ARROW FINANCIAL CORP

Previous wording

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

Current wording

In this Report, the terms "Arrow," "the registrant," "the Company," "we," "us," and "our" generally refer to Arrow Financial Corporation and its subsidiaries as a group, except where the context indicates otherwise. At certain points in this Report, Arrow's performance is compared with that of the Company's "peer group" of financial institutions. Unless otherwise specifically stated, the peer group for the purposes of this Report is comprised of the group of 193 domestic bank holding companies with $3 to $10 billion in total consolidated assets as identified in the FRB’s "Bank Holding Company Performance Report" for March 31, 2024 (the most recent such report currently available), and peer group data contained herein has been derived from such report.

Previous wording

•Potential complications with the implementation of our new core banking system could adversely impact our business and operations.

Current wording

•Potential complications with the implementation of (i) our new core banking system or (ii) adjustments related to integrating the core systems of our subsidiary banks in connection with the Combination could adversely impact our business and operations.

Previous wording

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

Current wording

Summary of Q2 2024 Financial Results: Net income for the second quarter of 2024 was $8.6 million, increasing from $7.7 million in the first quarter of 2024 and $6.0 million in the second quarter of 2023. As compared to the prior quarter, net income benefited from an increase of $0.7 million in net interest income as well as a decrease in non-interest expense of $0.7 million. As compared to the second quarter of 2023, net interest income increased $1.4 million. Non-interest income increased $1.0 million and non-interest expense decreased $0.8 million.

Previous wording

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

Current wording

Net interest income for the second quarter of 2024 was $27.2 million, increasing 2.6% from $26.5 million for the first quarter of 2024 and increasing 5.4% from $25.8 million in the second quarter of 2023. Total interest and dividend income was $48.0 million for the second quarter of 2024, an increase from $46.7 million in the first quarter of 2024 and from $40.0 million for the second quarter of 2023. These increases were primarily driven by loan growth and higher loan rates. Interest expense for the second quarter of 2024 was $20.8 million, an increase from $20.2 million for the first quarter of 2024 and from $14.2 million for the second quarter of 2023. The increases for both comparison periods were driven primarily by higher deposit rates and changes in deposit composition.

Previous wording

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

Current wording

Net interest margin, on a tax-equivalent basis (a non-GAAP measure), for the second quarter of 2024 was 2.69% compared to 2.62% for the first quarter of 2024 and 2.63% for the second quarter of 2023. See the disclosure on page 49 related to the use of non-GAAP financial measures, including net interest margin, and Footnote 3 to the Selected Quarterly Information for the reconciliation to GAAP. The increase in net interest margin compared to the first quarter in 2024 was primarily the result of continued yield expansion on earning assets combined with moderating increase in the cost of interest-bearing liabilities. As compared to the second quarter of 2023, the increase in net interest margin was primarily the result of yield on average earning assets increasing at a faster pace than costs of interest-bearing liabilities. Net interest margin is affected by deposits continuing to migrate to higher costs products, such as money market savings and time deposits.

Previous wording

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

Current wording

For the second quarter of 2024, the provision for credit losses was $0.8 million compared to $0.6 million in the first quarter of 2024 and $0.9 million in the second quarter of 2023. The key drivers for the provision for credit losses in the second quarter of 2024 were loan growth and replenishment of the allowance for charge-offs, partially offset by changes to the economic forecast factors embedded in the credit loss allowance model.

Previous wording

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

Current wording

The provision for income taxes was 21.2%, or $2.3 million, for the second quarter of 2024, 20.9%, or $2.0 million, for the first quarter of 2024 and 20.9%, or $1.6 million, for the second quarter of 2023.

Previous wording

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

Current wording

Total assets were $4.2 billion at June 30, 2024, a decrease of $89.2 million, or 2.1%, as compared to March 31, 2024 and an increase of $140.8 million, or 3.4%, as compared to June 30, 2023. For the second quarter of 2024, overall change in balance sheet was attributable to seasonal changes of cash balances offset by growth in the loan portfolio.

Previous wording

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

Current wording

Total investments were $556.4 million as of June 30, 2024, a decrease of $63.6 million, or 10.3%, compared to March 31, 2024 and a decrease of $137.6 million, or 19.8%, compared to June 30, 2023. The decrease from March 31, 2024 was driven primarily by paydowns and maturities. The change from June 30, 2023 was also driven by paydowns and maturities as well as the fourth quarter 2023 repositioning of the investment portfolio, reducing the portfolio by approximately $25 million at the time of the transaction. There were no credit quality issues related to the investment portfolio.

Previous wording

Total loans 1 reached $3.3 billion as of March 31, 2024. Loan growth for the first quarter of 2024 was $50.5 million, and $252.2 million compared to March 31, 2023. Loan growth was spread across all loan products.

Current wording

Total loans 1 reached $3.3 billion as of June 30, 2024. Loan growth for the second quarter of 2024 was $57.6 million, and $245.3 million since June 30, 2023. Loan growth was spread across all loan products

Previous wording

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

Current wording

The allowance for credit losses was $31.0 million as of June 30, 2024, which represented 0.94% of loans outstanding, as compared to $31.6 million, or 0.97%, at March 31, 2024 and $31.2 million, or 1.02%, at June 30, 2023. Net charge-offs, expressed as an annualized percentage of average loans outstanding, were 0.16% for the three-month period ended June 30, 20242, as compared to 0.04% for the three-month period ended March 31, 2024 and 0.07% for the three-month period ended June 30, 2023. Nonperforming assets were $21.3 million as of June 30, 2024, representing 0.50% of period-end assets, consistent with 0.50% at March 31, 2024 and up from 0.17% at June 30, 2023. The increase from the second quarter of 2023 was primarily due to one large, well collateralized loan relationship of approximately $15 million, which moved into non-performing status during the fourth quarter of 2023.

Previous wording

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

Current wording

At June 30, 2024, deposit balances were $3.7 billion, a decrease of $95.4 million from March 31, 2024 and an increase of $181.4 million from June 30, 2023. The decrease from the first quarter was primarily attributable to the seasonality of municipal deposits, expected to normalize in the third quarter. The increase from June 30, 2023 was partially attributable to $175 million of brokered certificates of deposit ("CDs"), primarily used to reduce borrowings by $160 million. Arrow simultaneously entered into three-year interest rate swaps to strategically manage its asset-liability profile and cost of funds. Please refer to page 6 for further details related to deposits.

Previous wording

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

Current wording

1 Excludes both $0.4 million fair value hedge adjustment at June 30, 2024 and $1.2 million fair value hedge adjustment at March 31, 2024

Previous wording

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

Current wording

The changes in net income, net interest income and net interest margin between the three-month and six-month periods are discussed in detail under the heading "RESULTS OF OPERATIONS," beginning on page 70.

Previous wording

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

Current wording

Stockholders’ equity was $383.0 million at June 30, 2024, an increase of $3.2 million, or 0.9%, from the December 31, 2023 level of $379.8 million. The increase in stockholders' equity over the first six months of 2024 principally reflected the following factors: the addition of (i) $16.3 million of net income for the period and (ii) other comprehensive gain $1.8 million and (iii) the issuance of $0.7 million of common stock through employee benefit and dividend reinvestment plans, reduced by (iv) cash dividends of $9.1 million and (v) repurchases of common stock of $6.5 million. The components of the change in stockholders’ equity since year-end 2023 are presented in the Consolidated Statements of Changes in Stockholders’ Equity on page 6, and are discussed in more detail in the next section.

Previous wording

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

Current wording

At June 30, 2024, book value per share was $22.90, up 8.0% over the prior-year level. Tangible book value per share (a non-GAAP measure that deducts intangible assets from stockholders' equity) was $21.54, an increase of $1.70, or 8.6%, over the level as of June 30, 2023. See the disclosure on page 49 related to the use of non-GAAP financial measures, including tangible book value, and Footnote 2 to the Selected Quarterly Information for the reconciliation to GAAP..

Previous wording

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

Current wording

On June 30, 2024, Arrow's closing stock price was $26.05, representing a trading multiple of 1.21 to tangible book value. In the second quarter of 2024, Arrow paid a quarterly cash dividend of $0.27. Further discussion of dividends is included in the Capital Components; Stock Repurchases; Dividends section located on page 68.

Previous wording

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

Current wording

Loan Quality: Net charge-offs for the second quarter of 2024 were $1.3 million as compared to $562 thousand for the comparable 2023 quarter. The ratio of net charge-offs to average loans (annualized) was 0.16% for the three month period ended June 30, 2024, an increase from 0.07% with the three month period ended June 30, 2023.

Previous wording

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

Current wording

For the second quarter of 2024, the provision for credit losses was $775 thousand and a credit for estimated credit losses on off-balance sheet credit exposures was $153 thousand. The allowance for credit losses was $31.0 million on June 30, 2024, which represented 0.94% of loans outstanding, as compared to 1.02% on June 30, 2023.

Previous wording

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

Current wording

Nonperforming loans were $21.1 million at June 30, 2024, representing 0.64% of period-end loans, an increase from the June 30, 2023 ratio of 0.21% and a decrease from the March 31, 2024 ratio of 0.66%. The ratio continues to reasonably compare with the weighted average ratio of the peer group of 0.53% at March 31, 2024. Nonperforming assets of $21.3 million at June 30, 2024 represented 0.50% of period-end assets up from 0.17% at June 30, 2023. The increase in delinquent loans from the prior year is primarily attributable to one commercial loan relationship moving to non-performing status during the fourth quarter of 2023.

Previous wording

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

Current wording

Loan Segments: As of June 30, 2024, total loans grew by $102.6 million, or 3.2%, as compared to the balance at December 31, 2023. The largest increase was in the residential real estate loan portfolio which increased $55.9 million, or 4.7%. Consumer loans increased $27.1 million, or 2.4%, primarily comprised of automobile loans. Commercial and commercial real estate loans increased by $19.6 million, or 2.2%, from December 31, 2023.

Previous wording

•Commercial and Commercial Real Estate Loans: Combined, these loans comprise 28.0% of the total loan portfolio at period-end. Commercial property values in Arrow's region have largely remained stable, however, there remains uncertainty surrounding market conditions due to inflation and the rising interest rate environment. Appraisals on nonperforming and watched CRE loan properties are updated as deemed necessary, usually when the loan is downgraded or when there has been significant market deterioration since the last appraisal.

Current wording

•Commercial and Commercial Real Estate Loans: Combined, these loans comprise 27.8% of the total loan portfolio at period-end. Commercial property values in Arrow's region have largely remained stable, however, there remains uncertainty surrounding market conditions due to inflation and the rising interest rate environment. Appraisals on nonperforming and watched commercial real estate 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.

Previous wording

•Consumer Loans: These loans (primarily automobile loans) comprised 34.6% of the total loan portfolio at period-end. Consumer automobile loans at March 31, 2024, were 99.6% of this portfolio segment. The vast majority of automobile loans are initiated through the purchase of vehicles by consumers with automobile dealers. As of March 31, 2024, demand has slowed as a result of current economic conditions. Inflation and higher rates may continue to limit the potential growth in this category.

Current wording

•Consumer Loans: These loans (primarily automobile loans) comprised 34.4% of the total loan portfolio at period-end. Consumer automobile loans at June 30, 2024, were 99.6% of this portfolio segment. The vast majority of automobile loans are initiated through the purchase of vehicles by consumers through automobile dealers. As of June 30, 2024, volume and growth have been relatively stable year over year. Inflation and higher rates may continue to limit the potential growth in this category.

Previous wording

•Residential Real Estate Loans: These loans, including home equity loans, made up 37.4% of the total loan portfolio at period-end. Demand for residential real estate has continued but weakened as interest rates have increased. A continuous elevated rate environment may impact future demand. Arrow originated nearly all of the residential real estate loans currently held in the loan portfolio and applies conservative underwriting standards to loan originations. Arrow has historically sold a portion of residential real estate mortgage originations into the secondary market. The ratio of the sales of originations to total originations tends to fluctuate from period to period based on market conditions and other factors. The rate at which mortgage loan originations are sold in future periods will depend on various circumstances, including prevailing mortgage rates, other lending opportunities, capital and liquidity needs, and the availability of a market for such transactions.

Current wording

•Residential Real Estate Loans: These loans, including home equity loans, made up 37.9% of the total loan portfolio at period-end. Demand for residential real estate has continued but weakened as interest rates have increased. A continuous elevated rate environment may impact future demand. Arrow originated nearly all of the residential real estate loans currently held in the loan portfolio and applies conservative underwriting standards to loan originations. Arrow has historically sold a portion of residential real estate mortgage originations into the secondary market. The ratio of the sales of originations to total originations tends to fluctuate from period to period based on market conditions and other factors. The rate at which mortgage loan originations are sold in future periods will depend on various circumstances, including prevailing mortgage rates, other lending opportunities, capital and liquidity needs, and the availability of a market for such transactions.

Previous wording

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

Current wording

Liquidity and Access to Credit Markets: Arrow has not experienced any liquidity events or special concerns in recent years or thus far in 2024. Arrow’s liquidity position provides the necessary flexibility to address any unexpected near-term liquidity needs. Interest-bearing cash balances at June 30, 2024 were $169.8 million compared to $139.8 million at June 30, 2023. Contingent lines of credit are also available. Operating collateralized lines of credit are established and available through the FHLBNY, FRB and other bank lines totaling approximately $1.3 billion. The general terms of Arrow's lines of credit have not changed significantly in recent periods (see the general liquidity discussion on page 68). Historically, Arrow has principally relied on asset-based liquidity (i.e., funds in overnight investments and cash flow from maturing investments and loans) with liability-based liquidity as a secondary source of funds

Previous wording

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

Current wording

Branch Acquisition: On August 2, 2024 GFNB completed the previously announced acquisition of the Whitehall Branch from Berkshire Bank, a subsidiary of Berkshire Hills Bancorp, Inc. The Whitehall Branch includes deposit accounts with an aggregate approximate balance of $37.5 million and loans with an aggregate approximate balance of $3 million. The acquisition includes the branch premises and substantially all of the personal property and equipment used in the operation of the Whitehall Branch. All employees associated with the Whitehall Branch were offered employment with Arrow.

Previous wording

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

Current wording

Changes in Earning Assets: The loan portfolio at June 30, 2024, was $3.3 billion, an increase of $102.6 million, or 3.2%, from the December 31, 2023 level and up by $245.6 million, or 8.0%, from the June 30, 2023 level. The following trends were experienced in our largest segments:

Previous wording

•Commercial and commercial real estate loans: This segment of the loan portfolio increased by $11.6 million, or 1.3%, during the first three months of 2024. In the first three months of 2024, loan growth has slowed as a result of the current rate environment.

Current wording

•Commercial and commercial real estate loans: This segment of the loan portfolio increased by $19.6 million, or 2.2%, during the first six months of 2024. In the first six months of 2024, loan growth has slowed as a result of the current rate environment.

Previous wording

•Consumer loans (primarily automobile loans through indirect lending): As of March 31, 2024, these loans, primarily auto loans originated through dealerships in New York and Vermont, increased by $14.1 million, or 1.3%, from the December 31, 2023 balance. Inflation and rising rates may continue to slow demand.

Current wording

•Consumer loans (primarily automobile loans through indirect lending): As of June 30, 2024, these loans, primarily auto loans originated through dealerships in New York and Vermont, increased by $27.1 million, or 2.4%, from the December 31, 2023 balance. Inflation and rising rates may continue to slow demand.

Previous wording

•Residential real estate loans: This segment increased during the first three months of 2024 by $20.1 million, or 1.7%. A deterioration of economic conditions may trigger a reduction in loan production for the remainder of the year.

Current wording

•Residential real estate loans: This segment increased during the first six months of 2024 by $55.9 million, or 4.7%. A deterioration of economic conditions may trigger a reduction in loan production for the remainder of the year.

Previous wording

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

Current wording

Changes in Sources of Funds: Deposit balances reached $3.7 billion, an increase of $181.4 million, or 5.2%, from the prior-year level and a decrease of $3.9 million from December 31, 2023. The increase from June 30, 2023 was partially attributable to $175 million of brokered CDs, primarily used to reduce borrowings by $160 million. Noninterest-bearing deposits represented 19.1% of total deposits at June 30, 2024, compared to 21.7% of total deposits on June 30, 2023. At June 30, 2024, total time deposits were $675.3 million. Municipal deposits decreased $17.7 million, or 2.0% from June 30, 2023. Total borrowings were $106.5 million, an increase from $171.8 million at June 30, 2023. In the first quarter of 2024, Arrow borrowed $100 million as part of the BTFP to improve on-balance sheet liquidity and fund loan production. The BTFP was created to support American businesses and households by making additional funding available to eligible depository institutions to help assure banks have the ability to meet the needs of all their depositors.

Previous wording

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

Current wording

Arrow uses reciprocal deposits for a select group of municipalities to reduce the amount of investment securities required to be pledged as collateral for municipal deposits where municipal deposits in excess of the FDIC insurance coverage limits were transferred to other participating banks, divided into portions so as to qualify such transferred deposits for FDIC insurance coverage at each transferee bank. In return, reciprocal amounts are transferred to Arrow in equal amounts of deposits from the participant banks. The balances of reciprocal deposits were $629.9 million and $603.5 million at June 30, 2024 and June 30, 2023, respectively.

Previous wording

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

Current wording

Arrow evaluates available-for-sale debt securities in unrealized loss positions at each measurement date to determine whether the decline in the fair value below the amortized cost basis (impairment) is due to credit-related factors or non-credit related factors. Any impairment that is not credit related is recognized in other comprehensive income, net of applicable taxes. Credit-related impairment is recognized within the allowance for credit losses on the balance sheet, limited to the amount by which the amortized cost basis exceeds the fair value, with a corresponding adjustment to earnings via credit loss expense. Arrow determined that at June 30, 2024, gross unrealized losses were primarily attributable to changes in interest rates, relative to when the investment securities were purchased, and not due to the credit quality of the investment securities. The recent rising interest rate environment resulted in an increase in unrealized losses versus the comparable prior period. Arrow does not intend to sell, nor is it more likely than not that Arrow will be required to sell any securities before recovery of its amortized cost basis, which may be at maturity. Therefore, Arrow carried no allowance for credit loss at June 30, 2024 and there was no credit loss expense recognized by Arrow with respect to the securities portfolio during the six months ended June 30, 2024.

Previous wording

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

Current wording

There were no sales of investment securities within the six month periods ended June 30, 2024 or 2023.

Previous wording

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

Current wording

The following table summarizes purchases of investment securities within the available-for-sale and held-to-maturity portfolios for the six month periods ended June 30, 2024 and 2023, as well as proceeds from the maturity and calls of investment securities within each portfolio for the respective periods presented:

Previous wording

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

Current wording

The average yield on the loan portfolio was 5.17% for the second quarter of 2024 up 60 basis points from the second quarter of 2023. Market rates have continued to increase, which impacts new loan yields for fixed rate loans, and variable loan yields as these loans reach their repricing dates.

Previous wording

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

Current wording

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

Previous wording

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

Current wording

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

Previous wording

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

Current wording

For the quarter ended June 30, 2024, the total cost of deposits increased 6 basis points from the previous quarter and 77 basis points from the comparable prior year quarter. The Federal Funds rate increased throughout 2023 and has remained elevated for the first half of 2024. Arrow is well positioned for a variety of rate environments, see Part I, Item 3, entitled "Quantitative and Qualitative Disclosures About Market Risk," on page 74 for further discussion.

Previous wording

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

Current wording

The June 30, 2024 allowance for credit losses calculation incorporated a reasonable and supportable forecast period to account for economic conditions utilized in the measurement. The quantitative model utilized a six-quarter economic forecast sourced from reputable third-parties that reflects no change in the forecasted national unemployment rate, forecasted gross domestic product projected to improve by approximately 0.17%, and the HPI forecast to increase by approximately 2.62% from the previous quarter economic forecast. The overall change in the allowance from March 31, 2024 was primarily driven by the following factors: net loan growth contributed $0.5 million, changes in macro economic conditions reduced the allowance by $0.8 million, qualitative factors increased the allowance by $0.4 million, and net charge-offs of $0.6 million. The second quarter provision for credit losses was $775 thousand. In addition, Arrow recorded a credit for estimated credit losses on off-balance sheet credit exposures in other liabilities of $153 thousand in the second quarter of 2024.