# ARROW FINANCIAL CORP (AROW) FY 2024 MD&A Verbatim Item 7 Management's Discussion and Analysis from ARROW FINANCIAL CORP's 10-K for fiscal year 2024. SEC filing source: https://www.sec.gov/Archives/edgar/data/717538/000071753825000023/arow-20241231.htm Accession: 0000717538-25-000023 Filing date: 2025-03-14 Report date: 2024-12-31 Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary. Confidence: high Company profile: /company/AROW/ All MD&A years: /company/AROW/mda/ Previous year: /company/AROW/mda/fy2023/ (FY 2023) Next year: /company/AROW/mda/fy2025/ (FY 2025) Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations [[GREPCENT_TABLE]] [["Quarter Ended","12/31/2024","","9/30/2024","","6/30/2024","","3/31/2024","","12/31/2023"]] [[/GREPCENT_TABLE]] Selected Twelve-Month Information Dollars in thousands, except per share amounts 2022 share and per share amounts have been restated for the September 2023 3% stock dividend [[GREPCENT_TABLE]] [["","2024","","2023","","2022"],["Net Income","$","29,709","","","$","30,075","","","$","48,799"],["Transactions Recorded in Net Income (Net of Tax):"],["Net Changes in Fair Value of Equity Investments","95","","","(67)","","","315"],["Period End Shares Outstanding1","16,743","","","16,942","","","17,048"],["Basic Average Shares Outstanding1","16,739","","","17,037","","","17,008"],["Diluted Average Shares Outstanding1","16,745","","","17,037","","","17,059"],["Basic Earnings Per Share1","$","1.77","","","$","1.77","","","$","2.86"],["Diluted Earnings Per Share1","1.77","","","1.77","","","2.86"],["Cash Dividends Per Share1","1.09","","","1.06","","","0.99"],["Average Assets","4,266,721","","","4,084,519","","","4,047,480"],["Average Equity","384,858","","","362,781","","","360,095"],["Return on Average Assets","0.70","%","","0.74","%","","1.21","%"],["Return on Average Equity","7.72","%","","8.29","%","","13.55","%"],["Average Earning Assets","$","4,102,954","","","$","3,948,708","","","$","3,902,077"],["Average Interest-Bearing Liabilities","3,126,495","","","2,903,925","","","2,834,266"],["Interest Income","194,993","","","162,564","","","129,651"],["Interest Income, Tax-Equivalent*","195,638","","","163,328","","","130,737"],["Interest Expense","83,261","","","57,732","","","11,308"],["Net Interest Income","111,732","","","104,832","","","118,343"],["Net Interest Income, Tax-Equivalent*","112,377","","","105,596","","","119,429"],["Net Interest Margin","2.72","%","","2.65","%","","3.03","%"],["Net Interest Margin, Tax-Equivalent*","2.74","%","","2.67","%","","3.06","%"],["Efficiency Ratio Calculation*4"],["Noninterest Expense","$","97,268","","","$","93,048","","","$","81,530"],["Less: Intangible Asset Amortization","248","","","176","","","193"],["Net Noninterest Expense","97,020","","","92,872","","","81,337"],["Net Interest Income, Tax-Equivalent","112,377","","","105,596","","","119,429"],["Noninterest Income","28,074","","","29,117","","","30,898"],["Less: Net (Loss) Gain on Securities","(2,907)","","","(92)","","","427"],["Net Gross Income, Adjusted","$","143,358","","","$","134,805","","","$","149,900"],["Efficiency Ratio*","67.68","%","","68.89","%","","54.26","%"],["Period-End Capital Information:"],["Tier 1 Leverage Ratio","9.60","%","","9.84","%","","9.80","%"],["Total Stockholders\u2019 Equity (i.e. Book Value)","$","400,901","","","$","379,772","","","$","353,538"],["Book Value per Share","23.94","","","22.42","","","20.74"],["Intangible Assets","25,847","","","22,983","","","23,373"],["Tangible Book Value per Share 2","22.40","","","21.06","","","19.37"],["Asset Quality Information:"],["Net Loans Charged-off as a Percentage of Average Loans","0.09","%","","0.07","%","","0.08","%"],["Provision for Credit Losses as a Percentage of Average Loans","0.16","%","","0.11","%","","0.17","%"],["Allowance for Credit Losses as a Percentage of Period-End Loans","0.99","%","","0.97","%","","1.00","%"],["Allowance for Credit Losses as a Percentage of Nonperforming Loans","159.69","%","","147.82","%","","249.95","%"],["Nonperforming Loans as a Percentage of Period-End Loans","0.62","%","","0.66","%","","0.40","%"],["Nonperforming Assets as a Percentage of Total Assets","0.50","%","","0.51","%","","0.32","%"]] [[/GREPCENT_TABLE]] *See "Use of Non-GAAP Financial Measures" on page 4. 22 Arrow Financial Corporation Reconciliation of Non-GAAP Financial Information (Dollars In Thousands, Except Per Share Amounts) [[GREPCENT_TABLE]] [["Footnotes:"],["1.","2022 share and per share data have been restated for the September 26, 2023, 3% stock dividend."],["2.","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)."]] [[/GREPCENT_TABLE]] 23 CRITICAL ACCOUNTING POLICIES 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 adjusted 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 policy on the allowance for credit losses is disclosed in Note 2 to the consolidated financial statements of this Form 10-K. 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, 2024 and the financial condition as of December 31, 2024 and 2023.  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 2024 Financial Results: Net income for 2024 was $29.7 million, down from $30.1 million for 2023. Diluted earnings per share (EPS) was $1.77 for 2024, unchanged from 2023. ROE and ROA were 7.72% and 0.70%, respectively, as compared to 8.29% and 0.74%, respectively, for 2023. Net interest income for the year ended December 31, 2024 was $111.7 million, an increase of $6.9 million, or 6.6%, from the prior year. Compared to the prior year, the increase was primarily due to interest income outpacing growth in interest expense. Interest and fees on loans were $171.3 million for the year ended December 31, 2024, an increase of 20.6% from $142.0 million for the year ended December 31, 2023. The increase was primarily driven by loan growth and higher loan rates. Interest expense for the year ended December 31, 2024 was $83.3 million. This represents an increase of $25.5 million, or 44.2%, from $57.7 million in interest expense for the prior-year period. The increase in interest expense was driven primarily by higher deposit rates and changes in deposit composition. Net interest margin was 2.72% (2.74% FTE1) for the year ended December 31, 2024, as compared to 2.65% (2.67% FTE) for the year ended December 31, 2023. For the year ended December 31, 2024, the provision for credit losses was $5.2 million, compared to $3.4 million in the prior year. The key drivers for the provision for credit losses in 2024 were loan growth, charge-offs, and changes to the portfolio mix/age due to fourth-quarter commercial loan growth, partially 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. Non-interest expense for the year ended December 31, 2024 increased by $4.2 million, or 4.5%, to $97.3 million, as compared to $93.0 million in 2023. The largest component of non-interest expense is salaries and benefits paid to our employees, which totaled $52.7 million in 2024 and increased $5.0 million, or 10.6%, from the prior year. The increase was related to headcount increases to support additional control and compliance initiatives and our growing organization. Salaries and benefits were also impacted by inflation-driven wage increases and rising benefit costs. 1 FTE net interest margin is a non-GAAP measure. See reconciliation on Note 3 to the Selected Quarterly Information. 24 The provision for income taxes for 2024 was $7.6 million, compared to $7.4 million for 2023. The effective income tax rates for 2024 and 2023 were 20.5% and 19.8%, respectively. The increase in the effective tax rate was primarily the result of reduced tax exempt income in 2024. Total assets were $4.3 billion at December 31, 2024, an increase of $136.5 million, or 3.3%, compared to December 31, 2023. The increase over the prior year was primarily driven by loan growth. Total investments were $570.8 million at December 31, 2024, a decrease of $65.4 million, or 10.3%, compared to December 31, 2023. The decrease was driven primarily by paydowns and maturities, the proceeds of which were primarily used to fund loan growth in 2024. The minor repositioning of the investment portfolio in the fourth quarter did not materially impact the overall investment balance. There were no credit quality issues identified related to the investment portfolio. On December 20, 2024, Arrow sold approximately $75 million of lower-yielding available-for-sale investments with an average book yield of approximately 0.6% and weighted average remaining life of 1.3 years, recognizing a pre-tax loss on the sale of approximately $3.0 million. Proceeds from the sale have been redeployed into higher-yielding available-for-sale investments with an average book yield of approximately 4.4% and weighted average remaining life of 4.5 years. The expected earn-back period of these investment transactions is approximately 1.1 years. Based on current market interest rates, the transaction is expected to improve Arrow's net interest income by approximately $2.7 million for 2025 and beyond, due to increased duration within the portfolio. Year end regulatory capital ratios were not materially impacted as the new investments carry a lower risk weighting than the securities that were sold. Year-end tangible common equity and tangible book value were not impacted. At December 31, 2024, total loan balances reached $3.4 billion. Loan growth for the fourth quarter was $59 million2. Loan growth for the year was $185 million3 or 5.8%. Loan growth was spread across all loan products. The allowance for credit losses was $33.6 million at December 31, 2024, an increase of $2.3 million from December 31, 2023. The allowance for credit losses at year-end 2024 represented 0.99% of loans outstanding, an increase from 0.97% at year-end 2023. Asset quality remained solid at December 31, 2024. Net loan charge-offs, expressed as an annualized percentage of average loans outstanding, were 0.09% for the year ended December 31, 2024, as compared to 0.07% for the prior year. Nonperforming assets of $21.5 million at December 31, 2024, represented 0.50% of period-end assets, compared to $21.5 million or 0.51% at December 31, 2023. At December 31, 2024, total deposit balances were $3.8 billion, an increase of $140.4 million, or 3.8%, from the prior-year level. Non-municipal deposits, excluding brokered CDs, decreased by $57.6 million and municipal deposits decreased by $12.2 million, each as compared to December 31, 2023. Non-interest bearing deposits decreased by $55.4 million, or 7.3%, during 2024, and represented 18.4% of total deposits at year-end, as compared to the prior-year level of 20.6%. At December 31, 2024, total time deposits, excluding brokered CDs, increased $36.0 million from the prior-year level. The change in composition of deposits was primarily due to pressure from competitive rate pricing and the migration from low to higher costing products. Total borrowings were $8.6 million at December 31, 2024, a decrease of $17.9 million, or 67.5%, compared to December 31, 2023. Total shareholders’ equity was $400.9 million at December 31, 2024, an increase of $21.1 million, or 5.6%, from December 31, 2023. Arrow's regulatory capital ratios remained strong in 2024. At December 31, 2024, Arrow's Common Equity Tier 1 Capital Ratio was 12.71% and the Total Risk-Based Capital Ratio was 14.47%. The capital ratios of Arrow and Arrow Bank continued to significantly exceed the “well capitalized” regulatory standards. 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 27. Regulatory Capital and Stockholders' Equity: As of December 31, 2024, 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 Arrow, as well as Arrow Bank, 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. Total stockholders' equity was $400.9 million at December 31, 2024, an increase of $21.1 million, or 5.6%, from December 31, 2023. 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 50. Total book value per share increased by 6.8% over the prior year level. The net increase in total stockholders' equity during 2024 principally reflected the following factors: (i) $29.7 million of net income for the year, (ii) other comprehensive income of $15.0 million and (iii) $1.5 million of equity related to various stock-based compensation plans, reduced by (iv) cash dividends of $18.3 million and (v) repurchases of common stock of $6.8 million. As of December 31, 2024, Arrow's closing stock price was $28.71, resulting in a trading multiple of 1.28 to Arrow's tangible book value. The Board of Directors declared and Arrow paid a cash dividend of $0.27 per share for the first three quarters of 2024, a cash dividend of $0.28 per share for the fourth quarter of 2024, and a $0.28 per share cash dividend for the first quarter of 2025. Loan quality: Nonperforming loans were $21.0 million at December 31, 2024, a decrease of $0.1 million, or 0.5%, from year-end 2023. The ratio of nonperforming loans to period-end loans at December 31, 2024 was 0.62%, a decrease from 0.66% at December 31, 2023. Nonperforming loans are in various stages of work-out activities including, but not limited to, ongoing negotiations with the borrowers, borrowers looking to refinance with other lenders, potential foreclosures, as well as periodic 2 Excludes both $2.2 million fair value hedge adjustment at December 31, 2024 and $6.5 million fair value hedge adjustment at September 30, 2024 3 Excludes both $2.2 million fair value hedge adjustment at December 31, 2024 and $5.8 million fair value hedge adjustment at December 31, 2023. 25 updates to appraisals and cash flow analyses generated by the underlying collateral. Any future developments related to such activities may have a potential impact on financial results, however, the impact cannot be determined at this time. Loans charged-off (net of recoveries) against the allowance for credit losses was $2.8 million for 2024, an increase of $779 thousand from 2023. The ratio of net charge-offs to average loans was 0.09% for 2024 and 0.07% for 2023. At December 31, 2024, the allowance for credit losses was $33.6 million, representing 0.99% of total loans, an increase of 2 basis points from the December 31, 2023 ratio. Loans: As of December 31, 2024, total loans grew $181.6 million, or 5.7%, as compared to the balance at December 31, 2023. ◦    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 businesses 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 total loan portfolio is comprised of office related property. Retail loans were approximately 3% of the total loan portfolio and hotels and motels were approximately 4% of the total loan 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. 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 33.0% of the total loan portfolio at period-end. Consumer automobile loans at December 31, 2024, 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. Inflation and an elevated rate environment may limit the potential growth in this category. ◦    Residential Real Estate Loans: These loans, including home equity loans, made up 38.9% 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. 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. 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 2024. Arrow’s liquidity position provides the Company with the necessary flexibility to address any unexpected near-term disruptions.  Interest-bearing cash balances at December 31, 2024 were $127.1 million which represents a significant increase as compared to $105.8 million at December 31, 2023. Deposit balances of Arrow Bank 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 $1.2 billion. The terms of Arrow's lines of credit have not changed significantly in recent periods (see the general liquidity discussion on page 39). 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. 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 Bank, formerly GFNB, sold all 27,771 shares of Visa Class B common stock it previously held for a pre-tax gain of $9.3 million. The gain was used to offset a pre-tax loss of $9.2 million related to the sale of securities with a amortized cost basis of approximately $110 million. The sale of securities was driven by the strategic decision to reposition the investment portfolio to higher yielding investments producing an improved interest income run-rate. Branch Acquisition: On August 2, 2024 Arrow Bank, formerly 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 Bank. See footnote 23 for additional details of the acquisition. Subsidiary Bank Unification: On December 31, 2024, Arrow merged its two subsidiary banks, GFNB and SNB, into one bank, with GFNB as the survivor, and renamed the unified institution Arrow Bank. The Unification is expected to create long term operational efficiencies, unify branding and enhance Arrow's ability to pursue its strategic growth objectives. A&B Acquisition: On July 1, 2024, Arrow's subsidiary, Upstate Agency, LLC, expanded its insurance business with the strategic acquisition of the assets of A&B Agency, Inc. 26 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, 2024 and the prior two years. For a comparison of the years ended December 31, 2022 and 2023, see Part II. Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, in our Annual Report on Form 10-K for the year ended December 31, 2023. 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) [[GREPCENT_TABLE]] [["","Years Ended December 31,","","Change From Prior Year"],["","","","","","","","2023 to 2024","","2022 to 2023"],["","2024","","2023","","2022","","Amount","","%","","Amount","","%"],["Interest and Dividend Income","$","194,993","","","$","162,564","","","$","129,651","","","$","32,429","","","19.9","%","","$","32,913","","","25.4","%"],["Interest Expense","83,261","","","57,732","","","11,308","","","25,529","","","44.2","%","","46,424","","","410.5","%"],["Net Interest Income","$","111,732","","","$","104,832","","","$","118,343","","","$","6,900","","","6.6","%","","$","(13,511)","","","(11.4)","%"]] [[/GREPCENT_TABLE]] Net interest income was $111.7 million in 2024, an increase of $6.9 million, or 6.6%, from $104.8 million in 2023.  This is in comparison with a decrease of $13.5 million, or 11.4%, from 2022 to 2023.  Factors contributing to year-to-year changes in net interest income over the three-year period are discussed in the following portions of this Section B.I. The following tables reflect the components of net interest income for the years ended December 31, 2024, 2023 and 2022: (i) average balances of assets, liabilities and stockholders' equity, (ii) interest and dividend income earned on earning assets and interest expense incurred on interest-bearing liabilities, (iii) average yields on earning assets and average rates paid on interest-bearing liabilities, (iv) the net interest spread (average yield less average cost) and (v) the net interest margin (yield) on earning assets. The yield on securities available-for-sale is based on the amortized cost of the securities. Nonaccrual loans are included in average loans.   Average Consolidated Balance Sheets and Net Interest Income Analysis (GAAP basis) (Dollars in Thousands) [[GREPCENT_TABLE]] [["Years Ended December 31:","2024","","2023","","2022"],["","","","Interest","","Rate","","","","Interest","","Rate","","","","Interest","","Rate"],["","Average","","Income/","","Earned/","","Average","","Income/","","Earned/","","Average","","Income/","","Earned/"],["","Balance","","Expense","","Paid","","Balance","","Expense","","Paid","","Balance","","Expense","","Paid"],["Interest-Bearing Deposits at Banks","$","181,618","","","$","9,615","","","5.29","%","","$","109,906","","","5,831","","","5.31","%","","252,835","","","3,100","","","1.23","%"],["Investment Securities:"],["Fully Taxable","515,794","","","11,579","","","2.24","%","","622,575","","","11,764","","","1.89","%","","648,540","","","10,357","","","1.60","%"],["Exempt from Federal Taxes","105,196","","","2,457","","","2.34","%","","141,966","","","2,953","","","2.08","%","","173,184","","","3,212","","","1.85","%"],["Loans","3,300,346","","","171,342","","","5.19","%","","3,074,261","","","142,016","","","4.62","%","","2,827,518","","","112,982","","","4.00","%"],["Total Earning Assets","4,102,954","","","194,993","","","4.75","%","","3,948,708","","","162,564","","","4.12","%","","3,902,077","","","129,651","","","3.32","%"],["Allowance for Credit Losses","(31,387)","","","","","","","(30,799)","","","","","","","(27,954)"],["Cash and Due From Banks","30,577","","","","","","","30,640","","","","","","","30,462"],["Other Assets","164,577","","","","","","","135,970","","","","","","","142,895"],["Total Assets","$","4,266,721","","","","","","","$","4,084,519","","","","","","","$","4,047,480"]] [[/GREPCENT_TABLE]] 27 [[GREPCENT_TABLE]] [["Deposits:"],["Interest-Bearing Checking Accounts","$","812,634","","","7,442","","","0.92","%","","$","855,931","","","3,663","","","0.43","%","","1,038,751","","","973","","","0.09","%"],["Savings Deposits","1,507,227","","","42,850","","","2.84","%","","1,498,749","","","34,343","","","2.29","%","","1,549,278","","","7,879","","","0.51","%"],["Time Deposits of $250,000 Or More","176,844","","","7,460","","","4.22","%","","137,974","","","4,966","","","3.60","%","","55,690","","","369","","","0.66","%"],["Other Time Deposits","520,658","","","20,997","","","4.03","%","","241,218","","","7,127","","","2.95","%","","132,541","","","604","","","0.46","%"],["Total Interest-Bearing Deposits","3,017,363","","","78,749","","","2.61","%","","2,733,872","","","50,099","","","1.83","%","","2,776,260","","","9,825","","","0.35","%"],["Short-Term Borrowings","84,106","","","3,637","","","4.32","%","","144,971","","","6,756","","","4.66","%","","32,874","","","605","","","1.84","%"],["FHLBNY Term Advances and Other Long-Term Debt","20,000","","","686","","","3.43","%","","20,000","","","686","","","3.43","%","","20,000","","","685","","","3.43","%"],["Finance Leases","5,026","","","189","","","3.76","%","","5,082","","","191","","","3.76","%","","5,132","","","193","","","3.76","%"],["Total Interest- Bearing Liabilities","3,126,495","","","83,261","","","2.66","%","","2,903,925","","","57,732","","","1.99","%","","2,834,266","","","11,308","","","0.40","%"],["Demand Deposits","705,863","","","","","","","772,889","","","","","","","815,218"],["Other Liabilities","49,505","","","","","","","44,924","","","","","","","37,901"],["Total Liabilities","3,881,863","","","","","","","3,721,738","","","","","","","3,687,385"],["Stockholders\u2019 Equity","384,858","","","","","","","362,781","","","","","","","360,095"],["Total Liabilities and Stockholders\u2019 Equity","$","4,266,721","","","","","","","$","4,084,519","","","","","","","$","4,047,480"],["Net Interest Income","","","$","111,732","","","","","","","$","104,832","","","","","","","$","118,343"],["Net Interest Spread","","","","","2.09","%","","","","","","2.13","%","","","","","","2.92","%"],["Net Interest Margin","","","","","2.72","%","","","","","","2.65","%","","","","","","3.03","%"]] [[/GREPCENT_TABLE]] Changes between periods are attributed to movement in either the average daily balances or average rates for both earning assets and interest-bearing liabilities.  Changes attributable to both volume and rate have been allocated proportionately between the categories. Net Interest Income Rate and Volume Analysis (Dollars in Thousands) (GAAP basis) [[GREPCENT_TABLE]] [["","2024 Compared to 2023 Change in Net Interest Income Due to:","","2023 Compared to 2022 Change in Net Interest Income Due to:"],["Interest and Dividend Income:","Volume","","Rate","","Total","","Volume","","Rate","","Total"],["Interest-Bearing Bank Balances","$","3,805","","","$","(21)","","","$","3,784","","","$","(1,752)","","","$","4,483","","","$","2,731"],["Investment Securities:"],["Fully Taxable","(1,990)","","","1,805","","","(185)","","","(398)","","","1,805","","","1,407"],["Exempt from Federal Taxes","(770)","","","274","","","(496)","","","(586)","","","327","","","(259)"],["Loans","10,514","","","18,812","","","29,326","","","9,974","","","19,060","","","29,034"],["Total Interest and Dividend Income","11,559","","","20,870","","","32,429","","","7,238","","","25,675","","","32,913"],["Interest Expense:"],["Deposits:"],["Interest-Bearing Checking Accounts","(203)","","","3,982","","","3,779","","","(220)","","","2,910","","","2,690"],["Savings Deposits","217","","","8,290","","","8,507","","","(214)","","","26,678","","","26,464"],["Time Deposits of $250,000 or More","1,398","","","1,096","","","2,494","","","541","","","4,056","","","4,597"],["Other Time Deposits","8,247","","","5,623","","","13,870","","","517","","","6,006","","","6,523"],["Total Deposits","9,659","","","18,991","","","28,650","","","624","","","39,650","","","40,274"],["Borrowings and Finance Leases","(2,835)","","","(286)","","","(3,121)","","","2,062","","","4,088","","","6,150"],["Total Interest Expense","6,824","","","18,705","","","25,529","","","2,686","","","43,738","","","46,424"],["Net Interest Income","$","4,735","","","$","2,165","","","$","6,900","","","$","4,552","","","$","(18,063)","","","$","(13,511)"]] [[/GREPCENT_TABLE]] 28 NET INTEREST MARGIN [[GREPCENT_TABLE]] [["YIELD ANALYSIS (GAAP Basis)","December 31,"],["","2024","","2023","","2022"],["Yield on Earning Assets","4.75","%","","4.12","%","","3.32","%"],["Cost of Interest-Bearing Liabilities","2.66","%","","1.99","%","","0.40","%"],["Net Interest Spread","2.09","%","","2.13","%","","2.92","%"],["Net Interest Margin","2.72","%","","2.65","%","","3.03","%"]] [[/GREPCENT_TABLE]] Arrow's earnings are derived predominantly from net interest income, which is interest income, net of interest expense. Changes in balance sheet composition, including interest-earning assets, deposits, and borrowings, combined with changes in market interest rates, impact net interest income. Net interest margin is net interest income divided by average interest-earning assets. Interest-earning assets and funding sources are managed, including non-interest and interest-bearing liabilities, in order to maximize this margin. II. PROVISION FOR CREDIT LOSSES AND ALLOWANCE FOR CREDIT LOSSES Arrow considers the accounting policy relating to the allowance for credit losses to be a critical accounting policy, given the uncertainty involved in evaluating the level of the allowance required to cover credit losses inherent in the loan portfolio, and the material effect that such judgments may have on the results of operations.  The provision for credit losses for 2024 was $5.2 million, compared to the $3.4 million provision for 2023. The analysis of the method employed for determining the amount of the credit loss provision is explained in detail in Notes 2, Summary of Significant Accounting Policies, and 5, Loans, to the Consolidated Financial Statements. 29 SUMMARY OF THE ALLOWANCE AND PROVISION FOR CREDIT LOSSES (Dollars In Thousands) (Loans, Net of Unearned Income) [[GREPCENT_TABLE]] [["Years-Ended December 31,","2024","","2023"],["Period-End Loans","$3,394,541","","$3,212,908"],["Average Loans","3,300,346","","3,074,261"],["Period-End Assets","4,306,348","","4,169,868"],["Nonperforming Assets, at Period-End:"],["Nonaccrual Loans:"],["Commercial Loans","102","","","30"],["Commercial Real Estate","14,902","","","15,308"],["Consumer Loans","2,241","","","1,877"],["Residential Real Estate Loans","3,376","","","3,430"],["Total Nonaccrual Loans","20,621","","","20,645"],["Loans Past Due 90 or More Days and"],["Still Accruing Interest","398","","452"],["Restructured","20","","54"],["Total Nonperforming Loans","21,039","","21,151"],["Repossessed Assets","382","","312"],["Other Real Estate Owned","76","","\u2014"],["Total Nonperforming Assets","21,497","","21,463"],["Allowance for Credit Losses:"],["Balance at Beginning of Period","$","31,265","","","$","29,952"],["Loans Charged-off:"],["Commercial Loans","(9)","","","\u2014"],["Commercial Real Estate","\u2014","","","\u2014"],["Consumer Loans","(5,837)","","","(5,123)"],["Residential Real Estate Loans","(49)","","","(54)"],["Total Loans Charged-off","(5,895)","","(5,177)"],["Recoveries of Loans Previously Charged-off:"],["Commercial Loans","\u2014","","","\u2014"],["Commercial Real Estate","\u2014","","","\u2014"],["Consumer Loans","3,048","","","3,109"],["Residential Real Estate Loans","\u2014","","","\u2014"],["Total Recoveries of Loans Previously Charged-off","3,048","","","3,109"],["Net Loans Charged-off","(2,847)","","","(2,068)"],["Provision for Credit Losses"],["Charged to Expense","5,180","","","3,381"],["Balance at End of Period","$","33,598","","","$","31,265"],["Asset Quality Ratios:"],["Net Charge-offs to Average Loans","0.09","%","","0.07","%"],["Provision for Credit Losses to Average Loans","0.16","%","","0.11","%"],["Allowance for Credit Losses to Period-end Loans","0.99","%","","0.97","%"],["Allowance for Credit Losses to Nonperforming Loans","159.69","%","","147.82","%"],["Nonperforming Loans to Period-end Loans","0.62","%","","0.66","%"],["Nonperforming Assets to Period-end Assets","0.50","%","","0.51","%"]] [[/GREPCENT_TABLE]] ALLOCATION OF THE ALLOWANCE FOR CREDIT LOSSES (Dollars in Thousands) [[GREPCENT_TABLE]] [["","2024","","2023"],["Commercial Loans","$","1,925","","","$","1,958"],["Commercial Real Estate","14,507","","","15,521"],["Consumer Loans","3,882","","","2,566"],["Residential Real Estate Loans","13,284","","","11,220"],["Total","$","33,598","","","$","31,265"]] [[/GREPCENT_TABLE]] 30 Arrow adopted CECL on January 1, 2021. The CECL approach requires an estimate of the credit losses expected over the life of a loan (or pool of loans). The allowance for credit losses is a valuation account that is deducted from, or added to, the loans’ amortized cost basis to reflect the net, lifetime amount expected to be collected on the loans. Loan losses are charged off against the allowance when Arrow believes a loan balance is confirmed to be uncollectible. Expected recoveries do not exceed the aggregate of amounts previously charged off and expected to be charged off. Management estimates the allowance using relevant available information from internal and external sources related to past events, current conditions, and a reasonable and supportable economic forecast. Historical credit loss experience provides the basis for the estimation of expected credit losses. Arrow's historical loss experience was supplemented with peer information when there was insufficient loss data for Arrow. Peer selection was based on a review of institutions with comparable loss experience as well as loan yield, bank size, portfolio concentration and geography. Adjustments to historical loss information are made for differences in current loan-specific risk characteristics such as differences in credit concentrations, delinquency level, collateral values and underwriting standards as well as changes in economic conditions or other relevant factors. Management judgment is required at each point in the measurement process. Portfolio segment is defined as the level at which an entity develops and documents a systematic methodology to determine its allowance for credit losses. Loans with similar risk characteristics are pooled. Portfolio segments for estimating loss based on type of borrower and collateral are as follows: Commercial Loans Commercial Real Estate Loans Consumer Loans Residential Loans Further details related to loan portfolio segments are included in Note 5, Loans, to the Consolidated Financial Statements. Historical credit loss experience for both Arrow and segment-specific peers provides the basis for the estimation of expected credit losses. Arrow utilizes regression analyses of peer data where observed credit losses and selected economic factors are utilized to determine suitable loss drivers for modeling lifetime probability of default (PD) rates. Arrow uses the discounted cash flow (DCF) method to estimate expected credit losses for the commercial, commercial real estate, and residential segments. For each of these loan segments, Arrow generates cash flow projections at the instrument level wherein payment expectations are adjusted for estimated prepayment speed, curtailments, time to recovery, PD, and segment-specific loss given default (LGD) risk factors. The modeling of expected prepayment speeds, curtailment rates, and time to recovery are based on historical internal data and adjusted, if necessary, based on the reasonable and supportable forecast of economic conditions. For the loan segments utilizing the DCF method, (commercial, commercial real estate, and residential) Management utilizes externally developed economic forecasts of the following economic factors as loss drivers: national unemployment, gross domestic product and home price index (HPI). The economic forecast is applied over a reasonable and supportable forecast period. Arrow utilizes a six quarter reasonable and supportable forecast period with an eight quarter reversion to the historic mean on a straight-line basis. The combination of adjustments for credit expectations (default and loss) and timing expectations (prepayment, curtailment, and time to recovery) produces an expected cash flow stream at the instrument level. Instrument effective yield is calculated, net of the impacts of prepayment assumptions, and the instrument expected cash flows are then discounted at that effective yield to produce an instrument-level net present value of expected cash flows (NPV). An allowance for credit loss is established for the difference between the instrument’s NPV and amortized cost basis. The contractual term excludes expected extensions, renewals, and modifications unless either of the following applies: Management has a reasonable expectation at the reporting date that a debt restructuring will be executed with an individual borrower or the extension or renewal options are included in the original or modified contract at the reporting date and are not unconditionally cancellable by Arrow. Arrow uses the vintage analysis method to estimate expected credit losses for the consumer loan segment. The vintage method was selected since the loans within the consumer loan segment are homogeneous, not just by risk characteristic, but by loan structure. Under the vintage analysis method, a loss rate is calculated based on the quarterly net charge-offs to the outstanding loan balance for each vintage year over the lookback period. Once this periodic loss rate is calculated for each quarter in the lookback period, the periodic rates are averaged into the loss rate. The loss rate is then applied to the outstanding loan balances based on the loan's vintage year. Arrow maintains, over the life of the loan, the loss curve by vintage year. If estimated losses computed by the vintage method need to be adjusted based on current conditions and the reasonable and supportable economic forecast, these adjustments would be incorporated over a six quarter reasonable and supportable forecast period, reverting to historical losses using a straight-line method over an eight quarter period. The vintage and DCF models also consider the need to qualitatively adjust expected loss estimates for information not already captured in the quantitative loss estimation process. Qualitative considerations include limitations inherent in the quantitative model; trends experienced in nonperforming and delinquent loans; changes in value of underlying collateral; changes in lending policies and procedures; nature and composition of loans; portfolio concentrations that may affect loss experience across one or more components or the portfolio; the experience, ability and depth of lending management and staff; Arrow's credit review system; and the effect of external factors such as competition, legal and regulatory requirements. These qualitative factor adjustments may increase or decrease Arrow's estimate of expected credit losses so that the allowance for credit loss is reflective of the estimate of lifetime losses that exist in the loan portfolio at the balance sheet date. Arrow's allowance for credit losses was $33.6 million at December 31, 2024, which represented 0.99% of loans outstanding, an increase from 0.97% at year-end 2023. 31 The overall change in the allowance from December 31, 2023 was primarily driven by the following factors: net loan growth contributed $2.0 million, model calculation, including mix and aging, increased the allowance by $297 thousand, and net charge-offs of $2.8 million. The 2024 provision for credit losses was $5.2 million. Management's evaluation considers the allowance for credit losses for loans to be appropriate as of December 31, 2024. See Note 5, Loans, to the Consolidated Financial Statements for the complete methodology used to calculate the provision for credit losses. III. NON-INTEREST INCOME The majority of the non-interest income constitutes fee income from services, principally fees and commissions from fiduciary services, deposit account service charges, insurance commissions, net gains (losses) on securities transactions, net gains on sales of loans and other recurring fee income. ANALYSIS OF NON-INTEREST INCOME (Dollars In Thousands) [[GREPCENT_TABLE]] [["","Years Ended December 31,","","Change From Prior Year"],["","","","","","","","2023 to 2024","","2022 to 2023"],["","2024","","2023","","2022","","Amount","","%","","Amount","","%"],["Income from Fiduciary Activities","$","9,952","","","$","9,444","","","$","9,711","","","$","508","","","5.4","%","","$","(267)","","","(2.7)","%"],["Fees for Other Services to Customers","10,892","","","10,798","","","11,626","","","94","","","0.9","%","","(828)","","","(7.1)","%"],["Insurance Commissions","7,147","","","6,498","","","6,463","","","649","","","10.0","%","","35","","","0.5","%"],["Net (Loss) Gain on Securities","(2,907)","","","(92)","","","427","","","(2,815)","","","3,059.8","%","","(519)","","","(121.5)","%"],["Net Gain on Sales of Loans","209","","","32","","","83","","","177","","","553.1","%","","(51)","","","(61.4)","%"],["Other Operating Income","2,781","","","2,437","","","2,588","","","344","","","14.1","%","","(151)","","","(5.8)","%"],["Total Non-interest Income","$","28,074","","","$","29,117","","","$","30,898","","","$","(1,043)","","","(3.6)","%","","$","(1,781)","","","(5.8)","%"]] [[/GREPCENT_TABLE]] 2024 Compared to 2023:  Total non-interest income in 2024 was $28.1 million, a decrease of $1.0 million, or 3.6%, from total non-interest income of $29.1 million for 2023. Income from fiduciary activities increased $508 thousand from 2023 to 2024. Fees for other services to customers were $10.9 million for 2024, an increase of $94 thousand as compared to 2023. Insurance commissions increased $649 thousand compared to the previous year driven by the acquisition of the assets of A&B Agency, Inc. as well as increased commissions. Net loss on securities in 2024, was $2.9 million as compared to a loss of $92 thousand in 2023. The loss in 2024 was the result of the minor repositioning of the investment portfolio. Net gains on the sales of loans in 2024 were $209 thousand. The rate at which mortgage loan originations may be 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. Therefore, Arrow is unable to predict what the retention rate of such loans in future periods may be. Servicing rights are generally retained for loans originated and sold, which also generates additional non-interest income in subsequent periods (fees for other services to customers). Other operating income increased by $344 thousand, or 14.1% between the two years primarily due to gains on non-marketable securities partially offset by bank-owned life insurance proceeds received in 2023. IV. NON-INTEREST EXPENSE Non-interest expense is the measure of the delivery cost of services, products and business activities of a company.  The key components of non-interest expense are presented in the following table. ANALYSIS OF NON-INTEREST EXPENSE (Dollars In Thousands) [[GREPCENT_TABLE]] [["","Years Ended December 31,","","Change From Prior Year"],["","","","","","","","2023 to 2024","","2022 to 2023"],["","2024","","2023","","2022","","Amount","","%","","Amount","","%"],["Salaries and Employee Benefits","$","52,707","","$","47,667","","$","47,003","","$","5,040","","10.6","%","","$","664","","1.4","%"],["Occupancy Expenses, Net","7,169","","6,554","","6,202","","615","","9.4","%","","352","","5.7","%"],["Technology and Equipment Expense","19,365","","17,608","","16,118","","1,757","","10.0","%","","1,490","","9.2","%"],["FDIC Regular Assessment","2,775","","2,050","","1,176","","725","","35.4","%","","874","","74.3","%"],["Amortization of Intangible Assets","248","","176","","193","","72","","40.9","%","","(17)","","(8.8)","%"],["Other Operating Expense","15,004","","18,993","","10,838","","(3,989)","","(21.0)","%","","8,155","","75.2","%"],["Total Non-interest Expense","$","97,268","","$","93,048","","$","81,530","","$","4,220","","4.5","%","","$","11,518","","14.1","%"],["Efficiency Ratio","67.68","%","","68.89","%","","54.26","%","","(1.21)","%","","(1.8)","%","","14.63","%","","27.0","%"]] [[/GREPCENT_TABLE]] 2024 compared to 2023:  Non-interest expense for 2024 was $97.3 million, an increase of $4.2 million, or 4.5%, from 2023.  For 2024, the efficiency ratio was 67.68%. This ratio, which is a commonly used non-GAAP financial measure in the banking 32 industry, is a comparative measure of a financial institution's operating efficiency. The efficiency ratio is the ratio of operating non-interest expense (excluding intangible asset amortization) to net interest income (on a tax-equivalent basis) plus operating non-interest income (excluding net securities gains or losses). See the discussion of the efficiency ratio in this Report under the heading “Use of Non-GAAP Financial Measures.” Salaries and employee benefits expense increased $5.0 million or 10.6%, from 2023. Included within salaries and benefits was a $868 thousand reclassification between salaries and employee benefits and other operating expenses. Under Accounting Standards Update ("ASU") 2017-07 (Compensation-Retirement Benefits), interest cost, expected return on plan assets, amortization of prior service cost and amortization of net loss are required to be reclassified out of salaries and employee benefits. The reclassification was $606 in 2023. Salaries and benefits increased primarily due to headcount increases to support additional control and compliance initiatives and our growing organization. Salaries and benefits were also impacted by inflation-driven wage increases and rising benefit costs. Technology expenses increased $1.8 million, or 10.0%, from 2023 due to continued investment in innovation and infrastructure. The expense reflects our strategic focus on a strong technology foundation and our enhancements of customer-facing technology intended to create more efficient and improved internal operations. Other operating expense decreased $4.0 million, or 21.0%, from 2023. The overall decrease from the prior year was primarily related to $4.8 million of additional legal and professional fees incurred in 2023 associated with the delay in the filing of the Annual Report on Form 10-K for the year ended December 31, 2022 (the "2022 Form 10-K"), and the Quarterly Report on Form 10-Q for the quarter ended March 31, 2023 (the "2023 Q1 Form 10-Q"). V. INCOME TAXES The following table sets forth the provision for income taxes and effective tax rates for the periods presented. INCOME TAXES AND EFFECTIVE RATES (Dollars In Thousands) [[GREPCENT_TABLE]] [["","Years Ended December 31,","","Change From Prior Year"],["","","","","","","","2023 to 2024","","2022 to 2023"],["","2024","","2023","","2022","","Amount","","%","","Amount","","%"],["Provision for Income Taxes","$","7,649","","","$","7,445","","","$","14,114","","","$","204","","","2.7","%","","$","(6,669)","","","(47.3)","%"],["Effective Tax Rate","20.5","%","","19.8","%","","22.4","%","","0.7","%","","3.5","%","","(2.6)","%","","(11.6)","%"]] [[/GREPCENT_TABLE]] The provisions for federal and state income taxes amounted to $7.6 million for 2024, $7.4 million for 2023, and $14.1 million for 2022. The effective income tax rates for 2024, 2023 and 2022 were 20.5%, 19.8% and 22.4%, respectively. The effective tax rate increased by 0.7% between 2024 and 2023 The increase in the 2024 effective tax rate compared to the 2023 effective tax rate was primarily the result of reduced tax exempt income in 2024. C. FINANCIAL CONDITION I. INVESTMENT PORTFOLIO During 2024 and 2023, Arrow held no trading securities. The available-for-sale securities portfolio, held-to-maturity securities portfolio and the equity securities portfolio are further detailed below. The table below presents the changes in the period-end balances for available-for-sale, held-to-maturity and equity securities from December 31, 2023 to December 31, 2024 (in thousands): 33 [[GREPCENT_TABLE]] [["","(Dollars in Thousands)"],["","Fair Value at Period-End","","Net Unrealized (Losses) Gains For Period Ended"],["","12/31/2024","","12/31/2023","","Change","","12/31/2024","","12/31/2023","","Change"],["Securities Available-for-Sale:"],["U.S. Treasury Securities","$","98,070","","","$","74,004","","","$","24,066","","","$","85","","","$","243","","","$","(158)"],["U.S. Agency Securities","69,214","","","152,925","","","(83,711)","","","(786)","","","(7,075)","","","$","6,289"],["State and Municipal Obligations","240","","","280","","","(40)","","","\u2014","","","\u2014","","","\u2014"],["Mortgage-Backed Securities","294,608","","","269,760","","","24,848","","","(35,840)","","","(35,401)","","","(439)"],["Corporate and Other Debt Securities","979","","","800","","","179","","","(21)","","","(200)","","","179"],["Total","$","463,111","","","$","497,769","","","$","(34,658)","","","$","(36,562)","","","$","(42,433)","","","$","5,871"],["Securities Held-to-Maturity:"],["State and Municipal Obligations","$","90,373","","","$","120,293","","","$","(29,920)","","","$","(1,456)","","","$","(2,157)","","","$","701"],["Mortgage-Backed Securities","6,213","","","8,544","","","(2,331)","","","(219)","","","(401)","","","182"],["Total","$","96,586","","","$","128,837","","","$","(32,251)","","","$","(1,675)","","","$","(2,558)","","","$","883"],["Equity Securities","$","5,055","","","$","1,925","","","$","3,130","","","$","\u2014","","","$","\u2014","","","$","\u2014"]] [[/GREPCENT_TABLE]] The 2024 decrease in the fair value and the related net unrealized losses on securities available-for-sale is primarily due to the focus of management to deploy proceeds from maturing investments to loan growth. In December, Arrow repositioned the investment portfolio as previously described on page 30. The table below presents the weighted average yield for available-for-sale and held-to-maturity securities as of December 31, 2024 (in thousands). The weighted-average yields are calculated by breaking down each investment segment by maturity date and calculating based on book value (amortized cost) against each corresponding rate. Yields on tax-exempt obligations are not presented on a tax-equivalent basis. [[GREPCENT_TABLE]] [["","December 31, 2024"],["","Within One Year","","After One But Within Five Years","","After Five But Within Ten Years","","After Ten Years","","Total"],["","Amount","","Yield","","Amount","","Yield","","Amount","","Yield","","Amount","","Yield","","Amount","","Yield"],["Securities Available-for-Sale:"],["U.S. Treasury Securities","$","24,960","","","4.7","%","","$","24,650","","","4.4","%","","$","48,375","","","4.4","%","","$","\u2014","","","$","\u2014","","","$","97,985","","","4.5","%"],["U.S. Agency Securities","45,000","","","3.3","%","","25,000","","","2.9","%","","\u2014","","","\u2014","%","","\u2014","","","\u2014","%","","70,000","","","3.2","%"],["State and Municipal Obligations","\u2014","","","\u2014","%","","\u2014","","","\u2014","%","","240","","","6.8","%","","","","\u2014","%","","240","","","6.8","%"],["Mortgage-Backed Securities","1,852","","","2.6","%","","166,436","","","1.6","%","","162,160","","","3.0","%","","\u2014","","","\u2014","%","","330,448","","","2.9","%"],["Corporate and Other Debt Securities","\u2014","","","\u2014","%","","1,000","","","7.6","%","","\u2014","","","\u2014","%","","\u2014","","","\u2014","%","","1,000","","","7.6","%"],["Total","$","71,812","","","3.8","%","","$","217,086","","","2.1","%","","$","210,775","","","3.4","%","","$","\u2014","","","\u2014","%","","$","499,673","","","2.9","%"],["Securities Held-to-Maturity:"],["State and Municipal Obligations","$","53,355","","","3.3","%","","$","36,209","","","2.8","%","","$","2,259","","","4.3","%","","$","6","","","6.7","%","","$","91,829","","","3.1","%"],["Mortgage-Backed Securities","756","","","2.8","%","","5,676","","","2.4","%","","\u2014","","","\u2014","%","","\u2014","","","\u2014","%","","6,432","","","2.5","%"],["Total","$","54,111","","","3.2","%","","$","41,885","","","2.7","%","","$","2,259","","","4.3","%","","$","6","","","6.7","%","","$","98,261","","","3.0","%"]] [[/GREPCENT_TABLE]] For the years above, Arrow held no investment securities in the securities portfolio that consisted of or included, directly or indirectly, obligations of foreign governments or government agencies of foreign issuers. In the periods referenced above, mortgage-backed securities consisted solely of mortgage pass-through securities and collateralized mortgage obligations (CMOs) issued or guaranteed by U.S. federal agencies or by government-sponsored enterprises (GSEs). Mortgage pass-through securities provide to the investor monthly portions of principal and interest pursuant to the contractual obligations of the underlying mortgages. CMOs are pools of mortgage-backed securities, the repayments on which have generally been separated into two or more components (tranches), where each tranche has a separate estimated life and yield. Arrow's practice has been to purchase pass-through securities and CMOs that are issued or guaranteed by U.S. federal agencies or GSEs, and the tranches of CMOs purchased are generally those having shorter average lives and/or durations. Lower market interest rates and/or payment deferrals on underlying loans that make up mortgage-backed security collateral may impact cashflows. 34 In the periods referenced above, U.S. Government & Agency Obligations consisted solely of agency bonds issued by GSEs. These securities generally pay fixed semi-annual coupons with principle payments at maturity. For some, callable options are included that may impact the timing of these principal payments. Arrow's practice has been to purchase agency securities that are issued or guaranteed by GSEs with limited embedded optionality (call features). Final maturities are generally less than 5 years. The yields on obligations of states and municipalities exempt from federal taxation were computed on a tax-equivalent basis. The yields on other debt securities shown in the table above are calculated by dividing annual interest, including accretion of discounts and amortization of premiums, by the amortized cost of the securities at December 31, 2024. 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 December 31, 2024, gross unrealized losses, $36.6 million, were primarily attributable to changes in interest rates, relative to when the investment securities were purchased, and not due to the credit quality of the investment securities. In 2024, both the investment portfolio restructuring as well as interest rates plateauing resulted in a decrease in unrealized losses versus the comparable prior period. Arrow does not intend to sell, nor is it more likely than not that Arrow will be required to sell, any securities before recovery of its amortized cost basis, which may be at maturity. Arrow carried no allowance for credit loss at December 31, 2024 and there was no credit loss expense recognized by Arrow with respect to the securities portfolio during the year ended December 31, 2024. At December 31, 2024 and 2023, the weighted average maturity was 4.2 and 3.4 years, respectively, for debt securities in the available-for-sale portfolio. For further information regarding the portfolio of securities available-for-sale, see Note 4, Investment Securities, to the Consolidated Financial Statements. Securities Held-to-Maturity: The following table sets forth the carrying value of the portfolio of securities held-to-maturity at December 31 of each of the last two years. SECURITIES HELD-TO-MATURITY (Dollars In Thousands) [[GREPCENT_TABLE]] [["","December 31,"],["","2024","","2023"],["State and Municipal Obligations","$","91,829","","","$","122,450"],["Mortgage Backed Securities - Residential","6,432","","","8,945"],["Total","$","98,261","","","$","131,395"]] [[/GREPCENT_TABLE]] Arrow's held-to-maturity debt securities are comprised of GSEs and state and municipal obligations. GSE securities carry the explicit and/or implicit guarantee of the U.S. government, are widely recognized as “risk free,” and have a long history of zero credit loss. Arrow performs an analysis of the credit worthiness of municipal obligations to determine if a security is of investment grade. The analysis may include, but may not solely rely upon credit analysis conducted by external credit rating agencies. Arrow determined that the expected credit loss on its held to maturity debt portfolio was immaterial and, therefore, no allowance for credit loss was recorded as of December 31, 2024. At December 31, 2024 and 2023, the weighted average maturity was 1.1 and 1.5 years, respectively, for the debt securities in the held-to-maturity portfolio. For additional information regarding the fair value of the portfolio of securities held-to-maturity at December 31, 2024, see Note 4, Investment Securities, to the Consolidated Financial Statements. EQUITY SECURITIES (Dollars In Thousands) The following table is the schedule of Equity Securities at December 31 of each of the last two years. [[GREPCENT_TABLE]] [["Equity Securities"],["","","December 31,"],["","","2024","","2023"],["Equity Securities, at Fair Value","","$","5,055","","","$","1,925"]] [[/GREPCENT_TABLE]] 35 II. LOAN PORTFOLIO The amounts and respective percentages of loans outstanding represented by each principal category on the dates indicated were as follows: a. Types of Loans (Dollars In Thousands) [[GREPCENT_TABLE]] [["","December 31,"],["","2024","","2023"],["","Amount","","%","","Amount","","%"],["Commercial","$","158,991","","","5","%","","$","156,224","","","5","%"],["Commercial Real Estate","796,365","","","23","%","","745,487","","","23","%"],["Consumer","1,118,981","","","33","%","","1,111,667","","","35","%"],["Residential Real Estate","1,320,204","","","39","%","","1,199,530","","","37","%"],["Total Loans","3,394,541","","","100","%","","3,212,908","","","100","%"],["Allowance for Credit Losses","(33,598)","","","","","(31,265)"],["Total Loans, Net","$","3,360,943","","","","","$","3,181,643"]] [[/GREPCENT_TABLE]] Commercial and Commercial Real Estate Loans: Commercial and commercial real estate loans in the loan portfolio were extended to businesses or borrowers primarily located in Arrow's regional markets. There are no commercial real estate loans in major metropolitan areas. Approximately 2% of the loan portfolio are 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 that currently have elevated office and retail vacancy rates. A portion of the loans in the commercial portfolio have variable rates tied to market indices, such as Prime, SOFR or FHLBNY. Consumer Loans: At December 31, 2024, consumer loans (primarily automobile loans originated through dealerships located in New York and Vermont) continue to be a significant component of Arrow's business, comprising approximately one third of the total loan portfolio. For credit quality purposes, Arrow assigns potential automobile loan customers into one of four tiers, ranging from lower to higher quality in terms of anticipated credit risk. Arrow's experienced lending staff not only utilizes credit evaluation software tools but also reviews and evaluates each loan individually prior to the loan being funded. Arrow believes that this disciplined approach to evaluating credit risk has contributed to maintaining the strong credit quality in this portfolio. Residential Real Estate Loans: Demand for residential real estate has continued to remain strong even with elevated interest rates. Arrow has historically sold portions of these originations in the secondary market. While we resumed selling residential real estate loans into the secondary market in the second half of 2024, sales were minimal in both 2024 and 2023. The rate at which mortgage loan originations may be 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. The following table indicates the changing mix in the loan portfolio by including the quarterly average balances for the significant loan segments for the past five quarters.  The remaining quarter-by-quarter tables present the percentage of total loans represented by each category and the annualized yield of each category. 36 b. Maturities and Sensitivities of Loans to Changes in Interest Rates (Dollars in Thousands) The table below shows the maturity of loans outstanding as of December 31, 2024. Also provided are the amounts due after one year, classified according to fixed interest rates and variable interest rates (in thousands): [[GREPCENT_TABLE]] [["","December 31, 2024"],["","Within One Year","","After One But Within Five Years","","After Five But Within 15 Years","","After 15 Years","","Total"],["Commercial","$","34,725","","","$","83,294","","","$","40,868","","","$","104","","","$","158,991"],["Commercial Real Estate","202,875","","","293,262","","","292,801","","","7,427","","","796,365"],["Consumer","9,901","","","621,329","","","487,288","","","463","","","1,118,981"],["Residential Real Estate","142,555","","","90,154","","","383,188","","","704,307","","","1,320,204"],["Total","$","390,056","","","$","1,088,039","","","$","1,204,145","","","$","712,301","","","$","3,394,541"],["","","","After One But Within Five Years","","After Five But Within 15 Years","","After 15 Years","","Total"],["Loans maturing with:"],["Fixed Interest Rates","","","$","751,424","","","$","842,901","","","$","708,320","","","$","2,302,645"],["Variable Interest Rates","","","336,615","","","361,244","","","3,981","","","701,840"],["Total","","","$","1,088,039","","","$","1,204,145","","","$","712,301","","","$","3,004,485"]] [[/GREPCENT_TABLE]] COMMITMENTS AND LINES OF CREDIT Stand-by letters of credit represent extensions of credit granted in the normal course of business, which are not reflected in the financial statements at a given date because the commitments are not funded at that time.  As of December 31, 2024, the total contingent liability for standby letters of credit amounted to $4.3 million.  In addition to these instruments, there are lines of credit to customers, including home equity lines of credit, commitments for residential and commercial construction loans and other personal and commercial lines of credit, which also may be unfunded or only partially funded from time-to-time. Commercial lines, generally issued for a period of one year, are usually extended to provide for the working capital requirements of the borrower. At December 31, 2024, outstanding unfunded loan commitments in the aggregate amount were approximately $449.5 million compared to $444.3 million at December 31, 2023. c. Risk Elements 1. Nonaccrual, Past Due and Restructured Loans The amounts of nonaccrual, past due and restructured loans at year-end for each of the past two years are presented in the table on page 29 under the heading "Summary of the Allowance and Provision for Credit Losses." 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. Unless already placed on nonaccrual status, loans secured by home equity lines of credit are put on nonaccrual status when 120 days past due and residential real estate loans are put 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. Under the Uniform Retail Credit Classification and Account Management Policy established by banking regulators, fixed-maturity consumer loans not secured by real estate must generally be charged-off no later than when 120 days past due. Loans secured with non-real estate collateral in the process of collection are charged-down to the value of the collateral, less cost to sell.  Arrow had no material commitments to lend additional funds on outstanding nonaccrual loans at December 31, 2024.  Loans past due 90 days or more and still accruing interest are those loans which were contractually past due 90 days or more but because of expected repayments, were still accruing interest.   The balance of loans 30-89 days past due and still accruing interest totaled $20.5 million at December 31, 2024 and represented 0.60% of loans outstanding at that date, as compared to approximately $24.3 million, or 0.76% of loans outstanding at December 31, 2023. These non-current loans at December 31, 2024 were composed of approximately $16.6 million of consumer loans (principally indirect automobile loans), $3.1 million of residential real estate loans and $0.8 million of commercial and commercial real estate loans. The method for measuring all other loans is described in detail in Note 2, Summary of Significant Accounting Policies, and Note 5, Loans, to the Consolidated Financial Statements. Note 5, Loans, to the Consolidated Financial Statements contains detailed information on modified loans and impaired loans. 37 2. Potential Problem Loans On at least a quarterly basis, the internal credit quality rating is re-evaluated for commercial loans that are either past due or fully performing but exhibit certain characteristics that could reflect potential weaknesses.  Loans are placed on nonaccrual status when the likely amount of future principal and interest payments are expected to be less than the contractual amounts, even if such loans are not past due. Periodically, Arrow reviews the loan portfolio for evidence of potential problem loans.  Potential problem loans are loans that are currently performing in accordance with contractual terms, but where known information about possible credit problems of the borrower may jeopardize loan repayment and result in a non-performing loan.  In the credit monitoring program, Arrow treats loans that are classified as substandard but continue to accrue interest as potential problem loans.  At December 31, 2024, Arrow identified 33 commercial loans totaling $21.0 million as potential problem loans.  At December 31, 2023, Arrow identified 45 commercial loans totaling $46.8 million as potential problem loans.  For these loans, although positive factors such as payment history, value of supporting collateral, and/or personal or government guarantees led Arrow to conclude that accounting for them as non-performing at year-end was not warranted, other factors, specifically, certain risk factors related to the loan or the borrower justified concerns that they may become nonperforming at some point in the future.   3. Foreign Outstandings - None 4. Loan Concentrations The loan portfolio is well diversified.  There are no concentrations of credit that exceed 10% of the portfolio, other than the general categories reported in the preceding Section C.II.a. of this Item 7, beginning on page 36.  For further discussion, see Note 1, Risks and Uncertainties, to the Consolidated Financial Statements. 5. Other Real Estate Owned and Repossessed Assets Other real estate owned ("OREO") primarily consists of real property acquired in foreclosure.  When held, OREO is carried at fair value less estimated cost to sell. Arrow establishes allowances for OREO losses, which are determined and monitored on a property-by-property basis and reflect the ongoing estimate of the property's estimated fair value less costs to sell. All Repossessed Assets for each of the years in the table below consist of motor vehicles. [[GREPCENT_TABLE]] [["Distribution of OREO and Repossessed Assets (Dollars In Thousands)","December 31,"],["","2024","","2023","","2022"],["Other Real Estate Owned","76","","","\u2014","","","\u2014"],["Repossessed Assets","382","","","312","","","593"],["Total OREO and Repossessed Assets","$","458","","","$","312","","","$","593"]] [[/GREPCENT_TABLE]] The following table summarizes changes in the net carrying amount of OREO and the number of properties for each of the periods presented. At December 31, 2022, Arrow had no OREO. [[GREPCENT_TABLE]] [["Schedule of Changes in OREO (Dollars In Thousands)","2024","","2023","","2022"],["Balance at Beginning of Year","$","\u2014","","","$","\u2014","","","$","\u2014"],["Properties Acquired Through Foreclosure","76","","","182","","","\u2014"],["Gain on Sale/Adjustment to Fair Value of OREO properties","\u2014","","","5","","","\u2014"],["Sales","\u2014","","","(187)","","","\u2014"],["Balance at End of Year","$","76","","","$","\u2014","","","$","\u2014"],["Number of Properties, Beginning of Year","\u2014","","","\u2014","","","\u2014"],["Properties Acquired During the Year","2","","","1","","","\u2014"],["Properties Sold During the Year","\u2014","","","(1)","","","\u2014"],["Number of Properties, End of Year","2","","","\u2014","","","\u2014"]] [[/GREPCENT_TABLE]] III. SUMMARY OF CREDIT LOSS EXPERIENCE The information required in this section is presented in the discussion of the "Provision for Credit Losses and Allowance for Credit Losses" in Part II Item 7, Section B.II. beginning on page 29 of this Report, including: •Charge-offs and Recoveries by loan type •Factors that led to the amount of the Provision for Credit Losses •Allocation of the Allowance for Credit Losses by loan type The percent of loans in each loan category is presented in the table of loan types in the preceding section on page 36 of this Report. 38 IV. DEPOSITS The following table sets forth the average balances of and average rates paid on deposits for the periods indicated. AVERAGE DEPOSIT BALANCES (Dollars In Thousands) [[GREPCENT_TABLE]] [["","Years Ended"],["","12/31/2024","","12/31/2023","","12/31/2022"],["","Average Balance","","Rate","","Average Balance","","Rate","","Average Balance","","Rate"],["Demand Deposits","$","705,863","","","\u2014","%","","$","772,889","","","\u2014","%","","$","815,218","","","\u2014","%"],["Interest-Bearing Checking Accounts","812,634","","","0.92","%","","855,931","","","0.43","%","","1,038,751","","","0.09","%"],["Savings Deposits","1,507,227","","","2.84","%","","1,498,749","","","2.29","%","","1,549,278","","","0.51","%"],["Time Deposits of $250,000 or More","176,844","","","4.22","%","","137,974","","","3.60","%","","55,690","","","0.66","%"],["Other Time Deposits","520,658","","","4.03","%","","241,218","","","2.95","%","","132,541","","","0.46","%"],["Total Deposits","$","3,723,226","","","2.12","%","","$","3,506,761","","","1.43","%","","$","3,591,478","","","0.27","%"]] [[/GREPCENT_TABLE]] Average total deposit balances increased by $216.5 million, or 6.2% in 2024. The change in composition of deposits was primarily the result of an additional $95 million in brokered CDs, the branch acquisition in Whitehall, New York, and the migration from low to higher costing products. Arrow used 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 $648.5 million and $600.3 million at December 31, 2024 and 2023, respectively. The cost of deposits increased throughout 2024. While the Federal Funds rate was cut twice in 2024, the timing and magnitude of future rate adjustments are unknown. Arrow believes it is well positioned for a variety of rate environments.     The maturities of time deposits of $250,000 or more at December 31, 2024 are presented below.  (Dollars In Thousands) [[GREPCENT_TABLE]] [["Maturing in:"],["Under Three Months","$","70,151"],["Three to Twelve Months","115,899"],["2026","5,562"],["2027","\u2014"],["2028","\u2014"],["2029","350"],["Later","\u2014"],["Total","$","191,962"]] [[/GREPCENT_TABLE]] V. SHORT-TERM BORROWINGS (Dollars in Thousands) [[GREPCENT_TABLE]] [["","12/31/2024","","12/31/2023","","12/31/2022"],["Overnight Advances from the FHLBNY, Federal Funds Purchased and Securities Sold Under Agreements to Repurchase:"],["Balance at December 31","$","\u2014","","","$","20,000","","","$","27,000"],["Maximum Month-End Balance","\u2014","","","112,000","","","27,000"],["Average Balance During the Year","\u2014","","","39,659","","","2,124"],["Average Rate During the Year","5.15","%","","5.25","%","","4.34","%"],["Rate at December 31","4.33","%","","5.64","%","","4.61","%"]] [[/GREPCENT_TABLE]] D. LIQUIDITY The objective of effective liquidity management is to ensure that Arrow has the ability to raise cash when needed at a reasonable cost.  This includes the capability of meeting expected and unexpected obligations to Arrow's customers at any time. Given the uncertain nature of customer demands and the need to maximize earnings, Arrow must have available reasonably priced sources of funds, both on- and off-balance sheet, that can be accessed quickly in times of need. Arrow’s liquidity position should provide the Company with the necessary flexibility to address any unexpected near-term disruptions such as reduced cash flows from the investment and loan portfolio, unexpected deposit runoff, or increased loan originations. 39 Arrow's primary sources of available liquidity are overnight investments in federal funds sold, interest bearing bank balances at the Federal Reserve Bank of New York, and cash flow from investment securities and loans.  Certain investment securities are categorized as available-for-sale at time of purchase based on their marketability and collateral value, as well as their yield and maturity. The securities available-for-sale portfolio was $463.1 million at year-end 2024, a decrease of $34.7 million from the year-end 2023 level. Due to the potential for volatility in market values, Arrow may not always be able to sell securities on short notice at their carrying value, even to provide needed liquidity. Arrow also held interest-bearing cash balances at December 31, 2024 of $127.1 million compared to $105.8 million at December 31, 2023. In addition to liquidity from cash, short-term investments, investment securities and loans, Arrow has supplemented available operating liquidity with additional off-balance sheet sources such as a federal funds lines of credit with correspondent banks and credit lines with the FHLBNY. The federal funds lines of credit are with two correspondent banks totaling $23 million which were not drawn on in 2024. To support the borrowing relationship with the FHLBNY, Arrow has pledged collateral, including residential mortgage, home equity and commercial real estate loans. At December 31, 2024, Arrow had outstanding collateralized obligations with the FHLBNY of $9 million; as of that date, the unused borrowing capacity at the FHLBNY was approximately $616 million. Brokered deposits have also been identified as an available source of funding accessible in a relatively short time period. At December 31, 2024, there were $270 million in brokered CD deposits. In addition, Arrow Bank has established a borrowing facility with the Federal Reserve Bank of New York, pledging certain consumer loans as collateral for potential "discount window" advances, which are maintained for contingency liquidity purposes. At December 31, 2024, the amount available under this facility was approximately $571 million in the aggregate, and there were no advances then outstanding. Arrow performs regular liquidity stress tests and tests of the contingent liquidity plan to ensure that an adequate amount of available funds can be generated to meet a wide variety of potential liquidity events. Additionally, Arrow continually monitors levels and composition of uninsured deposits. Uninsured deposit balances in excess of the FDIC insurance limit at December 31, 2024, were less than 30% of the total deposit base. Arrow measures and monitors liquidity both with and without the availability of borrowing arrangements. Based on the level of overnight investments, available liquidity from the investment securities portfolio, cash flows from the loan portfolio, the stable core deposit base and the significant borrowing capacity, Arrow believes that the available liquidity is sufficient to meet all reasonably likely events or occurrences. At December 31, 2024, Arrow's primary liquidity ratio was 10.2% of total assets, well in excess of the internal policy limit of 5%. Total primary liquidity was $440.1 million, comprised of unencumbered cash and securities. Arrow did not experience any liquidity constraints in 2024 and did not experience any such constraints in recent prior years. Arrow has not at any time during such period been forced to pay above-market rates to obtain retail deposits or other funds from any source. E. CAPITAL RESOURCES AND DIVIDENDS Important Regulatory Capital Standards: Dodd-Frank, enacted in 2010, directed U.S. bank regulators to promulgate revised bank organization capital standards, which were required to be at least as strict as the regulatory capital standards for banks then in effect. The Capital Rules under Dodd-Frank were adopted by the Federal bank regulatory agencies in 2013 and became effective for Arrow and Arrow Bank on January 1, 2015. These Capital Rules are summarized in an earlier section of this Report, "Regulatory Capital Standards," beginning on page 7. The table below sets forth the various capital ratios achieved by Arrow and Arrow Bank as of December 31, 2024, as determined under the bank regulatory capital standards in effect on that date, as well as the minimum levels for such capital ratios that bank holding companies and banks are required to maintain under the Capital Rules (not including the "capital conservation buffer"). As demonstrated in the table, all of Arrow's and the banks' capital ratios at year-end were well in excess of the minimum required levels for such ratios, as established by the regulators. (See Item 1, Section C, under "Regulatory Capital Standards" and Item 8, Note 19 in the Notes to Consolidated Financial Statements, for information regarding the "capital conservation buffer.") In addition, on December 31, 2024, Arrow Bank qualified as "well-capitalized", the highest capital classification category under the revised capital classification scheme recently established by the federal bank regulators, that was in effect on that date. [[GREPCENT_TABLE]] [["Capital Ratios:","Arrow","","Arrow Bank","","","Minimum Required Ratio"],["Tier 1 Leverage Ratio","9.6%","","9.2%","","","4.0%"],["Common Equity Tier 1 Capital Ratio","12.7%","","12.9%","","","4.5%"],["Tier 1 Risk-Based Capital Ratio","13.4%","","12.9%","","","6.0%"],["Total Risk-Based Capital Ratio","14.5%","","14.0%","","","8.0%"]] [[/GREPCENT_TABLE]] Stockholders' Equity at Year-end 2024: Total stockholders' equity was $400.9 million at December 31, 2024, an increase of $21.1 million, or 5.6%, from December 31, 2023. The net increase in total stockholders' equity during 2024 principally reflected the following factors: (i) $29.7 million of net income for the year, (ii) other comprehensive income of $15.0 million and (iii) $1.5 million of equity related to various stock-based compensation plans, reduced by (iv) cash dividends of $18.3 million and (v) repurchases of common stock of $6.8 million. 40 Trust Preferred Securities: In each of 2003 and 2004, Arrow issued $10 million of trust preferred securities (TRUPs) in a private placement. Under the Federal Reserve Board's regulatory capital rules then in effect, TRUPs proceeds typically qualified as Tier 1 capital for bank holding companies such as Arrow, but only in amounts up to 25% of Tier 1 capital, net of goodwill less any associated deferred tax liability. Under the Dodd-Frank Act, any trust preferred securities that Arrow might issue on or after the grandfathering date set forth in Dodd-Frank (May 19, 2010) would not qualify as Tier 1 capital under bank regulatory capital guidelines. For Arrow, TRUPs outstanding prior to the grandfathering cutoff date set forth in Dodd-Frank (May 19, 2010) would continue to qualify as Tier 1 capital until maturity or redemption, subject to limitations. Thus, Arrow's outstanding TRUPs continue to qualify as Tier 1 regulatory capital, subject to such limitations. In 2020, Arrow entered into interest rate swap agreements to synthetically fix the variable rate interest payments associated with $20 million in outstanding subordinated trust securities. The effective fixed rate is approximately 3.43% until maturity. These agreements are designated as cash flow hedges. Dividends: The source of funds for the payment of Arrow's cash dividends to shareholders consists primarily of dividends declared and paid to it by GFNB and SNB, prior to the Unification. In addition to legal and regulatory limitations on payments of dividends by Arrow (i.e., the need to maintain adequate regulatory capital), there are also legal and regulatory limitations applicable to the payment of dividends by a bank subsidiary to its parent bank holding company. As of December 31, 2024, under the statutory limitations in national banking law, the maximum amount that could have been paid by GFNB and SNB, prior to the Unification, to Arrow, without special regulatory approval, was approximately $44.4 million The ability of Arrow and Arrow Bank to pay dividends in the future is and will continue to be influenced by regulatory policies, capital guidelines and applicable laws. See Part II, Item 5, "Market for the Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities" for a recent history of its cash dividend payments. Stock Repurchase Program: On October 25, 2023, the Board expanded its existing stock repurchase program (the "2022 Repurchase Program") by $5 million, bringing the total availability under the repurchase program to $9.1 million, and removed the expiration date previously incorporated into the 2022 Repurchase Program. The 2022 Repurchase Program allowed Arrow to repurchase shares of its common stock in open-market or negotiated transactions. Arrow resumed repurchasing its shares in the fourth quarter of 2023. In the first half of 2024, Arrow repurchased approximately $6.4 million (263,000 shares of its common stock) under the 2022 Repurchase Program and fully utilized the $9.1 million authorized program amount. On April 24, 2024, the Board approved a new stock repurchase program (the "2024 Repurchase Program"), under which the Board authorized management, in its discretion, to repurchase from time to time, in the open market or in privately negotiated transactions, up to $5 million of Arrow common stock. From time to time, Arrow may establish a written trading plan in accordance with Rule 10b5-1 of the Exchange Act, pursuant to which it may repurchase shares of its common stock. Additional repurchases may be made by Arrow, at times and in amounts as it deems appropriate, and may be made through open market transactions in compliance with Rule 10b-18 of the Exchange Act, subject to market conditions, applicable legal requirements, and other factors. In addition, a de minimis portion of Arrow's common stock was purchased during 2024 other than through its repurchase program, i.e., through purchases in the open market under the ESOP and the surrender or deemed surrender of Arrow common stock to Arrow in connection with employees' stock-for-stock exercises of compensatory stock options granted as equity incentives. F. OFF-BALANCE SHEET ARRANGEMENTS In the normal course of operations, Arrow may engage in a variety of financial transactions or arrangements, including derivative transactions or arrangements, that in accordance with GAAP are not recorded in the financial statements, or are recorded in amounts that differ from the notional amounts. These transactions or arrangements involve, to varying degrees, elements of credit, interest rate, and liquidity risk. Such transactions or arrangements may be used by Arrow or Arrow's customers for general corporate purposes, such as managing credit, interest rate, or liquidity risk or to optimize capital, or may be used by Arrow or Arrow's customers to manage funding needs. Arrow entered into interest rate swap agreements with some commercial customers to provide them with a long-term fixed rate, while simultaneously entering into offsetting interest rate swap agreements with a counterparty to swap the fixed rate to a variable rate to manage interest rate exposure. These interest rate swap agreements are not designated as a hedge for accounting purposes. As the interest rate swap agreements have substantially equivalent and offsetting terms, they do not present any material exposure to Arrow's consolidated statements of income. Arrow records its interest rate swap agreements at fair value and is presented on a gross basis within other assets and other liabilities on the consolidated balance sheets. Changes in the fair value of assets and liabilities arising from these derivatives are included, net, in other income in the consolidated statement of income. In the third quarter of 2023, Arrow entered into two pay-fixed portfolio layer method fair value swaps, designated as hedging instruments, with a total notional amount of $250 million and $50 million, respectively. Arrow is designating the fair value swaps under the portfolio layer method ("PLM"). Under PLM, the hedged items are designated as hedged layers of a closed portfolio of financial loans that are anticipated to remain outstanding for the designated hedged period. Adjustments will be made to record the swaps at fair value on the Consolidated Balance Sheets, with changes in fair value recognized in interest income. The carrying value of the fair value swaps on the Consolidated Balance Sheets will also be adjusted through interest income, based on changes in fair value attributable to changes in the hedged risk. 41 In the fourth quarter of 2023, Arrow entered into two interest rate swaps, designated as hedging instruments, to add stability to interest expense and to manage its exposure to the variability of the future cash flows attributable to the contractually specified interest rates. The notional amounts were $100 million and $75 million, respectively. Arrow entered into pay-fixed interest rate swaps to convert rolling 90 days brokered deposits. In the third quarter of 2024, Arrow entered into a forward interest rate swaps agreement which will commence in the first quarter of 2025, designated as hedging instrument, to add stability to interest expense and to manage its exposure to the variability of the future cash flows attributable to the contractually specified interest rates. The notional amount is $125 million and will synthetically fix the variable rate interest payments. In addition, Arrow has entered into interest rate swaps to synthetically fix the variable rate interest payments associated with $20 million in outstanding subordinated trust securities. These agreements are designated as cash flow hedges. For derivatives designated and that qualify as cash flow hedges of interest rate risk, the gain or loss on the derivative is recorded in Accumulated Other Comprehensive Income ("AOCI") and subsequently reclassified into interest expense in the same period during which the hedge transaction affects earnings. Amounts reported in AOCI related to derivatives will be reclassified to interest expense as interest payments are made on Arrow's Junior Subordinated Obligations Issued to Unconsolidated Subsidiary Trusts borrowings. G. RECENTLY ISSUED ACCOUNTING STANDARDS The following accounting standard have been issued and become effective for Arrow at a future date: In December 2023, the FASB issued Accounting Standards Update No. 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures (“ASU 2023-09”). ASU 2023-09 requires additional disclosures related to rate reconciliation, income taxes paid, and other disclosures. Under ASU 2023-09, for each annual periods presented, public entities are required to (1) disclose specific categories in the tabular rate reconciliation and (2) provide additional information for reconciling items that meet a quantitative threshold. In addition, ASU 2023-09 requires all reporting entities to disclose on an annual basis the amount of income taxes paid disaggregated by federal, state, and foreign taxes as well as the amount of income taxes paid by individual jurisdiction. ASU 2023-09 is effective for public companies for annual periods beginning after December 15, 2024, and can be applied on a prospective basis with an option to apply the standard retrospectively. Early adoption is permitted. The Company is currently evaluating the impact of ASU 2023-09 on its condensed consolidated financial statements and related disclosures. 42