UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

☒ Annual Report Pursuant to Section 13 or 15(d) of

The Securities Exchange Act of 1934

For the Fiscal Year Ended December 31, 2023

☐ Transition Report Pursuant to Section 13 or 15(d)

of The Securities Exchange Act of 1934

Commission File Number: 0-12507

ARROW FINANCIAL CORPORATION

(Exact name of registrant as specified in its charter)

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

250 Glen Street,	Glens Falls	New York	12801
(Address of principal executive offices)			(Zip Code)
Registrant’s telephone number, including area code:			518	745-1000

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

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

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  ☐ Yes     ☒ No

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. ☐ Yes    ☒  No

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

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

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

Large accelerated filer	☐	Accelerated filer	☒
Non-accelerated filer	☐	Smaller reporting company	☐
		Emerging growth company	☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.			☐
Indicate by a check mark whether the registrant has filed a report on and attestation to its management's assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7562(b)) by the registered public accounting firm that prepared or issued its audit report.			☒
If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of an error to previously issued financial statements.			☐
Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant’s executive officers during the relevant recovery period pursuant to §240.10D-1(b).			☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).			☐

State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of the last business day of the registrant’s most recently completed second fiscal quarter:    $333,303,608

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

Class	Outstanding as of February 29, 2024
Common Stock, par value $1.00 per share	16,553,058

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Registrant’s Proxy Statement for Annual Meeting of Shareholders to be held June 5, 2024 are incorporated by reference into Part III of this Form 10-K.

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

ARROW FINANCIAL CORPORATION

FORM 10-K

TABLE OF CONTENTS

	Page
Note on Terminology	3
The Company and Its Subsidiaries	3
Forward-Looking Statements	3
Use of Non-GAAP Financial Measures	4
PART I
Item 1. Business	6
Item 1A. Risk Factors	16
Item 1B. Unresolved Staff Comments	20
Item 1C.Cybersecurity	20
Item 2. Properties	20
Item 3. Legal Proceedings	21
Item 4. Mine Safety Disclosures	21
PART II
Item 5. Market for the Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of    Equity Securities	22
Item 6. Reserved	25
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations	26
Item 7A. Quantitative and Qualitative Disclosures About Market Risk	53
Item 8. Financial Statements and Supplementary Data	53
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure	111
Item 9A. Controls and Procedures	111
Item 9B. Other Information	112
Item 9C.    Disclosure Regarding Foreign Jurisdictions that Prevent Inspections	113
PART III
Item 10. Directors, Executive Officers and Corporate Governance	114
Item 11. Executive Compensation	114
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	114
Item 13. Certain Relationships and Related Transactions, and Director Independence	114
Item 14. Principal Accounting Fees and Services	114
PART IV
Item 15. Exhibits, Financial Statement Schedules	114
Item 16. Form 10-K Summary	115
Exhibit Index	116
Signatures	118

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NOTE ON TERMINOLOGY

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

THE COMPANY AND ITS SUBSIDIARIES

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

FORWARD-LOOKING STATEMENTS

    The information contained in this Annual Report on Form 10-K contains statements that are not historical in nature but rather are based on our beliefs, assumptions, expectations, estimates and projections about the future.  These statements are “forward-looking statements” within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and involve a degree of uncertainty and attendant risk.  Words such as “expects,” “believes,” “anticipates,” “estimates” and variations of such words and similar expressions often identify such forward-looking statements.  Some of these statements, such as those included in the interest rate sensitivity analysis in Item 7A of this Report, entitled “Quantitative and Qualitative Disclosures About Market Risk,” are merely presentations of what future performance or changes in future performance would look like based on hypothetical assumptions and on simulation models.  Other forward-looking statements are based on our general perceptions of market conditions and trends in activity, both locally and nationally, as well as current management strategies for future operations and development.

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

•continuing and growing security risks to its information base including the information maintained relating to customers, and any breaches in the security systems implemented to protect this information;

•significant changes to market conditions presenting challenges to the U.S. commercial banking industry and any substantial downturn in the regional markets in which Arrow operates or in the U.S. economy generally;

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

•competition in the commercial banking industry and certain market areas;

•failing to adapt to increasing technological advances and changes on a continuing basis;

•adverse effects on Arrow based on problems encountered by other financial institutions;

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

•potential residual effects from the implementation of our new core banking system in September 2022;

•losing key personnel unexpectedly or if employee wages increase significantly;

•pandemics or other health emergencies and their impact on economic, market and social conditions;

•continued interest rate risk;

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

•maintaining an insufficient allowance for possible credit losses;

•risks from the increasing complexity of Arrow's operations;

•the failure to timely remediate the material weaknesses that we identified in our internal control over financial reporting and resolve litigation and other claims related to or arising out of the identified material weaknesses;

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

•maintaining higher quality capital and greater liquidity than has historically been the case;

•significant changes in banking or other laws and regulations, including both enactment of new legal or regulatory measures (e.g., the Economic Growth, Regulatory Relief, and Consumer Protection Act ("Economic Growth Act"), the Tax Cuts and Jobs Act of 2017 ("Tax Act") and the Dodd-Frank Wall Street Reform and Consumer Protection Act ("Dodd-Frank")) or the modification or elimination of pre-existing measures;

•non-compliance with the Patriot Act, Bank Secrecy Act, or other anti-money laundering laws and regulations;

•potential failure to comply with the CRA and fair lending laws;

•other rapid and dramatic changes in economic and market conditions;

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•sharp fluctuations in interest rates, economic activity, or consumer spending patterns;

•sudden changes in the market for products the Company provides, such as real estate or automobile loans;

•significant changes in U.S. monetary or fiscal policy, including new or revised monetary programs or targets adopted or announced by the Federal Reserve ("monetary tightening or easing") or significant new federal legislation materially affecting the federal budget ("fiscal tightening or expansion");

•competition from other sources (e.g., non-bank entities);

•similar uncertainties inherent in banking operations or business generally, including technological developments and changes;

•the continuity, timing and effectiveness of the recent transition in executive management; and

•other risks detailed from time to time within our filings with the Securities and Exchange Commission ("SEC").

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

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USE OF NON-GAAP FINANCIAL MEASURES

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

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

The Efficiency Ratio: Financial institutions often use an "efficiency ratio" as a measure of expense control.  The efficiency ratio typically is defined as the ratio of noninterest expense to net interest income and noninterest income.  Net interest income as utilized in calculating the efficiency ratio is typically the same as the net interest income presented in Selected Financial Information table discussed in the preceding paragraph, i.e., it is expressed on a tax-equivalent basis.  Moreover, many financial institutions, in calculating the efficiency ratio, also adjust both noninterest expense and noninterest income to exclude from these items (as calculated under GAAP) certain recurring component elements of income and expense, such as intangible asset amortization (which is included in noninterest expense under GAAP but may not be included therein for purposes of calculating the efficiency ratio) and securities gains or losses (which are reflected in the calculation of noninterest income under GAAP but may be ignored for purposes of calculating the efficiency ratio).  The Company makes these adjustments.

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

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

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

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PART I

Item 1. Business

A. GENERAL

The holding company, Arrow Financial Corporation, a New York corporation, was incorporated on March 21, 1983 and is registered as a bank holding company within the meaning of the Bank Holding Company Act of 1956.  Arrow owns two nationally-chartered banks in New York (Glens Falls National and Saratoga National), and through such banks indirectly owns various non-bank subsidiaries, including an insurance agency, a registered investment adviser and a REIT. See "The Company and Its Subsidiaries," above.

Subsidiary Banks (dollars in thousands and data is as of December 31, 2023)
	Glens Falls National		Saratoga National
Total Assets at Year-End	$	3,274,507	$	1,062,118
Trust Assets Under Administration and    Investment Management at Year-End    (Not Included in Total Assets)	$	1,625,139	$	138,055
Date Organized	1851		1988
Employees (full-time equivalent)	480		57
Offices	26		11
Counties of Operation	Warren, Washington, Saratoga, Essex & Clinton		Saratoga, Albany, Rensselaer, & Schenectady
Main Office	250 Glen Street Glens Falls, NY		171 So. Broadway Saratoga Springs, NY

The holding company’s business consists primarily of the ownership, supervision and control of Arrow's two banks, including the banks' subsidiaries.  The holding company provides various advisory and administrative services and coordinates the general policies and operation of the banks. There were 537 full-time equivalent employees, including 38 employees within Arrow's insurance agency subsidiary, at December 31, 2023. See the discussion of our human capital resources in Section G ("HUMAN CAPITAL") of this Item 1.

Arrow offers a broad range of commercial and consumer banking and financial products.  The deposit base consists of deposits derived principally from the communities served.  The Company targets lending activities to consumers and small- and mid-sized companies in Arrow's regional geographic area. In addition, through an indirect lending program Arrow sources consumer loans from an extensive network of automobile dealers that operate in upstate New York and Vermont. Through the banks' trust operations, the Company provides retirement planning, trust and estate administration services for individuals, and pension, profit-sharing and employee benefit plan administration for corporations.

B. LENDING ACTIVITIES

Arrow engages in a wide range of lending activities, including commercial and industrial lending primarily to small and mid-sized companies; mortgage lending for residential and commercial properties; and consumer installment and home equity financing. An active indirect lending program is maintained through Arrow's sponsorship of automobile dealer programs under which consumer auto loans, primarily from dealers that meet pre-established specifications are sourced.  From time to time, a portion of Arrow's residential real estate loan originations are sold into the secondary market, primarily to the Federal Home Loan Mortgage Corporation ("Freddie Mac") and other governmental agencies. Normally, the Company retains the servicing rights on mortgage loans originated and sold into the secondary markets, subject to periodic determinations on the continuing profitability of such activity.  Arrow does not engage in subprime mortgage lending as a business line and does not extend or purchase so-called "Alt A," "negative amortization," "option ARMs" or "negative equity" mortgage loans.  

Arrow lends primarily to borrowers within the normal retail service area in upstate New York, with the exception of the indirect consumer lending line of business, where Arrow makes loans through an extensive network of automobile dealers that operate in a larger area of New York and Vermont. The loan portfolio does not include any foreign loans or any other significant risk concentrations.  From time to time, Arrow buys and offers participations in individual commercial loans, primarily in upstate New York. In recent periods, the total dollar amount of such participations has fluctuated, but generally represents less than 20% of commercial loans outstanding. The majority of the portfolio is collateralized, and most commercial loans are further supported by personal guarantees.

Generally, Arrow continues to implement lending strategies and policies that are intended to protect the quality of the loan portfolio, including strong underwriting and collateral control procedures and credit review systems. Loans are placed on nonaccrual status either due to the delinquency status of principal and/or interest or a judgment by management that the full repayment of principal and interest is unlikely. Home equity lines of credit, secured by real property, are systematically placed on nonaccrual status when 120 days past due, and residential real estate loans are placed on nonaccrual status when 150 days past due. Commercial and commercial real estate loans are evaluated on a loan-by-loan basis and are placed on nonaccrual status when 90 days past due if the full collection of principal and interest is uncertain (See Part II, Item 7.C.II.c. "Risk Elements"). Subsequent cash payments on loans classified as nonaccrual may be applied entirely to principal, although income in some cases may be recognized on a cash basis.

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C. SUPERVISION AND REGULATION

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

Bank Regulatory Authorities with Jurisdiction over Arrow and its Subsidiary Banks

Arrow is a registered bank holding company within the meaning of the Bank Holding Company Act of 1956 ("BHC Act") and as such is subject to regulation by the Board of Governors of the Federal Reserve System ("FRB").  As a "bank holding company" under New York State law, Arrow is also subject to regulation by the New York State Department of Financial Services. Arrow's two subsidiary banks are both national banks and are subject to supervision and examination by the Office of the Comptroller of the Currency ("OCC"). The banks are members of the Federal Reserve System and the deposits of each bank are insured by the Deposit Insurance Fund of the Federal Deposit Insurance Corporation ("FDIC").  The BHC Act generally prohibits Arrow from engaging, directly or indirectly, in activities other than banking, activities closely related to banking, and certain other financial activities.  Under the BHC Act, a bank holding company generally must obtain FRB approval before acquiring, directly or indirectly, voting shares of another bank or bank holding company, if after the acquisition the acquiror would own 5 percent or more of a class of the voting shares of that other bank or bank holding company.  Bank holding companies are able to acquire banks or other bank holding companies located in all 50 states, subject to certain limitations. Bank holdings companies that meet certain qualifications may choose to apply to the FRB for designation as “financial holding companies.” Upon receipt of such designation, a financial holding company may engage in a broader array of activities, such as insurance underwriting, securities underwriting and merchant banking. Arrow has not attempted to become, and has not been designated as, a financial holding company.

The FRB and the OCC have broad regulatory, examination and enforcement authority. The FRB and the OCC conduct regular examinations of the entities they regulate. In addition, banking organizations are subject to requirements for periodic reporting to the regulatory authorities.  The FRB and OCC have the authority to implement various remedies if they determine that the financial condition, capital, asset quality, management, earnings, liquidity or other aspects of a banking organization's operations are unsatisfactory or if they determine the banking organization is violating or has violated any law or regulation. The authority of the federal bank regulators over banking organizations includes, but is not limited to, prohibiting unsafe or unsound practices; requiring affirmative action to correct a violation or unsafe or unsound practice; issuing administrative orders; requiring the organization to increase capital; requiring the organization to sell subsidiaries or other assets; restricting dividends, distributions and repurchases of the organization's stock; restricting the growth of the organization; assessing civil money penalties; removing officers and directors; and terminating deposit insurance. The FDIC may terminate a depository institution's deposit insurance upon a finding that the institution's financial condition is unsafe or unsound or that the institution has engaged in unsafe or unsound practices for certain other reasons.

Regulatory Supervision of Other Arrow Subsidiaries

The insurance agency subsidiary of Glens Falls National is subject to the licensing and other provisions of New York State Insurance Law and is regulated by the New York State Department of Financial Services. Arrow's investment adviser subsidiary is subject to the licensing and other provisions of the federal Investment Advisers Act of 1940 and is regulated by the SEC.

Regulation of Transactions between Banks and their Affiliates

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

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Regulatory Capital Standards

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

Bank Capital Rules. In July 2013, federal bank regulators, including the FRB and the OCC, approved revised bank capital rules aimed at implementing capital requirements pursuant to Dodd-Frank. These rules were also intended to coordinate U.S. bank capital standards with the then-current drafts of the Basel III proposed bank capital standards for all of the developed world's banking organizations. The federal regulators' revised capital rules (the "Capital Rules"), which impose significantly higher minimum capital ratios on U.S. financial institutions than the rules they replaced, became effective for Arrow and its subsidiary banks on January 1, 2015, and were fully phased in by the end of 2019.

In 2020, federal bank regulators introduced an optional simplified measure of capital adequacy for qualifying community banking organizations (CBLR).  A qualifying community banking organization that opts into the CBLR framework and meets all the requirements under the CBLR framework will be considered to have met the well-capitalized ratio requirements under the “prompt corrective action” regulations and will not be required to report or calculate risk-based capital ratios.

The CBLR final rule became effective as of January 1, 2020, and Arrow and both subsidiary banks have opted out of utilizing the CBLR framework. Therefore, the Capital Rules promulgated under Dodd-Frank remain applicable to Arrow and both subsidiary banks.

The Capital Rules which remain applicable to Arrow consist of two basic types of capital measures, a leverage ratio and a set of risk-based capital measures. Within these two broad types of rules, however, significant changes were made in the revised Capital Rules, as discussed below.

Leverage Ratio. The Capital Rules increased the minimum required leverage ratio from 3.0% to 4.0%. The leverage ratio continues to be defined as the ratio of the institution's "Tier 1" capital (as defined under the new leverage rule) to total tangible assets (as defined under the revised leverage rule).

Risk-Based Capital Measures. Current risk-based capital measures assign various risk weightings to all of the institution's assets, by asset type, and to certain off balance sheet items, and then establish minimum levels of capital to the aggregate dollar amount of such risk-weighted assets. Under the risk-based Capital Rules, there are eight major risk-weighted categories of assets (although there are several additional super-weighted categories for high-risk assets that are generally not held by community banking organizations like Arrow). The Capital Rules include a measure called the "common equity tier 1 capital ratio" (CET1). For this ratio, only common equity (basically, common stock plus surplus plus retained earnings) qualifies as capital (i.e., CET1). Preferred stock and trust preferred securities, which qualified as Tier 1 capital under the old Tier 1 risk-based capital measure (and continue to qualify as capital under the revised Tier 1 risk-based capital measure), are not included in CET1 capital. Under these rules, CET1 capital also includes most elements of accumulated other comprehensive income (AOCI), including unrealized securities gains and losses, as part of both total regulatory capital (numerator) and total assets (denominator). However, smaller banking organizations like Arrow's were given the opportunity to make a one-time irrevocable election to include or not to include certain elements of AOCI, most notably unrealized securities gains or losses. Arrow made such an election, and therefore does not include unrealized securities gains and losses in calculating the CET1 ratio under the Capital Rules. The minimum CET1 ratio under these rules, effective January 1, 2015, is 4.50%, which remained constant throughout the phase-in period.

Consistent with the general theme of higher capital levels, the Capital Rules also increased the minimum ratio for Tier 1 risk-based capital from 4.0% to 6.0%, effective January 1, 2015. The minimum level for total risk-based capital under the Capital Rules remained at 8.0%.

The Capital Rules also incorporated a capital concept, the so-called "capital conservation buffer" (set at 2.5%, after full phase-in), which must be added to each of the minimum required risk-based capital ratios (i.e., the minimum CET1 ratio, the minimum Tier 1 risk-based capital ratio and the minimum total risk-based capital ratio). The capital conservation buffer was phased-in over four years beginning January 1, 2016 (see the table below). When, during economic downturns, an institution's capital begins to erode, the first deductions from a regulatory perspective would be taken against the capital conservation buffer. To the extent that such deductions should erode the buffer below the required level (2.5% of total risk-based assets after full phase-in), the institution will not necessarily be required to replace the buffer deficit immediately, but will face restrictions on paying dividends and other negative consequences until the buffer is fully replenished.

Also under the Capital Rules, and as required under Dodd-Frank, TRUPs issued by small- to medium-sized banking organizations (such as Arrow) that were outstanding on the Dodd-Frank grandfathering date for TRUPS (May 19, 2010) will continue to qualify as tier 1 capital, up to a limit of 25% of tier 1 capital, until the TRUPs mature or are redeemed, subject to certain limitations. See the discussion of grandfathered TRUPs in Section E ("CAPITAL RESOURCES AND DIVIDENDS") of Item 7.

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

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

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

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

The following table presents the Capital Rules applicable to Arrow and its subsidiary banks:

Year, as of January 1	2023
Minimum CET1 Ratio	4.500	%
Capital Conservation Buffer ("Buffer")	2.500	%
Minimum CET1 Ratio Plus Buffer	7.000	%
Minimum Tier 1 Risk-Based Capital Ratio	6.000	%
Minimum Tier 1 Risk-Based Capital Ratio Plus Buffer	8.500	%
Minimum Total Risk-Based Capital Ratio	8.000	%
Minimum Total Risk-Based Capital Ratio Plus Buffer	10.500	%
Minimum Leverage Ratio	4.000	%

At December 31, 2023, Arrow and its two subsidiary banks exceeded, by a substantial amount, each of the applicable minimum capital ratios established under the revised Capital Rules, including the minimum CET1 Ratio, the minimum Tier 1 Risk-Based Capital Ratio, the minimum Total Risk-Based Capital Ratio, and the minimum Leverage Ratio, and including in the case of each risk-based ratio, the phased-in portion of the capital buffer. See Note 20, Regulatory Matters, to the Consolidated Financial Statements for a presentation of Arrow's period-end ratios for 2023 and 2022.

Regulatory Capital Classifications. Under applicable banking law, federal banking regulators are required to take prompt corrective action with respect to depository institutions that do not meet minimum capital requirements.  The regulators have established five capital classifications for banking institutions, ranging from the highest category of "well-capitalized" to the lowest category of "critically under-capitalized". Under the Capital Rules, a banking institution is considered "well-capitalized" if it meets the following capitalization standards on the date of measurement: a CET1 risk-based capital ratio of 6.50% or greater, a Tier 1 risk-based capital ratio of 8.00% or greater, and a total risk-based capital ratio of 10.00% or greater, provided the institution is not subject to any regulatory order or written directive regarding capital maintenance.

As of December 31, 2023, Arrow and its two subsidiary banks qualified as "well-capitalized" under the revised capital classification scheme.

Dividend Restrictions; Other Regulatory Sanctions

A holding company's ability to pay dividends or repurchase its outstanding stock, as well as its ability to expand its business, including for example, through acquisitions of additional banking organizations or permitted non-bank companies, may be restricted if its capital falls below minimum regulatory capital ratios or fails to meet other informal capital guidelines that the regulators may apply from time to time to specific banking organizations.  In addition to these potential regulatory limitations on payment of dividends, the holding company's ability to pay dividends to shareholders, and the subsidiary banks' ability to pay dividends to the holding company are also subject to various restrictions under applicable corporate laws, including banking laws (which affect the subsidiary banks) and the New York Business Corporation Law (which affects the holding company). The ability of the holding company and banks to pay dividends or repurchase shares in the future is, and is expected to continue to be, influenced by regulatory policies, the Capital Rules and other applicable law.

In cases where banking regulators have significant concerns regarding the financial condition, assets or operations of a bank holding company and/or one of its banks, the regulators may take enforcement action or impose enforcement orders, formal or informal, against the holding company or the particular bank.  If the ratio of tangible equity to total assets of a bank falls to 2% or below, the bank will likely be closed and placed in receivership, with the FDIC as receiver.

Cybersecurity

In addition to the provisions in the Gramm-Leach-Bliley Act relating to data security (discussed below), Arrow and its subsidiaries are subject to many federal and state laws, regulations and regulatory interpretations which impose standards and requirements related to cybersecurity.

In March 2015, federal regulators issued related statements regarding cybersecurity. One statement indicates that financial institutions should design multiple layers of security controls to establish lines of defense and to ensure that their risk management processes also address the risk posed by compromised customer credentials, including security measures to reliably authenticate customers accessing internet-based services of the financial institution. The other statement indicates that a financial institution’s management is expected to maintain sufficient business continuity planning processes to ensure the rapid recovery, resumption and maintenance of the institution’s operations after a cyber-attack involving destructive malware. A financial institution is also expected to develop appropriate processes to enable recovery of data and business operations and address rebuilding network capabilities and restoring data if the institution or its critical service providers fall victim to this type of cyber-attack. Financial institutions that fail to observe this regulatory guidance on cybersecurity may be subject to various regulatory sanctions, including financial penalties.

In February 2018, the SEC issued the “Commission Statement and Guidance on Public Company Cybersecurity Disclosures” to assist public companies in preparing disclosures about cybersecurity risks and incidents. With the increased frequency and magnitude of cybersecurity incidents, the SEC stated that it is critical that public companies take all required

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actions to inform investors about material cybersecurity risks and incidents in a timely fashion. Additionally, in October 2018 the SEC issued the “Report of Investigation Pursuant to Section 21(a) of the Securities Exchange Act of 1934 Regarding Certain Cyber-Related Frauds Perpetrated Against Public Companies and Related Internal Controls Requirements” which cited business email compromises that led to the incidents and that internal accounting controls may need to be reassessed in light of these emerging risks. Certain Arrow subsidiaries are also subject to certain New York State cybersecurity regulations.

In July 2023, the SEC adopted amendments intended to enhance and standardize disclosures related to cybersecurity. The amendments were effective December 18, 2023 and require timely disclosure of material cybersecurity incidents and annual disclosures related to cybersecurity risk management, strategy, and governance. Under the new rules, a material cybersecurity incident is required to be disclosed on a Form 8-K within four business days after the learning of a material incident. The SEC has defined a cybersecurity incident to mean “an unauthorized occurrence, or a series of related unauthorized occurrences, on or conducted through a registrant’s information systems that jeopardizes the confidentiality, integrity, or availability of a registrant’s information systems or any information residing therein.” Arrow has undertaken and implemented a number of procedures and control steps to comply with these expanded cybersecurity reporting requirements as outlined below under Item 1C. Cybersecurity.

Privacy and Confidentiality Laws

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

Anti-Money Laundering, the U.S. Patriot Act and OFAC

The Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism (USA PATRIOT) Act of 2001 initially adopted in 2001 and re-adopted by the U.S. Congress in 2006 with certain changes (the “Patriot Act”), imposes substantial record-keeping and due diligence obligations on banks and other financial institutions, with a particular focus on detecting and reporting money-laundering transactions involving domestic or international customers. The U.S. Treasury Department has issued and will continue to issue regulations clarifying the Patriot Act's requirements.

Under the Patriot Act and other federal anti-money laundering laws and regulations, including, but not limited to, the Currency and Foreign Transactions Report Act (collectively, “Anti-Money Laundering Laws”), financial institutions, including banks, must maintain certain anti-money laundering compliance, customer identification and due diligence programs that include established internal policies, procedures, and controls. Financial institutions are also prohibited from entering into specified financial transactions and account relationships and must meet enhanced standards for due diligence and customer identification. Financial institutions must take reasonable steps to conduct enhanced scrutiny of account relationships to guard against money laundering and to report suspicious transactions. Law enforcement authorities have been granted increased access to financial information maintained by financial institutions. Bank regulators routinely examine institutions for compliance with these obligations and they must consider an institution's compliance in connection with the regulatory review of applications, including applications for banking mergers and acquisitions. The U.S. Treasury Department's Financial Crises Enforcement Network (“FinCEN”) issued a final rule in 2016 increasing customer due diligence requirements for banks, including adding a requirement to identify and verify the identity of beneficial owners of customers that are legal entities, subject to certain exclusions and exemptions. The Company has established procedures for compliance with these requirements. Compliance with the provisions of the Patriot Act and other Anti-Money Laundering Laws results in substantial costs on all financial institutions.

The U.S. Department of the Treasury's Office of Foreign Assets Control (“OFAC”) is responsible for helping to insure that United States persons, including banks, do not engage in transactions with certain prohibited parties, as defined by various Executive Orders and Acts of Congress. OFAC publishes lists of persons, organizations, and countries suspected of aiding, harboring or engaging in terrorist acts, including, but not limited to, Specially Designated Nationals and Blocked Persons. If Arrow finds a name on any transaction, account or wire transfer that is on an OFAC list, Arrow must freeze or block such account or transaction, file a suspicious activity report, if required, notify the appropriate authorities and maintain appropriate records.

Community Reinvestment Act

Arrow's subsidiary banks are subject to the Community Reinvestment Act ("CRA") and implementing regulations. CRA regulations establish the framework and criteria by which the bank regulatory agencies assess an institution's record of helping to meet the credit needs of its community, including low and moderate-income individuals. CRA ratings are taken into account by regulators in reviewing certain applications made by Arrow and its bank subsidiaries.

The Dodd-Frank Act

Dodd-Frank significantly changed the regulatory structure for financial institutions and their holding companies, for example, through provisions requiring the Capital Rules. Among other provisions, Dodd-Frank implemented corporate governance revisions that apply to all public companies, not just financial institutions, permanently increased the FDIC’s standard maximum deposit insurance amount to $250,000, changed the FDIC insurance assessment base to assets rather than deposits and increased the reserve ratio for the deposit insurance fund to ensure the future strength of the fund. The federal prohibition on the payment of interest on certain demand deposits was repealed, thereby permitting depository institutions to pay interest on business transaction accounts. Dodd-Frank established a new federal agency, the Consumer Financial Protection Bureau (the “CFPB”), centralizing significant aspects of consumer financial protection under this agency. Limits were imposed for debit card

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interchange fees for issuers that have assets greater than $10 billion, which also could affect the amount of interchange fees collected by financial institutions with less than $10 billion in assets. Dodd-Frank also imposed new requirements related to mortgage lending, including prohibitions against payment of steering incentives and provisions relating to underwriting standards, disclosures, appraisals and escrows. The Volcker Rule prohibited banks and their affiliates from engaging in proprietary trading and investing in certain unregistered investment companies.

Federal banking regulators and other agencies including, among others, the FRB, the OCC and the CFPB, have been engaged in extensive rule-making efforts under Dodd-Frank, and the Community Bank Leverage Ratio has impacted certain Dodd-Frank requirements, as explained above.

    Incentive Compensation 

Dodd-Frank required the federal bank regulatory agencies and the SEC to establish joint regulations or guidelines prohibiting incentive-based payment arrangements at specified regulated entities, such as the Company, having at least $1 billion in total assets that encourage inappropriate risks by providing an executive officer, employee, director or principal shareholder with excessive compensation, fees, or benefits or that could lead to material financial loss to the entity. In addition, these regulators must establish regulations or guidelines requiring enhanced disclosure to regulators of incentive-based compensation arrangements.

The federal bank regulators issued proposed rules to address incentive-based compensation arrangements in June 2016. Final rules have not yet been issued by the federal bank regulatory agencies under this Dodd-Frank provision.

In 2010, the FRB, OCC and FDIC issued comprehensive final guidance on incentive compensation policies intended to ensure that the incentive compensation policies of banking organizations do not undermine the safety and soundness of such organizations by encouraging excessive risk-taking. The guidance, which covers all employees that have the ability to materially affect the risk profile of an organization, either individually or as part of a group, is based upon the key principles that a banking organization’s incentive compensation arrangements should (i) provide incentives that do not encourage risk-taking beyond the organization’s ability to effectively identify and manage risks, (ii) be compatible with effective internal controls and risk management, and (iii) be supported by strong corporate governance, including active and effective oversight by the organization’s board of directors. Management believes the current and past compensation practices of the Company do not encourage excessive risk taking or undermine the safety and soundness of the organization.

The FRB will review, as part of the regular, risk-focused examination process, the incentive compensation arrangements of banking organizations, such as the Company, that are not “large, complex banking organizations.” These reviews will be tailored to each organization based on the scope and complexity of the organization’s activities and the prevalence of incentive compensation arrangements. The findings of the supervisory initiatives will be included in reports of examination. Deficiencies will be incorporated into the organization’s supervisory ratings, which can affect the organization’s ability to make acquisitions and take other actions. Enforcement actions may be taken against a banking organization if its incentive compensation arrangements, or related risk-management control or governance processes, pose a risk to the organization’s safety and soundness and the organization is not taking prompt and effective measures to correct the deficiencies.

Deposit Insurance Laws and Regulations

In February 2011, the FDIC finalized a new assessment system that took effect in the second quarter of 2011.  The final rule changed the assessment base from domestic deposits to average assets minus average tangible equity, adopted a new large-bank pricing assessment scheme, and set a target size for the Deposit Insurance Fund. The rule (as mandated by Dodd-Frank) finalized a target size for the Deposit Insurance Fund Reserve Ratio at 2.0% of insured deposits.

Due to increased growth in insured deposits during the first half of 2020, on September 15, 2020, the FDIC established a plan to restore the Deposit Insurance Fund Reserve Ratio to at least 1.35% by September 30, 2028, as required by the FDIA, utilizing the rate schedule in effect at that time. In response to updated analysis and projections for the fund balance and the Deposit Insurance Fund Reserve Ratio, the FDIC adopted a final rule in October 2022 increasing the initial base deposit insurance assessment rate schedules by two percent effective January 1, 2023 and beginning on the first quarterly assessment period of 2023. The increase is intended to ensure that the reserve ratio meets the minimum ratio of 1.35% by the September 30, 2028 statutory deadline. Arrow is unable to predict whether or to what extent the FDIC may elect to impose additional special assessments on insured institutions in upcoming years, especially in light of recent high-profile large bank failures.

Reserve Requirements

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

D. RECENT LEGISLATIVE DEVELOPMENTS

The American Rescue Plan Act of 2021

On March 11, 2021, the American Rescue Plan Act of 2021 ("American Rescue Plan") was signed into law to speed up the recovery from the economic and health effects of the COVID-19 pandemic and the ongoing recession. The American Rescue Plan is a $1.9 trillion economic stimulus bill that builds upon both the CARES Act and the CAA.

Several provisions within the American Rescue Plan impact financial institutions. Key provisions include direct stimulus payments for the majority of Americans, extending unemployment benefits and continuing eviction and foreclosure moratoriums. In addition, over $350 billion has been allocated to state, local and tribal governments to bridge budget shortfalls.

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Other Legislative Initiatives 

From time to time, various legislative and regulatory initiatives are introduced in Congress and state legislatures, as well as by regulatory authorities. These initiatives may include proposals to expand or contract the powers of bank holding companies and depository institutions or proposals to change the financial institution regulatory environment. Such legislation could change banking laws and the operating environment of our Company in substantial, but unpredictable ways. Arrow cannot predict whether any such legislation will be enacted, and, if enacted, the effect that it, or any implementing regulations would have on the Company's financial condition or results of operations.

E. STATISTICAL DISCLOSURE – (Regulation S-K, Subpart 1400)

Set forth below is an index identifying the location in this Report of various items of statistical information required to be included in this Report by the SEC’s industry guide for Bank Holding Companies.

Required Information	Location in Report
Distribution of Assets, Liabilities and Stockholders' Equity; Interest Rates and Interest Differential	Part II, Item 7.B.I.
Investment Portfolio	Part II, Item 7.C.I.
Loan Portfolio	Part II, Item 7.C.II.
Summary of Credit Loss Experience	Part II, Item 7.C.III.
Deposits	Part II, Item 7.C.IV.
Return on Equity and Assets	Part II, Item 6.
Short-Term Borrowings	Part II, Item 7.C.V.

F. COMPETITION

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

G. HUMAN CAPITAL

Arrow believes that its employees are among its most important assets. Accordingly, Arrow has prioritized investment in the well-being, performance, engagement and development of its employees. This includes, but is not limited to, providing access to well-being resources and assistance, offering competitive compensation and benefits to attract and retain top-level talent, empowering team members to take an active role in the formation and execution of the business strategy, and fostering a diverse and inclusive work environment that reflects the many values of the communities that Arrow serves. One example is through the creation of Arrow University, we are investing in our people by bringing employee learning and development to the forefront. We offer opportunities to employees at all levels for personal and professional growth, technical training, and career exploration and enhancement. At December 31, 2023, Arrow had 537 full-time equivalent employees.

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H. ENVIRONMENTAL, SOCIAL AND GOVERNANCE (ESG)

We believe that meeting the evolving needs of our customers and being good stewards of our communities is critical. We are committed to operating in a manner that provides and maintains safe and healthy working conditions. We operate in compliance with applicable laws and regulations and are firmly committed to responsibly conducting business.

Arrow remains committed to strengthening financial lives within our communities through the power of care, capability, commitment and collaboration. Through our partnership, we aim to deliver meaningful engagement that translates into long‐term value for our team, our customers and our investors. We are dedicated to providing professional development and holistic support to our team and are working on many ways to demonstrate the value of differences, particularly around diversity, equity, inclusion and belonging (“DEIB”).

Employees

•Annual engagement with a diversity and inclusion consultant to assess diversity within our employee base and support for setting and tracking goals to encourage the advancement of minorities, women, veterans and persons with disabilities

•Learning and professional development through the Employee Experience Department

•Wellness and mental health services to our employees through outside Employee Assistance Program (EAP) contracted services

•Ongoing outreach to measure employee engagement

•Incorporated inclusion and belonging into our human resources policies, practices and learning and development programs

•Encouraged and facilitated employee giving including through payroll deduction, dress-down days, and a fundraising campaign that totaled more than $103,000 out of their own pockets, a true reflection of our culture of giving.

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

Customers

•Included energy-saving features into the renovation of our branches, such as interior and exterior LED lighting and energy-efficient plumbing in 60 percent of our branch network

•Incorporated the above environmentally friendly attributes into our Glens Falls, New York, headquarters renovation, which includes approximately 76,000 square feet of office space; motion-activated lighting; significant improvements to exterior wall and roof insulation; new HVAC systems with higher efficiency, which meet modern fresh-air and ventilation requirements; energy-efficient windows and entry doors; low-VOC materials; a separate tie-in to the city stormwater and sewer system to bypass the municipal treatment of rainwater collected off the building; and green plantings on a portion of the roof

•Installed solar panels at 20 South Street, part of our corporate headquarters, to support the main campus with approximately 3,000 square feet of green energy

•Reduced emissions via remote work and video conferencing for large segments of employees

•Provided and encouraged digital banking options and paperless statements

•Installed electric vehicle charging stations at our SNB Main Office

•Lending program to facilitate first-time home ownership

•Bank On-certified checking product for the unbanked or underbanked population with no overdraft fees

•Partnership with numerous organizations to meet the financial needs of the low- to moderate-income population

•Educated and empowered our customers to prevent, detect and report fraud on their accounts with us

•Introduced easy-to-use fraud prevention digital services for businesses to monitor and approve activity on their accounts

Communities

•Maintained our philanthropic support of environmental sustainability in our community, including organizations that impact soil and water conservation, land conservation, sustainable farming, mountain and lake protection and stewardship, and parks and recreation

•Donated nearly $3 million in giving in the last five years and more than 31,000 hours served in the last four years

•More than $781,000, including more than $103,000 from employee donations directly and nearly 11,200 hours donated to our communities in 2023, a 19 percent increase over 2022, in support of arts and culture, child care, economic and workforce development, emergency assistance, food security, financial literacy, mental and physical health, safe and affordable housing, transportation and more

•Prioritization of donations to organizations that make it their mission to provide affordable homeownership, environmental or sustainable activities and programming, economic empowerment, health and human services and social progress

•CRA rating of “Satisfactory” for meeting the credit needs of our communities and a CRA rating of “Outstanding” for community development

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

Shareholders and Corporate Governance

•Longstanding dedication to diversity on Arrow’s Board of Directors, exceeding NASDAQ requirements

•Both Glens Falls National Bank and Saratoga National Bank have maintained their Bauer Financial 5-Star "Exceptional Performance" ratings for the 16th and 14th consecutive years, respectively

•Developed ESG Investment Models for our socially conscious clients

•Strong cybersecurity protections and training

•Strong dedication to information security and data privacy

I. EXECUTIVE OFFICERS OF THE REGISTRANT

The names and ages of the executive officers of Arrow and positions held by each are presented in the following table:

Name	Age	Positions Held and Years from Which Held
David S. DeMarco	62	President and Chief Executive Officer of Arrow, GFNB and SNB since May 13, 2023. Mr. DeMarco joined the Company in 1987 as a commercial lender and since that time has served in positions of increasing responsibility within the organization. In 2012, he was named President and CEO of SNB. In May 2023, he was named President and CEO of Arrow Financial Corporation and GFNB. He holds a bachelor’s degree in finance from the University of Texas at Austin. Mr. DeMarco is a graduate of the Adirondack Regional Chamber of Commerce’s Leadership Program and the Stonier Graduate School of Banking. He serves as a Director of the Company and its subsidiary banks and sits on the boards of various non-profits dedicated to healthcare and economic development.
Penko Ivanov	55	Chief Financial Officer, Treasurer and Chief Accounting Officer effective February 21, 2023 and Senior Executive Vice President of Arrow, GFNB and SNB since February 1, 2024. Mr. Ivanov joined the Company in 2023 with more than 30 years of experience in Financial Planning & Analysis, Controllership, Financial Reporting, Treasury and compliance with Sarbanes-Oxley Act of 2002. Mr. Ivanov previously served as CFO for Bankwell Financial Group, helping it almost double in size over six-plus years to $3.3 billion in total consolidated assets. He has held CFO positions at Darien Rowayton Bank and for Doral Bank’s U.S. Operations. He began his career with Ernst & Young and held accounting/ finance positions at PepsiCo, GE Capital and Bridgewater Associates. Mr. Ivanov holds an MBA and bachelor’s degree in accounting and finance from the University of South Florida. He is also Six Sigma Black Belt certified.
Michael Jacobs	53	Chief Information Officer of Arrow, GFNB and SNB since February 1, 2024. Mr. Jacobs joined GFNB in 2003 as Information Systems Manager. He was later promoted to Senior Vice President and then Executive Vice President. As Chief Information Officer, Mr. Jacobs guides the Company’s strategic technology plans. He has more than 30 years of experience in the community banking industry, having previously served as Operations Manager at Cohoes Savings Bank and Item Processing Manager at Hudson River Bank and Trust. Mr. Jacobs earned a bachelor’s degree in finance from Siena College and an associate degree in business administration from Hudson Valley Community College.
David D. Kaiser	63	Senior Executive Vice President and Chief Credit Officer of Arrow, GFNB and SNB since February 2022. Mr. Kaiser joined the Company in 2001 as Vice President and Commercial Loan Officer. He served as Corporate Banking Manager and was later promoted to Senior Vice President, before being named Chief Credit Officer in 2011, followed by promotions to Executive Vice President and Senior Executive Vice President. Prior to joining the Company, he spent 15 years in the Capital Region as a Commercial Loan Officer. Mr. Kaiser has a bachelor’s degree in business administration from Siena College. Mr. Kaiser actively serves on boards of numerous community organizations.

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Brooke Pancoe	38	Chief Human Resources Officer of Arrow, GFNB and SNB since February 1, 2024. Ms. Pancoe joined the Company in 2018 as Director of Human Resources. In her current role as Chief Human Resources Officer, she has executive oversight of the Company’s human resource strategies, which includes organizational design and succession planning, talent acquisition and retention, performance management, professional development and compensation and benefits. Prior to joining the Company, Ms. Pancoe held various human resource management roles within the power generation and engineering services industry. Ms. Pancoe holds a bachelor’s degree in psychology from Clark University in Worcester, MA, and an MBA from the University at Albany. In addition, she maintains a certified professional human resources designation.
Andrew J. Wise	57	Senior Executive Vice President and Chief Risk Officer of Arrow, GFNB and SNB since February 1, 2024. Mr. Wise joined the Company in 2016 as Senior Vice President of Administration for GFNB. He has more than 30 years of experience building and leading both community banks and bank-owned insurance agencies. Mr. Wise previously served as Vice President and Chief Information Security Officer for The Adirondack Trust Company and acted as Executive Vice President and COO for Wise Insurance Brokers, Inc. He has extensive experience in designing, implementing and managing workflows and delivering operational efficiency. He holds a bachelor’s degree from Boston University’s School of Management.
Marc Yrsha	45	Chief Banking Officer of Arrow, GFNB and SNB since February 1, 2024. Mr. Yrsha and oversees the strategic direction of the Retail Banking unit, which includes retail deposits and lending, business development, consumer payments, business services, municipal banking, as well as small business and retail lending. Mr. Yrsha oversees the Wealth Management and Marketing divisions of the Company. Mr. Yrsha joined the Company in 2015. Prior to joining our Company, Mr. Yrsha spent time in retail leadership and retail and commercial lending at large regional and community banks within the Arrow footprint.Mr. Yrsha is active in the community serving in leadership roles on a variety of boards.He is a graduate of Castleton University in Vermont and the Adirondack Regional Chamber of Commerce’s Leadership Adirondack Program.

J. AVAILABLE INFORMATION

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

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Item 1A. Risk Factors

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

MACROECONOMIC AND INDUSTRY RISKS

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

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

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

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

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

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OPERATIONAL RISKS

Any future economic or financial downturn, including any significant correction in the equity markets, may negatively affect the volume of income attributable to, and demand for, fee-based services of banks such as Arrow, including the Company's fiduciary business, which could negatively impact Arrow's financial condition and results of operations. Revenues from trust and wealth management business are dependent on the level of assets under management. Any significant downturn in the equity markets may lead Arrow's trust and wealth management customers to liquidate their investments, or may diminish account values for those customers who elect to leave their portfolios with Arrow, in either case reducing assets under management and thereby decreasing revenues from this important sector of the business. Other fee-based businesses are also susceptible to a sudden economic or financial downturn.

In addition, Arrow's loan quality is affected by the condition of the economy. Like all financial institutions, Arrow maintains an allowance for credit losses to provide for probable credit losses at the balance sheet date. Arrow's allowance for credit losses is based on its historical loss experience as well as an evaluation of the risks associated with its loan portfolio, including the size and composition of the portfolio, current economic conditions and geographic concentrations within the portfolio and other factors. While Arrow has continued to enjoy a very high level of quality in its loan portfolio generally and very low levels of loan charge-offs and non-performing loans, if the economy in Arrow's geographic market area should deteriorate to the point that recessionary conditions return, or if the regional or national economy experiences a protracted period of stagnation, the quality of our loan portfolio may weaken so significantly that its allowance for loan losses may not be adequate to cover actual or expected loan losses. In such events, Arrow may be required to increase its provisions for credit losses and this could materially and adversely affect financial results. Moreover, weak or worsening economic conditions often lead to difficulties in other areas of its business, including growth of its business generally, thereby compounding the negative effects on earnings.

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

Arrow faces continuing and growing security risks to its information base including the information maintained relating to customers, and any breaches in the security systems implemented to protect this information could have a material negative effect on Arrow's business operations and financial condition. In the ordinary course of business, Arrow relies on electronic communications and information systems to conduct its operations and to store sensitive data. Arrow employs an in-depth, layered, defensive approach that leverages people, processes and technology to manage and maintain cybersecurity controls. Arrow employs a variety of preventative and detective tools to monitor, block, and provide alerts regarding suspicious activity, as well as to report on any suspected advanced persistent threats. Arrow has implemented and regularly reviews and updates extensive systems of internal controls and procedures as well as corporate governance policies and procedures intended to protect its business operations, including the security and privacy of all confidential customer information. In addition, Arrow relies on the services of a variety of vendors to meet data processing and communication needs. No matter how well designed or implemented its controls are, Arrow cannot provide an absolute guarantee to protect its business operations from every type of cybersecurity or other security problem in every situation, whether as a result of systems failures, human error or negligence, cyberattacks, security breaches, fraud or misappropriation. Any failure or circumvention of these controls could have a material adverse effect on Arrow's business operations and financial condition. Notwithstanding the strength of defensive measures, the threat from cyberattacks is severe, attacks are sophisticated and increasing in volume, and attackers respond rapidly to changes in defensive measures. While to date, Arrow has not experienced a significant compromise, significant data loss or any material financial losses related to cybersecurity attacks or other security problems, Arrow's systems and those of its customers and third-party service providers are under constant threat. Risks and exposures related to cybersecurity attacks or other security problems are expected to remain high for the foreseeable future due to the rapidly evolving nature and sophistication of these threats and issues, as well as due to the expanding use of Internet banking, mobile banking and other technology-based products and services by Arrow and customers.

The computer systems and network infrastructure that Arrow uses are always vulnerable to unforeseen disruptions, including theft of confidential customer information (“identity theft”) and interruption of service as a result of fire, natural disasters, explosion, general infrastructure failure, cyberattacks or other security problems. These disruptions may arise in Arrow's internally developed systems, or the systems of our third-party service providers or may originate from the actions of our consumer and business customers who access our systems from their own networks or digital devices to process transactions. Information security and cyber security risks have increased significantly in recent years because of consumer demand to use the Internet and other electronic delivery channels to conduct financial transactions. Cybersecurity risk and other security problems are a major concern to financial services regulators and all financial service providers, including Arrow. These risks are further exacerbated due to the increased sophistication and activities of organized crime, hackers, terrorists and other disreputable parties. Arrow regularly assesses and tests security systems and disaster preparedness, including back-up systems, but the risks are substantially escalating. As a result, cybersecurity and the continued enhancement of Arrow's controls and processes to protect its systems, data and networks from attacks or unauthorized access remain a priority. Accordingly, Arrow may be required to expend additional resources to enhance its protective measures or to investigate and remediate any information security vulnerabilities or exposures. Any breach of Arrow's system security could result in disruption of its operations, unauthorized access to confidential customer information, significant regulatory costs, litigation exposure and other possible damages, loss or liability. Such costs or losses could exceed the amount of available insurance coverage, if any, and

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would adversely affect Arrow's earnings. Also, any failure to prevent a security breach or to quickly and effectively deal with such a breach could negatively impact customer confidence, damaging Arrow's reputation and undermining its ability to attract and keep customers. In addition, if Arrow fails to observe any of the cybersecurity requirements in federal or state laws, regulations or regulatory guidance, Arrow could be subject to various sanctions, including financial penalties.

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

Pandemic or other health emergencies may adversely affect Arrow’s business activities, financial condition and results of operations. The business of Arrow and its subsidiary banks depends on the willingness and ability of its customers to conduct financial transactions. Pandemics or other health emergencies could disrupt the business, activities, and operations of Arrow’s customers, as well as Arrow's business and operations.

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

FINANCIAL RISKS

Arrow is subject to interest rate risk, which could adversely affect profitability. Profitability, like that of most financial institutions, depends to a large extent on Arrow's net interest income, which is the difference between interest income on interest-earning assets, such as loans and investment securities, and interest expense on interest-bearing liabilities, such as deposits and borrowings. Changes in monetary policy, including changes in interest rates, could influence not only the interest received on loans and securities and the amount of interest paid on deposits and borrowings, but also (i) Arrow's ability to originate loans and obtain deposits, (ii) the fair value of financial assets and liabilities, and (iii) the average duration of mortgage-backed securities portfolio. If the interest rates Arrow pays on deposits and other borrowings increase at a faster rate than the interest rates received on loans, securities and other interest-earning investments, net interest income, and therefore earnings, could be adversely affected. Earnings could also be adversely affected if the interest rates received on loans and other investments fall more quickly than the interest rates paid on deposits and other borrowings. Changes in interest rates, whether they are increases or decreases, can also trigger repricing and changes in the pace of payments for both assets and liabilities.

Beginning and continuing throughout early 2023, the Federal Reserve raised benchmark interest rates, partially in response to increasing inflation. In 2024, rates may stabilize and/or decrease. Continued higher interest rates could have a negative impact on results of operations by reducing the ability of borrowers to repay their current loan obligations. These circumstances could not only result in increased loan defaults, foreclosures and charge-offs, but also necessitate further increases to the allowance for credit losses which may materially and adversely affect Arrow's business, results of operations, financial condition and prospects.

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

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

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additional problem loans and other factors, both within and outside of Arrow's control. Additions to the allowance could have a negative impact on Arrow's results of operations.

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

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

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

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

RISKS RELATED TO OWNING OUR COMMON STOCK

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

LEGAL, TAX, REGULATORY AND COMPLIANCE RISKS

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

Federal banking statutes and regulations could change in the future, which may adversely affect Arrow. Arrow is subject to extensive federal and state banking regulations and supervision. Banking laws and regulations are intended primarily to protect bank depositors’ funds (and indirectly the Federal Deposit Insurance Fund) as well as bank retail customers, who may lack the sophistication to understand or appreciate bank products and services. These laws and regulations generally are not, however, aimed at protecting or enhancing the returns on investment enjoyed by bank shareholders.

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Arrow's depositor/customer awareness of the changing regulatory environment is particularly true of the set of laws and regulations under Dodd-Frank, which were passed in the aftermath of the 2008-09 financial crisis and in large part were intended to better protect bank customers (and to some degree, banks) against a wide variety of lending products and aggressive lending practices that pre-dated the crisis and are seen as having contributed to its severity. Although not all banks offered such products or engaged in such practices, all banks are affected by these laws and regulations to some degree.

Dodd-Frank restricts Arrow's lending practices, requires us to expend substantial additional resources to safeguard customers, significantly increases its regulatory burden, and subjects Arrow to significantly higher minimum capital requirements which, in the long run, may serve as a drag on its earnings, growth and ultimately on its dividends and stock price (the Dodd-Frank capital standards are separately addressed in a previous risk factor).

Although the Economic Growth Act and similar initiatives may mitigate the impact of Dodd-Frank, other statutory and regulatory changes including additional guidance and interpretations of existing rules and requirements could add to the existing regulatory burden imposed on banking organizations like Arrow, resulting in a potential material adverse effect on Arrow's financial condition and results of operations.

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

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

Item 1B. Unresolved Staff Comments - None

Item 1C.     Cybersecurity

Cybersecurity Risk Management & Strategy

Arrow’s cybersecurity risk management and data security program is an in-depth, layered, defensive approach that leverages people, processes and technology to manage and maintain cybersecurity controls. Arrow employs a variety of preventative and detective tools to monitor, block, and provide alerts regarding suspicious activity, as well as to report on any suspected advanced persistent cybersecurity threats. Our security framework involves processes for detection, identification, protection and response to a cybersecurity incident. Additionally, we are well prepared for recovery in the case of a cybersecurity incident with proper vendor support as well as backups both online and offline.

Arrow has implemented and regularly reviews and updates its internal controls and procedures as well as corporate governance policies and procedures intended to protect its business operations, including the security and privacy of the confidential information of its customers. Arrow also regularly assesses and tests its security systems and disaster preparedness, including the adequacy and functionality of its back-up systems. In addition, Arrow engages a variety of vendors to meet data processing and communication needs. Arrow communicates and works directly with all of our critical information technology ("IT") vendors to resolve issues and install releases. We perform business continuity plan testing on a periodic basis.

Arrow has not experienced, nor does it believe it is reasonably likely to experience, a material effect on the Company’s business strategy, results of operations or financial condition as a result of a significant compromise, significant data loss or any material financial losses related to cybersecurity incidents or other security problems.

Cybersecurity and the continued enhancement of Arrow's controls and processes to protect its systems, data and networks from cybersecurity incidents remain a priority to Arrow.

Governance

Arrow’s senior management regularly considers the impact of cybersecurity risks when developing its business strategy and financial planning. Arrow has various policies and procedures in place to mitigate cybersecurity risks and maintains a layered, defensive program to manage and maintain cybersecurity controls.

Arrow’s Board of Directors, Chief Information Officer, Director of IT and our enterprise risk management group all have a role in the cybersecurity risk management program.

Item 2. Properties

Arrow's main office is at 250 Glen Street, Glens Falls, New York. The building is owned by Glens Falls National and serves as the main office for Arrow and Glens Falls National. Arrow recently completed a multi-year renovation project to enhance and improve the downtown Glens Falls Main Campus. The renovations provide added energy efficiency, productivity, and more collaborative work space. This project provides for a renovated and more functional Main Office branch and lending space for

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customers. Arrow's investment in its downtown campus dates back to 2012 with the construction of our 20 South Street Building and has continued with phased improvements to other adjacent properties. The main office of the other banking subsidiary, Saratoga National, is in Saratoga Springs, New York. Arrow owns 26 branch banking offices, leases 11 branch banking offices, leases two residential loan origination offices and a business development office, all at market rates. Arrow's insurance agency is co-located in seven bank-owned branches, as well as two leased insurance offices. Arrow also leases office space in buildings and parking lots near the main office in Glens Falls as well as a back-up site for business continuity purposes.

In the opinion of management, the physical properties of the holding company and the various subsidiaries are suitable and adequate.  For more information on Arrow's properties, see Notes 2, Summary of Significant Accounting Policies, 6, Premises and Equipment, and 18, Leases, to the Consolidated Financial Statements contained in Part II, Item 8 of this Report.

Item 3. Legal Proceedings

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

On June 23, 2023, Robert C. Ashe filed a putative class action complaint (the "Ashe Lawsuit") against the Company in the United States District Court for the Northern District of New York. In addition to the Company, the complaint names as defendants Thomas J. Murphy, the Company’s former CEO and from September 30, 2022 to February 20, 2023, its interim CFO, Edward J. Campanella, the Company’s former CFO, and Penko Ivanov, the Company’s current CFO (“Individual Defendants” and, together with the Company, the "Defendants"). The complaint alleges that the Defendants made materially false and misleading statements regarding the Company’s business, operations and compliance policies in the Company’s public filings between March 12, 2022 and May 12, 2023. The complaint further alleges that the Individual Defendants are liable for these materially false and misleading statements as "controlling persons" of the Company. Based on these allegations, the complaint brings two claims for violations of Section 10(b) of the Exchange Act and Rule 10b-5 promulgated thereunder and of Section 20(a) of the Exchange Act. Mr. Ashe, on behalf of a purported class of shareholders, seeks compensatory damages as well as recovery of the costs and fees associated with the litigation. . On December 5, 2023, plaintiff Ashe filed an amended complaint that changed the putative class period to the period from August 5, 2022 through May 12, 2023, but challenged substantially the same statements on the same basis. On February 9, 2024, the Company moved to dismiss the action in its entirety. That motion is scheduled to be fully briefed on May 6, 2024. All discovery in the action is stayed pending a decision on that motion. The Company continues to believe the lawsuit to be without merit and expressly denies any wrongdoing in connection with the matters claimed in the complaint and intends to vigorously defend the lawsuit.

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

The Company intends to vigorously defend itself against the class action and derivative claims

Item 4. Mine Safety Disclosures - None

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PART II

Item 5. Market for the Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Arrow's common stock is traded on the Global Select Market of the National Association of Securities Dealers, Inc. ("NASDAQ®") Stock Market under the symbol AROW.

Based on information received from Arrow's transfer agent and various brokers, custodians and agents, Arrow estimates there were approximately 12,000 beneficial owners of Arrow’s common stock at December 31, 2023. Arrow has no other class of stock outstanding.

Equity Compensation Plan Information

The following table sets forth certain information regarding Arrow's equity compensation plans as of December 31, 2023. These equity compensation plans were (i) the 2022 Long-Term Incentive Plan ("LTIP") and its predecessors; (ii) the Amended and Restated 2011 Employee Stock Purchase Plan ("ESPP") and its predecessors; and (iii) the 2023 Directors' Stock Plan ("DSP") and its predecessors. The LTIP, the DSP and the ESPP have been approved by Arrow's shareholders. In October 2023, the Board of Directors approved the adoption of a new qualified ESPP that is intended to satisfy the requirements of Section 423 of the Internal Revenue Code, which was effective January 1, 2024 (the "2023 ESPP"). The 2023 ESPP will be presented for approval at the upcoming Annual Meeting to be held June 5, 2024.

Plan Category	(a) Number of Securities to be Issued Upon Exercise of Outstanding Options, Restricted Stock Units, Warrants and Rights	(b) Weighted-Average Exercise Price of Outstanding Options, Restricted Stock Units, Warrants and Rights		(c) Number of Securities Remaining Available for Future Issuance Under Equity Compensation Plans (Excluding Securities Reflected in Column (a))
Equity Compensation Plans Approved by Security Holders (1)(2)	305,308	$	28.96	740,062
Equity Compensation Plans Not Approved by Security Holders (pending approval at next Annual Meeting) (2)	—			300,000
Total	305,308			1,040,062

(1)The total of 305,308 shares listed in column (a) includes shares which are issuable pursuant to outstanding stock options granted under the LTIP or its predecessor plans.

(2)The total of 1,040,062 shares listed in column (c) includes (i) 414,561 shares of common stock available for future award grants under the LTIP, (ii) 250,501 shares of common stock available for future issuance under the ESPP, (iii) 300,000 shares of common stock available for future issuance under the 2023 ESPP which is pending shareholder approval at the next Annual Meeting and (iii) 75,000 shares of common stock available for future issuance under the DSP.

STOCK PERFORMANCE GRAPHS

The following two graphs provide a comparison of the total cumulative return (assuming reinvestment of dividends) for the common stock of Arrow as compared to the Russell 2000 Index, the ABA NASDAQ Community Bank TRBanks Index and the Zacks $1B-$5B Bank Assets Index.

The first graph presents comparative stock performance for the five-year period from December 31, 2018 to December 31, 2023 and the second graph presents comparative stock performance for the fifteen-year period from December 31, 2008 to December 31, 2023.

The historical information in the graphs and accompanying tables may not be indicative of future performance of Arrow stock on the various stock indices.

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	TOTAL RETURN PERFORMANCE Period Ending
Index	2018	2019	2020	2021	2022	2023
Arrow Financial Corporation	100.00	125.39	105.80	132.22	135.28	120.71
Russell 2000 Index	100.00	125.52	150.58	172.90	137.56	160.85
ABA NASDAQ Community Bank TR	100.00	123.30	109.05	147.76	137.43	134.58
Zacks $1B - $5B Bank Assets Index	100.00	117.34	95.01	130.61	127.10	126.09

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

23

	TOTAL RETURN PERFORMANCE Period Ending
Index	2008	2009	2010	2011	2012	2013	2014	2015
Arrow Financial Corporation	100.00	106.74	126.21	115.69	130.80	147.59	161.74	169.10
Russell 2000 Index	100.00	127.17	161.32	154.57	179.84	249.66	261.87	250.32
ABA NASDAQ Community Bank TR	100.00	80.80	90.06	84.18	99.10	140.40	146.94	160.97
Zacks $1B - $5B Bank Assets Index	100.00	83.14	91.29	86.56	101.88	128.00	140.15	152.44
	TOTAL RETURN PERFORMANCE (Cont'd.) Period Ending
Index	2016	2017	2018	2019	2020	2021	2022	2023
Arrow Financial Corporation	267.96	238.23	238.10	298.56	251.91	314.82	322.12	287.41
Russell 2000 Index	303.66	348.15	309.82	388.90	466.53	535.66	426.19	498.34
ABA NASDAQ Community Bank TR	223.37	229.11	194.97	240.40	212.62	288.09	267.94	262.39
Zacks $1B - $5B Bank Assets Index	212.71	234.10	214.34	251.50	203.63	279.96	272.42	270.26

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

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

Unregistered Sales of Equity Securities

None.

24

Issuer Purchases of Equity Securities

The following table presents information about repurchases by Arrow during the three months ended December 31, 2023 of Arrow's common stock (the only class of equity securities registered pursuant to Section 12 of the Securities Exchange Act of 1934):

Fourth Quarter 2023 Calendar Month	(a) Total Number of Shares Purchased1	(b) Average Price Paid Per Share1		(c) Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs2	(d) Maximum Approximate Dollar Value of Shares that May Yet be Purchased Under the Plans or Programs2
October	—	$	—	—	$	9,152,132
November	99,223	24.23		99,223	6,748,038
December	14,347	24.92		14,347	6,390,538
Total	113,570	24.32		113,570

1 The total number of shares purchased and the average price paid per share listed in columns (a) and (b) consist solely of shares repurchased by Arrow pursuant to its publicly-announced stock repurchase program. Arrow resumed its DRIP effective with the cash dividend which was paid in December 2023. All shares under the DRIP are being sourced from the open market through an independent Plan Adminstrator, no shares will be sourced from Arrow treasury.

2 Includes only those shares acquired by Arrow pursuant to its publicly-announced stock repurchase programs.  Arrow's only publicly announced stock repurchase program in effect for 2023 was the 2023 Repurchase Program approved by the Board of Directors and announced in October 2022, under which the Board authorized management, in its discretion, in 2023 to repurchase from time to time, in the open market or in privately negotiated transactions, up to $5 million of Arrow common stock subject to certain exceptions. In October 2023, the Board of Directors expanded the 2023 Repurchase Program by $5 million, bringing the total availability under the repurchase program to $9.1 million, and removed the expiration date previously incorporated into the existing repurchase program.

Item 6. Reserved

25

Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations

Selected Quarterly Information

Dollars in thousands, except per share amounts

Share and per share amounts have been restated for the September 2023 3% stock dividend

Quarter Ended	12/31/2023			9/30/2023			6/30/2023			3/31/2023			12/31/2022
Net Income	$	7,723		$	7,743		$	6,047		$	8,562		$	12,087
Transactions Recorded in Net Income (Net of Tax):
Net Changes in Fair Value of Equity Investments	90			52			(133)			(76)			35
Share and Per Share Data: 1
Period End Shares Outstanding	16,942			17,049			17,050			17,050			17,048
Basic Average Shares Outstanding	17,002			17,050			17,050			17,048			17,031
Diluted Average Shares Outstanding	17,004			17,050			17,050			17,060			17,087
Basic Earnings Per Share	$	0.46		$	0.46		$	0.35		$	0.50		$	0.70
Diluted Earnings Per Share	0.46			0.46			0.35			$	0.50		$	0.71
Cash Dividend Per Share	0.270			0.262			0.262			0.262			0.262
Selected Quarterly Average Balances:
Interest-Bearing Deposits at Banks	$	136,026		$	131,814		$	130,057		$	40,436		$	143,499
Investment Securities	713,144			745,693			787,175			813,461			845,859
Loans	3,170,262			3,096,240			3,036,410			2,991,928			2,951,547
Deposits	3,593,949			3,491,028			3,460,711			3,480,279			3,614,945
Other Borrowed Funds	149,507			208,527			220,616			100,596			63,304
Shareholders’ Equity	363,753			362,701			365,070			359,556			351,402
Total Assets	4,159,313			4,109,995			4,087,653			3,978,851			4,074,028
Return on Average Assets, annualized	0.74		%	0.75		%	0.59		%	0.87		%	1.18		%
Return on Average Equity, annualized	8.42		%	8.47		%	6.64		%	9.66		%	13.65		%
Return on Average Tangible Equity, annualized 2	8.99		%	9.05		%	7.10		%	10.33		%	14.62		%
Average Earning Assets	$	4,019,432		$	3,973,747		$	3,953,642		$	3,845,825		$	3,940,905
Average Paying Liabilities	2,985,717			2,920,518			2,924,743			2,782,299			2,891,092
Interest Income	44,324			42,117			40,013			36,110			35,904
Tax-Equivalent Adjustment 3	184			183			196			202			279
Interest Income, Tax-Equivalent 3	44,508			42,300			40,209			36,312			36,183
Interest Expense	18,711			16,764			14,241			8,016			5,325
Net Interest Income	25,613			25,353			25,772			28,094			30,579
Net Interest Income, Tax-Equivalent 3	25,797			25,536			25,968			28,296			30,858
Net Interest Margin, annualized	2.53		%	2.53		%	2.61		%	2.96		%	3.08		%
Net Interest Margin, Tax-Equivalent, annualized 3	2.55		%	2.55		%	2.63		%	2.98		%	3.11		%
Efficiency Ratio Calculation: 4
Noninterest Expense	$	23,190		$	23,479		$	24,083		$	22,296		$	20,792
Less: Intangible Asset Amortization	43			43			44			45			47
Net Noninterest Expense	23,147			23,436			24,039			22,251			20,745
Net Interest Income, Tax-Equivalent	25,797			25,536			25,968			28,296			30,858
Noninterest Income	7,484			8,050			6,906			6,677			7,165
Less: Net Changes in Fair Value of Equity Investments	158			71			(181)			(104)			48
Net Gross Income	$	33,123		$	33,515		$	33,055		$	35,077		$	37,975
Efficiency Ratio	69.88		%	69.93		%	72.72		%	63.43		%	54.63		%
Period-End Capital Information: 5
Total Stockholders’ Equity (i.e. Book Value)	$	379,772		$	360,014		$	361,443		$	363,371		$	353,538
Book Value per Share 1	22.42			21.12			21.20			21.31			20.74
Goodwill and Other Intangible Assets, net	22,983			23,078			23,175			23,273			23,373
Tangible Book Value per Share 1,2	21.06			19.76			19.84			19.95			19.37
Capital Ratios: 5
Tier 1 Leverage Ratio	9.84		%	9.94		%	9.92		%	10.13		%	9.80		%
Common Equity Tier 1 Capital Ratio	13.00		%	13.17		%	13.27		%	13.34		%	13.32		%
Tier 1 Risk-Based Capital Ratio	13.66		%	13.84		%	13.96		%	14.03		%	14.01		%
Total Risk-Based Capital Ratio	14.74		%	14.94		%	15.08		%	15.15		%	15.11		%
Assets Under Trust Administration & Investment Mgmt	$	1,763,194		$	1,627,522		$	1,711,460		$	1,672,117		$	1,606,132

26

Selected Twelve-Month Information

Dollars in thousands, except per share amounts

Share and per share amounts have been restated for the September 2023 3% stock dividend

	2023			2022			2021
Net Income	$	30,075		$	48,799		$	49,857
Transactions Recorded in Net Income (Net of Tax):
Net Gain (Loss) on Securities	(67)			315			83
Period End Shares Outstanding1	16,942			17,048			17,018
Basic Average Shares Outstanding1	17,037			17,008			16,994
Diluted Average Shares Outstanding1	17,037			17,059			17,052
Basic Earnings Per Share1	$	1.77		$	2.86		$	2.93
Diluted Earnings Per Share1	1.77			2.86			2.92
Cash Dividends Per Share1	1.06			0.99			0.96
Average Assets	4,084,519			4,047,480			3,882,642
Average Equity	362,781			360,095			353,757
Return on Average Assets	0.74		%	1.21		%	1.28		%
Return on Average Equity	8.29		%	13.55		%	14.09		%
Average Earning Assets	$	3,948,708		$	3,902,077		$	3,716,856
Average Interest-Bearing Liabilities	2,903,925			2,834,266			2,727,441
Interest Income	162,564			129,651			115,550
Interest Income, Tax-Equivalent*	163,328			130,737			116,655
Interest Expense	57,732			11,308			5,195
Net Interest Income	104,832			118,343			110,355
Net Interest Income, Tax-Equivalent*	105,596			119,429			111,460
Net Interest Margin	2.65		%	3.03		%	2.97		%
Net Interest Margin, Tax-Equivalent*	2.67		%	3.06		%	3.00		%
Efficiency Ratio Calculation*4
Noninterest Expense	$	93,048		$	81,530		$	78,048
Less: Intangible Asset Amortization	176			193			210
Net Noninterest Expense	92,872			81,337			77,838
Net Interest Income, Tax-Equivalent	105,596			119,429			111,460
Noninterest Income	29,117			30,898			32,369
Less: Net (Loss) Gain on Securities	(92)			427			111
Net Gross Income, Adjusted	$	134,805		$	149,900		$	143,718
Efficiency Ratio*	68.89		%	54.26		%	54.16		%
Period-End Capital Information:
Tier 1 Leverage Ratio	9.84		%	9.80		%	9.20		%
Total Stockholders’ Equity (i.e. Book Value)	$	379,772		$	353,538		$	371,186
Book Value per Share	22.42			20.74			21.81
Intangible Assets	22,983			23,373			23,791
Tangible Book Value per Share 2	21.06			19.37			20.41
Asset Quality Information:
Net Loans Charged-off as a Percentage of Average Loans	0.07		%	0.08		%	0.03		%
Provision for Credit Losses as a Percentage of Average Loans	0.11		%	0.17		%	0.01		%
Allowance for Credit Losses as a Percentage of Period-End Loans	0.97		%	1.00		%	1.02		%
Allowance for Credit Losses as a Percentage of Nonperforming Loans	147.82		%	249.95		%	233.89		%
Nonperforming Loans as a Percentage of Period-End Loans	0.66		%	0.40		%	0.44		%
Nonperforming Assets as a Percentage of Total Assets	0.51		%	0.32		%	0.29		%

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

27

Arrow Financial Corporation

Reconciliation of Non-GAAP Financial Information

(Dollars In Thousands, Except Per Share Amounts)

Footnotes:
1.	Share and per share data have been restated for the September 26, 2023, 3% stock dividend.
2.	Non-GAAP Financial Measure Reconciliation: Tangible Book Value, Tangible Equity, and Return on Tangible Equity exclude goodwill and other intangible assets, net from total equity.  These are non-GAAP financial measures which Arrow believes provides investors with information that is useful in understanding its financial performance.
		12/31/2023			9/30/2023			6/30/2023			3/31/2023			12/31/2022
	Total Stockholders' Equity (GAAP)	$	379,772		$	360,014		$	361,443		$	363,371		$	353,538
	Less: Goodwill and Other Intangible assets, net	22,983			23,078			23,175			23,273			23,373
	Tangible Equity (Non-GAAP)	$	356,789		$	336,936		$	338,268		$	340,098		$	330,165
	Period End Shares Outstanding	16,942			17,049			17,050			17,050			17,048
	Tangible Book Value per Share (Non-GAAP)	$	21.06		$	19.76		$	19.84		$	19.95		$	19.37
	Net Income	7,723			7,743			6,047			8,562			12,087
	Return on Average Tangible Equity (Net Income/Average Tangible Equity - Annualized)	8.99		%	9.05		%	7.10		%	10.33		%	14.62		%
3.	Non-GAAP Financial Measure Reconciliation: Net Interest Margin is the ratio of annualized tax-equivalent net interest income to average earning assets. This is also a non-GAAP financial measure which Arrow believes provides investors with information that is useful in understanding its financial performance.
		12/31/2023			9/30/2023			6/30/2023			3/31/2023			12/31/2022
	Interest Income (GAAP)	$	44,324		$	42,117		$	40,013		$	36,110		$	35,904
	Add: Tax Equivalent Adjustment (Non-GAAP)	184			183			196			202			279
	Interest Income - Tax Equivalent (Non-GAAP)	$	44,508		$	42,300		$	40,209		$	36,312		$	36,183
	Net Interest Income (GAAP)	$	25,613		$	25,353		$	25,772		$	28,094		$	30,579
	Add: Tax-Equivalent adjustment (Non-GAAP)	184			183			196			202			279
	Net Interest Income - Tax Equivalent (Non-GAAP)	$	25,797		$	25,536		$	25,968		$	28,296		$	30,858
	Average Earning Assets	$	4,019,432		$	3,973,747		$	3,953,642		$	3,845,825		$	3,940,905
	Net Interest Margin (Non-GAAP)	2.55		%	2.55		%	2.63		%	2.98		%	3.11		%
4.	Non-GAAP Financial Measure Reconciliation: Financial Institutions often use the "efficiency ratio", a non-GAAP ratio, as a measure of expense control. Arrow believes the efficiency ratio provides investors with information that is useful in understanding its financial performance. Arrow defines efficiency ratio as the ratio of noninterest expense to net gross income (which equals tax-equivalent net interest income plus noninterest income, as adjusted).
5.	For the current quarter, all of the regulatory capital ratios as well as the Total Risk-Weighted Assets are calculated in accordance with bank regulatory capital rules. The December 31, 2023 CET1 ratio listed in the tables (i.e., 13.00%) exceeds the sum of the required minimum CET1 ratio plus the fully phased-in Capital Conservation Buffer (i.e., 7.00%).
		12/31/2023			9/30/2023			6/30/2023			3/31/2023			12/31/2022
	Total Risk Weighted Assets	$	3,032,188		$	2,988,438		$	2,937,837		$	2,909,610		$	2,883,902
	Common Equity Tier 1 Capital	394,166			393,541			389,966			388,228			384,003
	Common Equity Tier 1 Ratio	13.00		%	13.17		%	13.27		%	13.34		%	13.32		%

28

CRITICAL ACCOUNTING ESTIMATES

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

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

29

A. OVERVIEW

The following discussion and analysis focuses on and reviews Arrow's results of operations for each of the years in the three-year period ended December 31, 2023 and the financial condition as of December 31, 2023 and 2022.  The discussion below should be read in conjunction with the selected quarterly and annual information set forth above and the Consolidated Financial Statements and other financial data presented elsewhere in this Report.  When necessary, prior-year financial information has been reclassified to conform to the current-year presentation.

Summary of 2023 Financial Results: For the year ended December 31, 2023, net income was $30.1 million, down 38.4% from $48.8 million for 2022. The decrease from the prior year was primarily the result of a decrease in net interest income of $13.5 million and an increase of non-interest expense of $11.5 million, partially offset by a $1.4 million decrease in the provision for credit loss and a $6.7 million decrease in the provision for income taxes.

Diluted EPS was $1.77 for 2023, down 38.1% from $2.86 in 2022. Return on average equity (ROE) and return on average assets (ROA) were 8.29% and 0.74%, respectively, as compared to 13.55% and 1.21%, respectively, for 2022.

Net interest income for the year ended December 31, 2023 was $104.8 million, a decrease of $13.5 million, or 11.4%, from the prior year. Interest and fees on loans were $142.0 million, an increase of 25.7% from the $113.0 million for the year ended December 31, 2022. Interest expense for the year ended December 31, 2023 was $57.7 million. This is an increase of $46.4 million, or 410.5%, from the $11.3 million in expense for the prior-year period.

Net interest margin was 2.65% for the year ended December 31, 2023, as compared to 3.03% for the year ended December 31, 2022. In the fourth quarter of 2023, the net interest margin was 2.53%, as compared to 3.08% for the fourth quarter of 2022. The decrease in net interest margin compared to the fourth quarter of 2022 and the full year 2022 was primarily the result of the cost of interest-bearing liabilities increasing at a faster pace than the yield on average earning assets. In addition, deposits have continued to migrate to higher cost products, such as money market savings and time deposits.

For 2023, the provision for credit losses related to the loan portfolio was $3.4 million, compared to $4.8 million in 2022. The key drivers for the provision for credit losses in 2023 were loan growth and charge-offs, offset by changes to the economic forecast factors embedded in the credit loss allowance model as well as qualitative factors relating to local and Arrow-specific conditions.

Noninterest income was $29.1 million for the year ended December 31, 2023, a decrease of 5.8%, as compared to $30.9 million for the year ended December 31, 2022. Income from fiduciary activities, which includes Wealth Management services, was fairly consistent to the prior year. Fees and other services to customers declined compared to the prior year, primarily due to lower interchange fees.

Noninterest expense for the year ended December 31, 2023 increased by $11.5 million, or 14.1%, to $93.0 million, as compared to $81.5 million in 2022. The largest component of noninterest expense is salaries and benefits paid to our employees, which totaled $47.7 million in 2023. Salaries and benefits increased $0.7 million, or 1.4%, from the prior year. The overall increase from the prior year was primarily related to $4.8 million of additional legal and professional fees incurred in 2023 associated with the delay in the filing of the Annual Report on Form 10-K for the year ended December 31, 2022 (the "2022 Form 10-K"), and the Quarterly Report on Form 10-Q for the quarter ended March 31, 2023 (the "Q1 2023 Form 10-Q"), as well as an increase in costs related to technology and Federal Deposit Insurance Corporation insurance.

The provision for income taxes for 2023 was $7.4 million, compared to $14.1 million for 2022. The effective income tax rates for 2023 and 2022 were 19.8% and 22.4%, respectively. The reduction in the effective tax rate was the result of substantially similar permanent favorable tax benefits in each year while pre-tax income decreased in 2023.

Total assets were $4.17 billion at December 31, 2023, an increase of $200.4 million, or 5.0%, compared to December 31, 2022. Total cash and cash equivalents were $142.5 million at December 31, 2023, an increase of $77.9 million, or 120.4%, compared to December 31, 2022.

Total investments were $636.1 million at December 31, 2023, a decrease of $121.0 million, or 16.0%, compared to December 31, 2022. The net change was primarily driven by paydowns and maturities of approximately $119 million, a net decrease from the repositioning of our investment portfolio of approximately $25 million, partially offset by an improvement in the mark-to-market adjustments of $23 million. The proceeds from the decrease in investments were primarily used to fund loan growth and for general corporate purposes. There were no credit quality issues related to the investment portfolio.

In the fourth quarter of 2023 as part of the investment portfolio repositioning, Arrow sold all 27,771 of its previously held Visa Class B shares for a pre-tax gain of $9.3 million while recognizing a pre-tax loss of $9.2 million from the sale of approximately $100 million of lower-yielding securities. The proceeds of the sale were reinvested in higher-yielding available for sale securities and federal funds, resulting in an annual interest income run-rate improvement of over $3 million in pre-tax earnings. This transaction was part of Arrow's strategy to improve profitability and its asset-liability management position.

At December 31, 2023, total loan balances reached $3.2 billion, up $230 million, or 7.7%, from the prior-year level. Loan growth for the fourth quarter was $74.3 million. The consumer loan portfolio grew by $46.5 million, or 4.4%, over the balance at December 31, 2022. The residential real estate loan portfolio increased $128.8 million, or 12.0%, from the prior year primarily as a result of the continued strength of the housing market within Arrow's service area. Commercial loans, including commercial real estate, increased $54.4 million, or 6.4%, over the balances at December 31, 2022.

The allowance for credit losses was $31.3 million at December 31, 2023, an increase of $1.3 million from December 31, 2022. The allowance for credit losses represents 0.97% of loans outstanding, a decrease from 1.00% at year-end 2022. Asset quality remained solid at December 31, 2023. Net loan losses, expressed as an annualized percentage of average loans outstanding, were 0.07% for the year ended December 31, 2023, as compared to 0.08% for the prior year. Nonperforming assets of $21.5 million at December 31, 2023, represented 0.51% of period-end assets, compared to $12.6 million or 0.32% at December 31, 2022. The increase was primarily due to one large loan relationship of approximately $15 million, which is well collateralized.

30

At December 31, 2023, total deposit balances were $3.7 billion, an increase of $189.2 million, or 5.4%, from the prior-year level. Arrow obtained $175 million of brokered CDs with corresponding three-year swaps as part of a funding hedge to strategically manage its asset-liability profile and cost of funds. Non-municipal deposits, excluding brokered CDs, increased by $45.3 million and municipal deposits decreased by $31.1 million as compared to December 31, 2022. Noninterest-bearing deposits decreased by $78.4 million, or 9.4%, during 2023, and represented 20.6% of total deposits at year-end, as compared to the prior-year level of 23.9%. At December 31, 2023, total time deposits, excluding brokered CDs, increased $278.6 million from the prior-year level. The change in composition of deposits was primarily the result of pressure from competitive rate pricing and the migration from low to higher costing products.

Total borrowings were $26.5 million at December 31, 2023, a decrease of $28.3 million, or 51.6%, compared to December 31, 2022. In addition to timing, the majority of the decrease was a $20 million payoff of a Federal Home Loan Bank term advance.

Total shareholders’ equity was $379.8 million at December 31, 2023, an increase of $26.2 million, or 7.4%, from the year-end 2022 balance. Arrow's regulatory capital ratios remained strong in 2023. At December 31, 2023, Arrow's Common Equity Tier 1 Capital Ratio was 13.00% and Total Risk-Based Capital Ratio was 14.74%. The capital ratios of Arrow and both of its subsidiary banks, Glens Falls National Bank and Trust Company and Saratoga National Bank and Trust Company, continued to significantly exceed the “well capitalized” regulatory standards.

In 2022, Arrow upgraded its core banking system. The system upgrade reflects the strategic focus on a strong technology foundation and this investment paves the way for customer-facing enhancements and more efficient and improved internal operations as Arrow continues to work toward fully leveraging the capabilities of the new bank core system. In connection with the material weaknesses which are being remediated, we have expended a significant amount of time and resources negatively impacting our operations and business. Please refer to Part II, Item 9A, Controls and Procedures for additional information.

The changes in net income, net interest income and net interest margin between the current and prior year are discussed in detail under the heading "Results of Operations," beginning on page 33.

Regulatory Capital and Stockholders' Equity: As of December 31, 2023, Arrow continued to exceed all required minimum capital ratios under the current bank regulatory capital rules as implemented under Dodd-Frank (the "Capital Rules") at both the holding company and bank levels.  At that date, both subsidiary banks, as well as the holding company, continued to qualify as "well-capitalized" under the capital classification guidelines as defined by the Capital Rules.  Because of continued profitability and strong asset quality, the regulatory capital levels throughout recent years have consistently remained well in excess of the various required regulatory minimums in effect from time to time, as they do at present.

In 2020, federal bank regulators introduced an optional simplified measure of capital adequacy for qualifying community banking organizations (CBLR).  A qualifying community banking organization that opts into the CBLR framework and meets all the requirements under the CBLR framework will be considered to have met the well-capitalized ratio requirements under the “prompt corrective action” regulations and will not be required to report or calculate risk-based capital ratios.

The CBLR final rule became effective as of January 1, 2020, and Arrow and both subsidiary banks have opted out of utilizing the CBLR framework. Therefore, the Capital Rules promulgated under Dodd-Frank will remain applicable to Arrow and both subsidiary banks.

Total stockholders' equity was $379.8 million at December 31, 2023, an increase of $26.2 million, or 7.4%, from December 31, 2022. The components of the change in stockholders' equity since year-end 2022 are presented in the Consolidated Statement of Changes in Stockholders' Equity on page 60. Total book value per share increased by 8.1% over the prior year level. The net increase in total stockholders' equity during 2023 principally reflected the following factors: (i) $30.1 million of net income for the year, (ii) other comprehensive income of $16.2 million, (iii) $1.0 million of equity related to various stock-based compensation plans and (iv) $0.5 million of equity resulting from the dividend reinvestment plan, reduced by (v) cash dividends of $18.0 million and (vi) repurchases of common stock of $3.6 million. As of December 31, 2023, Arrow's closing stock price was $27.94, resulting in a trading multiple of 1.33 to Arrow's tangible book value. The Board of Directors declared and Arrow paid a cash dividend of $0.262 per share for the first three quarters of 2023, as adjusted for a 3% stock dividend distributed September 26, 2023, a cash dividend of $0.27 per share for the fourth quarter of 2023, and a $0.27 per share cash dividend for the first quarter of 2024.

Loan quality: Nonperforming loans were $21.2 million at December 31, 2023, an increase of $9.2 million, or 76.5%, from year-end 2022. The increase was primarily due to one large loan relationship of approximately $15 million, which is well collateralized. The ratio of nonperforming loans to period-end loans at December 31, 2023 was 0.66%, an increase from 0.40% at December 31, 2022. Loans charged-off (net of recoveries) against the allowance for credit losses was $2.1 million for 2023, a decrease of $59 thousand from 2022. The ratio of net charge-offs to average loans was 0.07% for 2023 and 0.08% for 2022. At December 31, 2023, the allowance for credit losses was $31.3 million, representing 0.97% of total loans, a decrease of 3 basis points from the December 31, 2022 ratio.

Loan Segments: As of December 31, 2023, total loans grew $229.7 million, or 7.7%, as compared to the balance at December 31, 2022.

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

31

Appraisals on nonperforming and watched CRE loan properties are updated as deemed necessary, usually when the loan is downgraded or when there has been significant market deterioration since the last appraisal.

◦    Consumer Loans: These loans (primarily automobile loans) comprised approximately 34.6% of the total loan portfolio at period-end. Consumer automobile loans at December 31, 2023, were $1.1 billion, or 99.6% of this portfolio segment. The vast majority of automobile loans are initiated through the purchase of vehicles by consumers with automobile dealers. Although previous supply chain constraints have lessened, inflation and higher rates may limit the potential growth in this category.

◦    Residential Real Estate Loans: These loans, including home equity loans, made up 37.3% of the total loan portfolio at period-end. Demand for residential real estate has continued to remain strong. Arrow originated nearly all of the residential real estate loans currently held in the loan portfolio and applies conservative underwriting standards to loan originations. Arrow has historically sold a portion of the residential real estate mortgage originations into the secondary market. The ratio of the sales of originations to total originations tends to fluctuate from period to period based on market conditions and other factors. In recent periods, sales have decreased as a result of the strategic decision to grow the residential loan portfolio. The rate at which mortgage loan originations are sold in future periods will depend on various circumstances, including prevailing mortgage rates, other lending opportunities, capital and liquidity needs, and the availability of a market for such transactions.

Liquidity and access to credit markets: Arrow did not experience any liquidity issues in recent years or in 2023. Arrow’s liquidity position should provide the Company with the necessary flexibility to address any unexpected near-term disruptions.  Interest-bearing cash balances at December 31, 2023 were $105.8 million which represents a significant increase as compared to $32.8 million at December 31, 2022. Deposit balances are Arrow's primary funding source. Additionally, contingent lines of credit are also available. Arrow has collateralized lines of credit established and available through the FHLBNY and FRB, totaling $1.4 billion. The terms of Arrow's lines of credit have not changed significantly in recent periods (see the general liquidity discussion on page 47). Arrow has principally relied on asset-based liquidity (i.e., funds in overnight investments and cash flow from maturing investments and loans) with liability-based liquidity as a secondary source of funds (the main liability-based sources are an overnight borrowing arrangement with correspondent banks, an arrangement for overnight borrowing and term credit advances from the FHLBNY, and an additional arrangement for short-term advances at the Federal Reserve Bank discount window as well as the Bank Term Funding Program). Regular liquidity stress tests and tests of the contingent liquidity plan are performed to ensure that an adequate amount of available funds can be generated to meet a wide variety of potential liquidity crises.

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

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B. RESULTS OF OPERATIONS

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

I. NET INTEREST INCOME

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

CHANGE IN NET INTEREST INCOME

(Dollars In Thousands) (GAAP Basis)

	Years Ended December 31,						Change From Prior Year
							2022 to 2023				2021 to 2022
	2023		2022		2021		Amount		%		Amount		%
Interest and Dividend Income	$	162,564	$	129,651	$	115,550	$	32,913	25.4	%	$	14,101	12.2	%
Interest Expense	57,732		11,308		5,195		46,424		410.5	%	6,113		117.7	%
Net Interest Income	$	104,832	$	118,343	$	110,355	$	(13,511)	(11.4)	%	$	7,988	7.2	%

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

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

Average Consolidated Balance Sheets and Net Interest Income Analysis

(GAAP basis)

(Dollars in Thousands)

Years Ended December 31:	2023						2022					2021
			Interest		Rate				Interest	Rate				Interest	Rate
	Average		Income/		Earned/		Average		Income/	Earned/		Average		Income/	Earned/
	Balance		Expense		Paid		Balance		Expense	Paid		Balance		Expense	Paid
Interest-Bearing Deposits at Banks	$	109,906	$	5,831	5.31	%	$	252,835	3,100	1.23	%	418,488		565	0.14	%
Investment Securities:
Fully Taxable	622,575		11,764		1.89	%	648,540		10,357	1.60	%	470,133		6,487	1.38	%
Exempt from Federal    Taxes	141,966		2,953		2.08	%	173,184		3,212	1.85	%	185,072		3,513	1.90	%
Loans	3,074,261		142,016		4.62	%	2,827,518		112,982	4.00	%	2,643,163		104,985	3.97	%
Total Earning Assets	3,948,708		162,564		4.12	%	3,902,077		129,651	3.32	%	3,716,856		115,550	3.11	%
Allowance for Credit Losses	(30,799)						(27,954)					(27,187)
Cash and Due From Banks	30,640						30,462					36,464
Other Assets	135,970						142,895					156,509
Total Assets	$	4,084,519					$	4,047,480				$	3,882,642

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Deposits:
Interest-Bearing Checking    Accounts	$	855,931	3,663		0.43	%	$	1,038,751	973		0.09	%	926,875		731		0.08	%
Savings Deposits	1,498,749		34,343		2.29	%	1,549,278		7,879		0.51	%	1,496,906		1,904		0.13	%
Time Deposits of $250,000   Or More	137,974		4,966		3.60	%	55,690		369		0.66	%	87,033		261		0.30	%
Other Time Deposits	241,218		7,127		2.95	%	132,541		604		0.46	%	141,677		632		0.45	%
Total Interest-Bearing     Deposits	2,733,872		50,099		1.83	%	2,776,260		9,825		0.35	%	2,652,491		3,528		0.13	%
Short-Term Borrowings	144,971		6,756		4.66	%	32,874		605		1.84	%	49,768		786		1.58	%
FHLBNY Term Advances and Other Long-Term Debt	20,000		686		3.43	%	20,000		685		3.43	%	20,000		686		3.43	%
Finance Leases	5,082		191		3.76	%	5,132		193		3.76	%	5,182		195		3.76	%
Total Interest-   Bearing Liabilities	2,903,925		57,732		1.99	%	2,834,266		11,308		0.40	%	2,727,441		5,195		0.19	%
Demand Deposits	772,889						815,218						767,671
Other Liabilities	44,924						37,901						33,773
Total Liabilities	3,721,738						3,687,385						3,528,885
Stockholders’ Equity	362,781						360,095						353,757
Total Liabilities and  Stockholders’ Equity	$	4,084,519					$	4,047,480					$	3,882,642
Net Interest Income			$	104,832					$	118,343					$	110,355
Net Interest Spread					2.13	%					2.92	%					2.92	%
Net Interest Margin					2.65	%					3.03	%					2.97	%

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

Net Interest Income Rate and Volume Analysis

(Dollars in Thousands) (GAAP basis)

	2023 Compared to 2022 Change in Net Interest Income Due to:						2022 Compared to 2021 Change in Net Interest Income Due to:
Interest and Dividend Income:	Volume		Rate		Total		Volume		Rate		Total
Interest-Bearing Bank Balances	$	(1,752)	$	4,483	$	2,731	$	(224)	$	2,759	$	2,535
Investment Securities:
Fully Taxable	(398)		1,805		1,407		2,443		1,427		3,870
Exempt from Federal Taxes	(586)		327		(259)		(214)		(87)		(301)
Loans	9,974		19,060		29,034		7,149		848		7,997
Total Interest and Dividend Income	7,238		25,675		32,913		9,154		4,947		14,101
Interest Expense:
Deposits:
Interest-Bearing Checking Accounts	(220)		2,910		2,690		138		104		242
Savings Deposits	(214)		26,678		26,464		88		5,887		5,975
Time Deposits of $250,000 or More	541		4,056		4,597		(92)		200		108
Other Time Deposits	517		6,006		6,523		(41)		13		(28)
Total Deposits	624		39,650		40,274		93		6,204		6,297
Other Liabilities	2,062		4,088		6,150		(269)		85		(184)
Total Interest Expense	2,686		43,738		46,424		(176)		6,289		6,113
Net Interest Income	$	4,552	$	(18,063)	$	(13,511)	$	9,330	$	(1,342)	$	7,988

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NET INTEREST MARGIN

YIELD ANALYSIS (GAAP Basis)	December 31,
	2023		2022		2021
Yield on Earning Assets	4.12	%	3.32	%	3.11	%
Cost of Interest-Bearing Liabilities	1.99	%	0.40	%	0.19	%
Net Interest Spread	2.13	%	2.92	%	2.92	%
Net Interest Margin	2.65	%	3.03	%	2.97	%