# Arrow Financial Corp: Form 10-Q for the period ended Mar 31, 2024

- Company: [Arrow Financial Corp](/companies/arow.md) (CIK 717538)
- Form: 10-Q
- Filed: 2024-05-10
- Accepted by EDGAR: May 10, 2024, 08:32 ET
- Period: 2024-03-31
- Accession: 0000717538-24-000076
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/717538/000071753824000076/arow-20240331.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/717538/000071753824000076/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2024-03-31.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Interest expense | 3 months, 2024-01-01 to 2024-03-31 | $20.2m | us-gaap:InterestExpense |
| Income tax | 3 months, 2024-01-01 to 2024-03-31 | $2.0m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2024-01-01 to 2024-03-31 | $7.7m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2024-01-01 to 2024-03-31 | $0.45 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2024-01-01 to 2024-03-31 | $0.45 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2024-01-01 to 2024-03-31 | 16,867,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 3 months, 2024-01-01 to 2024-03-31 | $10.3m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 3 months, 2024-01-01 to 2024-03-31 | $1.2m | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Share repurchases | 3 months, 2024-01-01 to 2024-03-31 | $6.0m | us-gaap:PaymentsForRepurchaseOfCommonStock |
| Total assets | at 2024-03-31 | $4.33bn | us-gaap:Assets |
| Total liabilities | at 2024-03-31 | $3.96bn | us-gaap:Liabilities |
| Shareholders' equity | at 2024-03-31 | $378.0m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 96,334 characters.

### MANAGEMENT'S DISCUSSION AND ANALYSIS OF

### FINANCIAL CONDITION AND RESULTS OF OPERATIONS

### March 31, 2024

### NOTE ON TERMINOLOGY

In this Report, the terms "Arrow," "the registrant," "the Company," "we," "us," and "our" generally refer to Arrow Financial Corporation and its subsidiaries as a group, except where the context indicates otherwise. At certain points in this Report, Arrow's performance is compared with that of the Company's "peer group" of financial institutions. Unless otherwise specifically stated, the peer group for the purposes of this Report is comprised of the group of 180 domestic bank holding companies with $3 to $10 billion in total consolidated assets as identified in the FRB’s "Bank Holding Company Performance Report" for December 31, 2023 (the most recent such report currently available), and peer group data contained herein has been derived from such report.

### THE COMPANY AND ITS SUBSIDIARIES

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

### FORWARD-LOOKING STATEMENTS

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

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

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

Arrow is under no duty to update any of the forward-looking statements after the date of this Report to conform such statements to actual results. All forward-looking statements, express or implied, included in this Report and the documents incorporated by reference and that are attributable to Arrow are expressly qualified in their entirety by this cautionary statement. This cautionary statement should also be considered in connection with any subsequent written or oral forward-looking statements that Arrow or any persons acting on its behalf may issue. This Report should be read in conjunction with the 2023 Form 10-K and our other filings with the SEC.

### USE OF NON-GAAP FINANCIAL MEASURES

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

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

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

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

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

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

### Arrow Financial Corporation

### Selected Quarterly Information

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

| Quarter Ended | 3/31/2024 | 12/31/2023 | 9/30/2023 | 6/30/2023 | 3/31/2023 |
| --- | ---: | ---: | ---: | ---: | ---: |
| Net Income | $7,660 | $7,723 | $7,743 | $6,047 | $8,562 |
| **Transactions in Net Income (Net of Tax):** |  |  |  |  |  |
| Net Changes in Fair Value of Equity Investments | 13 | 90 | 52 | (133) | (76) |
| **Share and Per Share Data:1** |  |  |  |  |  |
| Period End Shares Outstanding | 16,710 | 16,942 | 17,049 | 17,050 | 17,050 |
| Basic Average Shares Outstanding | 16,865 | 17,002 | 17,050 | 17,050 | 17,048 |
| Diluted Average Shares Outstanding | 16,867 | 17,004 | 17,050 | 17,050 | 17,060 |
| Basic Earnings Per Share | $0.45 | $0.46 | $0.46 | $0.35 | $0.50 |
| Diluted Earnings Per Share | 0.45 | 0.46 | 0.46 | 0.35 | 0.50 |
| Cash Dividend Per Share | 0.270 | 0.270 | 0.262 | 0.262 | 0.262 |
| **Selected Quarterly Average Balances:** |  |  |  |  |  |
| Interest-bearing Deposits at Banks | $178,452 | $136,026 | $131,814 | $130,057 | $40,436 |
| Investment Securities | 671,105 | 713,144 | 745,693 | 787,175 | 813,461 |
| Loans | 3,235,841 | 3,170,262 | 3,096,240 | 3,036,410 | 2,991,928 |
| Deposits | 3,693,325 | 3,593,949 | 3,491,028 | 3,460,711 | 3,480,279 |
| Other Borrowed Funds | 122,033 | 149,507 | 208,527 | 220,616 | 100,596 |
| Stockholders’ Equity | 379,446 | 363,753 | 362,701 | 365,070 | 359,556 |
| Total Assets | 4,245,484 | 4,159,313 | 4,109,995 | 4,087,653 | 3,978,851 |
| Return on Average Assets, annualized | 0.73% | 0.74% | 0.75% | 0.59% | 0.87% |
| Return on Average Equity, annualized | 8.12% | 8.42% | 8.47% | 6.64% | 9.66% |
| Return on Average Tangible Equity, annualized 2 | 8.64% | 8.99% | 9.05% | 7.10% | 10.33% |
| Average Earning Assets | $4,085,398 | $4,019,432 | $3,973,747 | $3,953,642 | $3,845,825 |
| Average Paying Liabilities | 3,108,093 | 2,985,717 | 2,920,518 | 2,924,743 | 2,782,299 |
| Interest Income | 46,677 | 44,324 | 42,117 | 40,013 | 36,110 |
| Tax-Equivalent Adjustment 3 | 176 | 184 | 183 | 196 | 202 |
| Interest Income, Tax-Equivalent 3 | 46,853 | 44,508 | 42,117 | 40,013 | 36,110 |
| Interest Expense | 20,222 | 18,711 | 16,764 | 14,241 | 8,016 |
| Net Interest Income | 26,455 | 25,613 | 25,353 | 25,772 | 28,094 |
| Net Interest Income, Tax-Equivalent 3 | 26,631 | 25,797 | 25,536 | 25,968 | 28,296 |
| Net Interest Margin, annualized | 2.60% | 2.53% | 2.53% | 2.61% | 2.96% |
| Net Interest Margin, Tax Equivalent, annualized 3 | 2.62% | 2.55% | 2.55% | 2.63% | 2.98% |
| **Efficiency Ratio Calculation: 4** |  |  |  |  |  |
| Non-Interest Expense | $24,012 | $23,190 | $23,479 | $24,083 | $22,296 |
| Less: Intangible Asset Amortization | 41 | 43 | 43 | 44 | 45 |
| Net Non-Interest Expense | $23,971 | $23,147 | $23,436 | $24,039 | $22,251 |
| Net Interest Income, Tax-Equivalent 3 | $26,631 | $25,797 | $25,536 | $25,968 | $28,296 |
| Non-Interest Income | 7,858 | 7,484 | 8,050 | 6,906 | 6,677 |
| Less: Net Changes in Fair Value of Equity Invest. | 17 | 122 | 71 | (181) | (104) |
| Net Gross Income | $34,472 | $33,159 | $33,515 | $33,055 | $35,077 |
| Efficiency Ratio 4 | 69.54% | 69.81% | 69.93% | 72.72% | 63.43% |
| **Period-End Capital Information:** |  |  |  |  |  |
| Total Stockholders’ Equity (i.e. Book Value) | $377,986 | $379,772 | $360,014 | $361,443 | $363,371 |
| Book Value per Share 1 | 22.62 | 22.42 | 21.12 | 21.20 | 21.31 |
| Goodwill and Other Intangible Assets, net | 22,891 | 22,983 | 23,078 | 23,175 | 23,273 |
| Tangible Book Value per Share 1,2 | 21.25 | 21.06 | 19.76 | 19.84 | 19.95 |
| **Capital Ratios:5** |  |  |  |  |  |
| Tier 1 Leverage Ratio | 9.63% | 9.84% | 9.94% | 9.92% | 10.13% |
| Common Equity Tier 1 Capital Ratio | 12.84% | 13.00% | 13.17% | 13.27% | 13.34% |
| Tier 1 Risk-Based Capital Ratio | 13.50% | 13.66% | 13.84% | 13.96% | 14.03% |
| Total Risk-Based Capital Ratio | 14.57% | 14.74% | 14.94% | 15.08% | 15.15% |
| **Assets Under Trust Admin. & Investment Mgmt.** | $1,829,266 | $1,763,194 | $1,627,522 | $1,711,460 | $1,672,117 |

47

### Arrow Financial Corporation

### 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 46. 3/31/2024 12/31/2023 9/30/2023 6/30/2023 3/31/2023 |
| --- | --- |
|  | Total Stockholders' Equity (GAAP) $377,986 $379,772 $360,014 $361,443 $363,371 |
|  | Less: Goodwill and Other Intangible assets, net 22,891 22,983 23,078 23,175 23,273 |
|  | Tangible Equity (Non-GAAP) $355,095 $356,789 $336,936 $338,268 $340,098 |
|  | Period End Shares Outstanding 16,710 16,942 17,049 17,050 17,050 |
|  | Tangible Book Value per Share (Non-GAAP) $21.25 $21.06 $19.76 $19.84 $19.95 |
|  | Net Income 7,660 7,723 7,743 6,047 8,562 |
|  | Return on Average Tangible Equity (Net Income/Tangible Equity - Annualized) 8.64% 8.99% 9.05% 7.10% 10.33% |
| 3. | Non-GAAP Financial Measures Reconciliation: Net Interest Margin, Tax-Equivalent is the ratio of our annualized tax-equivalent net interest income to average earning assets. This is also a non-GAAP financial measure which Arrow believes provides investors with information that is useful in understanding our financial performance. See "Use of Non-GAAP Financial Measures" on page 46. |
|  | 3/31/2024 12/31/2023 9/30/2023 6/30/2023 3/31/2023 |
|  | Interest Income (GAAP) $46,677 $44,324 $42,117 $40,013 $36,110 |
|  | Add: Tax-Equivalent adjustment (Non-GAAP) 176 184 183 196 202 |
|  | Interest Income - Tax Equivalent (Non-GAAP) $46,853 $44,508 $42,300 $40,209 $36,312 |
|  | Net Interest Income (GAAP) $26,455 $25,613 $25,353 $25,772 $28,094 |
|  | Add: Tax-Equivalent adjustment (Non-GAAP) 176 184 183 196 202 |
|  | Net Interest Income - Tax Equivalent (Non-GAAP) $26,631 $25,797 $25,536 $25,968 $28,296 |
|  | Average Earning Assets $4,085,398 $4,019,432 $3,973,747 $3,953,642 $3,845,825 |
|  | Net Interest Margin (Non-GAAP)\* 2.62% 2.55% 2.55% 2.63% 2.98% |
| 4. | Non-GAAP Financial Measures: Financial Institutions often use the "efficiency ratio", a non-GAAP ratio, as a measure of expense control. Arrow believes that the efficiency ratio provides investors with information that is useful in understanding our financial performance. Arrow defines efficiency ratio as the ratio of our non-interest expense to our net gross income (which equals tax-equivalent net interest income plus non-interest income, as adjusted). There is no GAAP financial measure that is closely comparable to the efficiency ratio. See "Use of Non-GAAP Financial Measures" on page 46. |
| 5. | For the current quarter, all of the regulatory capital ratios as well as the Total Risk-Weighted Assets are calculated in accordance with bank regulatory capital rules. The March 31, 2024 CET1 ratio listed in the tables (i.e., 12.84%) exceeds the sum of the required minimum CET1 ratio plus the fully phased-in Capital Conservation Buffer (i.e., 7.00%). |
|  | 3/31/2024 12/31/2023 9/30/2023 6/30/2023 3/31/2023 |
|  | Total Risk Weighted Assets $3,049,525 $3,032,188 $2,988,438 $2,937,837 $2,909,610 |
|  | Common Equity Tier 1 Capital 391,706 394,166 393,541 389,966 388,228 |
|  | Common Equity Tier 1 Capital Ratio 12.84% 13.00% 13.17% 13.27% 13.34% |
| \* Quarterly ratios have been annualized. |  |

48

*Average Consolidated Balance Sheets and Net Interest Income Analysis*

*(Dollars In Thousands)*

| Three Months Ended March 31: | 2024 Average Balance | Interest Income/ Expense | Rate Earned/ Paid | 2023 Average Balance | Interest Income/ Expense | Rate Earned/ Paid |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Interest-Bearing Deposits at Banks | $178,452 | $2,447 | 5.52% | $40,436 | $479 | 4.80 |
| Investment Securities: |  |  |  |  |  |  |
| Fully Taxable | 550,538 | 3,186 | 2.33 | 652,743 | 2,948 | 1.83 |
| Exempt from Federal Taxes | 120,567 | 668 | 2.23 | 160,718 | 797 | 2.01 |
| Loans | 3,235,841 | 40,376 | 5.02 | 2,991,928 | 31,886 | 4.32 |
| Total Earning Assets | 4,085,398 | 46,677 | 4.60 | 3,845,825 | 36,110 | 3.81 |
| Allowance for Credit Losses | (31,416) |  |  | (29,792) |  |  |
| Cash and Due From Banks | 29,804 |  |  | 30,518 |  |  |
| Other Assets | 161,698 |  |  | 132,300 |  |  |
| Total Assets | $4,245,484 |  |  | $3,978,851 |  |  |
| Deposits: |  |  |  |  |  |  |
| Interest-Bearing Checking Accounts | $830,918 | 1,641 | 0.79 | $964,735 | 370 | 0.16 |
| Savings Deposits | 1,481,001 | 10,230 | 2.78 | 1,474,251 | 5,587 | 1.54 |
| Time Deposits of $250,000 or More | 177,328 | 1,973 | 4.47 | 94,415 | 574 | 2.47 |
| Other Time Deposits | 496,813 | 5,083 | 4.11 | 148,302 | 474 | 1.30 |
| Total Interest-Bearing Deposits | 2,986,060 | 18,927 | 2.55 | 2,681,703 | 7,005 | 1.06 |
| Borrowings | 96,984 | 1,076 | 4.46 | 40,138 | 490 | 4.95 |
| Junior Subordinated Obligations Issued to Unconsolidated Subsidiary Trusts | 20,000 | 171 | 3.44 | 55,356 | 472 | 3.46 |
| Finance Leases | 5,049 | 48 | 3.82 | 5,102 | 49 | 3.89 |
| Total Interest-bearing Liabilities | 3,108,093 | 20,222 | 2.62 | 2,782,299 | 8,016 | 1.17 |
| Noninterest-bearing deposits | 707,265 |  |  | 798,576 |  |  |
| Other Liabilities | 50,680 |  |  | 38,420 |  |  |
| Total Liabilities | 3,866,038 |  |  | 3,619,295 |  |  |
| Stockholders’ Equity | 379,446 |  |  | 359,556 |  |  |
| Total Liabilities and Stockholders’ Equity | $4,245,484 |  |  | $3,978,851 |  |  |
| Net Interest Income |  | $26,455 |  |  | $28,094 |  |
| Net Interest Spread |  |  | 1.98% |  |  | 2.64% |
| Net Interest Margin |  |  | 2.60% |  |  | 2.96% |

49

### OVERVIEW

The following discussion and analysis focuses on and reviews the results of operations for the three-month period ended March 31, 2024 and the financial conditions as of March 31, 2024 and 2023. The discussion below should be read in conjunction with the selected quarterly and annual information set forth above and the Unaudited Interim Consolidated Financial Statements and other financial data presented elsewhere in this Report. When necessary, prior-year financial information has been reclassified to conform to the current-year presentation.

***Summary of Q1 2024 Financial Results:*** Net income for the first quarter of 2024 was $7.7 million, consistent with $7.7 million in the fourth quarter of 2023, while decreasing from $8.6 million in the first quarter of 2023. As compared to the prior quarter, net income benefited from an increase of $0.8 million in net interest income as well as an increase in non-interest income of $0.4 million, offset by an increase in non-interest expense of $0.8 million. As compared to the first quarter of 2023, net interest income decreased $1.6 million primarily on higher deposit costs. Non-interest income increased $1.2 million and non-interest expense increased $1.7 million.

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

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

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

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

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

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

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

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

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

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

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

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

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

***Regulatory Capital and Change in Stockholders' Equity:*** At March 31, 2024, Arrow continued to exceed all required minimum capital ratios under the current bank regulatory capital rules (the "Capital Rules") as implemented under the Dodd-Frank Wall Street Reform and Consumer Protection Act ("Dodd-Frank") at both the holding company and bank levels. At that date, both subsidiary banks, continued to qualify as "well-capitalized" under the capital classification guidelines as defined by the Capital Rules. Because of continued profitability and strong asset quality, the regulatory capital levels throughout recent years have consistently remained well in excess of the various required regulatory minimums in effect from time to time, as they do at present.

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

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

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

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

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

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

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

- **Commercial and Commercial Real Estate Loans:** Combined, these loans comprise 28.0% of the total loan portfolio at period-end. Commercial property values in Arrow's region have largely remained stable, however, there remains uncertainty surrounding market conditions due to inflation and the rising interest rate environment. Appraisals on nonperforming and watched CRE loan properties are updated as deemed necessary, usually when the loan is downgraded or when there has been significant market deterioration since the last appraisal.
- **Consumer Loans:** These loans (primarily automobile loans) comprised 34.6% of the total loan portfolio at period-end. Consumer automobile loans at March 31, 2024, were 99.6% of this portfolio segment. The vast majority of automobile loans are initiated through the purchase of vehicles by consumers with automobile dealers. As of March 31, 2024, demand has slowed as a result of current economic conditions. Inflation and higher rates may continue to limit the potential growth in this category.
- **Residential Real Estate Loans:** These loans, including home equity loans, made up 37.4% of the total loan portfolio at period-end. Demand for residential real estate has continued but weakened as interest rates have increased. A continuous elevated rate environment may impact future demand. Arrow originated nearly all of the residential real estate loans currently held in the loan portfolio and applies conservative underwriting standards to loan originations. Arrow has historically sold a portion of residential real estate mortgage originations into the secondary market. The ratio of the sales of originations to total originations tends to fluctuate from period to period based on market conditions and other factors. The rate at which mortgage loan originations are sold in future periods will depend on various circumstances, including prevailing mortgage rates, other lending opportunities, capital and liquidity needs, and the availability of a market for such transactions.

***Liquidity and Access to Credit Markets:*** Arrow has not experienced any liquidity events or special concerns in recent years or thus far in 2024. Arrow’s liquidity position provides the necessary flexibility to address any unexpected near-term liquidity needs. Interest-bearing cash balances at March 31, 2024 were $255.1 million compared to $178.4 million at March 31, 2023. Contingent lines of credit are also available. Operating collateralized lines of credit are established and available through the FHLBNY, FRB and other bank lines totaling approximately $1.3 billion. The general terms of Arrow's lines of credit have not changed significantly in recent periods (see the general liquidity discussion on page 65). Historically, Arrow has principally relied on asset-based liquidity (i.e., funds in overnight investments and cash flow from maturing investments and loans) with liability-based liquidity as a secondary source of funds (the main liability-based sources are an overnight borrowing arrangement with correspondent banks, an arrangement for overnight borrowing and term credit advances from the FHLBNY, and an additional arrangement for short-term advances at the FRB discount window). Regular liquidity stress tests and tests of the contingent liquidity plan are performed to ensure that an adequate amount of available funds can be generated to meet a wide variety of potential liquidity crises.

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

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

### CHANGE IN FINANCIAL CONDITION

### Summary of Selected Consolidated Balance Sheet Data

(Dollars in Thousands)

|  | At Period-End 3/31/2024 | 12/31/2023 | 3/31/2023 | $ Change From December | $ Change From March | % Change From December (not annualized) | % Change From March |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Interest-Bearing Bank Balances | $255,109 | $105,781 | $178,365 | $149,328 | $76,744 | 141.2% | 43.0% |
| Securities Available-for-Sale | 485,833 | 497,769 | 565,693 | (11,936) | (79,860) | (2.4)% | (14.1)% |
| Securities Held-to-Maturity | 128,051 | 131,395 | 167,347 | (3,344) | (39,296) | (2.5)% | (23.5)% |
| Equity Securities | 1,942 | 1,925 | 2,070 | 17 | (128) | 0.9% | (6.2)% |
| Loans (1) | 3,258,758 | 3,212,908 | 3,005,352 | 45,850 | 253,406 | 1.4% | 8.4% |
| Allowance for Credit Losses | 31,561 | 31,265 | 30,784 | 296 | 777 | 0.9% | 2.5% |
| Earning Assets (1) | 4,133,901 | 3,954,827 | 3,928,854 | 179,074 | 205,047 | 4.5% | 5.2% |
| Total Assets | $4,333,623 | $4,169,868 | $4,114,630 | $163,755 | $218,993 | 3.9% | 5.3% |
| Noninterest-Bearing Deposits | $696,519 | $758,425 | $788,690 | $(61,906) | $(92,171) | (8.2)% | (11.7)% |
| Interest-Bearing Checking Accounts | 908,453 | 799,785 | 958,490 | 108,668 | (50,037) | 13.6% | (5.2)% |
| Savings Deposits | 1,497,466 | 1,466,280 | 1,497,326 | 31,186 | 140 | 2.1% | —% |
| Time Deposits over $250,000 | 173,976 | 179,301 | 122,827 | (5,325) | 51,149 | (3.0)% | 41.6% |
| Other Time Deposits | 502,607 | 483,775 | 179,016 | 18,832 | 323,591 | 3.9% | 180.8% |
| Total Deposits | $3,779,021 | $3,687,566 | $3,546,349 | $91,455 | $232,672 | 2.5% | 6.6% |
| Borrowings | $106,500 | $26,500 | $142,800 | $80,000 | $(36,300) | 301.9% | (25.4)% |
| Junior Subordinated Obligations Issued to Unconsolidated Subsidiary Trusts | 20,000 | 20,000 | 20,000 | — | — | —% | —% |
| Stockholders' Equity | 377,986 | 379,772 | 363,371 | (1,786) | 14,615 | (0.5)% | 4.0% |

(1) Includes Nonaccrual Loans.

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

- **Commercial and commercial real estate loans:** This segment of the loan portfolio increased by $11.6 million, or 1.3%, during the first three months of 2024. In the first three months of 2024, loan growth has slowed as a result of the current rate environment.
- **Consumer loans (primarily automobile loans through indirect lending):** As of March 31, 2024, these loans, primarily auto loans originated through dealerships in New York and Vermont, increased by $14.1 million, or 1.3%, from the December 31, 2023 balance. Inflation and rising rates may continue to slow demand.
- **Residential real estate loans:** This segment increased during the first three months of 2024 by $20.1 million, or 1.7%. A deterioration of economic conditions may trigger a reduction in loan production for the remainder of the year.

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

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

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

Arrow uses reciprocal deposits for a select group of municipalities to reduce the amount of investment securities required to be pledged as collateral for municipal deposits where municipal deposits in excess of the FDIC insurance coverage limits were transferred to other participating banks, divided into portions so as to qualify such transferred deposits for FDIC insurance coverage at each transferee bank. In return, reciprocal amounts are transferred to Arrow in equal amounts of deposits from the participant banks. The balances of reciprocal deposits were $675.1 million and $568.0 million at March 31, 2024 and March 31, 2023, respectively.

***Uninsured Deposits***: Arrow's deposit base includes both insured and uninsured deposits. Arrow continually monitors levels and composition of uninsured deposits. Uninsured deposit balances at March 31, 2024 were less than 30% of the total deposit base.

### FINANCIAL CONDITION

### Investment Portfolio Trends

The table below presents the changes in the period-end balances for available-for-sale, held-to-maturity and equity securities from December 31, 2023 to March 31, 2024 (in thousands):

*(Dollars in Thousands)*

| Securities Available-for-Sale: | Fair Value at Period-End 3/31/2024 | 12/31/2023 | Change | Net Unrealized Gains (Losses) For Period Ended 3/31/2024 | 12/31/2023 | Change |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| U.S. Treasury Securities | $74,152 | $74,004 | $148 | $(38) | $243 | $(281) |
| U.S. Agency Securities | 152,749 | 152,925 | (176) | (7,251) | (7,075) | (176) |
| State and Municipal Obligations | 280 | 280 | — | — | — | — |
| Mortgage-Backed Securities | 257,717 | 269,760 | (12,043) | (37,141) | (35,401) | (1,740) |
| Corporate and Other Debt Securities | 935 | 800 | 135 | (65) | (200) | 135 |
| Total | $485,833 | $497,769 | $(11,936) | $(44,495) | $(42,433) | $(2,062) |
| Securities Held-to-Maturity: |  |  |  |  |  |  |
| State and Municipal Obligations | $116,948 | $120,293 | $(3,345) | $(2,794) | $(2,157) | $(637) |
| Mortgage-Backed Securities | 7,913 | 8,544 | (631) | (396) | (401) | 5 |
| Total | $124,861 | $128,837 | $(3,976) | $(3,190) | $(2,558) | $(632) |
| Equity Securities | $1,942 | $1,925 | $17 | $— | $— | $— |

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

| Securities Available-for-Sale: | March 31, 2024 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. Treasury Securities | $49,263 | 5.3% | $24,927 | 4.7% | $— | $— | $— | $— | $74,190 | 5.1% |
| U.S. Agency Securities | 15,000 | 3.5% | 145,000 | 1.8% | — | —% | — | —% | 160,000 | 2.0% |
| State and Municipal Obligations | — | —% | — | —% | 280 | 4.7% |  | —% | 280 | 4.9% |
| Mortgage-Backed Securities | 2,555 | 2.5% | 152,490 | 1.6% | 139,813 | 1.7% | — | —% | 294,858 | 1.7% |
| Corporate and Other Debt Securities |  | —% |  | —% | 1,000 | 8.4% | — | —% | 1,000 | 8.3% |
| Total | $66,818 | 4.8% | $322,417 | 2.0% | $141,093 | 1.8% | $— | —% | $530,328 | 2.3% |
| Securities Held-to-Maturity: |  |  |  |  |  |  |  |  |  |  |
| State and Municipal Obligations | $44,049 | 2.7% | $73,469 | 2.5% | $2,218 | 5.1% | $6 | 1.8% | $119,742 | 2.6% |
| Mortgage-Backed Securities | — | —% | 8,309 | 2.5% | — | —% | — | —% | 8,309 | 2.5% |
| Corporate and Other Debt Securities | — | —% | — | —% | — | —% | — | —% | — | —% |
| Total | $44,049 | 2.7% | $81,778 | 2.5% | $2,218 | 5.1% | $6 | 1.8% | $128,051 | 2.6% |

At March 31, 2024, Arrow held no investment securities in the securities portfolios that consisted of or included, directly or indirectly, obligations of foreign governments or governmental agencies of foreign issuers.

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

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

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

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

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

### Investment Sales, Purchases and Maturities

There were no sales of investment securities within the three month periods ended March 31, 2024 or 2023.

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

*(In Thousands)*

| Purchases: Available-for-Sale Portfolio | Three Months Ended 3/31/2024 | 3/31/2023 |
| --- | ---: | ---: |
| U.S. Agency Securities | $— | $— |
| Mortgage-Backed Securities | — | — |
| Total Purchases | $— | $— |
| **Maturities & Calls** | $10,362 | $15,669 |

*(In Thousands)*

| Purchases: Held-to-Maturity Portfolio | Three Months Ended 3/31/2024 | 3/31/2023 |
| --- | ---: | ---: |
| State and Municipal Obligations | $750 | $1,448 |
| **Maturities & Calls** | $4,003 | $9,328 |

### Loan Trends

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

### Quarterly Average Loan Balances

(Dollars in Thousands)

|  | Quarter Ended 3/31/2024 | 12/31/2023 | 9/30/2023 | 6/30/2023 | 3/31/2023 |
| --- | ---: | ---: | ---: | ---: | ---: |
| Commercial | $159,629 | $151,947 | $147,585 | $135,370 | $135,670 |
| Commercial Real Estate | 749,928 | 738,305 | 727,060 | 722,753 | 710,719 |
| Consumer | 1,114,415 | 1,108,660 | 1,094,994 | 1,081,838 | 1,070,314 |
| Residential Real Estate | 1,211,869 | 1,171,350 | 1,126,601 | 1,096,449 | 1,075,225 |
| Total Loans | $3,235,841 | $3,170,262 | $3,096,240 | $3,036,410 | $2,991,928 |

56

### Percentage of Total Quarterly Average Loans

|  | Quarter Ended 3/31/2024 | 12/31/2023 | 9/30/2023 | 6/30/2023 | 3/31/2023 |
| --- | ---: | ---: | ---: | ---: | ---: |
| Commercial | 4.9% | 4.8% | 4.8% | 4.5% | 4.5% |
| Commercial Real Estate | 23.2% | 23.3% | 23.5% | 23.8% | 23.8% |
| Consumer | 34.4% | 35.0% | 35.4% | 35.6% | 35.8% |
| Residential Real Estate | 37.5% | 36.9% | 36.3% | 36.1% | 35.9% |
| Total Loans | 100.0% | 100.0% | 100.0% | 100.0% | 100.0% |

### Quarterly Yield on Loans

|  | Quarter Ended 3/31/2024 | 12/31/2023 | 9/30/2023 | 6/30/2023 | 3/31/2023 |
| --- | ---: | ---: | ---: | ---: | ---: |
| Commercial | 5.53% | 5.38% | 4.89% | 4.53% | 4.28% |
| Commercial Real Estate | 5.07% | 4.88% | 5.19% | 5.09% | 4.73% |
| Consumer | 5.36% | 5.11% | 4.83% | 4.61% | 4.26% |
| Residential Real Estate | 4.57% | 4.52% | 4.26% | 4.17% | 4.10% |
| Total Loans | 5.02% | 4.86% | 4.70% | 4.57% | 4.32% |

The average yield on the loan portfolio was 5.02% for the first quarter of 2024 up 70 basis points from the first quarter of 2023. Market rates have continued to increase, which impacts new loan yields for fixed rate loans, and variable loan yields as these loans reach their repricing dates.

The table below shows the maturity of loans outstanding as of March 31, 2024. Also provided are the amounts due after one year, classified according to fixed interest rates and variable interest rates (in thousands):

|  | March 31, 2024 Within One Year | After One But Within Five Years | After Five But Within 15 Years | After 15 Years | Total |
| --- | ---: | ---: | ---: | ---: | ---: |
| Commercial | $41,851 | $82,983 | $37,442 | $113 | $162,389 |
| Commercial Real Estate | 161,657 | 274,490 | 307,236 | 7,586 | 750,969 |
| Consumer | 10,235 | 602,593 | 512,458 | 468 | 1,125,754 |
| Residential Real Estate | 133,188 | 67,463 | 333,203 | 685,792 | 1,219,646 |
| Total | $346,931 | $1,027,529 | $1,190,339 | $693,959 | $3,258,758 |
|  |  | After One But Within Five Years | After Five But Within 15 Years | After 15 Years | Total |
| Loans maturing with: |  |  |  |  |  |
| Fixed Interest Rates |  | $714,602 | $884,054 | $689,909 | $2,288,565 |
| Variable Interest Rates |  | 312,927 | 306,285 | 4,050 | 623,262 |
| Total |  | $1,027,529 | $1,190,339 | $693,959 | $2,911,827 |

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

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

**Consumer Loans:** At March 31, 2024, consumer loans (primarily automobile loans originated through dealerships located in upstate New York and Vermont) continue to be a significant component of Arrow's business, comprising approximately one third of the total loan portfolio.

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

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

### Deposit Trends

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

*Quarterly Average Deposit Balances*

*(Dollars in Thousands)*

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

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

### Percentage of Total Quarterly Average Deposits

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

### Quarterly Cost of Deposits

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

For the quarter ended March 31, 2024, the total cost of deposits increased 18 basis points from the previous quarter and 124 basis points from the comparable prior year quarter. The Federal Funds rate increased throughout 2023 and has remained elevated for the first quarter of 2024. Arrow is well positioned for a variety of rate environments, see Part I, Item 3, entitled "Quantitative and Qualitative Disclosures About Market Risk," on page 68 for further discussion.

### Non-Deposit Sources of Funds

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

The $20 million principal amount of Junior Subordinated Obligations Issued to Unconsolidated Subsidiary Trusts listed on the consolidated balance sheet as of March 31, 2024 (i.e., previously issued TRUPs) will, subject to certain limits, continue to qualify as Tier 1 regulatory capital for Arrow until such TRUPs mature or are redeemed. This is further discussed under "Capital Resources" beginning on page 62 of this Report.

### ASSET QUALITY

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

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

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

| Loan Balances: | 3/31/2024 | 12/31/2023 | 9/30/2023 | 6/30/2023 | 3/31/2023 |
| --- | ---: | ---: | ---: | ---: | ---: |
| Period-End Loans | $3,258,758 | $3,212,908 | $3,138,617 | $3,069,897 | $3,005,352 |
| Average Loans, Year-to-Date | 3,235,841 | 3,074,261 | 3,041,909 | 3,014,292 | 2,991,928 |
| Average Loans, Quarter-to-Date | 3,235,841 | 3,170,262 | 3,096,240 | 3,036,410 | 2,991,928 |
| Period-End Assets | 4,333,623 | 4,169,868 | 4,272,911 | 4,103,653 | 4,114,630 |
| Allowance for Credit Losses, Year-to-Date: |  |  |  |  |  |
| Allowance for Credit Losses, Beginning of Period | $31,265 | $29,952 | $29,952 | $29,952 | $29,952 |
| Provision for Credit Losses, YTD | 617 | 3,381 | 2,856 | 2,502 | 1,554 |
| Loans Charged-off, YTD | (1,283) | (5,177) | (3,812) | (2,608) | (1,328) |
| Recoveries of Loans Previously Charged-off | 962 | 3,109 | 2,116 | 1,324 | 606 |
| Net Charge-offs, YTD | (321) | (2,068) | (1,696) | (1,284) | (722) |
| Allowance for Credit Losses, End of Period | $31,561 | $31,265 | $31,112 | $31,170 | $30,784 |
| Nonperforming Assets, at Period-End: |  |  |  |  |  |
| Nonaccrual Loans | $20,244 | $20,645 | $6,023 | $5,997 | $10,852 |
| Loans Past Due 90 or More Days and Still Accruing Interest | 1,147 | 452 | 251 | 467 | 241 |
| Restructured and in Compliance with Modified Terms | 49 | 54 | 60 | 67 | 62 |
| Total Nonperforming Loans | 21,440 | 21,151 | 6,334 | 6,531 | 11,155 |
| Repossessed Assets | 312 | 312 | 344 | 342 | 144 |
| Other Real Estate Owned | — | — | 182 | 182 | — |
| Total Nonperforming Assets | $21,752 | $21,463 | $6,860 | $7,055 | $11,299 |
| Asset Quality Ratios: |  |  |  |  |  |
| Allowance to Nonperforming Loans | 147.21% | 147.82% | 491.19% | 477.26% | 275.97% |
| Allowance to Period-End Loans | 0.97% | 0.97% | 0.99% | 1.02% | 1.02% |
| Provision to Average Loans (Quarter) (1) | 0.08% | 0.07% | 0.05% | 0.13% | 0.21% |
| Provision to Average Loans (YTD) (1) | 0.08% | 0.11% | 0.13% | 0.17% | 0.21% |
| Net Charge-offs to Average Loans (Quarter) (1) | 0.04% | 0.05% | 0.05% | 0.07% | 0.10% |
| Net Charge-offs to Average Loans (YTD) (1) | 0.04% | 0.07% | 0.07% | 0.09% | 0.10% |
| Nonperforming Loans to Total Loans | 0.66% | 0.66% | 0.20% | 0.21% | 0.37% |
| Nonperforming Assets to Total Assets | 0.50% | 0.51% | 0.16% | 0.17% | 0.27% |
| (1) Annualized |  |  |  |  |  |

### Provision for Credit Losses

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 March 31, 2024 allowance for credit losses calculation incorporated a reasonable and supportable forecast period to account for economic conditions utilized in the measurement. The quantitative model utilized an economic forecast sourced from reputable third-parties that reflects the economic conditions with a slight improvement in the national unemployment rate of approximately 0.32% during the six-quarter forecast period and forecasted gross domestic product projected to improve by approximately 0.65%. The home price index (HPI) forecast increased approximately 0.03% from the previous quarter level. The overall change in the allowance from December 31, 2023 was driven by the following factors: net loan growth contributed $0.4 million, changes in macro economic conditions reduced the allowance by $1.8 million, qualitative factors increased the allowance by $0.9 million, and a specific reserve of $0.7 million tied to overdraft balances from an instance of check fraud related to one customer relationship. The first quarter provision for credit losses was $617 thousand. In addition, Arrow recorded a credit for estimated credit losses on off-balance sheet credit exposures in other liabilities of $466 thousand in the first quarter of 2024.

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

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

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

### Risk Elements

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

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

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

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

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

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

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

### CAPITAL RESOURCES

### Regulatory Capital Standards

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

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

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

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

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

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

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

| Capital Ratio | 2024 |
| --- | ---: |
| Minimum CET1 Ratio | 4.500% |
| Capital Conservation Buffer ("Buffer") | 2.500% |
| Minimum CET1 Ratio Plus Buffer | 7.000% |
| Minimum Tier 1 Risk-Based Capital Ratio | 6.000% |
| Minimum Tier 1 Risk-Based Capital Ratio Plus Buffer | 8.500% |
| Minimum Total Risk-Based Capital Ratio | 8.000% |
| Minimum Total Risk-Based Capital Ratio Plus Buffer | 10.500% |
| Minimum Leverage Ratio | 4.000% |

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

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

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

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

|  | Common Equity Tier 1 Capital Ratio | Tier 1 Risk-Based Capital Ratio | Total Risk-Based Capital Ratio | Tier 1 Leverage Ratio |
| --- | ---: | ---: | ---: | ---: |
| Arrow Financial Corporation | 12.84% | 13.50% | 14.57% | 9.63% |
| Glens Falls National Bank & Trust Co. | 13.03% | 13.03% | 14.02% | 8.76% |
| Saratoga National Bank & Trust Co. | 12.37% | 12.37% | 13.62% | 9.40% |
| FDICIA's Prompt Corrective Action - "Well-Capitalized" Standard (2019) | 6.50% | 8.00% | 10.00% | 5.00% |
| Regulatory Minimum | 7.00%(1) | 8.50%(1) | 10.50%(1) | 4.00% |
| (1) Including the fully phased-in 2.50% capital conservation buffer |  |  |  |  |

At March 31, 2024, Arrow's subsidiary banks exceeded the minimum regulatory capital ratios established under the current Capital Rules and each also qualified as "well-capitalized", the highest category in the new capital classification scheme established by federal bank regulatory agencies under the "prompt corrective action" standards, as described above.

### Capital Components; Stock Repurchases; Dividends

*Stockholders' Equity:* Stockholders’ equity was $378.0 million at March 31, 2024, a decrease of $1.8 million, or 0.5%, from the December 31, 2023 level of $379.8 million The decrease in stockholders' equity over the first three months of 2024 principally reflected the following factors: the addition of (i) $7.7 million of net income for the period, (ii) the issuance of $0.4 million of common stock through employee benefit and dividend reinvestment plans and (iii) other comprehensive gain of $0.7 million, reduced by (iv) cash dividends of $4.6 million and (v) repurchases of common stock of $6.0 million.

*Trust Preferred Securities:* In each of 2003 and 2004, Arrow issued $10 million of trust preferred securities (TRUPs) in a private placement. Under the FRB's regulatory capital rules then in effect, TRUPs proceeds typically qualified as Tier 1 capital for bank holding companies such as Arrow, but only in amounts up to 25% of Tier 1 capital, net of goodwill less any associated deferred tax liability. Under the Dodd-Frank Act, any trust preferred securities that Arrow might issue on or after the grandfathering date set forth in Dodd-Frank (May 19, 2010) would not qualify as Tier 1 capital under bank regulatory capital guidelines. For Arrow, TRUPs outstanding prior to the grandfathering cutoff date set forth in Dodd-Frank (May 19, 2010) would continue to qualify as Tier 1 capital until maturity or redemption, subject to limitations. Thus, Arrow's outstanding TRUPs continue to qualify as Tier 1 regulatory capital, subject to such limitations.

In the first quarter of 2020, Arrow entered into interest rate swap agreements to synthetically fix the variable rate interest payments associated with $20 million in outstanding subordinated trust securities. The effective fixed rate is 3.43% until maturity. These agreements are designated as cash flow hedges.

*Stock Repurchase Program:* On October 25, 2023, the Board expanded its existing stock repurchase program (the "2022 Repurchase Program") by $5 million, bringing the total availability under the repurchase program to $9.1 million, and removed the expiration date previously incorporated into the 2022 Repurchase Program. The 2022 Repurchase Program allowed Arrow to repurchase shares of its common stock in open-market or negotiated transactions. Arrow resumed repurchasing its shares in the fourth quarter of 2023. In the first quarter of 2024, Arrow had repurchased approximately $6.0 million (244,000 shares of its common stock) under the 2022 Repurchase Program and additional purchases in April 2024 fully utilized the $9.1 million authorized program amount.

On April 24, 2024, the Board approved a new stock repurchase program (the "2024 Repurchase Program"), under which the Board authorized management, in its discretion, to repurchase from time to time, in the open market or in privately negotiated transactions, up to $5 million of Arrow common stock.

From time to time, Arrow may establish a written trading plan in accordance with Rule 10b5-1 of the Exchange Act, pursuant to which it may repurchase shares of its common stock. Additional repurchases may be made by Arrow, at times and in amounts as it deems appropriate, and may be made through open market transactions in compliance with Rule 10b-18 of the Exchange Act, subject to market conditions, applicable legal requirements, and other factors.

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

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

| 2023 | Market Price Low | High | Cash Dividends Declared |
| --- | ---: | ---: | ---: |
| First Quarter | $23.57 | $33.49 | $0.262 |
| Second Quarter | 17.12 | 24.19 | 0.262 |
| Third Quarter | 16.38 | 21.60 | 0.262 |
| Fourth Quarter | 16.70 | 29.66 | 0.270 |
| **2024** |  |  |  |
| First Quarter | $23.11 | $28.62 | $0.270 |
| Second Quarter (dividend payable May 24, 2024) | TBD | TBD | 0.270 |

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

### LIQUIDITY

The objective of effective liquidity management is to ensure that Arrow has the ability to raise cash when needed at a reasonable cost. This includes the capability of meeting expected and unexpected obligations to Arrow's customers at any time. Given the uncertain nature of customer demands and the need to maximize earnings, Arrow must have available reasonably priced sources of funds, both on- and off-balance sheet, that can be accessed quickly in times of need. Arrow’s liquidity position should provide the Company with the necessary flexibility to address any unexpected near-term disruptions such as reduced cash flows from the investment and loan portfolio, unexpected deposit runoff, or increased loan originations.

Arrow's primary sources of available liquidity are overnight investments in federal funds sold, interest-bearing bank balances at the FRBNY, and cash flow from investment securities and loans. Certain investment securities are categorized as available-for-sale at time of purchase based on their marketability and collateral value, as well as their yield and maturity. The securities available-for-sale portfolio was $485.8 million at March 31, 2024, a decrease of $11.9 million, from the year-end 2023 level. Due to the potential for volatility in market values, Arrow may not always be able to sell securities on short notice at their carrying value, even to provide needed liquidity. Arrow also held interest-bearing cash balances at March 31, 2024 of $255.1 million compared to $105.8 million at December 31, 2023.

In addition to liquidity from cash, short-term investments, investment securities and loans, Arrow has supplemented available operating liquidity with additional off-balance sheet sources such as a federal funds lines of credit with correspondent banks and credit lines with the FHLBNY. The federal funds lines of credit are with two correspondent banks totaling $28 million which were not drawn on during the three months ended March 31, 2024.

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

Arrow performs regular liquidity stress tests and tests of the contingent liquidity plan to ensure that an adequate amount of available funds can be generated to meet a wide variety of potential liquidity events. Additionally, Arrow continually monitors levels and composition of uninsured deposits.

Arrow measures and monitors basic liquidity as a ratio of liquid assets to total short-term liabilities, both with and without the availability of borrowing arrangements. Based on the level of overnight investments, available liquidity from the investment securities portfolio, cash flows from the loan portfolio, the stable core deposit base and the significant borrowing capacity, Arrow believes that the available liquidity is sufficient to meet all reasonably likely events or occurrences. At March 31, 2024, Arrow's primary liquidity ratio was approximately 10.4% of total assets, well in excess of the internal policy limit of 5%. Total primary liquidity was approximately $450 million, comprised of $255.1 million of interest-bearing cash and $194.4 in unencumbered securities.

Arrow did not experience any liquidity constraints in the three month period ended March 31, 2024, in 2023 or in any recent prior period. Arrow has not at any time during such periods been forced to pay above-market rates to obtain retail deposits or other funds from any source.

### RECENTLY ISSUED ACCOUNTING STANDARDS

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

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

### RESULTS OF OPERATIONS

### Three Months Ended March 31, 2024 Compared With

### Three Months Ended March 31, 2023

### Summary of Earnings Performance

(Dollars in Thousands, Except Per Share Amounts)

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

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

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

### Net Interest Income

### Summary of Net Interest Income

(Dollars in Thousands)

|  | Three Months Ended March 31, 2024 | March 31, 2023 | Change | % Change |
| --- | ---: | ---: | ---: | ---: |
| Interest and Dividend Income | $46,677 | $36,110 | $10,567 | 29.3% |
| Interest Expense | 20,222 | 8,016 | 12,206 | 152.3% |
| Net Interest Income | 26,455 | 28,094 | (1,639) | (5.8)% |
| Average Earning Assets(1) | 4,085,398 | 3,845,825 | 239,573 | 6.2% |
| Average Interest-Bearing Liabilities | 3,108,093 | 2,782,299 | 325,794 | 11.7% |
| Yield on Earning Assets(1) | 4.60% | 3.81% | 0.79% | 20.7% |
| Cost of Interest-Bearing Liabilities | 2.62 | 1.17 | 1.45 | 123.9% |
| Net Interest Spread | 1.98 | 2.64 | (0.66) | (25.0)% |
| Net Interest Margin | 2.60 | 2.96 | (0.36) | (12.2)% |
| (1) Includes Nonaccrual Loans. |  |  |  |  |

Net interest income for the recently completed quarter decreased by $1.6 million, or 5.8%, from the first quarter of 2023. Interest and fees on loans were $40.4 million for the first quarter of 2024, an increase from $31.9 million for the quarter ending March 31, 2023, primarily due to loan growth and higher loan rates. Interest expense for the first quarter of 2024 was $20.2 million, an increase of $12.2 million versus the comparable quarter ending March 31, 2023, primarily due to higher deposit rates and changes in deposit composition. Net interest margin decreased 36 basis points in the first quarter of 2024 to 2.60%, from 2.96% during the first quarter of 2023. Average earning asset yields were 79 basis points higher as compared to the first quarter of 2023. The cost of interest-bearing liabilities increased 145 basis points from the quarter ended March 31, 2023. Arrow defines net interest margin as net interest income divided by average earning assets, annualized. Further detailed information is presented above under the section entitled "Average Consolidated Balance Sheets and Net Interest Income Analysis" on page 49 The impact of recent interest rate changes on Arrow's deposit and loan portfolios are discussed above in this Report under the sections entitled "Deposit Trends" on page 58 and "Loan Trends" on page 56.

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

### Non-interest Income

### Summary of Non-interest Income

(Dollars in Thousands)

|  | Three Months Ended March 31, 2024 | March 31, 2023 | Change | % Change |
| --- | ---: | ---: | ---: | ---: |
| Income From Fiduciary Activities | $2,457 | $2,275 | $182 | 8.0% |
| Fees for Other Services to Customers | 2,543 | 2,595 | (52) | (2.0)% |
| Insurance Commissions | 1,682 | 1,520 | 162 | 10.7% |
| Net Gain on Securities | 17 | (104) | 121 | (116.3)% |
| Net Gain on the Sale of Loans | 4 | 4 | — | —% |
| Other Operating Income | 1,155 | 387 | 768 | 198.4% |
| Total Non-interest Income | $7,858 | $6,677 | $1,181 | 17.7% |

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

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

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

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

### Non-interest Expense

### Summary of Non-interest Expense

(Dollars in Thousands)

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

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

### Income Taxes

### Summary of Income Taxes

(Dollars in Thousands)

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

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

## Market risk

As filed, 4,672 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 March 31, 2024:

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

The balance sheet shows an inverse relationship between changes in prevailing rates and Arrow's net interest income in the near term, suggesting that liabilities and sources of funds generally reprice more quickly than earning assets. However, when net interest income is simulated over a longer time frame, the balance sheet shows a relatively neutral profile with long-term asset sensitivity, as asset yields continue to reprice while the cost of funding reaches assumed ceilings or floors.

The hypothetical estimates underlying the sensitivity analysis are based upon numerous assumptions, including: the nature and timing of changes in interest rates including yield curve shape, prepayments on loans and securities, deposit decay rates, pricing decisions on loans and deposits, reinvestment/replacement of asset and liability cash flows, and others. While assumptions are developed based upon current economic and local market conditions, Arrow cannot make any assurance as to the predictive nature of these assumptions including how customer preferences or competitor influences might change.

Also, as market conditions vary from those assumed in the sensitivity analysis, actual results will differ due to: prepayment/refinancing levels likely deviating from those assumed, the varying impact of interest rate changes on caps or floors on adjustable rate assets, the potential effect of changing debt service levels on customers with adjustable rate loans, depositor early withdrawals and product preference changes, unanticipated shifts in the yield curve and other internal/external variables. Furthermore, the sensitivity analysis does not reflect actions that ALCO might take in responding to or anticipating changes in interest rates.

## Controls and procedures

As filed, 6,808 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 March 31, 2024. The term "disclosure controls and procedures" means controls and other procedures of a company that are designed to ensure that:

- information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms; and
- information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to management, including the principal executive and principal financial officers, or persons and committees performing similar functions, such as the Audit Committee, as appropriate to allow timely decisions regarding required disclosure.

Based on this evaluation, management concluded that our internal control over financial reporting was not effective due to the following unremediated material weaknesses identified in our internal control over financial reporting, previously disclosed on the 2023 Form 10-K:

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

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

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

### Remediation Efforts to Address the Material Weaknesses

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

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

- The Company evaluated the assignment of responsibilities of internal and external resources associated with the performance of internal controls over financial reporting and hired additional resources, contracted external resources, and/or provided additional training to existing resources as appropriate. In addition, we have initiated a process to identify and maintain the information required to support the functioning of internal control.
- Audit Committee and management implemented the following actions to improve the monitoring activities related to Audit Committee oversight over Internal Audit’s testing of management’s internal control over financial reporting:
- Increased the frequency and depth of reporting to the Audit Committee through the creation of a sub-committee of Audit Committee members that meet in the months in which the full Audit Committee does not have scheduled meetings or as needed.
- Instituted more frequent Audit Committee meetings to facilitate timely review of matters related to the results of the Company’s monitoring program and Internal Audit’s progress against their plan as well as status of control testing results.
- Developed a comprehensive internal audit strategy and program to test management’s controls over financial reporting.
- Developed a robust reporting mechanism to ensure the completeness, accuracy and improved effectiveness of information which is presented on a timely basis to the Audit Committee to help fulfill the Audit Committee's oversight responsibilities.
- Utilized monthly dashboards to report status and results of internal audits as well as operations of internal controls over financial reporting.
- Engaged a professional services firm to review the Company’s control program required by the Sarbanes-Oxley Act of 2002, as amended, and assist Management with its overall Company-wide processes and with selecting and developing control activities designed to mitigate risks and support achievement of control objectives.
- Performed a thorough risk assessment to identify the impact of the core banking system conversion on our internal control over financial reporting. As a result, the company identified the need for additional controls to mitigate risks and support the achievement of control objectives. These controls are being implemented as part of the ongoing, overall remediation efforts.

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

### Changes in Internal Control Over Financial Reporting

Except for the remediation measures in connection with the material weaknesses described above, there were no changes in our internal control over financial reporting, as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act, during the quarter ended March 31, 2024 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Filed May 10, 2024.
Source: SEC EDGAR, the filing index for accession 0000717538-24-000076. Last ingested by Listed: Oct 29, 2026, 08:06 ET. No prices; not investment advice.