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 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.

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 190 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 June 30, 2024 (the most recent such report currently available), and peer group data contained herein has been derived from such report.

Previous wording

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

Current wording

Arrow is a two-bank holding company headquartered in Glens Falls, New York. The banking subsidiaries are GFNB, whose main office is located in Glens Falls, New York, and SNB, whose main office is located in Saratoga Springs, New York. In July 2024, Arrow announced plans to undertake the Unification, which will be legally completed by December 31, 2024. Active subsidiaries of GFNB include Upstate Agency, LLC (an insurance agency that sells property and casualty insurance and also specializes in selling and servicing group health care policies and life insurance), North Country Investment Advisers, Inc. (a registered investment adviser that provides investment advice to Arrow's proprietary mutual funds) and Arrow Properties, Inc. (a real estate investment trust, or REIT). Arrow also owns directly two subsidiary business trusts, organized in 2003 and 2004, which issued trust preferred securities (TRUPs), which are still outstanding.

Previous 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.

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 Unification could adversely impact our business and operations.

Previous wording

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

Current wording

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

Previous 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.

Current wording

Summary of Q3 2024 Financial Results: Net income for the third quarter of 2024 was $9.0 million, increasing from $8.6 million in the second quarter of 2024 and $7.7 million in the third quarter of 2023. Compared to the prior quarter, net income benefited from an increase of $1.3 million in net interest income, partially offset by an increase in non-interest expense of $0.8 million. Compared to the third quarter of 2023, net income growth was driven by an increase in net interest income of $3.1 million, partially offset by an increase in non-interest expense of $0.6 million.

Previous 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.

Current wording

Net interest income for the third quarter of 2024 was $28.4 million, increasing 4.7% from $27.2 million for the second quarter of 2024 and increasing 12.2% from $25.4 million in the third quarter of 2023. Total interest and dividend income was $49.4 million for the third quarter of 2024, an increase from $48.0 million in the second quarter of 2024 and from $42.1 million for the third quarter of 2023. These increases were primarily driven by loan growth and higher loan yields. Interest expense for the third quarter of 2024 was $21.0 million, an increase from $20.8 million for the second quarter of 2024 and from $16.8 million for the third quarter of 2023. The increase from the prior year was driven primarily by higher deposit rates and changes in deposit composition.

Previous 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.

Current wording

Net interest margin, on an FTE basis (a non-GAAP measure), for the third quarter of 2024 was 2.79% compared to 2.69% for the second quarter of 2024 and 2.55% for the third quarter of 2023. The increase in net interest margin compared to the second quarter in 2024 was primarily the result of continued yield expansion on earning assets combined with the moderating cost of interest-bearing liabilities. As compared to the third 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 costing products, such as money market savings and time deposits. See the disclosure on page 49 related to the use of non-GAAP financial measures, including net interest margin, on an FTE basis, and Footnote 2 to the Selected Quarterly Information for the reconciliation to GAAP.

Previous 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.

Current wording

For the third quarter of 2024, the provision for credit losses was $0.9 million compared to $0.8 million in the second quarter of 2024 and $0.4 million in the third quarter of 2023. The key drivers for the provision for credit losses in the third quarter of 2024 were replenishment of the allowance for charge-offs, growth in loan balances and changes to the economic forecast factors embedded in the credit loss allowance model.

Previous 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.

Current wording

Total assets were $4.4 billion at September 30, 2024, an increase of $167.0 million, or 3.9%, as compared to June 30, 2024 and an increase of $138.5 million, or 3.2%, as compared to September 30, 2023. For the third quarter of 2024, overall growth in the balance sheet was attributable to changes in cash balances, primarily seasonal municipal deposits, as well as growth in the loan portfolio.

Previous 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.

Current wording

Total investments were $549.8 million as of September 30, 2024, a decrease of $6.6 million, or 1.2%, compared to June 30, 2024 and a decrease of $117.0 million, or 17.6%, compared to September 30, 2023. The decrease from June 30, 2024 was driven primarily by paydowns and maturities. The decrease from September 30, 2023 was also driven by paydowns and maturities as well as the fourth quarter 2023 repositioning of the investment portfolio, which reduced 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 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

Current wording

Total loans 1 were $3.3 billion as of September 30, 2024. Loan growth for the third quarter of 2024 was $24.2 million, and $201.2 million since September 30, 2023. Loan growth was spread across all loan products.

Previous 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.

Current wording

At September 30, 2024, deposit balances were $3.8 billion, an increase of $153.8 million from June 30, 2024 and an increase of $171.0 million from September 30, 2023. The increase from the second quarter was primarily attributable to the seasonality of municipal and corporate deposits and to a lessor degree the Whitehall acquisition. The increase from September 30, 2023 was partially attributable to $175 million of brokered CDs, primarily used to reduce borrowings and fund continued loan growth.

Previous 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.

Current wording

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

Previous 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

Current wording

1 Includes both $6.5 million fair value hedge adjustment at September 30, 2024 and $0.4 million fair value hedge adjustment at June 30, 2024

Previous wording

Regulatory Capital and Change in Stockholders' Equity: At June 30, 2024, Arrow continued to exceed all required minimum capital ratios under the current bank regulatory capital rules (the "Capital Rules") as implemented under the Dodd-Frank Wall Street Reform and Consumer Protection Act ("Dodd-Frank") at both the holding company and bank levels. At that date, both subsidiary banks continued to qualify as "well-capitalized" under the capital classification guidelines as defined by the Capital Rules. Because of continued profitability and strong asset quality, the regulatory capital levels throughout recent years have consistently remained well in excess of the various required regulatory minimums in effect from time to time, as they do at present.

Current wording

Regulatory Capital and Change in Stockholders' Equity: At September 30, 2024, Arrow continued to exceed all required minimum capital ratios under the current bank regulatory capital rules (the "Capital Rules") as implemented under the Dodd-Frank Wall Street Reform and Consumer Protection Act ("Dodd-Frank") at both the holding company and bank levels. At that date, both subsidiary banks continued to qualify as "well-capitalized" under the capital classification guidelines as defined by the Capital Rules.

Previous 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.

Current wording

Stockholders’ equity was $393.3 million at September 30, 2024, an increase of $13.5 million, or 3.6%, from the December 31, 2023 level of $379.8 million. The increase in stockholders' equity over the first nine months of 2024 principally reflected the following factors: the addition of (i) $25.2 million of net income for the period, (ii) other comprehensive gain of $7.4 million, and (iii) the issuance of $0.9 million of common stock through employee benefit and dividend reinvestment plans, reduced by (iv) cash dividends of $13.6 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 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..

Current wording

At September 30, 2024, book value per share was $23.50, up 11.3% over the prior-year level. Tangible book value per share (a non-GAAP measure that deducts intangible assets from stockholders' equity) was $21.95, an increase of $2.19, or 11.1%, over the level as of September 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 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.

Current wording

On September 30, 2024, Arrow's closing stock price was $28.66 per share, representing a trading multiple of 1.31 to tangible book value per share. In the third quarter of 2024, Arrow paid a quarterly cash dividend of $0.27 per share. 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 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.

Current wording

Loan Quality: Net charge-offs for the third quarter of 2024 were $0.7 million as compared to $0.4 million for the comparable 2023 quarter. The ratio of net charge-offs to average loans (annualized) was 0.08% for the three month period ended September 30, 2024, an increase from 0.05% as compared to the three month period ended September 30, 2023.

Previous 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.

Current wording

For the third quarter of 2024, the provision for credit losses was $934 thousand and an expense for estimated credit losses on off-balance sheet credit exposures was $234 thousand. The allowance for credit losses was $31.3 million on September 30, 2024, which represented 0.94% of loans outstanding, as compared to 0.99% on September 30, 2023.

Previous 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.

Current wording

Nonperforming loans were $21.9 million at September 30, 2024, representing 0.66% of period-end loans, an increase from the September 30, 2023 ratio of 0.20% and was unchanged from December 31, 2023. The ratio continues to reasonably compare with the weighted average ratio of the peer group of 0.54% at June 30, 2024. Nonperforming assets of $22.3 million at September 30, 2024 represented 0.51% of period-end assets up from 0.16% at September 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 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.

Current wording

Loan Segments: As of September 30, 2024, total loans grew by $127.0 million, or 4.0%, as compared to the balance at December 31, 2023. The largest increase was in the residential real estate loan portfolio which increased $93.9 million, or 7.8%. Consumer loans increased $8.6 million, or 0.8%, primarily comprised of automobile loans. Commercial and commercial real estate loans increased by $24.6 million, or 2.7%, from December 31, 2023.

Previous 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.

Current wording

•Commercial and Commercial Real Estate Loans: Combined, these loans comprise 27.7% 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 34.4% 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.

Current wording

•Consumer Loans: These loans (primarily automobile loans) comprised 33.6% of the total loan portfolio at period-end. Consumer automobile loans at September 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 September 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 37.9% 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.

Current wording

•Residential Real Estate Loans: These loans, including home equity loans, made up 38.7% 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. In the third quarter of 2024, Arrow resumed selling 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 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

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 September 30, 2024 were $286.1 million compared to $255.0 million at September 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 (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.

Previous 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.

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 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. See footnote 15 for additional details of the acquisition.

Previous wording

Subsidiary Bank Combination: On July 22 2024, Arrow received approval from the Office of the Comptroller of the Currency to complete the Combination, combining its two subsidiary banks, GFNB and SNB, into one bank that will be known as Arrow Bank National Association. The Combination will create operational efficiencies, unify branding and enhance Arrow's ability to pursue its strategic growth objectives. We expect to complete the Combination by December 31, 2024.

Current wording

Subsidiary Bank Unification: On July 22 2024, Arrow received approval from the Office of the Comptroller of the Currency to complete the Unification, combining its two subsidiary banks, GFNB and SNB, into one bank that will be known as Arrow Bank National Association. The Unification will create long term operational efficiencies, unify branding and enhance Arrow's ability to pursue its strategic growth objectives. We expect to complete the Unification by December 31, 2024.

Previous 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:

Current wording

Changes in Earning Assets: The loan portfolio at September 30, 2024, was $3.3 billion, an increase of $127.0 million, or 4.0%, from the December 31, 2023 level and up by $201.3 million, or 6.4%, from the September 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 $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.

Current wording

•Commercial and commercial real estate loans: This segment of the loan portfolio increased by $24.6 million, or 2.7%, during the first nine months of 2024. In the first nine 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 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.

Current wording

•Consumer loans (primarily automobile loans through indirect lending): As of September 30, 2024, these loans, primarily auto loans originated through dealerships in New York and Vermont, increased by $8.6 million, or 0.8%, 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 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.

Current wording

•Residential real estate loans: This segment increased during the first nine months of 2024 by $93.9 million, or 7.8%. Loan growth continues to be solid however a deterioration of economic conditions may trigger a reduction in loan production.

Previous 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.

Current wording

Changes in Sources of Funds: Deposit balances reached $3.8 billion, an increase of $171.0 million, or 4.7%, from the prior-year level and a an increase of $149.9 million from December 31, 2023. The increase from September 30, 2023 was partially attributable to $175 million of brokered CDs to fund continued loan growth. Noninterest-bearing deposits represented 19.3% of total deposits at September 30, 2024, compared to 21.8% of total deposits on September 30, 2023. At September 30, 2024, total time deposits were $677.1 million. Municipal deposits decreased $43.2 million, or 4.4% from September 30, 2023. Total borrowings were $103.6 million, a decrease from $174.3 million at September 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. In the third quarter, Arrow paid down $5 million of the balance outstanding and replaced the remaining $95 million in the fourth quarter with lower cost brokered CDs.

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 $629.9 million and $603.5 million at June 30, 2024 and June 30, 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 $700.6 million and $618.9 million at September 30, 2024 and September 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 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.

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 September 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 September 30, 2024 and there was no credit loss expense recognized by Arrow with respect to the securities portfolio during the nine months ended September 30, 2024.

Previous wording

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

Current wording

There were no sales of investment securities within the nine month periods ended September 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 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:

Current wording

The following table summarizes purchases of investment securities within the available-for-sale and held-to-maturity portfolios for the three and nine month periods ended September 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 5.17% 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.

Current wording

The average yield on the loan portfolio was 5.27% for the third quarter of 2024 up 57 basis points from the third 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

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

Current wording

Residential Real Estate Loans: Strong demand for residential real estate has continued even as interest rates have increased. Although the projected ongoing rise in the interest rates may impact future demand. Arrow has historically sold portions of originations in the secondary market and resumed the practice beginning in the third quarter of 2024. Sales decreased as the result of the strategic decision to grow the residential loan portfolio as well as current market conditions. The rate at which mortgage loan originations are sold in future periods will depend on a variety of factors, including demand for residential mortgages in our operating markets, market conditions for mortgage sales and strategic balance sheet and interest-rate risk management decisions.

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 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.

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. In addition, due to the current rate environment and increased competitive pricing, deposits have also migrated to higher cost time deposits.