# Arrow Financial Corp: Form 10-Q for the period ended Sep 30, 2023

- Company: [Arrow Financial Corp](/companies/arow.md) (CIK 717538)
- Form: 10-Q
- Filed: 2023-11-09
- Accepted by EDGAR: Nov 9, 2023, 16:18 ET
- Period: 2023-09-30
- Accession: 0000717538-23-000239
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/717538/000071753823000239/arow-20230930.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/717538/000071753823000239/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2023-09-30.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Interest expense | 3 months, 2023-07-01 to 2023-09-30 | $16.8m | us-gaap:InterestExpense |
| Interest expense | 9 months, 2023-01-01 to 2023-09-30 | $39.0m | us-gaap:InterestExpense |
| Income tax | 3 months, 2023-07-01 to 2023-09-30 | $1.8m | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 9 months, 2023-01-01 to 2023-09-30 | $5.8m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2023-07-01 to 2023-09-30 | $7.7m | us-gaap:NetIncomeLoss |
| Net income | 9 months, 2023-01-01 to 2023-09-30 | $22.4m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2023-07-01 to 2023-09-30 | $0.46 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 9 months, 2023-01-01 to 2023-09-30 | $1.31 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2023-07-01 to 2023-09-30 | $0.46 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 9 months, 2023-01-01 to 2023-09-30 | $1.31 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2023-07-01 to 2023-09-30 | 17,050,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 9 months, 2023-01-01 to 2023-09-30 | 17,049,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 9 months, 2023-01-01 to 2023-09-30 | $36.9m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 9 months, 2023-01-01 to 2023-09-30 | $6.5m | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Share repurchases | 9 months, 2023-01-01 to 2023-09-30 | $848.0k | us-gaap:PaymentsForRepurchaseOfCommonStock |
| Total assets | at 2023-09-30 | $4.27bn | us-gaap:Assets |
| Total liabilities | at 2023-09-30 | $3.91bn | us-gaap:Liabilities |
| Shareholders' equity | at 2023-09-30 | $360.0m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 111,169 characters.

### MANAGEMENT'S DISCUSSION AND ANALYSIS OF

### FINANCIAL CONDITION AND RESULTS OF OPERATIONS

### September 30, 2023

### NOTE ON TERMINOLOGY

In this Report, the terms "Arrow," "the registrant," "the Company," "we," "us," and "our" generally refer to Arrow Financial Corporation and its subsidiaries as a group, except where the context indicates otherwise. At certain points in this Report, Arrow's performance is compared with that of the Company's "peer group" of financial institutions. Unless otherwise specifically stated, the peer group for the purposes of this Report is comprised of the group of 176 domestic bank holding companies with $3 to $10 billion in total consolidated assets as identified in the Federal Reserve Board’s "Bank Holding Company Performance Report" for June 30, 2023 (the most recent such report currently available), and peer group data contained herein has been derived from such report.

### THE COMPANY AND ITS SUBSIDIARIES

Arrow is a two-bank holding company headquartered in Glens Falls, New York. The banking subsidiaries are GFNB, whose main office is located in Glens Falls, New York, and SNB, whose main office is located in Saratoga Springs, New York. Active subsidiaries of GFNB include Upstate Agency, LLC (an insurance agency that sells property and casualty insurance and also specializes in selling and servicing group health care policies and life insurance), North Country Investment Advisers, Inc. (a registered investment adviser that provides investment advice to Arrow's proprietary mutual funds) and Arrow Properties, Inc. (a real estate investment trust, or REIT). Arrow also owns directly two subsidiary business trusts, organized in 2003 and 2004, which issued trust preferred securities (TRUPs), which are still outstanding.

### FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q (this "Report") contains statements that are not historical in nature but rather are based on Arrow's beliefs, assumptions, expectations, estimates and projections about the future. These statements are "forward-looking statements" within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, and involve a degree of uncertainty and attendant risk. Words such as "may," "will," "expect," "believe," "anticipate," "estimate," "continue," and variations of such words and similar expressions are intended to identify such forward-looking statements. Examples of forward-looking statements include statements regarding Arrow's asset quality, the level of allowance for credit losses, the sufficiency of liquidity sources, interest rate change exposure, changes in accounting standards, and Arrow's tax plans and strategies. Some of these statements, such as those included in the interest rate sensitivity analysis in Part I, Item 3, entitled "Quantitative and Qualitative Disclosures About Market Risk," are merely presentations of what future performance or changes in future performance would look like based on hypothetical assumptions and on simulation models. Other forward-looking statements are based on Arrow's general perceptions of market conditions and trends in business activity, both Arrow's and in the banking industry generally, as well as current management strategies for future operations and development.

These forward-looking statements may not be exhaustive, are not guarantees of future performance and involve certain risks and uncertainties that are difficult to quantify or, in some cases, to identify. You should not place undue reliance on any such forward-looking statements. In the case of all forward-looking statements, our actual outcomes and results may differ materially from what the statements predict or forecast. Factors that could cause or contribute to such differences include, but are not limited to the following:

- Market conditions could present significant challenges to the U.S. commercial banking industry and its core business of making and servicing loans and any substantial downturn in the regional markets in which Arrow operates or in the U.S. economy generally could adversely affect Arrow's ability to maintain steady growth in the loan portfolio and earnings.
- A continued period of high inflation could adversely impact our business and our customers.
- Arrow operates in a highly competitive industry and market areas that could negatively affect growth and profitability.
- Uncertainty relating to the discontinuance of LIBOR and other reference rates and their potential discontinuance may negatively impact our access to funding and the value of our financial instruments and commercial agreements.
- The financial services industry is faced with technological advances and changes on a continuing basis, and failure to adapt to these advances and changes could have a material adverse impact on Arrow's business.
- Problems encountered by other financial institutions could adversely affect Arrow.
- Any future economic or financial downturn, including any significant correction in the equity markets, may negatively affect the volume of income attributable to, and demand for, fee-based services of banks such as Arrow, including the Company's fiduciary business, which could negatively impact Arrow's financial condition and results of operations.
- Potential complications with the implementation of our new core banking system could adversely impact our business and operations.
- Arrow faces continuing and growing security risks to its information base including the information maintained relating to customers, and any breaches in the security systems implemented to protect this information could have a material negative effect on Arrow's business operations and financial condition.
- Business could suffer if Arrow loses key personnel unexpectedly or if employee wages increase significantly.
- COVID-19 or other health emergencies may adversely affect Arrow’s business activities, financial condition and results of operations.
- Arrow is subject to interest rate risk, which could adversely affect profitability.
- Arrow could recognize losses on securities held in our securities portfolio, particularly if interest rates increase or economic and market conditions deteriorate.
- Arrow's allowance for possible credit losses may be insufficient, and an increase in the allowance would reduce earnings.
- Arrow’s financial condition and the results of its operations could be negatively impacted by liquidity management.
- The increasing complexity of Arrow's operations presents varied risks that could affect earnings and financial condition.
- We have identified material weaknesses in our internal control over financial reporting which could, if not remediated, result in a material misstatement of our financial statements.
- The Company relies on the operations of its banking subsidiaries to provide liquidity, which, if limited, could impact Arrow's ability to pay dividends to its shareholders or to repurchase its common stock.
- Capital and liquidity standards require banks and bank holding companies to maintain more and higher quality capital and greater liquidity than has historically been the case.
- Federal banking statutes and regulations could change in the future, which may adversely affect Arrow.
- Non-compliance with the Patriot Act, Bank Secrecy Act, or other anti-money laundering laws and regulations could result in fines or sanctions and restrictions on conducting acquisitions or establishing new branches.
- Arrow, through its banking subsidiaries, is subject to the CRA and fair lending laws, and failure to comply with these laws could lead to material penalties.
- Disruption in the continuity, timing and effectiveness of the recent transition in executive management could adversely affect Arrow's business activities, financial conditional and results of operations.

Arrow is under no duty to update any of the forward-looking statements after the date of this Report to conform such statements to actual results. All forward-looking statements, express or implied, included in this Report and the documents incorporated by reference and that are attributable to Arrow are expressly qualified in their entirety by this cautionary statement. This cautionary statement should also be considered in connection with any subsequent written or oral forward-looking statements that Arrow or any persons acting on its behalf may issue. This Report should be read in conjunction with the 2022 Form 10-K and our other filings with the SEC.

### USE OF NON-GAAP FINANCIAL MEASURES

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

**Tax-Equivalent Net Interest Income and Net Interest Margin:** Net interest income, as a component of the tabular presentation by financial institutions of Selected Financial Information regarding their recently completed operations, as well as disclosures based on that tabular presentation, is commonly presented on a tax-equivalent basis. That is, to the extent that some component of the institution's net interest income, which is presented on a before-tax basis, is exempt from taxation (e.g., is received by the institution as a result of its holdings of state or municipal obligations), an amount equal to the tax benefit derived from that component is added to the actual before-tax net interest income total. This adjustment is considered helpful in comparing one financial institution's net interest income to that of another institution or in analyzing any institution’s net interest income trend line over time, to correct any analytical distortion that might otherwise arise from the fact that financial institutions vary widely in the proportions of their portfolios that are invested in tax-exempt securities, and from the fact that even a single institution may significantly alter over time the proportion of its own portfolio that is invested in tax-exempt obligations. Moreover, net interest income is itself a component of a second financial measure commonly used by financial institutions, net interest margin, which is the ratio of net interest income to average earning assets. For purposes of this measure as well, tax-equivalent net interest income is generally used by financial institutions, again to provide a better basis of comparison from institution to institution and to better demonstrate a single institution’s performance over time. Arrow follows these practices.

**The Efficiency Ratio:** Financial institutions often use an "efficiency ratio" as a measure of expense control. The efficiency ratio typically is defined as the ratio of non-interest expense to net interest income and non-interest income. Net interest income as utilized in calculating the efficiency ratio is typically the same as the net interest income presented in Selected Financial Information table discussed in the preceding paragraph, i.e., it is expressed on a tax-equivalent basis. Moreover, many financial institutions, in calculating the efficiency ratio, also adjust both non-interest expense and non-interest income to exclude from these items (as calculated under GAAP) certain recurring component elements of income and expense, such as intangible asset amortization (which is included in non-interest expense under GAAP but may be excluded therefrom for purposes of calculating the efficiency ratio) and securities gains or losses (which are reflected in the calculation of non-interest income under GAAP but may be excluded therefrom for purposes of calculating the efficiency ratio). Arrow makes these adjustments.

**Tangible Book Value per Share:** Tangible equity is total stockholders’ equity less intangible assets. Tangible book value per share is tangible equity divided by total shares issued and outstanding. Tangible book value per share is often regarded as a more meaningful comparative ratio than book value per share as calculated under GAAP, that is, total stockholders’ equity including intangible assets divided by total shares issued and outstanding. Intangible assets include many items, but in Arrow's case, essentially represents goodwill.

**Adjustments for Certain Items of Income or Expense:** In addition to our regular utilization in our public filings and disclosures of the various non-GAAP measures commonly utilized by financial institutions discussed above, Arrow may also elect from time to time, in connection with our presentation of various financial measures prepared in accordance with GAAP, such as net income, EPS, return on average assets (ROA), and return on average equity (ROE), to provide as well certain comparative disclosures that adjust these GAAP financial measures, typically by removing them from the impact of certain transactions or other material items of income or expense that are unusual or unlikely to be repeated. Arrow will do so only if it believes that provision of the resulting non-GAAP financial measures may improve the average investor's understanding of our results of operations by separating out items that have a disproportional positive or negative impact on the particular period in question or by otherwise permitting a better comparison from period-to-period in our results of operations with respect to our fundamental lines of business, including the commercial banking business.

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

### Selected Quarterly Information

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

| Quarter Ended | 9/30/2023 | 6/30/2023 | 3/31/2023 | 12/31/2022 | 9/30/2022 |
| --- | ---: | ---: | ---: | ---: | ---: |
| Net Income | $7,743 | $6,047 | $8,562 | $12,087 | $12,163 |
| **Transactions in Net Income (Net of Tax):** |  |  |  |  |  |
| Net Changes in Fair Value of Equity Investments | 52 | (133) | (76) | 35 | 70 |
| **Share and Per Share Data:1** |  |  |  |  |  |
| Period End Shares Outstanding | 17,049 | 17,050 | 17,050 | 17,048 | 17,019 |
| Basic Average Shares Outstanding | 17,050 | 17,050 | 17,048 | 17,031 | 17,007 |
| Diluted Average Shares Outstanding | 17,050 | 17,050 | 17,060 | 17,087 | 17,054 |
| Basic Earnings Per Share | $0.46 | $0.35 | $0.50 | $0.71 | $0.72 |
| Diluted Earnings Per Share | 0.46 | 0.35 | 0.50 | 0.71 | 0.72 |
| Cash Dividend Per Share | 0.262 | 0.262 | 0.262 | 0.262 | 0.255 |
| **Selected Quarterly Average Balances:** |  |  |  |  |  |
| Interest-bearing Deposits at Banks | $131,814 | $130,057 | $40,436 | $143,499 | $209,001 |
| Investment Securities | 745,693 | 787,175 | 813,461 | 845,859 | 821,052 |
| Loans | 3,096,240 | 3,036,410 | 2,991,928 | 2,951,547 | 2,872,066 |
| Deposits | 3,491,028 | 3,460,711 | 3,480,279 | 3,614,945 | 3,598,519 |
| Other Borrowed Funds | 208,527 | 220,616 | 100,596 | 63,304 | 50,125 |
| Stockholders’ Equity | 362,701 | 365,070 | 359,556 | 351,402 | 361,675 |
| Total Assets | 4,109,995 | 4,087,653 | 3,978,851 | 4,074,028 | 4,047,738 |
| Return on Average Assets, annualized | 0.75% | 0.59% | 0.87% | 1.18% | 1.19% |
| Return on Average Equity, annualized | 8.47% | 6.64% | 9.66% | 13.65% | 13.34% |
| Return on Average Tangible Equity, annualized 2 | 9.05% | 7.10% | 10.33% | 14.62% | 14.27% |
| Average Earning Assets | $3,973,747 | $3,953,642 | $3,845,825 | $3,940,905 | $3,902,119 |
| Average Paying Liabilities | 2,920,518 | 2,924,743 | 2,782,299 | 2,891,092 | 2,781,985 |
| Interest Income | 42,117 | 40,013 | 36,110 | 35,904 | 34,207 |
| Tax-Equivalent Adjustment 3 | 183 | 196 | 202 | 279 | 268 |
| Interest Income, Tax-Equivalent 3 | 42,300 | 40,209 | 36,312 | 36,183 | 34,475 |
| Interest Expense | 16,764 | 14,241 | 8,016 | 5,325 | 3,306 |
| Net Interest Income | 25,353 | 25,772 | 28,094 | 30,579 | 30,901 |
| Net Interest Income, Tax-Equivalent 3 | 25,536 | 25,968 | 28,296 | 30,858 | 31,169 |
| Net Interest Margin, annualized | 2.53% | 2.61% | 2.96% | 3.08% | 3.14% |
| Net Interest Margin, Tax Equivalent, annualized 3 | 2.55% | 2.63% | 2.98% | 3.11% | 3.17% |
| **Efficiency Ratio Calculation: 4** |  |  |  |  |  |
| Non-Interest Expense | $23,479 | $24,083 | $22,296 | $20,792 | $21,448 |
| Less: Intangible Asset Amortization | 43 | 44 | 45 | 47 | 48 |
| Net Non-Interest Expense | $23,436 | $24,039 | $22,251 | $20,745 | $21,400 |
| Net Interest Income, Tax-Equivalent 3 | $25,536 | $25,968 | $28,296 | $30,858 | $31,169 |
| Non-Interest Income | 8,050 | 6,906 | 6,677 | 7,165 | 7,827 |
| Less: Net Changes in Fair Value of Equity Invest. | 71 | (181) | (104) | 48 | 95 |
| Net Gross Income | $33,515 | $33,055 | $35,077 | $37,975 | $38,901 |
| Efficiency Ratio 4 | 69.93% | 72.72% | 63.43% | 54.63% | 55.01% |
| **Period-End Capital Information:** |  |  |  |  |  |
| Total Stockholders’ Equity (i.e. Book Value) | $360,014 | $361,443 | $363,371 | $353,538 | $345,550 |
| Book Value per Share 1 | 21.12 | 21.20 | 21.31 | 20.74 | 20.30 |
| Goodwill and Other Intangible Assets, net | 23,078 | 23,175 | 23,273 | 23,373 | 23,477 |
| Tangible Book Value per Share 1,2 | 19.76 | 19.84 | 19.95 | 19.37 | 18.92 |
| **Capital Ratios:5** |  |  |  |  |  |
| Tier 1 Leverage Ratio | 9.94% | 9.92% | 10.13% | 9.80% | 9.71% |
| Common Equity Tier 1 Capital Ratio | 13.17% | 13.27% | 13.34% | 13.32% | 13.14% |
| Tier 1 Risk-Based Capital Ratio | 13.84% | 13.96% | 14.03% | 14.01% | 13.85% |
| Total Risk-Based Capital Ratio | 14.94% | 15.08% | 15.15% | 15.11% | 14.93% |
| **Assets Under Trust Admin. & Investment Mgmt.** | $1,627,522 | $1,711,460 | $1,672,117 | $1,606,132 | $1,515,994 |

52

### Selected Quarterly Information - Continued

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

| Footnotes: 1. 2. | Share and Per Share Data have been restated for the September 26, 2023, 3% stock dividend. Non-GAAP Financial Measures Reconciliation: Tangible Book Value, Tangible Equity and Return on Tangible Equity exclude goodwill and other intangible assets, net from total equity. These are non-GAAP financial measures which Arrow believes provide investors with information that is useful in understanding our financial performance. See "Use of Non-GAAP Financial Measures" on page 51. 9/30/2023 6/30/2023 3/31/2023 12/31/2022 9/30/2022 |
| --- | --- |
|  | Total Stockholders' Equity (GAAP) $360,014 $361,443 $363,371 $353,538 $345,550 |
|  | Less: Goodwill and Other Intangible assets, net 23,078 23,175 23,273 23,373 23,477 |
|  | Tangible Equity (Non-GAAP) $336,936 $338,268 $340,098 $330,165 $322,073 |
|  | Period End Shares Outstanding 17,049 17,050 17,050 17,048 17,019 |
|  | Tangible Book Value per Share (Non-GAAP) $19.76 $19.84 $19.95 $19.37 $18.92 |
|  | Net Income 7,743 6,047 8,562 12,087 12,163 |
|  | Return on Average Tangible Equity (Net Income/Tangible Equity - Annualized) 9.05% 7.10% 10.33% 14.62% 14.27% |
| 3. | Non-GAAP Financial Measures Reconciliation: Net Interest Margin, Tax-Equivalent is the ratio of our annualized tax-equivalent net interest income to average earning assets. This is also a non-GAAP financial measure which Arrow believes provides investors with information that is useful in understanding our financial performance. See "Use of Non-GAAP Financial Measures" on page 51. |
|  | 9/30/2023 6/30/2023 3/31/2023 12/31/2022 9/30/2022 |
|  | Interest Income (GAAP) $42,117 $40,013 $36,110 $35,904 $34,207 |
|  | Add: Tax-Equivalent adjustment (Non-GAAP) 183 196 202 279 268 |
|  | Interest Income - Tax Equivalent (Non-GAAP) $42,300 $40,209 $36,312 $36,183 $34,475 |
|  | Net Interest Income (GAAP) $25,353 $25,772 $28,094 $30,579 $30,901 |
|  | Add: Tax-Equivalent adjustment (Non-GAAP) 183 196 202 279 268 |
|  | Net Interest Income - Tax Equivalent (Non-GAAP) $25,536 $25,968 $28,296 $30,858 $31,169 |
|  | Average Earning Assets $3,973,747 $3,953,642 $3,845,825 $3,940,905 $3,902,119 |
|  | Net Interest Margin (Non-GAAP)\* 2.55% 2.63% 2.98% 3.11% 3.17% |
| 4. | Non-GAAP Financial Measures: Financial Institutions often use the "efficiency ratio", a non-GAAP ratio, as a measure of expense control. Arrow believes that the efficiency ratio provides investors with information that is useful in understanding our financial performance. Arrow defines efficiency ratio as the ratio of our non-interest expense to our net gross income (which equals tax-equivalent net interest income plus non-interest income, as adjusted). There is no GAAP financial measure that is closely comparable to the efficiency ratio. See "Use of Non-GAAP Financial Measures" on page 51. |
| 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 September 30, 2023 CET1 ratio listed in the tables (i.e., 13.17%) exceeds the sum of the required minimum CET1 ratio plus the fully phased-in Capital Conservation Buffer (i.e., 7.00%). |
|  | 9/30/2023 6/30/2023 3/31/2023 12/31/2022 9/30/2022 |
|  | Total Risk Weighted Assets $2,988,438 $2,937,837 $2,909,610 $2,883,902 $2,856,224 |
|  | Common Equity Tier 1 Capital 393,541 389,966 388,228 384,003 375,394 |
|  | Common Equity Tier 1 Capital Ratio 13.17% 13.27% 13.34% 13.32% 13.14% |
| \* Quarterly ratios have been annualized. |  |

53

### Selected Year-to-Date Information

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

| Nine Months Ended | 9/30/2023 | 9/30/2022 |
| --- | ---: | ---: |
| Net Income | $22,352 | $36,712 |
| **Transactions Recorded in Net Income (Net of Tax):** |  |  |
| Net Changes in Fair Value of Equity Investments | (157) | 281 |
| **Share and Per Share Data: 1** |  |  |
| Period End Shares Outstanding | 17,049 | 17,019 |
| Basic Average Shares Outstanding | 17,049 | 17,001 |
| Diluted Average Shares Outstanding | 17,049 | 17,050 |
| Basic Earnings Per Share | $1.31 | $2.16 |
| Diluted Earnings Per Share | 1.31 | 2.15 |
| Cash Dividend Per Share | 0.79 | 0.76 |
| **Selected Year-to-Date Average Balances:** |  |  |
| Interest-bearing Deposits at Banks | $101,104 | $289,681 |
| Investment Securities | 781,862 | 813,590 |
| Loans | 3,041,909 | 2,785,721 |
| Deposits | 3,477,379 | 3,583,570 |
| Borrowings | 176,975 | 56,219 |
| Stockholders’ Equity | 362,454 | 363,024 |
| Total Assets | 4,059,314 | 4,038,533 |
| Return on Average Assets, annualized | 0.74% | 1.22% |
| Return on Average Equity, annualized | 8.25% | 13.52% |
| Return on Average Tangible Equity, annualized 2 | 8.81% | 14.46% |
| Average Earning Assets | 3,924,875 | 3,888,992 |
| Average Paying Liabilities | 2,876,360 | 2,815,115 |
| Interest Income | 118,240 | 93,747 |
| Tax-Equivalent Adjustment 3 | 581 | 807 |
| Interest Income, Tax-Equivalent 3 | 118,821 | 94,554 |
| Interest Expense | 39,021 | 5,983 |
| Net Interest Income | 79,219 | 87,764 |
| Net Interest Income, Tax-Equivalent 3 | 79,800 | 88,571 |
| Net Interest Margin, annualized | 2.70% | 3.02% |
| Net Interest Margin, Tax Equivalent, annualized 3 | 2.72% | 3.04% |
| **Efficiency Ratio Calculation: 4** |  |  |
| Noninterest Expense | $69,858 | $60,738 |
| Less: Intangible Asset Amortization | 133 | 144 |
| Net Noninterest Expense | 69,725 | 60,594 |
| Net Interest Income, Tax-Equivalent 3 | 79,800 | 88,571 |
| Noninterest Income | 21,633 | 23,733 |
| Less: Net Changes in Fair Value of Equity Securities | (214) | 379 |
| Net Gross Income | 101,647 | 111,925 |
| Efficiency Ratio 4 | 68.60% | 54.14% |

54

### Selected Year-to-Date Information - Continued

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

| Footnotes: 1. 2. | Share and Per Share Data have been restated for the September 26, 2023, 3% stock dividend. Tangible Book Value, Tangible Equity and Return on Tangible Equity exclude goodwill and other intangible assets, net from total equity. These are non-GAAP financial measures which Arrow believes provide investors with information that is useful in understanding our financial performance. See "Use of Non-GAAP Financial Measures" on page 51. 9/30/2023 9/30/2022 |
| --- | --- |
|  | Total Stockholders' Equity (GAAP) $360,014 $345,550 |
|  | Less: Goodwill and Other Intangible assets, net 23,078 23,477 |
|  | Tangible Equity (Non-GAAP) $336,936 $322,073 |
|  | Period End Shares Outstanding 17,049 17,019 |
|  | Tangible Book Value per Share (Non-GAAP) $19.76 $18.92 |
|  | Net Income 22,352 36,712 |
|  | Return on Average Tangible Equity (Net Income/Tangible Equity - Annualized) 8.81% 14.46% |
| 3. | Net Interest Margin is the ratio of our annualized tax-equivalent net interest income to average earning assets. This is also a non-GAAP financial measure which Arrow believes provides investors with information that is useful in understanding our financial performance. See "Use of Non-GAAP Financial Measures" on page 51. |
|  | 9/30/2023 9/30/2022 |
|  | Interest Income (GAAP) $118,240 $93,747 |
|  | Add: Tax-Equivalent adjustment (Non-GAAP) 580 807 |
|  | Interest Income - Tax Equivalent (Non-GAAP) $118,820 $94,554 |
|  | Net Interest Income (GAAP) 79,219 87,764 |
|  | Add: Tax-Equivalent adjustment (Non-GAAP) 580 807 |
|  | Net Interest Income - Tax Equivalent (Non-GAAP) $79,799 $88,571 |
|  | Average Earning Assets $3,924,875 $3,888,992 |
|  | Net Interest Margin (Non-GAAP)\* 2.72% 3.04% |
| 4. | 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 financial performance. The efficiency ratio is defined as the ratio of our non-interest expense to our net gross income (which equals our tax-equivalent net interest income plus non-interest income, as adjusted). See "Use of Non-GAAP Financial Measures" on page 51. |
| \* Year-to-date ratios have been annualized. |  |

55

*Average Consolidated Balance Sheets and Net Interest Income Analysis*

*(Dollars In Thousands)*

| Three Months Ended September 30: | 2023 Average Balance | Interest Income/ Expense | Rate Earned/ Paid | 2022 Average Balance | Interest Income/ Expense | Rate Earned/ Paid |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Interest-Bearing Deposits at Banks | $131,814 | $1,805 | 5.43% | $209,001 | $1,201 | 2.28 |
| Investment Securities: |  |  |  |  |  |  |
| Fully Taxable | 616,020 | 2,924 | 1.88 | 651,899 | 2,603 | 1.58 |
| Exempt from Federal Taxes | 129,673 | 689 | 2.11 | 169,153 | 785 | 1.84 |
| Loans | 3,096,240 | 36,699 | 4.70 | 2,872,066 | 29,618 | 4.09 |
| Total Earning Assets | 3,973,747 | 42,117 | 4.20 | 3,902,119 | 34,207 | 3.48 |
| Allowance for Credit Losses | (31,386) |  |  | (28,006) |  |  |
| Cash and Due From Banks | 32,874 |  |  | 32,475 |  |  |
| Other Assets | 134,760 |  |  | 141,150 |  |  |
| Total Assets | $4,109,995 |  |  | $4,047,738 |  |  |
| Deposits: |  |  |  |  |  |  |
| Interest-Bearing Checking Accounts | $795,627 | 1,156 | 0.58 | $996,116 | 267 | 0.11 |
| Savings Deposits | 1,505,916 | 9,729 | 2.56 | 1,549,451 | 2,469 | 0.63 |
| Time Deposits of $250,000 or More | 152,738 | 1,466 | 3.81 | 49,459 | 89 | 0.71 |
| Other Time Deposits | 257,710 | 2,051 | 3.16 | 136,834 | 150 | 0.43 |
| Total Interest-Bearing Deposits | 2,711,991 | 14,402 | 2.11 | 2,731,860 | 2,975 | 0.43 |
| Borrowings | 183,452 | 2,143 | 4.63 | — | — |  |
| Junior Subordinated Obligations Issued to Unconsolidated Subsidiary Trusts | 20,000 | 173 | 3.43 | 45,000 | 283 | 2.50 |
| Finance Leases | 5,075 | 46 | 3.60 | 5,125 | 48 | 3.72 |
| Total Interest-bearing Liabilities | 2,920,518 | 16,764 | 2.28 | 2,781,985 | 3,306 | 0.47 |
| Noninterest-bearing deposits | 779,037 |  |  | 866,659 |  |  |
| Other Liabilities | 47,739 |  |  | 37,419 |  |  |
| Total Liabilities | 3,747,294 |  |  | 3,686,063 |  |  |
| Stockholders’ Equity | 362,701 |  |  | 361,675 |  |  |
| Total Liabilities and Stockholders’ Equity | $4,109,995 |  |  | $4,047,738 |  |  |
| Net Interest Income |  | $25,353 |  |  | $30,901 |  |
| Net Interest Spread |  |  | 1.92% |  |  | 3.01% |
| Net Interest Margin |  |  | 2.53% |  |  | 3.14% |

56

*Average Consolidated Balance Sheets and Net Interest Income Analysis*

*(GAAP Basis)*

*(Dollars In Thousands)*

| Nine Months Ended September 30: | 2023 Average Balance | Interest Income/ Expense | Rate Earned/ Paid | 2022 Average Balance | Interest Income/ Expense | Rate Earned/ Paid |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Interest-Bearing Deposits at Banks | $101,104 | $3,958 | 5.23% | $289,681 | $1,826 | 0.84% |
| Investment Securities: |  |  |  |  |  |  |
| Fully Taxable | 635,126 | 8,823 | 1.86% | 638,504 | 7,236 | 1.52% |
| Exempt from Federal Taxes | 146,736 | 2,256 | 2.06% | 175,086 | 2,422 | 1.85% |
| Loans | 3,041,909 | 103,203 | 4.54% | 2,785,721 | 82,263 | 3.95% |
| Total Earning Assets | 3,924,875 | 118,240 | 4.03% | 3,888,992 | 93,747 | 3.22% |
| Allowance for Credit Losses | (30,591) |  |  | (27,579) |  |  |
| Cash and Due From Banks | 30,720 |  |  | 30,370 |  |  |
| Other Assets | 134,310 |  |  | 146,750 |  |  |
| Total Assets | $4,059,314 |  |  | $4,038,533 |  |  |
| Deposits: |  |  |  |  |  |  |
| Interest-Bearing Checking Accounts | $874,132 | 2,346 | 0.36 | $1,024,087 | 629 | 0.08 |
| Savings Deposits | 1,494,976 | 23,830 | 2.13 | 1,549,610 | 3,778 | 0.33 |
| Time Deposits of $250,000 or More | 127,230 | 3,159 | 3.32 | 52,251 | 143 | 0.37 |
| Other Time Deposits | 203,047 | 3,721 | 2.45 | 132,948 | 370 | 0.37 |
| Total Interest-Bearing Deposits | 2,699,385 | 33,056 | 1.64 | 2,758,896 | 4,920 | 0.24 |
| Borrowings | 151,887 | 5,309 | 4.67 | (1) | — | — |
| Junior Subordinated Obligations Issued to Unconsolidated Subsidiary Trusts | 20,000 | 513 | 3.43 | 51,081 | 918 | 2.40 |
| Finance Leases | 5,088 | 143 | 3.76 | 5,139 | 145 | 3.77 |
| Total Interest-Bearing Liabilities | 2,876,360 | 39,021 | 1.81 | 2,815,115 | 5,983 | 0.28 |
| Noninterest-bearing deposits | 777,994 |  |  | 824,674 |  |  |
| Other Liabilities | 42,506 |  |  | 35,720 |  |  |
| Total Liabilities | 3,696,860 |  |  | 3,675,509 |  |  |
| Stockholders’ Equity | 362,454 |  |  | 363,024 |  |  |
| Total Liabilities and Stockholders’ Equity | $4,059,314 |  |  | $4,038,533 |  |  |
| Net Interest Income |  | $79,219 |  |  | $87,764 |  |
| Net Interest Spread |  |  | 2.22% |  |  | 2.94% |
| Net Interest Margin |  |  | 2.70% |  |  | 3.02% |

57

### OVERVIEW

The following discussion and analysis focuses on and reviews the results of operations for the three-month period ended September 30, 2023 and the financial conditions as of September 30, 2023 and 2022. The discussion below should be read in conjunction with the selected quarterly and annual information set forth above and the Unaudited Interim Consolidated Financial Statements and other financial data presented elsewhere in this Report. When necessary, prior-year financial information has been reclassified to conform to the current-year presentation.

***Summary of Q3 2023 Financial Results:*** Net income for the third quarter of 2023 was $7.7 million, increasing from $6.0 million in the second quarter of 2023 and decreasing from $12.2 million in the third quarter of 2022. The increase from the second quarter of 2023 was primarily due to an increase in interest and dividend income of $2.1 million, an increase of $1.1 million in non-interest income and a decrease in non-interest expense of $0.6 million, partially offset by an increase of $2.5 million in interest expense. The decline from the the same period in the prior year was primarily due to an increase of $13.5 million in interest expense partially offset by an increase in interest and dividend income of $7.9 million.

Diluted earnings per share (diluted EPS) for the first quarter of 2023 was $0.46, a decrease from $0.72 reported for the third quarter of 2022. Return on average equity (ROE) for the third quarter of 2023 decreased to 8.47%, as compared to a ROE of 13.34% for the quarter ended September 30, 2022. Return on average assets (ROA) for the third quarter of 2023 was 0.75%, a decrease from an ROA of 1.19% for the quarter ended September 30, 2022.

Total loans reached a record high of $3.1 billion as of September 30, 2023. Loan growth for the third quarter of 2023 was $68.7 million, and $155.4 million from December 31, 2022. Loan growth was spread across all segments.

Arrow entered into two pay-fixed PLM fair value swaps, with total notional amounts of $250 million and $50 million, respectively. The transaction is accretive to interest income, adding more than $2 million annually. Rising interest rates will increase the net interest income benefit, while falling rates will reduce the benefit.

At September 30, 2023, deposit balances were $3.7 billion, an increase of $164.3 million from June 30, 2023 and $168.1 million from December 31, 2022. Overall in 2023, the deposit mix has continued to shift from non-interest bearing accounts to higher cost money market and time deposit accounts. Seasonal municipal deposits help drive an increase in demand deposits of $38.9 million in the third quarter.

Net interest income for the third quarter was $25.4 million, decreasing 1.6% from $25.8 million in the second quarter of 2023 and 18.0% from $30.9 million in the comparable quarter of 2022. Total interest and dividend income was $42.1 million for the third quarter of 2023, an increase from $40.0 million in the second quarter of 2023 and from $34.2 million for the quarter ended September 30, 2022. These increases are driven by loan growth and higher loan rates. Interest expense for the third quarter of 2023 was $16.8 million, an increase from $14.2 million for the second quarter of 2023 and from $3.3 million for the comparable quarter ended September 30, 2022. The increases for both comparison periods were driven by higher deposit rates and changes in deposit composition.

Net interest margin was 2.53% for the quarter, compared to 2.61% for the second quarter of 2023 and 3.14% for the third quarter of 2022. The decrease in net interest margin compared to the second quarter in 2023 as well as the third quarter of 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 costs products such as money market savings and time deposits.

Non-interest income for the three months ended September 30, 2023, was $8.1 million, compared to $6.9 million in the second quarter of 2023 and $7.8 million in the comparable quarter of 2022. Income from fiduciary activities, which includes Wealth Management services, was fairly consistent to the comparable prior-year quarter. Year to date income from fiduciary activities trail the prior year due to continued declining market performance. Fees and other services to customers was consistent with the linked quarter of 2023, but declined year-over-year due to lower interchange fees. Other income increased from both the second quarter and the previous year as a result of bank owned life insurance proceeds.

Non-interest expense for the third quarter of 2023 was $23.5 million, a decrease from $24.1 million in the second quarter of 2023 and an increase from $21.4 million for the third quarter of 2022. The increase from the prior year was in large part related to $1.1 million of additional legal and professional fees incurred in the third quarter of 2023 associated with the delay in the filing of the 2022 Form 10-K and the Quarterly Report on Form 10-Q for the quarter ended March 31, 2023 (the "First Quarter Form 10-Q"), as well as an increase in technology costs and costs related to FDIC insurance. Total year to date expenses related to the delayed filings were $4.1 million.

For the third quarter of 2023, the provision for credit losses was $354 thousand compared to $948 thousand in the second quarter of 2023 and $1.7 million in the prior-year quarter. The key drivers for the provision for credit losses in the third quarter of 2023 were loan growth, charge-offs and to a lesser extent changes to the economic forecast factors embedded in the allowance model. The provision was partially offset by the qualitative factors related to the residential loan portfolio, which continue to indicate local market conditions performing well above the Case-Shiller U.S. National Home Price Index, which is utilized in the economic forecast.

The changes in net income, net interest income and net interest margin between the three-month periods are discussed in detail under the heading "RESULTS OF OPERATIONS," beginning on page 74.

***Regulatory Capital and Change in Stockholders' Equity:*** At September 30, 2023, Arrow continued to exceed all required minimum capital ratios under the current bank regulatory capital rules (the "Capital Rules") as implemented under the Dodd-Frank Wall Street Reform and Consumer Protection Act ("Dodd-Frank") at both the holding company and bank levels. At that date, both subsidiary banks, 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 remain applicable to Arrow and both subsidiary banks.

Stockholders’ equity was $360.0 million at September 30, 2023, a decrease of $1.4 million or 0.4%, from the June 30, 2023 level of $361.4 million, and an increase of $6.5 million, or 1.8%, from the December 31, 2022 level of $353.5 million The increase in stockholders' equity over the first nine months of 2023 principally reflected the following factors: the addition of (i) $22.4 million of net income for the period plus (ii) the issuance of $1.3 million of common stock through employee benefit and dividend reinvestment plans reduced by (iii) other comprehensive loss of $2.9 million, (iv) cash dividends of $13.4 million and (v) repurchases of common stock of $848 thousand. 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 6, and are discussed in more detail in the next section.

At September 30, 2023, book value per share was $21.12, up 4.0% over the prior-year level. Tangible book value per share (a non-GAAP measure that deducts intangible assets from stockholders' equity) was $19.76, an increase of $0.84, or 4.4%, over the level as of September 30, 2022. See the disclosure on page 51 related to the use of non-GAAP financial measures including tangible book value.

On September 30, 2023, Arrow's closing stock price was $17.02, representing a trading multiple of 0.86 to tangible book value. In the third quarter of 2023, Arrow paid a quarterly cash dividend of $0.26. Further discussion of dividends is included in the Capital Components; Stock Repurchases; Dividends section located on page 72.

***Loan Quality:*** Net charge-offs for the third quarter of 2023 were $412 thousand as compared to $573 thousand for the comparable 2022 quarter. The ratio of net charge-offs to average loans (annualized) was 0.05% for the three month period ended September 30, 2023, a decrease from 0.08% with the three month period ended September 30, 2022. The increase in delinquent loans is primarily attributable to one commercial loan relationship. See Footnote 5, Loans, for additional discussion.

For the third quarter of 2023, the provision for credit losses was $354 thousand and a credit for estimated credit losses on off-balance sheet credit exposures was $192 thousand. The allowance for credit losses was $31.1 million on September 30, 2023, which represented 0.99% of loans outstanding, as compared to 1.00% on September 30, 2022.

Nonperforming loans were $6.3 million at September 30, 2023, representing 0.20% of period-end loans, a decrease from the September 30, 2022 ratio of 0.32% and a decrease from the June 30, 2023 ratio of 0.21%. The ratio continues to reasonably compare with the weighted average ratio of the peer group of 0.39% at June 30, 2023. Nonperforming assets of $6.9 million at September 30, 2023 represented 0.16% of period-end assets down from 0.24% at September 30, 2022.

***Loan Segments:*** As of September 30, 2023, total loans grew by $155.4 million, or 5.2%, as compared to the balance at December 31, 2022. The largest increase was in the residential real estate loan portfolio which increased $77.6 million, or 7.2%. Consumer loans increased $42.5 million, or 4.0%, primarily comprised of automobile loans. Commercial and commercial real estate loans increased by $35.4 million, or 4.2%, from December 31, 2022.

- **Commercial and Commercial Real Estate Loans:** Combined, these loans comprise 28.1% of the total loan portfolio at period-end. Commercial property values in Arrow's region have largely remained stable, however, there remains uncertainty surrounding market conditions due to inflation and the rising interest rate environment. Appraisals on nonperforming and watched CRE loan properties are updated as deemed necessary, usually when the loan is downgraded or when there has been significant market deterioration since the last appraisal.
- **Consumer Loans:** These loans (primarily automobile loans) comprised 35.3% of the total loan portfolio at period-end. Consumer automobile loans at September 30, 2023, were 99.6% of this portfolio segment. The vast majority of automobile loans are initiated through the purchase of vehicles by consumers with automobile dealers. As of September 30, 2023, demand has slowed as a result of current economic conditions. Inflation and higher rates may continue to limit the potential growth in this category.
- **Residential Real Estate Loans:** These loans, including home equity loans, made up 36.6% of the total loan portfolio at period-end. Demand for residential real estate has continued but weakened as interest rates have increased. A continuous elevated rate environment may impact future demand. Arrow originated nearly all of the residential real estate loans currently held in the loan portfolio and applies conservative underwriting standards to loan originations. Arrow has historically sold a portion of residential real estate mortgage originations into the secondary market. The ratio of the sales of originations to total originations tends to fluctuate from period to period based on market conditions and other factors. The rate at which mortgage loan originations are sold in future periods will depend on various circumstances, including prevailing mortgage rates, other lending opportunities, capital and liquidity needs, and the availability of a market for such transactions.

***Liquidity and Access to Credit Markets:*** Arrow has not experienced any liquidity events or special concerns in recent years or thus far in 2023. Arrow’s liquidity position provides the necessary flexibility to address any unexpected near-term liquidity needs. Interest-bearing cash balances at September 30, 2023 were $255.0 million compared to $328.6 million at September 30, 2022. Contingent lines of credit are also available. Operating collateralized lines of credit are established and available through the FHLBNY, FRB and other bank lines totaling approximately $1.5 billion. The general terms of Arrow's lines of credit have not changed significantly in recent periods (see the general liquidity discussion on page 72). Historically, Arrow has principally relied on asset-based liquidity (i.e., funds in overnight investments and cash flow from maturing investments and loans) with liability-based liquidity as a secondary source of funds (the main liability-based sources are an overnight borrowing arrangement with correspondent banks, an arrangement for overnight borrowing and term credit advances from the FHLBNY, and an additional arrangement for short-term advances at the Federal Reserve Bank discount window). Regular liquidity stress tests and tests of the contingent liquidity plan are performed to ensure that an adequate amount of available funds can be generated to meet a wide variety of potential liquidity crises.

***Visa Class B Common Stock:*** Arrow's subsidiary bank, GFNB, like other Visa member banks, bears some indirect contingent liability for Visa's direct liability arising out of certain antitrust claims involving merchant discounts to the extent that Visa's liability might exceed the amount funded in its litigation escrow account. On December 13, 2019, the Court granted final approval to a settlement in this class action lawsuit. On January 3, 2020 an appeal of the final-approved order was filed with the court. On December 16, 2021, the second circuit court of appeals set oral arguments regarding objections to final approval of the settlement for March 16, 2022. On March 16, 2022, the Second Circuit Court of Appeals heard oral arguments regarding objections to final approval of the settlement. On April 25, 2023, the Court of Appeals for the Second Circuit denied certain objectors’ request for panel rehearing or, in the alternative, rehearing en banc. It is unknown if any party will pursue further appeals to the U.S Supreme Court. When the appeals process is resolved and assuming the balance in the litigation escrow account is sufficient to cover the litigation claims and related expenses, Arrow could potentially realize a gain on the receipt of Visa Class A common stock. At September 30, 2023, GFNB held 27,771 shares of Visa Class B common stock, and utilizing the conversion ratio to Class A common stock at that time, these Class B shares would convert to approximately 44,000 shares of Visa Class A common stock. Since the litigation settlement is not certain, Arrow has not recognized any economic value for these shares.

### CHANGE IN FINANCIAL CONDITION

### Summary of Selected Consolidated Balance Sheet Data

(Dollars in Thousands)

|  | At Period-End 9/30/2023 | 12/31/2022 | 9/30/2022 | $ Change From December | $ Change From September | % Change From December (not annualized) | % Change From September |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Interest-Bearing Bank Balances | $254,961 | $32,774 | $328,557 | $222,187 | $(73,596) | 677.9% | (22.4)% |
| Securities Available-for-Sale | 519,240 | 573,495 | 575,054 | (54,255) | (55,814) | (9.5)% | (9.7)% |
| Securities Held-to-Maturity | 140,577 | 175,364 | 182,178 | (34,787) | (41,601) | (19.8)% | (22.8)% |
| Equity Securities | 1,960 | 2,174 | 2,126 | (214) | (166) | (9.8)% | (7.8)% |
| Loans (1) | 3,138,617 | 2,983,207 | 2,924,794 | 155,410 | 213,823 | 5.2% | 7.3% |
| Allowance for Credit Losses | 31,112 | 29,952 | 29,232 | 1,160 | 1,880 | 3.9% | 6.4% |
| Earning Assets (1) | 4,060,465 | 3,773,078 | 4,017,429 | 287,387 | 43,036 | 7.6% | 1.1% |
| Total Assets | $4,272,911 | $3,969,509 | $4,232,778 | $303,402 | $40,133 | 7.6% | 0.9% |
| Noninterest-Bearing Deposits | $798,392 | $836,871 | $910,221 | $(38,479) | $(111,829) | (4.6)% | (12.3)% |
| Interest-Bearing Checking Accounts | 920,250 | 997,694 | 1,113,850 | (77,444) | (193,600) | (7.8)% | (17.4)% |
| Savings Deposits | 1,496,193 | 1,454,364 | 1,584,373 | 41,829 | (88,180) | 2.9% | (5.6)% |
| Time Deposits over $250,000 | 167,614 | 76,224 | 59,059 | 91,390 | 108,555 | 119.9% | 183.8% |
| Other Time Deposits | 284,036 | 133,211 | 127,602 | 150,825 | 156,434 | 113.2% | 122.6% |
| Total Deposits | $3,666,485 | $3,498,364 | $3,795,105 | $168,121 | $(128,620) | 4.8% | (3.4)% |
| Borrowings | $174,300 | $54,800 | $25,000 | $119,500 | $149,300 | 218.1% | 597.2% |
| Junior Subordinated Obligations Issued to Unconsolidated Subsidiary Trusts | 20,000 | 20,000 | 20,000 | — | — | —% | —% |
| Stockholders' Equity | 360,014 | 353,538 | 345,550 | 6,476 | 14,464 | 1.8% | 4.2% |

(1) Includes Nonaccrual Loans.

***Changes in Earning Assets:*** The loan portfolio at September 30, 2023, was $3.1 billion, an increase of $155.4 million, or 5.2%, from the December 31, 2022 level and up by $213.8 million, or 7.3%, from the September 30, 2022 level. The following trends were experienced in our largest segments:

- **Commercial and commercial real estate loans:** This segment of the loan portfolio increased by $35.4 million, or 4.2%, during the first nine months of 2023. In the first nine months of 2023, loan growth has slowed as a result of the current rate environment.
- **Consumer loans (primarily automobile loans through indirect lending):** As of September 30, 2023, these loans, primarily auto loans originated through dealerships in New York and Vermont, increased by $42.5 million, or 4.0%, from the December 31, 2022 balance. Inflation and rising rates may continue to slow demand.
- **Residential real estate loans:** This segment increased during the first nine months of 2023 by $77.6 million, or 7.2%. A deterioration of economic conditions may continue to reduce loan production for the remainder of the year.

***Changes in Sources of Funds:*** Deposit balances reached $3.7 billion, down $128.6 million, or 3.4%, from the prior-year level and increased $168.1 million from December 31, 2022. Noninterest-bearing deposits represented 21.8% of total deposits at September 30, 2023, compared to 24.0% of total deposits on September 30, 2022. At September 30, 2023, total time deposits were $451.6 million. Municipal deposits increased $110.0 million, or 12.6% from September 30, 2022. Total borrowings were $174.3 million, an increase from $25.0 million at September 30, 2022. In the second quarter of 2023, Arrow borrowed $150 million as part of the BTFP primarily replacing FHLB advances. The BTFP was created to support American businesses and households by making additional funding available to eligible depository institutions to help assure banks have the ability to meet the needs of all their depositors.

***Municipal Deposits:*** Fluctuations in balances of interest-bearing checking accounts are often the result of timing and behavior of municipal deposits. Municipal deposits have historically averaged between 20% to 30% of total deposits. Municipal deposits are typically placed in interest-bearing checking, savings and various time deposit accounts.

In general, there is a seasonal pattern to municipal deposits which dip to a low point in August each year. Account balances tend to increase throughout the fall and into early winter from tax deposits, flatten out after the beginning of the ensuing calendar year, and increase again at the end of March from the electronic deposit of NYS aid payments to school districts. In addition to seasonal behavior, the overall level of municipal deposit balances fluctuates from year-to-year as a result of local economic factors as well as competition from other banks and non-bank entities.

Arrow uses reciprocal deposits for a select group of municipalities to reduce the amount of investment securities required to be pledged as collateral for municipal deposits where municipal deposits in excess of the FDIC insurance coverage limits were transferred to other participating banks, divided into portions so as to qualify such transferred deposits for FDIC insurance coverage at each transferee bank. In return, reciprocal amounts are transferred to Arrow in equal amounts of deposits from the participant banks. The balances of reciprocal deposits were $618.9 million and $557.6 million at September 30, 2023 and September 30, 2022, respectively.

***Uninsured Deposits***: Arrow's deposit base includes both insured and uninsured deposits. Arrow continually monitors levels and composition of uninsured deposits. Uninsured deposit balances at September 30, 2023 were less than 30% of the total deposit base.

### FINANCIAL CONDITION

### Investment Portfolio Trends

The table below presents the changes in the period-end balances for available-for-sale, held-to-maturity and equity securities from December 31, 2022 to September 30, 2023 (in thousands):

*(Dollars in Thousands)*

| . Securities Available-for-Sale: | Fair Value at Period-End 9/30/2023 | 12/31/2022 | Change | Net Unrealized Gains (Losses) For Period Ended 9/30/2023 | 12/31/2022 | Change |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| U.S. Agency Securities | $176,421 | $175,199 | $1,222 | $(13,579) | $(14,801) | $1,222 |
| State and Municipal Obligations | 280 | 340 | (60) | — | — | — |
| Mortgage-Backed Securities | 341,739 | 397,156 | (55,417) | (56,584) | (50,599) | (5,985) |
| Corporate and Other Debt Securities | 800 | 800 | — | (200) | (200) | — |
| Total | $519,240 | $573,495 | $(54,255) | $(70,363) | $(65,600) | $(4,763) |
| Securities Held-to-Maturity: |  |  |  |  |  |  |
| State and Municipal Obligations | $125,813 | $160,470 | $(34,657) | $(5,204) | $(3,130) | $(2,074) |
| Mortgage-Backed Securities | 8,998 | 11,153 | (2,155) | (562) | (611) | 49 |
| Total | $134,811 | $171,623 | $(36,812) | $(5,766) | $(3,741) | $(2,025) |
| Equity Securities | $1,960 | $2,174 | $(214) | $— | $— | $— |

The table below presents the weighted average yield for available-for-sale and held-to-maturity securities as of September 30, 2023 (in thousands).

| Securities Available-for-Sale: | September 30, 2023 Within One Year Amount | Yield | After One But Within Five Years Amount | Yield | After Five But Within Ten Years Amount | Yield | After Ten Years Amount | Yield | Total Amount |  | Yield |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| U.S. Agency Securities | $15,000 | 3.5% | $175,000 | 1.7% | $— | —% | $— | —% | $190,000 | 190000000 | 1.8% |
| State and Municipal Obligations | — | —% | — | —% | 280 | 6.8% |  | —% | 280 |  | 6.8% |
| Mortgage-Backed Securities | 586 | 1.7% | 215,671 | 1.9% | 182,066 | 1.7% | — | —% | 398,323 |  | 1.8% |
| Corporate and Other Debt Securities |  | —% |  | —% | 1,000 | 8.3% | — | —% | 1,000 |  | 8.3% |
| Total | $15,586 | 3.4% | $390,671 | 1.8% | $183,346 | 1.7% | $— | —% | $589,603 |  | 1.8% |
| Securities Held-to-Maturity: |  |  |  |  |  |  |  |  |  |  |  |
| State and Municipal Obligations | $56,686 | 2.9% | $71,994 | 2.5% | $2,308 | 3.7% | $29 | 6.7% | $131,017 |  | 2.7% |
| Mortgage-Backed Securities | — | —% | 9,560 | 2.5% | — | —% | — | —% | 9,560 |  | 2.5% |
| Corporate and Other Debt Securities | — | —% | — | —% | — | —% | — | —% | — |  | —% |
| Total | $56,686 | 2.9% | $81,554 | 2.5% | $2,308 | 3.7% | $29 | 6.7% | $140,577 |  | 2.7% |

At September 30, 2023, Arrow held no investment securities in the securities portfolios that consisted of or included, directly or indirectly, obligations of foreign governments or governmental agencies of foreign issuers.

In the periods referenced above, mortgage-backed securities consisted solely of mortgage pass-through securities and collateralized mortgage obligations (CMOs) issued or guaranteed by U.S. federal agencies or by government-sponsored enterprises (GSEs). Mortgage pass-through securities provide to the investor monthly portions of principal and interest pursuant to the contractual obligations of the underlying mortgages. CMOs are pools of mortgage-backed securities, the repayments on which have generally been separated into two or more components (tranches), where each tranche has a separate estimated life and yield. Arrow's practice has been to purchase pass-through securities and CMOs that are issued or guaranteed by U.S. federal agencies or GSEs, and the tranches of CMOs purchased are generally those having shorter average lives and/or durations. Lower market interest rates and/or payment deferrals on underlying loans that make up mortgage-backed security collateral may impact cashflows.

In the periods referenced above, U.S. Government & Agency Obligations consisted solely of agency bonds issued by GSEs. These securities generally pay fixed semi-annual coupons with principle payments at maturity. For some, callable options are included that may impact the timing of these principal payments. Arrow's practice has been to purchase agency securities that are issued or guaranteed by GSEs with limited embedded optionality (call features). Final maturities are generally less than 5 years.

Arrow evaluates available-for-sale debt securities in unrealized loss positions at each measurement date to determine whether the decline in the fair value below the amortized cost basis (impairment) is due to credit-related factors or non-credit related factors. Any impairment that is not credit related is recognized in other comprehensive income, net of applicable taxes. Credit-related impairment is recognized within the allowance for credit losses on the balance sheet, limited to the amount by which the amortized cost basis exceeds the fair value, with a corresponding adjustment to earnings via credit loss expense. Arrow determined that at September 30, 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. The recent rising interest rate environment resulted in an increase in unrealized losses versus the comparable prior period. Arrow does not intend to sell, nor is it more likely than not that Arrow will be required to sell any securities before recovery of its amortized cost basis, which may be at maturity. Therefore, Arrow carried no allowance for credit loss at September 30, 2023 and there was no credit loss expense recognized by Arrow with respect to the securities portfolio during the nine months ended September 30, 2023.

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 September 30, 2023.

Changes in net unrealized gains or losses during recent periods have been primarily attributable to changes in market rates during the periods in question and not due to the credit-worthiness of the issuers.

### Investment Sales, Purchases and Maturities

There were no sales of investment securities within the nine month periods ended September 30, 2023 or 2022.

The following table summarizes purchases of investment securities within the available-for-sale and held-to-maturity portfolios for the nine month periods ended September 30, 2023 and 2022, as well as proceeds from the maturity and calls of investment securities within each portfolio for the respective periods presented:

*(In Thousands)*

| Purchases: Available-for-Sale Portfolio | Three Months Ended 9/30/2023 | 9/30/2022 | Nine Months Ended 9/30/2023 | 9/30/2022 |
| --- | ---: | ---: | ---: | ---: |
| U.S. Agency Securities | $— | $15,000 | $— | $70,000 |
| Mortgage-Backed Securities | — | 24,625 | — | 79,674 |
| Total Purchases | $— | $39,625 | $— | $149,674 |
| **Maturities & Calls** | $16,365 | $18,960 | $48,499 | $61,620 |

*(In Thousands)*

| Purchases: Held-to-Maturity Portfolio | Three Months Ended 9/30/2023 | 9/30/2022 | Nine Months Ended 9/30/2023 | 9/30/2022 |
| --- | ---: | ---: | ---: | ---: |
| State and Municipal Obligations | $4,938 | $4,802 | $7,490 | $10,293 |
| **Maturities & Calls** | $7,721 | $4,575 | $41,919 | $24,231 |

### Loan Trends

The following three tables present, for each of the last five quarters, the quarterly average balances by loan type, the percentage of total loans represented by each loan type and the annualized yield of each loan category:

### Quarterly Average Loan Balances

(Dollars in Thousands)

|  | Quarter Ended 9/30/2023 | 6/30/2023 | 3/31/2023 | 12/31/2022 | 9/30/2022 |
| --- | ---: | ---: | ---: | ---: | ---: |
| Commercial excluding PPP Loans | $147,585 | $135,370 | $135,670 | $141,419 | $134,986 |
| PPP Loans | — | — | — | — | 637 |
| Commercial Real Estate | 727,060 | 722,753 | 710,719 | 674,420 | 661,471 |
| Consumer | 1,094,994 | 1,081,838 | 1,070,314 | 1,065,467 | 1,047,470 |
| Residential Real Estate | 1,126,601 | 1,096,449 | 1,075,225 | 1,070,241 | 1,027,502 |
| Total Loans | $3,096,240 | $3,036,410 | $2,991,928 | $2,951,547 | $2,872,066 |

64

### Percentage of Total Quarterly Average Loans

|  | Quarter Ended 9/30/2023 | 6/30/2023 | 3/31/2023 | 12/31/2022 | 9/30/2022 |
| --- | ---: | ---: | ---: | ---: | ---: |
| Commercial | 4.8% | 4.5% | 4.5% | 4.8% | 4.7% |
| Commercial Real Estate | 23.5% | 23.8% | 23.8% | 22.8% | 23.0% |
| Consumer | 35.4% | 35.6% | 35.8% | 36.1% | 36.5% |
| Residential Real Estate | 36.3% | 36.1% | 35.9% | 36.3% | 35.8% |
| Total Loans | 100.0% | 100.0% | 100.0% | 100.0% | 100.0% |

### Quarterly Yield on Loans

|  | Quarter Ended 9/30/2023 | 6/30/2023 | 3/31/2023 | 12/31/2022 | 9/30/2022 |
| --- | ---: | ---: | ---: | ---: | ---: |
| Commercial | 4.89% | 4.53% | 4.28% | 4.18% | 4.17% |
| Commercial Real Estate | 5.19% | 5.09% | 4.73% | 4.57% | 4.60% |
| Consumer | 4.83% | 4.61% | 4.26% | 4.02% | 4.10% |
| Residential Real Estate | 4.26% | 4.17% | 4.10% | 3.80% | 3.78% |
| Total Loans | 4.70% | 4.57% | 4.32% | 4.13% | 4.09% |

The average yield on the loan portfolio was 4.70% for the third quarter of 2023 up 61 basis points from the third quarter of 2022. Market rates have continued to increase, which impacts new loan yields for fixed rate loans, and variable loan yields as these loans reach their repricing dates.

The table below shows the maturity of loans outstanding as of September 30, 2023. Also provided are the amounts due after one year, classified according to fixed interest rates and variable interest rates (in thousands):

|  | September 30, 2023 Within One Year | After One But Within Five Years | After Five But Within 15 Years | After 15 Years | Total |
| --- | ---: | ---: | ---: | ---: | ---: |
| Commercial | $34,271 | $76,654 | $37,009 | $133 | $148,067 |
| Commercial Real Estate | 165,207 | 250,838 | 311,799 | 6,759 | 734,603 |
| Consumer | 10,103 | 575,306 | 521,771 | 458 | 1,107,638 |
| Residential Real Estate | 129,482 | 62,883 | 278,619 | 677,325 | 1,148,309 |
| Total | $339,063 | $965,681 | $1,149,198 | $684,675 | $3,138,617 |
|  |  | After One But Within Five Years | After Five But Within 15 Years | After 15 Years | Total |
| Loans maturing with: |  |  |  |  |  |
| Fixed Interest Rates |  | $671,819 | $907,507 | $681,507 | $2,260,833 |
| Variable Interest Rates |  | 293,862 | 241,691 | 3,168 | 538,721 |
| Total |  | $965,681 | $1,149,198 | $684,675 | $2,799,554 |

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

**Commercial Loans and Commercial Real Estate Loans:** Substantially all commercial and commercial real estate loans in the loan portfolio were extended to businesses or borrowers located in Arrow's regional markets. A portion of the loans in the commercial portfolio have variable rates tied to market indices, such as Prime, SOFR or FHLBNY. PPP loans were previously included within the commercial loan portfolio. The PPP program ended in 2022.

**Consumer Loans:** At September 30, 2023, consumer loans (primarily automobile loans originated through dealerships located in upstate New York and Vermont) continue to be a significant component of Arrow's business, comprising approximately one third of the total loan portfolio.

For credit quality purposes, Arrow assigns potential automobile loan customers into one of four tiers, ranging from lower to higher quality in terms of anticipated credit risk. Arrow's experienced lending staff not only utilizes credit evaluation software tools but also reviews and evaluates each loan individually prior to the loan being funded. Arrow believes that this disciplined approach to evaluating risk has contributed to maintaining the strong credit quality in this portfolio.

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

### Deposit Trends

The following tables provide information on trends in the balance and mix of the deposit portfolio by presenting, for each of the last five quarters, the quarterly average balances by deposit type and the percentage of total deposits represented by each deposit type. The quarterly average balances have declined from the 4th quarter of 2022 as well as the comparable 2022 quarter. In addition, due to the current rate environment and increased competitive pricing, deposits have also migrated to higher cost time deposits.

*Quarterly Average Deposit Balances*

*(Dollars in Thousands)*

|  | Quarter Ended 9/30/2023 | 6/30/2023 | 3/31/2023 | 12/31/2022 | 9/30/2022 |
| --- | ---: | ---: | ---: | ---: | ---: |
| Noninterest-Bearing Deposits | $779,037 | $756,584 | $798,576 | $787,157 | $866,659 |
| Interest-Bearing Checking Accounts | 795,627 | 863,892 | 964,735 | 1,082,267 | 996,116 |
| Savings Deposits | 1,505,916 | 1,504,412 | 1,474,251 | 1,548,293 | 1,549,451 |
| Time Deposits over $250,000 | 152,738 | 133,897 | 94,415 | 65,897 | 49,459 |
| Other Time Deposits | 257,710 | 201,926 | 148,302 | 131,331 | 136,834 |
| Total Deposits | $3,491,028 | $3,460,711 | $3,480,279 | $3,614,945 | $3,598,519 |

|  | Quarter Ended 9/30/2023 | 6/30/2023 | 3/31/2023 | 12/31/2022 | 9/30/2022 |
| --- | ---: | ---: | ---: | ---: | ---: |
| Non-Municipal Deposits | $2,629,532 | $2,528,871 | $2,567,132 | $2,668,704 | $2,719,291 |
| Municipal Deposits | 861,496 | 931,840 | 913,147 | 946,241 | 879,228 |
| Total Deposits | $3,491,028 | $3,460,711 | $3,480,279 | $3,614,945 | $3,598,519 |

### Percentage of Total Quarterly Average Deposits

|  | Quarter Ended 9/30/2023 | 6/30/2023 | 3/31/2023 | 12/31/2022 | 9/30/2022 |
| --- | ---: | ---: | ---: | ---: | ---: |
| Noninterest-Bearing Deposits | 22.3% | 21.9% | 22.9% | 21.8% | 24.1% |
| Interest-Bearing Checking Accounts | 22.8% | 25.0% | 27.7% | 29.9% | 27.7% |
| Savings Deposits | 43.1% | 43.4% | 42.4% | 42.9% | 43.0% |
| Time Deposits over $250,000 | 4.4% | 3.9% | 2.7% | 1.8% | 1.4% |
| Other Time Deposits | 7.4% | 5.8% | 4.3% | 3.6% | 3.8% |
| Total Deposits | 100.0% | 100.0% | 100.0% | 100.0% | 100.0% |

### Quarterly Cost of Deposits

|  | Quarter Ended 9/30/2023 | 6/30/2023 | 3/31/2023 | 12/31/2022 | 9/30/2022 |
| --- | ---: | ---: | ---: | ---: | ---: |
| Demand Deposits | —% | —% | —% | —% | —% |
| Interest-Bearing Checking Accounts | 0.58% | 0.38% | 0.16% | 0.13% | 0.11% |
| Savings Deposits | 2.56% | 2.27% | 1.54% | 1.05% | 0.63% |
| Time Deposits over $250,000 | 3.81% | 3.35% | 2.47% | 1.36% | 0.71% |
| Other Time Deposits | 3.16% | 2.38% | 1.30% | 0.71% | 0.43% |
| Total Deposits | 1.64% | 1.35% | 0.82% | 0.54% | 0.33% |

For the quarter ended September 30, 2023, the total cost of deposits increased 29 basis points from the previous quarter and 131 basis points from the comparable prior year quarter. The Federal Funds rate has continued to increase during the previous five quarters presented. Arrow is well positioned for a variety of rate environments, see Part I, Item 3, entitled "Quantitative and Qualitative Disclosures About Market Risk," on page 78 for further discussion.

### Non-Deposit Sources of Funds

Arrow's other sources of funds include securities sold under agreements to repurchase, term advances from the FHLBNY and BTFP advances. The securities sold under agreements to repurchase are offered to existing customers, short-term in nature and are collateralized by investment securities. The remaining term advance from the FHLBNY is a fixed rate non-callable advance that will mature within one year. The BTFP advances mature in less than 12 months and have a weighted average interest rate of 4.83%.

The $20 million principal amount of Junior Subordinated Obligations Issued to Unconsolidated Subsidiary Trusts listed on the consolidated balance sheet as of September 30, 2023 (i.e., previously issued TRUPs) will, subject to certain limits, continue to qualify as Tier 1 regulatory capital for Arrow until such TRUPs mature or are redeemed. This is further discussed under "Capital Resources" beginning on page 70 of this Report.

### ASSET QUALITY

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

### Summary of the Allowance and Provision for Credit Losses

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

| Loan Balances: | 9/30/2023 | 6/30/2023 | 3/31/2023 | 12/31/2022 | 9/30/2022 |
| --- | ---: | ---: | ---: | ---: | ---: |
| Period-End Loans | $3,138,617 | $3,069,897 | $3,005,352 | $2,983,207 | $2,924,794 |
| Average Loans, Year-to-Date | 3,041,909 | 3,014,292 | 2,991,928 | 2,827,518 | 2,785,721 |
| Average Loans, Quarter-to-Date | 3,096,240 | 3,036,410 | 2,991,928 | 2,951,547 | 2,872,066 |
| Period-End Assets | 4,272,911 | 4,103,653 | 4,114,630 | 3,969,509 | 4,232,778 |
| Allowance for Credit Losses, Year-to-Date: |  |  |  |  |  |
| Allowance for Credit Losses, Beginning of Period | $29,952 | $29,952 | $29,952 | $27,281 | $27,281 |
| Provision for Credit Losses, YTD | 2,856 | 2,502 | 1,554 | 4,798 | 3,389 |
| Loans Charged-off, YTD | (3,812) | (2,608) | (1,328) | (4,143) | (2,883) |
| Recoveries of Loans Previously Charged-off | 2,116 | 1,324 | 606 | 2,016 | 1,445 |
| Net Charge-offs, YTD | (1,696) | (1,284) | (722) | (2,127) | (1,438) |
| Allowance for Credit Losses, End of Period | $31,112 | $31,170 | $30,784 | $29,952 | $29,232 |
| Allowance for Credit Losses, Quarter-to-Date: |  |  |  |  |  |
| Allowance for Credit Losses, Beginning of Period | $31,170 | $30,784 | $29,952 | $29,232 | $28,090 |
| Provision for Credit Losses, QTD | 354 | 948 | 1,554 | 1,409 | 1,715 |
| Loans Charged-off, QTD | (1,204) | (1,280) | (1,328) | (1,261) | (1,147) |
| Recoveries of Loans Previously Charged-off | 792 | 718 | 606 | 572 | 574 |
| Net Charge-offs, QTD | (412) | (562) | (722) | (689) | (573) |
| Allowance for Credit Losses, End of Period | $31,112 | $31,170 | $30,784 | $29,952 | $29,232 |
| Nonperforming Assets, at Period-End: |  |  |  |  |  |
| Nonaccrual Loans | $6,023 | $5,997 | $10,852 | $10,757 | $8,812 |
| Loans Past Due 90 or More Days and Still Accruing Interest | 251 | 467 | 241 | 1,157 | 514 |
| Restructured and in Compliance with Modified Terms | 60 | 67 | 62 | 69 | 82 |
| Total Nonperforming Loans | 6,334 | 6,531 | 11,155 | 11,983 | 9,408 |
| Repossessed Assets | 344 | 342 | 144 | 593 | 604 |
| Other Real Estate Owned | 182 | 182 | — | — | — |
| Total Nonperforming Assets | $6,860 | $7,055 | $11,299 | $12,576 | $10,012 |
| Asset Quality Ratios: |  |  |  |  |  |
| Allowance to Nonperforming Loans | 491.19% | 477.26% | 275.97% | 249.95% | 310.71% |
| Allowance to Period-End Loans | 0.99% | 1.02% | 1.02% | 1.00% | 1.00% |
| Provision to Average Loans (Quarter) (1) | 0.05% | 0.13% | 0.21% | 0.19% | 0.24% |
| Provision to Average Loans (YTD) (1) | 0.13% | 0.17% | 0.21% | 0.17% | 0.16% |
| Net Charge-offs to Average Loans (Quarter) (1) | 0.05% | 0.07% | 0.10% | 0.09% | 0.08% |
| Net Charge-offs to Average Loans (YTD) (1) | 0.07% | 0.09% | 0.10% | 0.08% | 0.07% |
| Nonperforming Loans to Total Loans | 0.20% | 0.21% | 0.37% | 0.40% | 0.32% |
| Nonperforming Assets to Total Assets | 0.16% | 0.17% | 0.27% | 0.32% | 0.24% |
| (1) Annualized |  |  |  |  |  |

### Provision for Credit Losses

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

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

The September 30, 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 slight improvement in the national unemployment rate of approximately 0.33% during the six-quarter forecast period, while forecasted gross domestic product projected a deterioration of approximately 0.42%. The home price index (HPI) forecast declined approximately 1.60% from the previous quarter level. Driven by current economic forecasts, loan growth and net charge offs during the quarter, the third quarter provision for credit losses was $354 thousand. The provision is directionally consistent with both the latest economic forecasts as well as third quarter activity. In addition, Arrow recorded a credit for estimated credit losses on off-balance sheet credit exposures in other liabilities of $192 thousand in the third quarter of 2023.

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

The ratio of the allowance for credit losses to total loans was 0.99% at September 30, 2023, a decrease from 1.00% at December 31, 2022 and 1.00% at September 30, 2022.

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

### Risk Elements

Nonperforming assets at September 30, 2023 amounted to $6.9 million, a decrease from the $12.6 million total at December 31, 2022 and $10.0 million total at September 30, 2022. For the three month periods ended September 30, 2023 and 2022, ratios of nonperforming assets to total assets have remained fairly consistent to the average ratios for the peer group. (See page 49 for a discussion of the peer group.) At June 30, 2023, the ratio of loans past due 90 or more days plus nonaccrual loans plus other real estate owned to total assets was 0.17% as compared to the 0.30% ratio of the peer group at such date (the latest date for which peer group information is available). At September 30, 2023 the ratio was 0.16%.

The following table presents the balance of other non-current loans at period-end as to which interest income was being accrued (i.e., loans 30 to 89 days past due, as defined in bank regulatory guidelines). These non-current loans are not included in nonperforming assets, but entail heightened risk:

*Loans Past Due 30-89 Days and Accruing Interest ($ in 000's)*

|  | 9/30/2023 | 12/31/2022 | 9/30/2022 |
| --- | ---: | ---: | ---: |
| Commercial Loans | $306 | $450 | $156 |
| Commercial Real Estate Loans | 15,764 | — | — |
| Residential Real Estate Loans | 1,711 | 1,779 | 1,456 |
| Consumer Loans - Primarily Indirect Automobile | 16,817 | 18,175 | 13,268 |
| Total Loans Past Due 30-89 Days and Accruing Interest | $34,598 | $20,404 | $14,880 |

At September 30, 2023, the loans in the above-referenced category totaled $34.6 million, an increase of $14.2 million, or 69.6%, from the $20.4 million of such loans at December 31, 2022. The increase is primarily due to a single commercial real estate loan that was delinquent as of September 30, 2023. The loan will be continued to be monitored in the fourth quarter. The September 30, 2023 total of non-current loans equaled 1.10% of loans then outstanding, compared to 0.68% at December 31, 2022 and 0.51% at September 30, 2022.

The number and dollar amount of performing loans that demonstrate characteristics of potential weakness from time-to-time (potential problem loans) typically is a very small percentage of the loan portfolio. See the table of Credit Quality Indicators in Note 4 to the unaudited interim consolidated financial statements. Arrow considers all performing commercial and commercial real estate loans classified as substandard or lower (as reported in Note 4) to be potential problem loans. These loans will continue to be closely monitored and Arrow expects to collect all payments of contractual principal and interest in full on these classified loans.

As of September 30, 2023, Arrow held one other real estate owned property. At this time, Arrow does not expect to acquire a significant number of other real estate properties in the near term as a result of payment defaults or the foreclosure process.

### CAPITAL RESOURCES

### Regulatory Capital Standards

Capital Adequacy Requirements. An important area of banking regulation is the federal banking system's promulgation and enforcement of minimum capitalization standards for banks and bank holding companies.

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

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

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

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

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

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

| Capital Ratio | 2023 |
| --- | ---: |
| Minimum CET1 Ratio | 4.500% |
| Capital Conservation Buffer ("Buffer") | 2.500% |
| Minimum CET1 Ratio Plus Buffer | 7.000% |
| Minimum Tier 1 Risk-Based Capital Ratio | 6.000% |
| Minimum Tier 1 Risk-Based Capital Ratio Plus Buffer | 8.500% |
| Minimum Total Risk-Based Capital Ratio | 8.000% |
| Minimum Total Risk-Based Capital Ratio Plus Buffer | 10.500% |
| Minimum Leverage Ratio | 4.000% |

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

At September 30, 2023, Arrow and its subsidiary banks exceeded by a substantial amount each of the applicable minimum capital ratios established under the Capital Rules, including the minimum CET1 Ratio, the minimum Tier 1 Risk-Based Capital Ratio, the minimum Total Risk-Based Capital Ratio, and the minimum Leverage Ratio, including in the case of each risk-based ratio, the capital buffer.

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

Current Capital Ratios: The table below sets forth the regulatory capital ratios of Arrow and its subsidiary banks under the current Capital Rules, as of September 30, 2023:

|  | Common Equity Tier 1 Capital Ratio | Tier 1 Risk-Based Capital Ratio | Total Risk-Based Capital Ratio | Tier 1 Leverage Ratio |
| --- | ---: | ---: | ---: | ---: |
| Arrow Financial Corporation | 13.17% | 13.84% | 14.94% | 9.94% |
| Glens Falls National Bank & Trust Co. | 13.44% | 13.44% | 14.49% | 9.28% |
| Saratoga National Bank & Trust Co. | 13.09% | 13.09% | 14.33% | 9.97% |
| FDICIA's Prompt Corrective Action - "Well-Capitalized" Standard (2019) | 6.50% | 8.00% | 10.00% | 5.00% |
| Regulatory Minimum | 7.00%(1) | 8.50%(1) | 10.50%(1) | 4.00% |
| (1) Including the fully phased-in 2.50% capital conservation buffer |  |  |  |  |

At September 30, 2023, Arrow and its subsidiary banks exceeded the minimum regulatory capital ratios established under the current Capital Rules and each also qualified as "well-capitalized", the highest category in the new capital classification scheme established by federal bank regulatory agencies under the "prompt corrective action" standards, as described above.

### Capital Components; Stock Repurchases; Dividends

*Stockholders' Equity:* Stockholders’ equity was $360.0 million at September 30, 2023, an increase of $6.5 million, or 1.8%, from the December 31, 2022 level of $353.5 million, and an increase of $14.5 million, or 4.2%, from the prior-year level. The increase in stockholders' equity over the first nine months of 2023 principally reflected the following factors: the addition of (i) $22.4 million of net income for the period plus (ii) the issuance of $1.3 million of common stock through employee benefit and dividend reinvestment plans reduced by (iii) other comprehensive loss of $2.9 million, (iv) cash dividends of $13.4 million and (v) repurchases of common stock of $848 thousand.

*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.

*Stock Repurchase Program:* 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. The Company did not repurchase any shares in the third quarter however through September 30, 2023, Arrow had repurchased $848 thousand of common stock under the 2023 Repurchase Program. This repurchase arrangement does not include repurchases of Arrow's common stock other than through its 2023 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.

*Dividends:* Arrow's common stock is traded on NasdaqGS® under the symbol AROW. The high and low stock prices for the past seven quarters listed below represent actual sales transactions, as reported by NASDAQ. Per share amounts and share counts in the following tables have been restated for the September 26, 2023 3% stock dividend.

| 2022 | Market Price Low | High | Cash Dividends Declared |
| --- | ---: | ---: | ---: |
| First Quarter | $30.28 | $34.86 | $0.255 |
| Second Quarter | 28.75 | 31.83 | 0.255 |
| Third Quarter | 27.84 | 33.90 | 0.255 |
| Fourth Quarter | 27.67 | 35.44 | 0.262 |
| **2023** |  |  |  |
| First Quarter | $23.57 | $33.49 | $0.262 |
| Second Quarter | 17.12 | 24.19 | 0.262 |
| Third Quarter | 16.38 | 21.60 | 0.262 |
| Fourth Quarter (dividend payable December 15, 2023) | TBD | TBD | 0.270 |

|  | Quarter Ended September 30 2023 | 2022 |
| --- | ---: | ---: |
| Cash Dividends Per Share | $0.262 | $0.255 |
| Diluted Earnings Per Share | 0.46 | 0.72 |
| **Dividend Payout Ratio** | **56.96%** | **35.42%** |
| Total Equity (in thousands) | 360,014 | $345,550 |
| Shares Issued and Outstanding (in thousands) | 17,049 | 17,019 |
| **Book Value Per Share** | **$21.12** | **$20.30** |
| Intangible Assets (in thousands) | 23,078 | 23,477 |
| **Tangible Book Value Per Share** | **$19.76** | **$18.92** |

### 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 $519.2 million at September 30, 2023, a decrease of $54.3 million, from the 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 September 30, 2023 of $255.0 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 during the six months ended September 30, 2023.

To support the borrowing relationship with the FHLBNY, Arrow has pledged collateral, including residential mortgage, home equity and commercial real estate loans. At September 30, 2023, Arrow had outstanding collateralized obligations with the FHLBNY of $158.3 million; as of that date, the unused borrowing capacity at the FHLBNY was approximately $449 million. Brokered deposits have also been identified as an available source of funding accessible in a relatively short time period. At September 30, 2023, there were no outstanding brokered deposits. Also, 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 September 30, 2023, the amount available under this facility was approximately $722 million in the aggregate, and there were no advances then outstanding.

Arrow performs regular liquidity stress tests and maintains a contingent liquidity plan to ensure that an adequate amount of available funds can be generated to meet a wide variety of potential liquidity events.

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 funds 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 September 30, 2023, Arrow's basic liquidity ratio, including FHLBNY collateralized borrowing capacity, was 16.7% of total assets, or $542 million in excess of Arrow's internally-set minimum target ratio of 4%.

Arrow did not experience any significant liquidity constraints in the nine month period ended September 30, 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.

### RECENTLY ISSUED ACCOUNTING STANDARDS

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

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

### RESULTS OF OPERATIONS

### Three Months Ended September 30, 2023 Compared With

### Three Months Ended September 30, 2022

### Summary of Earnings Performance

(Dollars in Thousands, Except Per Share Amounts)

|  | Three Months Ended September 30, 2023 | September 30, 2022 | Change | % Change |
| --- | ---: | ---: | ---: | ---: |
| Net Income | $7,743 | $12,163 | $(4,420) | (36.3)% |
| Diluted Earnings Per Share | 0.46 | 0.72 | (0.26) | (36.1)% |
| Return on Average Assets | 0.75% | 1.19% | (0.44)% | (37.0)% |
| Return on Average Equity | 8.47% | 13.34% | (4.87)% | (36.5)% |

Net income was $7.7 million and diluted EPS of $0.46 for the third quarter of 2023, compared to net income of $12.2 million and diluted EPS of $0.72 for the third quarter of 2022. Return on average assets for the third quarter of 2023 was 0.75%, a decrease from 1.19% in the third quarter of 2022. In addition, return on average equity decreased to 8.47% for the third quarter of 2023, from 13.34% in the third quarter of 2022.

The following narrative discusses the quarter-to-quarter changes in net interest income, non-interest income, non-interest expense and income taxes:

### Net Interest Income

### Summary of Net Interest Income

(Dollars in Thousands)

|  | Three Months Ended September 30, 2023 | September 30, 2022 | Change | % Change |
| --- | ---: | ---: | ---: | ---: |
| Interest and Dividend Income | $42,117 | $34,207 | $7,910 | 23.1% |
| Interest Expense | 16,764 | 3,306 | 13,458 | 407.1% |
| Net Interest Income | 25,353 | 30,901 | (5,548) | (18.0)% |
| Average Earning Assets(1) | 3,973,747 | 3,902,119 | 71,628 | 1.8% |
| Average Interest-Bearing Liabilities | 2,920,518 | 2,781,985 | 138,533 | 5.0% |
| Yield on Earning Assets(1) | 4.20% | 3.48% | 0.72% | 20.7% |
| Cost of Interest-Bearing Liabilities | 2.28 | 0.47 | 1.81 | 385.1% |
| Net Interest Spread | 1.92 | 3.01 | (1.09) | (36.2)% |
| Net Interest Margin | 2.53 | 3.14 | (0.61) | (19.4)% |
| Income Earned on PPP Loans included Net Interest Income | $— | $70 | $(70) | (100.0)% |
| Net Interest Income excluding PPP loans | 25,353 | 30,831 | (5,478) | (17.8)% |
| Net Interest Margin excluding PPP loans | 2.53% | 3.14% | (0.61)% | (19.4)% |
| (1) Includes Nonaccrual Loans. |  |  |  |  |

Net interest income for the recently completed quarter decreased by $5.5 million, or 18.0%, from the third quarter of 2022. Interest and fees on loans were $36.7 million for the third quarter of 2023, an increase from $29.6 million for the quarter ending September 30, 2022, primarily due to loan growth and higher loan rates. Interest expense for the third quarter of 2023 was $16.8 million, an increase of $13.5 million versus the comparable quarter ending September 30, 2022, primarily due to higher deposit rates and changes in deposit composition. Net interest margin decreased 61 basis points in the third quarter of 2023 to 2.53%, from 3.14% during the third quarter of 2022. Average earning asset yields were 72 basis points higher as compared to the third quarter of 2022. The cost of interest-bearing liabilities increased 181 basis points from the quarter ended September 30, 2022. Arrow defines net interest margin as net interest income divided by average earning assets, annualized. Further detailed information is presented above under the section entitled "Average Consolidated Balance Sheets and Net Interest Income Analysis" on page 56 and 57 The impact of recent interest rate changes on Arrow's deposit and loan portfolios are discussed above in this Report under the sections entitled "Deposit Trends" on page 66 and "Loan Trends" on page 64.

As discussed previously under the heading "Asset Quality" beginning on page 68, the provision for loan losses for the third quarter of 2023 was $354 thousand, compared to a provision of $1.7 million for the third quarter of 2022.

### Non-interest Income

### Summary of Non-interest Income

(Dollars in Thousands)

|  | Three Months Ended September 30, 2023 | September 30, 2022 | Change | % Change |
| --- | ---: | ---: | ---: | ---: |
| Income From Fiduciary Activities | $2,378 | $2,341 | $37 | 1.6% |
| Fees for Other Services to Customers | 2,761 | 3,071 | (310) | (10.1)% |
| Insurance Commissions | 1,695 | 1,650 | 45 | 2.7% |
| Net Gain on Securities | 71 | 95 | (24) | (25.3)% |
| Net Gain on the Sale of Loans | 21 | 18 | 3 | 16.7% |
| Other Operating Income | 1,124 | 652 | 472 | 72.4% |
| Total Non-interest Income | $8,050 | $7,827 | $223 | 2.8% |

Total non-interest income in the current quarter was $8.1 million, an increase of $0.2 million from the comparable quarter of 2022. Income from fiduciary activities for the third quarter of 2023 increased by 1.6% from the third quarter of 2022. Assets under trust administration and investment management at September 30, 2023 were $1.63 billion, an increase from $1.52 billion at September 30, 2022.

Fees for other services to customers were $2.8 million for the third quarter of 2023, a decrease of $310 thousand or 10.1% from the third quarter of 2022.

Insurance commissions were $1.7 million for the third quarter of 2023, essentially flat as compared to the third quarter of 2022.

Net gain on securities of $71 thousand for the third quarter of 2023 was the result of an increase in the fair value of equity securities from June 30, 2023. Other operating income increased from the comparable prior-year quarter as the result of bank-owned life insurance proceeds.

### Non-interest Expense

### Summary of Non-interest Expense

(Dollars in Thousands)

|  | Three Months Ended September 30, 2023 | September 30, 2022 | Change | % Change |
| --- | ---: | ---: | ---: | ---: |
| Salaries and Employee Benefits | $11,988 | $12,427 | $(439) | (3.5)% |
| Occupancy Expense of Premises, Net | 1,517 | 1,521 | (4) | (0.3)% |
| Technology and Equipment Expense | 4,371 | 4,049 | 322 | 8.0% |
| FDIC and FICO Assessments | 515 | 295 | 220 | 74.6% |
| Amortization | 43 | 48 | (5) | (10.4)% |
| Other Operating Expense | 5,045 | 3,108 | 1,937 | 62.3% |
| Total Non-interest Expense | $23,479 | $21,448 | $2,031 | 9.5% |
| Efficiency Ratio | 69.93% | 55.01% | 14.9% | 27.1% |

Non-interest expense for the third quarter of 2023 was $23.5 million, an increase of $2.0 million, or 9.5%, from the third quarter of 2022. Salaries and benefit expenses decreased $439 thousand, or 3.5%, from the comparable quarter in 2022. Technology expenses in the third quarter increased $322 thousand, or 8.0%, from the third quarter of 2022. In the third quarter of 2023, other operating expenses increased $1.9 million, driven primarily by the legal and professional fees associated with the delay in the filing the 2022 Form 10-K and the 2023 First Quarter Form 10-Q.

### Income Taxes

### Summary of Income Taxes

(Dollars in Thousands)

|  | Three Months Ended September 30, 2023 | September 30, 2022 | Change | % Change |
| --- | ---: | ---: | ---: | ---: |
| Provision for Income Taxes | $1,827 | $3,402 | $(1,575) | (46.3)% |
| Effective Tax Rate | 19.1% | 21.9% | (2.8)% | (12.8)% |

The decrease in the effective tax rate for the three months ended September 30, 2023 compared to the three months ended September 30, 2022 was primarily due to the reduction of pretax income.

### RESULTS OF OPERATIONS

### Nine Months Ended September 30, 2023 Compared With

### Nine Months Ended September 30, 2022

### Summary of Earnings Performance

(Dollars in Thousands, Except Per Share Amounts)

|  | Nine Months Ended September 30, 2023 | September 30, 2022 | Change | % Change |
| --- | ---: | ---: | ---: | ---: |
| Net Income | $22,352 | $36,712 | $(14,360) | (39.1)% |
| Diluted Earnings Per Share | 1.31 | 2.15 | (0.84) | (39.1) |
| Return on Average Assets | 0.74% | 1.22% | (0.48)% | (39.3) |
| Return on Average Equity | 8.25% | 13.52% | (5.27)% | (39.0) |

Net income was $22.4 million and diluted EPS was $1.31 for the first nine months of 2023, compared to net income of $36.7 million and diluted EPS of $2.15 for the first nine months of 2022. ROA for the first nine months of 2023 was 0.74%, a decrease from 1.22% for the first nine months of 2022. In addition, ROE decreased to 8.25% for the first nine months of 2023 from 13.52% for the first nine months of 2022.

The following narrative discusses the period-to-period changes in net interest income, non-interest income, non-interest expense and income taxes:

### Net Interest Income

### Summary of Net Interest Income

(Dollars in Thousands)

|  | Nine Months Ended September 30, 2023 | September 30, 2022 | Change | % Change |
| --- | ---: | ---: | ---: | ---: |
| Interest and Dividend Income | $118,240 | $93,747 | $24,493 | 26.1% |
| Interest Expense | 39,021 | 5,983 | 33,038 | 552.2% |
| Net Interest Income | 79,219 | 87,764 | (8,545) | (9.7)% |
| Average Earning Assets (1) | 3,924,875 | 3,888,992 | 35,883 | 0.9% |
| Average Interest-Bearing Liabilities | 2,876,360 | 2,815,115 | 61,245 | 2.2% |
| Yield on Earning Assets (1) | 4.03% | 3.22% | 0.81% | 25.2% |
| Cost of Interest-Bearing Liabilities | 1.81 | 0.28 | 1.53 | 546.4% |
| Net Interest Spread | 2.22 | 2.94 | (0.72) | (24.5)% |
| Net Interest Margin | 2.70 | 3.02 | (0.32) | (10.6)% |
| Income Earned on PPP Loans included Net Interest Income | $— | $1,574 | $(1,574) | (100.0)% |
| Net Interest Income excluding PPP loans | 79,219 | 86,190 | (6,971) | (8.1)% |
| Net Interest Margin excluding PPP loans | 2.70% | 2.97% | (0.27)% | (9.1)% |
| (1) Includes Nonaccrual Loans. |  |  |  |  |

Net interest income for the first nine months of 2023 decreased $8.5 million, or 9.7%, as compared to the first nine months of 2022. Total loans at September 30, 2023 increased $213.8 million from September 30, 2022. Investments decreased $97.2 million from September 30, 2022. At September 30, 2023, deposit balances were $3.7 billion. The decline of deposits from September 30, 2022 to September 30, 2023 was $128.6 million, or 3.4%. Net interest margin for the first nine months of 2023 decreased 32 basis points to 2.70%, from 3.02% for the first nine months of 2022. Average earning asset yields were 81 basis points higher as compared to the first nine months of 2022, primarily due to higher market rates. The cost of interest-bearing liabilities increased 153 basis points from the first nine months of 2022. Arrow defines net interest margin as net interest income divided by average earning assets, annualized. Further detailed information is presented above under the section entitled "Average Consolidated Balance Sheets and Net Interest Income Analysis." The impact of recent interest rate changes on Arrow's deposit and loan portfolios are discussed above in this Report under the sections entitled "Deposit Trends" on page 66 and "Loan Trends" on page 64.

As discussed previously under the heading "Asset Quality" beginning on page 68, the provision for loan losses for the first nine months of 2023 was $2.9 million, compared to $3.4 million for the first nine months of 2022.

### Non-interest Income

### Summary of Non-interest Income

(Dollars in Thousands)

|  | Nine Months Ended September 30, 2023 | September 30, 2022 | Change | % Change |
| --- | ---: | ---: | ---: | ---: |
| Income From Fiduciary Activities | 7,081 | 7,454 | $(373) | (5.0)% |
| Fees for Other Services to Customers | 8,073 | 8,916 | (843) | (9.5) |
| Insurance Commissions | 4,775 | 4,783 | (8) | (0.2) |
| Net (Loss) Gain on Securities | (214) | 379 | (593) | (156.5) |
| Net Gain on the Sale of Loans | 25 | 80 | (55) | (68.8) |
| Other Operating Income | 1,893 | 2,121 | (228) | (10.7) |
| Total Non-interest Income | $21,633 | $23,733 | $(2,100) | (8.8)% |

Total non-interest income for the first nine months of 2023 was $21.6 million, a decrease of $2.1 million from the first nine months of 2022. Income from fiduciary activities for the first nine months of 2023 decreased by 5.0% from the first nine months of 2022, primarily due to market performance. For the first nine months of 2023, Arrow has been able to maintain a stable customer base.

Fees for other services to customers were $8.1 million for the first nine months of 2023 representing a decrease of $0.8 million, or 9.5%, from the prior year comparative period.

Insurance commissions were $4.8 million for the first nine months of 2023, which was relatively unchanged from the prior year comparable period.

Net loss on security transactions of $214 thousand for the first nine months of 2023 was the result of the decrease in the fair value of equity securities.

Other operating income decreased $228 thousand from the comparable period in 2022, due to gains on other assets received in 2022.

### Noninterest Expense

### Summary of Noninterest Expense

(Dollars in Thousands)

|  | Nine Months Ended September 30, 2023 | September 30, 2022 | Change | % Change |
| --- | ---: | ---: | ---: | ---: |
| Salaries and Employee Benefits | $35,974 | $35,400 | $574 | 1.6% |
| Occupancy Expense of Premises, Net | 4,728 | 4,721 | 7 | 0.1 |
| Technology and Equipment Expense | 13,150 | 11,802 | 1,348 | 11.4 |
| FDIC and FICO Assessments | 1,478 | 893 | 585 | 65.5 |
| Amortization | 132 | 145 | (13) | (9.0) |
| Other Operating Expense | 14,396 | 7,777 | 6,619 | 85.1 |
| Total Noninterest Expense | $69,858 | $60,738 | $9,120 | 15.0 |
| Efficiency Ratio | 68.60% | 54.14% | 14.46% | 26.7% |

Noninterest expense for the first nine months of 2023 was $69.9 million, an increase of $9.1 million, or 15.0%, from the first nine months of 2022. Salaries and benefit expenses increased $574 thousand, or 1.6%, from the comparable period in 2022. Technology expenses increased $1.3 million, or 11.4%, from the first nine months of 2022. Other non-interest expense increased $6.6 million for the first nine months of 2023, as compared to the first nine months of 2022. The majority of the increase in expense was related to additional legal and professional fees associated with the delay in the filing of the 2022 Form 10-K and First Quarter 2023 Form 10-Q.

### Income Taxes

### Summary of Income Taxes

(Dollars in Thousands)

|  | Nine Months Ended September 30, 2023 | September 30, 2022 | Change | % Change |
| --- | ---: | ---: | ---: | ---: |
| Provision for Income Taxes | $5,786 | $10,658 | $(4,872) | (45.7)% |
| Effective Tax Rate | 20.6% | 22.5% | (1.9)% | (8.4)% |

The decrease in the effective tax rate for the nine months ended September 30, 2023 compared to the nine months ended September 30, 2022 was primarily due to the reduction of pretax income.

## Market risk

As filed, 4,676 characters.

### 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 September 30, 2023:

|  | Change in Interest Rate + 200 basis points | - 100 basis points |
| --- | ---: | ---: |
| Calculated change in Net Interest Income - Year 1 | (3.4)% | 0.9% |
| Calculated change in Net Interest Income - Year 2 | 13.5% | 12.4% |

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.

## Controls and procedures

As filed, 6,052 characters.

### CONTROLS AND PROCEDURES

Management, under the supervision and with the participation of the Chief Executive Officer ("CEO") (who is our principal executive officer) and Chief Financial Officer ("CFO") (who is our principal financial officer), evaluated the effectiveness of our disclosure controls and procedures, as defined in Rule 13a-15(e) and 15d15(e) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), as of September 30, 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 this evaluation, management concluded that our internal control over financial reporting was not effective due to the following unremediated material weaknesses identified in our internal control over financial reporting, previously disclosed on the 2022 Form 10-K:

- We did not maintain effective monitoring controls related to 1) Internal Audit’s testing of management’s internal control over financial reporting, 2) the completeness and accuracy of information presented to the Audit Committee by Internal Audit, and 3) the related Audit Committee oversight over Internal Audit’s testing of management’s internal control over financial reporting.
- With regard to the conversion of our core banking information technology system, we did not effectively perform risk assessment procedures to identify the impact of the conversion on our internal control over financial reporting.

The material weaknesses did not result in a material misstatement of our annual or interim financial statements or previously released financial results.For additional information please refer to Part II - Item 9A. of the 2022 Form 10-K.

Prior to filing this Report, we performed relevant and responsive substantive procedures as of September 30, 2023, in order to complete our financial statements and related disclosures. Based on these procedures, management believes that our consolidated financial statements included in this Report have been prepared in accordance with GAAP. Our CEO and CFO have certified that, based on their knowledge, the financial statements, and other financial information included in this Form 10-Q, fairly present in all material respects the financial condition, results of operations, and cash flows of the Company as of the dates, and for the periods presented in this Report.

During the first quarter of 2023 we initiated, and will continue to implement, measures designed to improve our internal control over financial reporting to remediate the deficiencies that comprised the material weaknesses, including engaging 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 As part of management’s remediation efforts in this area, management has now performed a risk assessment around the impact of the core banking system conversion over internal controls over financial reporting. As a result, the Company has 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.

In addition, the Company is in the process of evaluating the assignment of responsibilities of internal and external resources associated with the performance of internal controls over financial reporting and will consider hiring additional resources, contracting external resources, and/or providing 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 controls over financial reporting and to establish and reinforce communication protocols, including required information and expectations to enable personnel to perform internal control responsibilities (e.g., formal training programs and corporate communications).

The material weaknesses set forth above will not be considered remediated until the applicable remedial controls operate for a sufficient period of time and Management has concluded, through testing, that these controls are operating effectively. We may also conclude that additional measures may be required to remediate the material weaknesses in our internal control over financial reporting.

Even once remediated, our internal controls over financial reporting may not prevent or detect all misstatements because of their inherent limitations. Further, no internal control over financial reporting framework can provide absolute assurance that all instances of fraud will be detected and prevented. Additionally, any 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 policies or procedures may deteriorate.

Other than the ongoing remediation efforts described above, there were no other changes in Arrow's internal control over financial reporting that occurred during the quarter ended September 30, 2023, that materially affected, or are reasonably likely to materially affect, Arrow's internal control over financial reporting.

Filed Nov 9, 2023.
Source: SEC EDGAR, the filing index for accession 0000717538-23-000239. Last ingested by Listed: Oct 29, 2026, 08:06 ET. No prices; not investment advice.