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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended June 30, 2023
or
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number: 0-12507

ARROW FINANCIAL CORPORATION

(Exact name of registrant as specified in its charter)
New York22-2448962
(State or other jurisdiction of incorporation or organization)(I.R.S. Employer Identification No.)

250 Glen StreetGlens FallsNew York12801
(Address of principal executive offices)(Zip Code)
Registrant’s telephone number, including area code:518 745-1000

Securities registered pursuant to Section 12(b) of the Act:
Title of Each ClassTrading SymbolName of Each Exchange on Which Registered
Common Stock, Par Value $1.00 per shareAROWNASDAQ Global Select Market

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

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

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

Large accelerated filer☐Accelerated filer☑
Non-accelerated filer☐Smaller reporting company☐
Emerging growth company☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standard provided pursuant to Section 13(a) of the Exchange Act. __☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ☐  Yes   ☑ No

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
ClassOutstanding as of August 4, 2023
Common Stock, par value $1.00 per share16,553,058


ARROW FINANCIAL CORPORATION
FORM 10-Q
TABLE OF CONTENTS

2

PART I - FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS

ARROW FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In Thousands, Except Share and Per Share Amounts)
(Unaudited)
 June 30,
2023		December 31,
2022		June 30,
2022
ASSETS  
Cash and Due From Banks$33,803 $31,886 $51,549 
Interest-Bearing Deposits at Banks139,798 32,774 165,705 
Investment Securities: 
Available-for-Sale at Fair Value543,708 573,495 582,741 
Held-to-Maturity (Fair Value of $139,143 at June 30, 2023; $171,623 at December 31, 2022; and $180,511 at June 30, 2022)
143,460 175,364 182,096 
Equity Securities1,889 2,174 2,031 
FHLB and Federal Reserve Bank Stock4,932 6,064 4,718 
Loans3,069,897 2,983,207 2,844,802 
Allowance for Credit Losses(31,170)(29,952)(28,090)
Net Loans3,038,727 2,953,255 2,816,712 
Premises and Equipment, Net59,773 56,491 50,141 
Goodwill21,873 21,873 21,873 
Other Intangible Assets, Net1,302 1,500 1,710 
Other Assets114,388 114,633 111,929 
Total Assets$4,103,653 $3,969,509 $3,991,205 
LIABILITIES  
Noninterest-Bearing Deposits$759,495 $836,871 $824,842 
Interest-Bearing Checking Accounts856,016 997,694 1,046,570 
Savings Deposits1,517,937 1,454,364 1,504,791 
Time Deposits over $250,000140,694 76,224 40,021 
Other Time Deposits228,082 133,211 129,436 
Total Deposits3,502,224 3,498,364 3,545,660 
Borrowings171,800 54,800 25,000 
Finance Leases5,093 5,119 5,144 
Other Liabilities43,093 37,688 38,903 
Junior Subordinated Obligations Issued to Unconsolidated Subsidiary Trusts20,000 20,000 20,000 
Total Liabilities3,742,210 3,615,971 3,634,707 
STOCKHOLDERS’ EQUITY  
Preferred Stock, $1 Par Value and 1,000,000 Shares Authorized at June 30, 2023, December 31, 2022 and June 30, 2022
— — — 
Common Stock, $1 Par Value; 30,000,000 Shares Authorized (21,423,992 Shares Issued at June 30, 2023 and December 31, 2022 and 20,800,144 at June 30, 2022)
21,424 21,424 20,800 
Additional Paid-in Capital401,069 400,270 379,423 
Retained Earnings71,076 65,401 69,980 
Accumulated Other Comprehensive Loss(47,613)(49,655)(29,564)
Treasury Stock, at Cost (4,870,934 Shares at June 30, 2023; 4,872,355 Shares at December 31, 2022 and 4,777,605 Shares at June 30, 2022)
(84,513)(83,902)(84,141)
Total Stockholders’ Equity361,443 353,538 356,498 
Total Liabilities and Stockholders’ Equity$4,103,653 $3,969,509 $3,991,205 
    See Notes to Unaudited Interim Consolidated Financial Statements.
3


ARROW FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In Thousands, Except Per Share Amounts)
(Unaudited)
 Three Months Ended June 30Six Months Ended June 30,
 2023202220232022
INTEREST AND DIVIDEND INCOME  
Interest and Fees on Loans$34,618 $26,906 $66,504 $52,645 
Interest on Deposits at Banks1,674 427 2,153 625 
Interest and Dividends on Investment Securities:
Fully Taxable2,951 2,444 5,899 4,633 
Exempt from Federal Taxes770 816 1,567 1,637 
Total Interest and Dividend Income40,013 30,593 76,123 59,540 
INTEREST EXPENSE  
Interest-Bearing Checking Accounts820 199 1,190 362 
Savings Deposits8,514 892 14,101 1,309 
Time Deposits over $250,0001,119 26 1,693 54 
Other Time Deposits1,196 111 1,670 220 
Borrowings2,373 108 3,166 295 
Junior Subordinated Obligations Issued to
  Unconsolidated Subsidiary Trusts		171 171 340 340 
Interest on Financing Leases48 48 97 97 
Total Interest Expense14,241 1,555 22,257 2,677 
NET INTEREST INCOME25,772 29,038 53,866 56,863 
Provision for Credit Losses948 905 2,502 1,674 
NET INTEREST INCOME AFTER PROVISION FOR CREDIT LOSSES24,824 28,133 51,364 55,189 
NON-INTEREST INCOME  
Income From Fiduciary Activities2,428 2,517 4,703 5,113 
Fees for Other Services to Customers2,717 3,050 5,312 5,845 
Insurance Commissions1,560 1,622 3,080 3,133 
Net (Loss) Gain on Securities(181)154 (285)284 
Net Gain on Sales of Loans— 10 4 62 
Other Operating Income382 391 769 1,469 
Total Non-Interest Income6,906 7,744 13,583 15,906 
NON-INTEREST EXPENSE  
Salaries and Employee Benefits12,039 11,687 23,986 22,973 
Occupancy Expenses, Net1,583 1,602 3,211 3,200 
Technology and Equipment Expense4,362 3,974 8,779 7,753 
FDIC Assessments484 291 963 598 
Other Operating Expense5,615 2,791 9,440 4,766 
Total Non-Interest Expense24,083 20,345 46,379 39,290 
INCOME BEFORE PROVISION FOR INCOME TAXES7,647 15,532 18,568 31,805 
Provision for Income Taxes1,600 3,558 3,959 7,256 
NET INCOME$6,047 $11,974 $14,609 $24,549 
Average Shares Outstanding 1:
  
Basic16,553 16,494 16,552 16,503 
Diluted16,553 16,535 16,552 16,551 
Per Common Share:  
Basic Earnings$0.36 $0.72 $0.88 $1.48 
Diluted Earnings0.36 0.72 0.88 1.48 


    1 2022 Share and Per Share Amounts have been restated for the September 23, 2022 3% stock dividend.
See Notes to Unaudited Interim Consolidated Financial Statements.
4


ARROW FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(In Thousands)
(Unaudited)
Three Months Ended June 30:Six Months Ended June 30
2023202220232022
Net Income$6,047 $11,974 $14,609 $24,549 
Other Comprehensive Income (Loss), Net of Tax:
  Net Unrealized Securities Holding (Loss) Gain
  Arising During the Period		(3,849)(9,711)2,250 (32,007)
  Net Unrealized Gain (Loss) on Cash Flow Hedge
  Agreements		59 878 (534)2,003 
  Reclassification of Net Unrealized Loss on
  Cash Flow Hedge Agreements to Interest Expense		163 8 310 (13)
  Amortization of Net Retirement Plan Actuarial (Gain)
  Loss		(42)(21)(60)21 
  Amortization of Net Retirement Plan Prior Service Cost 39 79 76 85 
Other Comprehensive (Loss) Income (3,630)(8,767)2,042 (29,911)
  Comprehensive Income (Loss) $2,417 $3,207 $16,651 $(5,362)

    See Notes to Unaudited Interim Consolidated Financial Statements.

5

ARROW FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(In Thousands, Except Share and Per Share Amounts)
(Unaudited)
Six Month Period Ended June 30, 2023
Common
Stock		Additional
Paid-In
Capital		Retained
Earnings		Accumu-lated
Other Com-
prehensive
Income (Loss)		Treasury
Stock		Total
Balance at December 31, 2022
$21,424 $400,270 $65,401 $(49,655)$(83,902)$353,538 
Net Income— — 14,609 — — 14,609 
Other Comprehensive Income— — — 2,042 — 2,042 
Cash Dividends Paid, $.54 per Share 1
— — (8,934)— — (8,934)
Stock Options Exercised, Net  (3,772 Shares)
— 50 — — 33 83 
Shares Issued Under the Directors’ Stock
  Plan  (3,418 Shares)
— 85 — — 29 114 
Shares Issued Under the Employee Stock
  Purchase Plan  (3,872 Shares)
— 87 — — 33 120 
Shares Issued for Dividend
  Reinvestment Plans (17,753 Shares)
— 330 — — 142 472 
Stock-Based Compensation Expense— 247 — — — 247 
Purchase of Treasury Stock
  (27,395 Shares)
— — — — (848)(848)
Balance at June 30, 2023
$21,424 $401,069 $71,076 $(47,613)$(84,513)$361,443 
Three Month Period Ended June 30, 2023
Common
Stock		Additional
Paid-In
Capital		Retained
Earnings		Accumu-lated
Other Com-
prehensive
Loss		Treasury
Stock		Total
Balance at March 31, 2023
$21,424 $400,944 $69,499 $(43,983)$(84,513)$363,371 
Net Income— — 6,047 — — 6,047 
Other Comprehensive Loss— — — (3,630)— (3,630)
Cash Dividends Paid, $.27 per Share
— — (4,470)— — (4,470)
Stock-Based Compensation Expense— 125 — — — 125 
Balance at June 30, 2023
$21,424 $401,069 $71,076 $(47,613)$(84,513)$361,443 
6

Six Month Period Ended June 30, 2022
Common
Stock		Additional
Paid-In
Capital		Retained
Earnings		Accumu-lated
Other Com-
prehensive
Loss		Treasury
Stock		Total
Balance at December 31, 2021$20,800 377,996 54,078 $347 $(82,035)$371,186 
Net Income— — 24,549 — — 24,549 
Other Comprehensive Loss— — — (29,911)— (29,911)
Cash Dividends Paid, $.524 per Share 1
— — (8,647)— — (8,647)
Stock Options Exercised, Net (15,878 Shares)
— 188 — — 138 326 
Shares Issued Under the Directors’ Stock
  Plan  (5,770 Shares)
— 143 — — 50 193 
Shares Issued Under the Employee Stock
  Purchase Plan  (7,561 Shares)
— 176 — — 66 242 
Shares Issued for Dividend
  Reinvestment Plans (29,152 Shares)
— 696 — — 253 949 
Stock-Based Compensation Expense— 224 — — — 224 
Purchase of Treasury Stock
 (76,552 Shares)
— — — — (2,613)(2,613)
Balance at June 30, 2022
$20,800 $379,423 $69,980 $(29,564)$(84,141)$356,498 
Three Month Period Ended June 30, 2022
Common
Stock		Additional
Paid-In
Capital		Retained
Earnings		Accumu-lated
Other Com-
prehensive
Loss		Treasury
Stock		Total
Balance at March 31, 2022$20,800 $378,758 $62,328 $(20,797)$(83,846)$357,243 
Net Income— — 11,974 — — 11,974 
Other Comprehensive Income— — — (8,767)— (8,767)
Cash Dividends Paid, $.262 per Share 1
— — (4,322)— — (4,322)
Stock Options Exercised, Net (3,733 Shares)
— 53 — — 32 85 
Shares Issued Under the Directors’ Stock
  Plan  (2,986 Shares)
— 68 — — 26 94 
Shares Issued Under the Employee Stock
  Purchase Plan  (3,935 Shares)
— 87 — — 35 122 
Shares Issued for Dividend
  Reinvestment Plans (15,235 Shares)
— 343 — — 132 475 
Stock-Based Compensation Expense— 114 — — — 114 
Purchase of Treasury Stock
 (16,311 Shares)
— — — — (520)(520)
Balance at June 30, 2022
$20,800 $379,423 $69,980 $(29,564)$(84,141)$356,498 



1 Cash dividends paid per share have been adjusted for the September 23, 2022 3% stock dividend.
See Notes to Unaudited Interim Consolidated Financial Statements.



7

ARROW FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
Six Months Ended June 30,
Cash Flows from Operating Activities:20232022
Net Income$14,609 $24,549 
Provision for Credit Losses2,502 1,674 
Depreciation and Amortization3,432 3,835 
Net Loss (Gain) on Securities Transactions285 (284)
Loans Originated and Held-for-Sale344 (1,002)
Proceeds from the Sale of Loans Held-for-Sale4 1,359 
Net Gain on the Sale of Loans(4)(62)
Net Loss on the Sale of Premises and Equipment, Other Real Estate Owned and Repossessed Assets86 120 
Contributions to Retirement Benefit Plans(273)(319)
Deferred Income Tax Benefit(71)(328)
Shares Issued Under the Directors’ Stock Plan114 193 
Stock-Based Compensation Expense247 224 
Tax Benefit from Exercise of Stock Options11 22 
Net Decrease in Other Assets1,023 173 
Net Decrease in Other Liabilities3,390 530 
Net Cash Provided By Operating Activities25,699 30,684 
Cash Flows from Investing Activities:
Proceeds from the Maturities and Calls of Securities Available-for-Sale32,134 42,660 
Purchases of Securities Available-for-Sale— (110,049)
Proceeds from the Maturities and Calls of Securities Held-to-Maturity34,198 19,656 
Purchases of Securities Held-to-Maturity(2,552)(5,491)
Net Increase in Loans(89,638)(178,740)
Proceeds from the Sales of Premises and Equipment, Other Real Estate Owned and Repossessed Assets1,305 860 
Purchase of Premises and Equipment(5,064)(6,079)
Net Decrease in FHLB and Federal Reserve Bank Stock1,132 662 
Net Cash Used By Investing Activities(28,485)(236,521)
Cash Flows from Financing Activities:
Net Increase (Decrease) in Deposits3,860 (4,837)
Finance Lease Payments(26)(25)
Other Borrowings - Advances 250,000 — 
Other Borrowings - Paydowns(133,000)(20,000)
Purchase of Treasury Stock(848)(2,613)
Stock Options Exercised, Net83 326 
Shares Issued Under the Employee Stock Purchase Plan120 242 
Shares Issued for Dividend Reinvestment Plans472 949 
Cash Dividends Paid(8,934)(8,647)
Net Cash Provided (Used) By Financing Activities111,727 (34,605)
Net Increase (Decrease) in Cash and Cash Equivalents108,941 (240,442)
Cash and Cash Equivalents at Beginning of Period64,660 457,696 
Cash and Cash Equivalents at End of Period$173,601 $217,254 
Supplemental Disclosures to Statements of Cash Flow Information:
Interest on Deposits and Borrowings$19,179 $2,703 
Income Taxes3,269 5,918 
Transfer of Loans to Other Real Estate Owned and Repossessed Assets1,320 719 

See Notes to Unaudited Interim Consolidated Financial Statements.
8

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Note 1.RISKS AND UNCERTAINTIES

Nature of Operations - Arrow Financial Corporation, a New York corporation ("Arrow," the "Company," "we," or "us"), was incorporated on March 21, 1983 and is registered as a bank holding company within the meaning of the Bank Holding Company Act of 1956.  The banking subsidiaries are Glens Falls National Bank and Trust Company ("GFNB") whose main office is located in Glens Falls, New York, and Saratoga National Bank and Trust Company ("SNB") whose main office is located in Saratoga Springs, New York. The two subsidiary banks provide a full range of services to individuals and small to mid-size businesses in northeastern New York State from Albany, the State's capitol, to the Canadian border. Both banks have wealth management departments which provide investment management and administrative services. An active subsidiary of GFNB is Upstate Agency LLC, offering insurance services including property, and casualty insurance, group health insurance and individual life insurance products. North Country Investment Advisers, Inc., a registered investment adviser that provides investment advice to our proprietary mutual fund, and Arrow Properties, Inc., a real estate investment trust (REIT), are subsidiaries of GFNB. Arrow also owns directly two subsidiary business trusts, organized in 2003 and 2004 to issue trust preferred securities (TRUPs), which are still outstanding.

Concentrations of Credit - With the exception of some indirect auto lending, Arrow's loans are primarily with borrowers in upstate New York.  Although the loan portfolios of the subsidiary banks are well diversified, tourism has a substantial impact on the northeastern New York economy. The commitments to extend credit are fairly consistent with the distribution of loans presented in Note 5, "Loans," generally have the same credit risk and are subject to normal credit policies.  Generally, the loans are secured by assets and are expected to be repaid from cash flow or the sale of selected assets of the borrowers.  Arrow evaluates each customer's creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by Arrow upon extension of credit, is based upon Management's credit evaluation of the counterparty.  The nature of the collateral varies with the type of loan and may include: residential real estate, cash and securities, inventory, accounts receivable, property, plant and equipment, income producing commercial properties and automobiles.

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.
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, advances from the Federal Reserve Bank of New York Bank Term Funding Program ("BTFP") and cash flow from investment securities and loans.

Note 2.     ACCOUNTING POLICIES

In the opinion of the management of Arrow, the accompanying unaudited interim consolidated financial statements contain all of the adjustments necessary to present fairly the financial position as of June 30, 2023, December 31, 2022 and June 30, 2022; the results of operations for the three and six month periods ended June 30, 2023 and 2022; the consolidated statements of comprehensive income for the three and six month periods ended June 30, 2023 and 2022; the changes in stockholders' equity for the three and six month periods ended June 30, 2023 and 2022; and the cash flows for the six month periods ended June 30, 2023 and 2022. All such adjustments are of a normal recurring nature. The unaudited interim consolidated financial statements should be read in conjunction with the audited annual consolidated financial statements of Arrow for the year ended December 31, 2022 included in Arrow's Annual Report on Form 10-K for the year ended December 31, 2022 (the "2022 Form 10-K").

Management’s Use of Estimates
The preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the United States of America (GAAP) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of income and expenses during the reporting period.  Management utilized estimates and assumptions in its evaluation of potential impairment of Arrow's right-of-use lease assets, goodwill and intangible assets. Our most significant estimate is the allowance for credit losses. Other estimates include the fair value of financial instruments, evaluation of pension and other post-retirement liabilities, an analysis of a need for a valuation allowance for deferred tax assets and a reserve for unfunded loan commitments recorded as an other liability. Actual results could differ from those estimates.
A material estimate that is particularly susceptible to significant change in the near term is the allowance for credit losses.  In connection with the determination of the allowance for credit losses management obtains economic forecasts from reliable sources and appraisals for properties.  The allowance for credit losses is management’s best estimate of the life of loan losses as of the balance sheet date.  While management uses available information to recognize losses on loans, future adjustments to the allowance for credit losses may be necessary based on changes in economic conditions.

Allowance for Credit Losses – Loans - Accounting Standards Update (ASU) 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (CECL) approach requires an estimate of the credit losses expected over the life of a loan (or pool of loans). It replaces the incurred loss approach’s threshold that required the recognition of a
9

credit loss when it was probable that a loss event was incurred. The allowance for credit losses is a valuation account that is deducted from, or added to, the loans’ amortized cost basis to present the net lifetime amount expected to be collected on the loans. Credit losses are charged off against the allowance when management 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 single 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. Upon adoption of CECL, management revised the manner in which loans were pooled for similar risk characteristics. Management developed portfolio segments for estimating loss based on type of borrower and collateral as follows:

Commercial Loans
Commercial Real Estate Loans
Consumer Loans
Residential Loans

Further details related to loan portfolio segments is included in Note 5 Loans.
Historical credit loss experience for both Arrow and segment-specific peers provides the basis for the estimation of expected credit losses. Arrow utilized regression analyses of peer data, of which Arrow is included, where observed credit losses and selected economic factors were 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 forecast 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 (NPV) of expected cash flows. 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 troubled debt restructuring (TDR) 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. Based on current conditions and the reasonable and supportable economic forecast, no adjustment to the loss rate for each vintage is currently required.
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.
All loans not included in the vintage analysis method that exceed $250,000 which are on nonaccrual, are evaluated on an individual basis. For collateral dependent financial assets where Arrow has determined that foreclosure of the collateral is probable, or where the borrower is experiencing financial difficulty and Arrow expects repayment of the financial asset to be provided substantially through the operation or sale of the collateral, Arrow has elected a practical expedient to measure the allowance for credit loss as the difference
10

between the fair value of the collateral less cost to sell, and the amortized cost basis of the asset as of the measurement date. In the event the repayment of a collateral dependent financial asset is expected to be provided substantially through the operating of the collateral, Arrow will use fair value of the collateral at the reporting date when recording the net carrying amount of the asset and determining the allowance for credit losses. When repayment is expected to be from the sale of the collateral, expected credit losses are calculated as the amount by which the amortized cost basis of the financial asset exceeds the fair value of the underlying collateral less estimated cost to sell. The allowance for credit losses may be zero if the fair value of the collateral at the measurement date exceeds the amortized cost basis of the financial asset.
ASU No. 2022-02, “Troubled Debt Restructurings and Vintage Disclosures” (“ASU 2022-02”), was issued in March 2022 to provide updates on the accounting treatment for TDRs and related disclosures requirements, as well as modifying the disclosure requirement associated with the existing credit quality indicators “vintage” disclosure. With respect to TDRs, ASU 2022-02 eliminates the recognition and measurement guidance for TDRs under current GAAP and instead requires that Arrow evaluate whether the modification represents a new loan or a continuation of an existing loan, consistent with the current GAAP treatment for other loan modifications. In addition, ASU 2022-02 eliminates existing disclosure requirements on TDRs and replaces with enhanced disclosure requirements related to certain loan modifications made to borrowers experiencing financial difficulty. ASU 2022-02 also provides an update to the existing credit quality indicators “vintage” tabular disclosure requiring current period gross write-offs to be disclosed by year of origination for each loan segment. The provisions of ASU 2022-02 were effective January 1, 2023 and Arrow adopted the provisions on a prospective basis. Historical disclosures on TDRs were removed from this report in accordance with the provisions of this ASU. The adoption of this ASU did not have a material impact on the consolidated financial statements.

Estimated Credit Losses on Off-Balance Sheet Credit Exposures Recognized as Other Liabilities - Arrow estimates expected credit losses over the contractual period in which Arrow has exposure to credit risk via a contractual obligation to extend credit, unless that obligation is unconditionally cancellable by Arrow. The allowance for credit losses on off-balance sheet credit exposures recognized in other liabilities, is adjusted as an expense in other non-interest expense. The estimate includes consideration of the likelihood that funding will occur and an estimate of expected credit losses on commitments expected to be funded over their estimated lives. Estimating credit losses on unfunded commitments requires Arrow to consider the following categories of off-balance sheet credit exposure: unfunded commitments to extend credit, unfunded lines of credit, and standby letters of credit. Each of these unfunded commitments is then analyzed for a probability of funding to calculate a probable funding amount. The life of loan loss factor by related portfolio segment from the loan allowance for credit loss calculation is then applied to the probable funding amount to calculate the estimated credit losses on off-balance sheet credit exposures recognized as other liabilities.

Accrued Interest Receivable - Upon adoption of CECL on January 1, 2021, Arrow made the following elections regarding accrued interest receivable: (1) presented accrued interest receivable balances separately within the other assets balance sheet line item; (2) excluded interest receivable that is included in amortized cost of financing receivables from related disclosures requirements and (3) continued its policy to write off accrued interest receivable by reversing interest income. For loans, write off typically occurs upon becoming over 90 to 120 days past due and therefore the amount of such write offs are immaterial. Historically, Arrow has not experienced uncollectible accrued interest receivable on investment securities.

Allowance for Credit Losses – Held-to-Maturity (HTM) Debt Securities - Arrow's HTM debt securities are also required to utilize the CECL approach to estimate expected credit losses. Management measures expected credit losses on HTM debt securities on a collective basis by major security types that share similar risk characteristics, such as financial asset type and collateral type adjusted for current conditions and reasonable and supportable forecasts. Management classifies the HTM portfolio into the following major security types: U.S. government agency or U.S. government sponsored mortgage-backed and collateralized mortgage obligations securities, and state and municipal debt securities.
The mortgage-backed and collateralized mortgage obligations HTM securities are issued by U.S. government entities and agencies. These securities are either explicitly or implicitly guaranteed by the U.S. government as to timely repayment of principal and interest, are highly rated by major rating agencies, and have a long history of no credit losses. Therefore, Arrow did not record a credit loss for these securities.
State and municipal bonds carry an investment grade from an accredited ratings agency, primarily with an investment grade rating. In addition, Arrow has a limited amount of New York state local municipal bonds that are not rated. The estimate of expected credit losses on the HTM portfolio is based on the expected cash flows of each individual CUSIP over its contractual life and utilized a municipal loss forecast model for determining PD and LGD rates. Management may exercise discretion to make adjustments based on environmental factors. A calculated expected credit loss for individual securities was determined using the PD and LGD rates. Arrow determined that the expected credit loss on its municipal bond portfolio was de minimis, and therefore, an allowance for credit losses was not recorded.

Allowance for Credit Losses – Available-for-Sale (AFS) Debt Securities - The impairment model for AFS debt securities differs from the CECL approach utilized by HTM debt securities since AFS debt securities are measured at fair value rather than amortized cost. For AFS debt securities in an unrealized loss position, Arrow first assesses whether it intends to sell, or it is more likely than not that it will be required to sell the security before recovery of its amortized cost basis. If either of the criteria regarding intent or requirement to sell is met, the security’s amortized cost basis is written down to fair value through income. For AFS debt securities that do not meet the aforementioned criteria, in making this assessment, management considers the extent to which fair value is less than amortized cost, any changes to the rating of the security by a rating agency, adverse conditions specifically related to the security, failure of the issuer of the debt security to make scheduled interest or principal payments, among other factors. If this assessment indicates that a credit loss exists, the present value of cash flows expected to be collected from the security are compared to the amortized cost basis of the security. The cash flows are estimated using information relevant to the collectability of the security, including information about past events, current conditions and reasonable and supportable forecasts. If the present value of cash flows expected to be collected is less than the amortized cost basis, a credit loss exists and an allowance for credit losses is recorded for the
11

credit loss, limited by the amount that the fair value is less than the amortized cost basis. Any impairment that has not been recorded through an allowance for credit losses is recognized in other comprehensive income.
Investments in Federal Reserve Bank ("FRB") and Federal Home Loan Bank ("FHLB") stock are required for membership in those organizations and are carried at cost since there is no market value available. The FHLB New York ("FHLBNY") continues to pay dividends and repurchase stock. As such, the Company has not recognized any impairment on its holdings of FRB and FHLB stock.


Note 3. CASH AND CASH EQUIVALENTS (In Thousands)

The following table is the schedule of Cash and Cash Equivalents at June 30, 2023, December 31, 2022 and June 30, 2022:
June 30, 2023December 31, 2022June 30, 2022
Cash and Due From Banks$33,803 $31,886 $51,549 
Interest-bearing Deposits at Banks139,798 32,774 165,705 
Total Cash and Cash Equivalents$173,601 64,660 217,254 

The increase in cash from December 31, 2022 to June 30, 2023 reflects the strategic enhancement of the Company's liquidity position in light of recent industry events. The decline in cash from June 30, 2022 to December 31, 2022 was primarily the result of record loan growth in 2022 and a decrease in deposits in the fourth quarter of 2022.


12

Note 4.    INVESTMENT SECURITIES (In Thousands)

The following table is the schedule of Available-For-Sale Securities at June 30, 2023, December 31, 2022 and June 30, 2022:
Available-For-Sale Securities
U.S. Government & Agency
Obligations		State and
Municipal
Obligations		Mortgage-
Backed
Securities		Corporate
and Other
Debt
Securities		Total
Available-
For-Sale
Securities
June 30, 2023
Available-For-Sale Securities,
  at Amortized Cost		$190,000 $280 $414,995 $1,000 $606,275 
Gross Unrealized Gains— — 3 — 3 
Gross Unrealized Losses (13,984)— (48,386)(200)(62,570)
Available-For-Sale Securities,
  at Fair Value 		176,016 280 366,612 800 543,708 
Available-For-Sale Securities,
  Pledged as Collateral, at Fair
  Value		362,707 
Maturities of Debt Securities,
  at Amortized Cost:
Within One Year$15,000 $— $730 $— $15,730 
From 1 - 5 Years175,000 — 227,541 — 402,541 
From 5 - 10 Years— 280 186,724 1,000 188,004 
Over 10 Years— — — — — 
Maturities of Debt Securities,
  at Fair Value:
Within One Year$14,660 $— $706 $— $15,366 
From 1 - 5 Years161,356 — 207,528 — 368,884 
From 5 - 10 Years— 280 158,378 800 159,458 
Over 10 Years— — — — — 
Securities in a Continuous
  Loss Position, at Fair Value:
Less than 12 Months$29,509 $— $24,851 $— $54,360 
12 Months or Longer146,505 — 341,648 800 488,953 
Total$176,014 $— $366,499 $800 $543,313 
Number of Securities in a
  Continuous Loss Position		25 — 154 1 180 
Unrealized Losses on
  Securities in a Continuous
  Loss Position:
Less than 12 Months$490 $— $551 $— $1,041 
12 Months or Longer13,494 — 47,835 200 61,529 
Total$13,984 $— $48,386 $200 $62,570 
13

Available-For-Sale Securities
U.S. Government & Agency
Obligations		State and
Municipal
Obligations		Mortgage-
Backed
Securities		Corporate
and Other
Debt
Securities		Total
Available-
For-Sale
Securities
Disaggregated Details:
US Agency Obligations,
  at Amortized Cost		$190,000 
US Agency Obligations,
  at Fair Value		176,016 
US Government Agency
  Securities, at Amortized Cost		$7,573 
US Government Agency
  Securities, at Fair Value		7,048 
Government Sponsored Entity
  Securities, at Amortized Cost		407,422 
Government Sponsored Entity
  Securities, at Fair Value		359,564 
December 31, 2022
Available-For-Sale Securities,
  at Amortized Cost		$190,000 $340 $447,755 $1,000 $639,095 
Gross Unrealized Gains15 — 65 — 80 
Gross Unrealized Losses(14,816)— (50,664)(200)(65,680)
Available-For-Sale Securities,
  at Fair Value		175,199 340 397,156 800 573,495 
Available-For-Sale Securities,
  Pledged as Collateral,
  at Fair Value		308,266 
Securities in a Continuous
  Loss Position, at Fair Value:
Less than 12 Months$66,690 $— $183,868 $— $250,558 
12 Months or Longer93,493 — 199,262 800 293,555 
Total$160,183 $— $383,130 $800 $544,113 
Number of Securities in a
  Continuous Loss Position		23 — 150 1 174 
Unrealized Losses on
  Securities in a Continuous
  Loss Position:
Less than 12 Months$3,310 $— $18,756 $— $22,066 
12 Months or Longer11,506 — 31,908 200 43,614 
Total$14,816 $— $50,664 $200 $65,680 
Disaggregated Details:
US Agency Obligations,
  at Amortized Cost		$190,000 
US Agency Obligations,
  at Fair Value		175,199 
US Government Agency
  Securities, at Amortized Cost		$7,934 
US Government Agency
  Securities, at Fair Value		7,433 
Government Sponsored Entity
  Securities, at Amortized Cost		439,821 
Government Sponsored Entity
  Securities, at Fair Value		389,723 
June 30, 2022
Available-For-Sale Securities,
  at Amortized Cost		$165,000 $340 $460,227 $1,000 $626,567 
14

Available-For-Sale Securities
U.S. Government & Agency
Obligations		State and
Municipal
Obligations		Mortgage-
Backed
Securities		Corporate
and Other
Debt
Securities		Total
Available-
For-Sale
Securities
Gross Unrealized Gains— — 43 — 43 
Gross Unrealized Losses(9,525)— (34,144)(200)(43,869)
Available-For-Sale Securities,
  at Fair Value		155,475 340 426,126 800 582,741 
Available-For-Sale Securities,
  Pledged as Collateral, at Fair
  Value		329,371 
Securities in a Continuous
  Loss Position, at Fair Value:
Less than 12 Months$72,817 $— $350,994 $— $423,811 
12 Months or Longer82,657 — 68,992 800 152,449 
Total$155,474 $— $419,986 $800 $576,260 
Number of Securities in a
  Continuous Loss Position		22 — 137 1 160 
Unrealized Losses on Securities
  in a Continuous Loss Position:
Less than 12 Months$2,183 $— $24,539 $— $26,722 
12 Months or Longer7,342 — 9,605 200 17,147 
Total$9,525 $— $34,144 $200 $43,869 
Disaggregated Details:
US Agency Obligations,
  at Amortized Cost		$165,000 
US Agency Obligations,
  at Fair Value		155,475 
US Government Agency
  Securities, at Amortized Cost		$8,533 
US Government Agency
  Securities, at Fair Value		8,292 
Government Sponsored Entity
  Securities, at Amortized Cost		451,694 
Government Sponsored Entity
  Securities, at Fair Value		417,834 

At June 30, 2023, there was no allowance for credit losses for the AFS debt securities portfolio.

The following table is the schedule of Held-To-Maturity Securities at June 30, 2023, December 31, 2022 and June 30, 2022:
Held-To-Maturity Securities
State and
Municipal
Obligations		Mortgage-
Backed
Securities		Total
Held-To
Maturity
Securities
June 30, 2023
Held-To-Maturity Securities,
  at Amortized Cost		$133,176 $10,284 $143,460 
Gross Unrealized Gains— — — 
Gross Unrealized Losses(3,717)(600)(4,317)
Held-To-Maturity Securities,
  at Fair Value		129,459 9,684 139,143 
Held-To-Maturity Securities,
  Pledged as Collateral, at Fair Value		115,674 
Maturities of Debt Securities,
  at Amortized Cost:
Within One Year$58,665 $— $58,665 
15

Held-To-Maturity Securities
State and
Municipal
Obligations		Mortgage-
Backed
Securities		Total
Held-To
Maturity
Securities
From 1 - 5 Years72,172 10,284 82,456 
From 5 - 10 Years2,309 — 2,309 
Over 10 Years30 — 30 
Maturities of Debt Securities,
  at Fair Value:
Within One Year$57,955 $— $57,955 
From 1 - 5 Years69,197 9,684 78,881 
From 5 - 10 Years2,277 — 2,277 
Over 10 Years30 — 30 
Securities in a Continuous
  Loss Position, at Fair Value:
Less than 12 Months$19,210 $— $19,210 
12 Months or Longer94,163 9,684 103,847 
Total$113,373 $9,684 $123,057 
Number of Securities in a
  Continuous Loss Position		343 16 359 
Unrealized Losses on Securities
   in a Continuous Loss Position:
Less than 12 Months$292 $— $292 
12 Months or Longer3,425 600 4,025 
Total$3,717