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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K
☒ Annual Report Pursuant to Section 13 or 15(d) of
The Securities Exchange Act of 1934

For the Fiscal Year Ended December 31, 2023
☐ 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 York22-2448962
(State or other jurisdiction of incorporation or organization)(I.R.S. Employer Identification No.)
250 Glen Street, Glens FallsNew York12801
(Address of principal executive offices)   (Zip Code)
Registrant’s telephone number, including area code:   518745-1000

Securities registered pursuant to Section 12(b) of the Act:
Title of Each ClassTrading SymbolName of Each Exchange on Which Registered
Common Stock, Par Value $1.00 per share
AROWNASDAQ Global Select Market
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  ☐ Yes     ☒ No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. ☐ Yes    ☒  No
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 standards provided pursuant to Section 13(a) of the Exchange Act.☐
Indicate by a check mark whether the registrant has filed a report on and attestation to its management's assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7562(b)) by the registered public accounting firm that prepared or issued its audit report.☒
If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of an error to previously issued financial statements.☐
Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant’s executive officers during the relevant recovery period pursuant to §240.10D-1(b).☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).☐
State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of the last business day of the registrant’s most recently completed second fiscal quarter:    $333,303,608
Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date.
ClassOutstanding as of February 29, 2024
Common Stock, par value $1.00 per share16,553,058
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant’s Proxy Statement for Annual Meeting of Shareholders to be held June 5, 2024 are incorporated by reference into Part III of this Form 10-K.

Auditor Name: KPMG LLP         Auditor Location: Albany, New York         Auditor Firm ID: 185        


ARROW FINANCIAL CORPORATION
FORM 10-K
TABLE OF CONTENTS
Page
Note on Terminology3 
The Company and Its Subsidiaries3 
Forward-Looking Statements3 
Use of Non-GAAP Financial Measures4 
PART I
PART II
PART III
PART IV




2

NOTE ON TERMINOLOGY
In this Annual Report on Form 10-K, the terms “Arrow,” “the registrant,” “the Company,” “we,” “us,” and “our,” generally refer to Arrow Financial Corporation and subsidiaries as a group, except where the context indicates otherwise.  At certain points in this Report, our performance is compared with that of our “peer group” of financial institutions.  Unless otherwise specifically stated, this peer group is comprised of the group of 177 domestic (U.S.-based) bank holding companies with $3 to $10 billion in total consolidated assets as identified in the Federal Reserve Board’s most recent “Bank Holding Company Performance Report” (which is the Performance Report for the most recently available period ending September 30, 2023), and peer group data has been derived from such Report.  This peer group is not, however, identical to either of the peer groups comprising the two bank indices included in the stock performance graphs on pages 23 and 24 of this Report.

THE COMPANY AND ITS SUBSIDIARIES
Arrow is a two-bank holding company headquartered in Glens Falls, New York.  The banking subsidiaries are Glens Falls National Bank and Trust Company (Glens Falls National or GFNB) whose main office is located in Glens Falls, New York, and Saratoga National Bank and Trust Company (Saratoga National or SNB) whose main office is located in Saratoga Springs, New York.  Active subsidiaries of Glens Falls National 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 fund) and Arrow Properties, Inc. (a real estate investment trust, or REIT). Arrow also owns directly two subsidiary business trusts, organized in 2003 and 2004 to issue trust preferred securities (TRUPs), which are still outstanding.

FORWARD-LOOKING STATEMENTS
    The information contained in this Annual Report on Form 10-K contains statements that are not historical in nature but rather are based on our 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 (the "Exchange Act"), and involve a degree of uncertainty and attendant risk.  Words such as “expects,” “believes,” “anticipates,” “estimates” and variations of such words and similar expressions often identify such forward-looking statements.  Some of these statements, such as those included in the interest rate sensitivity analysis in Item 7A of this Report, 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 our general perceptions of market conditions and trends in activity, both locally and nationally, as well as current management strategies for future operations and development.

These forward-looking statements may not be exhaustive, are not guarantees of future performance and involve certain risks and uncertainties that are difficult to quantify or, in some cases, to identify.  You should not place undue reliance on any such forward-looking statements. In the case of all forward-looking statements, actual outcomes and results may differ materially from what the statements predict or forecast.  Factors that could cause or contribute to such differences include, but are not limited to the following:  
•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;
•significant changes to market conditions presenting challenges to the U.S. commercial banking industry and any substantial downturn in the regional markets in which Arrow operates or in the U.S. economy generally;
•continued period of high inflation could adversely impact our business and our customers;
•competition in the commercial banking industry and certain market areas;
•failing to adapt to increasing technological advances and changes on a continuing basis;
•adverse effects on Arrow based on problems encountered by other financial institutions;
•any future economic or financial downturn, including any significant correction in the equity markets, which 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;
•potential residual effects from the implementation of our new core banking system in September 2022;
•losing key personnel unexpectedly or if employee wages increase significantly;
•pandemics or other health emergencies and their impact on economic, market and social conditions;
•continued interest rate risk;
•losses on securities held in our securities portfolio, particularly if interest rates increase or economic and market conditions deteriorate;
•maintaining an insufficient allowance for possible credit losses;
•risks from the increasing complexity of Arrow's operations;
•the failure to timely remediate the material weaknesses that we identified in our internal control over financial reporting and resolve litigation and other claims related to or arising out of the identified material weaknesses;
•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;
•maintaining higher quality capital and greater liquidity than has historically been the case;
•significant changes in banking or other laws and regulations, including both enactment of new legal or regulatory measures (e.g., the Economic Growth, Regulatory Relief, and Consumer Protection Act ("Economic Growth Act"), the Tax Cuts and Jobs Act of 2017 ("Tax Act") and the Dodd-Frank Wall Street Reform and Consumer Protection Act ("Dodd-Frank")) or the modification or elimination of pre-existing measures;
•non-compliance with the Patriot Act, Bank Secrecy Act, or other anti-money laundering laws and regulations;
•potential failure to comply with the CRA and fair lending laws;
•other rapid and dramatic changes in economic and market conditions;
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•sharp fluctuations in interest rates, economic activity, or consumer spending patterns;
•sudden changes in the market for products the Company provides, such as real estate or automobile loans;
•significant changes in U.S. monetary or fiscal policy, including new or revised monetary programs or targets adopted or announced by the Federal Reserve ("monetary tightening or easing") or significant new federal legislation materially affecting the federal budget ("fiscal tightening or expansion");
•competition from other sources (e.g., non-bank entities);
•similar uncertainties inherent in banking operations or business generally, including technological developments and changes;
•the continuity, timing and effectiveness of the recent transition in executive management; and
•other risks detailed from time to time within our filings with the Securities and Exchange Commission ("SEC").

The Company is under no duty to update any of the forward-looking statements after the date of this Annual Report on Form 10-K 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 the Company 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 the Company or any persons acting on our behalf may issue.

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USE OF NON-GAAP FINANCIAL MEASURES
The SEC has adopted Regulation G, which applies to all public disclosures, including earnings releases, made by registered companies that contain “non-GAAP financial measures.”  GAAP is generally accepted accounting principles in the United States of America.  Under Regulation G, companies making public disclosures containing non-GAAP financial measures must also disclose, along with each non-GAAP financial measure, certain additional information, including a reconciliation of the non-GAAP financial measure to the closest comparable GAAP financial measure and a statement of the Company’s reasons for utilizing the non-GAAP financial measure as part of its financial disclosures.  The SEC has exempted from the definition of “non-GAAP financial measures” certain commonly used financial measures that are not based on GAAP.  When these exempted measures are included in public disclosures, supplemental information is not required.  The following measures used in this Report, which are commonly utilized by financial institutions, have not been specifically exempted by the SEC and may constitute "non-GAAP financial measures" within the meaning of the SEC's rules, although the Company 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. The Company follows these practices.

The Efficiency Ratio: Financial institutions often use an "efficiency ratio" as a measure of expense control.  The efficiency ratio typically is defined as the ratio of noninterest expense to net interest income and noninterest 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 noninterest expense and noninterest 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 noninterest expense under GAAP but may not be included therein for purposes of calculating the efficiency ratio) and securities gains or losses (which are reflected in the calculation of noninterest income under GAAP but may be ignored for purposes of calculating the efficiency ratio).  The Company makes these adjustments.

Tangible Book Value per Share:  Tangible equity is total stockholders’ equity less intangible assets.  Tangible book value per share is tangible equity divided by total shares issued and outstanding.  Tangible book value per share is often regarded as a more meaningful comparative ratio than book value per share as calculated under GAAP, that is, total stockholders’ equity including intangible assets divided by total shares issued and outstanding.  Intangible assets include many items, but in our 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, we also may elect from time to time, in connection with our presentation of various financial measures prepared in accordance with GAAP, such as net income, earnings per share (i.e., EPS), return on average assets (i.e., ROA), and return on average equity (i.e., ROE), to additionally provide certain comparative disclosures that adjust these GAAP financial measures, typically by removing therefrom the impact of certain transactions or other material items of income or expense that are unusual or unlikely to be repeated.  The Company does so only if it believes that inclusion of the resulting non-GAAP financial measures may improve the average investor's understanding of Arrow's results of operations by separating out items that have a disproportional positive or negative impact on the particular period in question or by otherwise permitting a better comparison from period-to-period in the results of operations with respect to the Company's fundamental lines of business, including the commercial banking business.

The Company believes that the non-GAAP financial measures disclosed from time-to-time are useful in evaluating Arrow's performance and that such information should be considered as supplemental in nature, and not as a substitute for or superior to, the related financial information prepared in accordance with GAAP.  Arrow's non-GAAP financial measures may differ from similar measures presented by other companies.

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PART I
Item 1. Business

A. GENERAL
The holding company, Arrow Financial Corporation, a New York corporation, 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.  Arrow owns two nationally-chartered banks in New York (Glens Falls National and Saratoga National), and through such banks indirectly owns various non-bank subsidiaries, including an insurance agency, a registered investment adviser and a REIT. See "The Company and Its Subsidiaries," above.
Subsidiary Banks (dollars in thousands and data is as of December 31, 2023)
Glens Falls NationalSaratoga National
Total Assets at Year-End$3,274,507 $1,062,118 
Trust Assets Under Administration and
   Investment Management at Year-End
   (Not Included in Total Assets)		$1,625,139 $138,055 
Date Organized18511988
Employees (full-time equivalent)480 57 
Offices26 11 
Counties of OperationWarren, Washington,
Saratoga, Essex &
Clinton		 Saratoga, Albany,
Rensselaer, & Schenectady
Main Office250 Glen Street
Glens Falls, NY		171 So. Broadway
Saratoga Springs, NY

The holding company’s business consists primarily of the ownership, supervision and control of Arrow's two banks, including the banks' subsidiaries.  The holding company provides various advisory and administrative services and coordinates the general policies and operation of the banks. There were 537 full-time equivalent employees, including 38 employees within Arrow's insurance agency subsidiary, at December 31, 2023. See the discussion of our human capital resources in Section G ("HUMAN CAPITAL") of this Item 1.
Arrow offers a broad range of commercial and consumer banking and financial products.  The deposit base consists of deposits derived principally from the communities served.  The Company targets lending activities to consumers and small- and mid-sized companies in Arrow's regional geographic area. In addition, through an indirect lending program Arrow sources consumer loans from an extensive network of automobile dealers that operate in upstate New York and Vermont. Through the banks' trust operations, the Company provides retirement planning, trust and estate administration services for individuals, and pension, profit-sharing and employee benefit plan administration for corporations.

B. LENDING ACTIVITIES
Arrow engages in a wide range of lending activities, including commercial and industrial lending primarily to small and mid-sized companies; mortgage lending for residential and commercial properties; and consumer installment and home equity financing. An active indirect lending program is maintained through Arrow's sponsorship of automobile dealer programs under which consumer auto loans, primarily from dealers that meet pre-established specifications are sourced.  From time to time, a portion of Arrow's residential real estate loan originations are sold into the secondary market, primarily to the Federal Home Loan Mortgage Corporation ("Freddie Mac") and other governmental agencies. Normally, the Company retains the servicing rights on mortgage loans originated and sold into the secondary markets, subject to periodic determinations on the continuing profitability of such activity.  Arrow does not engage in subprime mortgage lending as a business line and does not extend or purchase so-called "Alt A," "negative amortization," "option ARMs" or "negative equity" mortgage loans.  
Arrow lends primarily to borrowers within the normal retail service area in upstate New York, with the exception of the indirect consumer lending line of business, where Arrow makes loans through an extensive network of automobile dealers that operate in a larger area of New York and Vermont. The loan portfolio does not include any foreign loans or any other significant risk concentrations.  From time to time, Arrow buys and offers participations in individual commercial loans, primarily in upstate New York. In recent periods, the total dollar amount of such participations has fluctuated, but generally represents less than 20% of commercial loans outstanding. The majority of the portfolio is collateralized, and most commercial loans are further supported by personal guarantees.
Generally, Arrow continues to implement lending strategies and policies that are intended to protect the quality of the loan portfolio, including strong underwriting and collateral control procedures and credit review systems. Loans are placed on nonaccrual status either due to the delinquency status of principal and/or interest or a judgment by management that the full repayment of principal and interest is unlikely. Home equity lines of credit, secured by real property, are systematically placed on nonaccrual status when 120 days past due, and residential real estate loans are placed on nonaccrual status when 150 days past due. Commercial and commercial real estate loans are evaluated on a loan-by-loan basis and are placed on nonaccrual status when 90 days past due if the full collection of principal and interest is uncertain (See Part II, Item 7.C.II.c. "Risk Elements"). Subsequent cash payments on loans classified as nonaccrual may be applied entirely to principal, although income in some cases may be recognized on a cash basis.

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C. SUPERVISION AND REGULATION
The following generally describes the laws and regulations to which Arrow is subject.  Bank holding companies, banks and their affiliates are extensively regulated under both federal and state law.  To the extent that the following information summarizes statutory or regulatory law, it is qualified in its entirety by reference to the particular provisions of the various statutes and regulations.  Any change in applicable law may have a material effect on business operations, customers, prospects and investors.

Bank Regulatory Authorities with Jurisdiction over Arrow and its Subsidiary Banks
Arrow is a registered bank holding company within the meaning of the Bank Holding Company Act of 1956 ("BHC Act") and as such is subject to regulation by the Board of Governors of the Federal Reserve System ("FRB").  As a "bank holding company" under New York State law, Arrow is also subject to regulation by the New York State Department of Financial Services. Arrow's two subsidiary banks are both national banks and are subject to supervision and examination by the Office of the Comptroller of the Currency ("OCC"). The banks are members of the Federal Reserve System and the deposits of each bank are insured by the Deposit Insurance Fund of the Federal Deposit Insurance Corporation ("FDIC").  The BHC Act generally prohibits Arrow from engaging, directly or indirectly, in activities other than banking, activities closely related to banking, and certain other financial activities.  Under the BHC Act, a bank holding company generally must obtain FRB approval before acquiring, directly or indirectly, voting shares of another bank or bank holding company, if after the acquisition the acquiror would own 5 percent or more of a class of the voting shares of that other bank or bank holding company.  Bank holding companies are able to acquire banks or other bank holding companies located in all 50 states, subject to certain limitations. Bank holdings companies that meet certain qualifications may choose to apply to the FRB for designation as “financial holding companies.” Upon receipt of such designation, a financial holding company may engage in a broader array of activities, such as insurance underwriting, securities underwriting and merchant banking. Arrow has not attempted to become, and has not been designated as, a financial holding company.
The FRB and the OCC have broad regulatory, examination and enforcement authority. The FRB and the OCC conduct regular examinations of the entities they regulate. In addition, banking organizations are subject to requirements for periodic reporting to the regulatory authorities.  The FRB and OCC have the authority to implement various remedies if they determine that the financial condition, capital, asset quality, management, earnings, liquidity or other aspects of a banking organization's operations are unsatisfactory or if they determine the banking organization is violating or has violated any law or regulation. The authority of the federal bank regulators over banking organizations includes, but is not limited to, prohibiting unsafe or unsound practices; requiring affirmative action to correct a violation or unsafe or unsound practice; issuing administrative orders; requiring the organization to increase capital; requiring the organization to sell subsidiaries or other assets; restricting dividends, distributions and repurchases of the organization's stock; restricting the growth of the organization; assessing civil money penalties; removing officers and directors; and terminating deposit insurance. The FDIC may terminate a depository institution's deposit insurance upon a finding that the institution's financial condition is unsafe or unsound or that the institution has engaged in unsafe or unsound practices for certain other reasons.

Regulatory Supervision of Other Arrow Subsidiaries
The insurance agency subsidiary of Glens Falls National is subject to the licensing and other provisions of New York State Insurance Law and is regulated by the New York State Department of Financial Services. Arrow's investment adviser subsidiary is subject to the licensing and other provisions of the federal Investment Advisers Act of 1940 and is regulated by the SEC.
Regulation of Transactions between Banks and their Affiliates
Transactions between banks and their "affiliates" are regulated by Sections 23A and 23B of the Federal Reserve Act (FRA). Each of Arrow's non-bank subsidiaries (other than the business trusts formed to issue the TRUPs) is a subsidiary of one of the subsidiary banks, and also is an "operating subsidiary" under Sections 23A and 23B. This means each non-bank subsidiary is considered to be part of the bank that owns it and thus is not an affiliate of that bank for purposes of Section 23A and 23B. However, each of the two banks is an affiliate of the other bank, under Section 23A, and Arrow, the holding company, is also an affiliate of each bank under both Sections 23A and 23B. Extensions of credit that a bank may make to affiliates, or to third parties secured by securities or obligations of the affiliates, are substantially limited by the FRA and the Federal Deposit Insurance Act (FDIA). Such acts further restrict the range of permissible transactions between a bank and any affiliate, including a bank affiliate. Furthermore, under the FRA, a bank may engage in certain transactions, including loans and purchases of assets, with a non-bank affiliate, only if certain special conditions, including collateral requirements for loans, are met and if the other terms and conditions of the transaction, including interest rates and credit standards, are substantially the same as, or at least as favorable to the bank as, those prevailing at the time for comparable transactions by the bank with non-affiliated companies or, in the absence of comparable transactions, on terms and conditions that would be offered by the bank to non-affiliated companies.

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Regulatory Capital Standards
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.  
Bank Capital Rules. In July 2013, federal bank regulators, including the FRB and the OCC, approved revised bank capital rules aimed at implementing capital requirements pursuant to Dodd-Frank. These rules were also intended to coordinate U.S. bank capital standards with the then-current drafts of the Basel III proposed bank capital standards for all of the developed world's banking organizations. The federal regulators' revised capital rules (the "Capital Rules"), which impose significantly higher minimum capital ratios on U.S. financial institutions than the rules they replaced, became effective for Arrow and its subsidiary banks on January 1, 2015, and were fully phased in by the end of 2019.
In 2020, federal bank regulators introduced an optional simplified measure of capital adequacy for qualifying community banking organizations (CBLR).  A qualifying community banking organization that opts into the CBLR framework and meets all the requirements under the CBLR framework will be considered to have met the well-capitalized ratio requirements under the “prompt corrective action” regulations and will not be required to report or calculate risk-based capital ratios.
The CBLR final rule became effective as of January 1, 2020, and Arrow and both subsidiary banks have opted out of utilizing the CBLR framework. Therefore, the Capital Rules promulgated under Dodd-Frank remain applicable to Arrow and both subsidiary banks.
The Capital Rules which remain applicable to Arrow consist of two basic types of capital measures, a leverage ratio and a set of risk-based capital measures. Within these two broad types of rules, however, significant changes were made in the revised Capital Rules, as discussed below.
Leverage Ratio. The Capital Rules increased the minimum required leverage ratio from 3.0% to 4.0%. The leverage ratio continues to be defined as the ratio of the institution's "Tier 1" capital (as defined under the new leverage rule) to total tangible assets (as defined under the revised leverage rule).
Risk-Based Capital Measures. Current risk-based capital measures assign various risk weightings to all of the institution's assets, by asset type, and to certain off balance sheet items, and then establish minimum levels of capital to the aggregate dollar amount of such risk-weighted assets. Under the risk-based Capital Rules, there are eight major risk-weighted categories of assets (although there are several additional super-weighted categories for high-risk assets that are generally not held by community banking organizations like Arrow). The Capital Rules include a measure called the "common equity tier 1 capital ratio" (CET1). For this ratio, only common equity (basically, common stock plus surplus plus retained earnings) qualifies as capital (i.e., CET1). Preferred stock and trust preferred securities, which qualified as Tier 1 capital under the old Tier 1 risk-based capital measure (and continue to qualify as capital under the revised Tier 1 risk-based capital measure), are not included in CET1 capital. Under these rules, CET1 capital also includes most elements of accumulated other comprehensive income (AOCI), including unrealized securities gains and losses, as part of both total regulatory capital (numerator) and total assets (denominator). However, smaller banking organizations like Arrow's were given the opportunity to make a one-time irrevocable election to include or not to include certain elements of AOCI, most notably unrealized securities gains or losses. Arrow made such an election, and therefore does not include unrealized securities gains and losses in calculating the CET1 ratio under the Capital Rules. The minimum CET1 ratio under these rules, effective January 1, 2015, is 4.50%, which remained constant throughout the phase-in period.
Consistent with the general theme of higher capital levels, the Capital Rules also increased the minimum ratio for Tier 1 risk-based capital from 4.0% to 6.0%, effective January 1, 2015. The minimum level for total risk-based capital under the Capital Rules remained at 8.0%.
The Capital Rules also incorporated a capital concept, the so-called "capital conservation buffer" (set at 2.5%, after full phase-in), which must be added to each of the minimum required risk-based capital ratios (i.e., the minimum CET1 ratio, the minimum Tier 1 risk-based capital ratio and the minimum total risk-based capital ratio). The capital conservation buffer was phased-in over four years beginning January 1, 2016 (see the table below). When, during economic downturns, an institution's capital begins to erode, the first deductions from a regulatory perspective would be taken against the capital conservation buffer. To the extent that such deductions should erode the buffer below the required level (2.5% of total risk-based assets after full phase-in), the institution will not necessarily be required to replace the buffer deficit immediately, but will face restrictions on paying dividends and other negative consequences until the buffer is fully replenished.
Also under the Capital Rules, and as required under Dodd-Frank, TRUPs issued by small- to medium-sized banking organizations (such as Arrow) that were outstanding on the Dodd-Frank grandfathering date for TRUPS (May 19, 2010) will continue to qualify as tier 1 capital, up to a limit of 25% of tier 1 capital, until the TRUPs mature or are redeemed, subject to certain limitations. See the discussion of grandfathered TRUPs in Section E ("CAPITAL RESOURCES AND DIVIDENDS") of Item 7.

The following is a summary of the definitions of capital under the various risk-based 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.
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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 Capital Rules applicable to Arrow and its subsidiary banks:
Year, as of January 12023
Minimum CET1 Ratio4.500 %
Capital Conservation Buffer ("Buffer")2.500 %
Minimum CET1 Ratio Plus Buffer7.000 %
Minimum Tier 1 Risk-Based Capital Ratio6.000 %
Minimum Tier 1 Risk-Based Capital Ratio Plus Buffer8.500 %
Minimum Total Risk-Based Capital Ratio8.000 %
Minimum Total Risk-Based Capital Ratio Plus Buffer10.500 %
Minimum Leverage Ratio4.000 %
 
At December 31, 2023, Arrow and its two subsidiary banks exceeded, by a substantial amount, each of the applicable minimum capital ratios established under the revised 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, and including in the case of each risk-based ratio, the phased-in portion of the capital buffer. See Note 20, Regulatory Matters, to the Consolidated Financial Statements for a presentation of Arrow's period-end ratios for 2023 and 2022.

Regulatory 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 minimum capital requirements.  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 Capital Rules, 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, and a total risk-based capital ratio of 10.00% or greater, provided the institution is not subject to any regulatory order or written directive regarding capital maintenance.
As of December 31, 2023, Arrow and its two subsidiary banks qualified as "well-capitalized" under the revised capital classification scheme.

Dividend Restrictions; Other Regulatory Sanctions
A holding company's ability to pay dividends or repurchase its outstanding stock, as well as its ability to expand its business, including for example, through acquisitions of additional banking organizations or permitted non-bank companies, may be restricted if its capital falls below minimum regulatory capital ratios or fails to meet other informal capital guidelines that the regulators may apply from time to time to specific banking organizations.  In addition to these potential regulatory limitations on payment of dividends, the holding company's ability to pay dividends to shareholders, and the subsidiary banks' ability to pay dividends to the holding company are also subject to various restrictions under applicable corporate laws, including banking laws (which affect the subsidiary banks) and the New York Business Corporation Law (which affects the holding company). The ability of the holding company and banks to pay dividends or repurchase shares in the future is, and is expected to continue to be, influenced by regulatory policies, the Capital Rules and other applicable law.
In cases where banking regulators have significant concerns regarding the financial condition, assets or operations of a bank holding company and/or one of its banks, the regulators may take enforcement action or impose enforcement orders, formal or informal, against the holding company or the particular bank.  If the ratio of tangible equity to total assets of a bank falls to 2% or below, the bank will likely be closed and placed in receivership, with the FDIC as receiver.

Cybersecurity
In addition to the provisions in the Gramm-Leach-Bliley Act relating to data security (discussed below), Arrow and its subsidiaries are subject to many federal and state laws, regulations and regulatory interpretations which impose standards and requirements related to cybersecurity.
In March 2015, federal regulators issued related statements regarding cybersecurity. One statement indicates that financial institutions should design multiple layers of security controls to establish lines of defense and to ensure that their risk management processes also address the risk posed by compromised customer credentials, including security measures to reliably authenticate customers accessing internet-based services of the financial institution. The other statement indicates that a financial institution’s management is expected to maintain sufficient business continuity planning processes to ensure the rapid recovery, resumption and maintenance of the institution’s operations after a cyber-attack involving destructive malware. A financial institution is also expected to develop appropriate processes to enable recovery of data and business operations and address rebuilding network capabilities and restoring data if the institution or its critical service providers fall victim to this type of cyber-attack. Financial institutions that fail to observe this regulatory guidance on cybersecurity may be subject to various regulatory sanctions, including financial penalties.
In February 2018, the SEC issued the “Commission Statement and Guidance on Public Company Cybersecurity Disclosures” to assist public companies in preparing disclosures about cybersecurity risks and incidents. With the increased frequency and magnitude of cybersecurity incidents, the SEC stated that it is critical that public companies take all required
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actions to inform investors about material cybersecurity risks and incidents in a timely fashion. Additionally, in October 2018 the SEC issued the “Report of Investigation Pursuant to Section 21(a) of the Securities Exchange Act of 1934 Regarding Certain Cyber-Related Frauds Perpetrated Against Public Companies and Related Internal Controls Requirements” which cited business email compromises that led to the incidents and that internal accounting controls may need to be reassessed in light of these emerging risks. Certain Arrow subsidiaries are also subject to certain New York State cybersecurity regulations.
In July 2023, the SEC adopted amendments intended to enhance and standardize disclosures related to cybersecurity. The amendments were 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.” Arrow has undertaken and implemented a number of procedures and control steps to comply with these expanded cybersecurity reporting requirements as outlined below under Item 1C. Cybersecurity.

Privacy and Confidentiality Laws
Arrow and its subsidiaries are subject to a variety of laws that regulate customer privacy and confidentiality. The Gramm-Leach-Bliley Act requires financial institutions to adopt privacy policies, to restrict the sharing of nonpublic customer information with nonaffiliated parties upon the request of the customer, and to implement data security measures to protect customer information. Certain state laws may impose additional privacy and confidentiality restrictions. The Fair Credit Reporting Act, as amended by the Fair and Accurate Credit Transactions Act of 2003, regulates use of credit reports, providing of information to credit reporting agencies and sharing of customer information with affiliates, and sets identity theft prevention standards.

Anti-Money Laundering, the U.S. Patriot Act and OFAC
The Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism (USA PATRIOT) Act of 2001 initially adopted in 2001 and re-adopted by the U.S. Congress in 2006 with certain changes (the “Patriot Act”), imposes substantial record-keeping and due diligence obligations on banks and other financial institutions, with a particular focus on detecting and reporting money-laundering transactions involving domestic or international customers. The U.S. Treasury Department has issued and will continue to issue regulations clarifying the Patriot Act's requirements.
Under the Patriot Act and other federal anti-money laundering laws and regulations, including, but not limited to, the Currency and Foreign Transactions Report Act (collectively, “Anti-Money Laundering Laws”), financial institutions, including banks, must maintain certain anti-money laundering compliance, customer identification and due diligence programs that include established internal policies, procedures, and controls. Financial institutions are also prohibited from entering into specified financial transactions and account relationships and must meet enhanced standards for due diligence and customer identification. Financial institutions must take reasonable steps to conduct enhanced scrutiny of account relationships to guard against money laundering and to report suspicious transactions. Law enforcement authorities have been granted increased access to financial information maintained by financial institutions. Bank regulators routinely examine institutions for compliance with these obligations and they must consider an institution's compliance in connection with the regulatory review of applications, including applications for banking mergers and acquisitions. The U.S. Treasury Department's Financial Crises Enforcement Network (“FinCEN”) issued a final rule in 2016 increasing customer due diligence requirements for banks, including adding a requirement to identify and verify the identity of beneficial owners of customers that are legal entities, subject to certain exclusions and exemptions. The Company has established procedures for compliance with these requirements. Compliance with the provisions of the Patriot Act and other Anti-Money Laundering Laws results in substantial costs on all financial institutions.
The U.S. Department of the Treasury's Office of Foreign Assets Control (“OFAC”) is responsible for helping to insure that United States persons, including banks, do not engage in transactions with certain prohibited parties, as defined by various Executive Orders and Acts of Congress. OFAC publishes lists of persons, organizations, and countries suspected of aiding, harboring or engaging in terrorist acts, including, but not limited to, Specially Designated Nationals and Blocked Persons. If Arrow finds a name on any transaction, account or wire transfer that is on an OFAC list, Arrow must freeze or block such account or transaction, file a suspicious activity report, if required, notify the appropriate authorities and maintain appropriate records.

Community Reinvestment Act
Arrow's subsidiary banks are subject to the Community Reinvestment Act ("CRA") and implementing regulations. CRA regulations establish the framework and criteria by which the bank regulatory agencies assess an institution's record of helping to meet the credit needs of its community, including low and moderate-income individuals. CRA ratings are taken into account by regulators in reviewing certain applications made by Arrow and its bank subsidiaries.
The Dodd-Frank Act
Dodd-Frank significantly changed the regulatory structure for financial institutions and their holding companies, for example, through provisions requiring the Capital Rules. Among other provisions, Dodd-Frank implemented corporate governance revisions that apply to all public companies, not just financial institutions, permanently increased the FDIC’s standard maximum deposit insurance amount to $250,000, changed the FDIC insurance assessment base to assets rather than deposits and increased the reserve ratio for the deposit insurance fund to ensure the future strength of the fund. The federal prohibition on the payment of interest on certain demand deposits was repealed, thereby permitting depository institutions to pay interest on business transaction accounts. Dodd-Frank established a new federal agency, the Consumer Financial Protection Bureau (the “CFPB”), centralizing significant aspects of consumer financial protection under this agency. Limits were imposed for debit card
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interchange fees for issuers that have assets greater than $10 billion, which also could affect the amount of interchange fees collected by financial institutions with less than $10 billion in assets. Dodd-Frank also imposed new requirements related to mortgage lending, including prohibitions against payment of steering incentives and provisions relating to underwriting standards, disclosures, appraisals and escrows. The Volcker Rule prohibited banks and their affiliates from engaging in proprietary trading and investing in certain unregistered investment companies.
Federal banking regulators and other agencies including, among others, the FRB, the OCC and the CFPB, have been engaged in extensive rule-making efforts under Dodd-Frank, and the Community Bank Leverage Ratio has impacted certain Dodd-Frank requirements, as explained above.

    Incentive Compensation 
Dodd-Frank required the federal bank regulatory agencies and the SEC to establish joint regulations or guidelines prohibiting incentive-based payment arrangements at specified regulated entities, such as the Company, having at least $1 billion in total assets that encourage inappropriate risks by providing an executive officer, employee, director or principal shareholder with excessive compensation, fees, or benefits or that could lead to material financial loss to the entity. In addition, these regulators must establish regulations or guidelines requiring enhanced disclosure to regulators of incentive-based compensation arrangements.
The federal bank regulators issued proposed rules to address incentive-based compensation arrangements in June 2016. Final rules have not yet been issued by the federal bank regulatory agencies under this Dodd-Frank provision.
In 2010, the FRB, OCC and FDIC issued comprehensive final guidance on incentive compensation policies intended to ensure that the incentive compensation policies of banking organizations do not undermine the safety and soundness of such organizations by encouraging excessive risk-taking. The guidance, which covers all employees that have the ability to materially affect the risk profile of an organization, either individually or as part of a group, is based upon the key principles that a banking organization’s incentive compensation arrangements should (i) provide incentives that do not encourage risk-taking beyond the organization’s ability to effectively identify and manage risks, (ii) be compatible with effective internal controls and risk management, and (iii) be supported by strong corporate governance, including active and effective oversight by the organization’s board of directors. Management believes the current and past compensation practices of the Company do not encourage excessive risk taking or undermine the safety and soundness of the organization.
The FRB will review, as part of the regular, risk-focused examination process, the incentive compensation arrangements of banking organizations, such as the Company, that are not “large, complex banking organizations.” These reviews will be tailored to each organization based on the scope and complexity of the organization’s activities and the prevalence of incentive compensation arrangements. The findings of the supervisory initiatives will be included in reports of examination. Deficiencies will be incorporated into the organization’s supervisory ratings, which can affect the organization’s ability to make acquisitions and take other actions. Enforcement actions may be taken against a banking organization if its incentive compensation arrangements, or related risk-management control or governance processes, pose a risk to the organization’s safety and soundness and the organization is not taking prompt and effective measures to correct the deficiencies.
 
Deposit Insurance Laws and Regulations
In February 2011, the FDIC finalized a new assessment system that took effect in the second quarter of 2011.  The final rule changed the assessment base from domestic deposits to average assets minus average tangible equity, adopted a new large-bank pricing assessment scheme, and set a target size for the Deposit Insurance Fund. The rule (as mandated by Dodd-Frank) finalized a target size for the Deposit Insurance Fund Reserve Ratio at 2.0% of insured deposits.
Due to increased growth in insured deposits during the first half of 2020, on September 15, 2020, the FDIC established a plan to restore the Deposit Insurance Fund Reserve Ratio to at least 1.35% by September 30, 2028, as required by the FDIA, utilizing the rate schedule in effect at that time. In response to updated analysis and projections for the fund balance and the Deposit Insurance Fund Reserve Ratio, the FDIC adopted a final rule in October 2022 increasing the initial base deposit insurance assessment rate schedules by two percent effective January 1, 2023 and beginning on the first quarterly assessment period of 2023. The increase is intended to ensure that the reserve ratio meets the minimum ratio of 1.35% by the September 30, 2028 statutory deadline. Arrow is unable to predict whether or to what extent the FDIC may elect to impose additional special assessments on insured institutions in upcoming years, especially in light of recent high-profile large bank failures.

Reserve Requirements
Pursuant to regulations of the FRB, all banking organizations are required to maintain average daily reserves at mandated ratios against their transaction accounts and certain other types of deposit accounts. These reserves must be maintained in the form of vault cash or in an account at a Federal Reserve Bank. In March 2020, the Federal Reserve Board reduced reserve requirement ratios to zero percent to free up liquidity in the banking industry to support lending to households and businesses.

D. RECENT LEGISLATIVE DEVELOPMENTS
The American Rescue Plan Act of 2021
On March 11, 2021, the American Rescue Plan Act of 2021 ("American Rescue Plan") was signed into law to speed up the recovery from the economic and health effects of the COVID-19 pandemic and the ongoing recession. The American Rescue Plan is a $1.9 trillion economic stimulus bill that builds upon both the CARES Act and the CAA.
Several provisions within the American Rescue Plan impact financial institutions. Key provisions include direct stimulus payments for the majority of Americans, extending unemployment benefits and continuing eviction and foreclosure moratoriums. In addition, over $350 billion has been allocated to state, local and tribal governments to bridge budget shortfalls.
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Other Legislative Initiatives 
From time to time, various legislative and regulatory initiatives are introduced in Congress and state legislatures, as well as by regulatory authorities. These initiatives may include proposals to expand or contract the powers of bank holding companies and depository institutions or proposals to change the financial institution regulatory environment. Such legislation could change banking laws and the operating environment of our Company in substantial, but unpredictable ways. Arrow cannot predict whether any such legislation will be enacted, and, if enacted, the effect that it, or any implementing regulations would have on the Company's financial condition or results of operations.

E. STATISTICAL DISCLOSURE – (Regulation S-K, Subpart 1400)
Set forth below is an index identifying the location in this Report of various items of statistical information required to be included in this Report by the SEC’s industry guide for Bank Holding Companies.
Required InformationLocation in Report
Distribution of Assets, Liabilities and Stockholders' Equity; Interest Rates and Interest DifferentialPart II, Item 7.B.I.
Investment PortfolioPart II, Item 7.C.I.
Loan PortfolioPart II, Item 7.C.II.
Summary of Credit Loss ExperiencePart II, Item 7.C.III.
DepositsPart II, Item 7.C.IV.
Return on Equity and AssetsPart II, Item 6.
Short-Term BorrowingsPart II, Item 7.C.V.

F. COMPETITION
Arrow faces intense competition in all markets served.  Competitors include traditional local commercial banks, savings banks and credit unions, non-traditional internet-based lending alternatives, as well as local offices of major regional and money center banks.  Like all banks, the Company encounters strong competition in the mortgage lending space from a wide variety of other mortgage originators, all of whom are principally affected in this business by the rate and terms set, and the lending practices established from time-to-time by the very large government sponsored enterprises ("GSEs") engaged in residential mortgage lending, most importantly, “Fannie Mae” and “Freddie Mac.” For many years, these GSEs have purchased and/or guaranteed a very substantial percentage of all newly-originated mortgage loans in the U.S. Additionally, non-banking financial organizations, such as consumer finance companies, insurance companies, securities firms, money market funds, mutual funds, credit card companies and wealth management enterprises offer substantive equivalents of the various other types of loan and financial products and services and transactional accounts that are offered, even though these non-banking organizations are not subject to the same regulatory restrictions and capital requirements that apply to Arrow.  Under federal banking laws, such non-banking financial organizations not only may offer products and services comparable to those offered by commercial banks, but also may establish or acquire their own commercial banks.

G. HUMAN CAPITAL
Arrow believes that its employees are among its most important assets. Accordingly, Arrow has prioritized investment in the well-being, performance, engagement and development of its employees. This includes, but is not limited to, providing access to well-being resources and assistance, offering competitive compensation and benefits to attract and retain top-level talent, empowering team members to take an active role in the formation and execution of the business strategy, and fostering a diverse and inclusive work environment that reflects the many values of the communities that Arrow serves. One example is through the creation of Arrow University, we are investing in our people by bringing employee learning and development to the forefront. We offer opportunities to employees at all levels for personal and professional growth, technical training, and career exploration and enhancement. At December 31, 2023, Arrow had 537 full-time equivalent employees.
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H. ENVIRONMENTAL, SOCIAL AND GOVERNANCE (ESG)
We believe that meeting the evolving needs of our customers and being good stewards of our communities is critical. We are committed to operating in a manner that provides and maintains safe and healthy working conditions. We operate in compliance with applicable laws and regulations and are firmly committed to responsibly conducting business.
Arrow remains committed to strengthening financial lives within our communities through the power of care, capability, commitment and collaboration. Through our partnership, we aim to deliver meaningful engagement that translates into long‐term value for our team, our customers and our investors. We are dedicated to providing professional development and holistic support to our team and are working on many ways to demonstrate the value of differences, particularly around diversity, equity, inclusion and belonging (“DEIB”).

Employees
•Annual engagement with a diversity and inclusion consultant to assess diversity within our employee base and support for setting and tracking goals to encourage the advancement of minorities, women, veterans and persons with disabilities
•Learning and professional development through the Employee Experience Department
•Wellness and mental health services to our employees through outside Employee Assistance Program (EAP) contracted services
•Ongoing outreach to measure employee engagement
•Incorporated inclusion and belonging into our human resources policies, practices and learning and development programs
•Encouraged and facilitated employee giving including through payroll deduction, dress-down days, and a fundraising campaign that totaled more than $103,000 out of their own pockets, a true reflection of our culture of giving.

Arrow is proud of our many contributions to our customers and communities, including our commitment to complying with environmental regulations, meeting the financial needs of the low- to moderate-income population and giving back in dollars and volunteer hours.

Customers
•Included energy-saving features into the renovation of our branches, such as interior and exterior LED lighting and energy-efficient plumbing in 60 percent of our branch network
•Incorporated the above environmentally friendly attributes into our Glens Falls, New York, headquarters renovation, which includes approximately 76,000 square feet of office space; motion-activated lighting; significant improvements to exterior wall and roof insulation; new HVAC systems with higher efficiency, which meet modern fresh-air and ventilation requirements; energy-efficient windows and entry doors; low-VOC materials; a separate tie-in to the city stormwater and sewer system to bypass the municipal treatment of rainwater collected off the building; and green plantings on a portion of the roof
•Installed solar panels at 20 South Street, part of our corporate headquarters, to support the main campus with approximately 3,000 square feet of green energy
•Reduced emissions via remote work and video conferencing for large segments of employees
•Provided and encouraged digital banking options and paperless statements
•Installed electric vehicle charging stations at our SNB Main Office
•Lending program to facilitate first-time home ownership
•Bank On-certified checking product for the unbanked or underbanked population with no overdraft fees
•Partnership with numerous organizations to meet the financial needs of the low- to moderate-income population
•Educated and empowered our customers to prevent, detect and report fraud on their accounts with us
•Introduced easy-to-use fraud prevention digital services for businesses to monitor and approve activity on their accounts

Communities
•Maintained our philanthropic support of environmental sustainability in our community, including organizations that impact soil and water conservation, land conservation, sustainable farming, mountain and lake protection and stewardship, and parks and recreation
•Donated nearly $3 million in giving in the last five years and more than 31,000 hours served in the last four years
•More than $781,000, including more than $103,000 from employee donations directly and nearly 11,200 hours donated to our communities in 2023, a 19 percent increase over 2022, in support of arts and culture, child care, economic and workforce development, emergency assistance, food security, financial literacy, mental and physical health, safe and affordable housing, transportation and more
•Prioritization of donations to organizations that make it their mission to provide affordable homeownership, environmental or sustainable activities and programming, economic empowerment, health and human services and social progress
•CRA rating of “Satisfactory” for meeting the credit needs of our communities and a CRA rating of “Outstanding” for community development

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Arrow believes that strong corporate governance is the foundation to delivering on our commitments to stakeholders. Arrow adheres to a comprehensive governance program, including:

Shareholders and Corporate Governance
•Longstanding dedication to diversity on Arrow’s Board of Directors, exceeding NASDAQ requirements
•Both Glens Falls National Bank and Saratoga National Bank have maintained their Bauer Financial 5-Star "Exceptional Performance" ratings for the 16th and 14th consecutive years, respectively
•Developed ESG Investment Models for our socially conscious clients
•Strong cybersecurity protections and training
•Strong dedication to information security and data privacy

I. EXECUTIVE OFFICERS OF THE REGISTRANT
The names and ages of the executive officers of Arrow and positions held by each are presented in the following table:
NameAgePositions Held and Years from Which Held
David S. DeMarco62
President and Chief Executive Officer of Arrow, GFNB and SNB since May 13, 2023. Mr. DeMarco joined the Company in 1987 as a commercial lender and since that time has served in positions of increasing responsibility within the organization. In 2012, he was named President and CEO of SNB. In May 2023, he was named President and CEO of Arrow Financial Corporation and GFNB. He holds a bachelor’s degree in finance from the University of Texas at Austin. Mr. DeMarco is a graduate of the Adirondack Regional Chamber of Commerce’s Leadership Program and the Stonier Graduate School of Banking. He serves as a Director of the Company and its subsidiary banks and sits on the boards of various non-profits dedicated to healthcare and economic development.
Penko Ivanov55
Chief Financial Officer, Treasurer and Chief Accounting Officer effective February 21, 2023 and Senior Executive Vice President of Arrow, GFNB and SNB since February 1, 2024. Mr. Ivanov joined the Company in 2023 with more than 30 years of experience in Financial Planning & Analysis, Controllership, Financial Reporting, Treasury and compliance with Sarbanes-Oxley Act of 2002. Mr. Ivanov previously served as CFO for Bankwell Financial Group, helping it almost double in size over six-plus years to $3.3 billion in total consolidated assets. He has held CFO positions at Darien Rowayton Bank and for Doral Bank’s U.S. Operations. He began his career with Ernst & Young and held accounting/ finance positions at PepsiCo, GE Capital and Bridgewater Associates. Mr. Ivanov holds an MBA and bachelor’s degree in accounting and finance from the University of South Florida. He is also Six Sigma Black Belt certified.
Michael Jacobs53
Chief Information Officer of Arrow, GFNB and SNB since February 1, 2024. Mr. Jacobs joined GFNB in 2003 as Information Systems Manager. He was later promoted to Senior Vice President and then Executive Vice President. As Chief Information Officer, Mr. Jacobs guides the Company’s strategic technology plans. He has more than 30 years of experience in the community banking industry, having previously served as Operations Manager at Cohoes Savings Bank and Item Processing Manager at Hudson River Bank and Trust. Mr. Jacobs earned a bachelor’s degree in finance from Siena College and an associate degree in business administration from Hudson Valley Community College.
David D. Kaiser63
Senior Executive Vice President and Chief Credit Officer of Arrow, GFNB and SNB since February 2022. Mr. Kaiser joined the Company in 2001 as Vice President and Commercial Loan Officer. He served as Corporate Banking Manager and was later promoted to Senior Vice President, before being named Chief Credit Officer in 2011, followed by promotions to Executive Vice President and Senior Executive Vice President. Prior to joining the Company, he spent 15 years in the Capital Region as a Commercial Loan Officer. Mr. Kaiser has a bachelor’s degree in business administration from Siena College. Mr. Kaiser actively serves on boards of numerous community organizations.
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Brooke Pancoe38
Chief Human Resources Officer of Arrow, GFNB and SNB since February 1, 2024. Ms. Pancoe joined the Company in 2018 as Director of Human Resources. In her current role as Chief Human Resources Officer, she has executive oversight of the Company’s human resource strategies, which includes organizational design and succession planning, talent acquisition and retention, performance management, professional development and compensation and benefits. Prior to joining the Company, Ms. Pancoe held various human resource management roles within the power generation and engineering services industry. Ms. Pancoe holds a bachelor’s degree in psychology from Clark University in Worcester, MA, and an MBA from the University at Albany. In addition, she maintains a certified professional human resources designation.
Andrew J. Wise57
Senior Executive Vice President and Chief Risk Officer of Arrow, GFNB and SNB since February 1, 2024. Mr. Wise joined the Company in 2016 as Senior Vice President of Administration for GFNB. He has more than 30 years of experience building and leading both community banks and bank-owned insurance agencies. Mr. Wise previously served as Vice President and Chief Information Security Officer for The Adirondack Trust Company and acted as Executive Vice President and COO for Wise Insurance Brokers, Inc. He has extensive experience in designing, implementing and managing workflows and delivering operational efficiency. He holds a bachelor’s degree from Boston University’s School of Management.
Marc Yrsha45
Chief Banking Officer of Arrow, GFNB and SNB since February 1, 2024. Mr. Yrsha and oversees the strategic direction of the Retail Banking unit, which includes retail deposits and lending, business development, consumer payments, business services, municipal banking, as well as small business and retail lending. Mr. Yrsha oversees the Wealth Management and Marketing divisions of the Company. Mr. Yrsha joined the Company in 2015. Prior to joining our Company, Mr. Yrsha spent time in retail leadership and retail and commercial lending at large regional and community banks within the Arrow footprint.Mr. Yrsha is active in the community serving in leadership roles on a variety of boards.He is a graduate of Castleton University in Vermont and the Adirondack Regional Chamber of Commerce’s Leadership Adirondack Program.

J. AVAILABLE INFORMATION
Arrow's Internet address is www.arrowfinancial.com.  The Company makes available, free of charge on or through Arrow's website, the annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports as soon as practicable after they are filed or furnished with the SEC pursuant to the Exchange Act.  We intend to use our website to disclose material non-public information and various other documents related to corporate operations, including Corporate Governance Guidelines, the charters of principal board committees, and codes of ethics and to comply with our disclosure obligations under Regulation FD. Accordingly, investors should monitor our website, in addition to following and reviewing our news releases, filings with the SEC and public conference calls and other presentations.  The Company has adopted a financial code of ethics that applies to Arrow’s chief executive officer, chief financial officer and principal accounting officer and a business code of ethics that applies to all directors, officers and employees of the holding company and its subsidiaries. Both of these can be found at: https://www.arrowfinancial.com/Corporate/Governance.

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Item 1A. Risk Factors
Arrow's financial results and the market price of its stock are subject to risks arising from many factors, including the risks listed below, as well as other risks and uncertainties. Any of these risks could materially and adversely affect Arrow's business, financial condition or results of operations. Please note that the discussion below regarding the potential impact on Arrow of certain of these factors that may develop in the future is not meant to provide predictions by Arrow's management that such factors will develop, but to acknowledge the possible negative consequences to the Company and business if certain conditions materialize.

MACROECONOMIC AND INDUSTRY RISKS

Market conditions could present significant challenges to the U.S. commercial banking industry and its core business of making and servicing loans. Any substantial downturn in the regional markets in which Arrow operates or in the U.S. economy generally could adversely affect Arrow's ability to maintain and/or grow earnings. Arrow's business is highly dependent on the business environment in the markets in which the Company operates as well as the United States as a whole. Arrow's business is dependent upon the financial stability of the Company's borrowers, including their ability to pay interest on and repay the principal amount of outstanding loans, the value of the collateral securing those loans, and the overall demand for loans and other products and services, all of which impact Arrow's stability and future growth. Although Arrow's market area has experienced a stabilizing of economic conditions in recent years and even periods of modest growth, if unpredictable or unfavorable economic conditions unique to the market area should occur in upcoming periods, these conditions will likely have an adverse effect on the quality of the loan portfolio and financial performance. Arrow is less able than larger regional competitors to spread the risk of unfavorable local economic conditions over a larger market area. Further, if the overall U.S. economy deteriorates, then Arrow's business, results of operations, financial condition and prospects could be adversely affected. In particular, financial performance may be adversely affected by short-term and long-term interest rates, the prevailing yield curve, inflation, monetary supply, fluctuations in the debt and equity capital markets, and the strength of the domestic economy and the local economies in the markets in which Arrow operates, all of which are beyond Arrow's control.

A continued period of high inflation could adversely impact our business and our customers. The Federal Reserve Board has raised certain benchmark interest rates in an effort to combat the pronounced increase in inflation. Should rates continue to rise, the value of our investment securities, particularly those with longer maturities, would likely decrease (although this effect may be mitigated for floating rate instruments). Further, inflation increases the cost of operational expenses which increases our noninterest expenses. Additionally, our customers may be affected by inflation, which could have a negative impact on their ability to repay loans. Finally, the high inflationary environment may discourage our customers from pursuing new loans.

Arrow operates in a highly competitive industry and market areas that could negatively affect growth and profitability. Competition for commercial banking and other financial services is fierce in Arrow's market areas. In one or more aspects of business, Arrow's subsidiaries compete with other commercial banks, savings and loan associations, credit unions, finance companies, Internet-based financial services companies, mutual funds, insurance companies, brokerage and investment banking companies, and other financial intermediaries. Additionally, due to their size and other factors, many competitors may be able to achieve economies of scale and, as a result, may offer a broader range of products and services, as well as better pricing for those products and services, than Arrow can. Technology has lowered barriers to entry and made it possible for non-banks to offer products and services traditionally provided by banks, such as automatic transfer and automatic payment systems. In addition, many of Arrow's competitors are not subject to the same extensive federal regulations that govern bank holding companies and federally insured banks. Failure by Arrow to offer competitive services in Arrow's market areas could significantly weaken Arrow's market position, adversely affecting growth, which, in turn, could have a material adverse effect on Arrow's financial condition and results of operations.

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. Technological advances and changes in the financial services industry are pervasive and constant. The retail financial services sector, like many other retail goods and services sectors, is constantly evolving, involving new delivery and communications systems and technologies that are extraordinarily far-reaching and impactful. For Arrow to remain competitive, Arrow must comprehend and adapt to these systems and technologies. Proper implementation of new technologies can increase efficiency, decrease costs and help to meet customer demand. However, many competitors have greater resources to invest in technological advances and changes. Arrow may not always be successful in utilizing the latest technological advances in offering its products and services or in otherwise conducting its business. Failure to identify, consider, adapt to and implement technological advances and changes could have a material adverse effect on business.

Problems encountered by other financial institutions could adversely affect Arrow. Arrow's ability to engage in routine funding transactions could be adversely affected by financial or commercial problems confronting other financial institutions. Financial services institutions are interrelated as a result of trading, clearing, counterparty and other relationships. Arrow has exposure to many different counterparties in the normal course of business, and routinely executes transactions with counterparties in the financial services industry, including brokers and dealers, other commercial banks, investment banks, mutual and hedge funds, and other financial institutions. As a result, defaults by, or even rumors or questions about, one or more financial services institutions, or the financial services industry generally, including in response to recent high-profile large bank failures, could lead to market-wide liquidity problems and losses or defaults by Arrow or by other financial institutions on whom Arrow relies or with whom Arrow interacts. Some of these transactions expose Arrow to credit and other potential risks in the event of default of Arrow's counterparty or client. In addition, credit risk may be exacerbated when the collateral held by Arrow cannot be liquidated or only may be liquidated at prices not sufficient to recover the full amount due Arrow under the underlying financial instrument, held by Arrow. There is no assurance that any such losses would not materially and adversely affect results of operations.

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OPERATIONAL RISKS

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. Revenues from trust and wealth management business are dependent on the level of assets under management. Any significant downturn in the equity markets may lead Arrow's trust and wealth management customers to liquidate their investments, or may diminish account values for those customers who elect to leave their portfolios with Arrow, in either case reducing assets under management and thereby decreasing revenues from this important sector of the business. Other fee-based businesses are also susceptible to a sudden economic or financial downturn.
In addition, Arrow's loan quality is affected by the condition of the economy. Like all financial institutions, Arrow maintains an allowance for credit losses to provide for probable credit losses at the balance sheet date. Arrow's allowance for credit losses is based on its historical loss experience as well as an evaluation of the risks associated with its loan portfolio, including the size and composition of the portfolio, current economic conditions and geographic concentrations within the portfolio and other factors. While Arrow has continued to enjoy a very high level of quality in its loan portfolio generally and very low levels of loan charge-offs and non-performing loans, if the economy in Arrow's geographic market area should deteriorate to the point that recessionary conditions return, or if the regional or national economy experiences a protracted period of stagnation, the quality of our loan portfolio may weaken so significantly that its allowance for loan losses may not be adequate to cover actual or expected loan losses. In such events, Arrow may be required to increase its provisions for credit losses and this could materially and adversely affect financial results. Moreover, weak or worsening economic conditions often lead to difficulties in other areas of its business, including growth of its business generally, thereby compounding the negative effects on earnings.

Potential continuing complications with the implementation of our core banking system in September 2022 could adversely impact our business and operations. Arrow relies extensively on information systems and technology to manage the Company's business and summarize operating results. During September 2022, Arrow completed the implementation of a new core banking system which replaced the prior system. The new core system will enable future enhancements to our digital experience, improve efficiency for our teams and customers, and empower data-driven decisions. This upgrade constitutes a major investment in Arrow’s technology needs and is a key initiative within its strategic plan. The new core system implementation process has required, and will continue to require, the investment of significant personnel and financial resources. We are now using the new core system. In connection with the conversion, we have encountered, and are continuing to experience, operational and other issues, certain of which have required substantial time and resources to address, and which have had a negative impact on our operations and business and have contributed to the material weaknesses in the Company’s internal controls described in Part II, Item 9A, Controls and Procedures. We are continuing to resolve these issues expeditiously, but there can be no assurance that such issues will not have a further negative impact on our operations or business.

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. In the ordinary course of business, Arrow relies on electronic communications and information systems to conduct its operations and to store sensitive data. Arrow employs an in-depth, layered, defensive approach that leverages people, processes and technology to manage and maintain cybersecurity controls. Arrow employs a variety of preventative and detective tools to monitor, block, and provide alerts regarding suspicious activity, as well as to report on any suspected advanced persistent threats. Arrow has implemented and regularly reviews and updates extensive systems of internal controls and procedures as well as corporate governance policies and procedures intended to protect its business operations, including the security and privacy of all confidential customer information. In addition, Arrow relies on the services of a variety of vendors to meet data processing and communication needs. No matter how well designed or implemented its controls are, Arrow cannot provide an absolute guarantee to protect its business operations from every type of cybersecurity or other security problem in every situation, whether as a result of systems failures, human error or negligence, cyberattacks, security breaches, fraud or misappropriation. Any failure or circumvention of these controls could have a material adverse effect on Arrow's business operations and financial condition. Notwithstanding the strength of defensive measures, the threat from cyberattacks is severe, attacks are sophisticated and increasing in volume, and attackers respond rapidly to changes in defensive measures. While to date, Arrow has not experienced a significant compromise, significant data loss or any material financial losses related to cybersecurity attacks or other security problems, Arrow's systems and those of its customers and third-party service providers are under constant threat. Risks and exposures related to cybersecurity attacks or other security problems are expected to remain high for the foreseeable future due to the rapidly evolving nature and sophistication of these threats and issues, as well as due to the expanding use of Internet banking, mobile banking and other technology-based products and services by Arrow and customers.
The computer systems and network infrastructure that Arrow uses are always vulnerable to unforeseen disruptions, including theft of confidential customer information (“identity theft”) and interruption of service as a result of fire, natural disasters, explosion, general infrastructure failure, cyberattacks or other security problems. These disruptions may arise in Arrow's internally developed systems, or the systems of our third-party service providers or may originate from the actions of our consumer and business customers who access our systems from their own networks or digital devices to process transactions. Information security and cyber security risks have increased significantly in recent years because of consumer demand to use the Internet and other electronic delivery channels to conduct financial transactions. Cybersecurity risk and other security problems are a major concern to financial services regulators and all financial service providers, including Arrow. These risks are further exacerbated due to the increased sophistication and activities of organized crime, hackers, terrorists and other disreputable parties. Arrow regularly assesses and tests security systems and disaster preparedness, including back-up systems, but the risks are substantially escalating. As a result, cybersecurity and the continued enhancement of Arrow's controls and processes to protect its systems, data and networks from attacks or unauthorized access remain a priority. Accordingly, Arrow may be required to expend additional resources to enhance its protective measures or to investigate and remediate any information security vulnerabilities or exposures. Any breach of Arrow's system security could result in disruption of its operations, unauthorized access to confidential customer information, significant regulatory costs, litigation exposure and other possible damages, loss or liability. Such costs or losses could exceed the amount of available insurance coverage, if any, and
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would adversely affect Arrow's earnings. Also, any failure to prevent a security breach or to quickly and effectively deal with such a breach could negatively impact customer confidence, damaging Arrow's reputation and undermining its ability to attract and keep customers. In addition, if Arrow fails to observe any of the cybersecurity requirements in federal or state laws, regulations or regulatory guidance, Arrow could be subject to various sanctions, including financial penalties.

Business could suffer if Arrow loses key personnel unexpectedly or if employee wages increase significantly. Arrow's success depends, in large part, on Arrow's ability to retain key personnel for the duration of their expected terms of service. On an ongoing basis, Arrow prepares and reviews back-up plans, in the event key personnel are unexpectedly rendered incapable of performing or depart or resign from their positions. However, any sudden unexpected change at the senior management level may adversely affect business. In addition, should Arrow's industry begin to experience a shortage of qualified employees, Arrow, like other financial institutions or businesses in general, may have difficulty attracting and retaining entry level or higher bracket personnel and also may experience, as a result of such shortages or the enactment of higher minimum wage laws locally or nationwide, increased salary expense, which would likely negatively impact results of operations.

Pandemic or other health emergencies may adversely affect Arrow’s business activities, financial condition and results of operations. The business of Arrow and its subsidiary banks depends on the willingness and ability of its customers to conduct financial transactions. Pandemics or other health emergencies could disrupt the business, activities, and operations of Arrow’s customers, as well as Arrow's business and operations.
Arrow has taken steps to mitigate the risk of harm to its employees and customers and to its operations from health emergencies, such as the COVID-19 pandemic, or other events through its business continuity plan. There are a number of uncertainties related to the potential effects of a pandemic that may not be able to be addressed by this effort. If the spread of a pandemic or a health emergency has an adverse effect on (i) customer deposits, (ii) the ability of borrowers to satisfy their obligations, (iii) the demand for loans or other financial products and services, (iv) the ability of Arrow’s personnel and third party service providers to perform effectively, (v) financial markets, real estate markets, or economic growth, or (vi) other aspects of operations, then Arrow’s liquidity, financial condition and/or results of operations may be materially and adversely affected.

FINANCIAL RISKS

Arrow is subject to interest rate risk, which could adversely affect profitability. Profitability, like that of most financial institutions, depends to a large extent on Arrow's net interest income, which is the difference between interest income on interest-earning assets, such as loans and investment securities, and interest expense on interest-bearing liabilities, such as deposits and borrowings. Changes in monetary policy, including changes in interest rates, could influence not only the interest received on loans and securities and the amount of interest paid on deposits and borrowings, but also (i) Arrow's ability to originate loans and obtain deposits, (ii) the fair value of financial assets and liabilities, and (iii) the average duration of mortgage-backed securities portfolio. If the interest rates Arrow pays on deposits and other borrowings increase at a faster rate than the interest rates received on loans, securities and other interest-earning investments, net interest income, and therefore earnings, could be adversely affected. Earnings could also be adversely affected if the interest rates received on loans and other investments fall more quickly than the interest rates paid on deposits and other borrowings. Changes in interest rates, whether they are increases or decreases, can also trigger repricing and changes in the pace of payments for both assets and liabilities.
Beginning and continuing throughout early 2023, the Federal Reserve raised benchmark interest rates, partially in response to increasing inflation. In 2024, rates may stabilize and/or decrease. Continued higher interest rates could have a negative impact on results of operations by reducing the ability of borrowers to repay their current loan obligations. These circumstances could not only result in increased loan defaults, foreclosures and charge-offs, but also necessitate further increases to the allowance for credit losses which may materially and adversely affect Arrow's business, results of operations, financial condition and prospects.

Arrow could recognize losses on securities held in our securities portfolio, particularly if interest rates increase or economic and market conditions deteriorate. Factors beyond our control can significantly influence and cause potential adverse changes to the fair value of securities in our portfolio. For example, fixed-rate securities acquired by us are generally subject to decreases in market value when interest rates rise. Additional factors include, but are not limited to, rating agency downgrades of the securities, our own analysis of the value of the securities, defaults by the issuers or individual mortgagors with respect to the underlying securities and instability in the credit markets. Any of the foregoing factors, as well as changing economic and market conditions, generally, could cause other-than-temporary impairments, realized or unrealized losses in future periods and declines in other comprehensive income, any of which could have a material adverse effect on our business, financial condition, results of operations and growth prospects. The process for determining whether an impairment is other-than-temporary requires complex, subjective judgments about Arrow's future financial performance and liquidity, the fair value of any collateral underlying the security and whether and to what extent the principal and interest on the security will ultimately be paid in accordance with its payment terms, any of which could subsequently prove to have been wrong.

Arrow's allowance for possible credit losses may be insufficient, and an increase in the allowance would reduce earnings. The allowance is established through a provision for credit losses based on management’s evaluation of the risks inherent in the loan portfolio and the general economy. The allowance is based upon a number of factors, including the size of the loan portfolio, asset classifications, economic trends, industry experience and trends, industry and geographic concentrations, estimated collateral values, management’s assessment of the credit risk inherent in the portfolio, historical loss experience and loan underwriting policies. In addition, Arrow evaluates all loans identified as problem loans and augments the allowance based upon an estimation of the potential loss associated with those problem loans. Additions to the allowance for credit losses decrease net income through provisions for credit losses. If the evaluation performed in connection with establishing credit loss reserves is wrong, the allowance for credit losses may not be sufficient to cover Arrow's losses, which would have an adverse effect on operating results. Arrow's regulators, in reviewing the loan portfolio as part of a regulatory examination, may from time to time require Arrow to increase the allowance for credit losses, thereby negatively affecting earnings, financial condition and capital ratios at that time. Moreover, additions to the allowance may be necessary based on changes in economic and real estate market conditions, new information regarding existing loans and leases, identification of
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additional problem loans and other factors, both within and outside of Arrow's control. Additions to the allowance could have a negative impact on Arrow's results of operations.

Arrow’s financial condition and the results of its operations could be negatively impacted by liquidity management. Arrow’s liquidity can be significantly and negatively impacted by factors outside the Company’s control, including general disruptions in the financial markets, governmental fiscal and monetary policies, regulatory changes, negative investor perceptions of Arrow’s creditworthiness, unexpected increases in cash or collateral requirements and the consequent inability to monetize available liquidity resources. Further, competition for deposits has continued to increase in recent years, including as a result of online banks and digital banking and fixed income alternatives for customer funds. Continued or increased competition for deposits in the current higher interest rate environment could negatively impact Arrow’s liquidity going forward.

In addition, as a holding company, Arrow relies on interest, dividends, distributions and other payments from its subsidiary banks to fund dividends as well as to satisfy its debt and other obligations. Limitations on the payments that Arrow receives from its subsidiary banks could also impact Arrow’s liquidity. A bank holding company is required by law to act as a source of financial and managerial strength for its subsidiary banks. As a result, Arrow may be required to commit resources to its subsidiary banks, even if doing so is not otherwise in the interests of the Company, its shareholders or its creditors, which could reduce the amount of funds available to meet its obligations.

The increasing complexity of Arrow's operations presents varied risks that could affect earnings and financial condition. Arrow processes a large volume of transactions on a daily basis and is exposed to numerous types of risks related to internal processes, people and systems. These risks include, but are not limited to, the risk of fraud by persons inside or outside the Company, the execution of unauthorized transactions by employees, errors relating to transaction processing and systems, breaches of data security, human error or negligence, and Arrow's internal control system and compliance with a complex array of consumer and safety and soundness regulations. Arrow could also experience additional loss as a result of potential legal actions that could arise as a result of operational deficiencies or as a result of noncompliance with applicable laws and regulations.

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. As disclosed in our Annual Report on Form 10-K for the year ended December 31, 2022 (the “2022 Form 10-K”) and as further discussed in Part II, Item 9A, Controls and Procedures of this Annual Report on Form 10-K, we have identified material weaknesses in the system of internal controls we maintain to provide management with information on a timely basis and allow for the monitoring of compliance with operational standards. These material weaknesses did not result in a material misstatement of our annual or interim financial statements. The Company has improved its organizational capabilities and implemented necessary remediation measures, however the remediation steps taken were not in place for a sufficient amount of time for the material weaknesses to be considered fully remediated as of December 31, 2023. Accordingly, the Company will continue to assess its remediation measures in 2024 in order to confirm effective remediation of the identified material weaknesses. As part of the ongoing remediation process, the Company could conclude that additional remediation measures are required. Additionally, it is possible that inadequate remediation could result in a material misstatement to the annual or interim financial statements which would not be prevented or detected in a timely manner. These or other material weaknesses discovered in the future may adversely affect our reputation, our business and the market price of shares of our common stock. For additional discussion, see Part II, Item 9A, Controls and Procedures.

RISKS RELATED TO OWNING OUR COMMON STOCK

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. Arrow is a bank holding company, a separate legal entity from its subsidiaries. The bank holding company does not have significant operations of its own. The ability of the subsidiaries, including bank and insurance subsidiaries, to pay dividends is limited by various statutes and regulations. It is possible, depending upon the financial condition of Arrow's subsidiaries and other factors, that the subsidiaries might be restricted at some point in the ability to pay dividends to the holding company, including by a bank regulator asserting that the payment of such dividends or other payments would constitute an unsafe or unsound practice. In addition, under federal banking law, Arrow is subject to consolidated capital requirements at the holding company level. If the holding company or the bank subsidiaries are required to retain or increase capital, Arrow may not be able to maintain the cash dividends or pay dividends at all, or to repurchase shares of Arrow's common stock.

LEGAL, TAX, REGULATORY AND COMPLIANCE RISKS

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. Capital standards, particularly those adopted as a result of Dodd-Frank, continue to have a significant effect on banks and bank holding companies, including Arrow. The need to maintain more and higher quality capital, as well as greater liquidity, and generally increased regulatory scrutiny with respect to capital levels, may at some point limit business activities, including lending, and our ability to expand. It could also result in Arrow being required to take steps to increase regulatory capital and may dilute shareholder value or limit the ability to pay dividends or otherwise return capital to investors through stock repurchases. The Capital Rules promulgated under Dodd-Frank will remain applicable to Arrow.

Federal banking statutes and regulations could change in the future, which may adversely affect Arrow. Arrow is subject to extensive federal and state banking regulations and supervision. Banking laws and regulations are intended primarily to protect bank depositors’ funds (and indirectly the Federal Deposit Insurance Fund) as well as bank retail customers, who may lack the sophistication to understand or appreciate bank products and services. These laws and regulations generally are not, however, aimed at protecting or enhancing the returns on investment enjoyed by bank shareholders.
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Arrow's depositor/customer awareness of the changing regulatory environment is particularly true of the set of laws and regulations under Dodd-Frank, which were passed in the aftermath of the 2008-09 financial crisis and in large part were intended to better protect bank customers (and to some degree, banks) against a wide variety of lending products and aggressive lending practices that pre-dated the crisis and are seen as having contributed to its severity. Although not all banks offered such products or engaged in such practices, all banks are affected by these laws and regulations to some degree.
Dodd-Frank restricts Arrow's lending practices, requires us to expend substantial additional resources to safeguard customers, significantly increases its regulatory burden, and subjects Arrow to significantly higher minimum capital requirements which, in the long run, may serve as a drag on its earnings, growth and ultimately on its dividends and stock price (the Dodd-Frank capital standards are separately addressed in a previous risk factor).
Although the Economic Growth Act and similar initiatives may mitigate the impact of Dodd-Frank, other statutory and regulatory changes including additional guidance and interpretations of existing rules and requirements could add to the existing regulatory burden imposed on banking organizations like Arrow, resulting in a potential material adverse effect on Arrow's financial condition and results of operations.

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. The Patriot Act and Bank Secrecy Act require financial institutions to develop programs to prevent financial institutions from being used for money laundering and terrorist activities. If such activities are suspected, financial institutions are obligated to file suspicious activity reports with FinCEN. Federal anti-money laundering rules require financial institutions to establish procedures for identifying and verifying the identity of customers seeking to open new financial accounts. Failure to comply with these regulations could result in fines or sanctions, and restrictions on conducting acquisitions or establishing new branches. During the last few years, several banking institutions have received large fines for non-compliance with these laws and regulations. The policies and procedures Arrow adopted that are designed to assist in compliance with these laws and regulations may not be effective in preventing violations of these laws and regulations.

Arrow, through its banking subsidiaries, is subject to the CRA and fair lending laws, and failure to comply with these laws could lead to material penalties. CRA, the Equal Credit Opportunity Act, the Fair Housing Act and other fair lending laws and regulations impose nondiscriminatory lending requirements on financial institutions. A successful regulatory challenge to an institution’s performance under the CRA or fair lending laws and regulations could result in a wide variety of sanctions, including the required payment of damages and civil money penalties, injunctive relief, imposition of restrictions on mergers and acquisitions activity and restrictions on expansion. Private parties may also have the ability to challenge an institution’s performance under fair lending laws in private class action litigation. Such actions could have a material adverse effect on Arrow's business, financial condition and results of operations.


Item 1B. Unresolved Staff Comments - None

Item 1C.     Cybersecurity

Cybersecurity Risk Management & Strategy
Arrow’s cybersecurity risk management and data security program is an in-depth, layered, defensive approach that leverages people, processes and technology to manage and maintain cybersecurity controls. Arrow employs a variety of preventative and detective tools to monitor, block, and provide alerts regarding suspicious activity, as well as to report on any suspected advanced persistent cybersecurity threats. Our security framework involves processes for detection, identification, protection and response to a cybersecurity incident. Additionally, we are well prepared for recovery in the case of a cybersecurity incident with proper vendor support as well as backups both online and offline.
Arrow has implemented and regularly reviews and updates its internal controls and procedures as well as corporate governance policies and procedures intended to protect its business operations, including the security and privacy of the confidential information of its customers. Arrow also regularly assesses and tests its security systems and disaster preparedness, including the adequacy and functionality of its back-up systems. In addition, Arrow engages a variety of vendors to meet data processing and communication needs. Arrow communicates and works directly with all of our critical information technology ("IT") vendors to resolve issues and install releases. We perform business continuity plan testing on a periodic basis.
Arrow has not experienced, nor does it believe it is reasonably likely to experience, a material effect on the Company’s business strategy, results of operations or financial condition as a result of a significant compromise, significant data loss or any material financial losses related to cybersecurity incidents or other security problems.
Cybersecurity and the continued enhancement of Arrow's controls and processes to protect its systems, data and networks from cybersecurity incidents remain a priority to Arrow.

Governance
Arrow’s senior management regularly considers the impact of cybersecurity risks when developing its business strategy and financial planning. Arrow has various policies and procedures in place to mitigate cybersecurity risks and maintains a layered, defensive program to manage and maintain cybersecurity controls.
Arrow’s Board of Directors, Chief Information Officer, Director of IT and our enterprise risk management group all have a role in the cybersecurity risk management program.

Item 2. Properties
Arrow's main office is at 250 Glen Street, Glens Falls, New York. The building is owned by Glens Falls National and serves as the main office for Arrow and Glens Falls National. Arrow recently completed a multi-year renovation project to enhance and improve the downtown Glens Falls Main Campus. The renovations provide added energy efficiency, productivity, and more collaborative work space. This project provides for a renovated and more functional Main Office branch and lending space for
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customers. Arrow's investment in its downtown campus dates back to 2012 with the construction of our 20 South Street Building and has continued with phased improvements to other adjacent properties. The main office of the other banking subsidiary, Saratoga National, is in Saratoga Springs, New York. Arrow owns 26 branch banking offices, leases 11 branch banking offices, leases two residential loan origination offices and a business development office, all at market rates. Arrow's insurance agency is co-located in seven bank-owned branches, as well as two leased insurance offices. Arrow also leases office space in buildings and parking lots near the main office in Glens Falls as well as a back-up site for business continuity purposes.
In the opinion of management, the physical properties of the holding company and the various subsidiaries are suitable and adequate.  For more information on Arrow's properties, see Notes 2, Summary of Significant Accounting Policies, 6, Premises and Equipment, and 18, Leases, to the Consolidated Financial Statements contained in Part II, Item 8 of this Report.

Item 3. Legal Proceedings
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. 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.
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. That motion is scheduled to be fully briefed on May 6, 2024. All discovery in the action is stayed pending a decision on that motion. The Company continues to believe the lawsuit to be without merit and expressly denies any wrongdoing in connection with the matters claimed in the complaint and intends to vigorously defend the lawsuit.
On December 12, 2023 the Company become aware that Stephen Bull filed a complaint (Shareholder Derivative Complaint or Derivative Case) 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 the Ashe action.
The Company intends to vigorously defend itself against the class action and derivative claims

Item 4. Mine Safety Disclosures - None


21

PART II

Item 5. Market for the Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Arrow's common stock is traded on the Global Select Market of the National Association of Securities Dealers, Inc. ("NASDAQ®") Stock Market under the symbol AROW.
Based on information received from Arrow's transfer agent and various brokers, custodians and agents, Arrow estimates there were approximately 12,000 beneficial owners of Arrow’s common stock at December 31, 2023. Arrow has no other class of stock outstanding.

Equity Compensation Plan Information
The following table sets forth certain information regarding Arrow's equity compensation plans as of December 31, 2023. These equity compensation plans were (i) the 2022 Long-Term Incentive Plan ("LTIP") and its predecessors; (ii) the Amended and Restated 2011 Employee Stock Purchase Plan ("ESPP") and its predecessors; and (iii) the 2023 Directors' Stock Plan ("DSP") and its predecessors. The LTIP, the DSP and the ESPP have been approved by Arrow's shareholders. In October 2023, the Board of Directors approved the adoption of a new qualified ESPP that is intended to satisfy the requirements of Section 423 of the Internal Revenue Code, which was effective January 1, 2024 (the "2023 ESPP"). The 2023 ESPP will be presented for approval at the upcoming Annual Meeting to be held June 5, 2024.
Plan Category(a)
Number of Securities to be Issued Upon Exercise of Outstanding Options, Restricted Stock Units, Warrants and Rights		(b)
Weighted-Average
Exercise Price of Outstanding Options, Restricted Stock Units, Warrants and Rights		(c)
Number of Securities Remaining Available for Future Issuance Under Equity Compensation Plans (Excluding Securities Reflected in Column (a))
Equity Compensation Plans Approved by Security Holders (1)(2)
305,308 $28.96 740,062 
Equity Compensation Plans Not Approved by Security Holders (pending approval at next Annual Meeting) (2)
— 300,000 
Total305,308 1,040,062 

(1)The total of 305,308 shares listed in column (a) includes shares which are issuable pursuant to outstanding stock options granted under the LTIP or its predecessor plans.
(2)The total of 1,040,062 shares listed in column (c) includes (i) 414,561 shares of common stock available for future award grants under the LTIP, (ii) 250,501 shares of common stock available for future issuance under the ESPP, (iii) 300,000 shares of common stock available for future issuance under the 2023 ESPP which is pending shareholder approval at the next Annual Meeting and (iii) 75,000 shares of common stock available for future issuance under the DSP.

STOCK PERFORMANCE GRAPHS
The following two graphs provide a comparison of the total cumulative return (assuming reinvestment of dividends) for the common stock of Arrow as compared to the Russell 2000 Index, the ABA NASDAQ Community Bank TRBanks Index and the Zacks $1B-$5B Bank Assets Index.
The first graph presents comparative stock performance for the five-year period from December 31, 2018 to December 31, 2023 and the second graph presents comparative stock performance for the fifteen-year period from December 31, 2008 to December 31, 2023.
The historical information in the graphs and accompanying tables may not be indicative of future performance of Arrow stock on the various stock indices.

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2185
TOTAL RETURN PERFORMANCE
Period Ending
Index201820192020202120222023
Arrow Financial Corporation100.00 125.39 105.80 132.22 135.28 120.71 
Russell 2000 Index100.00 125.52 150.58 172.90 137.56 160.85 
ABA NASDAQ Community Bank TR100.00 123.30 109.05 147.76 137.43 134.58 
Zacks $1B - $5B Bank Assets Index100.00 117.34 95.01 130.61 127.10 126.09 

Source: Prepared by Zacks Investment Research, Inc. Used with permission. All rights reserved. Copyright 1980-2024.



23

2311
TOTAL RETURN PERFORMANCE
Period Ending
Index20082009201020112012201320142015
Arrow Financial Corporation 100.00 106.74 126.21 115.69 130.80 147.59 161.74 169.10 
Russell 2000 Index100.00 127.17 161.32 154.57 179.84 249.66 261.87 250.32 
ABA NASDAQ Community Bank TR100.00 80.80 90.06 84.18 99.10 140.40 146.94 160.97 
Zacks $1B - $5B Bank Assets Index100.00 83.14 91.29 86.56 101.88 128.00 140.15 152.44 
TOTAL RETURN PERFORMANCE (Cont'd.)
Period Ending
Index20162017201820192020202120222023
Arrow Financial Corporation 267.96 238.23 238.10 298.56 251.91 314.82 322.12 287.41 
Russell 2000 Index303.66 348.15 309.82 388.90 466.53 535.66 426.19 498.34 
ABA NASDAQ Community Bank TR223.37 229.11 194.97 240.40 212.62 288.09 267.94 262.39 
Zacks $1B - $5B Bank Assets Index212.71 234.10 214.34 251.50 203.63 279.96 272.42 270.26 

Source: Prepared by Zacks Investment Research, Inc. Used with permission. All rights reserved. Copyright 1980-2024.

The preceding stock performance graphs and tables shall not be deemed incorporated by reference, by virtue of any general statement contained herein or in any other filing incorporated by reference herein, into any other SEC filing by the Company under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, except to the extent the Company specifically incorporates this information by reference into such filing, and shall not otherwise be deemed filed as part of any such other filing.

Unregistered Sales of Equity Securities
None.

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Issuer Purchases of Equity Securities
The following table presents information about repurchases by Arrow during the three months ended December 31, 2023 of Arrow's common stock (the only class of equity securities registered pursuant to Section 12 of the Securities Exchange Act of 1934):
Fourth Quarter 2023
Calendar Month
(a) Total Number of
Shares Purchased1
(b) Average Price Paid Per Share1
(c) Total Number of
Shares Purchased as
Part of Publicly
Announced
Plans or Programs2
(d) Maximum
Approximate Dollar
Value of Shares that
May Yet be
Purchased Under the
Plans or Programs2
October— $— —$9,152,132 
November99,223 24.23 99,2236,748,038 
December14,347 24.92 14,3476,390,538 
Total113,570 24.32 113,570

1 The total number of shares purchased and the average price paid per share listed in columns (a) and (b) consist solely of shares repurchased by Arrow pursuant to its publicly-announced stock repurchase program. Arrow resumed its DRIP effective with the cash dividend which was paid in December 2023. All shares under the DRIP are being sourced from the open market through an independent Plan Adminstrator, no shares will be sourced from Arrow treasury.
2 Includes only those shares acquired by Arrow pursuant to its publicly-announced stock repurchase programs.  Arrow's only publicly announced stock repurchase program in effect for 2023 was the 2023 Repurchase Program approved by the Board of Directors and announced in October 2022, under which the Board authorized management, in its discretion, in 2023 to repurchase from time to time, in the open market or in privately negotiated transactions, up to $5 million of Arrow common stock subject to certain exceptions. In October 2023, the Board of Directors expanded the 2023 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.

Item 6. Reserved
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Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Selected Quarterly Information
Dollars in thousands, except per share amounts
Share and per share amounts have been restated for the September 2023 3% stock dividend
Quarter Ended12/31/20239/30/20236/30/20233/31/202312/31/2022
Net Income$7,723 $7,743 $6,047 $8,562 $12,087 
Transactions Recorded in Net Income (Net of Tax):     
Net Changes in Fair Value of Equity Investments90 52 (133)(76)35 
Share and Per Share Data: 1
     
Period End Shares Outstanding16,942 17,049 17,050 17,050 17,048 
Basic Average Shares Outstanding17,002 17,050 17,050 17,048 17,031 
Diluted Average Shares Outstanding17,004 17,050 17,050 17,060 17,087 
Basic Earnings Per Share$0.46 $0.46 $0.35 $0.50 $0.70 
Diluted Earnings Per Share0.46 0.46 0.35 $0.50 $0.71 
Cash Dividend Per Share0.270 0.262 0.262 0.262 0.262 
Selected Quarterly Average Balances:     
  Interest-Bearing Deposits at Banks$136,026 $131,814 $130,057 $40,436 $143,499 
  Investment Securities713,144 745,693 787,175 813,461 845,859 
  Loans3,170,262 3,096,240 3,036,410 2,991,928 2,951,547 
  Deposits3,593,949 3,491,028 3,460,711 3,480,279 3,614,945 
  Other Borrowed Funds149,507 208,527 220,616 100,596 63,304 
  Shareholders’ Equity363,753 362,701 365,070 359,556 351,402 
  Total Assets4,159,313 4,109,995 4,087,653 3,978,851 4,074,028 
Return on Average Assets, annualized0.74 %0.75 %0.59 %0.87 %1.18 %
Return on Average Equity, annualized8.42 %8.47 %6.64 %9.66 %13.65 %
Return on Average Tangible Equity, annualized 2
8.99 %9.05 %7.10 %10.33 %14.62 %
Average Earning Assets$4,019,432 $3,973,747 $3,953,642 $3,845,825 $3,940,905 
Average Paying Liabilities2,985,717 2,920,518 2,924,743 2,782,299 2,891,092 
Interest Income44,324 42,117 40,013 36,110 35,904 
Tax-Equivalent Adjustment 3
184 183 196 202 279 
Interest Income, Tax-Equivalent 3
44,508 42,300 40,209 36,312 36,183 
Interest Expense18,711 16,764 14,241 8,016 5,325 
Net Interest Income25,613 25,353 25,772 28,094 30,579 
Net Interest Income, Tax-Equivalent 3
25,797 25,536 25,968 28,296 30,858 
Net Interest Margin, annualized2.53 %2.53 %2.61 %2.96 %3.08 %
Net Interest Margin, Tax-Equivalent, annualized 3
2.55 %2.55 %2.63 %2.98 %3.11 %
Efficiency Ratio Calculation: 4
     
Noninterest Expense$23,190 $23,479 $24,083 $22,296 $20,792 
Less: Intangible Asset Amortization43 43 44 45 47 
Net Noninterest Expense23,147 23,436 24,039 22,251 20,745 
Net Interest Income, Tax-Equivalent25,797 25,536 25,968 28,296 30,858 
Noninterest Income7,484 8,050 6,906 6,677 7,165 
Less: Net Changes in Fair Value of Equity Investments158 71 (181)(104)48 
Net Gross Income$33,123 $33,515 $33,055 $35,077 $37,975 
Efficiency Ratio69.88 %69.93 %72.72 %63.43 %54.63 %
Period-End Capital Information: 5
     
Total Stockholders’ Equity (i.e. Book Value)$379,772 $360,014 $361,443 $363,371 $353,538 
Book Value per Share 1
22.42 21.12 21.20 21.31 20.74 
Goodwill and Other Intangible Assets, net22,983 23,078 23,175 23,273 23,373 
Tangible Book Value per Share 1,2
21.06 19.76 19.84 19.95 19.37 
Capital Ratios: 5
Tier 1 Leverage Ratio9.84 %9.94 %9.92 %10.13 %9.80 %
Common Equity Tier 1 Capital Ratio
13.00 %13.17 %13.27 %13.34 %13.32 %
Tier 1 Risk-Based Capital Ratio13.66 %13.84 %13.96 %14.03 %14.01 %
Total Risk-Based Capital Ratio14.74 %14.94 %15.08 %15.15 %15.11 %
Assets Under Trust Administration & Investment Mgmt
$1,763,194 $1,627,522 $1,711,460 $1,672,117 $1,606,132 
26


Selected Twelve-Month Information
Dollars in thousands, except per share amounts
Share and per share amounts have been restated for the September 2023 3% stock dividend
202320222021
Net Income$30,075 $48,799 $49,857 
Transactions Recorded in Net Income (Net of Tax):
Net Gain (Loss) on Securities(67)315 83 
Period End Shares Outstanding1
16,942 17,048 17,018 
Basic Average Shares Outstanding1
17,037 17,008 16,994 
Diluted Average Shares Outstanding1
17,037 17,059 17,052 
Basic Earnings Per Share1
$1.77 $2.86 $2.93 
Diluted Earnings Per Share1
1.77 2.86 2.92 
Cash Dividends Per Share1
1.06 0.99 0.96 
Average Assets4,084,519 4,047,480 3,882,642 
Average Equity362,781 360,095 353,757 
Return on Average Assets0.74 %1.21 %1.28 %
Return on Average Equity8.29 %13.55 %14.09 %
Average Earning Assets$3,948,708 $3,902,077 $3,716,856 
Average Interest-Bearing Liabilities2,903,925 2,834,266 2,727,441 
Interest Income162,564 129,651 115,550 
Interest Income, Tax-Equivalent*163,328 130,737 116,655 
Interest Expense57,732 11,308 5,195 
Net Interest Income104,832 118,343 110,355 
Net Interest Income, Tax-Equivalent*105,596 119,429 111,460 
Net Interest Margin2.65 %3.03 %2.97 %
Net Interest Margin, Tax-Equivalent*2.67 %3.06 %3.00 %
Efficiency Ratio Calculation*4
Noninterest Expense$93,048 $81,530 $78,048 
Less: Intangible Asset Amortization176 193 210 
Net Noninterest Expense92,872 81,337 77,838 
Net Interest Income, Tax-Equivalent 105,596 119,429 111,460 
Noninterest Income29,117 30,898 32,369 
Less: Net (Loss) Gain on Securities(92)427 111 
Net Gross Income, Adjusted$134,805 $149,900 $143,718 
Efficiency Ratio*68.89 %54.26 %54.16 %
Period-End Capital Information:
Tier 1 Leverage Ratio9.84 %9.80 %9.20 %
Total Stockholders’ Equity (i.e. Book Value)$379,772 $353,538 $371,186 
Book Value per Share22.42 20.74 21.81 
Intangible Assets22,983 23,373 23,791 
Tangible Book Value per Share 2
21.06 19.37 20.41 
Asset Quality Information:
Net Loans Charged-off as a Percentage of Average Loans0.07 %0.08 %0.03 %
Provision for Credit Losses as a Percentage of Average Loans0.11 %0.17 %0.01 %
Allowance for Credit Losses as a Percentage of Period-End Loans0.97 %1.00 %1.02 %
Allowance for Credit Losses as a Percentage of Nonperforming Loans147.82 %249.95 %233.89 %
Nonperforming Loans as a Percentage of Period-End Loans0.66 %0.40 %0.44 %
Nonperforming Assets as a Percentage of Total Assets0.51 %0.32 %0.29 %

*See "Use of Non-GAAP Financial Measures" on page 5.
27

Arrow Financial Corporation
Reconciliation of Non-GAAP Financial Information
(Dollars In Thousands, Except Per Share Amounts)
Footnotes:
1.
Share and per share data have been restated for the September 26, 2023, 3% stock dividend.

2.Non-GAAP Financial Measure 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 provides investors with information that is useful in understanding its financial performance.
12/31/20239/30/20236/30/20233/31/202312/31/2022
Total Stockholders' Equity (GAAP)$379,772 $360,014 $361,443 $363,371 $353,538 
Less: Goodwill and Other Intangible assets, net22,983 23,078 23,175 23,273 23,373 
Tangible Equity (Non-GAAP)$356,789 $336,936 $338,268 $340,098 $330,165 
Period End Shares Outstanding16,942 17,049 17,050 17,050 17,048 
Tangible Book Value per Share (Non-GAAP)$21.06 $19.76 $19.84 $19.95 $19.37 
Net Income7,723 7,743 6,047 8,562 12,087 
Return on Average Tangible Equity (Net Income/Average Tangible Equity - Annualized)
8.99 %9.05 %7.10 %10.33 %14.62 %
3.Non-GAAP Financial Measure Reconciliation: Net Interest Margin is the ratio of 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 its financial performance.
12/31/20239/30/20236/30/20233/31/202312/31/2022
Interest Income (GAAP)$44,324 $42,117 $40,013 $36,110 $35,904 
Add: Tax Equivalent Adjustment (Non-GAAP)184 183 196 202 279 
Interest Income - Tax Equivalent (Non-GAAP)$44,508 $42,300 $40,209 $36,312 $36,183 
Net Interest Income (GAAP)$25,613 $25,353 $25,772 $28,094 $30,579 
Add: Tax-Equivalent adjustment (Non-GAAP)184 183 196 202 279 
Net Interest Income - Tax Equivalent (Non-GAAP)$25,797 $25,536 $25,968 $28,296 $30,858 
Average Earning Assets$4,019,432 $3,973,747 $3,953,642 $3,845,825 $3,940,905 
Net Interest Margin (Non-GAAP)2.55 %2.55 %2.63 %2.98 %3.11 %
4.Non-GAAP Financial Measure Reconciliation: Financial Institutions often use the "efficiency ratio", a non-GAAP ratio, as a measure of expense control. Arrow believes the efficiency ratio provides investors with information that is useful in understanding its financial performance. Arrow defines efficiency ratio as the ratio of noninterest expense to net gross income (which equals tax-equivalent net interest income plus noninterest income, as adjusted).
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 December 31, 2023 CET1 ratio listed in the tables (i.e., 13.00%) exceeds the sum of the required minimum CET1 ratio plus the fully phased-in Capital Conservation Buffer (i.e., 7.00%).
12/31/20239/30/20236/30/20233/31/202312/31/2022
Total Risk Weighted Assets$3,032,188 $2,988,438 $2,937,837 $2,909,610 $2,883,902 
Common Equity Tier 1 Capital394,166 393,541 389,966 388,228 384,003 
Common Equity Tier 1 Ratio13.00 %13.17 %13.27 %13.34 %13.32 %
    
28

CRITICAL ACCOUNTING ESTIMATES
The significant accounting policies, as described in Note 2 - Summary of Significant Accounting Policies to the Consolidated Financial Statements are essential in understanding the Management Discussion and Analysis. Many of the significant accounting policies require complex judgments to estimate the values of assets and liabilities. Arrow has procedures and processes in place to facilitate making these judgments. The more judgmental estimates are summarized in the following discussion. In many cases, there are numerous alternative judgments that could be used in the process of determining the inputs to the models. Where alternatives exist, Arrow has used the factors that are believed to represent the most reasonable value in developing the inputs. Actual performance that differs from estimates of the key variables could impact the results of operations.

Allowance for credit losses: The allowance for credit losses consists of the allowance for credit losses and the allowance for losses on unfunded commitments. Arrow adopted on January 1, 2021, Accounting Standards Updates (‘‘ASU’’) 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (‘‘CECL’’) and its related amendments. The CECL approach requires an estimate of the credit losses expected over the life of an exposure (or pool of exposures). The estimate of expected credit losses under the CECL approach is based on relevant information about past events, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amounts. Historical loss experience is generally the starting point for estimating expected credit losses. Arrow then considers whether the historical loss experience should be adjusted for asset-specific risk characteristics or current conditions at the reporting date that did not exist over the period from which historical experience was used. Finally, Arrow considers forecasts about future economic conditions that are reasonable and supportable. The allowance for losses on unfunded commitments represents the expected credit losses on off-balance sheet commitments such as unfunded commitments to extend credit and standby letters of credit. However, a liability is not recognized for commitments unconditionally cancellable by Arrow. The allowance for losses on unfunded commitments is determined by estimating future draws and applying the expected loss rates on those draws. Arrow considers the accounting policy relating to the allowance for credit losses to be a critical accounting estimate given the uncertainty in evaluating the level of the allowance required to cover Arrow's estimate of all expected credit losses over the expected contractual life of our loan portfolio. Determining the appropriateness of the allowance is complex and requires judgment by management about the effect of matters that are inherently uncertain. Subsequent evaluations of the then-existing loan portfolio, in light of the factors then prevailing, may result in significant changes in the allowance for credit losses in those future periods. While management’s current evaluation of the allowance for credit losses indicates that the allowance is appropriate at this time, the allowance may need to be increased in the future due to changes in conditions or assumptions. The impact of utilizing the CECL approach to calculate the reserve for credit losses will be significantly influenced by the composition, characteristics and quality of our loan portfolio, as well as the prevailing economic conditions and forecasts utilized. Material changes to these and other relevant factors may result in greater volatility to the reserve for credit losses, and therefore, greater volatility to our reported earnings. Arrow's policies on the allowance for credit losses, pension accounting and provision for income taxes are disclosed in Note 2 to the consolidated financial statements of this Form 10-K.

29

A. OVERVIEW
The following discussion and analysis focuses on and reviews Arrow's results of operations for each of the years in the three-year period ended December 31, 2023 and the financial condition as of December 31, 2023 and 2022.  The discussion below should be read in conjunction with the selected quarterly and annual information set forth above and the 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 2023 Financial Results: For the year ended December 31, 2023, net income was $30.1 million, down 38.4% from $48.8 million for 2022. The decrease from the prior year was primarily the result of a decrease in net interest income of $13.5 million and an increase of non-interest expense of $11.5 million, partially offset by a $1.4 million decrease in the provision for credit loss and a $6.7 million decrease in the provision for income taxes.
Diluted EPS was $1.77 for 2023, down 38.1% from $2.86 in 2022. Return on average equity (ROE) and return on average assets (ROA) were 8.29% and 0.74%, respectively, as compared to 13.55% and 1.21%, respectively, for 2022.
Net interest income for the year ended December 31, 2023 was $104.8 million, a decrease of $13.5 million, or 11.4%, from the prior year. Interest and fees on loans were $142.0 million, an increase of 25.7% from the $113.0 million for the year ended December 31, 2022. Interest expense for the year ended December 31, 2023 was $57.7 million. This is an increase of $46.4 million, or 410.5%, from the $11.3 million in expense for the prior-year period.
Net interest margin was 2.65% for the year ended December 31, 2023, as compared to 3.03% for the year ended December 31, 2022. In the fourth quarter of 2023, the net interest margin was 2.53%, as compared to 3.08% for the fourth quarter of 2022. The decrease in net interest margin compared to the fourth quarter of 2022 and the full year 2022 was primarily the result of the cost 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 cost products, such as money market savings and time deposits.
For 2023, the provision for credit losses related to the loan portfolio was $3.4 million, compared to $4.8 million in 2022. The key drivers for the provision for credit losses in 2023 were loan growth and charge-offs, offset by changes to the economic forecast factors embedded in the credit loss allowance model as well as qualitative factors relating to local and Arrow-specific conditions.
Noninterest income was $29.1 million for the year ended December 31, 2023, a decrease of 5.8%, as compared to $30.9 million for the year ended December 31, 2022. Income from fiduciary activities, which includes Wealth Management services, was fairly consistent to the prior year. Fees and other services to customers declined compared to the prior year, primarily due to lower interchange fees.
Noninterest expense for the year ended December 31, 2023 increased by $11.5 million, or 14.1%, to $93.0 million, as compared to $81.5 million in 2022. The largest component of noninterest expense is salaries and benefits paid to our employees, which totaled $47.7 million in 2023. Salaries and benefits increased $0.7 million, or 1.4%, from the prior year. The overall increase from the prior year was primarily related to $4.8 million of additional legal and professional fees incurred in 2023 associated with the delay in the filing of the Annual Report on Form 10-K for the year ended December 31, 2022 (the "2022 Form 10-K"), and the Quarterly Report on Form 10-Q for the quarter ended March 31, 2023 (the "Q1 2023 Form 10-Q"), as well as an increase in costs related to technology and Federal Deposit Insurance Corporation insurance.
The provision for income taxes for 2023 was $7.4 million, compared to $14.1 million for 2022. The effective income tax rates for 2023 and 2022 were 19.8% and 22.4%, respectively. The reduction in the effective tax rate was the result of substantially similar permanent favorable tax benefits in each year while pre-tax income decreased in 2023.
Total assets were $4.17 billion at December 31, 2023, an increase of $200.4 million, or 5.0%, compared to December 31, 2022. Total cash and cash equivalents were $142.5 million at December 31, 2023, an increase of $77.9 million, or 120.4%, compared to December 31, 2022.
Total investments were $636.1 million at December 31, 2023, a decrease of $121.0 million, or 16.0%, compared to December 31, 2022. The net change was primarily driven by paydowns and maturities of approximately $119 million, a net decrease from the repositioning of our investment portfolio of approximately $25 million, partially offset by an improvement in the mark-to-market adjustments of $23 million. The proceeds from the decrease in investments were primarily used to fund loan growth and for general corporate purposes. There were no credit quality issues related to the investment portfolio.
In the fourth quarter of 2023 as part of the investment portfolio repositioning, Arrow sold all 27,771 of its previously held Visa Class B shares for a pre-tax gain of $9.3 million while recognizing a pre-tax loss of $9.2 million from the sale of approximately $100 million of lower-yielding securities. The proceeds of the sale were reinvested in higher-yielding available for sale securities and federal funds, resulting in an annual interest income run-rate improvement of over $3 million in pre-tax earnings. This transaction was part of Arrow's strategy to improve profitability and its asset-liability management position.
At December 31, 2023, total loan balances reached $3.2 billion, up $230 million, or 7.7%, from the prior-year level. Loan growth for the fourth quarter was $74.3 million. The consumer loan portfolio grew by $46.5 million, or 4.4%, over the balance at December 31, 2022. The residential real estate loan portfolio increased $128.8 million, or 12.0%, from the prior year primarily as a result of the continued strength of the housing market within Arrow's service area. Commercial loans, including commercial real estate, increased $54.4 million, or 6.4%, over the balances at December 31, 2022.
The allowance for credit losses was $31.3 million at December 31, 2023, an increase of $1.3 million from December 31, 2022. The allowance for credit losses represents 0.97% of loans outstanding, a decrease from 1.00% at year-end 2022. Asset quality remained solid at December 31, 2023. Net loan losses, expressed as an annualized percentage of average loans outstanding, were 0.07% for the year ended December 31, 2023, as compared to 0.08% for the prior year. Nonperforming assets of $21.5 million at December 31, 2023, represented 0.51% of period-end assets, compared to $12.6 million or 0.32% at December 31, 2022. The increase was primarily due to one large loan relationship of approximately $15 million, which is well collateralized.
30

At December 31, 2023, total deposit balances were $3.7 billion, an increase of $189.2 million, or 5.4%, from the prior-year level. Arrow obtained $175 million of brokered CDs with corresponding three-year swaps as part of a funding hedge to strategically manage its asset-liability profile and cost of funds. Non-municipal deposits, excluding brokered CDs, increased by $45.3 million and municipal deposits decreased by $31.1 million as compared to December 31, 2022. Noninterest-bearing deposits decreased by $78.4 million, or 9.4%, during 2023, and represented 20.6% of total deposits at year-end, as compared to the prior-year level of 23.9%. At December 31, 2023, total time deposits, excluding brokered CDs, increased $278.6 million from the prior-year level. The change in composition of deposits was primarily the result of pressure from competitive rate pricing and the migration from low to higher costing products.
Total borrowings were $26.5 million at December 31, 2023, a decrease of $28.3 million, or 51.6%, compared to December 31, 2022. In addition to timing, the majority of the decrease was a $20 million payoff of a Federal Home Loan Bank term advance.
Total shareholders’ equity was $379.8 million at December 31, 2023, an increase of $26.2 million, or 7.4%, from the year-end 2022 balance. Arrow's regulatory capital ratios remained strong in 2023. At December 31, 2023, Arrow's Common Equity Tier 1 Capital Ratio was 13.00% and Total Risk-Based Capital Ratio was 14.74%. The capital ratios of Arrow and both of its subsidiary banks, Glens Falls National Bank and Trust Company and Saratoga National Bank and Trust Company, continued to significantly exceed the “well capitalized” regulatory standards.
In 2022, Arrow upgraded its core banking system. The system upgrade reflects the strategic focus on a strong technology foundation and this investment paves the way for customer-facing enhancements and more efficient and improved internal operations as Arrow continues to work toward fully leveraging the capabilities of the new bank core system. In connection with the material weaknesses which are being remediated, we have expended a significant amount of time and resources negatively impacting our operations and business. Please refer to Part II, Item 9A, Controls and Procedures for additional information.
The changes in net income, net interest income and net interest margin between the current and prior year are discussed in detail under the heading "Results of Operations," beginning on page 33.
Regulatory Capital and Stockholders' Equity: As of December 31, 2023, Arrow continued to exceed all required minimum capital ratios under the current bank regulatory capital rules as implemented under Dodd-Frank (the "Capital Rules") at both the holding company and bank levels.  At that date, both subsidiary banks, as well as the holding company, 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.
In 2020, federal bank regulators introduced an optional simplified measure of capital adequacy for qualifying community banking organizations (CBLR).  A qualifying community banking organization that opts into the CBLR framework and meets all the requirements under the CBLR framework will be considered to have met the well-capitalized ratio requirements under the “prompt corrective action” regulations and will not be required to report or calculate risk-based capital ratios.
The CBLR final rule became effective as of January 1, 2020, and Arrow and both subsidiary banks have opted out of utilizing the CBLR framework. Therefore, the Capital Rules promulgated under Dodd-Frank will remain applicable to Arrow and both subsidiary banks.
Total stockholders' equity was $379.8 million at December 31, 2023, an increase of $26.2 million, or 7.4%, from December 31, 2022. The components of the change in stockholders' equity since year-end 2022 are presented in the Consolidated Statement of Changes in Stockholders' Equity on page 60. Total book value per share increased by 8.1% over the prior year level. The net increase in total stockholders' equity during 2023 principally reflected the following factors: (i) $30.1 million of net income for the year, (ii) other comprehensive income of $16.2 million, (iii) $1.0 million of equity related to various stock-based compensation plans and (iv) $0.5 million of equity resulting from the dividend reinvestment plan, reduced by (v) cash dividends of $18.0 million and (vi) repurchases of common stock of $3.6 million. As of December 31, 2023, Arrow's closing stock price was $27.94, resulting in a trading multiple of 1.33 to Arrow's tangible book value. The Board of Directors declared and Arrow paid a cash dividend of $0.262 per share for the first three quarters of 2023, as adjusted for a 3% stock dividend distributed September 26, 2023, a cash dividend of $0.27 per share for the fourth quarter of 2023, and a $0.27 per share cash dividend for the first quarter of 2024.
Loan quality: Nonperforming loans were $21.2 million at December 31, 2023, an increase of $9.2 million, or 76.5%, from year-end 2022. The increase was primarily due to one large loan relationship of approximately $15 million, which is well collateralized. The ratio of nonperforming loans to period-end loans at December 31, 2023 was 0.66%, an increase from 0.40% at December 31, 2022. Loans charged-off (net of recoveries) against the allowance for credit losses was $2.1 million for 2023, a decrease of $59 thousand from 2022. The ratio of net charge-offs to average loans was 0.07% for 2023 and 0.08% for 2022. At December 31, 2023, the allowance for credit losses was $31.3 million, representing 0.97% of total loans, a decrease of 3 basis points from the December 31, 2022 ratio.

Loan Segments: As of December 31, 2023, total loans grew $229.7 million, or 7.7%, as compared to the balance at December 31, 2022.
◦    Commercial and Commercial Real Estate Loans: Combined, these loans comprised 28.1% of the total loan portfolio at period-end. Commercial loans are extended to business primarily located in Arrow's regional market area. There are no commercial real estate loans in major metropolitan areas. In addition, only approximately 2% of the loan portfolio is comprised of office related property. Retail loans were approximately 3% of the loan portfolio and hotels and motels were approximately 4% of the portfolio. Overall, Arrow has minimal exposure to highly sensitive areas where large commercial and retail vacancies exist. Commercial property values in Arrow's region have largely remained stable.
31

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 approximately 34.6% of the total loan portfolio at period-end. Consumer automobile loans at December 31, 2023, were $1.1 billion, or 99.6% of this portfolio segment. The vast majority of automobile loans are initiated through the purchase of vehicles by consumers with automobile dealers. Although previous supply chain constraints have lessened, inflation and higher rates may limit the potential growth in this category.
◦    Residential Real Estate Loans: These loans, including home equity loans, made up 37.3% of the total loan portfolio at period-end. Demand for residential real estate has continued to remain strong. Arrow originated nearly all of the residential real estate loans currently held in the loan portfolio and applies conservative underwriting standards to loan originations. Arrow has historically sold a portion of the residential real estate mortgage originations into the secondary market. The ratio of the sales of originations to total originations tends to fluctuate from period to period based on market conditions and other factors. In recent periods, sales have decreased as a result of the strategic decision to grow the residential loan portfolio. 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 did not experience any liquidity issues in recent years or in 2023. Arrow’s liquidity position should provide the Company with the necessary flexibility to address any unexpected near-term disruptions.  Interest-bearing cash balances at December 31, 2023 were $105.8 million which represents a significant increase as compared to $32.8 million at December 31, 2022. Deposit balances are Arrow's primary funding source. Additionally, contingent lines of credit are also available. Arrow has collateralized lines of credit established and available through the FHLBNY and FRB, totaling $1.4 billion. The terms of Arrow's lines of credit have not changed significantly in recent periods (see the general liquidity discussion on page 47). 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 Federal Reserve Bank discount window as well as the Bank Term Funding Program). 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, Glens Falls National, sold all 27,771 Visa Class B common stock shares 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 approximately $110 million of securities. 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.

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B. RESULTS OF OPERATIONS
The following analysis of net interest income, the provision for credit losses, noninterest income, noninterest expense and income taxes, highlights the factors that had the greatest impact on the results of operations for December 31, 2023 and the prior two years. For a comparison of the years ended December 31, 2021 and 2022, see Part II. Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, in our Form 10-K for the year ended December 31, 2022.

I. NET INTEREST INCOME
Net interest income represents the difference between interest, dividends and fees earned on loans, securities and other earning assets and interest paid on deposits and other sources of funds.  Changes in net interest income result from changes in the level and mix of earning assets and sources of funds (volume) and changes in the yields earned and interest rates paid (rate). Net interest margin is the ratio of net interest income to average earning assets.  Net interest income may also be described as the product of average earning assets and the net interest margin.

CHANGE IN NET INTEREST INCOME
(Dollars In Thousands) (GAAP Basis)
Years Ended December 31,Change From Prior Year
2022 to 2023
2021 to 2022
202320222021Amount%Amount%
Interest and Dividend Income$162,564 $129,651 $115,550 $32,913 25.4 %$14,101 12.2 %
Interest Expense57,732 11,308 5,195 46,424 410.5 %6,113 117.7 %
Net Interest Income$104,832 $118,343 $110,355 $(13,511)(11.4)%$7,988 7.2 %

Net interest income was $104.8 million in 2023, a decrease of $13.5 million, or 11.4%, from the $118.3 million in 2022.  This is in comparison with the increase of $8.0 million, or 7.2%, from 2021 to 2022.  Factors contributing to the year-to-year changes in net interest income over the three-year period are discussed in the following portions of this Section B.I.

The following tables reflect the components of net interest income for the years ended December 31, 2023, 2022 and 2021: (i) average balances of assets, liabilities and stockholders' equity, (ii) interest and dividend income earned on earning assets and interest expense incurred on interest-bearing liabilities, (iii) average yields on earning assets and average rates paid on interest-bearing liabilities, (iv) the net interest spread (average yield less average cost) and (v) the net interest margin (yield) on earning assets. The yield on securities available-for-sale is based on the amortized cost of the securities. Nonaccrual loans are included in average loans.  

Average Consolidated Balance Sheets and Net Interest Income Analysis
(GAAP basis)
(Dollars in Thousands)

Years Ended December 31:202320222021
InterestRateInterestRateInterestRate
AverageIncome/Earned/AverageIncome/Earned/AverageIncome/Earned/
BalanceExpensePaidBalanceExpensePaidBalanceExpensePaid
Interest-Bearing Deposits at Banks$109,906 $5,831 5.31 %$252,835 3,100 1.23 %418,488 565 0.14 %
 Investment Securities:
   Fully Taxable622,575 11,764 1.89 %648,540 10,357 1.60 %470,133 6,487 1.38 %
   Exempt from Federal
   Taxes		141,966 2,953 2.08 %173,184 3,212 1.85 %185,072 3,513 1.90 %
Loans3,074,261 142,016 4.62 %2,827,518 112,982 4.00 %2,643,163 104,985 3.97 %
 Total Earning Assets3,948,708 162,564 4.12 %3,902,077 129,651 3.32 %3,716,856 115,550 3.11 %
Allowance for Credit Losses(30,799)(27,954)(27,187)
Cash and Due From Banks30,640 30,462 36,464 
Other Assets135,970 142,895 156,509 
 Total Assets$4,084,519 $4,047,480 $3,882,642 
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Deposits:
   Interest-Bearing Checking
   Accounts		$855,931 3,663 0.43 %$1,038,751 973 0.09 %926,875 731 0.08 %
  Savings Deposits1,498,749 34,343 2.29 %1,549,278 7,879 0.51 %1,496,906 1,904 0.13 %
  Time Deposits of $250,000
  Or More		137,974 4,966 3.60 %55,690 369 0.66 %87,033 261 0.30 %
  Other Time Deposits241,218 7,127 2.95 %132,541 604 0.46 %141,677 632 0.45 %
    Total Interest-Bearing
    Deposits		2,733,872 50,099 1.83 %2,776,260 9,825 0.35 %2,652,491 3,528 0.13 %
Short-Term Borrowings144,971 6,756 4.66 %32,874 605 1.84 %49,768 786 1.58 %
FHLBNY Term Advances
and Other Long-Term Debt		20,000 686 3.43 %20,000 685 3.43 %20,000 686 3.43 %
Finance Leases5,082 191 3.76 %5,132 193 3.76 %5,182 195 3.76 %
  Total Interest-
  Bearing Liabilities		2,903,925 57,732 1.99 %2,834,266 11,308 0.40 %2,727,441 5,195 0.19 %
Demand Deposits772,889 815,218 767,671 
Other Liabilities44,924 37,901 33,773 
 Total Liabilities3,721,738 3,687,385 3,528,885 
Stockholders’ Equity362,781 360,095 353,757 
 Total Liabilities and
 Stockholders’ Equity		$4,084,519 $4,047,480 $3,882,642 
Net Interest Income$104,832 $118,343 $110,355 
Net Interest Spread2.13 %2.92 %2.92 %
Net Interest Margin2.65 %3.03 %2.97 %

Changes between periods are attributed to movement in either the average daily balances or average rates for both earning assets and interest-bearing liabilities.  Changes attributable to both volume and rate have been allocated proportionately between the categories.

Net Interest Income Rate and Volume Analysis
(Dollars in Thousands) (GAAP basis)
2023 Compared to 2022 Change in Net Interest Income Due to:
2022 Compared to 2021 Change in Net Interest Income Due to:
Interest and Dividend Income:VolumeRateTotalVolumeRateTotal
Interest-Bearing Bank Balances$(1,752)$4,483 $2,731 $(224)$2,759 $2,535 
Investment Securities:
Fully Taxable(398)1,805 1,407 2,443 1,427 3,870 
Exempt from Federal Taxes(586)327 (259)(214)(87)(301)
Loans9,974 19,060 29,034 7,149 848 7,997 
Total Interest and Dividend Income7,238 25,675 32,913 9,154 4,947 14,101 
Interest Expense:
Deposits:
Interest-Bearing Checking Accounts(220)2,910 2,690 138 104 242 
Savings Deposits(214)26,678 26,464 88 5,887 5,975 
Time Deposits of $250,000 or More541 4,056 4,597 (92)200 108 
Other Time Deposits517 6,006 6,523 (41)13 (28)
Total Deposits624 39,650 40,274 93 6,204 6,297 
Other Liabilities2,062 4,088 6,150 (269)85 (184)
Total Interest Expense2,686 43,738 46,424 (176)6,289 6,113 
Net Interest Income$4,552 $(18,063)$(13,511)$9,330 $(1,342)$7,988 

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NET INTEREST MARGIN

YIELD ANALYSIS (GAAP Basis)December 31,
202320222021
Yield on Earning Assets4.12 %3.32 %3.11 %
Cost of Interest-Bearing Liabilities1.99 %0.40 %0.19 %
Net Interest Spread2.13 %2.92 %2.92 %
Net Interest Margin2.65 %3.03 %2.97 %
Net Interest Margin excluding PPP Loans2.65 %3.00 %2.84 %

Arrow's earnings are derived predominantly from net interest income, which is interest income, net of interest expense. Changes in balance sheet composition, including interest-earning assets, deposits, and borrowings, combined with changes in market interest rates, impact net interest income. Net interest margin is net interest income divided by average interest-earning assets. Interest-earning assets and funding sources are managed, including noninterest and interest-bearing liabilities, in order to maximize this margin.
2023 Compared to 2022: Net interest income decreased $13.5 million, or 11.4%, to $104.8 million for the year ended December 31, 2023 from $118.3 million for the year ended December 31, 2022. Interest and fees on loans were $142.0 million for the year ended December 31, 2023 , an increase of 25.7% from the $113.0 million for the year ended December 31, 2022. The net interest margin was 2.65% for the year ended December 31, 2023 as compared to 3.03% for the year ended December 31, 2022.
Income on investment securities increased $1.1 million, or 8.5%, between the years ended December 31, 2023 and December 31, 2022. The average balances for fully taxable securities were lower for the year, with yield increasing by 29 basis points. The average balances for securities exempt from federal taxes were also lower for the year, with yield increasing by 23 basis points.
Interest income from loans increased $29.0 million, or 25.7%, to $142.0 million for the year ended December 31, 2023 from $113.0 million for the year ended December 31, 2022. The loan portfolio yield increased 62 basis points in 2023, to 4.62%. Average loan balances increased by $246.7 million, a 8.7% increase over 2022 average balances. Within the loan portfolio, the three principal segments are residential real estate loans, consumer loans (primarily through the indirect automobile lending program) and commercial loans. The consumer loan portfolio grew by $46.5 million, or 4.4%, over the balance at December 31, 2022. The residential real estate loan portfolio increased $128.8 million, or 12.0% from the prior year. Commercial loans, including commercial real estate, increased $54.4 million, or 6.4%, over the balances at December 31, 2022.
Total interest expense on interest-bearing liabilities increased $46.4 million to $57.7 million for the year ended December 31, 2023 from $11.3 million for the year ended December 31, 2022.

II. PROVISION FOR CREDIT LOSSES AND ALLOWANCE FOR CREDIT LOSSES
Arrow considers the accounting policy relating to the allowance for credit losses to be a critical accounting policy, given the uncertainty involved in evaluating the level of the allowance required to cover credit losses inherent in the loan portfolio, and the material effect that such judgments may have on the results of operations.  The provision for credit losses for 2023 was $3.4 million, compared to the $4.8 million provision for 2022. The analysis of the method employed for determining the amount of the credit loss provision is explained in detail in Notes 2, Summary of Significant Accounting Policies, and 5, Loans, to the Consolidated Financial Statements.

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SUMMARY OF THE ALLOWANCE AND PROVISION FOR CREDIT LOSSES
(Dollars In Thousands) (Loans, Net of Unearned Income)
Years-Ended December 31,20232022
Period-End Loans$3,212,908$2,983,207
Average Loans3,074,2612,827,518
Period-End Assets4,169,8683,969,509
Nonperforming Assets, at Period-End:
Nonaccrual Loans:
Commercial Loans30 8 
Commercial Real Estate15,308 3,110 
Consumer Loans1,877 3,503 
Residential Real Estate Loans3,430 4,136 
Total Nonaccrual Loans20,645 10,757 
Loans Past Due 90 or More Days and
Still Accruing Interest4521,157
Restructured5469
Total Nonperforming Loans21,15111,983
Repossessed Assets312593
Other Real Estate Owned——
Total Nonperforming Assets21,46312,576
Allowance for Credit Losses:
Balance at Beginning of Period$29,952 $27,281 
Loans Charged-off:
Commercial Loans— (34)
Commercial Real Estate— — 
Consumer Loans(5,123)(4,079)
Residential Real Estate Loans(54)(30)
Total Loans Charged-off(5,177)(4,143)
Recoveries of Loans Previously Charged-off:
Commercial Loans— 43 
Commercial Real Estate— — 
Consumer Loans3,109 1,973 
Residential Real Estate Loans— — 
    Total Recoveries of Loans Previously Charged-off3,109 2,016 
Net Loans Charged-off(2,068)(2,127)
Provision for Credit Losses
Charged to Expense3,381 4,798 
Balance at End of Period$31,265 $29,952 
Asset Quality Ratios:
Net Charge-offs to Average Loans0.07 %0.08 %
Provision for Credit Losses to Average Loans0.11 %0.17 %
Allowance for Credit Losses to Period-end Loans0.97 %1.00 %
Allowance for Credit Losses to Nonperforming Loans147.82 %249.95 %
Nonperforming Loans to Period-end Loans0.66 %0.40 %
Nonperforming Assets to Period-end Assets0.51 %0.32 %

ALLOCATION OF THE ALLOWANCE FOR CREDIT LOSSES
(Dollars in Thousands)
20232022
Commercial Loans$1,958 $1,961 
Commercial Real Estate15,521 15,213 
Consumer Loans2,566 2,585 
Residential Real Estate Loans11,220 10,193 
Total$31,265 $29,952 



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Arrow adopted CECL on January 1, 2021. The CECL approach requires an estimate of the credit losses expected over the life of a loan (or pool of loans). The allowance for credit losses is a valuation account that is deducted from, or added to, the loans’ amortized cost basis to reflect the net, lifetime amount expected to be collected on the loans. Loan losses are charged off against the allowance when Arrow 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. Upon adoption of CECL, Management revised the manner in which loans were pooled for similar risk characteristics. 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 are included in Note 5, Loans, to the Consolidated Financial Statements.

Historical credit loss experience for both Arrow and segment-specific peers provides the basis for the estimation of expected credit losses. Arrow utilizes regression analyses of peer data, of which Arrow is included, where observed credit losses and selected economic factors are 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 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. The contractual term excludes expected extensions, renewals, and modifications unless either of the following applies: Management has a reasonable expectation at the reporting date that a debt restructuring will be executed with an individual borrower or the extension or renewal options are included in the original or modified contract at the reporting date and are not unconditionally cancellable by Arrow.
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 adjustments are 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.
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Arrow's allowance for credit losses was $31.3 million at December 31, 2023, which represented 0.97% of loans outstanding, a decrease from 1.00% at year-end 2022.
See Note 5, Loans, to the Consolidated Financial Statements for the complete methodology used to calculate the provision for credit losses.
III. NONINTEREST INCOME
The majority of the noninterest income constitutes fee income from services, principally fees and commissions from fiduciary services, deposit account service charges, insurance commissions, net gains (losses) on securities transactions, net gains on sales of loans and other recurring fee income.

ANALYSIS OF NONINTEREST INCOME
(Dollars In Thousands)
Years Ended December 31,Change From Prior Year
2022 to 2023
2021 to 2022
202320222021Amount %Amount %
Income from Fiduciary Activities$9,444 $9,711 $10,142 $(267)(2.7)%$(431)(4.2)%
Fees for Other Services to Customers10,798 11,626 11,462 (828)(7.1)%164 1.4 %
Insurance Commissions6,498 6,463 6,487 35 0.5 %(24)(0.4)%
Net Gain (Loss) on Securities(92)427 111 (519)(121.5)%316 (284.7)%
Net Gain on Sales of Loans32 83 2,393 (51)(61.4)%(2,310)(96.5)%
Other Operating Income2,437 2,588 1,774 (151)(5.8)%814 45.9 %
Total Noninterest Income$29,117 $30,898 $32,369 $(1,781)(5.8)%$(1,471)(4.5)%

2023 Compared to 2022:  Total noninterest income in 2023 was $29.1 million, a decrease of $1.8 million, or 5.8%, from total noninterest income of $30.9 million for 2022. Income from fiduciary activities decreased $267 thousand from 2022 to 2023. Assets under trust administration and investment management at December 31, 2023 were $1.76 billion, an increase of $157.1 million, or 9.8%, from the prior year-end balance of $1.61 billion. Fees for other services to customers were $10.8 million for 2023, a decrease of $828 thousand as compared to 2022. Insurance commissions were flat to the previous year. Net loss on securities in 2023, was $92 thousand as compared to a gain of $427 thousand in 2022.
Net gains on the sales of loans in 2023 were $32 thousand. Sales decreased from previously highs in 2021 as a result of the strategic decision to retain more newly originated residential real estate loans. The rate at which mortgage loan originations may be 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. Therefore, Arrow is unable to predict what the retention rate of such loans in future periods may be. Servicing rights are generally retained for loans originated and sold, which also generates additional noninterest income in subsequent periods (fees for other services to customers).
Other operating income decreased by $151 thousand, or 5.8% between the two years primarily due to a reduction in non-marketable securities partially offset by bank-owned life insurance proceeds.

IV. NONINTEREST EXPENSE
Noninterest expense is the measure of the delivery cost of services, products and business activities of a company.  The key components of noninterest expense are presented in the following table.

ANALYSIS OF NONINTEREST EXPENSE
(Dollars In Thousands)
Years Ended December 31,Change From Prior Year
2022 to 2023
2021 to 2022
202320222021Amount%Amount%
Salaries and Employee Benefits$47,667$47,003$44,798$6641.4 %$2,2054.9 %
Occupancy Expenses, Net6,5546,2025,8143525.7 %3886.7 %
Technology and Equipment Expense17,60816,11814,8701,4909.2 %1,2488.4 %
FDIC Regular Assessment2,0501,1761,04287474.3 %13412.9 %
Amortization of Intangible Assets176193210(17)(8.8)%(17)(8.1)%
Other Operating Expense18,99310,83811,3148,15575.2 %(476)(4.2)%
Total Noninterest Expense$93,048$81,530$78,048$11,51814.1 %$3,4824.5 %
Efficiency Ratio68.89 %54.26 %54.16 %14.63 %27.0 %0.10 %0.2 %

2023 compared to 2022:  Noninterest expenses for 2023 were $93.0 million, an increase of $11.5 million, or 14.1%, from 2022.  For 2023, the efficiency ratio was 68.89%. This ratio, which is a commonly used non-GAAP financial measure in the banking industry, is a comparative measure of a financial institution's operating efficiency. The efficiency ratio (a ratio where lower is better), as defined by Arrow, is the ratio of operating noninterest expense (excluding intangible asset amortization) to net
38

interest income (on a tax-equivalent basis) plus operating noninterest income (excluding net securities gains or losses). See the discussion of the efficiency ratio in this Report under the heading “Use of Non-GAAP Financial Measures.”
Salaries and employee benefits expense increased $0.7 million or 1.4%, from 2022. Included within salaries and benefits was a $606 thousand reclassification between salaries and employee benefits and other operating expenses. Under Accounting Standards Update ("ASU") 2017-07 (Compensation-Retirement Benefits), interest cost, expected return on plan assets, amortization of prior service cost and amortization of net loss are required to be reclassified out of salaries and employee benefits. The reclassification was $1.5 million in 2022. Salaries and benefits were also impacted by increased benefit costs and incentive payments.
Technology expenses increased $1.5 million, or 9.2%, from 2022 due to the investment in upgrading the core banking system. The expense reflects the strategic focus on a strong technology foundation and paves the way for customer-facing enhancements and more efficient and improved internal operations.
Other operating expense increased $8.2 million, or 75.2%, from 2022. The overall increase from the prior year was primarily related to $4.8 million of additional legal and professional fees incurred in 2023 associated with the delay in the filing of the 2022 Form 10-K, and the 2023 Q1 Form 10-Q for the quarter ended March 31, 2023.

V. INCOME TAXES
The following table sets forth the provision for income taxes and effective tax rates for the periods presented.

INCOME TAXES AND EFFECTIVE RATES
(Dollars In Thousands)
Years Ended December 31,Change From Prior Year
2022 to 2023
2021 to 2022
202320222021Amount%Amount%
Provision for Income Taxes$7,445 $14,114 $14,547 $(6,669)(47.3)%$(433)(3.0)%
Effective Tax Rate19.8 %22.4 %22.6 %(2.6)%(11.6)%(0.2)%(0.9)%

The provisions for federal and state income taxes amounted to $7.4 million for 2023, $14.1 million for 2022, and $14.5 million for 2021. The effective income tax rates for 2023, 2022 and 2021 were 19.8%, 22.4% and 22.6%, respectively. The effective tax rate declined by 2.6% between 2023 and 2022 The reduction in the 2023 effective tax rate compared to the 2022 effective tax rate was the result of substantially similar permanent favorable tax benefits in each year while pre-tax income decreased in 2023.


39

C. FINANCIAL CONDITION

I. INVESTMENT PORTFOLIO
During 2023 and 2022, Arrow held no trading securities.
The available-for-sale securities portfolio, held-to-maturity securities portfolio and the equity securities portfolio are further detailed below.
The table below presents the changes in the period-end balances for available-for-sale, held-to-maturity and equity securities from December 31, 2022 to December 31, 2023 (in thousands):

(Dollars in Thousands)
Fair Value at Period-EndNet Unrealized (Losses) Gains
For Period Ended
12/31/202312/31/2022Change12/31/202312/31/2022Change
Securities Available-for-Sale:
U.S. Treasury Securities$74,004 $— $74,004 $243 $— $243 
U.S. Agency Securities152,925 175,199 (22,274)(7,075)(14,801)$7,726 
State and Municipal Obligations280 340 (60)— — — 
Mortgage-Backed Securities
269,760 397,156 (127,396)(35,401)(50,599)15,198 
Corporate and Other Debt Securities800 800 — (200)(200)— 
Total$497,769 $573,495 $(75,726)$(42,433)$(65,600)$23,167 
Securities Held-to-Maturity:
State and Municipal Obligations$120,293 $160,470 $(40,177)$(2,157)$(3,130)$973 
Mortgage-Backed Securities8,544 11,153 (2,609)(401)(611)210 
Total$128,837 $171,623 $(42,786)$(2,558)$(3,741)$1,183 
Equity Securities $1,925 $2,174 $(249)$— $— $— 

The 2023 decrease in the fair value and the related net unrealized (losses) gains on securities available-for-sale is primarily due to the balance sheet repositioning that Arrow executed in November 2023.

The table below presents the weighted average yield for available-for-sale and held-to-maturity securities as of December 31, 2023 (in thousands).

December 31, 2023
Within One YearAfter One But Within Five YearsAfter Five But Within Ten YearsAfter Ten YearsTotal
AmountYieldAmountYieldAmountYieldAmountYieldAmountYield
Securities Available-for-Sale:
U.S. Treasury Securities$48,844 5.3 %$24,917 4.7 %$— — %$— $— $73,761 5.1 %
U.S. Agency Securities$15,000 3.5 %$145,000 1.8 %$— — %$— — %160,000 2.0 %
State and Municipal Obligations— — %— — %280 6.8 %— %280 6.8 %
Mortgage-Backed Securities
2,546 2.3 %148,164 1.6 %154,451 1.7 %— — %305,161 1.7 %
Corporate and Other Debt Securities— — %— %1,000 8.4 %— — %1,000 8.4 %
Total$66,390 4.8 %$318,081 2.0 %$155,731 1.7 %$— — %$540,202 2.2 %
Securities Held-to-Maturity:
State and Municipal Obligations$47,565 2.9 %$72,609 2.5 %$2,247 3.7 %$29 6.7 %$122,450 2.7 %
Mortgage-Backed Securities— — %8,945 2.5 %— — %— — %8,945 2.5 %
Total$47,565 2.9 %$81,554 2.5 %$2,247 3.7 %$29 6.7 %$131,395 2.7 %


For the years above, Arrow held no investment securities in the securities portfolio that consisted of or included, directly or indirectly, obligations of foreign governments or government 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
40

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.
The yields on obligations of states and municipalities exempt from federal taxation were computed on a tax-equivalent basis. The yields on other debt securities shown in the table above are calculated by dividing annual interest, including accretion of discounts and amortization of premiums, by the amortized cost of the securities at December 31, 2023.
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 December 31, 2023, gross unrealized losses, $42.4 million, 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. In 2023, the 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. Arrow carried no allowance for credit loss at December 31, 2023 and there was no credit loss expense recognized by Arrow with respect to the securities portfolio during the year ended December 31, 2023.
At December 31, 2023 and 2022, the weighted average maturity was 3.4 and 4.2 years, respectively, for debt securities in the available-for-sale portfolio.
For further information regarding the portfolio of securities available-for-sale, see Note 4, Investment Securities, to the Consolidated Financial Statements.

Securities Held-to-Maturity:
The following table sets forth the carrying value of the portfolio of securities held-to-maturity at December 31 of each of the last two years.

SECURITIES HELD-TO-MATURITY
(Dollars In Thousands)
December 31,
20232022
State and Municipal Obligations$122,450 $163,600 
Mortgage Backed Securities - Residential8,945 11,764 
Total$131,395 $175,364 

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 December 31, 2023.
At December 31, 2023 and 2022, the weighted average maturity was 1.5 and 1.9 years, respectively, for the debt securities in the held-to-maturity portfolio.
For additional information regarding the fair value of the portfolio of securities held-to-maturity at December 31, 2023, see Note 4, Investment Securities, to the Consolidated Financial Statements.


41

EQUITY SECURITIES
(Dollars In Thousands)

The following table is the schedule of Equity Securities at December 31 of each of the last two years.
Equity Securities
December 31,
20232022
Equity Securities, at Fair Value$1,925 $2,174 

II. LOAN PORTFOLIO
The amounts and respective percentages of loans outstanding represented by each principal category on the dates indicated were as follows:

a. Types of Loans
(Dollars In Thousands)
December 31,
20232022
Amount%Amount%
Commercial$156,224 5 %$140,293 5 %
Commercial Real Estate745,487 23 %707,022 24 %
Consumer1,111,667 34 %1,065,135 36 %
Residential Real Estate1,199,530 37 %1,070,757 36 %
Total Loans3,212,908 100 %2,983,207 100 %
Allowance for Credit Losses(31,265)(29,952)
Total Loans, Net$3,181,643 $2,953,255 

Commercial and Commercial Real Estate Loans: Commercial and commercial real estate loans in the loan portfolio were extended to businesses or borrowers primarily located in Arrow's regional markets. There are no commercial real estate loans in major metropolitan areas. In addition, only approximately 2% of the loan portfolio are comprised of office related property. Retail loans were approximately 3% of the loan portfolio and hotels and motels were approximately 4% of the portfolio. Overall, Arrow has minimal exposure to highly sensitive areas that currently have elevated office and retail vacancy rates. 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 December 31, 2023, consumer loans (primarily automobile loans originated through dealerships located in 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: Demand for residential real estate has continued to remain strong even with elevated interest rates. Arrow has historically sold portions of these originations in the secondary market. Sales were minimal in 2023 and 2022 as the result of the strategic decision to grow the residential loan portfolio. The rate at which mortgage loan originations may be 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.

The following table indicates the changing mix in the loan portfolio by including the quarterly average balances for the significant loan segments for the past five quarters.  The remaining quarter-by-quarter tables present the percentage of total loans represented by each category and the annualized yield of each category.


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LOAN PORTFOLIO
Quarterly Average Loan Balances
(Dollars In Thousands)
Quarters Ended
12/31/20239/30/20236/30/20233/31/202312/31/2022
Commercial$151,947 $147,585 $135,370 $135,670 $141,419 
Commercial Real Estate738,305 727,060 722,753 710,719 674,420 
Consumer1,108,660 1,094,994 1,081,838 1,070,314 1,065,467 
Residential Real Estate1,171,350 1,126,601 1,096,449 1,075,225 1,070,241 
Total Loans$3,170,262 $3,096,240 $3,036,410 $2,991,928 $2,951,547 


Percentage of Total Quarterly Average Loans
Quarters Ended
12/31/20239/30/20236/30/20233/31/202312/31/2022
Commercial4.8 %4.8 %4.5 %4.5 %4.8 %
Commercial Real Estate23.3 %23.5 %23.8 %23.8 %22.8 %
Consumer35.0 %35.4 %35.6 %35.8 %36.1 %
Residential Real Estate36.9 %36.3 %36.1 %35.9 %36.3 %
Total Loans100.0 %100.0 %100.0 %100.0 %100.0 %

Quarterly Yield on Loans
Quarters Ended
12/31/20239/30/20236/30/20233/31/202312/31/2022
Commercial5.38 %4.89 %4.53 %4.28 %4.18 %
Commercial Real Estate4.88 %5.19 %5.09 %4.73 %4.57 %
Consumer5.11 %4.83 %4.61 %4.26 %4.02 %
Residential Real Estate4.52 %4.26 %4.17 %4.10 %3.80 %
Total Loans - QTD Average4.86 %4.70 %4.57 %4.32 %4.13 %

The average yield on the loan portfolio increased from 4.13% for the fourth quarter of 2022 to 4.86% for the fourth quarter of 2023. The current raising rate environment prevailed for much of 2023, which impacted new loan yields for both fixed and variable rate loans.

The following table indicates the respective maturities and interest rate structure of commercial loans and commercial real estate construction loans at December 31, 2023.  For purposes of determining relevant maturities, loans are assumed to mature at (but not before) their scheduled repayment dates as required by contractual terms.  Demand loans and overdrafts are included in the “Within 1 Year” maturity category.  Most of the commercial construction loans are made with a commitment for permanent financing, whether extended by us or unrelated third parties.  The maturity distribution below reflects the final maturity of the permanent financing.

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b. Maturities and Sensitivities of Loans to Changes in Interest Rates
(Dollars in Thousands)

The table below shows the maturity of loans outstanding as of December 31, 2023. Also provided are the amounts due after one year, classified according to fixed interest rates and variable interest rates (in thousands):

December 31, 2023
Within One YearAfter One But Within Five YearsAfter Five But Within 15 YearsAfter 15 YearsTotal
Commercial$39,757 $81,237 $35,125 $105 $156,224 
Commercial Real Estate169,210 257,646 311,898 6,732 745,486 
Consumer10,306 589,113 511,782 467 1,111,668 
Residential Real Estate128,460 68,407 319,743 682,920 1,199,530 
Total$347,733 $996,403 $1,178,548 $690,224 $3,212,908 
After One But Within Five YearsAfter Five But Within 15 YearsAfter 15 YearsTotal
Loans maturing with:
Fixed Interest Rates$696,189 $890,485 $687,056 $2,273,730 
Variable Interest Rates300,214 288,063 3,168 591,445 
Total$996,403 $1,178,548 $690,224 $2,865,175 
COMMITMENTS AND LINES OF CREDIT
Stand-by letters of credit represent extensions of credit granted in the normal course of business, which are not reflected in the financial statements at a given date because the commitments are not funded at that time.  As of December 31, 2023, the total contingent liability for standby letters of credit amounted to $3.8 million.  In addition to these instruments, there are lines of credit to customers, including home equity lines of credit, commitments for residential and commercial construction loans and other personal and commercial lines of credit, which also may be unfunded or only partially funded from time-to-time. Commercial lines, generally issued for a period of one year, are usually extended to provide for the working capital requirements of the borrower. At December 31, 2023, outstanding unfunded loan commitments in the aggregate amount were approximately $444.3 million compared to $424.2 million at December 31, 2022.

c. Risk Elements

1. Nonaccrual, Past Due and Restructured Loans
The amounts of nonaccrual, past due and restructured loans at year-end for each of the past two years are presented in the table on page 35 under the heading "Summary of the Allowance and Provision for Credit Losses."
Loans are placed on nonaccrual status either due to the delinquency status of principal and/or interest or a judgment by Management that the full repayment of principal and interest is unlikely. Unless already placed on nonaccrual status, loans secured by home equity lines of credit are put on nonaccrual status when 120 days past due and residential real estate loans are put on nonaccrual status when 150 days past due. Commercial and commercial real estate loans are evaluated on a loan-by-loan basis and are placed on nonaccrual status when 90 days past due if the full collection of principal and interest is uncertain. Under the Uniform Retail Credit Classification and Account Management Policy established by banking regulators, fixed-maturity consumer loans not secured by real estate must generally be charged-off no later than when 120 days past due. Loans secured with non-real estate collateral in the process of collection are charged-down to the value of the collateral, less cost to sell.  Arrow had no material commitments to lend additional funds on outstanding nonaccrual loans at December 31, 2023.  Loans past due 90 days or more and still accruing interest are those loans which were contractually past due 90 days or more but because of expected repayments, were still accruing interest.  
The balance of loans 30-89 days past due and still accruing interest totaled $24.3 million at December 31, 2023 and represented 0.76% of loans outstanding at that date, as compared to approximately $20.4 million, or 0.68% of loans outstanding at December 31, 2022. These non-current loans at December 31, 2023 were composed of approximately $19.1 million of consumer loans (principally indirect automobile loans), $4.2 million of residential real estate loans and $1.0 million of commercial and commercial real estate loans.
The method for measuring all other loans is described in detail in Note 2, Summary of Significant Accounting Policies, and Note 5, Loans, to the Consolidated Financial Statements.
Note 5, Loans, to the Consolidated Financial Statements contains detailed information on modified loans and impaired loans.

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2. Potential Problem Loans
On at least a quarterly basis, the internal credit quality rating is re-evaluated for commercial loans that are either past due or fully performing but exhibit certain characteristics that could reflect potential weaknesses.  Loans are placed on nonaccrual status when the likely amount of future principal and interest payments are expected to be less than the contractual amounts, even if such loans are not past due.
Periodically, Arrow reviews the loan portfolio for evidence of potential problem loans.  Potential problem loans are loans that are currently performing in accordance with contractual terms, but where known information about possible credit problems of the borrower may jeopardize loan repayment and result in a non-performing loan.  In the credit monitoring program, Arrow treats loans that are classified as substandard but continue to accrue interest as potential problem loans.  At December 31, 2023, Arrow identified 45 commercial loans totaling $46.8 million as potential problem loans.  At December 31, 2022, Arrow identified 52 commercial loans totaling $41.7 million as potential problem loans.  For these loans, although positive factors such as payment history, value of supporting collateral, and/or personal or government guarantees led Arrow to conclude that accounting for them as non-performing at year-end was not warranted, other factors, specifically, certain risk factors related to the loan or the borrower justified concerns that they may become nonperforming at some point in the future.  

3. Foreign Outstandings - None

4. Loan Concentrations
The loan portfolio is well diversified.  There are no concentrations of credit that exceed 10% of the portfolio, other than the general categories reported in the preceding Section C.II.a. of this Item 7, beginning on page 42.  For further discussion, see Note 1, Risks and Uncertainties, to the Consolidated Financial Statements.

5. Other Real Estate Owned and Repossessed Assets
Other real estate owned ("OREO") primarily consists of real property acquired in foreclosure.  When held, OREO is carried at fair value less estimated cost to sell. Arrow establishes allowances for OREO losses, which are determined and monitored on a property-by-property basis and reflect the ongoing estimate of the property's estimated fair value less costs to sell. All Repossessed Assets for each of the years in the table below consist of motor vehicles.
Distribution of OREO and Repossessed Assets
(Dollars In Thousands)		December 31,
202320222021
Other Real Estate Owned— — — 
Repossessed Assets312 593 126 
Total OREO and Repossessed Assets$312 $593 $126 

The following table summarizes changes in the net carrying amount of OREO and the number of properties for each of the periods presented. At December 31, 2022, Arrow had no OREO.
Schedule of Changes in OREO
(Dollars In Thousands)		202320222021
Balance at Beginning of Year$— $— $— 
Properties Acquired Through Foreclosure182 — 99 
Gain of Sale of OREO properties— — — 
Subsequent Write-downs to Fair Value5 — (19)
Sales(187)— (80)
Balance at End of Year$— $— $— 
Number of Properties, Beginning of Year— — — 
Properties Acquired During the Year1 — 1 
Properties Sold During the Year(1)— (1)
Number of Properties, End of Year— — — 

III. SUMMARY OF CREDIT LOSS EXPERIENCE
The information required in this section is presented in the discussion of the "Provision for Credit Losses and Allowance for Credit Losses" in Part II Item 7, Section B.II. beginning on page 35 of this Report, including:
•Charge-offs and Recoveries by loan type
•Factors that led to the amount of the Provision for Credit Losses
•Allocation of the Allowance for Credit Losses by loan type

The percent of loans in each loan category is presented in the table of loan types in the preceding section on page 42 of this Report.


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IV. DEPOSITS
The following table sets forth the average balances of and average rates paid on deposits for the periods indicated.

AVERAGE DEPOSIT BALANCES
(Dollars In Thousands)
Years Ended
12/31/202312/31/202212/31/2021
Average
Balance		RateAverage
Balance		RateAverage
Balance		Rate
Demand Deposits$772,889 — %$815,218 — %$767,671 — %
Interest-Bearing Checking Accounts855,931 0.43 %1,038,751 0.09 %926,875 0.08 %
Savings Deposits1,498,749 2.29 %1,549,278 0.51 %1,496,906 0.13 %
Time Deposits of $250,000 or More137,974 3.60 %55,690 0.66 %87,033 0.30 %
Other Time Deposits241,218 2.95 %132,541 0.46 %141,677 0.45 %
Total Deposits$3,506,761 1.43 %$3,591,478 0.27 %$3,420,162 0.10 %

Average total deposit balances decreased by $84.7 million, or 2.4% in 2023. The change in composition of deposits was primarily the result of pressure from competitive rate pricing and the migration from low to higher costing products.
Arrow used 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 $600.3 million and $520.6 million at December 31, 2023 and 2022, respectively.

The following tables presents the quarterly average balance by deposit type for each of the most recent five quarters.  

DEPOSIT PORTFOLIO
Quarterly Average Deposit Balances
(Dollars In Thousands)
Quarters Ended
12/31/20239/30/20236/30/20233/31/202312/31/2022
Demand Deposits$757,739 $779,037 $756,584 $798,576 $787,157 
Interest-Bearing Checking Accounts801,923 795,627 863,892 964,735 1,082,267 
Savings Deposits1,509,946 1,505,916 1,504,412 1,474,251 1,548,293 
Time Deposits of $250,000 or More169,854 152,738 133,897 94,415 65,897 
Other Time Deposits354,487 257,710 201,926 148,302 131,331 
Total Deposits$3,593,949 $3,491,028 $3,460,711 $3,480,279 $3,614,945 
Quarters Ended
12/31/20239/30/20236/30/20233/31/202312/31/2022
Non-Municipal Deposits$2,693,191 $2,629,532 $2,528,871 $2,567,132 $2,668,704 
Municipal Deposits900,758 861,496 931,840 913,147 946,241 
Total Deposits$3,593,949 $3,491,028 $3,460,711 $3,480,279 $3,614,945 

The above 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. Time deposits over $250,000 and other time deposits have increased significantly for the last five quarters with the migration from lower to higher costing products.
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.  

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The total quarterly average balances as a percentage of total deposits are illustrated in the table below.
Percentage of Total Quarterly Average DepositsQuarters Ended
12/31/20239/30/20236/30/20233/31/202312/31/2022
Demand Deposits21.1 %22.3 %21.9 %22.9 %21.8 %
Interest-Bearing Checking Accounts22.3 %22.8 %25.0 %27.7 %29.9 %
Savings Deposits42.0 %43.1 %43.4 %42.4 %42.9 %
Time Deposits of $250,000 or More4.7 %4.4 %3.9 %2.7 %1.8 %
Other Time Deposits9.9 %7.4 %5.8 %4.3 %3.6 %
Total Deposits100.0 %100.0 %100.0 %100.0 %100.0 %

The total quarterly interest cost of deposits, by type of deposit and in total, for each of the most recent five quarters is set forth in the table below:
Quarterly Cost of DepositsQuarters Ended
12/31/20239/30/20236/30/20233/31/202312/31/2022
Demand Deposits— %— %— %— %— %
Interest-Bearing Checking Accounts0.65 %0.58 %0.38 %0.16 %0.13 %
Savings Deposits2.76 %2.56 %2.27 %1.54 %1.05 %
Time Deposits of $250,000 or More4.22 %3.81 %3.35 %2.47 %1.36 %
Other Time Deposits3.81 %3.16 %2.38 %1.30 %0.71 %
Total Deposits1.88 %1.64 %1.35 %0.82 %0.54 %

The cost of deposits increased throughout 2023. The Federal Funds rate is anticipated to decrease in 2024, the timing and magnitude of the reductions are unknown. Arrow believes it is well positioned for a variety of rate environments.

    The maturities of time deposits of $250,000 or more at December 31, 2023 are presented below.  (Dollars In Thousands)
Maturing in:
Under Three Months$46,591 
Three to Twelve Months127,498 
20254,706 
2026506 
2027— 
2028— 
Later— 
Total$179,301 


V. SHORT-TERM BORROWINGS (Dollars in Thousands)
12/31/202312/31/202212/31/2021
Overnight Advances from the FHLBNY, Federal Funds Purchased
  and Securities Sold Under Agreements to Repurchase:
Balance at December 31$20,000 $27,000 $— 
Maximum Month-End Balance112,000 27,000 15,798 
Average Balance During the Year39,659 2,124 4,768 
Average Rate During the Year5.25 %4.34 %0.06 %
Rate at December 315.64 %4.61 %N/A

D. 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, 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 $497.8 million at year-end 2023, a decrease of $75.7 million from the
47

year-end 2022 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 December 31, 2023 of $105.8 million compared to $32.8 million at December 31, 2022.
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 $52 million which were not drawn on in 2023.
To support the borrowing relationship with the FHLBNY, Arrow has pledged collateral, including residential mortgage, home equity and commercial real estate loans. At December 31, 2023, Arrow had outstanding collateralized obligations with the FHLBNY of $27 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 December 31, 2023, there were $175 million in brokered CD deposits. In addition, Arrow's two bank subsidiaries have each established a borrowing facility with the Federal Reserve Bank of New York, pledging certain consumer loans as collateral for potential "discount window" advances, which are maintained for contingency liquidity purposes. At December 31, 2023, the amount available under this facility was approximately $739 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 December 31, 2023, Arrow's primary liquidity ratio was 9.5% of total assets, well in excess of the internal policy limit of 5%. Total primary liquidity was $394.4 million, comprised of unencumbered cash and securities.
Arrow did not experience any liquidity constraints in 2023 and did not experience any such constraints in recent prior years. Arrow has not at any time during such period been forced to pay above-market rates to obtain retail deposits or other funds from any source.

E. CAPITAL RESOURCES AND DIVIDENDS

Important Regulatory Capital Standards: Dodd-Frank, enacted in 2010, directed U.S. bank regulators to promulgate revised bank organization capital standards, which were required to be at least as strict as the regulatory capital standards for banks then in effect. The Capital Rules under Dodd-Frank were adopted by the Federal bank regulatory agencies in 2013 and became effective for Arrow and its subsidiary banks on January 1, 2015. These Capital Rules are summarized in an earlier section of this Report, "Regulatory Capital Standards," beginning on page 7.
The table below sets forth the various capital ratios achieved by Arrow and its subsidiary banks, Glens Falls National and Saratoga National, as of December 31, 2023, as determined under the bank regulatory capital standards in effect on that date, as well as the minimum levels for such capital ratios that bank holding companies and banks are required to maintain under the Capital Rules (not including the "capital conservation buffer"). As demonstrated in the table, all of Arrow's and the banks' capital ratios at year-end were well in excess of the minimum required levels for such ratios, as established by the regulators. (See Item 1, Section C, under "Regulatory Capital Standards" and Item 8, Note 19 in the Notes to Consolidated Financial Statements, for information regarding the "capital conservation buffer.") In addition, on December 31, 2023, Arrow and each of the banks qualified as "well-capitalized", the highest capital classification category under the revised capital classification scheme recently established by the federal bank regulators, that was in effect on that date.
Capital Ratios:
ArrowGFNBSNBMinimum
Required
Ratio
Tier 1 Leverage Ratio9.8%9.2%9.6%4.0%
Common Equity Tier 1 Capital Ratio13.0%13.2%12.5%4.5%
Tier 1 Risk-Based Capital Ratio13.7%13.2%12.5%6.0%
Total Risk-Based Capital Ratio                            14.7%14.3%13.7%8.0%
Federal bank regulators introduced an optional simplified measure of capital adequacy for qualifying community banking organizations (CBLR).  A qualifying community banking organization that opts into the CBLR framework and meets all the requirements under the CBLR framework will be considered to have met the well-capitalized ratio requirements under the “prompt corrective action” regulations and will not be required to report or calculate risk-based capital ratios.
The CBLR final rule became effective as of January 1, 2020, and Arrow and both subsidiary banks have opted out of utilizing the CBLR framework. Therefore, the Capital Rules promulgated under Dodd-Frank will remain applicable to Arrow and both subsidiary banks.

Stockholders' Equity at Year-end 2023: Total stockholders' equity was $379.8 million at December 31, 2023, an increase of $26.2 million, or 7.4%, from December 31, 2022. The net increase in total stockholders' equity during 2023 principally reflected
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the following factors: (i) $30.1 million of net income for the year, (ii) other comprehensive income of $16.2 million, (iii) $1.0 million of equity related to various stock-based compensation plans and (iv) $0.5 million of equity resulting from the dividend reinvestment plan, reduced by (v) cash dividends of $18.0 million and (vi) repurchases of common stock of $3.6 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 Federal Reserve Board'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.

Dividends: The source of funds for the payment by Arrow of cash dividends to shareholders consists primarily of dividends declared and paid to it by its bank subsidiaries.  In addition to legal and regulatory limitations on payments of dividends by Arrow (i.e., the need to maintain adequate regulatory capital), there are also legal and regulatory limitations applicable to the payment of dividends by the bank subsidiaries to Arrow.  As of December 31, 2023, under the statutory limitations in national banking law, the maximum amount that could have been paid by the bank subsidiaries to Arrow, without special regulatory approval, was approximately $73.6 million  The ability of Arrow and its banks to pay dividends in the future is and will continue to be influenced by regulatory policies, capital guidelines and applicable laws.
See Part II, Item 5, "Market for the Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities" for a recent history of its cash dividend payments.

Stock Repurchase Program: On October 25, 2023, the Board expanded its existing stock 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. The stock repurchase program allows 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. At December 31, 2023, Arrow had repurchased approximately $2.8 million (114 thousand shares) under the referenced repurchase program.
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 2023 other than through its repurchase program, i.e., repurchases of Arrow shares on the market utilizing funds accumulated under Arrow's Dividend Reinvestment Plan and the surrender or deemed surrender of Arrow stock to Arrow in connection with employees' stock-for-stock exercises of compensatory stock options to buy Arrow stock.

F. OFF-BALANCE SHEET ARRANGEMENTS
In the normal course of operations, Arrow may engage in a variety of financial transactions or arrangements, including derivative transactions or arrangements, that in accordance with GAAP are not recorded in the financial statements, or are recorded in amounts that differ from the notional amounts.  These transactions or arrangements involve, to varying degrees, elements of credit, interest rate, and liquidity risk.  Such transactions or arrangements may be used by Arrow or Arrow's customers for general corporate purposes, such as managing credit, interest rate, or liquidity risk or to optimize capital, or may be used by Arrow or Arrow's customers to manage funding needs.
Arrow entered 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 any 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.
In addition, Arrow entered into two pay-fixed portfolio layer method 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 the portfolio layer method ("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.
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
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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.
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 designated and 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. 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.

G. CONTRACTUAL OBLIGATIONS (Dollars In Thousands)
Payments Due by Period
Contractual ObligationTotal
Less Than
 1 Year
1-3 Years3-5 Years
More Than 5 Years
Long-Term Debt Obligations:
  Federal Home Loan Bank Advances 1
$26,500 $24,250 $2,250 $— $— 
Junior Subordinated Obligations
    Issued to Unconsolidated
    Subsidiary Trusts 2
20,000 — — — 20,000 
Operating Lease Obligations 3
6,180 731 1,304 1,056 3,089 
Finance Lease Obligations 3
8,312 249 531 536 6,996 
Obligations under Retirement Plans 4
45,611 5,053 9,330 9,243 21,985 
Total$106,603 $30,283 $13,415 $10,835 $52,070 

1 See Note 10, Debt, to the Consolidated Financial Statements for additional information on Federal Home Loan Bank Advances, including call provisions.
2 See Note 10, Debt, to the Consolidated Financial Statements for additional information on Junior Subordinated Obligations Issued to Unconsolidated Subsidiary Trusts (trust preferred securities).
3 See Note 18, Leases, to the Consolidated Financial Statements for additional information on Operating Lease Obligations.
4 See Note 13, Retirement Benefit Plans, to the Consolidated Financial Statements for additional information on Retirement Benefit Plans.

H. RECENTLY ISSUED ACCOUNTING STANDARDS

The following accounting standard has been issued and becomes effective for Arrow at a future date:
    
In March 2020, the Financial Accounting Standards Board (“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 it will have a material impact on the consolidated financial statements.


I. FOURTH QUARTER RESULTS
Arrow reported net income of $7.7 million for the fourth quarter of 2023, a decrease of $4.4 million, or 36.1%, from the net income of $12.1 million reported for the fourth quarter of 2022.  Diluted earnings per common share for the fourth quarter of 2023 were $0.46, down from $0.71 during the fourth quarter of 2022. The net change in earnings between the two quarters was primarily due to the following: (a) a $5.0 million decrease in net interest income, (b) a $2.4 million increase in noninterest expense offset by (c) a $319 thousand increase in noninterest income, (d) a $884 thousand decrease in the provision for credit losses, and (e) a $1.8 million decrease in the provision for income taxes.  The principal factors contributing to these quarter-to-quarter changes are included in the discussion of the year-to-year changes in net income set forth elsewhere in this Item 7, specifically, in Section B, "Results of Operations," above, as well as in Arrow's Current Report on Form 8-K, as filed with the SEC on February 1, 2024, incorporating by reference Arrow's earnings release for the year ended December 31, 2023.

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SELECTED FOURTH QUARTER FINANCIAL INFORMATION
(Dollars In Thousands, Except Per Share Amounts)
For the Quarters Ended
 December 31,
20232022
Interest and Dividend Income$44,324 $35,904 
Interest Expense18,711 5,325 
Net Interest Income25,613 30,579 
Provision for Credit Losses525 1,409 
Net Interest Income after Provision for Credit Losses25,088 29,170 
Noninterest Income7,484 7,165 
Noninterest Expense23,190 20,792 
Income Before Provision for Income Taxes9,382 15,543 
Provision for Income Taxes1,659 3,456 
Net Income$7,723 $12,087 
SHARE AND PER SHARE DATA:
Weighted Average Number of Shares Outstanding:
Basic17,002 17,031 
Diluted17,004 17,087 
Basic Earnings Per Common Share$0.46 $0.70 
Diluted Earnings Per Common Share0.46 $0.71 
Cash Dividends Per Common Share0.270 0.262 
AVERAGE BALANCES:
Assets$4,159,313 $4,074,028 
Earning Assets4,019,432 3,940,905 
Loans3,170,262 2,951,547 
Deposits3,593,949 3,614,945 
Stockholders’ Equity363,753 351,402 
SELECTED RATIOS (Annualized):
Return on Average Assets0.74 %1.18 %
Return on Average Equity8.42 %13.65 %
Net Interest Margin2.53 %3.08 %
Net Charge-offs to Average Loans0.05 %0.09 %
Provision for Credit Losses to Average Loans0.07 %0.19 %


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SUMMARY OF QUARTERLY FINANCIAL DATA (Unaudited)
The following quarterly financial information for 2023 and 2022 is unaudited, but, in the opinion of Management, fairly presents the results of Arrow.  

SELECTED QUARTERLY FINANCIAL DATA
(Dollars In Thousands, Except Per Share Amounts)
2023
First
Quarter
Second
Quarter
Third
Quarter
Fourth
Quarter
Total Interest and Dividend Income$36,110 $40,013 $42,117 $44,324 
Net Interest Income28,094 25,772 25,353 25,613 
Provision for Credit Losses1,554 948 354 525 
Net (Loss) Gain on Securities(104)(181)71 122 
Income Before Provision for Income Taxes10,921 7,647 9,570 9,382 
Net Income8,562 6,047 7,743 7,723 
Basic Earnings Per Common Share0.50 0.35 0.46 0.46 
Diluted Earnings Per Common Share0.50 0.35 0.46 0.46 
2022
First
Quarter
Second
Quarter
Third
Quarter
Fourth
Quarter
Total Interest and Dividend Income$28,947 $30,593 $34,207 $35,904 
Net Interest Income27,825 29,038 30,901 30,579 
Provision for Loan Losses769 905 1,715 1,409 
Net Gain on Securities130 154 95 48 
Income Before Provision for Income Taxes16,273 15,532 15,565 15,543 
Net Income12,575 11,974 12,163 12,087 
Basic Earnings Per Common Share0.74 0.70 0.72 0.70 
Diluted Earnings Per Common Share0.74 0.70 0.71 0.71 


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Item 7A.  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 December 31, 2023:
Change in Interest Rate
+ 200 basis points- 100 basis points
Calculated change in Net Interest Income - Year 1(4.2)%1.3%
Calculated change in Net Interest Income - Year 215.2%13.5%

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 8. Financial Statements and Supplementary Data
The following audited Consolidated Financial Statements and unaudited supplementary data are submitted herewith:

Reports of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of December 31, 2023 and 2022
Consolidated Statements of Income for the Years Ended December 31, 2023, 2022 and 2021
Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2023, 2022 and 2021
Consolidated Statements of Changes in Stockholders' Equity for the Years Ended December 31, 2023, 2022 and 2021
Consolidated Statements of Cash Flows for the Years Ended December 31, 2023, 2022 and 2021
Notes to Consolidated Financial Statements



53


Report of Independent Registered Public Accounting Firm


To the Stockholders and Board of Directors
Arrow Financial Corporation:


Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of Arrow Financial Corporation and subsidiaries (the Company) as of December 31, 2023 and 2022, the related consolidated statements of income, comprehensive income, changes in stockholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2023, and the related notes (collectively, the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2023 and 2022, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2023, in conformity with U.S. generally accepted accounting principles.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2023, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated March 11, 2024 expressed an adverse opinion on the effectiveness of the Company’s internal control over financial reporting.

Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.

Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of a critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.

Allowance for Credit Losses - Loans evaluated on a collective basis

As discussed in Notes 2 and 5 to the consolidated financial statements, the Company’s allowance for credit losses totaled $31 million as of December 31, 2023. The collective ACL on loans includes the measure of expected credit losses on a collective (pooled) basis for loan portfolio segments that share similar risk characteristics. The Company estimates the collective ACL on loans using relevant available information, from internal and external sources, related to past events, current conditions, and a single reasonable and supportable forecast. For all loan portfolio segments other than consumer, the Company uses a discounted cash flow methodology where the respective quantitative allowance for each segment is measured by comparing the net present value of expected cash flows projected using a probability of default (PD) and loss given default (LGD) modeling methodology to the amortized cost. The Company uses regression models to develop the PD and LGD, which are derived from historical credit loss experience for both the Company and segment-specific selected peers, that incorporate external economic forecasts for the economic factors over the reasonable and supportable forecast period. After the reasonable and supportable forecast period, the Company reverts to long-term mean economic factors over a reversion period on a straight-line basis. Cash flows over the contractual term of the loans are the basis for modeled cash flows, adjusted for modeled defaults and expected prepayments and discounted at the effective interest rate. For the consumer loan segment the Company uses a vintage analysis model where the quantitative allowance for the loan segment is measured by applying the loss rate to the loan outstanding balance based on the loan’s vintage year. The loss rate is calculated based on the quarterly net charge-offs to outstanding loan balance for each vintage year over the lookback period. 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
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eight quarter period. For all loan portfolio segments, the Company applies additional qualitative adjustments, including the effects of limitations inherent in the quantitative models, so that the collective ACL is reflective of the estimate of lifetime losses that exist in the loan portfolio at the balance sheet date.

We identified the assessment of the collective ACL on loans as a critical audit matter. A high degree of audit effort, including specialized skills and knowledge, and subjective and complex auditor judgment was involved in the assessment of the collective ACL on loans due to significant measurement uncertainty. Specifically, the assessment encompassed the evaluation of the collective ACL on loans methodology, including the methods and models used to estimate (1) the PD and LGD and their significant assumptions including portfolio segmentation, the reasonable and supportable forecast period, the composition of the peer group and the period from which historical Company and peer experience was used, (2) the vintage model and the significant assumptions including portfolio segmentation, the length of the lookback period, and the need to adjust the estimated losses based on current conditions, (3) the expected prepayments assumption, and (4) the qualitative adjustments and their significant assumptions, including the effects of limitations inherent in the quantitative models. The assessment also included an evaluation of the conceptual soundness and performance of the PD and LGD and Vintage models. In addition, auditor judgment was required to evaluate the sufficiency of audit evidence obtained.

The following are the primary procedures we performed to address this critical audit matter. We evaluated the design and tested the operating effectiveness of certain internal controls related to the Company’s measurement of the collective ACL on loans estimate, including controls over the:

•development of the collective ACL on loans methodology
•development of the PD and LGD and Vintage models
•performance monitoring of the PD and LGD and Vintage models
•identification and determination of the expected prepayments assumption and the significant assumptions used in the PD and LGD and Vintage models
•development of the qualitative adjustments, including the significant assumptions used in the measurement of the qualitative adjustments
•analysis of the collective ACL on loans results, trends, and ratios

We evaluated the Company’s process to develop the collective ACL on loans estimate by testing certain sources of data, factors, and assumptions that the Company used, and considered the relevance and reliability of such data, factors, and assumptions. We evaluated whether the loan portfolio is segmented by similar risk characteristics by comparing to the Company’s business environment and relevant industry practices. In addition, we involved credit risk professionals with specialized skills and knowledge, who assisted in:
•evaluating the Company’s collective ACL on loans methodology for compliance with U.S. generally accepted accounting principles
•evaluating judgements made by the Company relative to the development and performance monitoring of the PD and LGD and Vintage models, by comparing them to relevant Company-specific metrics and trends, including macroeconomic trends, and the applicable industry and regulatory practices
•assessing the conceptual soundness and performance testing of the PD and LGD and Vintage models, by inspecting the model documentation to determine whether the models are suitable for their intended use
•evaluating the expected prepayments assumption by comparing to relevant Company-specific metrics and trends and the applicable industry and regulatory practices
•evaluating for all loans portfolio segments other than consumer, the length of the period from which historical Company and peer experience was used and the reasonable and supportable forecast period by comparing them to specific portfolio risk characteristics and trends
•evaluating for the consumer segment the length of the lookback period, and the need to adjust the estimated losses based on current conditions by comparing to the Company’s business environment and relevant industry practices
•assessing the composition of the peer group by comparing to Company and specific portfolio risk characteristics
•evaluating the methodology used to develop the qualitative adjustments and the effect of those adjustments on the collective ACL on loans compared with relevant credit risk factors and consistency with credit trends and identified limitations of the underlying quantitative models

We also assessed the sufficiency of the audit evidence obtained related to the collective ACL on loans by evaluating the:
•cumulative results of the audit procedures
•qualitative aspects of the Company’s accounting practices
•potential bias in the accounting estimate

/s/ KPMG LLP

We have served as the Company’s auditor since 1990.

Albany, New York
March 11, 2024
55

Report of Independent Registered Public Accounting Firm

To the Stockholders and Board of Directors
Arrow Financial Corporation:

Opinion on Internal Control Over Financial Reporting
We have audited Arrow Financial Corporation and subsidiaries' (the Company) internal control over financial reporting as of December 31, 2023, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. In our opinion, because of the effect of the material weaknesses, described below, on the achievement of the objectives of the control criteria, the Company has not maintained effective internal control over financial reporting as of December 31, 2023, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of December 31, 2023 and 2022, the related consolidated statements of income, comprehensive income, stockholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2023, and the related notes (collectively, the consolidated financial statements), and our report dated March 11, 2024 expressed an unqualified opinion on those consolidated financial statements.

A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company’s annual or interim financial statements will not be prevented or detected on a timely basis. Two material weaknesses related to the following have been identified and included in management’s assessment: The Company 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. Additionally, with regard to the Company’s conversion of its core banking information technology system, the Company did not effectively perform risk assessment procedures to identify the impact of the conversion on their internal control over financial reporting.The material weaknesses were considered in determining the nature, timing, and extent of audit tests applied in our audit of the 2023 consolidated financial statements, and this report does not affect our report on those consolidated financial statements.

Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management's Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.


/s/ KPMG LLP
Albany, New York
March 11, 2024
56


ARROW FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars In Thousands, Except Share and Per Share Amounts)
 December 31, 2023December 31, 2022
ASSETS  
Cash and Due From Banks$36,755 $31,886 
Interest-Bearing Deposits at Banks105,781 32,774 
Investment Securities:
Available-for-Sale497,769 573,495 
Held-to-Maturity (Approximate Fair Value of $128,837 at
December 31, 2023, and $171,623 at December 31, 2022)
131,395 175,364 
Equity Securities1,925 2,174 
Other Investments5,049 6,064 
Loans3,212,908 2,983,207 
Allowance for Credit Losses(31,265)(29,952)
Net Loans3,181,643 2,953,255 
Premises and Equipment, Net59,642 56,491 
Goodwill21,873 21,873 
Other Intangible Assets, Net1,110 1,500 
Other Assets126,926 114,633 
Total Assets$4,169,868 $3,969,509 
LIABILITIES
Noninterest-Bearing Deposits$758,425 $836,871 
Interest-Bearing Checking Accounts799,785 997,694 
Savings Deposits1,466,280 1,454,364 
Time Deposits over $250,000179,301 76,224 
Other Time Deposits483,775 133,211 
Total Deposits3,687,566 3,498,364 
Borrowings26,500 54,800 
Junior Subordinated Obligations Issued to Unconsolidated Subsidiary Trusts20,000 20,000 
Finance Leases5,066 5,119 
Other Liabilities50,964 37,688 
Total Liabilities3,790,096 3,615,971 
STOCKHOLDERS’ EQUITY
Preferred Stock, $1 Par Value, 1,000,000 Shares Authorized
— — 
Common Stock, $1 Par Value; 30,000,000 Shares Authorized (22,066,559 Shares Issued at December 31, 2023, and 21,423,992 Shares Issued at December 31, 2022)
22,067 21,424 
Additional Paid-in Capital412,551 400,270 
Retained Earnings65,792 65,401 
Accumulated Other Comprehensive Loss(33,416)(49,655)
Treasury Stock, at Cost (5,124,073 Shares at December 31, 2023, and 4,872,355 Shares at December 31, 2022)
(87,222)(83,902)
Total Stockholders’ Equity379,772 353,538 
Total Liabilities and Stockholders’ Equity$4,169,868 $3,969,509 



See Notes to Consolidated Financial Statements.
57

ARROW FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Dollars In Thousands, Except Per Share Amounts)

 Years Ended December 31,
 202320222021
INTEREST AND DIVIDEND INCOME  
Interest and Fees on Loans$142,016 $112,982 $104,985 
Interest on Deposits at Banks5,831 3,100 565 
Interest and Dividends on Investment Securities:
Fully Taxable11,764 10,357 6,487 
Exempt from Federal Taxes2,953 3,212 3,513 
Total Interest and Dividend Income162,564 129,651 115,550 
INTEREST EXPENSE  
Interest-Bearing Checking Accounts3,663 973 731 
Savings Deposits34,343 7,879 1,904 
Time Deposits over $250,0004,966 369 261 
Other Time Deposits7,127 604 632 
Borrowings6,756 605 786 
Junior Subordinated Obligations Issued to
  Unconsolidated Subsidiary Trusts		686 685 686 
Interest on Financing Leases191 193 195 
Total Interest Expense57,732 11,308 5,195 
NET INTEREST INCOME104,832 118,343 110,355 
Provision for Credit Losses3,381 4,798 272 
NET INTEREST INCOME AFTER PROVISION FOR
   CREDIT LOSSES		101,451 113,545 110,083 
NONINTEREST INCOME  
Income From Fiduciary Activities9,444 9,711 10,142 
Fees for Other Services to Customers10,798 11,626 11,462 
Insurance Commissions6,498 6,463 6,487 
Net (Loss) Gain on Securities
(92)427 111 
Net Gain on Sales of Loans32 83 2,393 
Other Operating Income2,437 2,588 1,774 
Total Noninterest Income29,117 30,898 32,369 
NONINTEREST EXPENSE  
Salaries and Employee Benefits47,667 47,003 44,798 
Occupancy Expenses, Net6,554 6,202 5,814 
Technology and Equipment Expense17,608 16,118 14,870 
FDIC Assessments2,050 1,176 1,042 
Other Operating Expense19,169 11,031 11,524 
Total Noninterest Expense93,048 81,530 78,048 
INCOME BEFORE PROVISION FOR INCOME TAXES37,520 62,913 64,404 
Provision for Income Taxes7,445 14,114 14,547 
NET INCOME$30,075 $48,799 $49,857 
Average Shares Outstanding:  
Basic17,037 17,008 16,994 
Diluted17,037 17,059 17,052 
Per Common Share:  
Basic Earnings$1.77 $2.86 $2.93 
Diluted Earnings1.77 2.86 2.92 


Share and Per Share Amounts have been restated for the September 26, 2023 3% stock dividend.
See Notes to Consolidated Financial Statements.
58


ARROW FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Dollars In Thousands)
Years Ended December 31,
202320222021
Net Income$30,075 $48,799 $49,857 
Other Comprehensive (Loss) Income, Net of Tax:
  Unrealized Net Securities Holding Gains Arising During the Year10,441 (48,227)(6,413)
  Reclassification Adjustment for Net Securities Losses Realized During the Year 6,752 — — 
  Net Unrealized (Loss) Gain on Cash Flow Hedge Agreements (2,900)2,582 929 
  Reclassification of Net Unrealized Loss (Gain) on Cash Flow Hedge Agreements 557 152 (94)
  Net Retirement Plan Gain (Loss) 1,747 (5,147)6,500 
  Net Retirement Plan Prior Service Cost(391)— — 
  Settlement Cost— 428 — 
  Amortization of Net Retirement Plan Actuarial Loss(119)41 68 
  Amortization of Net Retirement Plan Prior Service Cost152 169 173 
Other Comprehensive Income (Loss)16,239 (50,002)1,163 
  Comprehensive Income (Loss)$46,314 $(1,203)$51,020 

See Notes to Consolidated Financial Statements.

59

ARROW FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(Dollars In Thousands, Except Share and Per Share Amounts)
Common
Stock		Additional
Paid-In
Capital		Retained
Earnings		Accumu-
lated
Other Compre-
hensive
(Loss) Income		Treasury
Stock		Total
Balance at December 31, 2020$20,194 $353,662 $41,899 $(816)$(80,547)$334,392 
Cumulative impact of adoption of ASU 2016-13— — 120 — — 120 
Balance at January 1, 2021 as adjusted for impact of adoption of ASU 2016-1320,194 353,662 42,019 (816)(80,547)334,512 
Net Income— — 49,857 — — 49,857 
Other Comprehensive Income— — — 1,163 — 1,163 
3% Stock Dividend (605,670 Shares)
606 20,896 (21,502)— — — 
Cash Dividends Paid, $0.96 per Share1
— — (16,296)— — (16,296)
Shares Issued for Stock Option Exercises, net (54,757 Shares)
— 1,016 — — 489 1,505 
Shares Issued Under the Directors' Stock Plan (11,051 Shares)
— 278 — — 98 376 
Shares Issued Under the Employee Stock Purchase Plan (14,903 Shares)
— 350 — — 131 481 
Shares Issued for Dividend Reinvestment Plans (51,403 Shares)
— 1,380 — — 456 1,836 
Stock-Based Compensation Expense— 414 — — — 414 
Purchase of Treasury Stock (73,555 Shares)
— — — — (2,662)(2,662)
Balance at December 31, 2021$20,800 377,996 54,078 347 (82,035)371,186 
Balance at December 31, 2021$20,800 $377,996 $54,078 $347 $(82,035)$371,186 
Net Income— — 48,799 — — 48,799 
Other Comprehensive Loss— — — (50,002)— (50,002)
3% Stock Dividend (623,848 Shares)
624 19,408 (20,032)— — — 
Cash Dividends Paid, $1.03 per Share1
— — (17,444)— — (17,444)
Shares Issued for Stock Option Exercises, net (28,052 Shares)
— 384 — — 247 631 
Shares Issued Under the Directors' Stock Plan (12,933 Shares)
— 295 — — 113 408 
Shares Issued Under the Employee Stock Purchase Plan (15,207 Shares)
— 344 — — 133 477 
Shares Issued for Dividend Reinvestment Plans (57,745 Shares)
— 1,392 — — 512 1,904 
Stock-Based Compensation Expense— 451 — — — 451 
Purchase of Treasury Stock (84,132 Shares)
— — — — (2,872)(2,872)
Balance at December 31, 2022$21,424 $400,270 $65,401 $(49,655)$(83,902)$353,538 
60

ARROW FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(Dollars In Thousands, Except Share and Per Share Amounts)
Common
Stock		Additional
Paid-In
Capital		Retained
Earnings		Accumu-
lated
Other Compre-
hensive
(Loss) Income		Treasury
Stock		Total
Balance at December 31, 2022$21,424 $400,270 $65,401 $(49,655)$(83,902)$353,538 
Net Income— — 30,075 — — 30,075 
Other Comprehensive Income— — — 16,239 — 16,239 
3% Stock Dividend (642,567 Shares)2
643 11,058 (11,701)— — — 
Cash Dividends Paid, $1.06 per Share1
— — (17,983)— — (17,983)
Shares Issued for Stock Option Exercises, net (4,564 Shares)
— 58 — — 38 96 
Shares Issued Under the Directors' Stock Plan (9,186 Shares)
— 143 — — 75 218 
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— 605 — — — 605 
Purchase of Treasury Stock (140,965 Shares)
— — — — (3,608)(3,608)
Balance at December 31, 2023$22,067 $412,551 $65,792 $(33,416)$(87,222)$379,772 

1 Cash dividends paid per share have been adjusted for the September 26, 2023 3% stock dividend.
2 Included in the shares issued for the 3% stock dividend in 2023 were treasury shares of 146,128.

See Notes to Consolidated Financial Statements.

61

ARROW FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
December 31,
Cash Flows from Operating Activities:202320222021
Net Income$30,075 $48,799 $49,857 
Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities:
Provision for Credit Losses3,381 4,798 272 
Depreciation and Amortization6,718 7,548 7,826 
Loss on the Sale of Securities Available-for-Sale9,097 — — 
Net Gain on Equity Securities
(9,005)(427)(111)
Loans Originated and Held-for-Sale491 (799)(48,720)
Proceeds from the Sale of Loans Held-for-Sale32 1,380 61,044 
Net Gains on the Sale of Loans(32)(83)(2,393)
Net Gains on the Sale or Write-down of Premises and Equipment,
    Other Real Estate Owned and Repossessed Assets		187 167 277 
Contributions to Pension & Postretirement Plans(681)(741)(622)
Deferred Income Tax Expense (Benefit) 1,799 (1,252)945 
Shares Issued Under the Directors’ Stock Plan218 408 376 
Stock-Based Compensation Expense605 451 414 
Tax Benefit from Exercise of Stock Options11 34 69 
Effect of Swap Agreements
(2,365)— — 
Net Increase in Other Assets(29,220)(1,427)(5,065)
Net Increase in Other Liabilities9,269 857 4,037 
Net Cash Provided By Operating Activities20,580 59,713 68,206 
Cash Flows from Investing Activities:
Proceeds from the Sale of Equity Securities
9,254 — — 
Proceeds from the Sale of Securities Available-for-Sale100,739 — — 
Proceeds from the Maturities and Calls of Securities Available-for-Sale70,415 104,120 118,330 
Purchases of Securities Available-for-Sale(73,623)(184,785)(323,372)
Proceeds from the Maturities and Calls of Securities Held-to-Maturity51,724 32,068 30,561 
Purchases of Securities Held-to-Maturity(8,209)(11,459)(9,377)
Net Increase in Loans(228,899)(319,547)(85,123)
Proceeds from the Sales of Premises and Equipment, Other
   Real Estate Owned and Repossessed Assets		2,707 1,475 1,547 
Purchase of Premises and Equipment(7,081)(14,250)(7,137)
Net Decrease (Increase) in Federal Home Loan Bank Stock1,015 (684)(31)
Purchase of Bank Owned Life Insurance(692)— — 
Net Cash Used In Investing Activities(82,650)(393,062)(274,602)
Cash Flows from Financing Activities:
Net Increase (Decrease) in Deposits189,202 (52,133)315,771 
Other Borrowings - Advances
256,500 27,000 — 
Other Borrowings - Paydowns
(284,800)(17,200)(17,486)
Finance Lease Payments(53)(50)(48)
Purchase of Treasury Stock(3,608)(2,872)(2,662)
Shares Issued for Stock Option Exercises, net96 631 1,505 
Shares Issued Under the Employee Stock Purchase Plan120 477 481 
Shares Issued for Dividend Reinvestment Plans472 1,904 1,836 
Cash Dividends Paid(17,983)(17,444)(16,296)
Net Cash Provided (Used) By Financing Activities139,946 (59,687)283,101 
Net Increase (Decrease) in Cash and Cash Equivalents77,876 (393,036)76,705 
Cash and Cash Equivalents at Beginning of Year64,660 457,696 380,991 
Cash and Cash Equivalents at End of Year$142,536 $64,660 $457,696 
Supplemental Disclosures to Statements of Cash Flow Information:
Interest on Deposits and Borrowings$51,828 $5,752 $5,373 
Income Taxes6,644 13,018 14,760 
Non-cash Investing and Financing Activity:
Transfer of Loans to Other Real Estate Owned and Repossessed Assets2,488 1,656 1,358 
See Notes to Consolidated Financial Statements.
62

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1:RISKS AND UNCERTAINTIES

Nature of Operations - Arrow Financial Corporation, a New York corporation, 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 (Glens Falls National or GFNB) whose main office is located in Glens Falls, New York, and Saratoga National Bank and Trust Company (Saratoga National or SNB) whose main office is located in Saratoga Springs, New York.  The two 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 Glens Falls National 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, or REIT, are subsidiaries of Glens Falls National. 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, and cash flow from investment securities and loans.

Note 2:SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation - The financial statements of Arrow and its wholly owned subsidiaries are consolidated and all material inter-company transactions have been eliminated.  In the “Parent Company Only” financial statements in Note 21, the investment in wholly owned subsidiaries is carried under the equity method of accounting.  When necessary, prior years’ Consolidated Financial Statements have been reclassified to conform to the current-year financial statement presentation.
Arrow determines whether it has a controlling financial interest in an entity by first evaluating whether the entity is a voting interest entity or a variable interest entity under GAAP. Voting interest entities are entities in which the total equity investment at risk is sufficient to enable the entity to finance itself independently and provides the equity holders with the obligation to absorb losses, the right to receive residual returns and the right to make decisions about the entity’s activities. Arrow consolidates voting interest entities in which it has all, or at least a majority of, the voting interest. As defined in applicable accounting standards, variable interest entities (VIE) are entities that lack one or more of the characteristics of a voting interest entity. A controlling financial interest in a VIE is present when Arrow has both the power and ability to direct the activities of the VIE that most significantly impact the VIE's economic performance and an obligation to absorb losses or the right to receive benefits that could potentially be significant to the VIE. Arrow's wholly owned subsidiaries Arrow Capital Statutory Trust II and Arrow Capital Statutory Trust III are VIEs for which Arrow is not the primary beneficiary. Accordingly, the accounts of these entities are not included in Arrow's Consolidated Financial Statements.

Segment Reporting - Arrow operations are primarily in the community banking industry, which constitutes Arrow’s only segment for financial reporting purposes.  Arrow provides other services, such as trust administration, retirement plan administration, advice to the Company's proprietary mutual funds and insurance products, but these services do not rise to the quantitative thresholds for separate disclosure.  Arrow operates primarily in the northeastern region of New York State in Warren, Washington, Saratoga, Essex, Clinton, Rensselaer, Albany, and Schenectady counties and surrounding areas.

Cash and Cash Equivalents - Cash and cash equivalents include the following items:  cash at branches, due from bank balances, cash items in the process of collection, interest-bearing bank balances and federal funds sold.  

63

Securities - Management determines the appropriate classification of securities at the time of purchase.  Securities reported as held-to-maturity are those debt securities which Arrow has both the positive intent and ability to hold to maturity and are stated at amortized cost.  Securities available-for-sale are reported at fair value, with unrealized gains and losses reported in accumulated other comprehensive income or loss, net of taxes. Equity securities with readily determinable fair values are stated at fair value with realized and unrealized gains and losses reported in income. Arrow performs a qualitative assessment to determine whether investments are impaired.
Premiums and discounts are amortized or accreted over the life of the related security as an adjustment to yield using the interest method. Dividend and interest income are recognized when earned. Realized gains and losses on securities sold are derived using the specific identification method for determining the cost of securities sold.

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, the Bank 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 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 continues to pay dividends and repurchase stock. As such, the Company has not recognized any impairment on its holdings of Federal Reserve Bank and FHLB stock.

Loans - Loans are reported at their principal outstanding balance, net of deferred fees and costs, and unearned income. Arrow has the intent and ability to hold to maturity. Interest income on loans is accrued and credited to income based upon the principal amount outstanding.  Loan fees and costs directly associated with loan originations are deferred and amortized/accreted as an adjustment to yield over the lives of the loans originated.
From time-to-time, Arrow has sold (most with servicing retained) residential real estate loans at or shortly after origination. Any gain or loss on the sale of loans, along with the value of the servicing right, is recognized at the time of sale as the difference between the recorded basis in the loan and net proceeds from the sale.  Loans held for sale are recorded at the lower of cost or fair value on an aggregate basis.
Loans are placed on nonaccrual status either due to the delinquency status of principal and/or interest or a judgment by management that the full repayment of principal and interest is unlikely. Unless already placed on nonaccrual status, loans secured by home equity lines of credit are put on nonaccrual status when 120 days past due; residential real estate loans when 150 days past due; commercial and commercial real estate loans are evaluated on a loan-by-loan basis and are placed on nonaccrual status when 90 days past due if the full collection of principal and interest is uncertain; all other loans are to be moved to nonaccrual status upon the earliest occurrence of repossession, bankruptcy, delinquency of 90 days or more unless the loan is secured and in the process of collection with no loss anticipated or when full collection of principal and interest is in doubt.
The balance of any accrued interest deemed uncollectible at the date the loan is placed on nonaccrual status is reversed, generally against interest income.  A loan is returned to accrual status at the later of the date when the past due status of the loan falls below the threshold for nonaccrual status or Management deems that it is likely that the borrower will repay all interest
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and principal.  For payments received while the loan is on nonaccrual status, Arrow may recognize interest income on a cash basis if the repayment of the remaining principal and accrued interest is deemed likely.

Allowance for Credit Losses – Loans - CECL - 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. Upon adoption of CECL, Management revised the manner in which loans were pooled for similar risk characteristics. 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 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.
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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 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. 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.

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 noninterest 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 the Bank 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 - Upon adoption of CECL on January 1, 2021, Arrow 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 Arrow's 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.

Comprehensive Income (Loss) - For Arrow, comprehensive income (loss) represents net income plus unrealized net securities holding gains or losses arising during the year (net of taxes), the reclassification adjustment for net securities gains and losses arising during the year (net of taxes), net unrealized gains or losses on cash flow hedge agreements, reclassification of net unrealized gain or loss on cash flow hedge agreements to interest expense (net of taxes), net retirement plan gain or loss (net of taxes), net retirement plan prior service cost (net of taxes), amortization of net retirement plan actuarial gain or loss (net of taxes) and amortization of net retirement plan prior service credit or cost (net of taxes) and is presented in the Consolidated Statements of Comprehensive Income (Loss) and Consolidated Statements of Changes in Shareholders’ Equity. Accumulated other comprehensive income (loss) represents the unrealized net securities holding gains or losses arising during the year (net of taxes), net unrealized gains or losses on cash flow hedge agreements, reclassification of net unrealized gain or loss on cash flow hedge agreements to interest expense (net of taxes), net retirement plan gain or loss (net of taxes), net retirement plan prior service cost (net of taxes), amortization of net retirement plan actuarial gain or loss (net of taxes) and amortization of net retirement plan prior service credit or cost (net of taxes) in the Company’s defined-benefit retirement and pension plan, supplemental employee retirement plan, and post-retirement life and healthcare benefit plan.

Revenue Recognition - The following is a description of principal activities from which Arrow generates its revenue from noninterest income sources.
Income from Fiduciary Activities: represents revenue derived mainly through the management of client investments which is based on the market value of the covered assets and the fee schedule contained in the applicable account management agreement. Since the revenue is mainly based on the market value of assets, this amount can be volatile as financial markets increase and decrease based on various economic factors. The terms of the account management agreements generally specify that the performance obligations are completed each quarter. Accordingly, the Company mainly recognizes revenue from fiduciary activities on a quarterly basis.
Fees for Other Services to Customers: represents general service fees for monthly deposit account maintenance and account activity plus fees from other deposit-based services. Revenue is recognized when the performance obligation is completed, which is generally on a monthly basis for account maintenance services, or upon the completion of a deposit-related transaction. Payment for these performance obligations is generally received at the time the performance obligations are satisfied.
Insurance Commissions: represents commissions and fees paid by insurance carriers for both property and casualty insurance policies, and for services performed for employment benefits clients. Revenue from the property and casualty insurance business is recognized when the performance obligation is satisfied, which is generally the effective date of the bound coverage since there are no significant performance obligations remaining. Revenue from the employment benefit brokerage business is recognized when the benefit servicing performance obligations are satisfied, generally on a monthly basis.

Other Real Estate Owned and Repossessed Assets - Real estate acquired by foreclosure and assets acquired by repossession are recorded at the fair value of the property less estimated costs to sell at the time of repossession.  Subsequent
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declines in fair value, after transfer to other real estate owned and repossessed assets are recognized through a valuation allowance. Such declines in fair value along with related operating expenses to administer such properties or assets are charged directly to operating expense.

Premises and Equipment - Premises and equipment are stated at cost, less accumulated depreciation and amortization. Depreciation and amortization included in operating expenses are computed largely on the straight-line method. Depreciation is based on the estimated useful lives of the assets (buildings and improvements 20-40 years; furniture and equipment 7-10 years; data processing equipment 5-7 years) and, in the case of leasehold improvements, amortization is computed over the terms of the respective leases or their estimated useful lives, whichever is shorter.  Gains or losses on disposition are reflected in earnings.

Leases - Arrow recognizes right-of-use assets and lease liabilities on the balance sheet for all leases with terms longer than 12 months, and has elected not to separate lease and non-lease components, but accounts for the resulting combined component as a single lease component. Arrow also elected to account for short-term leases, those leases with a "lease term" of twelve months or less, as an operating lease. Since Arrow has not been able to determine the rate implicit in its leases, the secured borrowing rate from the Federal Home Loan Bank of New York is utilized to determine the lease discount rate. The expected expiration date of each new lease is determined on a lease-by-lease basis based on certain criteria, such as the availability of renewal options in the lease contracts, the amount of leasehold improvements required in addition to the feasibility of growth potential.

Investments in Real Estate Limited Partnerships - These limited partnerships acquire, develop and operate low and moderate-income housing. As a limited partner in these projects, Arrow receives low income housing tax credits and tax deductions for losses incurred by the underlying properties. The proportional amortization method allowed in Accounting Standards Update 2014-01 "Investments - Equity Method and Joint Ventures (Topic 323): Accounting for Investments in Qualified Affordable Housing Projects" is applied. The proportional amortization method permits an entity to amortize the initial cost of the investment in proportion to the amount of the tax credits and other tax benefits received and to recognize the net investment performance in the income statement as a component of income tax expense.

Investments in Historical Tax Credits - Arrow accounts for historic rehabilitation tax credits using the deferral method of accounting under which the tax benefit generated from an investment tax credit is recorded as a reduction to the GAAP asset basis. Accordingly, Arrow recognized a current tax receivable and a deferred tax asset and corresponding reduction in the basis of Arrow's historic tax credit investment.

Bank-Owned Life Insurance - Arrow has purchased life insurance policies on certain employees, key executives and directors. Bank-owned life insurance is recorded at the amount that can be realized under the insurance contract at the balance sheet date, which is the cash surrender value adjusted for other charges or other amounts due that are probable at settlement.

Derivative Instruments and Hedging Activities - Arrow enters into interest rate swap agreements that are not designated as hedges for accounting purposes. As the interest rate swap agreements have substantially equivalent and offsetting terms, they do not present any 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.
Arrow also enters into pay-fixed portfolio layer method fair value swaps, designated as hedging instruments. Arrow is designating the fair value swaps under the portfolio layer method ("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.
In addition, Arrow enters into interest rate swaps 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 and to synthetically fix the variable rate interest payments in outstanding subordinated trust securities. These agreements are designated as cash flow hedges. For derivatives designated and that qualify as cash flow hedges of interest rate risk, the gain or loss on the derivative is recorded in Accumulated Other Comprehensive Income and subsequently reclassified into interest expense in the same period during which the hedge transaction affects earnings.

Income Taxes - Arrow accounts for income taxes under the asset and liability method.  Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases.  Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income tax expense in the period that includes the enactment date.  Arrow’s policy is that deferred tax assets are reduced by a valuation allowance if, based on the weight of available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized.

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Goodwill and Other Intangible Assets - Identifiable intangible assets acquired in a business combination are capitalized and amortized.  Any remaining unidentifiable intangible asset is classified as goodwill, for which amortization is not required but which must be evaluated for impairment.  Arrow tests for impairment of goodwill on an annual basis, or when events and circumstances indicate potential impairment.  In evaluating goodwill for impairment, Arrow first assesses certain qualitative factors to determine if it is more likely than not that the fair value of the reporting unit is less than its carrying value. If it is more likely than not that the fair value of a reporting unit exceeds its carrying amount, goodwill of the reporting unit is considered not impaired. If the carrying amount of a reporting unit exceeds its fair value, the second step of the goodwill impairment test is performed to measure the amount of impairment loss, if any.
The carrying amounts of other recognized intangible assets that meet recognition criteria and for which separate accounting records have been maintained (mortgage servicing rights and customer intangibles), have been included in the consolidated balance sheet as “Other Intangible Assets, Net.”
Arrow has sold residential real estate loans, primarily to Freddie Mac, with servicing retained.   Mortgage servicing rights are recognized as an asset when loans are sold with servicing retained, by allocating the cost of an originated mortgage loan between the loan and servicing right based on estimated relative fair values.  The cost allocated to the servicing right is capitalized as a separate asset and amortized in proportion to, and over the period of, estimated net servicing income. Capitalized mortgage servicing rights are evaluated for impairment by comparing the asset’s carrying value to its current estimated fair value.  Fair values are estimated using a discounted cash flow approach, which considers future servicing income and costs, current market interest rates, and anticipated prepayment, and default rates.  Impairment losses are recognized through a valuation allowance for servicing rights having a current fair value that is less than amortized cost on an aggregate basis.  Adjustments to increase or decrease the valuation allowance are charged or credited to income as a component of other operating income.

Pension and Postretirement Benefits - Arrow maintains a non-contributory, defined benefit pension plan covering substantially all employees, a supplemental pension plan covering certain executive officers selected by the Board of Directors, and certain post-retirement medical, dental and life insurance benefits for employees and retirees which are more fully described in Note 13, Retirement Benefit Plans.  The costs of these plans, based on actuarial computations of current and future benefits for employees, are charged to current operating expenses. The cost of post-retirement benefits other than pensions is recognized on an accrual basis as employees perform services to earn the benefits.  Arrow recognizes the overfunded or underfunded status of our single employer defined benefit pension plan as an asset or liability on its consolidated balance sheet and recognizes changes in the funded status in comprehensive income in the year in which the change occurred. 
Prior service costs or credits are amortized on a straight-line basis over the average remaining service period of active participants.  Gains and losses in excess of 10% of the greater of the benefit obligation or the fair value of assets are amortized over the average remaining service period of active participants.  
The discount rate assumption is determined by preparing an analysis of the respective plan’s expected future cash flows and high-quality fixed-income investments currently available and expected to be available during the period to maturity of the pension benefits. 

Stock-Based Compensation Plans - Arrow has three stock-based compensation plans, which are described more fully in Note 12, Stock Based Compensation.  The Company expenses the grant date fair value of stock options and restricted stock units granted.  For stock options and restricted stock units, the expense is recognized over the vesting period of the grant, typically four years for stock options and three years for restricted stock units, on a straight-line basis. Shares are generally issued from treasury for the exercise of stock options.
In October 2023, the Board of Directors approved the adoption of the new qualified 2023 ESPP, which is intended to satisfy the requirements of Section 423 of the Internal Revenue Code, which was effective January 1, 2024. Under the new qualified 2023 ESPP, the amount of the discount is 10%. Until its suspension due to the filing delays, Arrow sponsored an ESPP under which 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.
Arrow maintains an employee stock ownership plan (“ESOP”).  Substantially all employees of Arrow and its subsidiaries are eligible to participate upon satisfaction of applicable service requirements.  The ESOP has the ability to borrow funds from one of Arrow’s subsidiary banks to purchase outstanding shares of Arrow’s common stock.   At December 31, 2023 and 2022, there were no loans outstanding and no unallocated shares. Arrow may, in its sole discretion, make additional cash contributions to the Plan each year on behalf of the participants.

Securities Sold Under Agreements to Repurchase - In securities repurchase agreements, Arrow receives cash from a counterparty in exchange for the transfer of securities to a third party custodian’s account that explicitly recognizes Arrow’s interest in the securities.  These agreements are accounted for by Arrow as secured financing transactions, since it maintains effective control over the transferred securities, and meets other criteria for such accounting.  Accordingly, the cash proceeds are recorded as borrowed funds, and the underlying securities continue to be carried in Arrow’s securities available-for-sale portfolio.

Earnings Per Share (“EPS”) - Basic EPS excludes dilution and is computed by dividing income available to common stockholders by the weighted average number of common shares outstanding for the period.  Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the entity (such as Arrow’s stock options), computed using the treasury stock method.  Unallocated common shares held by Arrow’s ESOP are not included in the weighted average number of common shares outstanding for either the basic or diluted EPS calculation.
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Financial Instruments - 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. These 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 policy is to record such instruments when funded.  Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial instrument.  These estimates do not reflect any premium or discount that could result from offering for sale at one time Arrow's entire holdings of a particular financial instrument. Because no market exists for a significant portion of Arrow's financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments, and other factors.  These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision.  Changes in assumptions could significantly affect the estimates.
Fair value estimates are based on existing on- and off-balance sheet financial instruments without attempting to estimate the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments.  For example, Arrow has a wealth management department that contributes net fee income annually.  The value of the wealth management department customer relationships is not considered a financial instrument of the Company, and therefore this value has not been incorporated into the fair value estimates. Other significant assets and liabilities that are not considered financial assets or liabilities include deferred taxes, premises and equipment, the value of low-cost, long-term core deposits and goodwill.  In addition, the tax ramifications related to the realization of the unrealized gains and losses can have a significant effect on fair value estimates and have not been considered in any of the estimates.
The fair value for loans is disclosed using the "exit price" notion which is a reasonable estimate of what another party might pay in an orderly transaction. Fair values for loans are calculated for portfolios of loans with similar financial characteristics. Loans are segregated by type such as commercial, commercial real estate, residential mortgage, indirect auto and other consumer loans.  Each loan category is further segmented into fixed and adjustable interest rate terms and by performing and nonperforming categories.  The fair value of performing loans is calculated by determining the estimated future cash flow, which is the contractual cash flow adjusted for estimated prepayments. The discount rate is determined by starting with current market yields, and adjusting for a discount spread. The discount spread is applied separately for each loan type based on market information. A liquidity premium is determined for each loan type based on market inefficiencies associated with the sale of a financial instrument. Finally, a credit loss component is determined utilizing the credit loss assumptions used in the allowance for credit loss model.
The carrying amount of short-term assets and liabilities is a reasonable estimate of fair value: cash and due from banks, federal funds sold and purchased, securities sold under agreements to repurchase, demand deposits, savings, N.O.W. and money market deposits, brokered money market deposits and time deposits, other short-term borrowings, accrued interest receivable and accrued interest payable.  The fair value estimates of other on- and off-balance sheet financial instruments, as well as the method of arriving at fair value estimates, are included in the related footnotes and summarized in Note 17, Fair Values.  

Fair Value Measures - Arrow determines the fair value of financial instruments 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;
•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).  
A financial instrument’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement.  

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 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.  Our most significant estimates are the allowance for credit losses, the evaluation of impairment of investment securities, goodwill impairment, pension and other postretirement liabilities and an analysis of a need for a valuation allowance for deferred tax assets. 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 appraisals for properties.  The allowance for credit losses is management’s best estimate of expected credit 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.  

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The following accounting standard was adopted by Arrow in 2023.
ASU No. 2022-02, “Troubled Debt Restructurings and Vintage Disclosures” (“ASU 2022-02”), was issued in March 2022 to provide updates on the accounting treatment for troubled debt restructuring ("TDRs") and related disclosures requirements, and modify the disclosure requirement associated with the existing credit quality indicators “vintage” disclosure. With respect to TDRs, ASU 2022-02 eliminates the recognition and measurement guidance for TDRs under current GAAP and instead requires that Arrow evaluate 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, ASU 2022-02 eliminates existing disclosure requirements on TDRs and replaces with enhanced disclosure requirements related to certain loan modifications made to borrowers experiencing financial difficulty. ASU 2022-02 also provides an update to the existing credit quality indicators “vintage” tabular disclosure requiring current period gross write-offs to be disclosed by year of origination for each loan segment. The provisions of ASU 2022-02 were effective January 1, 2023 and Arrow adopted the provisions on a prospective basis. Historical disclosures on TDRs were removed from this report in accordance with the provisions of this ASU. The adoption of this ASU did not have a material impact on the consolidated financial statements.

Note 3:CASH AND CASH EQUIVALENTS (Dollars In Thousands)
20232022
Balances at December 31:
Cash and Due From Banks$36,755 $31,886 
Interest-Bearing Deposits at Banks105,781 32,774 
Total Cash and Cash Equivalents$142,536 $64,660 

The increase in cash from December 31, 2022 reflects the strategic enhancement of the Arrow liquidity position.


Note 4:    INVESTMENT SECURITIES (Dollars In Thousands)

The following table is the schedule of Available-For-Sale Securities at December 31, 2023 and 2022:
Available-For-Sale Securities
U.S. TreasuriesU.S. Government & Agency
Obligations		State and
Municipal
Obligations		Mortgage-
Backed
Securities		Corporate
and Other
Debt
Securities		Total
Available-
For-Sale
Securities
December 31, 2023
Available-For-Sale Securities,
  at Amortized Cost		$73,761 $160,000 $280 $305,161 $1,000 $540,202 
Gross Unrealized Gains243 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 $497,769 
Available-For-Sale Securities,
  Pledged as Collateral,
  at Fair Value		242,938 
Maturities of Debt Securities,
at Amortized Cost:
Within One Year48,844 15,000 — 2,546 — 66,390 
From 1 - 5 Years24,917 145,000 — 148,164 — 318,081 
From 5 - 10 Years— — 280 154,451 1,000 155,731 
Over 10 Years— — — — — — 
Maturities of Debt Securities,
at Fair Value:
Within One Year48,915 14,858 — 2,481 — 66,254 
From 1 - 5 Years25,089 138,067 — 135,570 — 298,726 
From 5 - 10 Years— — 280 131,709 800 132,789 
Over 10 Years— — — — — — 
Securities in a Continuous
Loss Position, at Fair Value:
Less than 12 Months$— $— $— $— $— $— 
12 Months or Longer— 137,874 — 269,286 800 407,960 
Total$— $137,874 $— $269,286 $800 $407,960 
Number of Securities in a
  Continuous Loss Position		— 19 — 97 1 117 
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Available-For-Sale Securities
U.S. TreasuriesU.S. Government & Agency
Obligations		State and
Municipal
Obligations		Mortgage-
Backed
Securities		Corporate
and Other
Debt
Securities		Total
Available-
For-Sale
Securities
Unrealized Losses on
Securities in a Continuous
Loss Position:
Less than 12 Months$— $— $— $— $— $— 
12 Months or Longer— 7,126 — 35,407 200 42,733 
Total$— $7,126 $— $35,407 $200 $42,733 
Disaggregated Details:
US Treasury Obligations,
  at Amortized Cost		$73,761 
US Treasury Obligations,
  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 
Corporate Trust Preferred Securities, at Fair Value
800 




Available-For-Sale Securities
U.S. Government & Agency
Obligations		State and
Municipal
Obligations		Mortgage-
Backed
Securities		Corporate
and Other
Debt
Securities		Total
Available-
For-Sale
Securities
December 31, 2022
Available-For-Sale Securities,
  at Amortized Cost		$190,000 $340 $447,755 $1,000 $639,095 
Gross Unrealized Gains15 — 65 — 80 
Gross Unrealized Losses(14,816)— (50,664)(200)(65,680)
Available-For-Sale Securities,
  at Fair Value		$175,199 $340 $397,156 $800 $573,495 
Available-For-Sale Securities,
  Pledged as Collateral,
  at Fair Value		308,266 
Securities in a Continuous
Loss Position, at Fair Value:
Less than 12 Months$66,690 $— $183,868 $— $250,558 
12 Months or Longer93,493 — 199,262 800 293,555 
Total$160,183 $— $383,130 $800 $544,113 
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Number of Securities in a
  Continuous Loss Position		23 — 150 1 174 
Unrealized Losses on
Securities in a Continuous
Loss Position:
Less than 12 Months$3,310 $— $18,756 $— $22,066 
12 Months or Longer11,506 — 31,908 200 43,614 
Total$14,816 $— $50,664 $200 $65,680 
Disaggregated Details:
US Agency Obligations,
  at Amortized Cost		$190,000 
US Agency Obligations,
  at Fair Value		175,199 
Local Municipal Obligations, at Amortized Cost
$340 
Local Municipal Obligations, at Fair Value
340 
US Government Agency
  Securities, at Amortized Cost		$7,934 
US Government Agency
  Securities, at Fair Value		7,433 
Government Sponsored Entity
  Securities, at Amortized Cost		439,821 
Government Sponsored Entity
  Securities, at Fair Value		389,723 
Corporate Trust Preferred Securities, at Amortized Cost
$1,000 
Corporate Trust Preferred Securities, at Fair Value
800 

At December 31, 2023, there was no allowance for credit losses for the available for sale securities portfolio.

The following is a summary of realized losses recognized in net income on available-for-sale securities sold during the years ended December 31, 2023 and 2022:
December 31,
20232022
Proceeds Received on Sale of AFS Securities
$100,739 $— 
Basis of AFS investments Sold
109,836 — 
Net Loss Recognized on Sale of AFS Securities
$(9,097)$— 












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The following table is the schedule of Held-To-Maturity Securities at December 31, 2023 and 2022:
Held-To-Maturity Securities
State and
Municipal
Obligations		Mortgage-
Backed
Securities		Total
Held-To
Maturity
Securities
December 31, 2023
Held-To-Maturity Securities,
  at Amortized Cost		$122,450 $8,945 $131,395 
Gross Unrealized Gains— — — 
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 Fair Value		112,472 
Maturities of Debt Securities,
at Amortized Cost:
Within One Year47,565 — 47,565 
From 1 - 5 Years72,609 8,945 81,554 
From 5 - 10 Years2,247 — 2,247 
Over 10 Years29 — 29 
Maturities of Debt Securities,
at Fair Value:
Within One Year47,293 — 47,293 
From 1 - 5 Years70,751 8,543 79,294 
From 5 - 10 Years2,220 — 2,220 
Over 10 Years29 — 29 
Securities in a Continuous
Loss Position, at Fair Value:
Less than 12 Months$1,472 $— $1,472 
12 Months or Longer102,839 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 Longer2,143 402 2,545 
Total$2,157 $402 $2,559 
Disaggregated Details:
Municipal Securities, at Amortized Cost
$122,450 
Municipal Securities, at Fair Value
120,293 
US Government Agency
  Securities, at Amortized Cost		$3,114 
US Government Agency
  Securities, at Fair Value		2,954 
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Held-To-Maturity Securities
State and
Municipal
Obligations		Mortgage-
Backed
Securities		Total
Held-To
Maturity
Securities
Government Sponsored Entity
  Securities, at Amortized Cost		5,831 
Government Sponsored Entity
  Securities, at Fair Value		5,589 
December 31, 2022
Held-To-Maturity Securities,
  at Amortized Cost		$163,600 $11,764 $175,364 
Gross Unrealized Gains1 — 1 
Gross Unrealized Losses(3,131)(611)(3,742)
Held-To-Maturity Securities,
  at Fair Value		$160,470 $11,153 $171,623 
Held-To-Maturity Securities,
  Pledged as Collateral, at Fair Value		142,982 
Securities in a Continuous
Loss Position, at Fair Value:
Less than 12 Months$137,773 $11,153 $148,926 
12 Months or Longer— — — 
Total$137,773 $11,153 $148,926 
Number of Securities in a
  Continuous Loss Position		397 16 413 
Unrealized Losses on Securities
in a Continuous Loss Position:
Less than 12 Months$3,131 $611 $3,742 
12 Months or Longer— — — 
Total$3,131 $611 $3,742 
Disaggregated Details:
Municipal Securities, at Amortized Cost
$163,600 
Municipal Securities, at Fair Value
160,470 
US Government Agency
  Securities, at Amortized Cost		$3,898 
US Government Agency
  Securities, at Fair Value		3,687 
Government Sponsored Entity
  Securities, at Amortized Cost		7,866 
Government Sponsored Entity
  Securities, at Fair Value		7,466 

In the tables above, maturities of mortgage-backed securities are included based on their contractual average lives. Actual maturities will differ because issuers may have the right to call or prepay obligations with or without prepayment penalties.
Securities in a continuous loss position, in the tables above for December 31, 2023 and December 31, 2022 do not reflect any deterioration of the credit worthiness of the issuing entities.
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 noncredit-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 December 31, 2023, 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 the security before recovery of its amortized cost basis, which may be at maturity. Arrow carried no allowance for credit loss at December 31, 2023 and there was no credit loss expense recognized by Arrow with respect to the securities portfolio during 2023.  
Arrow's held to maturity debt securities are comprised of securities issued by U.S. government agencies or U.S. government-sponsored enterprises or state and municipal obligations. U.S. government agencies and U.S. government-sponsored enterprise 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 held to maturity debt portfolio was immaterial and therefore no allowance for credit loss was recorded as of December 31, 2023.
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The following table is the schedule of Equity Securities at December 31, 2023 and 2022.
Equity Securities
December 31,
20232022
Equity Securities, at Fair Value$1,925 $2,174 

The following is a summary of realized and unrealized gains and losses recognized in net income on equity securities during the years ended December 31, 2023 and 2022:
December 31,
20232022
Net Gain on Equity Securities
$9,005 $427 
Less: Net Gain recognized during the reporting period on equity securities sold during the period
9,254 — 
Unrealized Net (Loss) Gain recognized during the reporting period on equity securities still held at the reporting date
$(249)$427 

Schedule of Federal Reserve Bank and Federal Home Loan Bank Stock (at cost)
December 31,
20232022
Federal Reserve Bank Stock$1,197 $1,180 
Federal Home Loan Bank Stock3,852 4,884 
Total Federal Reserve Bank and Federal Home Loan Bank Stock$5,049 $6,064 



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Note 5:LOANS (Dollars In Thousands)

Loan Categories and Past Due Loans

The following table presents loan balances outstanding as of December 31, 2023 and December 31, 2022 and an analysis of the recorded investment in loans that are past due at these dates. Loans held-for-sale of $165 and $656 as of December 31, 2023, and December 31, 2022, respectively, are included in the residential real estate balances for current loans.
Schedule of Past Due Loans by Loan Category
Commercial
CommercialReal EstateConsumerResidentialTotal
December 31, 2023
Loans Past Due 30-59 Days$298 $— $13,511 $3,715 $17,524 
Loans Past Due 60-89 Days21 636 5,579 861 7,097 
Loans Past Due 90 or More Days30 15,308 1,801 3,140 20,279 
Total Loans Past Due349 15,944 20,891 7,716 44,900 
Current Loans155,875 729,543 1,090,776 1,191,814 3,168,008 
Total Loans$156,224 $745,487 $1,111,667 $1,199,530 $3,212,908 
December 31, 2022
Loans Past Due 30-59 Days$48 $370 $13,657 $1,833 $15,908 
Loans Past Due 60-89 Days33 — 4,517 112 4,662 
Loans Past Due 90 or More Days44 — 3,503 4,790 8,337 
Total Loans Past Due125 370 21,677 6,735 28,907 
Current Loans140,168 706,652 1,043,458 1,064,022 2,954,300 
Total Loans$140,293 $707,022 $1,065,135 $1,070,757 $2,983,207 
Schedule of Non Accrual Loans by Category
Commercial
December 31, 2023CommercialReal EstateConsumerResidentialTotal
Loans 90 or More Days Past Due
  and Still Accruing Interest		$— $— $6 $446 $452 
Nonaccrual Loans30 15,308 1,877 3,430 20,645 
Nonaccrual With No Allowance for Credit Loss30 15,308 1,877 3,430 20,645 
Interest Income on Nonaccrual Loans— — — — — 
December 31, 2022
Loans 90 or More Days Past Due
  and Still Accruing Interest		$44 $— $— $1,113 $1,157 
Nonaccrual Loans8 3,110 3,503 4,136 10,757 

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,
76

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.

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.
Schedule of Supplemental Loan Information
20232022
Supplemental Information:
Unamortized deferred loan origination costs, net of deferred loan
  origination fees, included in the above balances		$6,240 $6,774 
Overdrawn deposit accounts, included in the above balances180 298 
Pledged loans  under a blanket collateral agreement to secure borrowings from the Federal Home Loan Bank of New York576,602 663,259 
Residential real estate loans serviced for Freddie Mac, not included
   in the balances above		178,284 195,133 

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 December 31, 2023 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 deterioration in the national unemployment rate of approximately 0.03% during the six-quarter forecast period, while forecasted gross domestic product projected an improvement of approximately 0.17%. The home price index (HPI) forecast improved approximately 4.0% from the previous quarter level. Key assumptions utilized in the CECL calculation include loan segmentation, credit 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. Key assumptions are reviewed and approved on a quarterly basis. Driven by current economic forecasts, loan growth and net charge offs during the year, the provision for credit losses in 2023 was $3.4 million. Management's evaluation considers the allowance for credit losses for loans to be appropriate as of December 31, 2023.

77

The following table details activity in the allowance for credit losses on loans for the twelve months ended December 31, 2023 and December 31, 2022

Allowance for Credit Losses
Commercial
CommercialReal EstateConsumerResidentialTotal
Rollforward of the Allowance for Credit Losses for the Year Ended:
December 31, 2022$1,961 $15,213 $2,585 $10,193 $29,952 
Charge-offs— — (5,123)(54)(5,177)
Recoveries— — 3,109 — 3,109 
Provision(3)308 1,995 1,081 3,381 
December 31, 2023$1,958 $15,521 $2,566 $11,220 $31,265 
December 31, 2021$2,298 $13,136 $2,402 $9,445 $27,281 
Charge-offs(34)— (4,079)(30)(4,143)
Recoveries43 — 1,973 — 2,016 
Provision(346)2,077 2,289 778 4,798 
December 31, 2022$1,961 $15,213 $2,585 $10,193 $29,952 

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 the allowance are reflected in other operating expenses within the non-interest expense category. As of December 31, 2023, the total unfunded commitment off-balance sheet credit exposure was $1.6 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 December 31, 2023, there were four total relationships identified to be evaluated for loss on an individual basis which had an amortized cost basis of $16.8 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 December 31, 2023 and December 31, 2022:

December 31, 2023Collateral Type -Residential Real EstateCollateral Type - Commercial Real EstateTotal Loans
Commercial$— $— $— 
Commercial Real Estate— 15,308 15,308 
Consumer— — — 
Residential1,446 — 1,446 
Total$1,446 $15,308 $16,754 


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December 31, 2022Collateral Type -Residential Real EstateCollateral Type - Commercial Real EstateTotal Loans
Commercial$— $— $— 
Commercial Real Estate— 3,110 3,110 
Consumer— — — 
Residential1,963 — 1,963 
Total$1,963 $3,110 $5,073 

Allowance for Credit Losses - Collectively and Individually Evaluated
CommercialCommercial Real EstateConsumerResidentialTotal
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 Evaluated1,958 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— — — — — 


CommercialCommercial Real EstateConsumerResidentialTotal
December 31, 2022
Ending Loan Balance - Collectively Evaluated$140,293 $703,912 $1,065,135 $1,068,794 $2,978,134 
Allowance for Credit Losses - Loans Collectively Evaluated1,961 15,213 2,585 10,193 $29,952 
Ending Loan Balance - Individually Evaluated— 3,110 — 1,963 5,073 
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.
Management 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.

Management considers the qualitative factors that are relevant to Arrow 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.
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Loan Credit Quality Indicators and Modifications
Arrow adopted ASU 2022-02, "Troubled Debt Restructurings and Vintage Disclosures)" ("ASU 2022-02") effective January 1, 2023. ASU 2022-02 requires that entities disclose current-period gross charge-offs by year of origination for loans and leases, which has been incorporated in the credit quality table below.

In 2023,any loan modifications were in the form of short-term forbearance of interest payments and/or other insignificant actions and were immaterial in nature and do not meet the criteria for the modification disclosure as described in ASU 2022-02.

The following table presents credit quality indicators by total loans amortized cost basis by origination year as of December 31, 2023 and December 31, 2022:
Term Loans Amortized Cost Basis by Origination YearRevolving Loans Amortized Cost BasisRevolving Loan Converted to TermTotal
December 31, 202320232022202120202019Prior
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 $— $156,224 
Current-period gross charge-offs$— $— $— $— $— $— $— 
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 
Substandard150 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 $— $745,487 
Current-period gross charge-offs$— $— $— $— $— $— $— 
Consumer:
Risk rating
Performing$405,099 $355,217 $195,799 $93,708 $44,206 $15,252 $— $— $1,109,281 
Nonperforming208 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 
Current-period gross charge-offs$366 $1,368 $2,122 $604 $397 $266 $5,123 
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 $— $1,199,530 
Current-period gross charge-offs$— $— $— $21 $— $33 $54 
Total Loans$703,501 $792,838 $519,887 $344,185 $164,593 $548,654 $139,250 $— $3,212,908 
Total gross charge-offs$366 $1,368 $2,122 $625 $397 $299 $5,177 

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Term Loans Amortized Cost Basis by Origination YearRevolving Loans Amortized Cost BasisRevolving Loan Converted to TermTotal
December 31, 202220222021202020192018Prior
Commercial:
Risk rating
Satisfactory$42,038 $28,718 $16,870 $7,857 $8,129 $20,379 $8,909 $— $132,900 
Special mention— — — — — 30 30 — 60 
Substandard— — 255 478 — 3,464 3,136 — 7,333 
Doubtful— — — — — — — — — 
Total Commercial Loans$42,038 $28,718 $17,125 $8,335 $8,129 $23,873 $12,075 $— $140,293 
Commercial Real Estate:
Risk rating
Satisfactory$152,858 $115,111 $121,811 $43,647 $63,913 $159,876 $1,603 $— $658,819 
Special mention9,678 — — — 789 241 — — 10,708 
Substandard607 — 5,807 812 4,371 25,677 221 — 37,495 
Doubtful— — — — — — — — — 
Total Commercial Real Estate Loans$163,143 $115,111 $127,618 $44,459 $69,073 $185,794 $1,824 $— $707,022 
Consumer:
Risk rating
Performing$482,530 $284,831 $154,819 $88,165 $38,852 $12,032 $504 $— $1,061,733 
Nonperforming758 1,468 607 325 157 87 — — 3,402 
Total Consumer Loans$483,288 $286,299 $155,426 $88,490 $39,009 $12,119 $504 $— $1,065,135 
Residential:
Risk rating
Performing$210,565 $198,195 $128,372 $82,965 $74,281 $259,787 $111,563 $— $1,065,728 
Nonperforming— 255 939 597 520 2,311 407 — 5,029 
Total Residential Loans$210,565 $198,450 $129,311 $83,562 $74,801 $262,098 $111,970 $— $1,070,757 
Total Loans$899,034 $628,578 $429,480 $224,846 $191,012 $483,884 $126,373 $— $2,983,207 

For the purposes of the table above, nonperforming consumer and residential loans were those loans on nonaccrual status or are 90 days or more past due and still accruing interest.
The recorded investment of consumer mortgage loans secured by residential real estate properties for which formal foreclosure proceedings are in process is $2.6 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 the Company 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,
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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 credit 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:PREMISES AND EQUIPMENT (Dollars In Thousands)

A summary of premises and equipment at December 31, 2023 and 2022 is presented below:
20232022
Land and Bank Premises$60,123 $41,295 
Equipment, Furniture and Fixtures37,948 35,107 
Construction in Progress
1,099 15,855 
Leasehold Improvements5,127 5,083 
Total Cost104,297 97,340 
Accumulated Depreciation and Amortization(49,115)(45,486)
Net Owned Premises and Equipment55,182 51,854 
Leased Assets (see Note 18)4,460 4,637 
Net Premises and Equipment$59,642 $56,491 

Amounts charged to expense for depreciation totaled $3,752, $3,330 and $2,993 in 2023, 2022 and 2021, respectively. During 2023 the multi-year renovation project to enhance and improve the downtown Glens Falls Main Campus was completed and accordingly,amounts previously reflected in Construction in Progress were transferred into the appropriate asset category.


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Note 7:OTHER INTANGIBLE ASSETS (Dollars In Thousands)

The following table presents information on Arrow’s other intangible assets (other than goodwill) as of December 31, 2023, 2022 and 2021:
Depositor
Intangibles
Mortgage
Servicing
Rights1
Customer Intangibles2
Total  
Gross Carrying Amount, December 31, 2023
$2,247 $3,296 $4,382 $9,925 
Accumulated Amortization(2,247)(2,725)(3,843)(8,815)
Net Carrying Amount, December 31, 2023
$— $571 $539 $1,110 
Gross Carrying Amount, December 31, 2022
$2,247 $3,296 $4,382 $9,925 
Accumulated Amortization(2,247)(2,511)(3,667)(8,425)
Net Carrying Amount, December 31, 2022
$— $785 $715 $1,500 
Rollforward of Intangible Assets:
Balance, December 31, 2020
$— $832 $1,118 $1,950 
Intangible Assets Acquired— 436 — 436 
Intangible Assets Disposed— — — — 
Amortization of Intangible Assets— (258)(210)(468)
Balance, December 31, 2021
— 1,010 908 1,918 
Intangible Assets Acquired— 10 — 10 
Intangible Assets Disposed— — — — 
Amortization of Intangible Assets— (235)(193)(428)
Balance, December 31, 2022
— 785 715 1,500 
Intangible Assets Acquired— — — — 
Intangible Assets Disposed— — — — 
Amortization of Intangible Assets— (214)(176)(390)
Balance, December 31, 2023
$— $571 $539 $1,110 

1 Amortization of mortgage servicing rights is reported in the Consolidated Statements of Income as a reduction of mortgage servicing fee income, which is included with fees for other services to customers.
2 Amortization of customer intangibles are reported in the Consolidated Statements of Income as a component of other operating expense.

The following table presents the remaining estimated annual amortization expense for Arrow's intangible assets as of December 31, 2023:
Mortgage
Servicing Rights		Customer IntangiblesTotal
Estimated Annual Amortization Expense:
2024$206 $155 $361 
2025195 107 302 
2026144 89 233 
202725 72 97 
20281 55 56 
2029 and beyond— 61 61 
Total$571 $539 $1,110 



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Note 8:COMMITMENTS AND CONTINGENCIES (Dollars 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 December 31, 2023 and 2022:
Balance at December 31,20232022
Notional Amount:
Commitments to Extend Credit$444,256 $424,197 
Standby Letters of Credit3,824 3,627 
Fair Value:
Commitments to Extend Credit$— $— 
Standby Letters of Credit— 2 

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 expected to expire without being 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 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 December 31, 2023 and 2022 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. Company 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 December 31, 2023 and 2022 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.
In the normal course of business, Arrow and its subsidiary banks become involved in a variety of routine legal proceedings.  At present, there are no legal proceedings pending or threatened, which in the opinion of management and counsel, would result in a material loss to Arrow, except as noted below. Legal expenses incurred in connection with loss contingencies are expensed as incurred.
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. The various pending legal claims against Arrow will not, in the opinion of management based upon consultation with counsel, result in any material liability.
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On June 23, 2023, Robert C. Ashe filed a putative class action complaint (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. That motion is scheduled to be fully briefed on May 6, 2024. All discovery in the action is stayed pending a decision on that motion.. The Company continues to believes the lawsuit to be without merit and expressly denies any wrongdoing in connection with the matters claimed in the complaint and intends to vigorously defend the lawsuit.
On December 12, 2023 the Company become aware that Stephen Bull filed a complaint (Shareholder Derivative Complaint or Derivative Case) 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 a unjust enrichment theory, and (iii) , an order directing the Company to take all necessary actions to reform and improve its corporate governance, and 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. 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 the Ashe action.
The Company intends to vigorously defend itself against the class action and derivative claims.

Note 9:TIME DEPOSITS (Dollars In Thousands)

The following summarizes the contractual maturities of time deposits during years subsequent to December 31, 2023:
Year of MaturityTotal Time
Deposits
2024$626,010 
202525,250 
20265,535 
20274,098 
20282,183 
2029 and beyond— 
Total$663,076 


Note 10:DEBT (Dollars in Thousands)

Schedule of Borrowings:
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20232022
Balances at December 31:
FHLBNY Overnight Advances
20,000 27,000 
FHLBNY Term Advances
6,500 27,800 
Total Borrowings
$26,500 $54,800 
Maximum Borrowing Capacity at December 31:
Federal Funds Purchased$28,000 $52,000 
Federal Home Loan Bank of New York576,602 663,259 
Federal Reserve Bank of New York738,511 649,112 
Available Borrowing Capacity at December 31:
Federal Funds Purchased$28,000 $52,000 
Federal Home Loan Bank of New York550,102 608,458 
Federal Reserve Bank of New York738,511 649,112 

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 December 31, 2023, the carrying cost for the FHLBNY collateral was approximately $865 million and approximately $1.0 billion for the FRB. As of December 31, 2023, the fair value for the FHLBNY collateral was approximately $703 million and approximately $1.0 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 Federal Reserve Bank and Federal Home Loan Bank Stock in Note 4, Investment Securities, to the Consolidated Financial Statements). Arrow's bank subsidiaries have also established borrowing facilities with the Federal Reserve Bank of New York for potential “discount window” advances, pledging certain consumer loans as collateral (see Note 5, Loans, to the Consolidated Financial Statements).


Long Term Debt - FHLBNY Term Advances

In addition to overnight advances, Arrow also borrows longer-term funds from the FHLBNY.

Maturity Schedule of FHLBNY Term Advances:
BalancesWeighted Average Rate
Final Maturity2023202220232022
First Year$4,250 $27,800 5.80 %2.70 %
Second Year2,250 — 5.38 %— %
Total$6,500 $27,800 5.66 %2.70 %

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

During 2023, there were outstanding two classes of financial instruments issued by two separate subsidiary business trusts of Arrow, 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 Arrow Capital Statutory Trust II ("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 trust preferred securities"). The rate on the securities is variable, adjusting quarterly to the 3-month LIBOR plus 3.15%. Arrow designated SOFR as the replacement index for financial instruments. The rate on the securities will be tied to the 3-month SOFR plus 3.15% post-conversation. ACST II used the proceeds of the sale of its trust preferred securities 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 trust preferred securities.  The ACST II trust preferred securities 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 Arrow Capital Statutory Trust III ("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").  The rate on the ACST III trust preferred securities is a variable rate, adjusted quarterly, equal to the 3-month LIBOR plus 2.00%.  The rate on the securities will be tied to the 3-month SOFR plus 2.00% post-conversation. ACST III used the proceeds of the sale of its
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trust preferred securities 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 trust preferred securities.  The ACST III trust preferred securities 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. These agreements are designated as cash flow hedges.
The primary assets of the two subsidiary trusts having trust preferred securities outstanding at year-end, ACST II and ACST III (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 Trust’s 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 December 31, 2023, 2022 and 2021 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
20232022
ACST II
Balance at December 31,$10,000 $10,000 
Period End:
     Variable Interest Rate 8.74 %6.82 %
     Fixed Interest Rate resulting from cash flow hedge agreement 4.00 %4.00 %
ACST III
Balance at December 31,$10,000 $10,000 
Period End:
     Variable Interest Rate7.59 %5.67 %
     Fixed Interest Rate resulting from cash flow hedge agreement2.86 %2.86 %
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Note 11:COMPREHENSIVE INCOME (LOSS), NET OF TAX (Dollars In Thousands)

The following table presents the components of other comprehensive income (loss) for the years ended December 31, 2023, 2022 and 2021:
Schedule of Comprehensive Income (Loss)
Before-Tax
Amount		Tax
(Benefit)
Expense		Net-of-Tax
Amount
2023
Net Unrealized Securities Holding Gains Arising During the Period$14,070 (3,629)10,441 
Reclassification Adjustment for Securities Losses Included in Net Income9,097 (2,345)6,752 
Net Unrealized Gains on Cash Flow Swap(3,908)1,008 (2,900)
Reclassification of Net Unrealized Loss on Cash Flow Hedge Agreements 750 (193)557 
Net Retirement Plan Loss2,354 (607)1,747 
Prior Service Cost(526)135 (391)
Amortization of Net Retirement Plan Actuarial Loss(162)43 (119)
Amortization of Net Retirement Plan Prior Service Cost205 (53)152 
  Other Comprehensive Income$21,880 (5,641)16,239 
2022
Net Unrealized Securities Holding Losses Arising During the Period$(64,774)16,547 (48,227)
Net Unrealized Gains on Cash Flow Swap3,467 (885)2,582 
Reclassification of Net Unrealized Loss on Cash Flow Hedge Agreements 204 (52)152 
Net Retirement Plan Loss(6,938)1,791 (5,147)
Settlement Cost577 (149)428 
Amortization of Net Retirement Plan Actuarial Loss56 (15)41 
Amortization of Net Retirement Plan Prior Service Cost228 (59)169 
  Other Comprehensive Loss$(67,180)17,178 (50,002)
2021
Net Unrealized Securities Holding Losses Arising During the Period$(8,616)2,203 (6,413)
Net Unrealized Gains on Cash Flow Swap1,249 (320)929 
Reclassification of Net Unrealized Gain on Cash Flow Hedge Agreements(126)32 (94)
Net Retirement Plan Loss8,733 (2,233)6,500 
Amortization of Net Retirement Plan Actuarial Loss91 (23)68 
Amortization of Net Retirement Plan Prior Service Cost232 (59)173 
  Other Comprehensive Income$1,563 (400)1,163 

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    The following table presents the changes in accumulated other comprehensive (loss) income by component:
Changes in Accumulated Other Comprehensive (Loss) Income by Component (1)
UnrealizedDefined Benefit Plan Items
Gains andUnrealized
Losses onGain OnNetNet Prior
Available-for-Cash Flow Actuarial Service
Sale SecuritiesSwapGain (Loss)(Cost ) CreditTotal
For the Year-To-Date periods ended:
December 31, 2022$(48,841)4,054 (4,467)(401)(49,655)
Other comprehensive income (loss) before reclassifications10,441 (2,900)1,747 (391)8,897 
Amounts reclassified from accumulated other comprehensive income (loss)6,752 557 (119)152 7,342 
Net current-period other comprehensive income (loss) 17,193 (2,343)1,628 (239)16,239 
December 31, 2023$(31,648)1,711 (2,839)(640)(33,416)
December 31, 2021$(614)1,320 639 (998)347 
Other comprehensive (loss) income before reclassifications(48,227)2,582 (5,147)428 (50,364)
Amounts reclassified from accumulated other comprehensive income— 152 41 169 362 
Net current-period other comprehensive (loss) income (48,227)2,734 (5,106)597 (50,002)
December 31, 2022$(48,841)4,054 (4,467)(401)(49,655)
December 31, 2020$5,799 485 (5,929)(1,171)(816)
Other comprehensive (loss) income before reclassifications(6,413)929 6,500 — 1,016 
Amounts reclassified from accumulated other comprehensive (loss) income — (94)68 173 147 
Net current-period other comprehensive (loss) income(6,413)835 6,568 173 1,163 
December 31, 2021$(614)1,320 639 (998)347 
(1) All amounts are net of tax. Amounts in parentheses indicate debits.


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The following table presents the reclassifications out of accumulated other comprehensive income (loss)
Reclassifications Out of Accumulated Other Comprehensive Income (Loss) (1)
Amounts Reclassified
Details about Accumulated Otherfrom Accumulated OtherAffected Line Item in the Statement
Comprehensive Income (Loss) ComponentsComprehensive Income (Loss)Where Net Income Is Presented
For the Year-to-date periods ended:
December 31, 2023
Reclassification of unrealized gains and losses on available-for-sale securities$(9,097)Net (Loss) Gain on Securities
Reclassification of net unrealized gain on cash flow hedge agreements (750)Interest Expense
Amortization of defined benefit pension items
Prior-service credit(205)
(2)
Salaries and Employee Benefits
Actuarial Loss162 
(2)
Salaries and Employee Benefits
(9,890)Total before tax
2,548 Provision for Income Taxes
Total reclassifications for the period$(7,342)Net of tax
December 31, 2022
Reclassification of net unrealized gain on cash flow hedge agreements (204)Interest Expense
Amortization of defined benefit pension items
Prior-service credit$(228)
(2)
Salaries and Employee Benefits
Actuarial Loss(56)
(2)
Salaries and Employee Benefits
(488)Total before tax
126 Provision for Income Taxes
Total reclassifications for the period$(362)Net of tax
December 31, 2021
Reclassification of net unrealized gain on cash flow hedge agreements 126Interest Expense
Amortization of defined benefit pension items
Prior-service credit$(232)
(2)
Salaries and Employee Benefits
Actuarial Loss(91)
(2)
Salaries and Employee Benefits
(197)Total before tax
50 Provision for Income Taxes
Total reclassifications for the period$(147)Net of tax
(1) Amounts in parentheses indicate debits to profit/loss.
(2) These accumulated other comprehensive income components are included in the computation of net periodic pension cost (see retirement benefit plans footnote for additional details).



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Note 12: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.
Shares Available for Grant at December 31, 2023
414,561 

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 ended December 31, 2023.
SharesWeighted Average Exercise PriceWeighted Average Remaining Contractual Life (in years)Aggregate Intrinsic Value
Outstanding at January 1, 2023287,444 $28.56 
Granted57,680 $31.47 
Exercised(4,677)$20.62 
Forfeited(35,139)$30.91 
Outstanding at December 31, 2023305,308 $28.96 5.35$— 
Vested at Period-End206,850 $27.84 4.00$21 
Expected to Vest98,458 $31.32 8.19$— 

The following is the Schedule of Stock Options Granted Under the Long Term Incentive Plan by Exercise Price Range.
Exercise Price Ranges
$18.97
$19.99 to $20.41
$27.04 to $27.47
$30.26
$31.34 to $33.78
Total
Outstanding at December 31, 2023
Number of Stock Options Outstanding8,757 20,466 115,903 28,917 131,265 305,308 
Weighted-Average Remaining Contractual Life (in years)0.091.614.813.087.275.35
Weighted-Average Exercise Price$18.97 $20.21 $27.26 $30.26 $32.20 $28.96 
Vested at December 31, 2023
Number of Stock Options Outstanding8,757 20,466 97,864 28,917 50,846 206,850 
Weighted-Average Remaining Contractual Life (in years)0.091.614.393.085.434.00
Weighted-Average Exercise Price$18.97 $20.21 $27.30 $30.26 $32.08 $27.84 
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    The following is the Schedule of Other Information on Stock Options Granted.
202320222021
Stock Options Granted 57,680 60,471 60,646 
Weighted Average Grant Date Information:
Fair Value of Options Granted $7.78 $7.21 $4.44 
Fair Value Assumptions:
Dividend Yield3.30 %2.90 %3.41 %
Expected Volatility28.38 %27.15 %26.53 %
Risk Free Interest Rate3.57 %1.69 %0.49 %
Expected Lives (in years)8.348.568.75
Amount Expensed During the Year$284 $312 $282 
Compensation Costs for Non-vested Awards Not Yet Recognized536 542 427 
Weighted Average Expected Vesting Period, In Years2.292.222.16
Proceeds From Stock Options Exercised$96 $631 $1,505 
Tax Benefits Related to Stock Options Exercised11 34 69 
Intrinsic Value of Stock Options Exercised34 338 439 

Restricted Stock Units - Historically, the Company has granted restricted stock units which gives 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 become vested units and are no longer forfeitable. Vested units settle upon retirement 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.

The following table summarizes information about restricted stock unit activity for the year ended December 31, 2023.
Restricted Stock UnitsWeighted Average Grant Date Fair Value
Non-vested at January 1, 202313,925 $30.47 
Granted 516431.47 
Vested (19,089)30.74 
Non-vested at December 31, 2023— — 
Non-vested at January 1, 202214,007 $28.42 
Granted4,441 33.78 
Vested(4,523)27.35 
Non-vested at December 31, 202213,925 30.47 
Non-vested at January 1, 202112,744 $28.94 
Granted5,177 26.90 
Vested(3,914)28.11 
Non-vested at December 31, 202114,007 28.42 

The following table presents information on the amounts expensed related to Restricted Stock Units awarded pursuant to the Long Term Incentive Plan for the years ended December 31, 2023, 2022 and 2021.
202320222021
Amount Expensed During the Year$321 $141 $132 
Compensation Costs for Non-vested Awards Not Yet Recognized— 158 149 

Employee Stock Purchase Plan

In April 2023, Arrow suspended the operation of the ESPP as a result of the now resolved delay in filing the 2022 Form 10-K and 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 the 2023 ESPP, which is intended to satisfy all requirements of Section 423 of the Internal Revenue
92

Code, which was effective January 1, 2024. Under the new qualified 2023 ESPP, the amount of the discount is 10%. Until its suspension due to the filing delays, Arrow sponsored an ESPP under which 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 new qualified 2023 ESPP will be submitted to the Arrow shareholders for approval at the next annual meeting of shareholders. In the event the shareholders of the Company do not approve the 2023 ESPP at the Annual Meeting: (i) the 2023 ESPP shall immediately terminate; (ii) all amounts contributed by each participant in the 2023 ESPP which have not been used to purchase Common Stock will be returned to such participant as soon as practicable; and (iii) purchases under the 2023 ESPP made from the Inception Date through the date of termination of the 2023 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 employee stock ownership plan.  Substantially all employees of Arrow and its subsidiaries are eligible to participate upon satisfaction of applicable service requirements. The Company makes voluntary cash contributions to the Plan each year.

Schedule of ESOP Compensation Expense
202320222021
ESOP Compensation Expense$1,540 $1,457 $1,487 

Note 13: RETIREMENT BENEFIT PLANS (Dollars in Thousands)

Arrow sponsors qualified and nonqualified 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 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 3.0%.  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 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 and 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.
Segment interest rates of 5.50%, 5.76% and 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, Glens Falls National amended the Arrow Financial Corporation Employees' Pension Plan. The plan change was adopted January 1, 2021 and the amendment was valued as of December 31, 2020. The plan amendment included the following:
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 three percent (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.)
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Effective January 1, 2021, Glens Falls National amended the Arrow Financial Corporation Employees' Select Executive Retirement Plan. 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 2023, settlement accounting was not required. 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 has been fully reflected in the 2022 Net Periodic Cost.

The following tables set forth changes in the plans’ benefit obligations (projected benefit obligation for pension benefits and accumulated benefit obligation for postretirement benefits) and changes in the plans’ assets and the funded status of the pension plans and other postretirement benefit plan at December 31:

Schedule of Defined Benefit Plan Disclosures
Employees'
Pension
Plan		Select
Executive
Retirement
Plan		Postretirement
Benefit
Plans
Defined Benefit Plan Funded Status
December 31, 2023
Fair Value of Plan Assets$59,199 $— $— 
Benefit Obligation42,914 6,904 6,221 
Funded Status of Plan$16,285 $(6,904)$(6,221)
December 31, 2022
Fair Value of Plan Assets$54,300 $— $— 
Benefit Obligation39,528 6,070 6,482 
Funded Status of Plan$14,772 $(6,070)$(6,482)
Change in Benefit Obligation
Benefit Obligation, at January 1, 2023
$39,528 $6,070 $6,482 
Service Cost 1
1,593 570 56 
Interest Cost 2
2,099 336 332 
Plan Participants' Contributions— — 459 
Amendments / Curtailments / Special Termination526 — — 
Actuarial Gain (Loss)2,125 357 (397)
Benefits Paid(2,957)(429)(711)
Benefit Obligation, at December 31, 2023
$42,914 $6,904 $6,221 
Benefit Obligation, at January 1, 2022
$45,659 $6,455 $7,994 
Service Cost 1
1,877 835 90 
Interest Cost 2
1,439 225 248 
Plan Participants' Contributions— — 427 
Actuarial Loss(4,555)(983)(1,571)
Benefits Paid(4,892)(462)(706)
Benefit Obligation, at December 31, 2022
$39,528 $6,070 $6,482 
Change in Fair Value of Plan Assets
Fair Value of Plan Assets, at January 1, 2023
$54,300 $— $— 
Actual Return on Plan Assets7,856 — — 
Employer Contributions— 429 252 
Plan Participants' Contributions— — 459 
Benefits Paid(2,957)(429)(711)
Fair Value of Plan Assets, at December 31, 2023
$59,199 $— $— 
Fair Value of Plan Assets, at January 1, 2022
$68,925 $— $— 
Actual Return on Plan Assets(9,733)— — 
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Employees'
Pension
Plan		Select
Executive
Retirement
Plan		Postretirement
Benefit
Plans
Employer Contributions— 462 279 
Plan Participants' Contributions— — 427 
Benefits Paid(4,892)(462)(706)
Fair Value of Plan Assets, at December 31, 2022
$54,300 $— $— 
Accumulated Benefit Obligation at December 31, 2023
$42,900 $6,904 $6,221 
Amounts Recognized in the Consolidated Balance Sheets
December 31, 2023
Prepaid Pension Asset$16,285 $— $— 
Accrued Benefit Liability— (6,904)(6,221)
Net Benefit (Expense) Recognized$16,285 $(6,904)$(6,221)
December 31, 2022
Prepaid Pension Asset$14,772 $— $— 
Accrued Benefit Liability— (6,070)(6,482)
Net Benefit (Expense) Recognized$14,772 $(6,070)$(6,482)
Amounts Recognized in Other Comprehensive Income (Loss)
For the Year Ended December 31, 2023
Net Unamortized (Gain) Loss Arising During the Period$(2,315)$358 $(397)
Prior Service Cost526 — — 
Amortization of Net (Loss) Gain(118)(73)353 
Amortization of Prior Service Cost(62)(39)(104)
  Total Other Comprehensive (Loss) Income for Pension and
     Other Postretirement Benefit Plans		$(1,969)$246 $(148)
For the Year Ended December 31, 2022
Net Unamortized Loss (Gain) Arising During the Period$9,492 $(983)$(1,571)
Amortization of Net (Loss) Gain— (212)156 
Amortization of Prior Service Cost(78)(44)(106)
Settlement Cost(577)— — 
Total Other Comprehensive Income (Loss) for Pension and
     Other Postretirement Benefit Plans		$8,837 $(1,239)$(1,521)
For the Year Ended December 31, 2021
Net Unamortized (Gain) Loss Arising During the Period$(7,826)$332 $(1,239)
Amortization of Net (Loss) Gain— (178)87 
Amortization of Prior Service Cost(78)(48)(106)
Total Other Comprehensive (Loss) Income for Pension and
     Other Postretirement Benefit Plans		$(7,904)$106 $(1,258)
Accumulated Other Comprehensive Income
December 31, 2023
Net Actuarial Loss (Gain)$4,141 $1,739 $(2,641)
Prior Service Cost840 330 262 
Total Accumulated Other Comprehensive Income (Loss), Before Tax$4,981 $2,069 $(2,379)
December 31, 2022
Net Actuarial Loss (Gain)$6,574 $1,453 $(2,597)
Prior Service Cost376 370 366 
Total Accumulated Other Comprehensive Income (Loss), Before Tax$6,950 $1,823 $(2,231)
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Employees'
Pension
Plan		Select
Executive
Retirement
Plan		Postretirement
Benefit
Plans
Net Periodic Benefit Cost
For the Year Ended December 31, 2023
Service Cost 1
$1,593 $570 $56 
Interest Cost 2
2,099 336 332 
Expected Return on Plan Assets 2
(3,416)— — 
Amortization of Prior Service Cost 2
62 39 104 
Amortization of Net Loss (Gain) 2
118 73 (353)
Net Periodic Benefit Cost$456 $1,018 $139 
For the Year Ended December 31, 2022
Service Cost 1
$1,877 $835 $90 
Interest Cost 2
1,439 225 248 
Expected Return on Plan Assets 2
(4,314)— — 
Amortization of Prior Service Cost 2
77 44 106 
Amortization of Net Loss 2
— 212 (156)
Settlement Cost 2
577 — — 
Net Periodic Benefit (Income) Cost$(344)$1,316 $288 
For the Year Ended December 31, 2021
Service Cost 1
$1,934 $582 $109 
Interest Cost 2
1,365 191 249 
Expected Return on Plan Assets 2
(3,780)— — 
Amortization of Prior Service Cost 2
78 48 106 
Amortization of Net Loss (Gain) 2
— 178 (87)
Net Periodic Benefit (Income) Cost$(403)$999 $377 
Weighted-Average Assumptions Used in
  Calculating Benefit Obligation
December 31, 2023
Discount Rate5.52 %5.53 %5.51 %
Rate of Compensation Increase4.00 %4.00 %4.00 %
Interest Rate Credit for Determining
  Projected Cash Balance Account		4.66 %4.66 %
Interest Rates segments to Annuitize Cash
      Balance Account (Segment 1, Segment 2 and Segment 3,
      respectively)
5.50%, 5.76% and 5.83%
5.50%, 5.76% and 5.83%
Interest Rates to Convert Annuities to Actuarially
      Equivalent Lump Sum Amounts (Segment 1, Segment 2 and
      Segment 3, respectively)
5.50%,5.76% and 5.83%
5.50%, 5.76% and 5.83%
December 31, 2022
Discount Rate5.59 %5.61 %5.62 %
Rate of Compensation Increase3.50 %3.50 %3.50 %
Interest Rate Credit for Determining
  Projected Cash Balance Account		3.99 %3.99 %
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Employees'
Pension
Plan		Select
Executive
Retirement
Plan		Postretirement
Benefit
Plans
Weighted-Average Assumptions Used in
  Calculating Net Periodic Benefit Cost
December 31, 2023
Discount Rate5.59 %5.61 %5.62 %
Expected Long-Term Return on Plan Assets6.50 %
Rate of Compensation Increase3.50 %3.50 %3.50 %
Interest Rate Credit for Determining
      Projected Cash Balance Account		3.99 %3.99 %
Interest Rates to Annuitize Cash
    Balance Account (Segment 1, Segment 2, and Segment 3,
    respectively)
5.50%, 5.76% and 5.83%
5.50%, 5.76% and 5.83%
Interest Rates to Convert Annuities to Actuarially
    Equivalent Lump Sum Amounts (Segment 1, Segment 2 and
    Segment 3, respectively)
5.50%, 5.76% and 5.83%
5.50%, 5.76% and 5.83%
December 31, 2022
Discount Rate3.30 %5.61 %3.32 %
Expected Long-Term Return on Plan Assets6.50 %
Rate of Compensation Increase3.50 %3.50 %3.50 %
Interest Rate Credit for Determining
      Projected Cash Balance Account		3.00 %3.99 %
Interest Rates to Annuitize Cash
    Balance Account (Segment 1, Segment 2, and Segment 3,
    respectively)
5.09%, 5.60% and 5.41%
5.09%, 5.60% and 5.41%
Interest Rates to Convert Annuities to Actuarially
    Equivalent Lump Sum Amounts (Segment 1, Segment 2 and
    Segment 3, respectively)
5.09%, 5.60% and 5.41%
5.09%, 5.60% and 5.41%
December 31, 2021
Discount Rate3.14 %3.19 %3.17 %
Expected Long-Term Return on Plan Assets6.50 %
Rate of Compensation Increase3.50 %3.50 %3.50 %
Interest Rate Credit for Determining
      Projected Cash Balance Account		3.00 %3.00 %
Interest Rates to Annuitize Cash
    Balance Account (Segment 1, Segment 2, and Segment 3,
    respectively)
1.02%, 2.72% and 3.08%
1.02%, 2.72% and 3.08%
Interest Rates to Convert Annuities to Actuarially
    Equivalent Lump Sum Amounts (Segment 1, Segment 2 and
    Segment 3, respectively)
1.02%, 2.72% and 3.08%
1.02%, 2.72% and 3.08%
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
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Schedule of Defined Benefit Plan Disclosures
Information about Defined Benefit Plan Assets - Employees' Pension Plan
Fair Value Measurements Using:
Asset CategoryQuoted Prices
in Active Markets
for Identical Assets
(Level 1)		Significant Other Observable Inputs
(Level 2)		Significant Unobservable Inputs
(Level 3)		TotalPercent of TotalTarget Allocation MinimumTarget Allocation Maximum
December 31, 2023
Cash$— $— $— $— — %— %15.0 %
Interest-Bearing Money Market Fund1,257 — — 1,257 2.1 %— %15.0 %
Arrow Common Stock5,443 — — 5,443 9.2 %— %10.0 %
North Country Funds - Equity 2
20,012 — — 20,012 33.8 %
Other Mutual Funds - Equity19,883 — — 19,883 33.6 %
Total Equity Funds39,895 — — 39,895 67.4 %55.0 %85.0 %
Other Mutual Funds - Fixed Income12,012 — — 12,012 20.3 %
Total Fixed Income Funds12,012 — — 12,012 20.3 %10.0 %30.0 %
Alternative ETF592 — — 592 1.0 %— %20.0 %
  Total$59,199 $— $— $59,199 100.0 %
December 31, 2022
Cash$— $— $— $— — %— %15.0 %
Interest-Bearing Money Market Fund1,291 — — 1,291 2.4 %— %15.0 %
Arrow Common Stock1
6,411 — — 6,411 11.8 %— %10.0 %
North Country Funds - Equity 2
20,714 — — 20,714 38.2 %
Other Mutual Funds - Equity15,059 — — 15,059 27.7 %
Total Equity Funds35,773 — — 35,773 65.9 %55.0 %85.0 %
North Country Funds - Fixed income 2
— — — — — %
Other Mutual Funds - Fixed Income6,094 — — 6,094 11.2 %
Total Fixed Income Funds6,094 — — 6,094 11.2 %10.0 %30.0 %
Alternative ETF4,731 — — 4,731 8.7 %— %20.0 %
Total$54,300 $— $— $54,300 100.0 %

Footnotes:
1 Payment for the acquisition of Common Stock was under 10% of the total fair value of the employee's pension plan assets
at the time of acquisition.
2 The North Country Funds - Equity and the North Country Funds - Fixed Income are publicly traded mutual funds advised
by Arrow's subsidiary, North Country Investment Advisers, Inc. North Country Funds - Fixed Income was liquidated and
dissolved in 2022.
98

Schedule of Defined Benefit Plan Disclosures
Employees'
Pension
Plan		Select
Executive
Retirement
Plan		Postretirement
Benefit
Plans
Expected Future Benefit Payments
2024$3,739 $701 $613 
20253,468 682 622 
20263,262 653 643 
20273,330 654 664 
20283,336 623 636 
2029 - 203316,545 2,713 2,727 
Estimated Contributions During 2024
$— $701 $613 
Assumed Health Care Cost Trend Rates
December 31, 2023
Health Care Cost Trend
  Rate Assumed for Next Year		7.75 %
Rate to which the Cost Trend
  Rate is Assumed to Decline
  (the Ultimate Trend Rate)		4.04 %
Year that the Rate Reaches
   the Ultimate Trend Rate		2075
December 31, 2022
Health Care Cost Trend
  Rate Assumed for Next Year		7.75 %
Rate to which the Cost Trend
  Rate is Assumed to Decline
  (the Ultimate Trend Rate)		4.04 %
Year that the Rate Reaches
   the Ultimate Trend Rate		2075

Fair Value of Plan Assets (Defined Benefit Plan):

For information on fair value measurements, including descriptions of level 1, 2 and 3 of the fair value hierarchy and the valuation methods employed by Arrow, see Notes 2, Summary of Significant Accounting Policies, and 17, Fair Values, to the Consolidated Financial Statements.
The fair value of level 1 financial instruments in the table above are based on unadjusted, quoted market prices from exchanges in active markets.
In accordance with ERISA guidelines, the Board authorized the purchase of Arrow common stock up to 10% of the fair market value of the plan's assets at the time of acquisition.  

Pension Plan Investment Policies and Strategies:

The Company maintains a non-contributory pension benefit plan covering substantially all employees for the purpose of rewarding long and loyal service to the Company.  The pension assets are held in trust and are invested in a prudent manner for the exclusive purpose of providing benefits to participants.  The investment objective is to achieve an inflation-protected rate of return that meets the actuarial assumption which is used for funding purposes.  The investment strategy attempts to maximize the investment return on assets at a level of risk deemed appropriate by the Company while complying with ERISA and any applicable regulations and laws.  The investment strategy utilizes asset allocation as a principal determinant for establishing the risk/reward profile of the assets. Asset allocation ranges are established, periodically reviewed, and adjusted as funding levels, and participant benefit characteristics change. Active and passive investment management is employed to help enhance the risk/return profile of the assets.
The plan’s assets are invested in a diversified portfolio of equity securities comprised of companies with small, mid, and large capitalizations.  Both domestic and international equities are allowed to provide further diversification and opportunity for return in potentially higher growth economies with lower correlation of returns.  Growth and value styles of investment are employed to increase the diversification and offer varying opportunities for appreciation.  The fixed income portion of the plan may be invested in U.S. dollar denominated debt securities that shall be rated within the top four ratings categories by nationally recognized ratings agencies.   The fixed income portion will be invested without regard to industry or sector based on analysis of
99

each target security’s structural and repayment features, current pricing and trading opportunities as well as credit quality of the issuer.  Individual bonds with ratings that fall below the plan’s rating requirements will be sold only when it is in the best interests of the plan.  Hybrid investments, such as convertible bonds, may be used to provide growth characteristics while offering some protection to declining equity markets by having a fixed income component.  Alternative investments such as Treasury Inflation Protected Securities, commodities, and REITs may be used to further enhance diversification while offering opportunities for return.  In accordance with ERISA guidelines, common stock of the Company may be purchased up to 10% of the fair market value of the plan’s assets at the time of acquisition.  Derivative investments are prohibited in the plan.  
The return on assets assumption was developed through review of historical market returns, historical asset class volatility and correlations, current market conditions, the plan’s past experience, and expectations on potential future market returns. The assumption represents a long-term average view of the performance of the assets in the plan, a return that may or may not be achieved during any one calendar year. The assumption is based on the return of the plan using the historical 15 year return adjusted for the potential for lower than historical returns due to low interest rates.    
Cash Flows - We were not required to and we did not make any contribution to our qualified pension plan in 2023.  Arrow makes contributions for its postretirement benefits in an amount equal to actual expenses for the year.  

Note 14:OTHER EXPENSES (Dollars In Thousands)

Other operating expenses included in the Consolidated Statements of Income are as follows:
202320222021
Legal and Other Professional Fees8,989 3,076 2,706 
Postage and Courier1,367 1,277 1,044 
Advertising and Promotion1,173 1,190 1,083 
Stationery and Printing832 805 721 
Intangible Asset Amortization176 193 210 
Litigation Reserve Expense— — 1,475 
All Other6,630 4,490 4,285 
Total Other Operating Expense$19,169 $11,031 $11,524 

Note 15:INCOME TAXES (Dollars In Thousands)

    The provision for income taxes is summarized below:  
Current Tax Expense:202320222021
Federal$4,611 $12,263 $10,957 
State1,035 3,103 2,645 
Total Current Tax Expense5,646 15,366 13,602 
Deferred Tax Expense (Benefit):
Federal1,825 (798)712 
State(26)(454)233 
Total Deferred Tax Expense (Benefit)1,799 (1,252)945 
Total Provision for Income Taxes$7,445 $14,114 $14,547 

The provisions for income taxes differed from the amounts computed by applying the U.S. Federal Income Tax Rate of 21% to pre-tax income as a result of the following:
202320222021
Statutory Federal Tax Rate21.0 %21.0 %21.0 %
(Decrease) Increase Resulting From:
Tax-Exempt Income(2.3)(1.4)(1.5)
State Taxes, Net of Federal Income Tax Benefit2.3 3.4 3.4 
Other Items, Net(1.2)(0.6)(0.3)
Effective Tax Rate19.8 %22.4 %22.6 %


100

The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, 2023 and 2022 are presented below:
20232022
Deferred Tax Assets:
Net Unrealized Losses on Securities Available-for-Sale Included in Accumulated Other Comprehensive Income$11,003 $16,914 
Allowance for Credit Losses8,475 8,199 
Lease liabilities2,635 2,821 
Pension and Deferred Compensation Plans3,708 3,571 
Pension Liability Included in Accumulated Other Comprehensive Income1,210 1,692 
Historic Tax Credit363 749 
Other781 745 
Total Gross Deferred Tax Assets28,175 34,691 
Valuation Allowance for Deferred Tax Assets— — 
Total Gross Deferred Tax Assets, Net of Valuation Allowance$28,175 $34,691 
Deferred Tax Liabilities:
Pension Plans$5,489 $5,606 
Depreciation5,094 3,165 
ROU assets2,426 2,646 
Deferred Income3,905 3,266 
Net Unrealized Gains on Equity Securities207 272 
Goodwill3,379 3,416 
Gain on Cash Flow Hedge Agreements Included in Accumulated Other Comprehensive Income
590 1,404 
Total Gross Deferred Tax Liabilities$21,090 $19,775 
Deferred Tax Asset, Net$7,085 $14,916 

Management believes that the realization of the recognized gross deferred tax assets at December 31, 2023 and 2022 is more likely than not, based on historic earnings and expectations as to future taxable income.
Interest and penalties are recorded as a component of the provision for income taxes, if any.  There are no current examinations of our Federal income tax returns, nor have we been notified of any upcoming examinations. The State of New York is currently conducting a desk audit of the Special Additional Mortgage Recording Tax Credit that Arrow claimed on the 2021 New York State income tax return. Our Tax years 2020 through 2023 are subject to Federal and New York State examination. Management annually conducts an analysis of its tax positions and has concluded that it has no uncertain tax positions as of December 31, 2023.

Note 16: EARNINGS PER SHARE (Dollars 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 each of the years in the three-year period ended December 31, 2023.  All share and per share amounts have been adjusted for the September 26, 2023 3% stock dividend.
Earnings Per Share
Year-to-Date Period Ended:
12/31/202312/31/202212/31/2021
Earnings Per Share - Basic:
Net Income$30,075 $48,799 $49,857 
Weighted Average Shares - Basic17,037 17,008 16,994 
Earnings Per Share - Basic$1.77 $2.86 $2.93 
Earnings Per Share - Diluted:
Net Income$30,075 $48,799 $49,857 
Weighted Average Shares - Basic17,037 17,008 16,994 
Dilutive Average Shares Attributable to Stock Options— 51 58 
Weighted Average Shares - Diluted17,037 17,059 17,052 
Earnings Per Share - Diluted$1.77 $2.86 $2.92 
101

Note 17:FAIR VALUES (Dollars In Thousands)

FASB ASC Subtopic 820-10 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles (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 December 31, 2023 and 2022 were securities available-for-sale, equity securities and derivatives.  Arrow held no securities or liabilities for trading on such dates.  For information on fair value measurements, including descriptions of level 1, 2 and 3 of the fair value hierarchy and the valuation methods employed by Arrow, see Note 2, Summary of Significant Accounting Policies, to the Consolidated Financial Statements.

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 of Assets and Liabilities Measured on a Recurring Basis:Fair ValueQuoted Prices
In Active Markets for Identical Assets
(Level 1)		Significant Other
Observable Inputs
(Level 2)		Significant Unobservable Inputs
(Level 3)
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 Obligations280 — 280 — 
Mortgage-Backed Securities269,760 — 269,760 — 
Corporate and Other Debt Securities800 — 800 — 
  Total Securities Available-for-Sale497,769 — 497,769 $— 
Equity Securities1,925 — 1,925 — 
Total Securities Measured on a Recurring Basis499,694 — 499,694 — 
Derivative Assets12,057 — 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 $— 
December 31, 2022
Assets:
Securities Available-for Sale:
U.S. Government & Agency Obligations$175,199 $— $175,199 $— 
State and Municipal Obligations340 — 340 — 
Mortgage-Backed Securities397,156 — 397,156 — 
Corporate and Other Debt Securities800 — 800 — 
  Total Securities Available-for-Sale573,495 —573,495 —
Equity Securities2,174 — 2,174 — 
Total Securities Measured on a Recurring Basis575,669 — 575,669 — 
Derivative Assets7,506 — 7,506 — 
Total Measured on a Recurring Basis$583,175 $— $583,175 $— 
Liabilities:
Derivative Liabilities$2,060 $— $2,060 $— 
Total Measured on a Recurring Basis$2,060 $— $2,060 $— 
102

Fair Value of Assets and Liabilities Measured on a Nonrecurring Basis:Fair ValueQuoted 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
December 31, 2023
Collateral Dependent Impaired Loans$— $— $— $— $— 
Other Real Estate Owned and Repossessed Assets, Net312 — — 312 — 
December 31, 2022
Collateral Dependent Impaired Loans$— $— $— $— $— 
Other Real Estate Owned and Repossessed Assets, Net593 — — 593 — 

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).

There were no transfers between Levels 1, 2 and 3 for the years ended December 31, 2023 or 2022.

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

The fair value of level 1 securities available-for-sale are based on unadjusted, quoted market prices from exchanges in active markets. The fair value of level 2 securities available-for-sale 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 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 impaired 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 December 31, 2023 and 2022.

Fair Value Methodology for Financial Instruments Not Measured on a Recurring or Nonrecurring Basis

The fair value for securities held-to-maturity is determined utilizing an independent bond pricing service for identical assets or significantly similar securities.  The pricing service uses 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.
ASU 2016-01 "Recognition and Measurement of Financial Assets and Financial Liabilities" requires that the fair value for loans must be disclosed using the "exit price" notion which is a reasonable estimate of what another party might pay in an orderly transaction. Fair values for loans are calculated for portfolios of loans with similar financial characteristics.  Loans are segregated by type such as commercial, commercial real estate, residential mortgage, indirect auto and other consumer loans.  Each loan category is further segmented into fixed and adjustable interest rate terms and by performing and nonperforming categories.  The fair value of performing loans is calculated by determining the estimated future cash flow, which is the contractual cash flow adjusted for estimated prepayments. The discount rate is determined by starting with current market yields, and first adjusting for a liquidity premium. This premium is separately determined for each loan type. Then a credit loss component is determined utilizing the credit loss assumptions used in the allowance for credit loss model. Finally, a discount spread is applied separately for consumer loans vs. commercial loans based on market information and utilization of the swap curve. 
103

The fair value of time deposits is based on the discounted value of contractual cash flows, except that the fair value is limited to the extent that the customer could redeem the certificate after imposition of a premature withdrawal penalty.  The discount rates are estimated using the Federal Home Loan Bank of New York ("FHLBNY") yield curve, which is considered representative of Arrow’s time deposit rates. The fair value of all other deposits is equal to the carrying value.
The fair value of FHLBNY advances is calculated by the FHLBNY.
The carrying amount of FHLBNY and FRB stock approximates fair value. If the stock was redeemed, the Company will receive an amount equal to the par value of the stock.
The book value of the outstanding trust preferred securities (Junior Subordinated Obligations Issued to Unconsolidated Subsidiary Trusts) are considered to approximate fair value since the interest rates are variable (indexed to LIBOR and to be indexed to SOFR post-conversion) and Arrow is well-capitalized.

Fair Value by Balance Sheet Grouping

The following table presents a summary of the carrying amount, the fair value and the fair value hierarchy of Arrow’s financial instruments:
Schedule of Fair Values by Balance Sheet Grouping
Fair Value Hierarchy
Carrying
Amount		Fair
Value		Level 1Level 2Level 3
December 31, 2023
Cash and Cash Equivalents$142,536 $142,536 $142,536 $— $— 
Securities Available-for-Sale497,769 497,769 — 497,769 — 
Securities Held-to-Maturity131,395 128,837 — 128,837 — 
Equity Securities1,925 1,925 1,925 
Federal Home Loan Bank and Federal Reserve Bank Stock5,049 5,049 — 5,049 — 
Net Loans3,181,643 2,940,318 — — 2,940,318 
Accrued Interest Receivable11,076 11,076 — 11,076 — 
Derivative Assets12,057 12,057 — 12,057 — 
Deposits3,687,566 3,683,122 — 3,683,122 — 
Borrowings26,500 26,189 — 26,189 — 
Junior Subordinated Obligations Issued
  to Unconsolidated Subsidiary Trusts		20,000 20,000 — 20,000 — 
Accrued Interest Payable6,289 6,289 — 6,289 — 
Derivative Liabilities9,598 9,598 — 9,598 — 
December 31, 2022
Cash and Cash Equivalents$64,660 $64,660 $64,660 $— $— 
Securities Available-for-Sale573,495 573,495 — 573,495 — 
Securities Held-to-Maturity175,364 171,623 — 171,623 — 
Equity Securities2,174 2,174 — 2,174 
Federal Home Loan Bank and Federal Reserve Bank Stock6,064 6,064 — 6,064 — 
Net Loans2,953,255 2,742,721 — — 2,742,721 
Accrued Interest Receivable9,890 9,890 — 9,890 — 
Derivative Assets7,506 7,506 — 7,506 — 
Deposits3,498,364 3,492,021 — 3,492,021 — 
Borrowings54,800 54,757 — 54,757 — 
Junior Subordinated Obligations Issued
  to Unconsolidated Subsidiary Trusts		20,000 20,000 — 20,000 — 
Accrued Interest Payable357 357 — 357 — 
Derivative Liabilities2,060 2,060 — 2,060 — 

104

Note 18: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 the Company to pay third-party expenses on behalf of the Lessor, which are referred to as variable payments. Under some leases, the Company pays the variable payments to the lessor, and in other leases, the Company pays the variable payments directly to the applicable third party. None of the Company's current leases include any residual value guarantees or any subleases, and there are no significant rights or obligations of the Company 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 each of Arrow and the two subsidiary banks. Additional information regarding this relationship can be found in Part III, Item 13 under the caption "Related Party Transactions."

The following includes quantitative data related to the Company's leases as of and for the twelve months ended December 31, 2023 and December 31, 2022:

Twelve Months Ended
Finance Lease Amounts:ClassificationDecember 31, 2023December 31, 2022
Right-of-Use AssetsPremises and Equipment, Net$4,460 $4,637 
Lease LiabilitiesFinance Leases5,066 5,119 
Operating Lease Amounts:
Right-of-Use AssetsOther Assets$4,948 $5,627 
Lease LiabilitiesOther Liabilities5,152 5,822 
Other Information:
Cash Paid For Amounts Included In The Measurement Of Lease Liabilities:
Operating Outgoing Cash Flows From Finance Leases191193 
Operating Outgoing Cash Flows From Operating Leases817 1,301 
Financing Outgoing Cash Flows From Finance Leases53 50 
Right-of-Use Assets Obtained In Exchange For New Finance Lease Liabilities— — 
Right-of-Use Assets Obtained In Exchange For New Operating Lease Liabilities146 — 
Weighted-average Remaining Lease Term - Finance Leases (Yrs.)26.2827.24
Weighted-average Remaining Lease Term - Operating Leases (Yrs.)11.1511.14
Weighted-average Discount Rate—Finance Leases3.75 %3.75 %
Weighted-average Discount Rate—Operating Leases3.08 %2.92 %

Lease cost information for the Company's leases is as follows:
Three Months EndedTwelve Months Ended
December 31, 2023December 31, 2022December 31, 2023December 31, 2022
Lease Cost:
Finance Lease Cost:
   Reduction in the Carrying Amount of Right-of-Use Assets$44 $44 $176 $177 
   Interest on Lease Liabilities48 48 191 193 
Operating Lease Cost195 304 981 1,229 
Short-term Lease Cost15 15 61 47 
Variable Lease Cost52 81 231 334 
Total Lease Cost$354 $492 $1,640 $1,980 



105

Future Lease Payments at December 31, 2023 are as follows:
Operating
Leases
Finance
Leases
Twelve Months Ended:
12/31/2024$731 $249 
12/31/2025684 263 
12/31/2026620 268 
12/31/2027569 268 
12/31/2028487 268 
Thereafter3,089 6,996 
Total Undiscounted Cash Flows6,180 8,312 
Less: Net Present Value Adjustment1,028 3,244 
   Lease Liability$5,152 $5,066 

Note 19.    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 manages 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 entered 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 any 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
December 31, 2023December 31, 2022
Fair value adjustment included in other assets $6,208 $7,506 
Fair value adjustment included in other liabilities6,208 7,506 
Notional amount123,197 127,763 

Derivatives Designated as Hedging Instruments
Arrow entered into two pay-fixed portfolio layer method 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 the portfolio layer method ("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:

106

Derivatives Designated as Hedging Instruments - Fair Value Agreements
December 31, 2023December 31, 2022
Fair value adjustment included in other assets $— $— 
Fair value adjustment included in other liabilities5,678 — 
Notional amount300,000 — 

The following table summarizes the effect of the fair value hedging relationship recognized on the consolidated statement of income:
Derivatives Designated as Hedging Instruments - Fair Value Agreements
Twelve Months EndedTwelve Months Ended
December 31, 2023December 31, 2022
Hedged Asset$5,849 $— 
Fair value derivative designated as hedging instrument(5,828)— 
Total gain recognized in the consolidated statements of income with interest and fees on loans21 — 


The following table represents the carrying value of the portfolio layer method 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
December 31, 2023December 31, 2022
Carrying Value of Portfolio Layer Method Hedged Asset$305,849 $— 
Cumulative Fair Value Hedging Adjustment5,849 — 


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 designated and 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
December 31, 2023December 31, 2022
Fair value adjustment included in other liabilities$2,710 $— 
Amount of loss recognized in AOCI
(2,553)— 
Amount of gain reclassified from AOCI interest expense157 — 


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 designated and 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. 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
December 31, 2023December 31, 2022
Fair value adjustment included in other liabilities$(4,998)$(5,446)
Amount of (loss) gain recognized in AOCI(1,355)3,467 
Amount of loss reclassified from AOCI interest expense
(907)(204)
107


Note 20:REGULATORY MATTERS (Dollars in Thousands)

In the normal course of business, Arrow and its subsidiaries operate under certain regulatory restrictions, such as the extent and structure of covered inter-company borrowings and maintenance of reserve requirement balances.
The principal source of the funds for the payment of stockholder dividends by Arrow has been from dividends declared and paid to Arrow by its bank subsidiaries.  As of December 31, 2023, the maximum amount that could have been paid by subsidiary banks to Arrow, without prior regulatory approval, was approximately $73.6 million.
Under current Federal Reserve regulations, Arrow is prohibited from borrowing from the subsidiary banks unless such borrowings are secured by specific obligations.  Additionally, the maximum of any such borrowings from any one subsidiary bank (aggregated with all other "covered transactions" between the bank and Arrow) is limited to 10% of that bank’s capital and surplus. Loans and other covered transactions between any one subsidiary bank and all of its affiliates cannot exceed 20% of that bank's capital and surplus.
Arrow and its subsidiary banks are subject to various regulatory capital requirements administered by the federal banking agencies.  Failure to meet minimum capital requirements can initiate certain mandatory--and possibly additional discretionary--actions by regulators that, if undertaken, could have a direct material effect on an institution’s financial statements.  Under capital adequacy guidelines and the regulatory framework for prompt corrective action, Arrow and its subsidiary banks must meet specific capital guidelines that involve quantitative measures of assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices.  Capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.
Current quantitative measures established by regulation to ensure capital adequacy require Arrow and its subsidiary banks to maintain minimum capital amounts and ratios (set forth in the table below) of total and Tier I capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier I capital (as defined) to average assets (as defined).  Management believes, as of December 31, 2023 and 2022, that Arrow and both subsidiary banks meet all capital adequacy requirements to which they are subject. The regulatory capital requirements incorporate a capital concept, the so-called "capital conservation buffer" (set at 2.5%, after full phase-in), which must be added to each of the minimum required risk-based capital ratios (i.e., the minimum CET1 ratio, the minimum Tier 1 risk-based capital ratio and the minimum total risk-based capital ratio). As of January 1, 2019, the capital conservation buffer increased to 2.50% of risk weighted assets.
In 2020, federal bank regulators introduced an optional simplified measure of capital adequacy for qualifying community banking organizations (CBLR).  A qualifying community banking organization that opts into the CBLR framework and meets all the requirements under the CBLR framework will be considered to have met the well-capitalized ratio requirements under the “prompt corrective action” regulations and will not be required to report or calculate risk-based capital ratios.
The CBLR final rule became effective as of January 1, 2020, and Arrow and both subsidiary banks have opted out of utilizing the CBLR framework. Therefore, the Capital Rules promulgated under Dodd-Frank remain applicable to Arrow and both subsidiary banks.
As of December 31, 2023, Arrow and both subsidiary banks qualified as well-capitalized under the regulatory framework for prompt corrective action.  To be categorized as “well-capitalized,” Arrow and its subsidiary banks must maintain minimum total risk-based, Tier I risk-based, Tier I leverage, and CET1 risk-based ratios as set forth in the table below.  There are no conditions or events that management believes have changed Arrow’s or its subsidiary banks’ categories. The actual capital amounts and ratios for Arrow and its subsidiary banks, Glens Falls National and Saratoga National, are presented in the table below as of December 31, 2023 and 2022:

ActualMinimum Amounts For Capital Adequacy Purposes (including "capital conservation buffer")Minimum Amounts To Be Well-Capitalized
AmountRatioAmountRatioAmountRatio
As of December 31, 2023
Total Capital
 (to Risk Weighted Assets):
Arrow$447,091 14.7 %$319,351 10.5 %$304,144 10.0 %
Glens Falls National320,449 14.3 %235,295 10.5 %224,090 10.0 %
Saratoga National110,510 13.7 %84,697 10.5 %80,664 10.0 %
Tier I Capital
 (to Risk Weighted Assets):
Arrow414,221 13.7 %256,998 8.5 %241,881 8.0 %
Glens Falls National297,667 13.2 %191,680 8.5 %180,404 8.0 %
Saratoga National100,449 12.5 %68,305 8.5 %64,287 8.0 %
108

ActualMinimum Amounts For Capital Adequacy Purposes (including "capital conservation buffer")Minimum Amounts To Be Well-Capitalized
AmountRatioAmountRatioAmountRatio
Tier I Capital
 (to Average Assets):
Arrow414,221 9.8 %169,070 4.0 %211,337 5.0 %
Glens Falls National297,667 9.2 %129,420 4.0 %161,776 5.0 %
Saratoga National100,449 9.6 %41,854 4.0 %52,317 5.0 %
Common Equity Tier 1 Capital
 (to Risk Weighted Assets):
Arrow394,166 13.0 %212,243 7.0 %197,083 6.5 %
Glens Falls National297,612 13.2 %157,825 7.0 %146,551 6.5 %
Saratoga National100,449 12.5 %56,251 7.0 %52,233 6.5 %
As of December 31, 2022
Total Capital
 (to Risk Weighted Assets):
Arrow$435,857 15.1 %$303,079 10.5 %$288,647 10.0 %
Glens Falls National315,458 14.3 %231,630 10.5 %220,600 10.0 %
Saratoga National104,279 15.5 %70,641 10.5 %67,277 10.0 %
Tier I Capital
 (to Risk Weighted Assets):
Arrow404,059 14.0 %245,322 8.5 %230,891 8.0 %
Glens Falls National292,134 13.2 %188,117 8.5 %177,051 8.0 %
Saratoga National95,891 14.3 %56,998 8.5 %53,645 8.0 %
Tier I Capital
 (to Average Assets):
Arrow404,059 9.8 %164,922 4.0 %206,153 5.0 %
Glens Falls National292,134 9.0 %129,837 4.0 %162,297 5.0 %
Saratoga National95,891 10.5 %36,530 4.0 %45,662 5.0 %
Common Equity Tier 1 Capital
 (to Risk Weighted Assets):
Arrow384,003 13.3 %202,107 7.0 %187,671 6.5 %
Glens Falls National292,078 13.2 %154,890 7.0 %143,826 6.5 %
Saratoga National95,891 14.3 %46,940 7.0 %43,587 6.5 %


Note 21:PARENT ONLY FINANCIAL INFORMATION (Dollars In Thousands)

Condensed financial information for Arrow Financial Corporation is as follows:
BALANCE SHEETSDecember 31,
ASSETS20232022
Interest-Bearing Deposits with Subsidiary Banks$1,305 $1,532 
Equity Securities1,925 2,174 
Investment in Subsidiaries at Equity381,160 354,664 
Other Assets17,185 16,458 
Total Assets$401,575 $374,828 
LIABILITIES
Junior Subordinated Obligations Issued to
    Unconsolidated Subsidiary Trusts		$20,000 $20,000 
Other Liabilities1,803 1,290 
Total Liabilities21,803 21,290 
STOCKHOLDERS’ EQUITY
  Total Stockholders’ Equity379,772 353,538 
  Total Liabilities and Stockholders’ Equity$401,575 $374,828 
  

109

STATEMENTS OF INCOMEYears Ended December 31,
Income:202320222021
Dividends from Bank Subsidiaries$24,000 $19,264 $15,994 
Interest and Dividends on Investments47 49 49 
Other Income (Including Management Fees)363 1,095 664 
Total Income24,410 20,408 16,707 
Expense:
Interest Expense685 685 686 
Other Expense4,280 1,030 879 
Total Expense4,965 1,715 1,565 
Income Before Income Tax Benefit and Equity
in Undistributed Net Income of Subsidiaries19,445 18,693 15,142 
Income Tax Benefit1,242 257 312 
Equity in Undistributed Net Income of Subsidiaries9,388 29,849 34,403 
Net Income$30,075 $48,799 $49,857 

The Statement of Changes in Stockholders’ Equity is not reported because it is identical to the Consolidated Statement of Changes in Stockholders’ Equity.

STATEMENTS OF CASH FLOWSYears Ended December 31,
202320222021
Cash Flows from Operating Activities:
Net Income$30,075 $48,799 $49,857 
Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities:
Undistributed Net Income of Subsidiaries(9,388)(29,849)(34,403)
Shares Issued Under the Directors’ Stock Plan218 408 376 
Changes in Other Assets and Other Liabilities(229)(754)(462)
Net Cash Provided by Operating Activities20,676 18,604 15,368 
Cash Flows from Financing Activities:
Stock Options Exercised96 631 1,505 
Shares Issued Under the Employee Stock Purchase Plan120 477 481 
Shares Issued for Dividend Reinvestment Plans472 1,904 1,836 
Purchase of Treasury Stock(3,608)(2,872)(2,662)
Cash Dividends Paid(17,983)(17,444)(16,296)
Net Cash Used in Financing Activities(20,903)(17,304)(15,136)
Net (Decrease) Increase in Cash and Cash Equivalents
(227)1,300 232 
Cash and Cash Equivalents at Beginning of the Year1,532 232 — 
Cash and Cash Equivalents at End of the Year$1,305 $1,532 $232 
Supplemental Disclosures to Statements of
  Cash Flow Information:
Interest Paid$685 $685 $686 

Note 22:RELATED PARTY TRANSACTION

A member of the GFNB Board of Directors, is the Chief Executive Officer of the general contractor leading the multi-year renovation project to enhance and improve the downtown Glens Falls Main Campus. The reconstruction provided added energy efficiency and more collaborative work space. In 2023, Arrow paid $2.8 million to this general contractor. GFNB is a subsidiary of Arrow Financial Corporation.

Note 23:SUBSEQUENT EVENTS

As disclosed on Form 8-K which was filed March 4, 2024, GFNB has entered into a definitive agreement with Berkshire Hills Bancorp, Inc. (NYSE: BHLB) under which GFNB will acquire one branch office at 184 Broadway, Whitehall, New York.

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Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure - None.

Item 9A. Controls and Procedures

Management, under the supervision and with the participation of the Chief Executive Officer (who is our principal executive officer) and Chief Financial Officer (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 December 31, 2023. 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 that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that as of December 31, 2023, our disclosure controls and procedures were not effective due to material weaknesses in internal controls over financial reporting described below under the heading "Management's Report on Internal Control Over Financial Reporting." We have in place and are executing a remediation plan to address the material weaknesses described below.

Following identification of the material weaknesses and prior to filing this Form 10-K, we performed relevant and responsive substantive procedures as of December 31, 2023 and for the year then ended, in order to complete our financial statements and related disclosures. Based on these procedures, Management believes that our consolidated financial statements included in this Form 10-K have been prepared in accordance with GAAP. Our Chief Executive Officer and Chief Financial Officer have certified that, based on their knowledge, the financial statements, and other financial information included in this Form 10-K, 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 Form 10-K for 2023.

Management’s Report on Internal Control Over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting as such term is defined in Exchange Act Rules 13a-15(f) and 15d-15(f).
As of December 31, 2023, our management, under the oversight of our Board of Directors, evaluated the effectiveness of our internal control over financial reporting based on the criteria for effective internal control over financial reporting established by the Committee of Sponsoring Organization of the Treadway Commission (COSO) in Internal Control – Integrated Framework (2013). Based on this evaluation, our management concluded that our internal control over financial reporting was not effective as of December 31, 2023 due to the material weaknesses previously disclosed in the 2022 Form 10-K, which are described below:
•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 that occurred in September 2022, we did not effectively perform risk assessment procedures to identify the impact of the conversion on our internal control over financial reporting.

Management concluded that these material weaknesses were primarily due to:
•The Company did not have an effective control environment. Specifically, it did not effectively establish structure, authority and responsibility to support a functioning system of internal control. The Company’s Audit Committee did not demonstrate sufficient oversight of Internal Audit’s monitoring of management’s design, implementation and conduct of internal control over financial reporting. The Company did not have sufficient internal resources with appropriate knowledge and expertise to design and implement, document and operate effectively certain internal controls over financial reporting and certain information technology systems. The Company did not have sufficient training of personnel on the COSO 2013 Framework and its implications on financial reporting and their related internal control responsibilities. Additionally, the Company did not have effective policies and procedures that held personnel accountable for defined internal control responsibilities.
•The Company did not have an effective risk assessment process that successfully identified and assessed risks of misstatement to ensure controls were designed and implemented to respond to the risks associated with the core banking information technology system conversion. The Company did not adequately communicate the changes necessary in financial reporting and related internal controls throughout its organization.
•The Company did not have an effective information and communication process that identified and assessed the source of and controls necessary to ensure the reliability of information used in financial reporting to the Company’s Board of Directors, and communications with relevant third parties.
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•The Company did not have effective monitoring activities through Internal Audit to assess the operation of internal control over financial reporting, including the continued appropriateness of control design and level of documentation maintained to support control effectiveness as well as monitoring corrective action to remediate known control deficiencies in a timely manner.

The material weaknesses noted above did not result in misstatements to our consolidated financial statements for any of the years presented. As outlined below, as of December 31, 2023, certain remediation measures for these existing material weaknesses were implemented and operating but were not in place for a sufficient amount of time for the material weakness to be considered remediated. These remediation measures continue to be monitored and assessed on an ongoing basis and therefore, our management concluded that these outstanding material weaknesses cannot be considered remediated as of December 31, 2023.
KPMG LLP, the Company’s independent registered public accounting firm, who audited the consolidated financial statements included in this Annual Report on Form 10-K, has issued an attestation report on the Company’s internal control over financial reporting. KPMG LLP’s attestation report contains an adverse opinion on the effectiveness of the Company’s internal control over financial reporting. KPMG LLP’s report is included in Item 8 of this Annual Report on Form 10-K.

Remediation Efforts to Address the Material Weaknesses

The aforementioned material weaknesses were previously disclosed in the 2022 Form 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 December 31, 2023. Accordingly, the Company will continue to assess its remediation measures in 2024 in order to confirm effective remediation of the identified material weaknesses.
During the year ended December 31, 2023, 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 control 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 December 31, 2023 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Item 9B. Other Information

Rule 10b5-1 Trading Arrangements of our Directors and Officers
During the fourth quarter of 2023, 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).


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Item 9C.     Disclosure Regarding Foreign Jurisdictions that Prevent Inspections – None.


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PART III

Item 10. Directors, Executive Officers and Corporate Governance
The information required by this item regarding directors, nominees for director, and the committees of the Company's Board is set forth under the captions "Voting Item 1: Election of Directors" and “Corporate Governance” of Arrow's Proxy Statement for its Annual Meeting of Shareholders to be held June 5, 2024 (the "Proxy Statement"), which sections are incorporated herein by reference. Information regarding Compliance with Section 16(a) of the Exchange Act is set forth in the Company's Proxy Statement under the caption "Delinquent Section 16(a) Reports” and is incorporated herein by reference. Certain required information regarding our Executive Officers is contained in Part I, Item 1.G. of this Report, "Executive Officers of the Registrant."

Arrow has adopted a Financial Code of Ethics applicable to our principal executive officer, principal financial officer and principal accounting officer, a copy of which can be found on our website at www.arrowfinancial.com under the link "Corporate Governance" on the header tab "Corporate."

Insider Trading Policy

Arrow’s officers and directors are required to comply with Arrow’s Policy on Insider Trading at all times, including during a repurchase program. The Policy on Insider Trading, among other things, prohibits trading in the Company’s securities when in possession of material non-public information and restricts the ability of directors and executive officers from transacting in Arrow’s securities during specific blackout periods, subject to certain limited exceptions, including transactions pursuant to a Rule 10b5-1 trading arrangement that complies with the conditions of Exchange Act Rule 10b5-1.

Item 11. Executive Compensation
The information required by this item is set forth under the captions “Corporate Governance - Director Independence,” "Compensation Discussion and Analysis” including the “Compensation Committee Report” thereof, “Executive Compensation,” “Agreements with Named Executive Officers” including the "Potential Payments Upon Termination or Change of Control” and “Potential Payments Table” sections thereof, and “Voting Item 1: Election of Directors - Director Compensation” of the Proxy Statement, which sections are incorporated herein by reference.


Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
    Certain information required by this item is set forth under the caption "Stock Ownership Information" of the Proxy Statement, which section is incorporated herein by reference, and under the caption "Equity Compensation Plan Information" in Part II, item 5 of this Report.


Item 13. Certain Relationships and Related Transactions, and Director Independence
Director Independence:
The information required by this item is set forth under the captions “Corporate Governance - Related Party Transactions” and “Corporate Governance - Director Independence” of the Proxy Statement, which sections are incorporated herein by reference.

Item 14. Principal Accounting Fees and Services
The information required by this item is set forth under the captions "Voting Item 4, Ratification of Independent Registered Public Accounting Firm - Independent Registered Public Accounting Firm Fees," and “Corporate Governance - Board Committees” of the Proxy Statement, which sections are incorporated herein by reference.

PART IV

Item 15. Exhibits, Financial Statement Schedules
1.  Financial Statements

The following financial statements, the notes thereto, and the independent auditors’ report thereon are filed in Part II, Item 8 of this Report.  See the index to such financial statements at the beginning of Item 8.

Reports of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of December 31, 2023 and 2022
Consolidated Statements of Income for the Years Ended December 31, 2023, 2022 and 2021
Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2023, 2022 and 2021
Consolidated Statements of Changes in Stockholders’ Equity for the Years Ended December 31, 2023, 2022 and 2021
Consolidated Statements of Cash Flows for the Years Ended December 31, 2023, 2022 and 2021
Notes to Consolidated Financial Statements



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2.  Schedules

All schedules are omitted as the required information is either not applicable or not required or is contained in the respective financial statements or in the notes thereto.

3.  Exhibits:

See Exhibit Index on page 116.

Item 16. Form 10-K Summary - None

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EXHIBIT INDEX

The following exhibits are incorporated by reference herein.
Exhibit
Number
Exhibit
3.(i)
3.(ii)
4.1
4.2
4.3
4.4
4.5
4.6
4.7
4.8
4.9
10.1
10.2
10.3
10.4
10.5
10.6
10.7
10.8
116

Exhibit
Number
Exhibit
10.9
10.10
10.11
10.12
10.13
10.14
10.15
10.16
10.17
10.18
14

The following exhibits are submitted herewith:
Exhibit
Number
Exhibit
10.19
19.1
21
23
31.1
31.2
32
97.1
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
* Management contracts or compensation plans required to be filed as an exhibit.



117

Pursuant to the requirements of Section 13 or 15(d) 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

Date:March 11, 2024
By:   /s/ David S. DeMarco
David S. DeMarco
President and Chief Executive Officer
(Principal Executive Officer)
Date:March 11, 2024
By:   /s/ Penko Ivanov
Penko Ivanov
Chief Financial Officer
(Principal Financial and Accounting Officer)

Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below on March 11, 2024 by the following persons in the capacities indicated.

  /s/ Mark L. Behan
Mark L. Behan
Director
  /s/ David G. Kruczlnicki
David G. Kruczlnicki
Director
  /s/ Tenée R. Casaccio
Tenée R. Casaccio
Director
  /s/ Elizabeth A. Miller
Elizabeth A. Miller
Director
_/s/ Gregory J. Champion
Gregory J. Champion
Director
  /s/ Raymond F. O'Conor
Raymond F. O'Conor
Director
 /s/ Gary C. Dake
Gary C. Dake
Director
  /s/ William L. Owens
William L. Owens
Director and Chairman
  /s/ David S. DeMarco
David S. DeMarco
Director
  /s/ Colin L. Read
Colin L. Read
Director

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