ANNUAL REVIEW
Our employees, customers and communities count on us every day and, as you will see on the following pages, we have delivered for all of our stakeholders. Tom Murphy President and CEO The information in this document may contain statements based on management’s beliefs, assumptions, expectations, estimates and projections about the future. Such "forward-looking statements," as defined in Section 21E of the Securities Exchange Act of 1934, as amended, involve a degree of uncertainty and attendant risk. Actual outcomes and results may differ, explicitly or by implication. We are not obliged to revise or update these statements to reflect unanticipated events. This document should be read in conjunction with Arrow’s Annual Report on Form 10-K for the year ended December 31, 2021 and other filings with the Securities and Exchange Commission.
2 | ARROW FINANCIAL CORPORATION • 2021 ANNUAL REVIEW Arrow Stakeholders: I am pleased to report that Arrow Financial Corporation delivered another strong performance in 2021. We are proud, once again, to have delivered exceptional shareholder value with record earnings, strong profitability ratios, sound asset quality and asset growth to a record of more than $4 billion. We have issued a cash dividend to our shareholders for 114 consecutive quarters, including an increase in the cash dividend in 2021, and for the past 13 years we have issued an annual stock dividend. We did all this while weathering a second year of pandemic-related issues. Our employees, customers and communities count on us every day, and as an essential business, the Arrow Family of Companies demonstrated that we are here for them! Certainly, the pandemic was top- of-mind in the management of our business this year, but we continued to find ways to improve our customer experience. As you will see in the Year in Review section, our Team focused on investing and optimizing our technology as well as our physical network. We rolled out enhancements to the digital customer experience and worked on renovations, relocations and consolidations of our brick-and-mortar presence within our footprint. The Arrow Team rose to the challenge of Paycheck Protection Program loan demand, and our Retail Team navigated COVID-related staffing concerns, while avoiding widespread lobby closures for the predominance of the year. Our people and our values have always been our greatest asset. So to further strengthen this foundation, we asked ourselves how to best express our mission, vision and culture to reflect the workforce and marketplace of today as well as tomorrow. We are working on cultivating diversity, equity, inclusion and belonging in meaningful ways. Along these lines, we are very proud to advise you that we currently exceed the new Nasdaq diversity requirements for our Board of Directors. We have had a woman on our Board for more than 30 years, two women on our Board for more than 20 years and we currently have one person of color on our Board. Furthermore, as a publicly traded company, we recognize the importance of being environmentally and socially conscious and reporting back to our shareholders on the ways in which we demonstrate that commitment. We look forward to sharing updates of both our ongoing and emerging efforts. Finally, as noted at the end of this report, we surpassed prior-year community contributions in terms of both dollars and hours. Being a good and involved neighbor is a very important part of who we are. We are enormously proud of the dollars we donate, the thousands of hours our Team gives back and the impact we make on our communities by doing so. As we look ahead, I want to commend the Arrow Team for their stellar performance, and their commitment and dedication to our Company, our customers and our communities. They made these achievements and financial results possible, which, in turn, allow us to continue to deliver the best service for our customers, give back to our communities and deliver value for our shareholders. I thank you for your commitment to the Arrow Family of Companies. For those of you who are shareholders, I thank you for your investment in Arrow Financial Corporation. Your trust and support is appreciated as we continue to work to maintain your trust in us and create value for your investment. Please be healthy and stay safe! Tom Murphy President and CEO
3 | ARROW FINANCIAL CORPORATION • 2021 ANNUAL REVIEW STEADY GROWTH In 2021, Arrow Financial Corporation exceeded $4 billion in total assets, a significant growth milestone. Our growth has been steady, solid and organic, driven by expansion in new markets and deepening of existing customer relationships, all without sacrificing asset quality and other performance metrics, as recognized by a number of third-party entities: • Arrow was named a Raymond James Community Bankers Cup winner in 2021, which recognizes the top 10% of community banks using various profitability, efficiency and balance sheet metrics. • Arrow was also selected as one of the top 35 banks and thrifts that comprise the Piper Sandler Sm-All Stars Class Like most businesses, 2021 continued to challenge us in many ways. However, with teamwork, resilience and dedication, the Arrow Team excelled. Below are a few of our strategic areas of focus, followed by more detailed financial results. of 2021, and is one of just five New York financial institutions on the list. • Glens Falls National Bank and Saratoga National Bank maintained their 5-Star “Exceptional Performance” ratings from BauerFinancial for the 14th and 12th year, respectively. BRANCH OPTIMIZATION We focused on continued optimization of our branch network in 2021, evaluating placement, performance and opportunity within our footprint. A combination of renovation, consolidation and relocation has allowed us to deliver an enhanced customer experience and to streamline expenses. • In September, Saratoga National Bank consolidated its smaller Jones Road and
4 | ARROW FINANCIAL CORPORATION • 2021 ANNUAL REVIEW Ballard Road branches into one larger, fully renovated branch in nearby Wilton Square shopping plaza offering customers a better and more convenient location. • Glens Falls National Bank consolidated two branches within a mile of each other on Broadway in Fort Edward, allowing our Team to serve the community from one central, updated office. HEADQUARTERS RENOVATION The renovation of our Downtown Glens Falls Campus, which includes our Arrow Family of Companies headquarters as well as our Glens Falls National Bank Main Office, kicked off in 2021 and is expected to conclude in 2023. • This full renovation is the final stage of the multi-year plan to create a more flexible and functional work environment, improve energy efficiency and replace aging infrastructure. • The project involves exterior and interior improvements, replacement of aging building equipment with new, energy-efficient systems, creation of a new lobby for customer transactions and development of additional space for lending and corporate offices. ADVANCING TECHNOLOGY We are responding to customer experience trends that favor self-service digital channels. In 2021, efforts continued to enhance existing systems and provide new digital offerings. • An enhanced Business Online Banking interface was launched in early 2021, followed by a user-friendly Business Mobile App. • To help customers combat ongoing and ever-present fraud attempts, in June we launched SecurLOCK within our consumer banking platform that allows customers to turn their debit card on and off and customize alerts. • We rolled out a new mortgage application platform in mid-2021 to make it easier for customers to apply online and connect with a mortgage originator. • We refreshed all our native websites with enhanced navigation, content and functionality. • Planning and preparation for a new deposit online account opening platform began in 2021 and has since rolled out. SOCIALLY CONSCIOUS PERFORMANCE At Arrow, we are firmly committed to operating in a socially conscious manner that demonstrates positive environmental, social and governance contributions, also known as (“ESG”). Environmentally, Arrow is dedicated to conserving natural resources and complying with environmental regulations. Socially, we are proud of Arrow’s many contributions to our employees, our customers and our communities, including meeting financial needs of the low- to moderate-income population, providing professional development and holistic support of our Team, and giving back to our communities. We are working in many ways to demonstrate that we value differences, particularly in the areas of diversity, equity, inclusion and belonging (“DEIB”). Finally, we believe that strong corporate governance is the foundation to delivering on our commitments to our stakeholders.
5 | ARROW FINANCIAL CORPORATION • 2021 ANNUAL REVIEW Below are some examples of these commitments. Additional details can be found in our shareholder communications and filings with the Securities and Exchange Commission. • Digital banking options and paperless statements are provided and encouraged • Facility renovations incorporate energy-saving features • Emissions reduction through remote work and video conferencing • Longstanding dedication to diversity on Arrow’s Board of Directors, exceeding Nasdaq requirements • Professional development, wellness and mental health employee services are available to our Team • Annual engagements with a third-party to assess diversity within our employee base and support for the setting and tracking of goals to encourage the advancement of minorities, women, veterans and persons with disabilities • Incorporation of inclusion and belonging into our HR policies, practices and programs • Development of a future DEIB educational series and related stakeholder group to guide further initiatives • Products to facilitate first-time home ownership • Bank On certification for Smart Steps checking to serve the underbanked • Extensive pandemic-related support to customers in need, including PPP and loan deferrals • Annually, time, dollars and expertise are donated to community organizations, with an emphasis on affordable homeownership, economic empowerment, health and human services, and social progress (more on our 2021 support on page 11) • Comprehensive governance program, as described in further detail in our annual Proxy Statement As a good corporate neighbor that is firmly committed to both ESG and DEIB initiatives, we look forward to sharing more on the ways we are positively contributing to our communities. PANDEMIC PERFORMANCE The COVID-19 virus continued to challenge us through 2021, yet we met the pandemic head- on with solid financial strength and extraordinary business continuity management. We stayed strong and prioritized health and safety for our Team, our customers, and our communities. • In early 2021, both Glens Falls National Bank and Saratoga National Bank were named “Top Pandemic Performers” by the Rivel Banking Benchmark Survey, based on customer feedback. • In 2021, we assisted over 900 business customers with more than $93 million in second-round Paycheck Protection Program loans to help maintain their business. Additionally, we assisted those customers and first-round borrowers with the forgiveness process. • The Arrow Team implemented all of New York State’s HERO Act safety protocols and vaccination guidelines to keep our Team strong and our customers safe when conducting business on our premises. • We recognized our Team for their outstanding dedication and efforts with a COVID bonus of one- week’s pay in September.
6 | ARROW FINANCIAL CORPORATION • 2021 ANNUAL REVIEW 2021 Financial Highlights Arrow Financial Corporation delivered a strong year of solid earnings, profitability ratios and asset growth for increased shareholder value. Here are some highlights: Net Income: $49.9 million, up 22.1% Total Loans: $2.7 billion, up 2.8% Total Deposits: $3.6 billion, up 9.8% Total Assets: $4.0 billion, up 9.2% Return on Average Equity: 14.09% Return on Average Assets: 1.28% Stock Dividend: 3% distributed in September Current Quarterly Cash Dividend: $0.27 Book Value Per Share: Increase of 10.6% Shareholders’ Equity: Increase of 11.0%
7 | ARROW FINANCIAL CORPORATION • 2021 ANNUAL REVIEW $250 $270 $302 $334 Performance Comparisons As of December 31 ($ in Millions) *Per Share Amounts have been restated for stock dividends distributed. $3.10 $1.86 $2.29 $2.36 $2.56 For the 12 Months Ended December 31* DILUTED EARNINGS PER SHARE 2017 2018 2019 2020 2021 As of December 31 ($ in Millions) $2,760 $2,988 $3,184 $3,689 ASSETS 2017 2018 2019 2020 2021 $4,028 $0.86 $0.91 $0.96 $0.99 $1.02 For the 12 Months Ended December 31* CASH DIVIDENDS PAID PER SHARE 2017 2018 2019 2020 2021 $2,245 $2,346 $2,616 $3,235 As of December 31 ($ in Millions) DEPOSITS 2017 2018 2019 2020 2021 $3,550 $15.92 $17.04 $18.96 $20.92 As of December 31* BOOK VALUE PER SHARE 2017 2018 2019 2020 2021 $23.14 $371 2017 2018 2019 2020 2021 SHAREHOLDERS’ EQUITY
8 | ARROW FINANCIAL CORPORATION • 2021 ANNUAL REVIEW Source: Prepared by Zacks Investment Research, Inc. Used with permission. All rights reserved. Copyright 1980–2022. Total Return Performance 2016 2017 2018 2019 2020 2021 Arrow Financial Corporation 100.00 88.90 88.86 111.42 94.01 117.49 NASDAQ Banks Index 100.00 102.57 87.28 107.62 95.19 128.97 Russell 2000 Index 100.00 114.65 102.02 128.06 153.62 176.39 Zacks $1B-$5B Bank Assets Index 100.00 109.70 99.82 116.60 95.03 131.24 Comparison of 15-Year Cumulative Total Return • Assumes Initial Investment of $100 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 Arrow Financial Corporation 100.00 93.60 114.55 122.27 144.58 132.53 149.83 169.06 185.27 193.70 306.95 272.89 272.74 342.00 288.57 360.62 NASDAQ Banks Index 100.00 77.15 64.00 51.71 57.64 53.88 63.42 89.86 94.04 103.02 142.96 146.63 124.78 153.85 136.08 184.38 Russell 2000 Index 100.00 98.43 65.17 82.88 105.13 100.74 117.21 162.70 170.66 163.14 197.90 226.89 201.91 253.45 304.04 349.09 Zacks $1B-$5B Bank Assets Index 100.00 79.78 68.44 56.19 60.62 56.91 67.87 86.29 94.03 104.01 145.29 159.39 145.03 169.41 138.08 190.68 0.00 50.00 100.00 150.00 200.00 250.00 300.00 350.00 400.00 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 Comparison of 15 Year Cumulative Total Return Assumes Initial Investment of $100 December 2021 Arrow Financial Corporation Russell 2000 Index Zacks $1B-$5B Bank Assets Index ABA NASDAQ Community BankTR 0.00 20.00 40.00 60.00 80.00 100.00 120.00 140.00 160.00 180.00 200.00 2016 2017 2018 2019 2020 2021 Comparison of 5 Year Cumulative Total Return Assumes Initial Investment of $100 December 2021 Arrow Financial Corporation Russell 2000 Index Zacks $1B-$5B Bank Assets Index ABA NASDAQ Community BankTR Comparison of Five-Year Cumulative Total Return • Assumes Initial Investment of $100 December 2021 December 2021
9 | ARROW FINANCIAL CORPORATION • 2021 ANNUAL REVIEW $111,896 12,694 99,202 9,319 89,883 32,658 70,678 51,863 11,036 $40,827 Consolidated Statements of Income (Unaudited) (in thousands, except Per Share Amounts) Years Ended December 31 2017 2018 2019 2020 2021 Interest and Dividend Income Interest Expense Net Interest Income Provision for Credit Losses Net Interest Income after Provision for Credit Losses Total Noninterest Income Total Noninterest Expense Income Before Taxes Provision for Income Taxes Net Income Share and Per Share Data Diluted Average Shares Outstanding Diluted Earnings Per Share Cash Dividends Per Share Book Value Per Share Tangible Book Value Per Share Key Earnings Ratios Return on Average Assets Return on Average Equity Return on Tangible Equity Net Interest Margin Capital Ratios Tier 1 Leverage Ratio Total Risk-Based Capital Ratio Asset Quality Ratios Nonperforming Assets to Period-End Assets Allowance for Credit Losses to Period-End Loans 16,073 $3.10 $1.02 $23.14 $21.66 1.28% 14.09% 15.11% 2.97% 9.20% 15.69% 0.29% 1.02% 15,742 $1.86 $.86 $15.92 $14.39 1.09% 12.14% 13.51% 3.02% 9.49% 14.98% 0.28% 0.95% 15,831 $2.29 $.91 $17.04 $15.54 1.27% 13.96% 15.38% 3.07% 9.61% 14.86% 0.23% 0.92% 15,896 $2.36 $.96 $18.96 $17.48 1.24% 13.17% 14.36% 3.05% 9.98% 14.78% 0.18% 0.89% $84,657 7,006 77,651 2,736 74,915 27,645 62,705 39,855 10,529 $29,326 $96,503 12,485 84,018 2,607 81,411 28,949 65,055 45,305 9,026 $36,279 $109,759 21,710 88,049 2,079 85,970 28,555 67,450 47,075 9,600 $37,475 $115,550 5,195 110,365 272 110,083 32,369 78,048 64,404 14,547 $49,857 15,944 $2.56 $.99 $20.92 $19.43 1.17% 12.77% 13.78% 2.99% 9.07% 15.48% 0.18% 1.13%
10 | ARROW FINANCIAL CORPORATION • 2021 ANNUAL REVIEW 2017 2018 2019 2020 2021 Consolidated Balance Sheets (Unaudited) (in thousands) As of December 31 Assets Cash and Due from Banks Interest-Bearing Deposits at Banks Investment Securities Loans Allowance for Credit Losses Net Loans Premises and Equipment, Net Goodwill and Intangible Assets, Net Other Assets Total Assets Liabilities and Shareholders’ Equity Noninterest-Bearing Deposits Interest-Bearing Checking and Savings Deposits Time Deposits Total Deposits Short-Term Borrowings Federal Home Loan Bank Term Advances Other Long-Term Debt Other Liabilities Total Liabilities Total Shareholders’ Equity Total Liabilities and Shareholders’ Equity $47,035 23,186 614,779 2,386,120 (21,187) 2,364,933 40,629 23,534 70,179 $3,184,275 $484,944 1,735,789 395,321 2,616,054 181,099 30,000 20,000 35,394 2,882,547 301,728 $3,184,275 $42,562 30,276 646,056 1,950,770 (18,586) 1,932,184 27,619 24,162 57,606 $2,760,465 $441,945 1,601,888 201,283 2,245,116 169,966 55,000 20,000 20,780 2,510,862 249,603 $2,760,465 $56,529 27,710 618,291 2,196,215 (20,196) 2,176,019 30,446 23,725 55,614 $2,988,334 $472,768 1,608,829 263,987 2,345,584 288,659 45,000 20,000 19,507 2,718,750 269,584 $2,988,334 $26,978 430,718 763,009 2,667,941 (27,281) 2,640,660 46,217 23,791 96,579 $4,027,952 $810,274 2,525,678 214,545 3,550,497 0 45,000 20,000 41,269 3,656,766 371,186 $4,027,952 $42,116 338,875 590,677 2,595,030 (29,232) 2,565,798 42,612 23,823 84,735 $3,688,636 $701,341 2,255,792 277,593 3,234,726 17,486 45,000 20,000 37,032 3,354,244 334,392 $3,688,636
11 | ARROW FINANCIAL CORPORATION • 2021 ANNUAL REVIEW Community Contributions A LOOK AT OUR 2021 GIVING COMMUNITY ORGANIZATIONS SUPPORTED COUNTIES SERVED from Albany to Plattsburgh450+ 8 $674,000 1787,757Hours Donated Employee Volunteers Our philanthropy supported many areas of impact, including food insecurity, affordable housing, financial empowerment, economic development, youth and senior services, sports and recreation, emergency services, education, workforce development, animal welfare, arts and culture, environmental sustainability, health and human services and more! Donated to our communities INCLUDING $105,825 from employee contributions
12 | ARROW FINANCIAL CORPORATION • 2021 ANNUAL REVIEW We have been there and will continue to be there for our communities, through charitable contributions, partnerships and volunteerism.
13 | ARROW FINANCIAL CORPORATION • 2021 ANNUAL REVIEW Board of Directors Our Leadership Herbert O. Carpenter John J. Carusone, Jr. Mary-Elizabeth T. FitzGerald Herbert A. Heineman, Jr. Elizabeth O’Connor Little Michael F. Massiano (Chairman Emeritus) David L. Moynehan John J. Murphy Doris E. Ornstein Richard J. Reisman, DMD Corporate Officers Thomas L. Hoy (Chairman) Retired President and CEO Arrow Financial Corporation/ Glens Falls National Bank Mark L. Behan President Behan Communications, Inc. Tenée R. Casaccio, AIA President JMZ Architects and Planners, PC Michael B. Clarke Retired President and CEO Lone Star Industries Retiring eff. 2022 Annual Meeting Gary C. Dake President Stewart’s Shops Corp. David G. Kruczlnicki Retired President and CEO Glens Falls Hospital Elizabeth A. Miller President and CEO Miller Mechanical Services, Inc. Thomas J. Murphy President and CEO Arrow Financial Corporation/ Glens Falls National Bank Raymond F. O’Conor Chairman, Retired President and CEO Saratoga National Bank William L. Owens, Esq. Partner Stafford, Owens, Piller, Murnane, Kelleher and Trombley, PLLC Colin L. Read, PhD Professor of Economics/Finance SUNY Plattsburgh Directors Emeriti Andrew J. Wise Senior Vice President and Chief Operating Officer David D. Kaiser Senior Vice President and Chief Credit Officer David S. DeMarco Senior Vice President and Chief Banking Officer Edward J. Campanella Senior Vice President, Treasurer and Chief Financial Officer Thomas J. Murphy President and CEO Gregory J. Champion Retired Attorney and Managing Partner, Bond, Schoeneck & King PLLC
Glens Falls National Bank and Trust Company is a community bank headquartered in Glens Falls, New York, that serves Warren, Washington, Essex, Clinton and northern Saratoga counties in Upstate New York. It operates 27 banking offices and provides a wide range of financial products and services to individuals and businesses, including banking, investments and insurance. Saratoga National Bank and Trust Company is a community bank headquartered in Saratoga Springs, New York. It serves Saratoga, Albany, Rensselaer and Schenectady counties through 11 banking offices and provides a wide range of financial products to individuals and businesses, including banking, investments and insurance. Other Arrow Financial Corporation subsidiaries include Upstate Agency, LLC, an insurance agency that specializes in personal and business insurance, as well as group health and employee benefits North Country Investment Advisers, Inc., an investment advisory firm that provides portfolio management of proprietary accounts for our banks. Arrow Financial Corporation is the parent company of Glens Falls National Bank and Trust Company and Saratoga National Bank and Trust Company. Other subsidiaries include an insurance company, Upstate Agency, LLC and North Country Investment Advisers, Inc. Our Family of Companies 14 | ARROW FINANCIAL CORPORATION • 2021 ANNUAL REVIEW
15 | ARROW FINANCIAL CORPORATION • 2021 ANNUAL REVIEW Our Footprint Elizabethtown Warrensburg Chestertown Ticonderoga Schroon Lake Durkee St. Ticonderoga Drive-In Smithfield Blvd. Port Henry U.S. Ave. Schuylerville Cambridge Salem Argyle Kingsbury Fort Ann Fort Edward Greenwich Granville Main Office Queensbury Lake George South Glens Falls Aviation Road Lake Luzerne Broad St. Bay Road Exit 18 Corinth Wilton Square Route 9 West Ave. Clifton Park TroyLatham Colonie Saratoga Springs Schenectady Rotterdam Saratoga Albany Rensselaer Schenectady Washington Warren Clinton Essex Glens Falls National Bank and Trust Company Saratoga National Bank & Trust Company Upstate Agency, LLC Arrow Financial Corporation is a multi- bank holding company headquartered in Glens Falls, New York, providing banking, insurance and wealth management services from 38 branches and nine insurance offices in eight counties from Plattsburgh to Albany. With a footprint of more than 160 miles along the eastern border of New York State, our companies reach a broad customer base including rural, urban and suburban areas from the Canadian border to the Hudson Valley. As of the 2020 Census, this service area includes a population of over 1.1 million individuals, families and businesses. Our Arrow Team of more than 520 staff members, strive to deliver an exceptional customer experience across all lines of business. They make our achievements and financial results possible!
16 | ARROW FINANCIAL CORPORATION • 2021 ANNUAL REVIEW 250 Glen Street, PO Box 307, Glens Falls, NY 12801 (518) 745-1000 | arrowfinancial.com