		$	3,953,642		$	3,845,825
	Net Interest Margin (Non-GAAP)*	2.62		%	2.55		%	2.55		%	2.63		%	2.98		%

4.	Non-GAAP Financial Measures: Financial Institutions often use the "efficiency ratio", a non-GAAP ratio, as a measure of expense control. Arrow believes that the efficiency ratio provides investors with information that is useful in understanding our financial performance. Arrow defines efficiency ratio as the ratio of our non-interest expense to our net gross income (which equals tax-equivalent net interest income plus non-interest income, as adjusted). There is no GAAP financial measure that is closely comparable to the efficiency ratio. See "Use of Non-GAAP Financial Measures" on page 46.

5.	For the current quarter, all of the regulatory capital ratios as well as the Total Risk-Weighted Assets are calculated in accordance with bank regulatory capital rules. The March 31, 2024 CET1 ratio listed in the tables (i.e., 12.84%) exceeds the sum of the required minimum CET1 ratio plus the fully phased-in Capital Conservation Buffer (i.e., 7.00%).
		3/31/2024			12/31/2023			9/30/2023			6/30/2023			3/31/2023

	Total Risk Weighted Assets	$	3,049,525		$	3,032,188		$	2,988,438		$	2,937,837		$	2,909,610
	Common Equity Tier 1 Capital	391,706			394,166			393,541			389,966			388,228
	Common Equity Tier 1 Capital Ratio	12.84		%	13.00		%	13.17		%	13.27		%	13.34		%

* Quarterly ratios have been annualized.


Average Consolidated Balance Sheets and Net Interest Income Analysis


(Dollars In Thousands)

Three Months Ended March 31:	2024						2023
			Interest		Rate				Interest		Rate
	Average		Income/		Earned/		Average		Income/		Earned/
	Balance		Expense		Paid		Balance		Expense		Paid
Interest-Bearing Deposits at Banks	$	178,452	$	2,447	5.52	%	$	40,436	$	479	4.80
Investment Securities:
Fully Taxable	550,538		3,186		2.33		652,743		2,948		1.83
Exempt from Federal Taxes	120,567		668		2.23		160,718		797		2.01
Loans	3,235,841		40,376		5.02		2,991,928		31,886		4.32
Total Earning Assets	4,085,398		46,677		4.60		3,845,825		36,110		3.81
Allowance for Credit Losses	(31,416)						(29,792)
Cash and Due From Banks	29,804						30,518
Other Assets	161,698						132,300
Total Assets	$	4,245,484					$	3,978,851
Deposits:
Interest-Bearing Checking Accounts	$	830,918	1,641		0.79		$	964,735	370		0.16
Savings Deposits	1,481,001		10,230		2.78		1,474,251		5,587		1.54
Time Deposits of $250,000 or More	177,328		1,973		4.47		94,415		574		2.47
Other Time Deposits	496,813		5,083		4.11		148,302		474		1.30
Total Interest-Bearing Deposits	2,986,060		18,927		2.55		2,681,703		7,005		1.06
Borrowings	96,984		1,076		4.46		40,138		490		4.95
Junior Subordinated Obligations Issued to Unconsolidated Subsidiary Trusts	20,000		171		3.44		55,356		472		3.46
Finance Leases	5,049		48		3.82		5,102		49		3.89
Total Interest-bearing Liabilities	3,108,093		20,222		2.62		2,782,299		8,016		1.17
Noninterest-bearing deposits	707,265						798,576
Other Liabilities	50,680						38,420
Total Liabilities	3,866,038						3,619,295
Stockholders’ Equity	379,446						359,556
Total Liabilities and Stockholders’ Equity	$	4,245,484					$	3,978,851


Net Interest Income			$	26,455					$	28,094
Net Interest Spread					1.98	%					2.64	%
Net Interest Margin					2.60	%					2.96	%

OVERVIEW

The following discussion and analysis focuses on and reviews the results of operations for the three-month period ended March 31, 2024 and the financial conditions as of March 31, 2024 and 2023. 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 Q1 2024 Financial Results: Net income for the first quarter of 2024 was $7.7 million, consistent with $7.7 million in the fourth quarter of 2023, while decreasing from $8.6 million in the first quarter of 2023. As compared to the prior quarter, net income benefited from an increase of $0.8 million in net interest income as well as an increase in non-interest income of $0.4 million, offset by an increase in non-interest expense of $0.8 million. As compared to the first quarter of 2023, net interest income decreased $1.6 million primarily on higher deposit costs. Non-interest income increased $1.2 million and non-interest expense increased $1.7 million.

Net interest income for the first quarter of 2024 was $26.5 million, increasing 3.3% from $25.6 million for the fourth quarter of 2023 and decreasing 5.8% from $28.1 million in the comparable quarter of 2023. Total interest and dividend income was $46.7 million for the first quarter of 2024, an increase from $44.3 million in the fourth quarter of 2023 and from $36.1 million for the first quarter of 2023. These increases were primarily driven by loan growth and higher loan rates. Interest expense for the first quarter of 2024 was $20.2 million, an increase from $18.7 million for the fourth quarter of 2023 and from $8.0 million for the first quarter of 2023. The increases for both comparison periods were driven primarily by higher deposit rates and changes in deposit composition.

Net interest margin was 2.60% for the first quarter of 2024, compared to 2.53% for the fourth quarter of 2023 and 2.96% for the first quarter of 2023. The increase in net interest margin compared to the fourth quarter in 2023 was primarily the result of the continued expansion on the yield of earning assets combined with the moderating increase in the cost of interest-bearing liabilities. As compared to the first quarter of 2023, the decline in net interest margin was primarily the result of costs of interest-bearing liabilities increasing at a faster pace than the yield on average earning assets. In addition, deposits have continued to migrate to higher costs products, such as money market savings and time deposits.

For the first quarter of 2024, the provision for credit losses was $0.6 million compared to $0.5 million in the fourth quarter of 2023 and $1.6 million in the first quarter of 2023. The key drivers for the provision for credit losses in the first quarter of 2024 were an increase in specific reserves and loan growth, partially offset by changes to the economic forecast factors embedded in the credit loss allowance model. The increase in specific reserves of $0.7 million is tied to overdraft balances from an instance of check fraud from one customer relationship.

Non-interest income for the three months ended March 31, 2024, was $7.9 million, compared to $7.5 million in the fourth quarter of 2023 and $6.7 million in the first quarter of 2023. The increase was primarily driven by gains on other equity investments as well as income from fiduciary activities, which includes Wealth Management services, which benefited from strong equity markets.

Non-interest expense for the first quarter of 2024 was $24.0 million, an increase from $23.2 million in the fourth quarter of 2023 and an increase from $22.3 million for the first quarter of 2023. The increase from the prior year was primarily due to increased salaries and benefits related to new employees hired to support growth initiatives, increased legal and professional expenses associated with the finalization of the 2023 audit, and costs incurred to reach a settlement in the Ashe Lawsuit.

The provision for income taxes was 20.9% or $2.0 million for the first quarter of 2024, 17.7% or $1.7 million for the fourth quarter of 2023 and 21.6% or $2.4 million for the first quarter of 2023. The change in the effective tax rate from the previous quarter was primarily due to a change in pre-tax income combined with decreases in tax advantaged items.

Total assets were $4.3 billion at March 31, 2024, an increase of $163.8 million, or 3.9%, as compared to December 31, 2023 and an increase of $219.0 million, or 5.3%, as compared to March 31, 2023. For the first quarter of 2024, overall asset growth was primarily attributable to growth in the loan portfolio and an increase in cash balances.

Total investments were $620.0 million as of March 31, 2024, a decrease of $16.0 million, or 2.5%, compared to December 31, 2023 and a decrease of $125.1 million, or 16.8%, compared to March 31, 2023. The decrease from December 31, 2023 was driven primarily by paydowns and maturities. The change from March 31, 2023 was also impacted by the fourth quarter 2023 repositioning of the investment portfolio, reducing the portfolio by approximately $25 million at the time of the transaction. There were no credit quality issues related to the investment portfolio.

Total loans1 reached $3.3 billion as of March 31, 2024. Loan growth for the first quarter of 2024 was $50.5 million, and $252.2 million compared to March 31, 2023. Loan growth was spread across all loan products.

The allowance for credit losses was $31.6 million as of March 31, 2024, which represented 0.97% of loans outstanding, as compared to $31.3 million, or 0.97%, at December 31, 2023 and $30.8 million, or 1.02%, at March 31, 2023. Net charge-offs, expressed as an annualized percentage of average loans outstanding, were 0.04% for the three-month period ended March 31, 2024, as compared to 0.05% for the three-month period ended December 31, 2023 and 0.10% for the three-month period ended March 31, 2023. Nonperforming assets were $21.8 million as of March 31, 2024, representing 0.50% of period-end assets, compared to 0.51% at December 31, 2023 and 0.27% at March 31, 2023. The increase from the first quarter of 2023 was primarily due to one large, well collateralized loan relationship of approximately $15 million, which moved into non-performing status during the fourth quarter of 2023.

At March 31, 2024, deposit balances were $3.8 billion, an increase of $91.5 million from December 31, 2023 and $232.7 million from March 31, 2023. The increase from March 31, 2023 was partially attributable to $175 million of brokered CDs, primarily used to reduce borrowings by $160 million. Arrow simultaneously entered into three-year swaps to strategically manage its asset-liability profile and cost of funds.

The changes in net income, net interest income and net interest margin between the three-month periods are discussed in detail under the heading "RESULTS OF OPERATIONS," beginning on page 66.

1 Excludes both $1.2 million fair value hedge adjustment at March 31, 2024 and $5.8 million fair value hedge adjustment at December 31, 2023.

Regulatory Capital and Change in Stockholders' Equity: At March 31, 2024, Arrow continued to exceed all required minimum capital ratios under the current bank regulatory capital rules (the "Capital Rules") as implemented under the Dodd-Frank Wall Street Reform and Consumer Protection Act ("Dodd-Frank") at both the holding company and bank levels. At that date, both subsidiary banks, continued 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 from time to time, as they do at present.

Stockholders’ equity was $378.0 million at March 31, 2024, a decrease of $1.8 million, or 0.5%, from the December 31, 2023 level of $379.8 million The decrease in stockholders' equity over the first three months of 2024 principally reflected the following factors: the addition of (i) $7.7 million of net income for the period, (ii) the issuance of $0.4 million of common stock through employee benefit and dividend reinvestment plans plus (iii) other comprehensive gain of $0.7 million, reduced by (iv) cash dividends of $4.6 million and (v) repurchases of common stock of $6.0 million. The components of the change in stockholders’ equity since year-end 2023 are presented in the Consolidated Statement of Changes in Stockholders’ Equity on page 6, and are discussed in more detail in the next section.

At March 31, 2024, book value per share was $22.62, up 6.1% over the prior-year level. Tangible book value per share (a non-GAAP measure that deducts intangible assets from stockholders' equity) was $21.25, an increase of $1.30, or 6.5%, over the level as of March 31, 2023. See the disclosure on page 46 related to the use of non-GAAP financial measures including tangible book value.

On March 31, 2024, Arrow's closing stock price was $25.02, representing a trading multiple of 1.18 to tangible book value. In the first quarter of 2024, Arrow paid a quarterly cash dividend of $0.27. Further discussion of dividends is included in the Capital Components; Stock Repurchases; Dividends section located on page 63.

Loan Quality: Net charge-offs for the first quarter of 2024 were $321 thousand as compared to $722 thousand for the comparable 2023 quarter. The ratio of net charge-offs to average loans (annualized) was 0.04% for the three month period ended March 31, 2024, a decrease from 0.10% with the three month period ended March 31, 2023.

For the first quarter of 2024, the provision for credit losses was $617 thousand and a credit for estimated credit losses on off-balance sheet credit exposures was $466 thousand. The allowance for credit losses was $31.6 million on March 31, 2024, which represented 0.97% of loans outstanding, as compared to 1.02% on March 31, 2023.

Nonperforming loans were $21.4 million at March 31, 2024, representing 0.66% of period-end loans, an increase from the March 31, 2023 ratio of 0.37% and was unchanged from the December 31, 2023 ratio of 0.66%. The ratio continues to reasonably compare with the weighted average ratio of the peer group of 0.47% at December 31, 2023. Nonperforming assets of $21.8 million at March 31, 2024 represented 0.50% of period-end assets up from 0.27% at March 31, 2023. The increase in delinquent loans from the prior year is primarily attributable to one commercial loan relationship moving to non-performing status during the fourth quarter of 2023. See Footnote 5, Loans, for additional discussion.

Loan Segments: As of March 31, 2024, total loans grew by $45.9 million, or 1.4%, as compared to the balance at December 31, 2023. The largest increase was in the residential real estate loan portfolio which increased $20.1 million, or 1.7%. Consumer loans increased $14.1 million, or 1.3%, primarily comprised of automobile loans. Commercial and commercial real estate loans increased by $11.6 million, or 1.3%, from December 31, 2023.

•Commercial and Commercial Real Estate Loans: Combined, these loans comprise 28.0% of the total loan portfolio at period-end. Commercial property values in Arrow's region have largely remained stable, however, there remains uncertainty surrounding market conditions due to inflation and the rising interest rate environment. Appraisals on nonperforming and watched CRE loan properties are updated as deemed necessary, usually when the loan is downgraded or when there has been significant market deterioration since the last appraisal.

•Consumer Loans: These loans (primarily automobile loans) comprised 34.6% of the total loan portfolio at period-end. Consumer automobile loans at March 31, 2024, were 99.6% of this portfolio segment. The vast majority of automobile loans are initiated through the purchase of vehicles by consumers with automobile dealers. As of March 31, 2024, demand has slowed as a result of current economic conditions. Inflation and higher rates may continue to limit the potential growth in this category.

•Residential Real Estate Loans: These loans, including home equity loans, made up 37.4% of the total loan portfolio at period-end. Demand for residential real estate has continued but weakened as interest rates have increased. A continuous elevated rate environment may impact future demand. Arrow originated nearly all of the residential real estate loans currently held in the loan portfolio and applies conservative underwriting standards to loan originations. Arrow has historically sold a portion of 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. The rate at which mortgage loan originations are sold in future periods will depend on various circumstances, including 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 experienced any liquidity events or special concerns in recent years or thus far in 2024. Arrow’s liquidity position provides the necessary flexibility to address any unexpected near-term liquidity needs. Interest-bearing cash balances at March 31, 2024 were $255.1 million compared to $178.4 million at March 31, 2023. 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 $1.3 billion. The general terms of Arrow's lines of credit have not changed significantly in recent periods (see the general liquidity discussion on page 65). 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.

Visa Class B Common Stock: In the fourth quarter of 2023, Arrow's subsidiary bank, GFNB, sold all 27,771 shares of Visa Class B common stock it previously held for a pre-tax gain of $9.3 million. The gain was used to offset a pre-tax loss of $9.2 million related to the sale of securities with a amortized cost basis of approximately $110 million. The sale of securities was driven by the strategic decision to reposition the investment portfolio to higher yielding investments producing an improved interest income run-rate.

Branch Acquisition: On March 4, 2024, GFNB entered into a definitive agreement with Berkshire Bank, a subsidiary of Berkshire Hills Bancorp, Inc., to acquire the branch office at 184 Broadway, Whitehall, New York. The sale is targeted for completion by the end of the third quarter of 2024, subject to customary regulatory approvals. The Whitehall branch includes deposit accounts with an aggregate approximate balance of $39 million and loans with an aggregate approximate balance of $3 million. The sale includes the branch premises and substantially all of the personal property and equipment used in the business. All employees associated with the Whitehall branch will be offered employment with Arrow.

CHANGE IN FINANCIAL CONDITION

Summary of Selected Consolidated Balance Sheet Data

(Dollars in Thousands)


	At Period-End
	3/31/2024		12/31/2023		3/31/2023		$ Change From December		$ Change From March		% Change From December (not annualized)		% Change From March
Interest-Bearing Bank Balances	$	255,109	$	105,781	$	178,365	$	149,328	$	76,744	141.2	%	43.0	%
Securities Available-for-Sale	485,833		497,769		565,693		(11,936)		(79,860)		(2.4)	%	(14.1)	%
Securities Held-to-Maturity	128,051		131,395		167,347		(3,344)		(39,296)		(2.5)	%	(23.5)	%
Equity Securities	1,942		1,925		2,070		17		(128)		0.9	%	(6.2)	%
Loans (1)	3,258,758		3,212,908		3,005,352		45,850		253,406		1.4	%	8.4	%
Allowance for Credit Losses	31,561		31,265		30,784		296		777		0.9	%	2.5	%
Earning Assets (1)	4,133,901		3,954,827		3,928,854		179,074		205,047		4.5	%	5.2	%
Total Assets	$	4,333,623	$	4,169,868	$	4,114,630	$	163,755	$	218,993	3.9	%	5.3	%
Noninterest-Bearing Deposits	$	696,519	$	758,425	$	788,690	$	(61,906)	$	(92,171)	(8.2)	%	(11.7)	%
Interest-Bearing Checking Accounts	908,453		799,785		958,490		108,668		(50,037)		13.6	%	(5.2)	%
Savings Deposits	1,497,466		1,466,280		1,497,326		31,186		140		2.1	%	—	%
Time Deposits over $250,000	173,976		179,301		122,827		(5,325)		51,149		(3.0)	%	41.6	%
Other Time Deposits	502,607		483,775		179,016		18,832		323,591		3.9	%	180.8	%
Total Deposits	$	3,779,021	$	3,687,566	$	3,546,349	$	91,455	$	232,672	2.5	%	6.6	%
Borrowings	$	106,500	$	26,500	$	142,800	$	80,000	$	(36,300)	301.9	%	(25.4)	%


Junior Subordinated Obligations Issued to Unconsolidated Subsidiary Trusts	20,000		20,000		20,000		—		—		—	%	—	%
Stockholders' Equity	377,986		379,772		363,371		(1,786)		14,615		(0.5)	%	4.0	%

(1) Includes Nonaccrual Loans.

Changes in Earning Assets: The loan portfolio at March 31, 2024, was $3.3 billion, an increase of $45.9 million, or 1.4%, from the December 31, 2023 level and up by $253.4 million, or 8.4%, from the March 31, 2023 level. The following trends were experienced in our largest segments:

•Commercial and commercial real estate loans: This segment of the loan portfolio increased by $11.6 million, or 1.3%, during the first three months of 2024. In the first three months of 2024, loan growth has slowed as a result of the current rate environment.

•Consumer loans (primarily automobile loans through indirect lending): As of March 31, 2024, these loans, primarily auto loans originated through dealerships in New York and Vermont, increased by $14.1 million, or 1.3%, from the December 31, 2023 balance. Inflation and rising rates may continue to slow demand.

•Residential real estate loans: This segment increased during the first three months of 2024 by $20.1 million, or 1.7%. A deterioration of economic conditions may trigger a reduction in loan production for the remainder of the year.

Changes in Sources of Funds: Deposit balances reached $3.8 billion, up $232.7 million, or 6.6%, from the prior-year level and increased $91.5 million from December 31, 2023. The increase from March 31, 2023 was partially attributable to $175 million of brokered CDs, primarily used to reduce borrowings by $160 million. Noninterest-bearing deposits represented 18.4% of total deposits at March 31, 2024, compared to 22.2% of total deposits on March 31, 2023. At March 31, 2024, total time deposits were $676.6 million. Municipal deposits increased $83.9 million, or 9.6% from March 31, 2023. Total borrowings were $106.5 million, an increase from $142.8 million at March 31, 2023. In the first quarter of 2024, Arrow borrowed $100 million as part of the BTFP to improve on-balance sheet liquidity and fund loan production. The BTFP was created to support American businesses and households by making additional funding available to eligible depository institutions to help assure banks have the ability to meet the needs of all their depositors.

Municipal Deposits: Fluctuations in balances of interest-bearing checking accounts are often the result of timing and behavior of 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 behavior, 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 such transferred deposits 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 $675.1 million and $568.0 million at March 31, 2024 and March 31, 2023, 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 March 31, 2024 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 available-for-sale, held-to-maturity and equity securities from December 31, 2023 to March 31, 2024 (in thousands):


	(Dollars in Thousands)
	Fair Value at Period-End						Net Unrealized Gains (Losses) For Period Ended
	3/31/2024		12/31/2023		Change		3/31/2024		12/31/2023		Change
Securities Available-for-Sale:
U.S. Treasury Securities	$	74,152	$	74,004	$	148	$	(38)	$	243	$	(281)
U.S. Agency Securities	152,749		152,925		(176)		(7,251)		(7,075)		(176)
State and Municipal Obligations	280		280		—		—		—		—
Mortgage-Backed Securities	257,717		269,760		(12,043)		(37,141)		(35,401)		(1,740)
Corporate and Other Debt Securities	935		800		135		(65)		(200)		135

Total	$	485,833	$	497,769	$	(11,936)	$	(44,495)	$	(42,433)	$	(2,062)

Securities Held-to-Maturity:
State and Municipal Obligations	$	116,948	$	120,293	$	(3,345)	$	(2,794)	$	(2,157)	$	(637)
Mortgage-Backed Securities	7,913		8,544		(631)		(396)		(401)		5

Total	$	124,861	$	128,837	$	(3,976)	$	(3,190)	$	(2,558)	$	(632)

Equity Securities	$	1,942	$	1,925	$	17	$	—	$	—	$	—

The table below presents the weighted average yield for available-for-sale and held-to-maturity securities, at amortized cost, as of March 31, 2024 (in thousands).


	March 31, 2024
	Within One Year				After One But Within Five Years				After Five But Within Ten Years					After Ten Years					Total
	Amount		Yield		Amount		Yield		Amount		Yield			Amount		Yield			Amount		Yield
Securities Available-for-Sale:
U.S. Treasury Securities	$	49,263	5.3	%	$	24,927	4.7	%	$	—	$	—		$	—	$	—		$	74,190	5.1	%
U.S. Agency Securities	15,000		3.5	%	145,000		1.8	%	—		—		%	—		—		%	160,000		2.0	%
State and Municipal Obligations	—		—	%	—		—	%	280		4.7		%			—		%	280		4.9	%
Mortgage-Backed Securities	2,555		2.5	%	152,490		1.6	%	139,813		1.7		%	—		—		%	294,858		1.7	%
Corporate and Other Debt Securities			—	%			—	%	1,000		8.4		%	—		—		%	1,000		8.3	%

Total	$	66,818	4.8	%	$	322,417	2.0	%	$	141,093	1.8		%	$	—	—		%	$	530,328	2.3	%

Securities Held-to-Maturity:
State and Municipal Obligations	$	44,049	2.7	%	$	73,469	2.5	%	$	2,218	5.1		%	$	6	1.8		%	$	119,742	2.6	%
Mortgage-Backed Securities	—		—	%	8,309		2.5	%	—		—		%	—		—		%	8,309		2.5	%
Corporate and Other Debt Securities	—		—	%	—		—	%	—		—		%	—		—		%	—		—	%
Total	$	44,049	2.7	%	$	81,778	2.5	%	$	2,218	5.1		%	$	6	1.8		%	$	128,051	2.6	%

At March 31, 2024, Arrow held no investment securities in the securities portfolios that consisted of or included, 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 to 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 are generally those having 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.

In the periods referenced above, U.S. Government & Agency Obligations consisted solely of agency bonds issued by GSEs. These securities generally pay fixed semi-annual coupons with principle 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.

Arrow evaluates available-for-sale debt securities in unrealized loss positions at each measurement date to determine whether the decline in the fair value below the amortized cost basis (impairment) is due to credit-related factors or non-credit related factors. Any impairment that is not credit related is recognized in other comprehensive income, net of applicable taxes. Credit-related impairment is recognized within the allowance for credit losses on the balance sheet, limited to the amount by which the amortized cost basis exceeds the fair value, with a corresponding adjustment to earnings via credit loss expense. Arrow determined that at March 31, 2024, gross unrealized losses were primarily attributable to changes in interest rates, relative to when the investment securities were purchased, and not due to the credit quality of the investment securities. The recent rising interest rate environment resulted in an increase in unrealized losses versus the comparable prior period. Arrow does not intend to sell, nor is it more likely than not that Arrow will be required to sell any securities before recovery of its amortized cost basis, which may be at maturity. Therefore, Arrow carried no allowance for credit loss at March 31, 2024 and there was no credit loss expense recognized by Arrow with respect to the securities portfolio during the three months ended March 31, 2024.

Arrow's held-to-maturity debt securities are comprised of GSEs and state and municipal obligations. GSE securities carry the explicit and/or implicit guarantee of the U.S. government, are widely recognized as “risk free,” and have a long history of zero credit loss. Arrow performs an analysis of the credit worthiness of municipal obligations to determine if a security is of investment grade. The analysis may include, but may not solely rely upon credit analysis conducted by external credit rating agencies. Arrow determined that the expected credit loss on its held to maturity debt portfolio was immaterial and, therefore, no allowance for credit loss was recorded as of March 31, 2024.

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 three month periods ended March 31, 2024 or 2023.

The following table summarizes purchases of investment securities within the available-for-sale and held-to-maturity portfolios for the three month periods ended March 31, 2024 and 2023, as well as proceeds from the maturity and calls of investment securities within each portfolio for the respective periods presented:


(In Thousands)	Three Months Ended
Purchases:	3/31/2024		3/31/2023
Available-for-Sale Portfolio

U.S. Agency Securities	$	—	$	—

Mortgage-Backed Securities	—		—

Total Purchases	$	—	$	—

Maturities & Calls	$	10,362	$	15,669


(In Thousands)	Three Months Ended
Purchases:	3/31/2024		3/31/2023
Held-to-Maturity Portfolio
State and Municipal Obligations	$	750	$	1,448



Maturities & Calls	$	4,003	$	9,328

Loan Trends

The following three tables present, for each of the last five quarters, 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:

Quarterly Average Loan Balances

(Dollars in Thousands)


	Quarter Ended
	3/31/2024		12/31/2023		9/30/2023		6/30/2023		3/31/2023
Commercial	$	159,629	$	151,947	$	147,585	$	135,370	$	135,670

Commercial Real Estate	749,928		738,305		727,060		722,753		710,719
Consumer	1,114,415		1,108,660		1,094,994		1,081,838		1,070,314
Residential Real Estate	1,211,869		1,171,350		1,126,601		1,096,449		1,075,225
Total Loans	$	3,235,841	$	3,170,262	$	3,096,240	$	3,036,410	$	2,991,928

Percentage of Total Quarterly Average Loans


	Quarter Ended
	3/31/2024		12/31/2023		9/30/2023		6/30/2023		3/31/2023
Commercial	4.9	%	4.8	%	4.8	%	4.5	%	4.5	%

Commercial Real Estate	23.2	%	23.3	%	23.5	%	23.8	%	23.8	%
Consumer	34.4	%	35.0	%	35.4	%	35.6	%	35.8	%
Residential Real Estate	37.5	%	36.9	%	36.3	%	36.1	%	35.9	%
Total Loans	100.0	%	100.0	%	100.0	%	100.0	%	100.0	%

Quarterly Yield on Loans


	Quarter Ended
	3/31/2024		12/31/2023		9/30/2023		6/30/2023		3/31/2023
Commercial	5.53	%	5.38	%	4.89	%	4.53	%	4.28	%

Commercial Real Estate	5.07	%	4.88	%	5.19	%	5.09	%	4.73	%
Consumer	5.36	%	5.11	%	4.83	%	4.61	%	4.26	%
Residential Real Estate	4.57	%	4.52	%	4.26	%	4.17	%	4.10	%
Total Loans	5.02	%	4.86	%	4.70	%	4.57	%	4.32	%

The average yield on the loan portfolio was 5.02% for the first quarter of 2024 up 70 basis points from the first quarter of 2023. Market rates have continued to increase, 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 of loans outstanding as of March 31, 2024. Also provided are the amounts due after one year, classified according to fixed interest rates and variable interest rates (in thousands):


	March 31, 2024
	Within One Year		After One But Within Five Years		After Five But Within 15 Years		After 15 Years		Total
Commercial	$	41,851	$	82,983	$	37,442	$	113	$	162,389
Commercial Real Estate	161,657		274,490		307,236		7,586		750,969
Consumer	10,235		602,593		512,458		468		1,125,754
Residential Real Estate	133,188		67,463		333,203		685,792		1,219,646
Total	$	346,931	$	1,027,529	$	1,190,339	$	693,959	$	3,258,758

			After One But Within Five Years		After Five But Within 15 Years		After 15 Years		Total
Loans maturing with:
Fixed Interest Rates			$	714,602	$	884,054	$	689,909	$	2,288,565
Variable Interest Rates			312,927		306,285		4,050		623,262
Total			$	1,027,529	$	1,190,339	$	693,959	$	2,911,827

Maintenance of High Quality Credit in the Loan Portfolio: There have been no significant fluctuations in the quality of the loan portfolio or any segment thereof. In general, residential real estate loans have historically been underwritten to secondary market standards for prime loans and Arrow has not engaged in subprime mortgage lending as a business line. Similarly, high underwriting standards have generally been applied to commercial and commercial real estate lending operations and generally in the indirect lending program as well.

Commercial Loans and Commercial Real Estate Loans: Substantially all commercial and commercial real estate loans in the loan portfolio were extended to businesses or borrowers located in Arrow's regional markets. 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 March 31, 2024, consumer loans (primarily automobile loans originated through dealerships located in upstate New York and Vermont) 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 potential 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 risk has contributed to maintaining the strong credit quality in this portfolio.

Residential Real Estate Loans: Strong demand for residential real estate has continued even as interest rates have increased. Although the projected ongoing rise in the interest rates may impact future demand. Arrow has historically sold portions of originations in the secondary market. Sales decreased as the result of the strategic decision to grow the residential loan portfolio as well as current market conditions. The rate at which mortgage loan originations are sold in future periods will depend on a variety of factors, including demand for residential mortgages in our operating markets, market conditions for mortgage sales and strategic balance sheet and interest-rate risk management decisions.

Deposit Trends

The following tables provide information on trends in the balance and mix of the deposit portfolio by presenting, for each of the last five quarters, the quarterly average balances by deposit type and the percentage of total deposits represented by each deposit type. The quarterly average balances increased in 2023 and the first quarter of 2024. In the first quarter of 2024, Arrow added $175 million of brokered CDs, primarily used to reduce borrowings by $160 million. In addition, due to the current rate environment and increased competitive pricing, deposits have also migrated to higher cost time deposits.


Quarterly Average Deposit Balances
(Dollars in Thousands)

	Quarter Ended
	3/31/2024		12/31/2023		9/30/2023		6/30/2023		3/31/2023
Noninterest-Bearing Deposits	$	707,265	$	757,739	$	779,037	$	756,584	$	798,576
Interest-Bearing Checking Accounts	830,918		801,923		795,627		863,892		964,735
Savings Deposits	1,481,001		1,509,946		1,505,916		1,504,412		1,474,251
Time Deposits over $250,000	177,328		169,854		152,738		133,897		94,415
Other Time Deposits	496,813		354,487		257,710		201,926		148,302
Total Deposits	$	3,693,325	$	3,593,949	$	3,491,028	$	3,460,711	$	3,480,279


	Quarter Ended
	3/31/2024		12/31/2023		9/30/2023		6/30/2023		3/31/2023
Non-Municipal Deposits	$	2,808,605	$	2,693,191	$	2,629,532	$	2,528,871	$	2,567,132
Municipal Deposits	884,720		900,758		861,496		931,840		913,147
Total Deposits	$	3,693,325	$	3,593,949	$	3,491,028	$	3,460,711	$	3,480,279

Percentage of Total Quarterly Average Deposits


	Quarter Ended
	3/31/2024		12/31/2023		9/30/2023		6/30/2023		3/31/2023
Noninterest-Bearing Deposits	19.1	%	21.1	%	22.3	%	21.9	%	22.9	%
Interest-Bearing Checking Accounts	22.5	%	22.3	%	22.8	%	25.0	%	27.7	%
Savings Deposits	40.1	%	42.0	%	43.1	%	43.4	%	42.4	%
Time Deposits over $250,000	4.8	%	4.7	%	4.4	%	3.9	%	2.7	%
Other Time Deposits	13.5	%	9.9	%	7.4	%	5.8	%	4.3	%
Total Deposits	100.0	%	100.0	%	100.0	%	100.0	%	100.0	%

Quarterly Cost of Deposits


	Quarter Ended
	3/31/2024		12/31/2023		9/30/2023		6/30/2023		3/31/2023
Demand Deposits	—	%	—	%	—	%	—	%	—	%
Interest-Bearing Checking Accounts	0.79	%	0.65	%	0.58	%	0.38	%	0.16	%
Savings Deposits	2.78	%	2.76	%	2.56	%	2.27	%	1.54	%
Time Deposits over $250,000	4.47	%	4.22	%	3.81	%	3.35	%	2.47	%
Other Time Deposits	4.11	%	3.81	%	3.16	%	2.38	%	1.30	%
Total Deposits	2.06	%	1.88	%	1.64	%	1.35	%	0.82	%

For the quarter ended March 31, 2024, the total cost of deposits increased 18 basis points from the previous quarter and 124 basis points from the comparable prior year quarter. The Federal Funds rate increased throughout 2023 and has remained elevated for the first quarter of 2024. 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 68 for further discussion.

Non-Deposit Sources of Funds

Arrow's other sources of funds include securities sold under agreements to repurchase, term advances from the FHLBNY and BTFP advances. The securities sold under agreements to repurchase are offered to existing customers, short-term in nature and are collateralized by investment securities. The remaining term advance from the FHLBNY is a fixed rate non-callable advance that will mature within one year. The BTFP advances mature in less than 12 months and have a weighted average interest rate of 4.76%.

The $20 million principal amount of Junior Subordinated Obligations Issued to Unconsolidated Subsidiary Trusts listed on the consolidated balance sheet as of March 31, 2024 (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 62 of this Report.

ASSET QUALITY

The following table presents information related to the allowance and provision for credit losses for the past five quarters:

Summary of the Allowance and Provision for Credit Losses

(Dollars in Thousands, Loans Stated Net of Unearned Income)


	3/31/2024			12/31/2023			9/30/2023			6/30/2023			3/31/2023
Loan Balances:
Period-End Loans	$	3,258,758		$	3,212,908		$	3,138,617		$	3,069,897		$	3,005,352
Average Loans, Year-to-Date	3,235,841			3,074,261			3,041,909			3,014,292			2,991,928
Average Loans, Quarter-to-Date	3,235,841			3,170,262			3,096,240			3,036,410			2,991,928
Period-End Assets	4,333,623			4,169,868			4,272,911			4,103,653			4,114,630

Allowance for Credit Losses, Year-to-Date:
Allowance for Credit Losses, Beginning of Period	$	31,265		$	29,952		$	29,952		$	29,952		$	29,952

Provision for Credit Losses, YTD	617			3,381			2,856			2,502			1,554
Loans Charged-off, YTD	(1,283)			(5,177)			(3,812)			(2,608)			(1,328)
Recoveries of Loans Previously Charged-off	962			3,109			2,116			1,324			606
Net Charge-offs, YTD	(321)			(2,068)			(1,696)			(1,284)			(722)
Allowance for Credit Losses, End of Period	$	31,561		$	31,265		$	31,112		$	31,170		$	30,784










Nonperforming Assets, at Period-End:
Nonaccrual Loans	$	20,244		$	20,645		$	6,023		$	5,997		$	10,852
Loans Past Due 90 or More Days and Still Accruing Interest	1,147			452			251			467			241
Restructured and in Compliance with Modified Terms	49			54			60			67			62
Total Nonperforming Loans	21,440			21,151			6,334			6,531			11,155
Repossessed Assets	312			312			344			342			144
Other Real Estate Owned	—			—			182			182			—
Total Nonperforming Assets	$	21,752		$	21,463		$	6,860		$	7,055		$	11,299

Asset Quality Ratios:
Allowance to Nonperforming Loans	147.21		%	147.82		%	491.19		%	477.26		%	275.97		%
Allowance to Period-End Loans	0.97		%	0.97		%	0.99		%	1.02		%	1.02		%
Provision to Average Loans (Quarter) (1)	0.08		%	0.07		%	0.05		%	0.13		%	0.21		%
Provision to Average Loans (YTD) (1)	0.08		%	0.11		%	0.13		%	0.17		%	0.21		%
Net Charge-offs to Average Loans (Quarter) (1)	0.04		%	0.05		%	0.05		%	0.07		%	0.10		%
Net Charge-offs to Average Loans (YTD) (1)	0.04		%	0.07		%	0.07		%	0.09		%	0.10		%
Nonperforming Loans to Total Loans	0.66		%	0.66		%	0.20		%	0.21		%	0.37		%
Nonperforming Assets to Total Assets	0.50		%	0.51		%	0.16		%	0.17		%	0.27		%
(1) Annualized

Provision for Credit Losses

Arrow loan officers and risk managers meet at least quarterly to discuss and review the conditions and risks associated with certain criticized and classified commercial-related relationships. In addition, the independent internal loan review department performs periodic reviews of the credit quality indicators on individual loans in the commercial loan portfolio.

CECL calculates losses over the life of a loan or financial instrument. Arrow and its subsidiaries utilize a loss projection model updated with data from our core systems, and incorporates various assumptions to produce the CECL reserve. A CECL Steering Committee was created to provide a management governance function to review, critically challenge and approve components of the CECL reporting process. One key responsibility of the CECL Steering Committee is to review annually the key assumptions utilized in the CECL calculation including loan segmentation, loan loss regression analysis, reasonable and supportable forecast period, reversion period, discounted cash flow inputs including economic forecast data and prepayment and curtailment speeds and qualitative factors.

The March 31, 2024 allowance for credit losses calculation incorporated a reasonable and supportable forecast period to account for economic conditions utilized in the measurement. The quantitative model utilized an economic forecast sourced from reputable third-parties that reflects the economic conditions with a slight improvement in the national unemployment rate of approximately 0.32% during the six-quarter forecast period and forecasted gross domestic product projected to improve by approximately 0.65%. The home price index (HPI) forecast increased approximately 0.03% from the previous quarter level. The overall change in the allowance from December 31, 2023 was driven by the following factors: net loan growth contributed $0.4 million, changes in macro economic conditions

reduced the allowance by $1.8 million, qualitative factors increased the allowance by $0.9 million, and a specific reserve of $0.7 million tied to overdraft balances from an instance of check fraud related to one customer relationship. The first quarter provision for credit losses was $617 thousand. In addition, Arrow recorded a credit for estimated credit losses on off-balance sheet credit exposures in other liabilities of $466 thousand in the first quarter of 2024.

See Notes 1 and 5 to the unaudited interim consolidated financial statements for additional discussion related to CECL.

The ratio of the allowance for credit losses to total loans was 0.97% at March 31, 2024, was unchanged from 0.97% at December 31, 2023 and 1.02% at March 31, 2023.

The accounting policy relating to the allowance for credit losses is considered to be a critical accounting policy, given the uncertainty involved in evaluating the level of the allowance required to cover credit losses in the loan portfolio, and the material effect that such judgments may have on the results of operations. The process for determining the provision for credit losses is described in Note 5 to the unaudited interim consolidated financial statements.

Risk Elements

Nonperforming assets at March 31, 2024 amounted to $21.8 million, an increase from the $21.5 million total at December 31, 2023 and $11.3 million total at March 31, 2023. For the three month periods ended March 31, 2024 and 2023, ratios of nonperforming assets to total assets have remained fairly consistent to the average ratios for the peer group. (See page 45 for a discussion of the peer group.) At December 31, 2023, the ratio of loans past due 90 or more days plus nonaccrual loans plus other real estate owned to total assets was 0.51% as compared to the 0.37% ratio of the peer group at such date (the latest date for which peer group information is available). At March 31, 2024 the ratio was 0.50%.

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)
	3/31/2024		12/31/2023		3/31/2023
Commercial Loans	$	443	$	319	$	101
Commercial Real Estate Loans	494		636		—
Residential Real Estate Loans	2,487		4,245		1,328
Consumer Loans - Primarily Indirect Automobile	14,715		19,063		15,665
Total Loans Past Due 30-89 Days and Accruing Interest	$	18,139	$	24,263	$	17,094

At March 31, 2024, the loans in the above-referenced category totaled $18.1 million, a decrease from the $24.3 million of such loans at December 31, 2023. The March 31, 2024 total of non-current loans equaled 0.56% of loans then outstanding, compared to 0.76% at December 31, 2023 and 0.57% at March 31, 2023.

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 4 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 4) to be potential problem loans. These loans will continue to be closely monitored and Arrow expects to collect all payments of contractual principal and interest in full on these classified loans.

As of March 31, 2024, Arrow held no other real estate owned property. At this time, Arrow does not expect to acquire a significant number of other real estate properties in the near term as a result of payment defaults or the foreclosure process.

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.

As reported in the Regulatory Reform section above, Arrow elected to opt out of utilizing the CBLR framework. The Capital Rules remain applicable to Arrow.

The following is a summary of certain definitions of capital under the various capital measures in the Capital Rules:

Common Equity Tier 1 Capital (CET1): Equals the sum of common stock instruments and related surplus (net of treasury stock), retained earnings, accumulated other comprehensive income (AOCI), and qualifying minority interests, minus applicable regulatory adjustments and deductions. Such deductions will include AOCI, if the organization has exercised its irrevocable option not to include AOCI in capital (Arrow made such an election). Mortgage-servicing assets, deferred tax assets, and investments in financial institutions are limited to 15% of CET1 in the aggregate and 10% of CET1 for each such item individually.

Additional Tier 1 Capital: Equals the sum of noncumulative perpetual preferred stock, tier 1 minority interests, grandfathered TRUPs, and Troubled Asset Relief Program instruments, minus applicable regulatory adjustments and deductions.

Tier 2 Capital: Equals the sum of subordinated debt and preferred stock, total capital minority interests not included in Tier 1, and allowance for loan and lease losses (not exceeding 1.25% of risk-weighted assets) minus applicable regulatory adjustments and deductions.

The following table presents the minimum regulatory capital ratios applicable to Arrow and its subsidiary banks under the current Capital Rules:


Capital Ratio	2024
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	%

These minimum capital ratios, especially the minimum CET1 ratio (4.5%) and the enhanced minimum Tier 1 risk-based capital ratio (6.0%), represent a heightened and more restrictive capital regime than institutions like Arrow previously had to meet under the prior capital rules.

At March 31, 2024, Arrow and its subsidiary banks exceeded by a substantial amount each of the applicable minimum capital ratios established under the Capital Rules, including the minimum CET1 Ratio, the minimum Tier 1 Risk-Based Capital Ratio, the minimum Total Risk-Based Capital Ratio, and the minimum Leverage Ratio, including in the case of each risk-based ratio, the capital buffer.

Prompt Corrective Action Capital Classifications. Under applicable banking law, federal banking regulators are required to take prompt corrective action with respect to depository institutions that do not meet certain minimum capital requirements. For these purposes, the regulators have established five capital classifications for banking institutions, ranging from the highest category of "well-capitalized" to the lowest category of "critically under-capitalized". Under the current capital classifications, a banking institution is considered "well-capitalized" if it meets the following capitalization standards on the date of measurement: a CET1 risk-based capital ratio of 6.50% or greater, a Tier 1 risk-based capital ratio of 8.00% or greater, a total risk-based capital ratio of 10.00% or greater, and a Tier 1 leverage ratio of 5.00% or greater, provided the institution is not subject to any regulatory order or written directive regarding capital maintenance. Federal banking law also ties the ability of banking organizations to engage in certain types of activities and to utilize certain procedures to such organizations' continuing to qualify for inclusion in one of the two highest rankings of these capitalization categories, i.e., as "well-capitalized" or "adequately capitalized."

Current Capital Ratios: The table below sets forth the regulatory capital ratios of Arrow and its subsidiary banks under the current Capital Rules, as of March 31, 2024:


	Common Equity Tier 1 Capital Ratio		Tier 1 Risk-Based Capital Ratio		Total Risk-Based Capital Ratio		Tier 1 Leverage Ratio
Arrow Financial Corporation	12.84	%	13.50	%	14.57	%	9.63	%

Glens Falls National Bank & Trust Co.	13.03	%	13.03	%	14.02	%	8.76	%
Saratoga National Bank & Trust Co.	12.37	%	12.37	%	13.62	%	9.40	%

FDICIA's Prompt Corrective Action - "Well-Capitalized" Standard (2019)	6.50	%	8.00	%	10.00	%	5.00	%
Regulatory Minimum	7.00%(1)		8.50%(1)		10.50%(1)		4.00	%

(1) Including the fully phased-in 2.50% capital conservation buffer

At March 31, 2024, Arrow's subsidiary banks exceeded the minimum regulatory capital ratios established under the current Capital Rules and each also qualified as "well-capitalized", the highest category in the new 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 $378.0 million at March 31, 2024, a decrease of $1.8 million, or 0.5%, from the December 31, 2023 level of $379.8 million The decrease in stockholders' equity over the first three months of 2024 principally reflected the following factors: the addition of (i) $7.7 million of net income for the period, (ii) the issuance of $0.4 million of common stock through employee benefit and dividend reinvestment plans and (iii) other comprehensive gain of $0.7 million, reduced by (iv) cash dividends of $4.6 million and (v) repurchases of common stock of $6.0 million.

Trust Preferred Securities: In each of 2003 and 2004, Arrow issued $10 million of trust preferred securities (TRUPs) in a private placement. Under the FRB's regulatory capital rules then in effect, TRUPs proceeds typically 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. Under the Dodd-Frank Act, any trust preferred securities that Arrow might issue on or after the grandfathering date set forth in Dodd-Frank (May 19, 2010) would not qualify as Tier 1 capital under bank regulatory capital guidelines. 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. Thus, Arrow's outstanding TRUPs continue to qualify as Tier 1 regulatory capital, subject to such 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 Repurchase Program: On October 25, 2023, the Board expanded its existing stock repurchase program (the "2022 Repurchase Program") by $5 million, bringing the total availability under the repurchase program to $9.1 million, and removed the expiration date previously incorporated into the 2022 Repurchase Program. The 2022 Repurchase Program allowed Arrow to repurchase shares of its common stock in open-market or negotiated transactions. Arrow resumed repurchasing its shares in the fourth quarter of 2023. In the first quarter of 2024, Arrow had repurchased approximately $6.0 million (244,000 shares of its common stock) under the 2022 Repurchase Program and additional purchases in April 2024 fully utilized the $9.1 million authorized program amount.

On April 24, 2024, the Board approved a new stock repurchase program (the "2024 Repurchase Program"), under which 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.

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. Additional 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.

In addition, a de minimis portion of Arrow's common stock was purchased during the three months ended March 31, 2024 other than through its repurchase program, i.e., the surrender or deemed surrender of Arrow common stock to Arrow in connection with employees' stock-for-stock exercises of compensatory stock options to buy Arrow common stock.

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 sales transactions, as reported by NASDAQ. Per share amounts and share counts in the following tables have been restated for the September 26, 2023 3% stock dividend.


					Cash
	Market Price				Dividends
	Low		High		Declared
2023
First Quarter	$	23.57	$	33.49	$	0.262
Second Quarter	17.12		24.19		0.262
Third Quarter	16.38		21.60		0.262
Fourth Quarter	16.70		29.66		0.270
2024
First Quarter	$	23.11	$	28.62	$	0.270


Second Quarter (dividend payable May 24, 2024)	TBD		TBD		0.270


	Quarter Ended March 31
	2024			2023
Cash Dividends Per Share	$	0.270		$	0.262
Diluted Earnings Per Share	0.45			0.50
Dividend Payout Ratio	60.00		%	52.40		%
Total Equity (in thousands)	377,986			$	363,371
Shares Issued and Outstanding (in thousands)	16,710			17,050
Book Value Per Share	$	22.62		$	21.31
Intangible Assets (in thousands)	22,891			23,273
Tangible Book Value Per Share	$	21.25		$	19.95

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 must have available reasonably priced sources of funds, both on- and off-balance sheet, that can be accessed quickly in times of need. Arrow’s liquidity position should provide 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 based on their marketability and collateral value, as well as their yield and maturity. The securities available-for-sale portfolio was $485.8 million at March 31, 2024, a decrease of $11.9 million, from the year-end 2023 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 March 31, 2024 of $255.1 million compared to $105.8 million at December 31, 2023.

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 $28 million which were not drawn on during the three months ended March 31, 2024.

To support the borrowing relationship with the FHLBNY, Arrow has pledged collateral, including residential mortgage, home equity and commercial real estate loans. At March 31, 2024, Arrow had outstanding collateralized obligations with the FHLBNY of $7 million; as of that date, the unused borrowing capacity at the FHLBNY was approximately $550 million. Brokered deposits have also been identified as an available source of funding accessible in a relatively short time period. At March 31, 2024, there were $175 million in brokered CD deposits. In addition, Arrow's two bank subsidiaries have each 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 March 31, 2024, the amount available under this facility was approximately $750 million in the aggregate, and there were no advances then 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.

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 or occurrences. At March 31, 2024, Arrow's primary liquidity ratio was approximately 10.4% of total assets, well in excess of the internal policy limit of 5%. Total primary liquidity was approximately $450 million, comprised of $255.1 million of interest-bearing cash and $194.4 in unencumbered securities.

Arrow did not experience any liquidity constraints in the three month period ended March 31, 2024, in 2023 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.

RECENTLY ISSUED ACCOUNTING STANDARDS

The following accounting standards have been issued and become effective for Arrow at a future date:

In March 2020, the FASB issued ASU 2020-04, "Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting." On January 7, 2021, the FASB issued ASU 2021-01, which refines the scope of ASC 848 and clarifies some of its guidance. The ASU and related amendments provide temporary optional expedients and exceptions to the existing guidance for applying GAAP to affected contract modifications and hedge accounting relationships in the transition away from the LIBOR or other interbank offered rate on financial reporting. The guidance also allows a one-time election to sell and/or reclassify to AFS or trading HTM debt securities that reference an interest rate affected by reference rate reform. The amendments in this ASU are effective March 12, 2020 through December 31, 2022 and permit relief solely for reference rate reform actions and different elections over the effective date for legacy and new activity. In December 2022, FASB issued ASU 2022-06, "Reference Rate Reform (Topic 848)" which deferred the sunset date of Topic 848 to December 31, 2024, to allow for a transition period after the sunset of LIBOR. Arrow does not expect ASU 2022-06 will have a material impact on the consolidated financial statements.

RESULTS OF OPERATIONS

Three Months Ended March 31, 2024 Compared With

Three Months Ended March 31, 2023

Summary of Earnings Performance

(Dollars in Thousands, Except Per Share Amounts)


	Three Months Ended
	March 31, 2024			March 31, 2023			Change			% Change
Net Income	$	7,660		$	8,562		$	(902)		(10.5)	%
Diluted Earnings Per Share	0.45			0.50			(0.05)			(10.0)	%
Return on Average Assets	0.73		%	0.87		%	(0.14)		%	(16.1)	%
Return on Average Equity	8.12		%	9.66		%	(1.54)		%	(15.9)	%

Net income was $7.7 million and diluted EPS of $0.45 for the first quarter of 2024, compared to net income of $8.6 million and diluted EPS of $0.50 for the first quarter of 2023. Return on average assets for the first quarter of 2024 was 0.73%, a decrease from 0.87% in the first quarter of 2023. In addition, return on average equity decreased to 8.12% for the first quarter of 2024, from 9.66% in the first quarter of 2023.

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
	March 31, 2024			March 31, 2023			Change			% Change
Interest and Dividend Income	$	46,677		$	36,110		$	10,567		29.3	%



Interest Expense	20,222			8,016			12,206			152.3	%
Net Interest Income	26,455			28,094			(1,639)			(5.8)	%

Average Earning Assets(1)	4,085,398			3,845,825			239,573			6.2	%
Average Interest-Bearing Liabilities	3,108,093			2,782,299			325,794			11.7	%

Yield on Earning Assets(1)	4.60		%	3.81		%	0.79		%	20.7	%

Cost of Interest-Bearing Liabilities	2.62			1.17			1.45			123.9	%

Net Interest Spread	1.98			2.64			(0.66)			(25.0)	%


Net Interest Margin	2.60			2.96			(0.36)			(12.2)	%





(1) Includes Nonaccrual Loans.

Net interest income for the recently completed quarter decreased by $1.6 million, or 5.8%, from the first quarter of 2023. Interest and fees on loans were $40.4 million for the first quarter of 2024, an increase from $31.9 million for the quarter ending March 31, 2023, primarily due to loan growth and higher loan rates. Interest expense for the first quarter of 2024 was $20.2 million, an increase of $12.2 million versus the comparable quarter ending March 31, 2023, primarily due to higher deposit rates and changes in deposit composition. Net interest margin decreased 36 basis points in the first quarter of 2024 to 2.60%, from 2.96% during the first quarter of 2023. Average earning asset yields were 79 basis points higher as compared to the first quarter of 2023. The cost of interest-bearing liabilities increased 145 basis points from the quarter ended March 31, 2023. 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 49 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 58 and "Loan Trends" on page 56.

As discussed previously under the heading "Asset Quality" beginning on page 60, the provision for loan losses for the first quarter of 2024 was $617 thousand, compared to a provision of $1.6 million for the first quarter of 2023.

Non-interest Income

Summary of Non-interest Income

(Dollars in Thousands)


	Three Months Ended
	March 31, 2024		March 31, 2023		Change		% Change
Income From Fiduciary Activities	$	2,457	$	2,275	$	182	8.0	%
Fees for Other Services to Customers	2,543		2,595		(52)		(2.0)	%
Insurance Commissions	1,682		1,520		162		10.7	%

Net Gain on Securities	17		(104)		121		(116.3)	%
Net Gain on the Sale of Loans	4		4		—		—	%
Other Operating Income	1,155		387		768		198.4	%
Total Non-interest Income	$	7,858	$	6,677	$	1,181	17.7	%

Total non-interest income in the current quarter was $7.9 million, an increase of $1.2 million from the comparable quarter of 2023. Income from fiduciary activities for the first quarter of 2024 increased by 8.0% from the first quarter of 2023. Assets under trust administration and investment management at March 31, 2024 were $1.83 billion, an increase from $1.67 billion at March 31, 2023.

Fees for other services to customers were $2.5 million for the first quarter of 2024, a decrease of $52 thousand or 2.0% from the first quarter of 2023.

Insurance commissions were $1.7 million for the first quarter of 2024, an increase of $162 thousand or 10.7%, as compared to the first quarter of 2023.

Net gain on securities of $17 thousand for the first quarter of 2024 was the result of an increase in the fair value of equity securities from December 31, 2023. Other operating income increased from the comparable prior-year quarter as the result of gains on other assets.

Non-interest Expense

Summary of Non-interest Expense

(Dollars in Thousands)


	Three Months Ended
	March 31, 2024			March 31, 2023			Change			% Change
Salaries and Employee Benefits	$	12,893		$	11,947		$	946		7.9	%
Occupancy Expense of Premises, Net	1,771			1,628			143			8.8	%
Technology and Equipment Expense	4,820			4,417			403			9.1	%
FDIC and FICO Assessments	715			479			236			49.3	%
Amortization	41			45			(4)			(8.9)	%
Other Operating Expense	3,772			3,780			(8)			(0.2)	%
Total Non-interest Expense	$	24,012		$	22,296		$	1,716		7.7	%
Efficiency Ratio	69.54		%	63.43		%	6.1		%	9.6	%

Non-interest expense for the first quarter of 2024 was $24.0 million, an increase of $1.7 million, or 7.7%, from the first quarter of 2023. Salaries and benefit expenses increased $946 thousand, or 7.9%, from the comparable quarter in 2023. Technology expenses in the first quarter increased $403 thousand, or 9.1%, from the first quarter of 2023. In the first quarter of 2024, FDIC assessments increased $236 thousand from the first quarter of 2023, primarily the result of increase in the balance sheet.

Income Taxes

Summary of Income Taxes

(Dollars in Thousands)


	Three Months Ended
	March 31, 2024			March 31, 2023			Change			% Change
Provision for Income Taxes	$	2,024		$	2,359		$	(335)		(14.2)	%
Effective Tax Rate	20.9		%	21.6		%	(0.7)		%	(3.2)	%

The decrease in the effective tax rate for the three months ended March 31, 2024 compared to the three months ended March 31, 2023 was primarily due to the reduction of pretax income.

Item 3.

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 200 basis point upward and a 100 basis point downward 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 200 basis point increase in interest rate scenario and the 100 basis point decrease in interest rate scenario. These results are well within the ALCO policy limits as shown:

As of March 31, 2024:


	Change in Interest Rate
	+ 200 basis points	- 100 basis points
Calculated change in Net Interest Income - Year 1	(3.4)%	1.0%
Calculated change in Net Interest Income - Year 2	16.4%	14.5%

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.

Item 4.

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 Securities Exchange Act of 1934, as amended (the "Exchange Act"), as of March 31, 2024. The term "disclosure controls and procedures" means controls and other procedures of a company that are designed to ensure that:

•information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms; and

•information required to be disclosed by a company in the reports that it files or submits under the Exchange Act 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 not effective due to the following unremediated material weaknesses identified in our internal control over financial reporting, previously disclosed on the 2023 Form 10-K:

•We did not maintain effective monitoring controls related to 1) Internal Audit’s testing of management’s internal control over financial reporting, 2) the completeness and accuracy of information presented to the Audit Committee by Internal Audit, and 3) the related Audit Committee oversight over Internal Audit’s testing of management’s internal control over financial reporting.

•With regard to the conversion of our core banking information technology system, we did not effectively perform risk assessment procedures to identify the impact of the conversion on our internal control over financial reporting.

The material weaknesses did not result in a material misstatement of our annual or interim financial statements or previously released financial results.For additional information please refer to Part II - Item 9A. of the 2023 Form 10-K.

Prior to filing this Report, we performed relevant and responsive substantive procedures as of March 31, 2024, in order to complete our financial statements and related disclosures. Based on these procedures, management believes that our consolidated financial statements included in this Report have been prepared in accordance with GAAP. Our CEO and CFO have certified that, based on their knowledge, the financial statements, and other financial information included in this Form 10-Q, fairly present in all material respects the financial condition, results of operations, and cash flows of the Company as of the dates, and for the periods presented in this Report.

Remediation Efforts to Address the Material Weaknesses

The aforementioned material weaknesses were previously disclosed in the 2023 and 2022 Forms 10-K. While the Company has improved its organizational capabilities and implemented necessary remediation measures, the remediation steps taken were not in place for a sufficient amount of time for the material weaknesses to be considered remediated as of March 31, 2024. Accordingly, the Company will continue to monitor its remediation measures in the remaining quarters of 2024 in order to confirm effective remediation of the identified material weaknesses.

During the year ended December 31, 2023 and through the three months ended March 31, 2024, management initiated and/or completed the following remedial actions:

•The Company evaluated the assignment of responsibilities of internal and external resources associated with the performance of internal controls over financial reporting and hired additional resources, contracted external resources, and/or provided additional training to existing resources as appropriate. In addition, we have initiated a process to identify and maintain the information required to support the functioning of internal control.

•Audit Committee and management implemented the following actions to improve the monitoring activities related to Audit Committee oversight over Internal Audit’s testing of management’s internal control over financial reporting:

◦Increased the frequency and depth of reporting to the Audit Committee through the creation of a sub-committee of Audit Committee members that meet in the months in which the full Audit Committee does not have scheduled meetings or as needed.

◦Instituted more frequent Audit Committee meetings to facilitate timely review of matters related to the results of the Company’s monitoring program and Internal Audit’s progress against their plan as well as status of control testing results.

◦Developed a comprehensive internal audit strategy and program to test management’s controls over financial reporting.

◦Developed a robust reporting mechanism to ensure the completeness, accuracy and improved effectiveness of information which is presented on a timely basis to the Audit Committee to help fulfill the Audit Committee's oversight responsibilities.

◦Utilized monthly dashboards to report status and results of internal audits as well as operations of internal controls over financial reporting.

◦Engaged a professional services firm to review the Company’s control program required by the Sarbanes-Oxley Act of 2002, as amended, and assist Management with its overall Company-wide processes and with selecting and developing control activities designed to mitigate risks and support achievement of control objectives.

•Performed a thorough risk assessment to identify the impact of the core banking system conversion on our internal control over financial reporting. As a result, the company identified the need for additional controls to mitigate risks and support the achievement of control objectives. These controls are being implemented as part of the ongoing, overall remediation efforts.

The actions that we are taking are subject to ongoing management review and Audit Committee oversight to ensure they remain in place and continue to operate in order to be deemed effective.

Changes in Internal Control Over Financial Reporting

Except for the remediation measures in connection with the material weaknesses described above, 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 March 31, 2024 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II - OTHER INFORMATION

Item 1.

Legal Proceedings

As previously disclosed in certain of the Company’s filings with the SEC, on June 23, 2023, Robert C. Ashe filed a putative class action complaint (the "Ashe Lawsuit") against the Company in the United States District Court for the Northern District of New York. In addition to the Company, the complaint names as defendants Thomas J. Murphy, the Company’s former CEO and from September 30, 2022 to February 20, 2023, its interim CFO, Edward J. Campanella, the Company’s former CFO, and Penko Ivanov, the Company’s current CFO (“Individual Defendants” and, together with the Company, the "Defendants"). The complaint alleges that the Defendants made materially false and misleading statements regarding the Company’s business, operations and compliance policies in the Company’s public filings between March 12, 2022 and May 12, 2023. The complaint further alleges that the Individual Defendants are liable for these materially false and misleading statements as "controlling persons" of the Company. Based on these allegations, the complaint brings two claims for violations of Section 10(b) of the Exchange Act and Rule 10b-5 promulgated thereunder and of Section 20(a) of the Exchange Act. Mr. Ashe, on behalf of a purported class of shareholders, seeks compensatory damages as well as recovery of the costs and fees associated with the litigation. On December 5, 2023, plaintiff Ashe filed an amended complaint that changed the putative class period to the period from August 5, 2022 through May 12, 2023, but challenged substantially the same statements on the same basis. On February 9, 2024, the Company moved to dismiss the action in its entirety. On April 22, 2024, the parties reached an agreement in principle to settle the matter, subject to final documentation and court approval. Management believes that the terms of the proposed settlement will not have a material adverse impact on the Company’s financial results. In the event that the parties are not able to finalize a settlement, the Company intends to continue to vigorously defend against the claims asserted in the Ashe Lawsuit.

The Company intends to continue to vigorously defend itself against the Shareholder Derivative Complaint.

Item 1.A.

Risk Factors

The Risk Factors identified in the 2023 Form 10-K continue to represent the most significant risks to Arrow's future results of operations and financial conditions, without further modification or amendment.

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

Unregistered Sales of Equity Securities

None.

Issuer Purchases of Equity Securities

The following table presents information about purchases of common stock (our only class of equity securities registered pursuant to Section 12 of the Exchange Act) by Arrow during the three months ended March 31, 2024. In October 2023, the Board of Directors expanded the 2022 Repurchase Program by $5 million, bringing the total availability under the repurchase program to $9.1 million, and removed the expiration date previously incorporated into the existing repurchase program. As of March 31, 2024, $458,415 remained available for the repurchase of shares under the 2022 Repurchase Program. In the first quarter of 2024, Arrow had repurchased approximately $6.0 million (244,000 shares of its common stock) under the 2022 Repurchase Program and additional purchases in April 2024 fully utilized the $9.1 million authorized program amount.

On April 24, 2024, the Board approved the 2024 Repurchase Program, under which the Board authorized management, in its discretion and to the extent that it believes Arrow's common stock is reasonably priced and such repurchases appear to be an attractive use of available capital and in the best interests of shareholders, to repurchase from time to time, in the open market or in privately negotiated transactions, up to $5 million of Arrow common stock.


First Quarter 2024 Calendar Month	(A) Total Number of Shares Purchased 1	(B) Average Price Paid Per Share 1		(C) Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs 2	(D) Maximum Approximate Dollar Value of Shares that May Yet be Purchased Under the Plans or Programs 2
January	1,093	$	26.28	—	$	6,390,538
February	134,598	24.18		134,598	3,136,437
March	109,789	24.39		109,789	458,415
Total	245,480	24.28		244,387

1 The total number of shares purchased and the average price paid per share listed in columns (A) and (B) consist of (i) any shares surrendered or deemed surrendered to Arrow in such periods by holders of options to acquire Arrow common stock received by them under Arrow's long-term incentive plans in connection with their stock-for-stock exercise of such options and (ii) shares repurchased by Arrow pursuant to the 2022 Repurchase Program. In the months indicated, the listed number of shares purchased included the following number of shares purchased by Arrow through such methods: January - stock-for-stock option exercises (1,093 shares); February - repurchased under the 2022 Repurchase Program (134,598 shares); and March - repurchased under the 2022 Repurchase Program (109,789 shares.)

2 Includes only those shares acquired by Arrow pursuant to the 2022 Repurchase Program.

Item 3.

Defaults Upon Senior Securities - None

Item 4.

Mine Safety Disclosures - None

Item 5.

Other Information

Rule 10b5-1 Trading Arrangements

During the three months ended March 31, 2024, none of Arrow’s directors or officers (as defined in Rule 16a-1(f) under the Exchange Act) adopted, terminated or modified a Rule 10b5-1 trading arrangement or non-Rule 10b5-1 trading arrangement (as such terms are defined in Item 408 of Regulation S-K of the Securities Act of 1933).

Item 6.

Exhibits


Exhibit Number			Exhibit
3.(i)			Certificate of Incorporation of the Registrant as Amended through June 3, 2019, incorporated by reference from the Registrant's Current Report on Form 8-K filed June 5, 2019, Exhibit 3.1
3.(ii)			By-laws of the Registrant, as amended, incorporated herein by reference from the Registrant’s Current Report on Form 8-K filed on February 1, 2024 , Exhibit 3.1
10.1			Employment Agreement between the Registrant and David S . DeMarco , President and Chief Executive Officer , effective February 1, 202 4 incorporated herein by reference from the Registrant's Current Report on Form 8-K , filed February 6, 202 4 , Exhibit 10.1 *
10.2			Employment Agreement between the Registrant and David D . Kaiser , Senior Executive Vice President and Chief Credit Officer , effective February 1, 2024 incorporated herein by reference from the Registrant's Current Report on Form 8-K , filed February 6, 2024, Exhibit 10.2 *
10.3			Employment Agreement between the Registrant and Andrew J. Wise, Senior Executive Vice President and Chief Risk Officer , effective February 1, 202 4 incorporated herein by reference from the Registrant's Current Report on Form 8-K , filed February 6, 202 4 , Exhibit 10.3 *
10.4			Employment Agreement between the Registrant and Penko K. Ivanov , Senior Executive Vice President, Treasurer and Chief Financial Officer, effective February 1, 202 4 incorporated herein by reference from the Registrant's Current Report on Form 8-K , filed February 6, 202 4 , Exhibit 10.4*


31.1			Certification of Chief Executive Officer under SEC Rule 13a-14(a)/15d-14(a)
31.2			Certification of Chief Financial Officer under SEC Rule 13a-14(a)/15d-14(a)
32			Certification of Chief Executive Officer under 18 U.S.C. Section 1350 and Certification of Chief Financial Officer under 18 U.S.C. Section 1350
101.INS			XBRL Instance Document
101.SCH			XBRL Taxonomy Extension Schema Document
101.CAL			XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF			XBRL Taxonomy Extension Definition Linkbase Document
101.LAB			XBRL Taxonomy Extension Labels Linkbase Document
101.PRE			XBRL Taxonomy Extension Presentation Linkbase Document

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned thereunto duly authorized.

ARROW FINANCIAL CORPORATION

Registrant



May 10, 2024			/s/ David S. DeMarco
Date			David S. DeMarco
			President and Chief Executive Officer
			(Principal Executive Officer)

May 10, 2024			/s/ Penko Ivanov
Date			Penko Ivanov

			Chief Financial Officer
			(Principal Financial and Accounting Officer)