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 September 30, ~~2021~~2022

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number: 0-12507

ARROW FINANCIAL CORPORATION

(Exact name of registrant as specified in its charter)


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

250 Glen Street

Glens Falls

New York

12801

(Address of principal executive offices)

(Zip Code)

Registrant’s telephone number, including area code:

518

745-1000

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


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

Indicate by check mark 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.


Class						Outstanding as of October ~~29, 2021~~31, 2022
Common Stock, par value $1.00 per share						~~16,023,411~~16,528,659

ARROW FINANCIAL CORPORATION

FORM 10-Q

TABLE OF CONTENTS

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)


		September 30, 2021		December 31, 2020		September 30, 2020			September 30, 2022		December 31, 2021		September 30, 2021
ASSETS	ASSETS							ASSETS
Cash and Due From Banks	Cash and Due From Banks	$	49,430	$	42,116	$	54,286	Cash and Due From Banks	$	44,872	$	26,978	$	49,430
Interest-Bearing Deposits at Banks	Interest-Bearing Deposits at Banks	548,936		338,875		396,380		Interest-Bearing Deposits at Banks	328,557		430,718		548,936
Investment Securities:	Investment Securities:							Investment Securities:
Available-for-Sale at Fair Value	Available-for-Sale at Fair Value	486,900		365,287		374,928		Available-for-Sale at Fair Value	575,054		559,316		486,900
Held-to-Maturity (Approximate Fair Value of $203,936 at September 30, 2021; $226,576 at December 31, 2020; and $233,501 at September 30, 2020)		198,337		218,405		224,799
Held-to-Maturity (Fair Value of $175,800 at September 30, 2022; $201,292 at December 31, 2021; and $203,936 at September 30, 2021)								Held-to-Maturity (Fair Value of $175,800 at September 30, 2022; $201,292 at December 31, 2021; and $203,936 at September 30, 2021)	182,178		196,566		198,337
Equity Securities	Equity Securities	1,886		1,636		1,511		Equity Securities	2,126		1,747		1,886
FHLB and Federal Reserve Bank Stock	FHLB and Federal Reserve Bank Stock	5,380		5,349		5,574		FHLB and Federal Reserve Bank Stock	4,720		5,380		5,380
Loans	Loans	2,654,751		2,595,030		2,592,455		Loans	2,924,794		2,667,941		2,654,751
Allowance for Credit Losses	Allowance for Credit Losses	(26,956)		(29,232)		(28,446)		Allowance for Credit Losses	(29,232)		(27,281)		(26,956)
Net Loans	Net Loans	2,627,795		2,565,798		2,564,009		Net Loans	2,895,562		2,640,660		2,627,795
Premises and Equipment, Net	Premises and Equipment, Net	44,003		42,612		42,075		Premises and Equipment, Net	54,015		46,217		44,003
Goodwill	Goodwill	21,873		21,873		21,873		Goodwill	21,873		21,873		21,873
Other Intangible Assets, Net	Other Intangible Assets, Net	2,006		1,950		1,789		Other Intangible Assets, Net	1,604		1,918		2,006
Other Assets	Other Assets	84,558		84,735		90,460		Other Assets	122,217		96,579		84,558
Total Assets	Total Assets	$	4,071,104	$	3,688,636	$	3,777,684	Total Assets	$	4,232,778	$	4,027,952	$	4,071,104
LIABILITIES	LIABILITIES							LIABILITIES
Noninterest-Bearing Deposits	Noninterest-Bearing Deposits	$	841,910	$	701,341	$	690,232	Noninterest-Bearing Deposits	$	910,221	$	810,274	$	841,910
Interest-Bearing Checking Accounts	Interest-Bearing Checking Accounts	1,035,358		832,434		912,980		Interest-Bearing Checking Accounts	1,113,850		994,391		1,035,358
Savings Deposits	Savings Deposits	1,515,692		1,423,358		1,354,956		Savings Deposits	1,584,373		1,531,287		1,515,692
Time Deposits over $250,000	Time Deposits over $250,000	73,889		123,622		112,555		Time Deposits over $250,000	59,059		82,811		73,889
Other Time Deposits	Other Time Deposits	138,714		153,971		194,135		Other Time Deposits	127,602		131,734		138,714
Total Deposits	Total Deposits	3,605,563		3,234,726		3,264,858		Total Deposits	3,795,105		3,550,497		3,605,563
Federal Funds Purchased and Securities Sold Under Agreements to Repurchase	Federal Funds Purchased and Securities Sold Under Agreements to Repurchase	2,426		17,486		73,949		Federal Funds Purchased and Securities Sold Under Agreements to Repurchase	—		—		2,426

Federal Home Loan Bank Term Advances	Federal Home Loan Bank Term Advances	45,000		45,000		50,000		Federal Home Loan Bank Term Advances	25,000		45,000		45,000
Junior Subordinated Obligations Issued to Unconsolidated Subsidiary Trusts	Junior Subordinated Obligations Issued to Unconsolidated Subsidiary Trusts	20,000		20,000		20,000		Junior Subordinated Obligations Issued to Unconsolidated Subsidiary Trusts	20,000		20,000		20,000
Finance Leases	Finance Leases	5,181		5,217		5,228		Finance Leases	5,131		5,169		5,181
Other Liabilities	Other Liabilities	32,763		31,815		37,989		Other Liabilities	41,992		36,100		32,763
Total Liabilities	Total Liabilities	3,710,933		3,354,244		3,452,024		Total Liabilities	3,887,228		3,656,766		3,710,933
STOCKHOLDERS’ EQUITY	STOCKHOLDERS’ EQUITY							STOCKHOLDERS’ EQUITY
Preferred Stock, $1 Par Value and 1,000,000 Shares Authorized at September 30, 2021, December 31, 2020 and September 30, 2020		—		—		—
Common Stock, $1 Par Value; 30,000,000 Shares Authorized (20,800,144 Shares Issued at September 30, 2021 and 20,194,474 at December 31, 2020 and September 30, 2020)		20,800		20,194		20,194
Preferred Stock, $1 Par Value and 1,000,000 Shares Authorized at September 30, 2022, December 31, 2021 and September 30, 2021								Preferred Stock, $1 Par Value and 1,000,000 Shares Authorized at September 30, 2022, December 31, 2021 and September 30, 2021	—		—		—
Common Stock, $1 Par Value; 30,000,000 Shares Authorized (21,423,992 Shares Issued at September 30, 2022 and 20,800,144 at December 31, 2021 and September 30, 2021)								Common Stock, $1 Par Value; 30,000,000 Shares Authorized (21,423,992 Shares Issued at September 30, 2022 and 20,800,144 at December 31, 2021 and September 30, 2021)	21,424		20,800		20,800
Additional Paid-in Capital	Additional Paid-in Capital	377,349		353,662		353,062		Additional Paid-in Capital	399,461		377,996		377,349
Retained Earnings	Retained Earnings	47,936		41,899		33,434		Retained Earnings	57,778		54,078		47,936

Accumulated Other Comprehensive Loss		(3,719)		(816)		(253)
Treasury Stock, at Cost (4,780,496 Shares at September 30, 2021; 4,678,736 Shares at December 31, 2020 and 4,705,102 Shares at September 30, 2020)		(82,195)		(80,547)		(80,777)
Accumulated Other Comprehensive (Loss) Income								Accumulated Other Comprehensive (Loss) Income	(49,070)		347		(3,719)
Treasury Stock, at Cost (4,900,975 Shares at September 30, 2022; 4,759,414 Shares at December 31, 2021 and 4,780,496 Shares at September 30, 2021)								Treasury Stock, at Cost (4,900,975 Shares at September 30, 2022; 4,759,414 Shares at December 31, 2021 and 4,780,496 Shares at September 30, 2021)	(84,043)		(82,035)		(82,195)
Total Stockholders’ Equity	Total Stockholders’ Equity	360,171		334,392		325,660		Total Stockholders’ Equity	345,550		371,186		360,171
Total Liabilities and Stockholders’ Equity	Total Liabilities and Stockholders’ Equity	$	4,071,104	$	3,688,636	$	3,777,684	Total Liabilities and Stockholders’ Equity	$	4,232,778	$	4,027,952	$	4,071,104

See Notes to Unaudited Interim Consolidated Financial Statements.

ARROW FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

(In Thousands, Except Per Share Amounts)

(Unaudited)


		Three Months Ended September 30				Nine Months Ended September 30,					Three Months Ended September 30,				Nine Months Ended September 30,
		2021		2020		2021		2020			2022		2021		2022		2021
INTEREST AND DIVIDEND INCOME	INTEREST AND DIVIDEND INCOME									INTEREST AND DIVIDEND INCOME
Interest and Fees on Loans	Interest and Fees on Loans	$	27,157	$	24,706	$	79,354	$	74,657	Interest and Fees on Loans	$	29,618	$	27,157	$	82,263	$	79,354
Interest on Deposits at Banks	Interest on Deposits at Banks	163		64		351		229		Interest on Deposits at Banks	1,201		163		1,826		351
Interest and Dividends on Investment Securities:	Interest and Dividends on Investment Securities:									Interest and Dividends on Investment Securities:
Fully Taxable	Fully Taxable	1,632		1,557		4,809		5,621		Fully Taxable	2,603		1,632		7,236		4,809
Exempt from Federal Taxes	Exempt from Federal Taxes	855		969		2,682		3,017		Exempt from Federal Taxes	785		855		2,422		2,682
Total Interest and Dividend Income	Total Interest and Dividend Income	29,807		27,296		87,196		83,524		Total Interest and Dividend Income	34,207		29,807		93,747		87,196
INTEREST EXPENSE	INTEREST EXPENSE									INTEREST EXPENSE
Interest-Bearing Checking Accounts	Interest-Bearing Checking Accounts	155		264		566		1,061		Interest-Bearing Checking Accounts	267		155		629		566
Savings Deposits	Savings Deposits	424		806		1,490		4,450		Savings Deposits	2,469		424		3,778		1,490
Time Deposits over $250,000	Time Deposits over $250,000	39		292		228		1,263		Time Deposits over $250,000	89		39		143		228
Other Time Deposits	Other Time Deposits	133		576		511		2,360		Other Time Deposits	150		133		370		511
Federal Funds Purchased and Securities Sold Under Agreements to Repurchase	Federal Funds Purchased and Securities Sold Under Agreements to Repurchase	—		17		3		55		Federal Funds Purchased and Securities Sold Under Agreements to Repurchase	—		—		—		3
Federal Home Loan Bank Advances	Federal Home Loan Bank Advances	197		219		586		865		Federal Home Loan Bank Advances	110		197		405		586
Junior Subordinated Obligations Issued to Unconsolidated Subsidiary Trusts	Junior Subordinated Obligations Issued to Unconsolidated Subsidiary Trusts	173		173		513		574		Junior Subordinated Obligations Issued to Unconsolidated Subsidiary Trusts	173		173		513		513
Interest on Financing Leases	Interest on Financing Leases	48		49		146		148		Interest on Financing Leases	48		48		145		146
Total Interest Expense	Total Interest Expense	1,169		2,396		4,043		10,776		Total Interest Expense	3,306		1,169		5,983		4,043
NET INTEREST INCOME	NET INTEREST INCOME	28,638		24,900		83,153		72,748		NET INTEREST INCOME	30,901		28,638		87,764		83,153
Provision for Credit Losses	Provision for Credit Losses	99		2,271		(286)		8,083		Provision for Credit Losses	1,715		99		3,389		(286)
NET INTEREST INCOME AFTER PROVISION FOR CREDIT LOSSES	NET INTEREST INCOME AFTER PROVISION FOR CREDIT LOSSES	28,539		22,629		83,439		64,665		NET INTEREST INCOME AFTER PROVISION FOR CREDIT LOSSES	29,186		28,539		84,375		83,439
NONINTEREST INCOME	NONINTEREST INCOME									NONINTEREST INCOME
Income From Fiduciary Activities	Income From Fiduciary Activities	2,571		2,265		7,538		6,613		Income From Fiduciary Activities	2,341		2,571		7,454		7,538
Fees for Other Services to Customers	Fees for Other Services to Customers	2,966		2,619		8,494		7,348		Fees for Other Services to Customers	3,071		2,966		8,916		8,494
Insurance Commissions	Insurance Commissions	1,576		1,713		4,842		5,077		Insurance Commissions	1,650		1,576		4,783		4,842
Net (Loss) Gain on Securities		(106)		(72)		250		(552)
Net Gain (Loss) on Securities										Net Gain (Loss) on Securities	95		(106)		379		250
Net Gain on Sales of Loans	Net Gain on Sales of Loans	211		1,433		2,251		2,193		Net Gain on Sales of Loans	18		211		80		2,251
Other Operating Income	Other Operating Income	476		739		1,405		2,876		Other Operating Income	652		476		2,121		1,405
Total Noninterest Income	Total Noninterest Income	7,694		8,697		24,780		23,555		Total Noninterest Income	7,827		7,694		23,733		24,780
NONINTEREST EXPENSE	NONINTEREST EXPENSE									NONINTEREST EXPENSE
Salaries and Employee Benefits	Salaries and Employee Benefits	11,377		10,408		33,360		31,003		Salaries and Employee Benefits	12,427		11,377		35,400		33,360
Occupancy Expenses, Net	Occupancy Expenses, Net	1,403		1,427		4,480		4,221		Occupancy Expenses, Net	1,521		1,403		4,721		4,480
Technology and Equipment Expense	Technology and Equipment Expense	3,833		3,228		11,002		9,807		Technology and Equipment Expense	4,049		3,833		11,802		11,002
FDIC Assessments	FDIC Assessments	249		309		764		770		FDIC Assessments	295		249		893		764
Other Operating Expense	Other Operating Expense	2,561		2,115		7,582		6,685		Other Operating Expense	3,156		2,561		7,922		7,582
Total Noninterest Expense	Total Noninterest Expense	19,423		17,487		57,188		52,486		Total Noninterest Expense	21,448		19,423		60,738		57,188
INCOME BEFORE PROVISION FOR INCOME TAXES	INCOME BEFORE PROVISION FOR INCOME TAXES	16,810		13,839		51,031		35,734		INCOME BEFORE PROVISION FOR INCOME TAXES	15,565		16,810		47,370		51,031
Provision for Income Taxes	Provision for Income Taxes	3,821		2,793		11,483		7,402		Provision for Income Taxes	3,402		3,821		10,658		11,483
NET INCOME	NET INCOME	$	12,989	$	11,046	$	39,548	$	28,332	NET INCOME	$	12,163	$	12,989	$	36,712	$	39,548
Average Shares Outstanding 1:	Average Shares Outstanding 1:									Average Shares Outstanding 1:
Basic	Basic	16,027		15,936		16,015		15,917		Basic	16,512		16,508		16,506		16,495
Diluted	Diluted	16,085		15,946		16,072		15,931		Diluted	16,558		16,568		16,553		16,554
Per Common Share:	Per Common Share:									Per Common Share:
Basic Earnings	Basic Earnings	$	0.81	$	0.69	$	2.47	$	1.78	Basic Earnings	$	0.74	$	0.79	$	2.22	$	2.40
Diluted Earnings	Diluted Earnings	0.81		0.69		2.46		1.78		Diluted Earnings	0.74		0.78		2.22		2.39

1 ~~2020~~ Share and Per Share Amounts have been restated for the September ~~24, 2021~~23, 2022 3% stock dividend.

See Notes to Unaudited Interim Consolidated Financial Statements.

ARROW FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME

(In Thousands)

(Unaudited)


		Three Months Ended September 30				Nine Months Ended September 30					Three Months Ended September 30				Nine Months Ended September 30
		2021		2020		2021		2020			2022		2021		2022		2021
Net Income	Net Income	$	12,989	$	11,046	$	39,548	28,332		Net Income	$	12,163	$	12,989	$	36,712	39,548
Other Comprehensive (Loss) Income, Net of Tax:	Other Comprehensive (Loss) Income, Net of Tax:									Other Comprehensive (Loss) Income, Net of Tax:
Net Unrealized Securities Holding (Loss) Gain Arising During the Period		(1,279)		(296)		(3,969)		5,823
Net Unrealized Securities Holding Loss Arising During the Period										Net Unrealized Securities Holding Loss Arising During the Period	(20,801)		(1,279)		(52,808)		(3,969)

Net Unrealized Gain on Cash Flow Hedge Agreements	Net Unrealized Gain on Cash Flow Hedge Agreements	183		238		954		37		Net Unrealized Gain on Cash Flow Hedge Agreements	778		183		2,781		954
Reclassification of Net Unrealized Gain on Cash Flow Hedge Agreements to Interest Expense	Reclassification of Net Unrealized Gain on Cash Flow Hedge Agreements to Interest Expense	(25)		—		(68)		—		Reclassification of Net Unrealized Gain on Cash Flow Hedge Agreements to Interest Expense	55		(25)		42		(68)

Amortization of Net Retirement Plan Actuarial Loss	Amortization of Net Retirement Plan Actuarial Loss	17		42		51		127		Amortization of Net Retirement Plan Actuarial Loss	420		17		441		51
Amortization of Net Retirement Plan Prior Service Cost	Amortization of Net Retirement Plan Prior Service Cost	43		39		129		117		Amortization of Net Retirement Plan Prior Service Cost	42		43		127		129
Other Comprehensive (Loss) Income		(1,061)		23		(2,903)		6,104
Comprehensive Income		$	11,928	$	11,069	$	36,645	$	34,436
Other Comprehensive Loss										Other Comprehensive Loss	(19,506)		(1,061)		(49,417)		(2,903)
Comprehensive (Loss) Income										Comprehensive (Loss) Income	$	(7,343)	$	11,928	$	(12,705)	$	36,645

See Notes to Unaudited Interim Consolidated Financial Statements.

ARROW FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

(In Thousands, Except Share and Per Share Amounts)

(Unaudited)

Nine Month Period Ended September 30, 2021
Common
Stock Additional
Paid-In
Capital Retained
Earnings Accumu-lated
Other Com-
prehensive
Loss Treasury
Stock Total
Balance at December 31, 2020 $ 20,194 $ 353,662 $ 41,899 $ (816) $ (80,547) $ 334,392
Cumulative impact of adoption of ASU 2016-13 120 — 120
Balance at January 1, 2021 as adjusted for impact of adoption of ASU 2016-13 20,194 353,662 42,019 (816) (80,547) 334,512
Net Income — — 39,548 — — 39,548
Other Comprehensive Loss — — — (2,903) — (2,903)
3% Stock Dividend (605,670 Shares) 606 20,896 (21,502) — — —
Cash Dividends Paid, $.757 per Share — — (12,129) — — (12,129)
Stock Options Exercised, Net  (52,610 Shares) — 983 — — 470 1,453
Shares Issued Under the Directors’ Stock
  Plan (8,471 Shares)
— 208 — — 76 284
Shares Issued Under the Employee Stock
  Purchase Plan (11,304 Shares)
— 262 — — 101 363
Shares Issued for Dividend
  Reinvestment Plans (37,841 Shares)
— 1,028 — — 338 1,366
Stock-Based Compensation Expense — 310 — — — 310
Purchase of Treasury Stock
  (72,750 Shares)
— — — — (2,633) (2,633)
Balance at September 30, 2021 $ 20,800 $ 377,349 $ 47,936 $ (3,719) $ (82,195) $ 360,171
Three Month Period Ended September 30, 2021
Common
Stock Additional
Paid-In
Capital Retained
Earnings Accumu-lated
Other Com-
prehensive
Loss Treasury
Stock Total
Balance at June 30, 2021 $ 20,194 $ 355,195 $ 60,494 $ (2,658) $ (80,192) $ 353,033
Net Income — — 12,989 — — 12,989
Other Comprehensive Loss — — — (1,061) — (1,061)
3% Stock Dividend (605,670 Shares) 606 20,896 (21,502) — — —
Cash Dividends Paid, $.252 per Share — — (4,045) — — (4,045)
Stock Options Exercised, Net  (30,346 Shares) — 657 — — 271 928
Shares Issued Under the Directors’ Stock
  Plan (2,627 Shares)
— 71 — — 24 95
Shares Issued Under the Employee Stock
  Purchase Plan (3,387 Shares)
— 87 — — 30 117
Shares Issued for Dividend
  Reinvestment Plans (12,826 Shares)
— 340 — — 115 455
Stock-Based Compensation Expense — 103 — — — 103
Purchase of Treasury Stock
  (67,649 Shares)
— — — — (2,443) (2,443)
Balance at September 30, 2021 $ 20,800 $ 377,349 $ 47,936 $ (3,719) $ (82,195) $ 360,171


	Nine Month Period Ended September 30, 2022
	Common Stock		Additional Paid-In Capital		Retained Earnings		Accumu-lated Other Com- prehensive Income (Loss)		Treasury Stock		Total
Balance at December 31, 2021	$	20,800	$	377,996	$	54,078	$	347	$	(82,035)	$	371,186


Net Income	—		—		36,712		—		—		36,712
Other Comprehensive Loss	—		—		—		(49,417)		—		(49,417)


3% Stock Dividend (623,848 Shares)	624		19,408		(20,032)		—		—		—
Cash Dividends Paid, $.786 per Share 1	—		—		(12,980)		—		—		(12,980)
Stock Options Exercised, Net (17,284 Shares)	—		215		—		—		151		366
Shares Issued Under the Directors’ Stock Plan (8,693 Shares)	—		210		—		—		75		285
Shares Issued Under the Employee Stock Purchase Plan (11,416 Shares)	—		261		—		—		100		361
Shares Issued for Dividend Reinvestment Plans (43,673 Shares)	—		1,033		—		—		387		1,420
Stock-Based Compensation Expense	—		338		—		—		—		338

Purchase of Treasury Stock (79,881 Shares)	—		—		—		—		(2,721)		(2,721)



Balance at September 30, 2022	$	21,424	$	399,461	$	57,778	$	(49,070)	$	(84,043)	$	345,550

	Three Month Period Ended September 30, 2022
	Common Stock		Additional Paid-In Capital		Retained Earnings		Accumu-lated Other Com- prehensive Loss		Treasury Stock		Total
Balance at June 30 , 2022	$	20,800	$	379,423	$	69,980	$	(29,564)	$	(84,141)	$	356,498


Net Income	—		—		12,163		—		—		12,163
Other Comprehensive Loss	—		—		—		(19,506)		—		(19,506)


3% Stock Dividend (623,848 Shares)	624		19,408		(20,032)		—		—		—
Cash Dividends Paid, $.262 per Share 1	—		—		(4,333)		—		—		(4,333)
Stock Options Exercised, Net (1,406 Shares)	—		27		—		—		13		40
Shares Issued Under the Directors’ Stock Plan (2,923 Shares)	—		67		—		—		25		92
Shares Issued Under the Employee Stock Purchase Plan (3,855 Shares)	—		85		—		—		34		119
Shares Issued for Dividend Reinvestment Plans (14,521 Shares)	—		337		—		—		134		471
Stock-Based Compensation Expense	—		114		—		—		—		114

Purchase of Treasury Stock (3,329 Shares)	—		—		—		—		(108)		(108)



Balance at September 30, 2022	$	21,424	$	399,461	$	57,778	$	(49,070)	$	(84,043)	$	345,550

Nine Month Period Ended September 30, 2020
Common
Stock Additional
Paid-In
Capital Retained
Earnings Accumu-lated
Other Com-
prehensive
Loss Treasury
Stock Total
Balance at December 31, 2019 $ 19,606 335,355 33,218 $ (6,357) $ (80,094) $ 301,728
Net Income — — 28,332 — — 28,332
Other Comprehensive Income — — — 6,104 — 6,104
3% Stock Dividend (588,025 Shares) 588 15,818 (16,406) — — —
Cash Dividends Paid, $.735 per Share 1
— — (11,710) — — (11,710)
Stock Options Exercised, Net (26,039 Shares) — 344 — — 252 596
Shares Issued Under the Directors’ Stock
  Plan (4,245 Shares)
— 83 — — 42 125
Shares Issued Under the Employee Stock
  Purchase Plan (13,697 Shares)
— 260 — — 132 392
Shares Issued for Dividend
  Reinvestment Plans (48,473 Shares)
— 887 — — 462 1,349
Stock-Based Compensation Expense — 315 — — — 315
Purchase of Treasury Stock
(52,257 Shares)
— — — — (1,571) (1,571)
Balance at September 30, 2020 $ 20,194 $ 353,062 $ 33,434 $ (253) $ (80,777) $ 325,660
Three Month Period Ended September 30, 2020
Common
Stock Additional
Paid-In
Capital Retained
Earnings Accumu-lated
Other Com-
prehensive
Loss Treasury
Stock Total
Balance at June 30, 2020 $ 19,606 $ 336,643 $ 42,704 $ (276) $ (80,990) $ 317,687
Net Income — — 11,046 — — 11,046
Other Comprehensive Income — — — 23 — 23
3% Stock Dividend (588,025 Shares) 588 15,818 (16,406) — — —
Cash Dividends Paid, $.245 per Share 1
— — (3,910) — — (3,910)
Stock Options Exercised, Net (8,884 Shares) — 107 — — 81 188
Shares Issued Under the Employee Stock
  Purchase Plan (4,739 Shares)
— 84 — — 43 127
Shares Issued for Dividend
  Reinvestment Plans (16,443 Shares)
— 304 — — 153 457
Stock-Based Compensation Expense — 106 — — — 106
Purchase of Treasury Stock
(2,236 Shares)
— — — — (64) (64)
Balance at September 30, 2020 $ 20,194 $ 353,062 $ 33,434 $ (253) $ (80,777) $ 325,660


	Nine Month Period Ended September 30, 2021
	Common Stock		Additional Paid-In Capital		Retained Earnings		Accumu-lated Other Com- prehensive Loss		Treasury Stock		Total
Balance at December 31, 2020	$	20,194	353,662		41,899		$	(816)	$	(80,547)	$	334,392
Cumulative impact of adoption of ASU 2016-13					120						120
Balance at January 1, 2021 as adjusted for impact of adoption of ASU 2016-13	20,194		353,662		42,019		(816)		(80,547)		334,512
Net Income	—		—		39,548		—		—		39,548
Other Comprehensive Loss	—		—		—		(2,903)		—		(2,903)


3% Stock Dividend (605,670 Shares)	606		20,896		(21,502)		—		—		—
Cash Dividends Paid, $.735 per Share 1	—		—		(12,129)		—		—		(12,129)
Stock Options Exercised, Net (52,610 Shares)	—		983		—		—		470		1,453
Shares Issued Under the Directors’ Stock Plan (8,471 Shares)	—		208		—		—		76		284
Shares Issued Under the Employee Stock Purchase Plan (11,304 Shares)	—		262		—		—		101		363
Shares Issued for Dividend Reinvestment Plans (37,841 Shares)	—		1,028		—		—		338		1,366
Stock-Based Compensation Expense	—		310		—		—		—		310

Purchase of Treasury Stock (72,750 Shares)	—		—		—		—		(2,633)		(2,633)


Balance at September 30, 2021	$	20,800	$	377,349	$	47,936	$	(3,719)	$	(82,195)	$	360,171

	Three Month Period Ended September 30, 2021
	Common Stock		Additional Paid-In Capital		Retained Earnings		Accumu-lated Other Com- prehensive Loss		Treasury Stock		Total
Balance at June 30, 2021	$	20,194	$	355,195	$	60,494	$	(2,658)	$	(80,192)	$	353,033
Net Income	—		—		12,989		—		—		12,989
Other Comprehensive Income	—		—		—		(1,061)		—		(1,061)


3% Stock Dividend (605,670 Shares)	606		20,896		(21,502)		—		—		—
Cash Dividends Paid, $.245 per Share 1	—		—		(4,045)		—		—		(4,045)
Stock Options Exercised, Net (30,346 Shares)	—		657		—		—		271		928
Shares Issued Under the Directors’ Stock Plan (2,627 Shares)	—		71		—		—		24		95
Shares Issued Under the Employee Stock Purchase Plan (3,387 Shares)	—		87		—		—		30		117
Shares Issued for Dividend Reinvestment Plans (12,826 Shares)	—		340		—		—		115		455
Stock-Based Compensation Expense	—		103		—		—		—		103

Purchase of Treasury Stock (67,649 Shares)	—		—		—		—		(2,443)		(2,443)


Balance at September 30, 2021	$	20,800	$	377,349	$	47,936	$	(3,719)	$	(82,195)	$	360,171

1 Cash dividends paid per share have been adjusted for the September ~~24, 2021~~23, 2022 3% stock dividend.

See Notes to Unaudited Interim Consolidated Financial Statements.

ARROW FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollars in Thousands)


		Nine Months Ended September 30,					Nine Months Ended September 30,
Cash Flows from Operating Activities:	Cash Flows from Operating Activities:	2021		2020		Cash Flows from Operating Activities:	2022		2021
Net Income	Net Income	$	39,548	$	28,332	Net Income	$	36,712	$	39,548

Provision for Credit Losses	Provision for Credit Losses	(286)		8,083		Provision for Credit Losses	3,389		(286)
Depreciation and Amortization	Depreciation and Amortization	5,894		4,669		Depreciation and Amortization	5,845		5,894

Net (Gain) Loss on Securities Transactions		(250)		552
Net Gain on Securities Transactions						Net Gain on Securities Transactions	(379)		(250)
Loans Originated and Held-for-Sale	Loans Originated and Held-for-Sale	(45,930)		(60,335)		Loans Originated and Held-for-Sale	(626)		(45,930)
Proceeds from the Sale of Loans Held-for-Sale	Proceeds from the Sale of Loans Held-for-Sale	57,097		52,099		Proceeds from the Sale of Loans Held-for-Sale	1,377		57,097
Net Gain on the Sale of Loans	Net Gain on the Sale of Loans	(2,251)		(2,193)		Net Gain on the Sale of Loans	(80)		(2,251)
Net Loss (Gain) on the Sale of Premises and Equipment, Other Real Estate Owned and Repossessed Assets		68		(157)
Net Loss on the Sale of Premises and Equipment, Other Real Estate Owned and Repossessed Assets						Net Loss on the Sale of Premises and Equipment, Other Real Estate Owned and Repossessed Assets	136		68
Contributions to Retirement Benefit Plans	Contributions to Retirement Benefit Plans	(441)		(540)		Contributions to Retirement Benefit Plans	(478)		(441)
Deferred Income Tax Benefit	Deferred Income Tax Benefit	(35)		(2,255)		Deferred Income Tax Benefit	(670)		(35)
Shares Issued Under the Directors’ Stock Plan	Shares Issued Under the Directors’ Stock Plan	284		125		Shares Issued Under the Directors’ Stock Plan	285		284
Stock-Based Compensation Expense	Stock-Based Compensation Expense	310		315		Stock-Based Compensation Expense	338		310
Tax Benefit from Exercise of Stock Options	Tax Benefit from Exercise of Stock Options	69		41		Tax Benefit from Exercise of Stock Options	22		69
Net Increase in Other Assets	Net Increase in Other Assets	(92)		(5,924)		Net Increase in Other Assets	(1,076)		(92)
Net Increase in Other Liabilities	Net Increase in Other Liabilities	1,727		4,751		Net Increase in Other Liabilities	3,415		1,727
Net Cash Provided By Operating Activities	Net Cash Provided By Operating Activities	55,712		27,563		Net Cash Provided By Operating Activities	48,210		55,712
Cash Flows from Investing Activities:	Cash Flows from Investing Activities:					Cash Flows from Investing Activities:

Proceeds from the Maturities and Calls of Securities Available-for-Sale	Proceeds from the Maturities and Calls of Securities Available-for-Sale	93,332		75,449		Proceeds from the Maturities and Calls of Securities Available-for-Sale	61,620		93,332
Purchases of Securities Available-for-Sale	Purchases of Securities Available-for-Sale	(222,089)		(86,832)		Purchases of Securities Available-for-Sale	(149,674)		(222,089)

Proceeds from the Maturities and Calls of Securities Held-to-Maturity	Proceeds from the Maturities and Calls of Securities Held-to-Maturity	24,266		26,570		Proceeds from the Maturities and Calls of Securities Held-to-Maturity	24,231		24,266
Purchases of Securities Held-to-Maturity	Purchases of Securities Held-to-Maturity	(4,695)		(6,848)		Purchases of Securities Held-to-Maturity	(10,293)		(4,695)
Net Increase in Loans	Net Increase in Loans	(70,393)		(197,577)		Net Increase in Loans	(260,179)		(70,393)
Proceeds from the Sales of Premises and Equipment, Other Real Estate Owned and Repossessed Assets	Proceeds from the Sales of Premises and Equipment, Other Real Estate Owned and Repossessed Assets	1,054		2,332		Proceeds from the Sales of Premises and Equipment, Other Real Estate Owned and Repossessed Assets	1,055		1,054
Purchase of Premises and Equipment	Purchase of Premises and Equipment	(3,942)		(3,639)		Purchase of Premises and Equipment	(10,913)		(3,942)

Net (Increase) Decrease in FHLB and Federal Reserve Bank Stock		(31)		4,743
Purchase of Bank Owned Life Insurance		—		(12,000)
Net Decrease (Increase) in FHLB and Federal Reserve Bank Stock						Net Decrease (Increase) in FHLB and Federal Reserve Bank Stock	660		(31)

Net Cash Used By Investing Activities	Net Cash Used By Investing Activities	(182,498)		(197,802)		Net Cash Used By Investing Activities	(343,493)		(182,498)
Cash Flows from Financing Activities:	Cash Flows from Financing Activities:					Cash Flows from Financing Activities:
Net Increase in Deposits	Net Increase in Deposits	370,837		648,804		Net Increase in Deposits	244,608		370,837
Net Decrease in Short-Term Federal Home Loan Bank Borrowings		—		(130,000)
Net (Decrease) Increase in Short-Term Borrowings		(15,060)		22,850

Net Decrease in Short-Term Borrowings						Net Decrease in Short-Term Borrowings	—		(15,060)
Finance Lease Payments	Finance Lease Payments	(36)		(26)		Finance Lease Payments	(38)		(36)
Federal Home Loan Bank Advances		—		40,000

Repayments of Federal Home Loan Bank Term Advances	Repayments of Federal Home Loan Bank Term Advances	—		(20,000)		Repayments of Federal Home Loan Bank Term Advances	(20,000)		—
Purchase of Treasury Stock	Purchase of Treasury Stock	(2,633)		(1,571)		Purchase of Treasury Stock	(2,721)		(2,633)
Stock Options Exercised, Net	Stock Options Exercised, Net	1,453		596		Stock Options Exercised, Net	366		1,453
Shares Issued Under the Employee Stock Purchase Plan	Shares Issued Under the Employee Stock Purchase Plan	363		392		Shares Issued Under the Employee Stock Purchase Plan	361		363

Shares Issued for Dividend Reinvestment Plans	Shares Issued for Dividend Reinvestment Plans	1,366		1,349		Shares Issued for Dividend Reinvestment Plans	1,420		1,366

Cash Dividends Paid	Cash Dividends Paid	(12,129)		(11,710)		Cash Dividends Paid	(12,980)		(12,129)
Net Cash Provided By Financing Activities	Net Cash Provided By Financing Activities	344,161		550,684		Net Cash Provided By Financing Activities	211,016		344,161
Net Increase in Cash and Cash Equivalents		217,375		380,445
Net (Decrease) Increase in Cash and Cash Equivalents						Net (Decrease) Increase in Cash and Cash Equivalents	(84,267)		217,375
Cash and Cash Equivalents at Beginning of Period	Cash and Cash Equivalents at Beginning of Period	380,991		70,221		Cash and Cash Equivalents at Beginning of Period	457,696		380,991
Cash and Cash Equivalents at End of Period	Cash and Cash Equivalents at End of Period	$	598,366	$	450,666	Cash and Cash Equivalents at End of Period	$	373,429	$	598,366

Supplemental Disclosures to Statements of Cash Flow Information:	Supplemental Disclosures to Statements of Cash Flow Information:					Supplemental Disclosures to Statements of Cash Flow Information:
Interest on Deposits and Borrowings	Interest on Deposits and Borrowings	$	4,224	$	11,367	Interest on Deposits and Borrowings	$	5,911	$	4,224
Income Taxes	Income Taxes	11,060		8,369		Income Taxes	8,918		11,060

Transfer of Loans to Other Real Estate Owned and Repossessed Assets	Transfer of Loans to Other Real Estate Owned and Repossessed Assets	1,066		711		Transfer of Loans to Other Real Estate Owned and Repossessed Assets	1,217		1,066

See Notes to Unaudited Interim Consolidated Financial Statements.

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 1. ACCOUNTING POLICIES

In the opinion of the management of Arrow Financial Corporation (Arrow, the Company, we, or us), the accompanying unaudited interim consolidated financial statements contain all of the adjustments necessary to present fairly the financial position as of September 30, ~~2021,~~2022, December 31, ~~2020~~2021 and September 30, ~~2020;~~2021; the results of operations for the nine month periods ended September 30, ~~2021~~2022 and ~~2020;~~2021; the consolidated statements of comprehensive income for the nine month periods ended September 30, ~~2021~~2022 and ~~2020;~~2021; the changes in stockholders' equity for the nine month periods ended September 30, ~~2021~~2022 and ~~2020;~~2021; and the cash flows for the nine month periods ended September 30, ~~2021~~2022 and ~~2020.~~2021. 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, ~~2020~~2021 included in Arrow's Annual Report on Form 10-K for the year ended December 31, ~~2020.~~2021.

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 ~~(US GAAP)~~(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. ~~Due to the uncertainty regarding the impact of the COVID-19 pandemic, management~~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 statements, 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”)~~(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 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. ~~Loan~~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 ~~balance~~ 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 4 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 ~~forecasts~~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 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 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 ~~origination amounts.~~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 ~~may~~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 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 where 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.

Except as set forth below, a loan that has been modified or renewed is considered a TDR when two conditions are met:

•The borrower is experiencing financial difficulty, and

•Concessions are made for the borrower's benefit that would not otherwise be considered for a borrower or transaction with similar credit risk characteristics.

Arrow's allowance for credit losses reflects all effects of a TDR when an individual asset is specifically identified as a reasonably expected TDR. Arrow has determined that a TDR is reasonably expected no later than the point it is determined that modification is the best course of action and it is at least reasonably possible that the troubled borrower will accept some form of concession to avoid a default. Reasonably expected TDRs and executed non-performing TDRs are evaluated individually to determine the required allowance for credit losses. TDRs performing in accordance with their modified contractual terms for a reasonable period of time may be included in Arrow's existing pools based on the underlying risk characteristics of the loan to measure the allowance for credit losses. In accordance with the Coronavirus Aid, Relief, and Economic Security (CARES) Act and ASC Subtopic 310-40, as extended by the Consolidated Appropriations Act, 2021, if a qualifying loan modification was made for a borrower as the result of the COVID-19 pandemic, this modification was not considered a TDR.

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 noninterest 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 the Bank 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~~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~~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, the Bank 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 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 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 continues to pay dividends and repurchase stock. As such, the Company has not recognized any impairment on its holdings of Federal Reserve Bank and FHLB stock.

~~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 Arrow's 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.

~~The following~~There were no additional accounting standards ~~have been~~ adopted in the first nine months of ~~2021:~~

In June 2016, the Financial Accounting Standards Board (FASB) issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments and all related subsequent amendments thereto. ASU 2016-13 introduces new guidance that make substantive changes to the accounting for credit losses. ASU 2016-13 introduces the CECL model, which applies to financial assets subject to credit losses and measured at amortized cost, as well as certain off-balance sheet credit exposures. This includes loans, loan commitments, standby letters of credit, net investments in leases recognized by a lessor and HTM debt securities. The CECL model requires an entity to estimate credit losses expected over the life of an exposure, considering information about historical events, current conditions and reasonable and supportable forecasts and is generally expected to result in earlier recognition of credit losses. ASU 2016-13 also modifies certain provisions of the current other-than-temporary impairment model for AFS debt securities. Credit losses on AFS debt securities will be limited to the difference between the security’s amortized cost basis and its fair value and will be recognized through an allowance for credit losses rather than as a direct reduction in amortized cost basis. ASU 2016-13 also provides for a simplified accounting model for purchased financial assets with more than insignificant credit deterioration since their origination. ASU 2016-13 requires expanded disclosures including, but not limited to, (1) information about the methods and assumptions used to estimate expected credit losses, including changes in the factors that influenced management’s estimate and the reasons for those changes, (2) financing receivables and net investment in leases measured at amortized cost, further disaggregation of information about the credit quality of those assets and (3) a rollforward of the allowance for credit losses for HTM and AFS securities. The standard also changes the accounting for purchased credit-impaired debt securities and loans. ASU 2016-13 was effective for Arrow on January 1, 2020. As permitted by the CARES Act, Arrow deferred the adoption of the CECL methodology in determining credit losses until January 1, 2021. Management expects that the CECL model may create more volatility in the level of our allowance for loan losses from quarter to quarter as changes in the level of allowance for loan losses will be dependent upon, among other things, macroeconomic forecasts and conditions, loan portfolio volumes and credit quality.

Arrow adopted CECL on January 1, 2021 (“Day 1”) using the modified retrospective method for all financial assets measured at amortized cost and off-balance-sheet credit exposures recognized as other liabilities. Results for reporting periods beginning after January 1, 2021 are presented under Accounting Standards Codification (ASC) 326 while prior period amounts continue to be reported in accordance with previously applicable GAAP. Arrow recorded a net increase to retained earnings of $120,000 as of January 1, 2021 for the cumulative effect of adopting ASC 326. The transition adjustment includes a $1.3 million decrease to the allowance for credit losses on loans, a $1.1 million increase to the estimated credit losses on off-balance sheet credit exposures recorded as other liabilities, and a $41,000 impact to the deferred tax liability. Arrow did not record an allowance for HTM debt securities on January 1, 2021 as the amount of credit risk was deemed immaterial. Arrow did not record an allowance for credit losses on its AFS debt securities under the

newly codified AFS debt security impairment model, as the majority of these securities are government agency-backed securities for which the risk of loss is minimal. Refer to Note 3 Investment Securities and Note 4 Loans (under the captions "Allowance for Credit Losses" and "Loan Credit Quality Indicators") to the Company’s unaudited interim consolidated financial statements included in this Form 10-Q for more information.

In December 2019, the FASB issued ASU 2019-12 "Simplifying the Accounting for Income Taxes" (Topic 740), which removes certain exceptions to the general principles in Topic 740 and improves consistent application of and simplifies GAAP for other areas of Topic 740 by clarifying and amending existing guidance. This ASU is effective for fiscal years beginning after December 15, 2020 and interim periods within those fiscal years, with early adoption permitted. Arrow adopted this standard on January 1, 2021. Arrow does not expect that the adoption of this standard will have a material impact on its financial position or the results of operations in periods subsequent to its adoption.

2022.

Note 2. CASH AND CASH EQUIVALENTS (In Thousands)


The following table is the schedule of Cash and Cash Equivalents at September 30, 2021, December 31, 2020 and September 30, 2020.
The following table is the schedule of Cash and Cash Equivalents at September 30, 2022, December 31, 2021 and September 30, 2021:								The following table is the schedule of Cash and Cash Equivalents at September 30, 2022, December 31, 2021 and September 30, 2021:
		September 30, 2021		December 31, 2020		September 30, 2020			September 30, 2022		December 31, 2021		September 30, 2021
Cash and Due From Banks	Cash and Due From Banks	$	49,430	$	42,116	$	54,286	Cash and Due From Banks	$	44,872	$	26,978	$	49,430
Interest-Bearing Deposits at Banks	Interest-Bearing Deposits at Banks	548,936		338,875		396,380		Interest-Bearing Deposits at Banks	328,557		430,718		548,936
Total Cash and Cash Equivalents	Total Cash and Cash Equivalents	$	598,366	380,991		450,666		Total Cash and Cash Equivalents	$	373,429	457,696		598,366

Supplemental Information:

Restricted cash pledged as collateral related to swap agreements and included in Cash and Due From Banks		$	—	$	500	$	2,350

1211

Note 3. INVESTMENT SECURITIES (In Thousands)

The following table is the schedule of Available-For-Sale Securities at September 30, ~~2021,~~2022, December 31, ~~2020~~2021 and September 30, ~~2020:~~2021:


Available-For-Sale Securities	Available-For-Sale Securities									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			U.S. Government & Agency Obligations		State and Municipal Obligations		Mortgage- Backed Securities		Corporate and Other Debt Securities		Total Available- For-Sale Securities
September 30, 2021
September 30, 2022													September 30, 2022
Available-For-Sale Securities, at Amortized Cost	Available-For-Sale Securities, at Amortized Cost	$	110,001	$	400	$	373,042	$	1,000		$	484,443	Available-For-Sale Securities, at Amortized Cost	$	180,000	$	340	$	465,485	$	1,000	$	646,825
Gross Unrealized Gains	Gross Unrealized Gains	96		—		5,225		—			5,321		Gross Unrealized Gains	—		—		3		—		3
Gross Unrealized Losses	Gross Unrealized Losses	(792)		—		(1,872)		(200)			(2,864)		Gross Unrealized Losses	(16,035)		—		(55,539)		(200)		(71,774)
Available-For-Sale Securities, at Fair Value	Available-For-Sale Securities, at Fair Value	109,305		400		376,395		800			486,900		Available-For-Sale Securities, at Fair Value	163,965		340		409,949		800		575,054
Available-For-Sale Securities, Pledged as Collateral, at Fair Value	Available-For-Sale Securities, Pledged as Collateral, at Fair Value										361,014		Available-For-Sale Securities, Pledged as Collateral, at Fair Value									414,929

Maturities of Debt Securities, at Amortized Cost:	Maturities of Debt Securities, at Amortized Cost:												Maturities of Debt Securities, at Amortized Cost:
Within One Year	Within One Year	$	—	$	—	$	125	$	—		$	125	Within One Year	$	5,000	$	20	$	817	$	—	$	5,837
From 1 - 5 Years	From 1 - 5 Years	110,001		40		368,296		—			478,337		From 1 - 5 Years	175,000		—		254,104		—		429,104
From 5 - 10 Years	From 5 - 10 Years	—		360		4,621		1,000			5,981		From 5 - 10 Years	—		320		210,564		1,000		211,884
Over 10 Years	Over 10 Years	—		—		—		—			—		Over 10 Years	—		—		—		—		—

Maturities of Debt Securities, at Fair Value:	Maturities of Debt Securities, at Fair Value:												Maturities of Debt Securities, at Fair Value:
Within One Year	Within One Year	$	—	$	—	$	132	$	—		$	132	Within One Year	$	5,000	$	20	$	795	$	—	$	5,815
From 1 - 5 Years	From 1 - 5 Years	109,305		40		371,649		—			480,994		From 1 - 5 Years	158,965		—		232,760		—		391,725
From 5 - 10 Years	From 5 - 10 Years	—		360		4,614		800			5,774		From 5 - 10 Years	—		320		176,394		800		177,514
Over 10 Years	Over 10 Years	—		—		—		—			—		Over 10 Years	—		—		—		—		—

Securities in a Continuous Loss Position, at Fair Value:	Securities in a Continuous Loss Position, at Fair Value:												Securities in a Continuous Loss Position, at Fair Value:
Less than 12 Months	Less than 12 Months	$	74,695	$	—	$	190,532	$	—		$	265,227	Less than 12 Months	$	71,419	$	—	$	274,491	$	—	$	345,910
12 Months or Longer	12 Months or Longer	29,513		—		—		800			30,313		12 Months or Longer	92,545		—		135,329		800		228,674
Total	Total	$	104,208	$	—	$	190,532	$	800		$	295,540	Total	$	163,964	$	—	$	409,820	$	800	$	574,584
Number of Securities in a Continuous Loss Position	Number of Securities in a Continuous Loss Position	14		—		27		1			42		Number of Securities in a Continuous Loss Position	24		—		156		1		181

Unrealized Losses on Securities in a Continuous Loss Position:	Unrealized Losses on Securities in a Continuous Loss Position:												Unrealized Losses on Securities in a Continuous Loss Position:
Less than 12 Months	Less than 12 Months	$	305	$	—	$	1,872	$	—		$	2,177	Less than 12 Months	$	3,581	$	—	$	30,521	$	—	$	34,102
12 Months or Longer	12 Months or Longer	487		—		—		200			687		12 Months or Longer	12,454		—		25,018		200		37,672
Total	Total	$	792	$	—	$	1,872	$	200		$	2,864	Total	$	16,035	$	—	$	55,539	$	200	$	71,774

Disaggregated Details:

US Agency Obligations, at Amortized Cost		$	110,001
US Agency Obligations, at Fair Value		109,305
US Government Agency Securities, at Amortized Cost						$	10,119
US Government Agency Securities, at Fair Value						10,165
Government Sponsored Entity Securities, at Amortized Cost						362,923
Government Sponsored Entity Securities, at Fair Value						366,230


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 Treasury Obligations, at Amortized Cost	$	—
US Treasury Obligations, at Fair Value	—
US Agency Obligations, at Amortized Cost	$	180,000
US Agency Obligations, at Fair Value	163,965
US Government Agency Securities, at Amortized Cost					$	8,243
US Government Agency Securities, at Fair Value					7,842
Government Sponsored Entity Securities, at Amortized Cost					457,242
Government Sponsored Entity Securities, at Fair Value					402,107

December 31, 2021
Available-For-Sale Securities, at Amortized Cost	$	110,000	$	400	$	448,742	$	1,000	$	560,142
Gross Unrealized Gains	63		—		3,617		—		3,680
Gross Unrealized Losses	(1,698)		—		(2,608)		(200)		(4,506)
Available-For-Sale Securities, at Fair Value	108,365		400		449,751		800		559,316
Available-For-Sale Securities, Pledged as Collateral, at Fair Value									298,106

Securities in a Continuous Loss Position, at Fair Value:
Less than 12 Months	$	74,088	$	—	$	263,292	$	—	$	337,380
12 Months or Longer	29,214		—		—		800		30,014
Total	$	103,302	$	—	$	263,292	$	800	$	367,394
Number of Securities in a Continuous Loss Position	14		—		39		1		54

Unrealized Losses on Securities in a Continuous Loss Position:
Less than 12 Months	$	912	$	—	$	2,608	$	—	$	3,520
12 Months or Longer	786		—		—		200		986
Total	$	1,698	$	—	$	2,608	$	200	$	4,506

Disaggregated Details:


US Agency Obligations, at Amortized Cost	$	110,000
US Agency Obligations, at Fair Value	108,365
US Government Agency Securities, at Amortized Cost					$	9,386
US Government Agency Securities, at Fair Value					9,371
Government Sponsored Entity Securities, at Amortized Cost					439,356
Government Sponsored Entity Securities, at Fair Value					440,380

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
December 31, 2020
Available-For-Sale Securities,
  at Amortized Cost $ 65,002 $ 528 $ 290,967 $ 1,000 $ 357,497
Gross Unrealized Gains 184 — 7,934 — 8,118
Gross Unrealized Losses (74) — (54) (200) (328)
Available-For-Sale Securities,
  at Fair Value 65,112 528 298,847 800 365,287
Available-For-Sale Securities,
  Pledged as Collateral,
  at Fair Value 244,411
Securities in a Continuous
  Loss Position, at Fair Value:
Less than 12 Months $ 29,926 $ — $ — $ — $ 29,926
12 Months or Longer — — 4,882 800 5,682
Total $ 29,926 $ — $ 4,882 $ 800 $ 35,608
Number of Securities in a
  Continuous Loss Position 4 — 1 1 6
Unrealized Losses on
  Securities in a Continuous
  Loss Position:
Less than 12 Months $ 74 $ — $ — $ — $ 74
12 Months or Longer — — 54 200 254
Total $ 74 $ — $ 54 $ 200 $ 328
Disaggregated Details:
US Agency Obligations,
  at Amortized Cost $ 65,002
US Agency Obligations,
  at Fair Value 65,112
US Government Agency
  Securities, at Amortized Cost $ 12,696
US Government Agency
  Securities, at Fair Value 12,683
Government Sponsored Entity
  Securities, at Amortized Cost 278,271
Government Sponsored Entity
  Securities, at Fair Value 286,164


Available-For-Sale Securities	Available-For-Sale Securities									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			U.S. Government & Agency Obligations		State and Municipal Obligations		Mortgage- Backed Securities		Corporate and Other Debt Securities		Total Available- For-Sale Securities
September 30, 2020
September 30, 2021													September 30, 2021
Available-For-Sale Securities, at Amortized Cost	Available-For-Sale Securities, at Amortized Cost	$	35,001	$	593	$	329,887	$	1,000		$	366,481	Available-For-Sale Securities, at Amortized Cost	$	110,001	$	400	$	373,042	$	1,000	$	484,443
Gross Unrealized Gains	Gross Unrealized Gains	184		—		8,700		—			8,884		Gross Unrealized Gains	96		—		5,225		—		5,321
Gross Unrealized Losses	Gross Unrealized Losses	(18)		—		(219)		(200)			(437)		Gross Unrealized Losses	(792)		—		(1,872)		(200)		(2,864)
Available-For-Sale Securities, at Fair Value	Available-For-Sale Securities, at Fair Value	35,167		593		338,368		800			374,928		Available-For-Sale Securities, at Fair Value	109,305		400		376,395		800		486,900
Available-For-Sale Securities, Pledged as Collateral, at Fair Value	Available-For-Sale Securities, Pledged as Collateral, at Fair Value										308,879		Available-For-Sale Securities, Pledged as Collateral, at Fair Value									361,014

Securities in a Continuous Loss Position, at Fair Value:	Securities in a Continuous Loss Position, at Fair Value:												Securities in a Continuous Loss Position, at Fair Value:
Less than 12 Months	Less than 12 Months	$	29,982	$	—	$	13,847	$	—		$	43,829	Less than 12 Months	$	74,695	$	—	$	190,532	$	—	$	265,227
12 Months or Longer	12 Months or Longer	—		—		54,239		800			55,039		12 Months or Longer	29,513		—		—		800		30,313
Total	Total	$	29,982	$	—	$	68,086	$	800		$	98,868	Total	$	104,208	$	—	$	190,532	$	800	$	295,540
Number of Securities in a Continuous Loss Position	Number of Securities in a Continuous Loss Position	4		—		26		1			31		Number of Securities in a Continuous Loss Position	14		—		27		1		42

Unrealized Losses on Securities in a Continuous Loss Position:	Unrealized Losses on Securities in a Continuous Loss Position:												Unrealized Losses on Securities in a Continuous Loss Position:
Less than 12 Months	Less than 12 Months	$	18	$	—	$	36	$	—		$	54	Less than 12 Months	$	305	$	—	$	1,872	$	—	$	2,177
12 Months or Longer	12 Months or Longer	—		—		183		200			383		12 Months or Longer	487		—		—		200		687
Total	Total	$	18	$	—	$	219	$	200		$	437	Total	$	792	$	—	$	1,872	$	200	$	2,864

Disaggregated Details:	Disaggregated Details:												Disaggregated Details:

US Agency Obligations, at Amortized Cost	US Agency Obligations, at Amortized Cost	$	35,001										US Agency Obligations, at Amortized Cost	$	110,001
US Agency Obligations, at Fair Value	US Agency Obligations, at Fair Value	35,167											US Agency Obligations, at Fair Value	109,305
US Government Agency Securities, at Amortized Cost	US Government Agency Securities, at Amortized Cost					$	69,575						US Government Agency Securities, at Amortized Cost					$	10,119
US Government Agency Securities, at Fair Value	US Government Agency Securities, at Fair Value					69,407							US Government Agency Securities, at Fair Value					10,165
Government Sponsored Entity Securities, at Amortized Cost	Government Sponsored Entity Securities, at Amortized Cost					260,312							Government Sponsored Entity Securities, at Amortized Cost					362,923
Government Sponsored Entity Securities, at Fair Value	Government Sponsored Entity Securities, at Fair Value					268,961							Government Sponsored Entity Securities, at Fair Value					366,230

At September 30, ~~2021,~~2022, there was no allowance for credit losses for the ~~available for sale~~AFS debt securities portfolio.

The following table is the schedule of Held-To-Maturity Securities at September 30, ~~2021,~~2022, December 31, ~~2020~~2021 and September 30, ~~2020:~~2021:

Held-To-Maturity Securities
State and
Municipal
Obligations Mortgage-
Backed
Securities Total
Held-To
Maturity
Securities
September 30, 2021
Held-To-Maturity Securities,
  at Amortized Cost $ 179,952 $ 18,385 $ 198,337
Gross Unrealized Gains 4,834 765 5,599
Gross Unrealized Losses — — —
Held-To-Maturity Securities,
  at Fair Value 184,786 19,150 203,936
Held-To-Maturity Securities,
  Pledged as Collateral, at Fair Value 192,929
Maturities of Debt Securities,
  at Amortized Cost:
Within One Year $ 23,281 $ 940 $ 24,221
From 1 - 5 Years 140,014 17,445 157,459
From 5 - 10 Years 15,791 — 15,791
Over 10 Years 866 — 866
Maturities of Debt Securities,
  at Fair Value:
Within One Year $ 23,448 $ 959 $ 24,407
From 1 - 5 Years 143,994 18,191 162,185
From 5 - 10 Years 16,473 — 16,473
Over 10 Years 871 — 871
Securities in a Continuous
  Loss Position, at Fair Value:
Less than 12 Months $ — $ — $ —
12 Months or Longer — — —
Total $ — $ — $ —
Number of Securities in a
  Continuous Loss Position — — —
Unrealized Losses on Securities
   in a Continuous Loss Position:
Less than 12 Months $ — $ — $ —
12 Months or Longer — — —
Total $ — $ — $ —
Disaggregated Details:
US Government Agency
  Securities, at Amortized Cost $ 6,302
US Government Agency
  Securities, at Fair Value 6,506
Government Sponsored Entity
  Securities, at Amortized Cost 12,083
Government Sponsored Entity
  Securities, at Fair Value 12,644


Held-To-Maturity Securities
	State and Municipal Obligations		Mortgage- Backed Securities		Total Held-To Maturity Securities
September 30, 2022
Held-To-Maturity Securities, at Amortized Cost	$	169,619	$	12,559	$	182,178
Gross Unrealized Gains	1		—		1
Gross Unrealized Losses	(5,771)		(608)		(6,379)
Held-To-Maturity Securities, at Fair Value	163,849		11,951		175,800
Held-To-Maturity Securities, Pledged as Collateral, at Fair Value					153,364


Held-To-Maturity Securities
	State and Municipal Obligations		Mortgage- Backed Securities		Total Held-To Maturity Securities

Maturities of Debt Securities, at Amortized Cost:
Within One Year	$	50,423	$	—	$	50,423
From 1 - 5 Years	115,113		12,559		127,672
From 5 - 10 Years	4,044		—		4,044
Over 10 Years	39		—		39

Maturities of Debt Securities, at Fair Value:
Within One Year	$	50,058	$	—	$	50,058
From 1 - 5 Years	109,945		11,951		121,896
From 5 - 10 Years	3,807		—		3,807
Over 10 Years	39		—		39

Securities in a Continuous Loss Position, at Fair Value:
Less than 12 Months	$	141,132	$	11,951	$	153,083
12 Months or Longer	—		—		—
Total	$	141,132	$	11,951	$	153,083

Number of Securities in a Continuous Loss Position	419		16		435

Unrealized Losses on Securities in a Continuous Loss Position:
Less than 12 Months	$	5,771	$	608	$	6,379
12 Months or Longer	—		—		—
Total	$	5,771	$	608	$	6,379

Disaggregated Details:
US Government Agency Securities, at Amortized Cost			$	4,115
US Government Agency Securities, at Fair Value			3,924
Government Sponsored Entity Securities, at Amortized Cost			8,444
Government Sponsored Entity Securities, at Fair Value			8,027


Held-To-Maturity Securities
	State and Municipal Obligations		Mortgage- Backed Securities		Total Held-To Maturity Securities
December 31, 2021
Held-To-Maturity Securities, at Amortized Cost	$	180,195	$	16,371	$	196,566
Gross Unrealized Gains	4,179		547		4,726
Gross Unrealized Losses	—		—		—
Held-To-Maturity Securities, at Fair Value	184,374		16,918		201,292
Held-To-Maturity Securities, Pledged as Collateral, at Fair Value					175,218

Securities in a Continuous Loss Position, at Fair Value:
Less than 12 Months	$	—	$	—	$	—
12 Months or Longer	—		—		—
Total	$	—	$	—	$	—
Number of Securities in a Continuous Loss Position	—		—		—

Unrealized Losses on Securities in a Continuous Loss Position:
Less than 12 Months	$	—	$	—	$	—
12 Months or Longer	—		—		—
Total	$	—	$	—	$	—

Disaggregated Details:
US Government Agency Securities, at Amortized Cost			$	5,518
US Government Agency Securities, at Fair Value			5,647
Government Sponsored Entity Securities, at Amortized Cost			10,853
Government Sponsored Entity Securities, at Fair Value			11,271

Held-To-Maturity Securities
State and
Municipal
Obligations Mortgage-
Backed
Securities Total
Held-To
Maturity
Securities
December 31, 2020
Held-To-Maturity Securities,
  at Amortized Cost $ 192,352 $ 26,053 $ 218,405
Gross Unrealized Gains 7,080 1,094 8,174
Gross Unrealized Losses (3) — (3)
Held-To-Maturity Securities,
  at Fair Value 199,429 27,147 226,576
Held-To-Maturity Securities,
  Pledged as Collateral, at Fair Value 211,176
Securities in a Continuous
  Loss Position, at Fair Value:
Less than 12 Months $ 1,513 $ — $ 1,513
12 Months or Longer — — —
Total $ 1,513 $ — $ 1,513
Number of Securities in a
  Continuous Loss Position 4 — 4
Unrealized Losses on
  Securities in a Continuous
  Loss Position:
Less than 12 Months $ 3 $ — $ 3
12 Months or Longer — — —
Total $ 3 $ — $ 3
Disaggregated Details:
US Government Agency
  Securities, at Amortized Cost $ 9,440
US Government Agency
  Securities, at Fair Value 9,762
Government Sponsored Entity
  Securities, at Amortized Cost 16,613
Government Sponsored Entity
  Securities, at Fair Value 17,385


Held-To-Maturity Securities	Held-To-Maturity Securities					Held-To-Maturity Securities
		State and Municipal Obligations		Mortgage- Backed Securities			Total Held-To Maturity Securities			State and Municipal Obligations		Mortgage- Backed Securities		Total Held-To Maturity Securities
September 30, 2020
September 30, 2021									September 30, 2021
Held-To-Maturity Securities, at Amortized Cost	Held-To-Maturity Securities, at Amortized Cost	$	195,735	$	29,064		$	224,799	Held-To-Maturity Securities, at Amortized Cost	$	179,952	$	18,385	$	198,337
Gross Unrealized Gains	Gross Unrealized Gains	7,488		1,257			8,745		Gross Unrealized Gains	4,834		765		5,599
Gross Unrealized Losses	Gross Unrealized Losses	(43)		—			(43)		Gross Unrealized Losses	—		—		—
Held-To-Maturity Securities, at Fair Value	Held-To-Maturity Securities, at Fair Value	203,180		30,321			233,501		Held-To-Maturity Securities, at Fair Value	184,786		19,150		203,936
Held-To-Maturity Securities, Pledged as Collateral, at Fair Value	Held-To-Maturity Securities, Pledged as Collateral, at Fair Value						221,844		Held-To-Maturity Securities, Pledged as Collateral, at Fair Value					192,929

Securities in a Continuous Loss Position, at Fair Value:	Securities in a Continuous Loss Position, at Fair Value:								Securities in a Continuous Loss Position, at Fair Value:
Less than 12 Months	Less than 12 Months	$	1,476	$	—		$	1,476	Less than 12 Months	$	—	$	—	$	—
12 Months or Longer	12 Months or Longer	—		—			—		12 Months or Longer	—		—		—
Total	Total	$	1,476	$	—		$	1,476	Total	$	—	$	—	$	—
Number of Securities in a Continuous Loss Position	Number of Securities in a Continuous Loss Position	4		—			4		Number of Securities in a Continuous Loss Position	—		—		—

Unrealized Losses on Securities in a Continuous Loss Position:	Unrealized Losses on Securities in a Continuous Loss Position:								Unrealized Losses on Securities in a Continuous Loss Position:
Less than 12 Months	Less than 12 Months	$	42	$	—		$	42	Less than 12 Months	$	—	$	—	$	—
12 Months or Longer	12 Months or Longer	1		—			1		12 Months or Longer	—		—		—
Total	Total	$	43	$	—		$	43	Total	$	—	$	—	$	—

September 30, 2021									September 30, 2021
Disaggregated Details:	Disaggregated Details:								Disaggregated Details:
US Government Agency Securities, at Amortized Cost	US Government Agency Securities, at Amortized Cost			$	10,669				US Government Agency Securities, at Amortized Cost			$	6,302
US Government Agency Securities, at Fair Value	US Government Agency Securities, at Fair Value			11,049					US Government Agency Securities, at Fair Value			6,506
Government Sponsored Entity Securities, at Amortized Cost	Government Sponsored Entity Securities, at Amortized Cost			18,392					Government Sponsored Entity Securities, at Amortized Cost			12,083
Government Sponsored Entity Securities, at Fair Value	Government Sponsored Entity Securities, at Fair Value			19,272					Government Sponsored Entity Securities, at Fair Value			12,644

In the tables above, maturities of mortgage-backed securities are included based on their expected average lives. Actual maturities will differ because issuers may have the right to call or prepay obligations with or without prepayment penalties.

Securities in a continuous loss position, in the tables above for September 30, 2021, December 31, 2020 and September 30, 2020, do not reflect any deterioration of the credit worthiness of the issuing entities.

Arrow evaluates ~~available-for-sale~~AFS 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 ~~noncredit-related~~non-credit-related factors. Any impairment that is not credit related is recognized in other comprehensive income, net of applicable taxes. Credit-related impairment is recognized within the allowance for credit losses on the balance sheet, limited to the amount by which the amortized cost basis exceeds the fair value, with a corresponding adjustment to earnings via credit loss expense. Arrow determined that at September 30, ~~2021,~~2022, gross unrealized losses were primarily attributable to changes in interest rates, relative to when the investment securities were purchased, and not due to the credit quality of the investment securities. Arrow does not intend to sell, nor is it more likely than not that Arrow will be required to sell the security before recovery of its amortized cost basis, which may be at maturity. Therefore, Arrow carried no allowance for credit loss at September 30, ~~2021~~2022 and there was no credit loss expense recognized by Arrow with respect to the securities portfolio during the three months ended September 30, ~~2021.~~2022.

Arrow's held to maturity debt securities are comprised of U.S. ~~government agencies, U.S.~~ government-sponsored enterprises (GSEs) or state and municipal obligations. ~~U.S. government agencies and U.S. government-sponsored enterprise~~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 September 30, ~~2021.~~2022.

1817

The following table is the schedule of Equity Securities at September 30, ~~2021,~~2022, December 31, ~~2020~~2021 and September 30, ~~2020:~~2021:

Equity Securities

September 30, 2021

December 31, 2020

September 30, 2020

September 30, 2022

December 31, 2021

September 30, 2021

Equity Securities, at Fair Value

$1,886

$1,636

$1,511

Equity Securities, at Fair Value

$2,126

$1,747

$1,886

The following is a summary of realized and unrealized gains ~~and losses~~ recognized in net income on equity securities during the three and nine month ~~period~~periods ended September 30, ~~2021~~2022 and ~~2020:~~2021:

For the Three Months Ended September 30, For the Nine Months Ended September 30,
2021 2020 2021 2020
Net (Loss) Gain on Equity Securities $ (106) $ (72) $ 250 $ (552)
Less: Net (loss) gain recognized during the reporting period on equity securities sold during the period — — — —
Unrealized net (loss) gain recognized during the reporting period on equity securities still held at the reporting date $ (106) $ (72) $ 250 $ (552)


	For the Three Months Ended September 30,		For the Nine Months Ended September 30,
	2022		2021		2022		2021
Net Gain on Equity Securities	$	95	$	(106)	$	379	$	250
Less: Net gain recognized during the reporting period on equity securities sold during the period	—		—		—		—
Unrealized net gain recognized during the reporting period on equity securities still held at the reporting date	$	95	$	(106)	$	379	$	250

1918

Note 4. LOANS (In Thousands)

Loan Categories and Past Due Loans

The following two tables present loan balances outstanding as of September 30, ~~2021,~~2022 and an analysis of the recorded investment in loans that are past due at these dates. Generally, Arrow considers a loan past due 30 or more days when the borrower is two payments past due. Loans held-for-sale of ~~$2,169, $11,085~~$483, $1,154 and ~~$10,580~~$2,169 as of September 30, ~~2021,~~2022, December 31, ~~2020~~2021 and September 30, ~~2020,~~2021, respectively, are included in the residential real estate balances for current loans.


Schedule of Past Due Loans by Loan Category	Schedule of Past Due Loans by Loan Category											Schedule of Past Due Loans by Loan Category
				Commercial											Commercial
													Commercial		Real Estate		Consumer		Residential		Total
September 30, 2022												September 30, 2022
Loans Past Due 30-59 Days												Loans Past Due 30-59 Days	$	86	$	—	$	8,870	$	393	$	9,349
Loans Past Due 60-89 Days												Loans Past Due 60-89 Days	80		—		4,397		1,266		5,743
Loans Past Due 90 or more Days												Loans Past Due 90 or more Days	—		235		1,708		3,487		5,430
Total Loans Past Due												Total Loans Past Due	166		235		14,975		5,146		20,522
Current Loans												Current Loans	138,807		678,982		1,040,610		1,045,873		2,904,272
Total Loans												Total Loans	$	138,973	$	679,217	$	1,055,585	$	1,051,019	$	2,924,794

December 31, 2021												December 31, 2021
Loans Past Due 30-59 Days												Loans Past Due 30-59 Days	$	202	$	—	$	6,713	$	107	$	7,022
Loans Past Due 60-89 Days												Loans Past Due 60-89 Days	3		—		2,709		2,557		5,269
Loans Past Due 90 or more Days												Loans Past Due 90 or more Days	157		1,180		1,564		1,981		4,882
Total Loans Past Due												Total Loans Past Due	362		1,180		10,986		4,645		17,173
Current Loans												Current Loans	172,156		627,749		909,570		941,293		2,650,768
Total Loans												Total Loans	$	172,518	$	628,929	$	920,556	$	945,938	$	2,667,941
		Commercial		Real Estate		Consumer		Residential		Total
September 30, 2021	September 30, 2021											September 30, 2021
Loans Past Due 30-59 Days	Loans Past Due 30-59 Days	$	729	$	—	$	4,809	$	368	$	5,906	Loans Past Due 30-59 Days	$	729	$	—	$	4,809	$	368	$	5,906
Loans Past Due 60-89 Days	Loans Past Due 60-89 Days	63		—		2,543		1,295		3,901		Loans Past Due 60-89 Days	63		—		2,543		1,295		3,901
Loans Past Due 90 or more Days	Loans Past Due 90 or more Days	75		1,641		1,010		1,951		4,677		Loans Past Due 90 or more Days	75		1,641		1,010		1,951		4,677
Total Loans Past Due	Total Loans Past Due	867		1,641		8,362		3,614		14,484		Total Loans Past Due	867		1,641		8,362		3,614		14,484
Current Loans	Current Loans	187,324		613,440		912,827		926,676		2,640,267		Current Loans	187,324		613,440		912,827		926,676		2,640,267
Total Loans	Total Loans	$	188,191	$	615,081	$	921,189	$	930,290	$	2,654,751	Total Loans	$	188,191	$	615,081	$	921,189	$	930,290	$	2,654,751

December 31, 2020
Loans Past Due 30-59 Days		$	102	$	—	$	4,976	$	261	$	5,339
Loans Past Due 60-89 Days		113		—		2,713		1,279		4,105
Loans Past Due 90 or more Days		78		1,658		1,379		1,224		4,339
Total Loans Past Due		293		1,658		9,068		2,764		13,783
Current Loans		240,261		570,129		850,700		920,157		2,581,247
Total Loans		$	240,554	$	571,787	$	859,768	$	922,921	$	2,595,030

September 30, 2020
Loans Past Due 30-59 Days		$	43	$	—	$	4,238	$	428	$	4,709
Loans Past Due 60-89 Days		79		85		2,853		765		3,782
Loans Past Due 90 or more Days		22		1,475		1,303		1,517		4,317
Total Loans Past Due		144		1,560		8,394		2,710		12,808
Current Loans		275,777		539,673		841,132		923,065		2,579,647
Total Loans		$	275,921	$	541,233	$	849,526	$	925,775	$	2,592,455


Schedule of Non Accrual Loans by Category	Schedule of Non Accrual Loans by Category											Schedule of Non Accrual Loans by Category
				Commercial											Commercial
September 30, 2021		Commercial		Real Estate		Consumer		Residential		Total
September 30, 2022												September 30, 2022	Commercial		Real Estate		Consumer		Residential		Total
Loans 90 or More Days Past Due and Still Accruing Interest	Loans 90 or More Days Past Due and Still Accruing Interest	$	—	$	—	$	—	$	555	$	555	Loans 90 or More Days Past Due and Still Accruing Interest	$	—	$	—	$	—	$	514	$	514
Nonaccrual Loans	Nonaccrual Loans	91		7,766		1,101		1,765		10,723		Nonaccrual Loans	9		3,401		1,708		3,694		8,812
Nonaccrual With No Allowance for Credit Loss	Nonaccrual With No Allowance for Credit Loss	91		4,983		1,101		1,765		7,940		Nonaccrual With No Allowance for Credit Loss	9		3,401		1,708		3,694		8,812
Interest Income on Nonaccrual Loans	Interest Income on Nonaccrual Loans	—		111		—		—		111		Interest Income on Nonaccrual Loans	—		—		—		12		12

December 31, 2020
December 31, 2021												December 31, 2021
Loans 90 or More Days Past Due and Still Accruing Interest	Loans 90 or More Days Past Due and Still Accruing Interest	$	—	$	184	$	—	$	44	$	228	Loans 90 or More Days Past Due and Still Accruing Interest	$	157	$	—	$	—	$	666	$	823
Nonaccrual Loans	Nonaccrual Loans	78		1,475		1,470		3,010		6,033		Nonaccrual Loans	34		7,243		1,697		1,790		10,764

September 30, 2020
September 30, 2021												September 30, 2021
Loans 90 or More Days Past Due and Still Accruing Interest	Loans 90 or More Days Past Due and Still Accruing Interest	$	—	$	—	$	—	$	121	$	121	Loans 90 or More Days Past Due and Still Accruing Interest	$	—	$	—	$	—	$	555	$	555
Nonaccrual Loans	Nonaccrual Loans	72		1,475		1,559		2,898		6,004		Nonaccrual Loans	91		7,766		1,101		1,765		10,723

2019

Arrow disaggregates its loan portfolio into the following 4four categories:

Commercial - ~~The Company~~Arrow offers a variety of loan options to meet the specific needs of our commercial customers including term loans, time notes and lines of credit. Such loans are made available to businesses for working capital needs such as inventory and receivables, business expansion and equipment purchases. Generally, a collateral lien is placed on equipment or other assets owned by the borrower. Generally, these loans carry a higher risk than commercial real estate loans due to the nature of the underlying collateral, which can be business assets such as equipment and accounts receivable and generally have a lower liquidation value than real estate. In the event of default by the borrower, ~~the Company~~Arrow may be required to liquidate collateral at deeply discounted values. To reduce the risk, management usually obtains personal guarantees to support the borrowing, as permitted by applicable law.

Commercial Real Estate - ~~The Company~~Arrow offers commercial real estate loans to finance real estate purchases, refinancings, expansions and improvements to commercial properties. Commercial real estate loans are made to finance the purchases of real property which generally consists of real estate with completed structures. These commercial real estate loans are typically secured by first liens on the real estate, which may include apartments, commercial structures, housing businesses, healthcare facilities, and both ~~owner~~owner- and ~~non owner-occupied~~non-owner-occupied facilities. These loans are typically less risky than commercial loans, since they are secured by real estate and buildings, and are generally originated in amounts of no more than 80% of the appraised value of the property. However, ~~the Company~~Arrow also offers commercial construction and land development loans to finance projects. Many projects will ultimately be used by the borrowers' businesses, while others are developed for resale. These real estate loans are also typically secured by first liens on the real estate, which may include apartments, commercial structures, housing businesses, healthcare facilities and both owner-occupied and non-owner-occupied facilities. There is enhanced risk during the construction period, since the loan is secured by an incomplete project.

Consumer Loans - This category is primarily comprised of automobile loans. Arrow primarily finances the purchases of automobiles indirectly through dealer relationships located throughout upstate New York and Vermont. Most automobile loans carry a fixed rate of interest with principal repayment terms typically ranging from three to seven years. Automobile loans are underwritten on a secured basis using the underlying collateral being financed. Arrow also offers a variety of consumer installment loans to finance personal expenditures. Most of these loans carry a fixed rate of interest with principal repayment terms typically ranging from one to five years, based upon the nature of the collateral and the size of the loan. In addition to installment loans, Arrow also offers personal lines of credit and overdraft protection. Several of these consumer loans are unsecured, which carry a higher risk of loss.

Residential - Residential real estate loans consist primarily of loans secured by first or second mortgages on primary residences. Arrow originates fixed-rate and adjustable-rate one-to-four-family residential real estate loans for the construction, purchase of real estate or refinancing of an existing mortgage. These loans are collateralized primarily by owner-occupied properties generally located in Arrow's market area. Loans on one-to-four-family residential real estate are generally originated in amounts of no more than 80% of the purchase price or appraised value (whichever is lower), or have private mortgage insurance. Arrow’s underwriting analysis for residential mortgage loans typically includes credit verification, independent appraisals, and a review of the borrower’s financial condition. Mortgage title insurance and hazard insurance are normally required. It is Arrow's general practice to underwrite residential real estate loans to secondary market standards. Construction loans have a unique risk, because they are secured by an incomplete dwelling. This risk is reduced through periodic site inspections, including one at each loan draw period. In addition, ~~the Company~~Arrow offers fixed home equity loans, as well as home equity lines of credit to consumers to finance home improvements, debt consolidation, education and other uses. Arrow's policy allows for a maximum loan to value ratio of 80%, although periodically higher advances are allowed. Arrow originates home equity lines of credit and second mortgage loans (loans secured by a second junior lien position on one-to-four-family residential real estate). Risk is generally reduced through underwriting criteria, which include credit verification, appraisals, a review of the borrower's financial condition, and personal cash flows. A security interest, with title insurance when necessary, is taken in the underlying real estate.

~~The following tables present the amortized cost basis of collateral-dependent loans by class of loans as of September 30, 2021:~~

September 30, 2021 Collateral Type -Residential Real Estate Collateral Type - Commercial Real Estate Total Loans
Commercial $ — $ — $ —
Commercial Real Estate — 7,254 7,254
Consumer — — —
Residential 676 — 676
Total $ 676 $ 7,254 $ 7,930

Allowance for Credit Losses

~~As mentioned in Note 1 Accounting Policies, Arrow adopted CECL on January 1, 2021.~~

Loan segments were selected by class code and application code to ensure each segment is comprised of loans with homogenous loan characteristics and similar risk profiles. The resulting loan segments are commercial -Paycheck Protection Program (PPP), commercial non-PPP, ~~commercial PPP,~~ commercial real estate, consumer and residential real estate loans. The consumer segment is mainly comprised of automobile loans, and since they are relatively short-term in nature, with similar dollar amounts and collateral, the vintage analysis method was selected to determine the credit loss reserve. The vintage method utilizes Arrow loan data exclusively as the method calculates a loss rate based on the total

origination balance of the loans by year and the charge-off and recovery rate of the same origination year. Arrow maintains, over the life of the loan, the loss curve by vintage year. The discounted cash flow method (DCF) is used to calculate the reserve for credit losses for the commercial, commercial real estate and residential real estate segments. ~~Please see Note 1 for a full explanation.~~

The September 30, ~~2021~~2022 allowance for credit losses calculation incorporated a reasonable and supportable forecast period to account for economic conditions utilized in the measurement. The quantitative model utilized an economic forecast sourced from reputable third-parties that ~~reflected~~reflects the economic ~~improvement~~conditions with a ~~reduction~~deterioration of approximately ~~0.2%~~0.45% in the national unemployment rate during the six-quarter forecast period, while forecasted gross domestic product ~~declined~~are projected to decline approximately ~~1.0%~~1.00%. The home price index (HPI) forecast ~~increased~~declined approximately ~~2.2%~~4.63% from the previous quarter level. The recent volatility of the national HPI forecast in projecting growth and decline is beyond any recent actual change when compared to the Albany Metropolitan Statistical Area for the last 10 years and is considered to be a unique circumstance not reflective of current economic conditions in our markets. As a result, an additional qualitative adjustment was utilized during 2022 to address risk outside of the quantitative model. Key assumptions utilized in the CECL calculation include loan segmentation, loan loss regression analysis, reasonable and supportable forecast period,

reversion period, discounted cash flow inputs including economic forecast data and prepayment and curtailment speeds and qualitative factors. Key assumptions are reviewed and approved on a quarterly basis. There was one assumption change for the third quarter calculation. Demand loans, which do not have a maturity date, now utilize a 1-year maturity as the loans are reviewed annually. The loans previously utilized a 10-year maturity. Driven by current economic forecasts, loan growth and net charge offs during the quarter, the third quarter provision for credit losses was ~~$99 thousand.~~$1.7 million. The provision is directionally consistent with both the latest economic forecasts as well as third quarter activity. Management's evaluation considers the allowance for credit losses for loans to be appropriate as of September 30, ~~2021.~~2022.

The following table details activity in the allowance for credit losses on loans for the three and nine months ended September 30, ~~2021~~2022 and September 30, 2020. Arrow adopted ASU 2016-13 on January 1, 2021. Results for the periods beginning after January 1, 2021 are presented under ASC 326 and prior periods continue to be reported in accordance with previously applicable US GAAP.2021:

Allowance for Credit Losses
Commercial Commercial Real Estate Consumer Residential Total
Rollforward of the Allowance for Credit Losses for the Quarterly Period:
June 30, 2021 $ 2,241 $ 13,606 $ 2,443 $ 8,720 $ 27,010
Charge-offs (17) — (427) — (444)
Recoveries — — 291 — 291
Provision 200 65 (19) (147) 99
September 30, 2021 $ 2,424 $ 13,671 $ 2,288 $ 8,573 $ 26,956
December 31, 2020 $ 2,173 $ 9,990 $ 11,562 $ 5,507 $ 29,232
Impact of Adoption ASC 326 2,084 2,064 (9,383) 3,935 (1,300)
Balance as of January 1, 2021 as adjusted for ASU 2016-13 4,257 12,054 2,179 9,442 27,932
Charge-offs (37) — (1,480) (3) (1,520)
Recoveries — — 830 — 830
Provision (1,796) 1,617 759 (866) (286)
September 30, 2021 $ 2,424 $ 13,671 $ 2,288 $ 8,573 $ 26,956

Allowance for Loan Losses
Commercial Commercial Real Estate Consumer Residential Total
Rollforward of the Allowance for Loan Losses for the Quarterly Period:
June 30, 2020 $ 1,917 $ 8,361 $ 10,639 $ 5,383 $ 26,300
Charge-offs (17) (5) (370) — $ (392)
Recoveries — — 267 — $ 267
Provision 419 1,013 609 230 $ 2,271
September 30, 2020 $ 2,319 $ 9,369 $ 11,145 $ 5,613 $ 28,446


Allowance for Credit Losses
	Commercial		Commercial Real Estate		Consumer		Residential		Total

June 30, 2022	$	2,465	$	13,936	$	2,358	$	9,331	$	28,090


Charge-offs	(44)		—		(1,103)		—		(1,147)
Recoveries	—		—		574		—		574
Provision	(416)		930		692		509		1,715
September 30, 2022	$	2,005	$	14,866	$	2,521	$	9,840	$	29,232

December 31, 2021	$	2,298	$	13,136	$	2,402	$	9,445	$	27,281
Charge-offs	$	(48)	$	—	$	(2,805)	$	(30)	$	(2,883)
Recoveries	$	26	$	—	$	1,419	$	—	$	1,445
Provision	$	(271)	$	1,730	$	1,505	$	425	$	3,389
September 30, 2022	$	2,005	$	14,866	$	2,521	$	9,840	$	29,232


June 30, 2021	$	2,241	$	13,606	$	2,443	$	8,720	$	27,010
Charge-offs	(17)		—		(427)		—		$	(444)
Recoveries	—		—		291		—		$	291
Provision	200		65		(19)		(147)		$	99
September 30, 2021	$	2,424	$	13,671	$	2,288	$	8,573	$	26,956



Balance as of January 1, 2021 as adjusted for ASU 2016-13	$	4,257	$	12,054	$	2,179	$	9,442	$	27,932
Charge-offs	(37)		—		(1,480)		(3)		(1,520)
Recoveries	—		—		830		—		830
Provision	(1,796)		1,617		759		(866)		(286)
September 30, 2021	$	2,424	$	13,671	$	2,288	$	8,573	$	26,956

Estimated Credit Losses on Off-Balance Sheet Credit Exposures Recognized as Other Liabilities

Financial instrument credit losses apply to off-balance sheet credit exposures such as unfunded loan commitments and standby letters of credit. A liability for expected credit losses for off-balance sheet exposures is recognized if the entity has a present contractual obligation to extend the credit and the obligation is not unconditionally cancellable by the entity. ~~The Day 1 adoption of ASU 2016-13, created an allowance for credit loss on off-balance sheet exposures recognized as other liabilities of $1.1 million. Subsequent changes~~Changes in this allowance are reflected in other operating expenses within the non-interest expense category. As of September 30, ~~2021,~~2022, the total unfunded commitment off-balance sheet credit exposure was ~~$1.8~~$1.6 million.

Individually Evaluated Loans

All loans not included in the vintage analysis method that exceed $250,000, which are on nonaccrual status, are evaluated on an individual basis. Arrow made the policy election to apply a practical expedient for collateral dependent financial assets when the borrower is experiencing financial difficulty and the repayment is expected through the sale of the collateral. This allows Arrow to use fair value of the collateral at the reporting date adjusted for estimated cost to sell when recording the net carrying amount of the asset and determining the allowance for credit losses for a financial asset. In the event where 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. As of September 30, ~~2021,~~2022, there were 6four total relationships identified to be evaluated for loss on an individual basis which had an amortized cost basis of ~~$7.9~~$4.7 million and ~~only 1 loan~~none had an allowance for credit ~~loss of $616 thousand.~~loss.

Allowance for Credit Losses - Collectively and Individually Evaluated
Commercial Commercial Real Estate Consumer Residential Total
September 30, 2021
Ending Loan Balance - Collectively Evaluated $ 188,191 $ 607,827 $ 921,189 $ 929,614 $ 2,646,821
Allowance for Credit Losses - Loans Collectively Evaluated 2,424 13,055 2,288 8,573 26,340
Ending Loan Balance - Individually Evaluated — 7,254 — 676 7,930
Allowance for Credit Losses - Loans Individually Evaluated — 616 — — 616

The following ~~table presents information pertaining to~~tables present the ~~allowance for loan losses~~amortized cost basis of collateral-dependent loans by class of loans as of September 30, 2022, December 31, ~~2020~~2021 and September 30, ~~2020, as determined in accordance with ASC 310, prior to the adoption of ASU 2016-13:~~2021:


September 30, 2022	Collateral Type -Residential Real Estate		Collateral Type - Commercial Real Estate		Total Loans
Commercial	$	—	$	—	$	—
Commercial Real Estate	—		3,166		3,166
Consumer	—		—		—
Residential	1,494		—		1,494
Total	$	1,494	$	3,166	$	4,660

Allowance for Loan Losses - Collectively and Individually Evaluated for Impairment
Commercial Commercial Real Estate Consumer Residential Total
December 31, 2020
Ending Loan Balance - Collectively Evaluated for Impairment $ 240,507 $ 570,659 $ 859,657 $ 921,504 $ 2,592,327
Allowance for Loan Losses - Loans Collectively Evaluated for Impairment 2,154 9,990 11,562 5,485 $ 29,191
Ending Loan Balance - Individually Evaluated for Impairment 47 1,128 111 1,417 2,703
Allowance for Loan Losses - Loans Individually Evaluated for Impairment 19 — — 22 41
September 30, 2020
Ending Loan Balance - Collectively Evaluated for Impairment $ 275,874 $ 540,105 $ 849,402 $ 924,348 $ 2,589,729
Allowance for Loan Losses - Loans Collectively Evaluated for Impairment 2,301 9,369 11,145 5,585 28,400
Ending Loan Balance - Individually Evaluated for Impairment 47 1,128 124 1,427 2,726
Allowance for Loan Losses - Loans Individually Evaluated for Impairment 18 — — 28 46


December 31, 2021	Collateral Type -Residential Real Estate		Collateral Type - Commercial Real Estate		Total Loans
Commercial	$	—	$	—	$	—
Commercial Real Estate	—		6,732		6,732
Consumer	—		—		—
Residential	673		—		673
Total	$	673	$	6,732	$	7,405


September 30, 2021	Collateral Type -Residential Real Estate		Collateral Type - Commercial Real Estate		Total Loans
Commercial	$	—	$	—	$	—
Commercial Real Estate	—		7,254		7,254
Consumer	—		—		—
Residential	676		—		676
Total	$	676	$	7,254	$	7,930


Allowance for Credit Losses - Collectively and Individually Evaluated
	Commercial		Commercial Real Estate		Consumer		Residential		Total
September 30, 2022
Ending Loan Balance - Collectively Evaluated	$	138,973	$	676,051	$	1,055,585	$	1,049,525	$	2,920,134
Allowance for Credit Losses - Loans Collectively Evaluated	2,005		14,866		2,521		9,840		29,232

Ending Loan Balance - Individually Evaluated	—		3,166		—		1,494		4,660
Allowance for Credit Losses - Loans Individually Evaluated	—		—		—		—		—

December 31, 2021
Ending Loan Balance - Collectively Evaluated	$	172,518	$	622,197	$	920,556	$	945,265	$	2,660,536
Allowance for Credit Losses - Loans Collectively Evaluated	2,298		12,537		2,402		9,445		$	26,682
Ending Loan Balance - Individually Evaluated	—		6,732		—		673		7,405
Allowance for Credit Losses - Loans Individually Evaluated	—		599		—		—		599

September 30, 2021
Ending Loan Balance - Collectively Evaluated	$	188,191	$	607,827	$	921,189	$	929,614	$	2,646,821
Allowance for Credit Losses - Loans Collectively Evaluated	2,424		13,055		2,288		8,573		26,340
Ending Loan Balance - Individually Evaluated	—		7,254		—		676		7,930
Allowance for Credit Losses - Loans Individually Evaluated	—		616		—		—		616

Through the provision for credit losses, an allowance for credit losses is maintained that reflects the best estimate of the calculated expected credit losses in ~~the Company’s~~Arrow's loan portfolio as of the balance sheet date. Additions are made to the allowance for credit losses through a periodic provision for credit losses. Actual credit losses are charged against the allowance for credit losses when loans are deemed uncollectible and recoveries of amounts previously charged off are recorded as credits to the allowance for credit losses.

Arrow's loan officers and risk managers meet at least quarterly to discuss and review the conditions and risks associated with certain criticized and classified commercial-related relationships. In addition, the independent internal loan review department performs periodic reviews of the credit quality indicators on individual loans in the commercial loan portfolio.

~~Management~~

Arrow considers the need to qualitatively adjust expected credit loss estimates for information not already captured in the loss estimation process. These qualitative factor adjustments may increase or decrease management’s estimate of expected credit losses. Adjustments are not made for information that has already been considered and included in the loss estimation process.

~~Management~~Arrow considers the qualitative factors that are relevant ~~to Arrow~~ as of the reporting date, which may include, but are not limited to the following factors:

•The nature and volume of Arrow's financial assets;

•The existence, growth, and effect of any concentrations of credit;

•The volume and severity of past due loans, the volume of nonaccrual loans, and the volume and severity of adversely classified or graded loans;

•The value of the underlying collateral for loans that are not collateral-dependent;

•Arrow's lending policies and procedures, including changes in underwriting standards and practices for collections, write-offs, and recoveries;

•The quality of Arrow's loan review function;

•The experience, ability, and depth of Arrow's lending, investment, collection, and other relevant management/staff;

•The effect of other external factors such as the regulatory, legal and technological environments; competition; and events such as natural disasters;

•Actual and expected changes in international, national, regional, and local economic and business conditions and developments in which the institution operates that affect the collectability of financial assets; and,

•Other qualitative factors not reflected in quantitative loss rate calculations.

2423

Loan Credit Quality Indicators

The following ~~table presents~~tables present credit quality indicators by total loans amortized cost basis by origination year as of September 30, ~~2021.~~2022, December 31, 2021 and September 30, 2021:


	Term Loans Amortized Cost Basis by Origination Year												Revolving Loans Amortized Cost Basis		Revolving Loan Converted to Term		Total
September 30, 2022	2022		2021		2020		2019		2018		Prior
Commercial:
Risk rating
Satisfactory	$	34,589	$	31,762	$	26,654	$	7,554	$	9,605	$	11,194	$	8,008	$	—	$	129,366
Special mention	—		—		—		—		—		35		35		—		70
Substandard	—		3,318		479		445		—		37		5,258		—		9,537
Doubtful	—		—		—		—		—		—		—		—		—
Total Commercial Loans	$	34,589	$	35,080	$	27,133	$	7,999	$	9,605	$	11,266	$	13,301	$	—	$	138,973

Commercial Real Estate:
Risk rating
Satisfactory	$	106,549	$	136,306	$	247,780	$	40,959	$	30,667	$	64,934	$	3,052	$	—	$	630,247
Special mention	9,801		—		2,973		—		4,315		1,425		—		—		18,514
Substandard	9,531		4,723		11,352		1,133		93		3,403		221		—		30,456
Doubtful	—		—		—		—		—		—		—		—		—
Total Commercial Real Estate Loans	$	125,881	$	141,029	$	262,105	$	42,092	$	35,075	$	69,762	$	3,273	$	—	$	679,217

Consumer:
Risk rating
Performing	$	406,206	$	309,006	$	172,974	$	101,458	$	47,874	$	15,933	$	483	$	—	$	1,053,934
Nonperforming	268		583		351		304		58		87		—		—		1,651
Total Consumer Loans	$	406,474	$	309,589	$	173,325	$	101,762	$	47,932	$	16,020	$	483	$	—	$	1,055,585

Residential:
Risk rating
Performing	$	163,702	$	209,408	$	173,435	$	84,370	$	61,907	$	232,021	$	122,191	$	—	$	1,047,034
Nonperforming	—		257		939		28		318		2,268		175		—		3,985
Total Residential Loans	$	163,702	$	209,665	$	174,374	$	84,398	$	62,225	$	234,289	$	122,366	$	—	$	1,051,019

Total Loans	$	730,646	$	695,363	$	636,937	$	236,251	$	154,837	$	331,337	$	139,423	$	—	$	2,924,794


	Term Loans Amortized Cost Basis by Origination Year												Revolving Loans Amortized Cost Basis		Revolving Loan Converted to Term		Total
December 31, 2021	2021		2020		2019		2018		2017		Prior
Commercial:
Risk rating
Satisfactory	$	75,615	$	35,522	$	11,591	$	11,661	$	7,792	$	3,442	$	12,783	$	—	$	158,406
Special mention	—		—		3		—		—		5,899		—		—		5,902
Substandard	3,541		3,791		589		—		25		12		252		—		8,210
Doubtful	—		—		—		—		—		—		—		—		—
Total Commercial Loans	$	79,156	$	39,313	$	12,183	$	11,661	$	7,817	$	9,353	$	13,035	$	—	$	172,518

Commercial Real Estate:
Risk rating
Satisfactory	$	140,636	$	276,461	$	42,369	$	37,997	$	22,155	$	59,698	$	1,923	$	—	$	581,239
Special mention	—		7,893		1,204		—		137		1,906		—		—		11,140
Substandard	7,248		16,405		3,910		96		—		8,867		24		—		36,550
Doubtful	—		—		—		—		—		—		—		—		—
Total Commercial Real Estate Loans	$	147,884	$	300,759	$	47,483	$	38,093	$	22,292	$	70,471	$	1,947	$	—	$	628,929

Consumer:
Risk rating
Performing	$	402,558	$	239,492	$	154,517	$	82,673	$	29,587	$	9,578	$	455	$	—	$	918,860
Nonperforming	388		399		502		151		160		96		—		—		1,696
Total Consumer Loans	$	402,946	$	239,891	$	155,019	$	82,824	$	29,747	$	9,674	$	455	$	—	$	920,556

Residential:
Risk rating
Performing	$	187,708	$	146,113	$	93,547	$	88,505	$	93,524	$	215,679	$	118,595	$	—	$	943,671
Nonperforming	—		133		—		27		162		1,907		38		—		2,267
Total Residential Loans	$	187,708	$	146,246	$	93,547	$	88,532	$	93,686��	$	217,586	$	118,633	$	—	$	945,938

Total Loans	$	817,694	$	726,209	$	308,232	$	221,110	$	153,542	$	307,084	$	134,070	$	—	$	2,667,941


	Term Loans Amortized Cost Basis by Origination Year												Revolving Loans Amortized Cost Basis		Revolving Loan Converted to Term		Total
September 30, 2021	2021		2020		2019		2018		2017		Prior
Commercial:
Risk rating
Satisfactory	$	81,914	$	38,970	$	13,966	$	12,860	$	8,511	$	3,917	$	12,796	$	—	$	172,934
Special mention	—		652		51		—		—		5,499		—		—		6,202
Substandard	3,575		4,496		636		—		31		295		22		—		9,055
Doubtful	—		—		—		—		—		—		—		—		—
Total Commercial Loans	$	85,489	$	44,118	$	14,653	$	12,860	$	8,542	$	9,711	$	12,818	$	—	$	188,191

Commercial Real Estate:
Risk rating
Satisfactory	$	96,419	$	290,785	$	47,605	$	41,215	$	22,661	$	62,203	$	2,935	$	—	$	563,823
Special mention	—		16,829		1,227		—		139		1,976		—		—		20,171
Substandard	7,248		10,359		3,950		146		—		9,384		—		—		31,087
Doubtful	—		—		—		—		—		—		—		—		—
Total Commercial Real Estate Loans	$	103,667	$	317,973	$	52,782	$	41,361	$	22,800	$	73,563	$	2,935	$	—	$	615,081

Consumer:
Risk rating
Performing	$	330,952	$	264,963	$	175,448	$	97,563	$	37,112	$	13,572	$	477	$	—	$	920,087
Nonperforming	203		319		332		160		30		58		—		—		1,102
Total Consumer Loans	$	331,155	$	265,282	$	175,780	$	97,723	$	37,142	$	13,630	$	477	$	—	$	921,189

Residential:
Risk rating
Performing	$	124,536	$	154,071	$	101,678	$	94,621	$	97,457	$	231,375	$	124,231	$	—	$	927,969
Nonperforming	—		336		—		155		213		1,586		31		—		2,321
Total Residential Loans	$	124,536	$	154,407	$	101,678	$	94,776	$	97,670	$	232,961	$	124,262	$	—	$	930,290

Total Loans	$	644,847	$	781,780	$	344,893	$	246,720	$	166,154	$	329,865	$	140,492	$	—	$	2,654,751

For the purposes of the table above, nonperforming consumer and residential loans were those loans on nonaccrual status or ~~are~~were 90 days or more past due and still accruing interest.

The recorded investment of consumer mortgage loans secured by residential real estate properties for which formal foreclosure proceedings are in process is ~~$1.3~~$2.2 million.

For the allowance calculation, an internally developed system of five credit quality indicators is used to rate the credit worthiness of each commercial loan defined as follows:

1) Satisfactory - "Satisfactory" borrowers have acceptable financial condition with satisfactory record of earnings and sufficient historical and projected cash flow to service the debt. Borrowers have satisfactory repayment histories and primary and secondary sources of repayment can be clearly identified;

2) Special Mention - Loans in this category have potential weaknesses that deserve management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the asset or in the institution’s credit position at some future date. "Special mention" assets are not adversely classified and do not expose an institution to sufficient risk to warrant adverse classification. Loans which might be assigned this credit quality indicator include loans to borrowers with deteriorating financial strength and/or earnings record and loans with potential for problems due to weakening economic or market conditions;

3) Substandard - Loans classified as “substandard” are inadequately protected by the current sound net worth or paying capacity of the borrower or the collateral pledged, if any. Loans in this category have well defined weaknesses that jeopardize the repayment. They are characterized by the distinct possibility that ~~the Company~~Arrow will sustain some loss if the deficiencies are not corrected. “Substandard” loans may include loans which are likely to require liquidation of collateral to effect repayment, and other loans where

character or ability to repay has become suspect. Loss potential, while existing in the aggregate amount of substandard assets, does not have to exist in individual assets classified substandard;

4) Doubtful - Loans classified as “doubtful” have all of the weaknesses inherent in those classified as “substandard” with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of current existing facts, conditions, and values, highly questionable and improbable. Although possibility of loss is extremely high, classification of these loans as “loss” has been deferred due to specific pending factors or events which may strengthen the value (e.g. possibility of additional collateral, injection of

capital, collateral liquidation, debt restructure, economic recovery, etc). Loans classified as “doubtful” need to be placed on non-accrual; and,

5) Loss - Loans classified as “loss” are considered uncollectible with collateral of such little value that their continuance as bankable assets is not warranted. As of the date of the balance sheet, all loans in this category have been charged-off to the allowance for loan losses.

Commercial loans are generally evaluated on an annual basis depending on the size and complexity of the loan relationship, unless the credit related quality indicator falls to a level of "special mention" or below, when the loan is evaluated quarterly. The credit quality indicator is one of the factors used in assessing the level of incurred risk of loss in our commercial related loan portfolios.

The following table presents information pertaining to loan credit quality indicators as of December 31, 2020 and September 30, 2020, as determined in accordance with ASC 310, prior to the adoption of ASU 2016-13:

Loan Credit Quality Indicators
Commercial
Commercial Real Estate Consumer Residential Total
December 31, 2020
Credit Risk Profile by Creditworthiness Category:
Satisfactory $ 229,351 $ 525,609 $ 754,960
Special Mention 1,574 16,213 17,787
Substandard 9,629 29,965 39,594
Doubtful — — —
Performing $ 858,298 $ 919,867 $ 1,778,165
Nonperforming 1,470 3,054 4,524
September 30, 2020
Credit Risk Profile by Creditworthiness Category:
Satisfactory $ 264,094 $ 493,982 $ 758,076
Special Mention 1,485 12,620 14,105
Substandard 10,342 34,631 44,973
Doubtful — — —
Credit Risk Profile Based on Payment Activity:
Performing $ 847,967 $ 922,756 $ 1,770,723
Nonperforming 1,559 3,019 4,578

I~~mpaired Loans~~

The following table presents information on impaired loans as of December 31, 2020 and September 30, 2020 based on whether the impaired loan has a recorded related allowance or has no recorded related allowance, as determined in accordance with ASC 310, prior to the adoption of ASU 2016-13:

Impaired Loans
Commercial
Commercial Real Estate Consumer Residential Total
December 31, 2020
Recorded Investment:
With No Related Allowance $ — $ 1,124 $ 112 $ 1,174 $ 2,410
With a Related Allowance 46 — — 244 290
Unpaid Principal Balance:
With No Related Allowance — 1,128 111 1,174 2,413
With a Related Allowance 47 — — 244 291
September 30, 2020
Recorded Investment:
With No Related Allowance $ — $ 1,124 $ 124 $ 1,178 $ 2,426
With a Related Allowance 46 — — 249 295
Unpaid Principal Balance:
With No Related Allowance — 1,128 124 1,178 $ 2,430
With a Related Allowance 47 — — 249 296
September 30, 2020
Average Recorded Balance:
With No Related Allowance $ 2 $ 1,127 $ 120 $ 938 $ 2,187
With a Related Allowance 46 — — 253 299
Interest Income Recognized:
With No Related Allowance — — — — —
With a Related Allowance — — — — —
Cash Basis Income:
With No Related Allowance — — — — —
With a Related Allowance — — — — —

At December 31, 2020 and September 30, 2020, all impaired loans were considered to be collateral dependent and were therefore evaluated for impairment based on the fair value of collateral less estimated cost to sell. Interest income recognized in the table above represents income earned after the loan became impaired and includes restructured loans in compliance with their modified terms and nonaccrual loans where interest income was recognized on a cash basis.

Loans Modified in Trouble Debt Restructurings

The following table presents information on loans modified in trouble debt restructurings during the periods ~~indicated.~~indicated:

Loans Modified in Trouble Debt Restructurings During the Period
Commercial
Commercial Real Estate Consumer Residential Total
For the Quarter Ended:
September 30, 2021
Number of Loans — — — — —
Pre-Modification Outstanding Recorded Investment $ — $ — $ — $ — $ —
Post-Modification Outstanding Recorded Investment — — — — —
Subsequent Default, Number of Contracts — — — — —
Subsequent Default, Recorded Investment — — — — —
September 30, 2020
Number of Loans — — — — —
Pre-Modification Outstanding Recorded Investment $ — $ — $ — $ — $ —
Post-Modification Outstanding Recorded Investment — — — — —
Subsequent Default, Number of Contracts — — — — —
Subsequent Default, Recorded Investment — — — — —
For the Year-To-Date Period Ended:
September 30, 2021
Number of Loans — — — — —
Pre-Modification Outstanding Recorded Investment $ — $ — $ — $ — $ —
Post-Modification Outstanding Recorded Investment — — — — —
Subsequent Default, Number of Contracts — — — — —
Subsequent Default, Recorded Investment — — — — —
September 30, 2020
Number of Loans — — 2 — 2
Pre-Modification Outstanding Recorded Investment $ — $ — $ 32 $ — $ 32
Post-Modification Outstanding Recorded Investment — — 32 — 32
Subsequent Default, Number of Contracts — — — — —
Subsequent Default, Recorded Investment — — — — —

Loans Modified in Trouble Debt Restructurings During the Period

Commercial

Real Estate

Consumer

Residential

Total

For the Quarter Ended:

September 30, 2022

Number of Loans

—

Pre-Modification Outstanding Recorded Investment

—

Post-Modification Outstanding Recorded Investment

—

Subsequent Default, Number of Contracts

—

Subsequent Default, Recorded Investment

—

September 30, 2021

Number of Loans

—

Pre-Modification Outstanding Recorded Investment

—

Post-Modification Outstanding Recorded Investment

—

Subsequent Default, Number of Contracts

—

Subsequent Default, Recorded Investment

—

In general, prior to the ~~novel coronavirus (COVID-19)~~ COVID-19 pandemic, loans requiring modification ~~are~~were restructured to accommodate the projected cash-flows of the borrower. Such modifications may involve a reduction of the interest rate, a significant deferral of payments or forgiveness of a portion of the outstanding principal balance. As indicated in the table above, no loans modified during the preceding twelve months subsequently defaulted as of September 30, 2021. The Consolidated Appropriations Act, 2021 extended certain provisions of the CARES Act including, if a short-term loan modification (e.g. six months) is made for a borrower as the result of the COVID-19 pandemic, and who was current on contractual payments as of December 31, 2019, this modification is not considered a TDR.2022.

Note 5. COMMITMENTS AND CONTINGENCIES (In Thousands)

The following table presents the notional amount and fair value of Arrow's off-balance sheet commitments to extend credit and commitments under standby letters of credit as of September 30, ~~2021,~~2022, December 31, ~~2020~~2021 and September 30, ~~2020:~~2021:


Commitments to Extend Credit and Letters of Credit	Commitments to Extend Credit and Letters of Credit							Commitments to Extend Credit and Letters of Credit
		September 30, 2021		December 31, 2020		September 30, 2020			September 30, 2022		December 31, 2021		September 30, 2021
Notional Amount:	Notional Amount:							Notional Amount:
Commitments to Extend Credit	Commitments to Extend Credit	$	431,452	$	399,882	$	364,861	Commitments to Extend Credit	$	440,167	$	402,280	$	431,452
Standby Letters of Credit	Standby Letters of Credit	3,392		3,703		3,330		Standby Letters of Credit	3,445		3,223		3,392
Fair Value:	Fair Value:							Fair Value:
Commitments to Extend Credit	Commitments to Extend Credit	$	—	$	—	$	—	Commitments to Extend Credit	$	—	$	—	$	—
Standby Letters of Credit	Standby Letters of Credit	21		28		30		Standby Letters of Credit	—		24		21

Arrow is party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit. Commitments to extend credit include home equity lines of credit, commitments for residential and commercial construction loans and other personal and commercial lines of credit. Those instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the consolidated balance sheets. The contract or notional amounts of those instruments reflect the extent of the involvement Arrow has in particular classes of financial instruments.

Arrow's exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby letters of credit is represented by the contractual notional amount of those instruments. Arrow uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments.

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are not expected to be fully drawn upon, the total commitment amounts do not necessarily represent future cash requirements. Arrow evaluates each customer's creditworthiness on a case-by-case basis. Home equity lines of credit are secured by residential real estate. Construction lines of credit are secured by underlying real estate. For other lines of credit, the amount of collateral obtained, if deemed necessary by Arrow upon extension of credit, is based on management's credit evaluation of the counterparty. Collateral held varies, but may include accounts receivable, inventory, property, plant and equipment, and income-producing commercial properties. Most of the commitments are variable rate instruments.

Arrow does not issue any guarantees that would require liability-recognition or disclosure, other than its standby letters of credit. Arrow has issued conditional commitments in the form of standby letters of credit to guarantee payment on behalf of a customer and guarantee the performance of a customer to a third party. Standby letters of credit generally arise in connection with commercial lending relationships. The credit risk involved in issuing these instruments is essentially the same as that involved in extending loans to customers. Contingent obligations under standby letters of credit at September 30, ~~2021,~~2022, December 31, ~~2020~~2021 and September 30, ~~2020~~2021 represent the maximum potential future payments Arrow could be required to make. Typically, these instruments have terms of 12 months or less and expire unused; therefore, the total amounts do not necessarily represent future cash requirements. Each customer is evaluated individually for creditworthiness under the same underwriting standards used for commitments to extend credit and on-balance sheet instruments. ~~Company~~Arrow's policies governing loan collateral apply to standby letters of credit at the time of credit extension. Loan-to-value ratios will generally range from 50% for movable assets, such as inventory, to 100% for liquid assets, such as bank CD's. Fees for standby letters of credit range from 1% to 3% of the notional amount. Fees are collected upfront and amortized over the life of the commitment. The carrying amount and fair value of Arrow's standby letters of credit at September 30, ~~2021,~~2022, December 31, ~~2020~~2021 and September 30, ~~2020,~~2021, were insignificant. The fair value of standby letters of credit is based on the fees currently charged for similar agreements or the cost to terminate the arrangement with the counterparties.

The fair value of commitments to extend credit is determined by estimating the fees to enter into similar agreements, taking into account the remaining terms and present creditworthiness of the counterparties, and for fixed rate loan commitments, the difference between the current and committed interest rates. Arrow provides several types of commercial lines of credit and standby letters of credit to its commercial customers. The pricing of these services is not isolated as Arrow considers the customer's complete deposit and borrowing relationship in pricing individual products and services. The commitments to extend credit also include commitments under home equity lines of credit, for which Arrow charges no fee. The carrying value and fair value of commitments to extend credit are not material and Arrow does not expect to incur any material loss as a result of these commitments.

In the normal course of business, Arrow and its subsidiary banks become involved in a variety of routine legal proceedings. At present, there are no legal proceedings pending or threatened, which in the opinion of management and counsel, would result in a material loss to Arrow, except as noted below.

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

2928

~~institutions pertaining to overdraft fees. Arrow denies any wrongdoing. The parties engaged in an initial mediation session in September 2021. Settlement discussions are ongoing.~~

Note 6. COMPREHENSIVE (LOSS) INCOME ~~(LOSS)~~ (In Thousands)

The following table presents the components of other comprehensive (loss) income ~~(loss)~~ for the three and nine month periods ended September 30, ~~2021~~2022 and ~~2020:~~2021:


Schedule of Comprehensive (Loss) Income	Schedule of Comprehensive (Loss) Income													Schedule of Comprehensive (Loss) Income
		Three Months Ended September 30						Nine Months Ended September 30,							Three Months Ended September 30,						Nine Months Ended September 30,
				Tax						Tax							Tax						Tax
		Before-Tax		(Expense)		Net-of-Tax		Before-Tax		Benefit		Net-of-Tax			Before-Tax		Benefit		Net-of-Tax		Before-Tax		Benefit		Net-of-Tax
		Amount		Benefit		Amount		Amount		(Expense)		Amount			Amount		(Expense)		Amount		Amount		(Expense)		Amount
2021
2022														2022
Net Unrealized Securities Holding Loss on Securities Available-for-Sale Arising During the Period	Net Unrealized Securities Holding Loss on Securities Available-for-Sale Arising During the Period	$	(1,719)	$	440	$	(1,279)	$	(5,333)	$	1,364	$	(3,969)	Net Unrealized Securities Holding Loss on Securities Available-for-Sale Arising During the Period	$	(27,945)	$	7,144	$	(20,801)	$	(70,945)	$	18,137	$	(52,808)
Net Unrealized Gain on Cash Flow Swap	Net Unrealized Gain on Cash Flow Swap	245		(62)		183		1,281		(327)		954		Net Unrealized Gain on Cash Flow Swap	1,046		(268)		778		3,737		(956)		2,781

Reclassification of Net Unrealized Gain on Cash Flow Hedge Agreements to Interest Expense	Reclassification of Net Unrealized Gain on Cash Flow Hedge Agreements to Interest Expense	(34)		9		(25)		(92)		24		(68)		Reclassification of Net Unrealized Gain on Cash Flow Hedge Agreements to Interest Expense	75		(20)		55		57		(15)		42
Amortization of Net Retirement Plan Actuarial Loss	Amortization of Net Retirement Plan Actuarial Loss	22		(5)		17		68		(17)		51		Amortization of Net Retirement Plan Actuarial Loss	564		(144)		420		592		(151)		441
Amortization of Net Retirement Plan Prior Service Cost	Amortization of Net Retirement Plan Prior Service Cost	59		(16)		43		175		(46)		129		Amortization of Net Retirement Plan Prior Service Cost	57		(15)		42		171		(44)		127
Other Comprehensive Loss	Other Comprehensive Loss	$	(1,427)	$	366	$	(1,061)	$	(3,901)	$	998	$	(2,903)	Other Comprehensive Loss	$	(26,203)	$	6,697	$	(19,506)	$	(66,388)	$	16,971	$	(49,417)

2020
Net Unrealized Securities Holding (Loss) Gain on Securities Available-for-Sale Arising During the Period		$	(397)	$	101	$	(296)	$	7,823	$	(2,000)	$	5,823
2021														2021
Net Unrealized Securities Holding Loss on Securities Available-for-Sale Arising During the Period														Net Unrealized Securities Holding Loss on Securities Available-for-Sale Arising During the Period	$	(1,719)	$	440	$	(1,279)	$	(5,333)	$	1,364	$	(3,969)
Net Unrealized Gain on Cash Flow Swap	Net Unrealized Gain on Cash Flow Swap	317		(79)		238		48		(11)		37		Net Unrealized Gain on Cash Flow Swap	245		(62)		183		1,281		(327)		954
Reclassification of Net Unrealized Gain on Cash Flow Hedge Agreements to Interest Expense														Reclassification of Net Unrealized Gain on Cash Flow Hedge Agreements to Interest Expense	(34)		9		(25)		(92)		24		(68)

Amortization of Net Retirement Plan Actuarial Loss	Amortization of Net Retirement Plan Actuarial Loss	57		(15)		42		171		(44)		127		Amortization of Net Retirement Plan Actuarial Loss	22		(5)		17		68		(17)		51
Amortization of Net Retirement Plan Prior Service Cost	Amortization of Net Retirement Plan Prior Service Cost	53		(14)		39		159		(42)		117		Amortization of Net Retirement Plan Prior Service Cost	59		(16)		43		175		(46)		129
Other Comprehensive Income		$	30	$	(7)	$	23	$	8,201	$	(2,097)	$	6,104
Other Comprehensive Loss														Other Comprehensive Loss	$	(1,427)	$	366	$	(1,061)	$	(3,901)	$	998	$	(2,903)

The following table presents the changes in accumulated other comprehensive (loss) income by component:


Changes in Accumulated Other Comprehensive (Loss) Income by Component (1)

	Unrealized (Loss) and Gain on Available-for-Sale Securities		Unrealized Gain on Cash Flow Swap		Defined Benefit Plan Items				Total
					Net Actuarial Loss		Net Prior Service Cost


For the Quarter-To-Date periods ended:
June 30, 2022	$	(32,621)	$	3,310	$	660	$	(913)	$	(29,564)
Other comprehensive income or loss before reclassifications	(20,801)		778		—		—		(20,023)
Amounts reclassified from accumulated other comprehensive income or loss	—		55		420		42		517
Net current-period other comprehensive income or loss	(20,801)		833		420		42		(19,506)

September 30, 2022	$	(53,422)	$	4,143	$	1,080	$	(871)	$	(49,070)

June 30, 2021	$	3,109	$	1,213	$	(5,895)	$	(1,085)	$	(2,658)
Other comprehensive income or loss before reclassifications	(1,279)		183		—		—		(1,096)
Amounts reclassified from accumulated other comprehensive income or loss	—		(25)		17		43		35
Net current-period other comprehensive income or loss	(1,279)		158		17		43		(1,061)

September 30, 2021	$	1,830	$	1,371	$	(5,878)	$	(1,042)	$	(3,719)


For the Year-To-Date periods ended:

December 31, 2021	$	(614)	$	1,320	$	639	$	(998)	$	347
Other comprehensive income or loss before reclassifications	(52,808)		2,781		—		—		(50,027)
Amounts reclassified from accumulated other comprehensive income or loss	—		42		441		127		610
Net current-period other comprehensive income or loss	(52,808)		2,823		441		127		(49,417)

September 30, 2022	$	(53,422)	$	4,143	$	1,080	$	(871)	$	(49,070)

December 31, 2020	$	5,799	$	485	$	(5,929)	$	(1,171)	$	(816)
Other comprehensive income or loss before reclassifications	(3,969)		954		—		—		(3,015)
Amounts reclassified from accumulated other comprehensive income	—		(68)		51		129		112
Net current-period other comprehensive income or loss	(3,969)		886		51		129		(2,903)

September 30, 2021	$	1,830	$	1,371	$	(5,878)	$	(1,042)	$	(3,719)

(1) All amounts are net of tax.

The following table presents the ~~changes in accumulated other comprehensive income (loss) by component:~~

Changes in Accumulated Other Comprehensive Income (Loss) by Component (1)
Unrealized (Loss) and Gain on Available-for-Sale Securities Unrealized Gain (Loss) on Cash Flow Swap Defined Benefit Plan Items Total
Net Actuarial Loss Net Prior Service Cost
For the Quarter-To-Date periods ended:
June 30, 2021 $ 3,109 $ 1,213 $ (5,895) $ (1,085) $ (2,658)
Other comprehensive income or loss before reclassifications (1,279) 183 — — (1,096)
Amounts reclassified from accumulated other comprehensive income — (25) 17 43 35
Net current-period other comprehensive income (1,279) 158 17 43 (1,061)
September 30, 2021 $ 1,830 $ 1,371 $ (5,878) $ (1,042) $ (3,719)
June 30, 2020 $ 6,584 $ (201) $ (5,762) $ (897) $ (276)
Other comprehensive income or loss before reclassifications (296) 238 — — (58)
Amounts reclassified from accumulated other comprehensive income — — 42 39 81
Net current-period other comprehensive income (296) 238 42 39 23
September 30, 2020 $ 6,288 $ 37 $ (5,720) $ (858) $ (253)
For the Year-To-Date periods ended:
December 31, 2020 $ 5,799 $ 485 $ (5,929) $ (1,171) $ (816)
Other comprehensive income or loss before reclassifications (3,969) 954 — — (3,015)
Amounts reclassified from accumulated other comprehensive income — (68) 51 129 112
Net current-period other comprehensive income (3,969) 886 51 129 (2,903)
September 30, 2021 $ 1,830 $ 1,371 $ (5,878) $ (1,042) $ (3,719)
December 31, 2019 $ 465 $ — $ (5,847) $ (975) $ (6,357)
Other comprehensive income or loss before reclassifications 5,823 37 — — 5,860
Amounts reclassified from accumulated other comprehensive income — — 127 117 244
Net current-period other comprehensive income 5,823 37 127 117 6,104
September 30, 2020 $ 6,288 $ 37 $ (5,720) $ (858) $ (253)

~~(1) All amounts are net of tax.~~

~~The following table presents the~~ reclassifications out of accumulated other comprehensive income ~~(loss):~~or loss:

Reclassifications Out of Accumulated Other Comprehensive Income (Loss)

Reclassifications Out of Accumulated Other Comprehensive Income or Loss

Details about Accumulated Other Comprehensive Income (Loss) Components

Amounts Reclassified from Accumulated Other Comprehensive Income (Loss)

Affected Line Item in the Statement Where Net Income Is Presented

Details about Accumulated Other Comprehensive Income or Loss Components

Amounts Reclassified from Accumulated Other Comprehensive Income or Loss

Affected Line Item in the Statement Where Net Income Is Presented

For the Quarter-to-date periods ended:

September 30, 2022

Reclassification of Net Unrealized Gain on Cash Flow Hedge Agreements to Interest Expense

(75)

Interest expense

Amortization of defined benefit pension items:

Prior-service costs

(57)

(1)

Salaries and Employee Benefits

Actuarial loss

(564)

(1)

Salaries and Employee Benefits

(696)

Total before Tax

179

Provision for Income Taxes

Total reclassifications for the period

(517)

Net of Tax

September 30, 2021

Reclassification of Net Unrealized Gain on Cash Flow Hedge Agreements to Interest Expense

Interest expense

Amortization of defined benefit pension items:

Prior-service costs

(59)

(1)

Salaries and Employee Benefits

Actuarial loss

(22)

(1)

Salaries and Employee Benefits

(47)

Total before Tax

Provision for Income Taxes

Total reclassifications for the period

(35)

Net of Tax

For the Year-to-date periods ended:

September 30, 2022

Reclassification of Net Unrealized Gain on Cash Flow Hedge Agreements to Interest Expense

(57)

Interest expense

Amortization of defined benefit pension items:

Prior-service costs

(171)

(1)

Salaries and Employee Benefits

Actuarial loss

(592)

(1)

Salaries and Employee Benefits

(820)

Total before Tax

210

Provision for Income Taxes

Total reclassifications for the period

(610)

Net of Tax

September 30, 2021

Reclassification of Net Unrealized Gain on Cash Flow Hedge Agreements to Interest Expense

Interest expense

Reclassification of Net Unrealized Gain on Cash Flow Hedge Agreements to Interest Expense

Interest expense

Amortization of defined benefit pension items:

Prior-service costs

(59)

(1)

Salaries and Employee Benefits

Prior-service costs

(175)

(1)

Salaries and Employee Benefits

Actuarial loss

(22)

(1)

Salaries and Employee Benefits

Actuarial loss

(68)

(1)

Salaries and Employee Benefits

(47)

Total before Tax

(151)

Total before Tax

Provision for Income Taxes

Total reclassifications for the period

(35)

Net of Tax

Total reclassifications for the period

(112)

Net of Tax

(1) These accumulated other comprehensive loss components are included in the computation of net periodic pension cost.

September 30, 2020

Amortization of defined benefit pension items:

Prior-service costs

(53)

(1)

Salaries and Employee Benefits

Actuarial loss

(57)

(1)

Salaries and Employee Benefits

(110)

Total before Tax

Provision for Income Taxes

Total reclassifications for the period

(81)

Net of Tax

For the Year-to-date periods ended:

September 30, 2021

Reclassification of Net Unrealized Gain on Cash Flow Hedge Agreements to Interest Expense

Amortization of defined benefit pension items:

Prior-service costs

(175)

(1)

Salaries and Employee Benefits

Actuarial loss

(68)

(1)

Salaries and Employee Benefits

(151)

Total before Tax

Provision for Income Taxes

Total reclassifications for the period

(112)

Net of Tax

Total reclassifications for the period

(112)

Net of Tax

September 30, 2020

Amortization of defined benefit pension items:

Prior-service costs

(159)

(1)

Salaries and Employee Benefits

Actuarial loss

(171)

(1)

Salaries and Employee Benefits

(330)

Total before Tax

Provision for Income Taxes

Total reclassifications for the period

(244)

Net of Tax

(1) These accumulated other comprehensive income (loss) components are included in the computation of net periodic pension cost.

3231

Note 7. STOCK-BASED COMPENSATION (Dollars In Thousands, Except Share and Per Share Amounts)

Arrow has established 3three stock-based compensation plans: a Long Term Incentive Plan, an Employee Stock Purchase Plan (ESPP) and an Employee Stock Ownership Plan (ESOP). All share and per share data have been adjusted for the September ~~24, 2021~~23, 2022 3% stock dividend.

Long Term Incentive Plan

The Long Term Incentive Plan provides for the grant of incentive stock options, non-qualified stock options, restricted stock, restricted stock units, performance units and performance shares. The Compensation Committee of the Board of Directors administers the Long Term Incentive Plan.

Stock Options - Options may be granted at a price no less than the greater of the par value or fair market value of such shares on the date on which such option is granted, and generally expire ten years from the date of grant. The options usually vest over a four-year period.

The following table summarizes information about stock option activity for the year to date period ended September 30, ~~2021.~~2022:

Shares Weighted Average Exercise Price
Outstanding at January 1, 2021 272,024 $ 28.00
Granted 57,165 28.69
Exercised (54,189) 28.81
Forfeited (1,580) 22.25
Outstanding at September 30, 2021 273,420 28.42
Vested at Period-End 140,690 26.77
Expected to Vest 132,730 30.16
Stock Options Granted
Weighted Average Grant Date Information:
Fair Value of Options Granted $ 4.71
Fair Value Assumptions:
Dividend Yield 3.41 %
Expected Volatility 26.53 %
Risk Free Interest Rate 0.49 %
Expected Lives (in years) 8.75


	Shares			Weighted Average Exercise Price

Outstanding at January 1, 2022	278,899			$	27.62
Granted	58,710			34.79
Exercised	(17,803)			20.56
Forfeited	(18,844)			30.71
Outstanding at September 30, 2022	300,962			29.24

Vested at Period-End	178,250			27.56
Expected to Vest	122,712			31.68

Stock Options Granted
Weighted Average Grant Date Information:
Fair Value of Options Granted	$	7.43
Fair Value Assumptions:
Dividend Yield	2.90		%
Expected Volatility	27.15		%
Risk Free Interest Rate	1.69		%
Expected Lives (in years)	8.56

The following table presents information on the amounts expensed related to stock options for the three and nine month periods ended September 30, ~~2021~~2022 and ~~2020:~~2021:

For the Three Months Ended September 30, For the Nine Months Ended September 30,
2021 2020 2021 2020
Amount expensed $ 71 $ 76 $ 212 $ 227


	For the Three Months Ended September 30,				For the Nine Months Ended September 30,
	2022		2021		2022		2021
Amount expensed	$	79	$	71	$	233	$	212

Restricted Stock Units - The Company grants restricted stock units which gives the recipient the right to receive shares of Company stock upon vesting. The fair value of each restricted stock unit is the market value of Company stock on the date of grant. 100% of the restricted stock unit awards vest three years from the grant date. Once vested, the restricted stock units become vested units and are no longer forfeitable. Vested units settle upon retirement of the recipient. Unvested restricted stock unit awards will generally be forfeited if the recipient ceases to be employed by the Company, with limited exceptions.

3332

The following table summarizes information about restricted stock unit activity for the periods ended September 30, ~~2021~~2022 and ~~2020.~~2021:


						Restricted Stock Units	Weighted Average Grant Date Fair Value
Non-vested at January 1, 2022					Non-vested at January 1, 2022	13,599	$	29.27
Granted					Granted	4,312	34.79
Vested					Vested	(4,391)	28.17

Non-vested at September 30, 2022					Non-vested at September 30, 2022	13,520	31.38
		Restricted Stock Units	Weighted Average Grant Date Fair Value
Non-vested at January 1, 2021	Non-vested at January 1, 2021	12,012	$	30.70	Non-vested at January 1, 2021	12,373	29.81
Granted	Granted	4,880	28.54		Granted	5,026	27.71
Vested	Vested	(3,689)	29.82		Vested	(3,800)	28.95

Non-vested at September 30, 2021	Non-vested at September 30, 2021	13,203	30.15		Non-vested at September 30, 2021	13,599	29.27

Non-vested at January 1, 2020		7,952	29.39
Granted		4,060	33.25

Non-vested at September 30, 2020		12,012	30.70

The following table presents information on the amounts expensed related to restricted stock units for the periods ended September 30, ~~2021~~2022 and ~~2020:~~2021:

For the Three Months Ended September 30, For the Nine Months Ended September 30,
2021 2020 2021 2020
Amount expensed $ 32 $ 30 $ 98 $ 88


	For the Three Months Ended September 30,				For the Nine Months Ended September 30,
	2022		2021		2022		2021
Amount expensed	$	35	$	32	$	105	$	98

Employee Stock Purchase Plan

Arrow sponsors an ESPP under which employees may purchase Arrow's common stock at a discount below market price. The current amount of the discount is 5%. Under current accounting guidance, a stock purchase plan with a discount of 5% or less is not considered a compensatory plan.

Employee Stock Ownership Plan

Arrow maintains an ESOP, pursuant to which substantially all employees of Arrow and its subsidiaries are eligible to participate upon satisfaction of applicable service requirements. The Company makes cash contributions to the ESOP each year.

3433

Note 8. RETIREMENT BENEFIT PLANS (Dollars in Thousands)

Arrow sponsors qualified and non-qualified defined benefit pension plans and other postretirement benefit plans for its employees. Arrow maintains a non-contributory pension plan, which covers substantially all employees. Effective December 1, 2002, all active participants in the qualified defined benefit pension plan were given a one-time irrevocable election to continue participating in the traditional plan design, for which benefits were based on years of service and the participant’s final compensation (as defined), or to begin participating in the new cash balance plan design. All employees who first participate in the plan after December 1, 2002 automatically participate in the cash balance plan design. The interest credits under the cash balance plan are based on the 30-year U.S. Treasury rate in effect for November of the prior year with a minimum interest credit of 3%. The service credits under the cash balance plan are equal to 6.0% of eligible salaries for employees who become participants on or after January 1, 2003. For employees in the plan prior to January 1, 2003, the service credits are scaled based on the age of the participant, and range from 6.0% to 12.0%. The funding policy is to contribute up to the maximum amount that can be deducted for federal income tax purposes and to make all payments required under The Employee Retirement Income Security Act (ERISA). Arrow also maintains a supplemental non-qualified unfunded retirement plan to provide eligible employees of Arrow and its subsidiaries with benefits in excess of qualified plan limits imposed by federal tax law.

Arrow has multiple non-pension postretirement benefit plans. The health care, dental and life insurance plans are contributory, with participants’ contributions adjusted annually. Arrow’s policy is to fund the cost of postretirement benefits based on the current cost of the underlying policies. However, the health care plan provision allows for grandfathered participants to receive automatic increases of Company contributions each year based on the increase in inflation, limited to a maximum of 5%.

As of December 31, ~~2020,~~2021, Arrow ~~used~~began using the sex-distinct amount-weighted Pri-2012 mortality tables for employees, healthy annuitants and contingent survivors, adjusted for mortality improvements with the Scale ~~MP-2020~~MP-2021 mortality improvement scale on a generational basis for the Pension Plan and the sex-distinct amount-weighted White Collar tables for employees, ~~and~~ healthy annuitants and contingent survivors, adjusted for mortality improvements with the scale ~~MP-2020~~MP-2021 mortality improvement scale on a generational basis for the Select Executive Retirement Plan. As of December 31, ~~2020,~~2021, Arrow ~~updated its mortality assumption used for the Postretirement Plan to~~began using the sex-distinct Pri.H-2012 headcount-weighted mortality tables for employees and healthy annuitants, adjusted for mortality improvements with the Scale ~~MP-2020~~MP-2021 mortality improvement scale on a generational basis. ~~The change in mortality tables resulted in a decrease in liabilities for the Employees' Pension Plan, the Select Executive Retirement Plan and the Postretirement Benefit Plan.~~

~~The~~Segment interest rates of 1.02%, 2.72%, 3.08% were used in determining the present value of a lump sum payment/annuitizing cash balance accounts ~~were changed to the segment rates in effect~~ for the 2021 plan year.

Effective January 1, ~~2020 plan year (0.53%, 2.31%, 3.09%) as of December 31, 2020.~~

~~The~~2021, Glens Falls National amended the Arrow Financial Corporation Employees' Pension Plan ~~was amended effective January 1, 2021.~~(the "Plan"). The ~~plan~~Plan change was adopted January 1, 2021 and the amendment was valued as of December 31, 2020. The ~~plan~~Plan amendment ~~included the following:~~was as follows:

Effective January 1, 2021, the benefit payable to or on behalf of each participant:

• whose employment with the ~~employer~~Employer (or any predecessor ~~employer,~~Employer, except as noted below) terminated on or before
January 1, 2016;

• who satisfied the requirements for early, normal, or late retirement as of such termination;

• who never participated in the United Vermont Bancorporation ~~Plan and;~~Plan; and

• who is, or whose beneficiary is, receiving monthly benefit payments from the Plan as of January 1, 2021 (including a
participant or beneficiary who shall commence receiving benefits from the Plan as of January 1, 2021), shall be increased
by ~~three percent (3%)~~3%.

The foregoing increase was applied to the monthly benefit actually payable to the participant, or to the participant's beneficiary, as of January 1, 2021, determined after all applicable adjustments, regardless of whether such benefit had been determined under the Company's plan or the plan of a predecessor employer that had been merged into the Plan.

The plan amendment caused a $351,638 increase in the projected benefit obligation creating a positive service cost which will be amortized over 9.70 years (the average expected future service of active plan participants.)

~~The~~Effective January 1, 2021, Glens Falls National amended the Arrow Financial Corporation Employees' Select Executive Retirement ~~Plan was amended effective January 1, 2021.~~Plan. The plan change was adopted January 1, 2021 and the amendment was valued as of December 31, 2020. The plan amendment provides a special adjustment to the monthly benefit payment for certain retirees. The plan amendment caused a $122,797 increase in the projected benefit obligation creating a positive prior service cost which will be amortized over 12.5 years.

Settlement accounting is required when lump sum payments during a fiscal year exceed that fiscal year's Service Cost plus Interest Cost components of the Net Periodic Pension Cost. For 2022, the sum of the Service Cost and Interest Cost is expected to be $3,316,118 and the total lump sum payments through September 30, 2022 have exceeded that amount. The Plan must therefore recognize in the 2022 Net Periodic Pension Cost a portion of the Unamortized Net (Gain)/Loss equal to the ratio of the projected benefit obligation for the participants that received a lump sum to the total projected benefit obligation. As of December 31, 2022, the Unamortized Net (Gain)/Loss prior to reflecting settlement accounting is projected to be approximately $7,000,000. The ratio of the projected benefit obligation for participants that received a lump sum to the total projected benefit obligation is 7.91%. The effect of the settlement that must be recognized in the 2022 Net Periodic Pension Cost is estimated at September 30, 2022 to be $550,000, which has been fully reflected in the Net Periodic Cost for the quarter ended September 30, 2022 .

The following tables provide the components of net periodic benefit costs for the ~~three-~~three and nine-month periods ended September 30, ~~2021~~2022 and ~~2020.~~2021:

Employees' Select Executive Postretirement
Pension Retirement Benefit
Plan Plan Plans
Net Periodic (Benefit) Cost
For the Three Months Ended September 30, 2021:
Service Cost 1
$ 484 $ 146 $ 27
Interest Cost 2
340 48 62
Expected Return on Plan Assets 2
(945) — —
Amortization of Prior Service Cost 2
20 12 27
Amortization of Net Loss (Gain) 2
— 44 (22)
Net Periodic (Benefit) Cost $ (101) $ 250 $ 94
Plan Contributions During the Period $ — $ 118 $ 32


	Employees'		Select Executive		Postretirement
	Pension		Retirement		Benefit
	Plan		Plan		Plans
Net Periodic Cost
For the Three Months Ended September 30, 2022:
Service Cost 1	$	469	$	208	$	23
Interest Cost 2	360		57		61

3534


For the Three Months Ended September 30, 2020:
Expected Return on Plan Assets 2								Expected Return on Plan Assets 2	(1,078)		—		—
Amortization of Prior Service Cost 2								Amortization of Prior Service Cost 2	19		11		27
Amortization of Net Loss (Gain) 2								Amortization of Net Loss (Gain) 2	550		53		(39)
Net Periodic Cost								Net Periodic Cost	$	320	$	329	$	72

Plan Contributions During the Period								Plan Contributions During the Period	$	—	$	116	$	43

For the Three Months Ended September 30, 2021:								For the Three Months Ended September 30, 2021:
Service Cost 1	Service Cost 1	$	416	$	102	$	30	Service Cost 1	$	484	$	146	$	27
Interest Cost 2	Interest Cost 2	387		48		78		Interest Cost 2	340		48		62
Expected Return on Plan Assets 2	Expected Return on Plan Assets 2	(902)		—		—		Expected Return on Plan Assets 2	(945)		—		—
Amortization of Prior Service Cost 2	Amortization of Prior Service Cost 2	15		11		27		Amortization of Prior Service Cost 2	20		12		27
Amortization of Net Loss 2		20		37		—
Amortization of Net Loss (Gain) 2								Amortization of Net Loss (Gain) 2	—		44		(22)
Net Periodic (Benefit) Cost	Net Periodic (Benefit) Cost	$	(64)	$	198	$	135	Net Periodic (Benefit) Cost	$	(101)	$	250	$	94

Plan Contributions During the Period	Plan Contributions During the Period	$	—	$	116	$	54	Plan Contributions During the Period	$	—	$	118	$	32

Net Periodic Benefit Cost	Net Periodic Benefit Cost							Net Periodic Benefit Cost
For the Nine Months Ended September 30, 2021:
For the Nine Months Ended September 30, 2022:								For the Nine Months Ended September 30, 2022:
Service Cost 1	Service Cost 1	$	1,451	$	437	$	82	Service Cost 1	$	1,408	$	626	$	68
Interest Cost 2	Interest Cost 2	1,023		143		186		Interest Cost 2	1,079		169		185
Expected Return on Plan Assets 2	Expected Return on Plan Assets 2	(2,835)		—		—		Expected Return on Plan Assets 2	(3,235)		—		—
Amortization of Prior Service Cost 2	Amortization of Prior Service Cost 2	59		36		80		Amortization of Prior Service Cost 2	58		33		80
Amortization of Net Loss (Gain) 2	Amortization of Net Loss (Gain) 2	—		134		(66)		Amortization of Net Loss (Gain) 2	550		159		(117)
Net Periodic (Benefit) Cost	Net Periodic (Benefit) Cost	$	(302)	$	750	$	282	Net Periodic (Benefit) Cost	$	(140)	$	987	$	216

Plan Contributions During the Period	Plan Contributions During the Period	$	—	$	354	$	87	Plan Contributions During the Period	$	—	$	347	$	131

Estimated Future Contributions in the Current Fiscal Year	Estimated Future Contributions in the Current Fiscal Year	$	—	$	118	$	32	Estimated Future Contributions in the Current Fiscal Year	$	—	$	116	$	43

For the Nine Months Ended September 30, 2020:
For the Nine Months Ended September 30, 2021:								For the Nine Months Ended September 30, 2021:
Service Cost 1	Service Cost 1	$	1,247	$	306	$	92	Service Cost 1	$	1,451	$	437	$	82
Interest Cost 2	Interest Cost 2	1,159		144		233		Interest Cost 2	1,023		143		186
Expected Return on Plan Assets 2	Expected Return on Plan Assets 2	(2,706)		—		—		Expected Return on Plan Assets 2	(2,835)		—		—
Amortization of Prior Service Cost 2	Amortization of Prior Service Cost 2	47		32		80		Amortization of Prior Service Cost 2	59		36		80
Amortization of Net Loss 2		61		110		—
Amortization of Net Loss (Gain) 2								Amortization of Net Loss (Gain) 2	—		134		(66)
Net Periodic (Benefit) Cost	Net Periodic (Benefit) Cost	$	(192)	$	592	$	405	Net Periodic (Benefit) Cost	$	(302)	$	750	$	282

Plan Contributions During the Period	Plan Contributions During the Period	$	—	$	349	$	191	Plan Contributions During the Period	$	—	$	354	$	87

Footnotes:

1. Included in Salaries and Employee Benefits on the Consolidated Statements of Income

2. Included in Other Operating Expense on the Consolidated Statements of Income

A contribution to the qualified pension plan was not required during the period ended September 30, ~~2021~~2022 and currently, additional contributions in ~~2021~~2022 are not expected. Arrow makes contributions to its other post-retirement benefit plans in an amount equal to benefit payments for the year.

3635

Note 9. EARNINGS PER COMMON SHARE (In Thousands, Except Per Share Amounts)

The following table presents a reconciliation of the numerator and denominator used in the calculation of basic and diluted earnings per common share ~~(“EPS”)~~(EPS) for periods ended September 30, ~~2021~~2022 and ~~2020. All~~2021. When applicable, share and per share amounts have been adjusted for the September ~~24, 2021,~~23, 2022, 3% stock dividend.


Earnings Per Share	Earnings Per Share									Earnings Per Share
		Three Months Ended				Year-to-Date Period Ended:					Three Months Ended				Year-to-Date Period Ended:
		September 30, 2021		September 30, 2020		September 30, 2021		September 30, 2020			September 30, 2022		September 30, 2021		September 30, 2022		September 30, 2021
Earnings Per Share - Basic:	Earnings Per Share - Basic:									Earnings Per Share - Basic:
Net Income	Net Income	$	12,989	$	11,046	$	39,548	$	28,332	Net Income	$	12,163	$	12,989	$	36,712	$	39,548
Weighted Average Shares - Basic	Weighted Average Shares - Basic	16,027		15,936		16,015		15,917		Weighted Average Shares - Basic	16,512		16,508		16,506		16,495
Earnings Per Share - Basic	Earnings Per Share - Basic	$	0.81	$	0.69	$	2.47	$	1.78	Earnings Per Share - Basic	$	0.74	$	0.79	$	2.22	$	2.40

Earnings Per Share - Diluted:	Earnings Per Share - Diluted:									Earnings Per Share - Diluted:
Net Income	Net Income	$	12,989	$	11,046	$	39,548	$	28,332	Net Income	$	12,163	$	12,989	$	36,712	$	39,548
Weighted Average Shares - Basic	Weighted Average Shares - Basic	16,027		15,936		16,015		15,917		Weighted Average Shares - Basic	16,512		16,508		16,506		16,495
Dilutive Average Shares Attributable to Stock Options	Dilutive Average Shares Attributable to Stock Options	58		10		57		14		Dilutive Average Shares Attributable to Stock Options	46		60		47		59
Weighted Average Shares - Diluted	Weighted Average Shares - Diluted	16,085		15,946		16,072		15,931		Weighted Average Shares - Diluted	16,558		16,568		16,553		16,554
Earnings Per Share - Diluted	Earnings Per Share - Diluted	$	0.81	$	0.69	$	2.46	$	1.78	Earnings Per Share - Diluted	$	0.74	$	0.78	$	2.22	$	2.39

3736

Note 10. FAIR VALUES (Dollars In Thousands)

~~FASB ASC~~Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) Subtopic 820-10 defines fair value, establishes a framework for measuring fair value in GAAP and requires certain disclosures about fair value measurements. There are no nonfinancial assets or liabilities measured at fair value on a recurring basis. The only assets or liabilities that Arrow measured at fair value on a recurring basis at September 30, ~~2021,~~2022, December 31, ~~2020~~2021 and September 30, ~~2020~~2021 were securities available-for-sale, equity securities and derivatives. Arrow held no securities or liabilities for trading on such dates.

The table below presents the financial instrument's fair value and the amounts within the fair value hierarchy based on the lowest level of input that is significant to the fair value measurement:


Fair Value of Assets and Liabilities Measured on a Recurring and Nonrecurring Basis	Fair Value of Assets and Liabilities Measured on a Recurring and Nonrecurring Basis									Fair Value of Assets and Liabilities Measured on a Recurring and Nonrecurring Basis
				Fair Value Measurements at Reporting Date Using:									Fair Value Measurements at Reporting Date Using:
		Fair Value		Quoted Prices In Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)			Fair Value		Quoted Prices In Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)

Fair Value of Assets and Liabilities Measured on a Recurring Basis:	Fair Value of Assets and Liabilities Measured on a Recurring Basis:									Fair Value of Assets and Liabilities Measured on a Recurring Basis:
September 30, 2021
September 30, 2022										September 30, 2022
Assets:	Assets:									Assets:
Securities Available-for Sale:	Securities Available-for Sale:									Securities Available-for Sale:
U.S. Government & Agency Obligations	U.S. Government & Agency Obligations	$	109,305	$	—	$	109,305	$	—	U.S. Government & Agency Obligations	$	163,965	$	—	$	163,965	$	—
State and Municipal Obligations	State and Municipal Obligations	400		—		400		—		State and Municipal Obligations	340		—		340		—
Mortgage-Backed Securities	Mortgage-Backed Securities	376,395		—		376,395		—		Mortgage-Backed Securities	409,949		—		409,949		—
Corporate and Other Debt Securities	Corporate and Other Debt Securities	800		—		800		—		Corporate and Other Debt Securities	800		—		800		—
Total Securities Available-for-Sale	Total Securities Available-for-Sale	486,900		—		486,900		—		Total Securities Available-for-Sale	575,054		—		575,054		—
Equity Securities	Equity Securities	1,886		—		1,886		—		Equity Securities	2,126		—		2,126		—
Total Securities Measured on a Recurring Basis	Total Securities Measured on a Recurring Basis	488,786		—		488,786		—		Total Securities Measured on a Recurring Basis	577,180		—		577,180		—
Derivatives, included in other assets	Derivatives, included in other assets	2,287		—		2,287		—		Derivatives, included in other assets	8,508		—		8,508		—
Total Measured on a Recurring Basis	Total Measured on a Recurring Basis	$	491,073	$	—	$	491,073	$	—	Total Measured on a Recurring Basis	$	585,688	$	—	$	585,688	$	—
Liabilities:	Liabilities:									Liabilities:
Derivatives, included in other liabilities	Derivatives, included in other liabilities	2,287		—		2,287		—		Derivatives, included in other liabilities	8,508		—		8,508		—
Total Measured on a Recurring Basis	Total Measured on a Recurring Basis	$	2,287	$	—	$	2,287	$	—	Total Measured on a Recurring Basis	$	8,508	$	—	$	8,508	$	—
December 31, 2020
December 31, 2021										December 31, 2021
Assets:	Assets:									Assets:
Securities Available-for Sale:	Securities Available-for Sale:									Securities Available-for Sale:
U.S. Government & Agency Obligations	U.S. Government & Agency Obligations	$	65,112	$	—	$	65,112	$	—	U.S. Government & Agency Obligations	$	108,365	$	—	$	108,365	$	—
State and Municipal Obligations	State and Municipal Obligations	528		—		528		—		State and Municipal Obligations	400		—		400		—
Mortgage-Backed Securities	Mortgage-Backed Securities	298,847		—		298,847		—		Mortgage-Backed Securities	449,751		—		449,751		—
Corporate and Other Debt Securities	Corporate and Other Debt Securities	800		—		800		—		Corporate and Other Debt Securities	800		—		800		—
Total Securities Available-for-Sale	Total Securities Available-for-Sale	365,287		—		365,287		—		Total Securities Available-for-Sale	559,316		—		559,316		—
Equity Securities	Equity Securities	1,636		—		1,636		—		Equity Securities	1,747		—		1,747		—

3837


Fair Value of Assets and Liabilities Measured on a Recurring and Nonrecurring Basis	Fair Value of Assets and Liabilities Measured on a Recurring and Nonrecurring Basis									Fair Value of Assets and Liabilities Measured on a Recurring and Nonrecurring Basis
				Fair Value Measurements at Reporting Date Using:									Fair Value Measurements at Reporting Date Using:
		Fair Value		Quoted Prices In Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)			Fair Value		Quoted Prices In Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Total Securities Measured on a Recurring Basis	Total Securities Measured on a Recurring Basis	366,923		—		366,923		—		Total Securities Measured on a Recurring Basis	561,063		—		561,063		—
Derivatives, included in other liabilities	Derivatives, included in other liabilities	5,080		—		5,080		—		Derivatives, included in other liabilities	2,083		—		2,083		—
Total Measured on a Recurring Basis	Total Measured on a Recurring Basis	$	372,003	$	—	$	372,003	$	—	Total Measured on a Recurring Basis	$	563,146	$	—	$	563,146	$	—
Liabilities:	Liabilities:									Liabilities:
Derivatives, included in other liabilities	Derivatives, included in other liabilities	5,080		—		5,080		—		Derivatives, included in other liabilities	2,083		—		2,083		—
Total Measured on a Recurring Basis	Total Measured on a Recurring Basis	$	5,080	$	—	$	5,080	$	—	Total Measured on a Recurring Basis	$	2,083	$	—	$	2,083	$	—
September 30, 2020
September 30, 2021										September 30, 2021
Assets:	Assets:									Assets:
Securities Available-for Sale:	Securities Available-for Sale:									Securities Available-for Sale:
U.S. Government & Agency Obligations	U.S. Government & Agency Obligations	$	35,167	$	—	$	35,167	$	—	U.S. Government & Agency Obligations	$	109,305	$	—	$	109,305	$	—
State and Municipal Obligations	State and Municipal Obligations	593		—		593		—		State and Municipal Obligations	400		—		400		—
Mortgage-Backed Securities	Mortgage-Backed Securities	338,368		—		338,368		—		Mortgage-Backed Securities	376,395		—		376,395		—
Corporate and Other Debt Securities	Corporate and Other Debt Securities	800		—		800		—		Corporate and Other Debt Securities	800		—		800		—
Total Securities Available-for-Sale	Total Securities Available-for-Sale	374,928		—		374,928		—		Total Securities Available-for-Sale	486,900		—		486,900		—
Equity Securities	Equity Securities	1,511		—		1,511		—		Equity Securities	1,886		—		1,886		—
Total Securities Measured on a Recurring Basis	Total Securities Measured on a Recurring Basis	$	376,439	$	—	$	376,439	$	—	Total Securities Measured on a Recurring Basis	$	488,786	$	—	$	488,786	$	—
Derivatives, included in other assets	Derivatives, included in other assets	6,366		$	—	6,366		—		Derivatives, included in other assets	2,287		$	—	2,287		—
Total Measured on a Recurring Basis	Total Measured on a Recurring Basis	$	382,805	$	—	$	382,805	$	—	Total Measured on a Recurring Basis	$	491,073	$	—	$	491,073	$	—
Liabilities:	Liabilities:									Liabilities:
Derivatives, included in other liabilities	Derivatives, included in other liabilities	6,366		—		6,366		—		Derivatives, included in other liabilities	2,287		—		2,287		—
Total Measured on a Recurring Basis	Total Measured on a Recurring Basis	$	6,366	$	—	$	6,366	$	—	Total Measured on a Recurring Basis	$	2,287	$	—	$	2,287	$	—


		Fair Value		Quoted Prices In Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Gains (Losses) Recognized in Earnings		Fair Value		Quoted Prices In Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Gains (Losses) Recognized in Earnings
Fair Value of Assets and Liabilities Measured on a Nonrecurring Basis:	Fair Value of Assets and Liabilities Measured on a Nonrecurring Basis:										Fair Value of Assets and Liabilities Measured on a Nonrecurring Basis:
September 30, 2021
September 30, 2022											September 30, 2022
Collateral Dependent Evaluated Loans	Collateral Dependent Evaluated Loans	$	2,456	$	—	$	—	$	2,456	0	Collateral Dependent Evaluated Loans	$	—	$	—	$	—	$	—
Other Real Estate Owned and Repossessed Assets, Net	Other Real Estate Owned and Repossessed Assets, Net	351		—		—		351		13	Other Real Estate Owned and Repossessed Assets, Net	604		—		—		604		—
December 31, 2020
December 31, 2021											December 31, 2021
Collateral Dependent Impaired Loans	Collateral Dependent Impaired Loans	$	594	$	—	$	—	$	594	0	Collateral Dependent Impaired Loans	$	2,457	$	—	$	—	$	2,457
Other Real Estate Owned and Repossessed Assets, Net	Other Real Estate Owned and Repossessed Assets, Net	155		—		—		155		—	Other Real Estate Owned and Repossessed Assets, Net	126		—		—		126		—
September 30, 2020
September 30, 2021											September 30, 2021
Collateral Dependent Impaired Loans	Collateral Dependent Impaired Loans	$	594	$	—	$	—	$	594	0	Collateral Dependent Impaired Loans	$	2,456	$	—	$	—	$	2,456
Other Real Estate Owned and Repossessed Assets, Net	Other Real Estate Owned and Repossessed Assets, Net	126		—		—		126		—	Other Real Estate Owned and Repossessed Assets, Net	351		—		—		351		13

3938

The fair value of financial instruments is determined under the following hierarchy:

•Level 1 - Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities;

•Level 2 - Quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, or inputs that are observable, either directly or indirectly, for substantially the full term of the asset or liability; and,

•Level 3 - Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (i.e., supported by little or no market activity).

Fair Value Methodology for Assets and Liabilities Measured on a Recurring Basis

The fair value of Level 1 securities available-for-sale are based on unadjusted, quoted market prices from exchanges in active markets. The fair value of Level 2 securities available-for-sale are based on an independent bond and equity pricing service for identical assets or significantly similar securities and an independent equity pricing service for equity securities not actively traded. The pricing services use a variety of techniques to arrive at fair value including market maker bids, quotes and pricing models. Inputs to the pricing models include recent trades, benchmark interest rates, spreads and actual and projected cash flows. The fair value of Level 2 equities are based on the last observable price in open markets. The fair value of Level 2 derivatives is determined using inputs that are observable in the market place obtained from third parties including yield curves, publicly available volatilities, and floating indexes.

Fair Value Methodology for Assets and Liabilities Measured on a Nonrecurring Basis

The fair value of collateral dependent evaluated loans and other real estate owned was based on third-party appraisals less estimated cost to sell. The appraisals may be adjusted by management for qualitative factors such as economic conditions and estimated liquidation expenses. Other assets which might have been included in this table include mortgage servicing rights, goodwill and other intangible assets. Arrow evaluates each of these assets for impairment at least annually, with no impairment recognized for these assets at September 30, ~~2021,~~2022, December 31, ~~2020~~2021 and September 30, ~~2020.~~2021.

Fair Value Methodology for Financial Instruments Not Measured on a Recurring or Nonrecurring Basis

The fair value for securities held-to-maturity is determined utilizing an independent bond pricing service for identical assets or significantly similar securities. The pricing service uses a variety of techniques to arrive at fair value including market maker bids, quotes and pricing models. Inputs to the pricing models include recent trades, benchmark interest rates, spreads and actual and projected cash flows.

ASU 2016-01 "Recognition and Measurement of Financial Assets and Financial Liabilities" requires that the fair value for loans must be disclosed using the "exit price" notion which is a reasonable estimate of what another party might pay in an orderly transaction. Fair values for loans are calculated for portfolios of loans with similar financial characteristics. Loans are segregated by type such as commercial, commercial real estate, residential mortgage, indirect auto and other consumer loans. Each loan category is further segmented into fixed and adjustable interest rate terms and by performing and nonperforming categories. The fair value of performing loans is calculated by determining the estimated future cash flow, which is the contractual cash flow adjusted for estimated prepayments. The discount rate is determined by starting with current market yields, and first adjusting for a liquidity premium. This premium is separately determined for each loan type. Then a credit loss component is determined utilizing the credit loss assumptions used in the allowance for credit loss model. Finally, a discount spread is applied separately for consumer loans vs. commercial loans based on market information and utilization of the swap curve.

The fair value of time deposits is based on the discounted value of contractual cash flows, except that the fair value is limited to the extent that the customer could redeem the certificate after imposition of a premature withdrawal penalty. The discount rates are estimated using the Federal Home Loan Bank of New York ~~("FHLBNY")~~(FHLBNY) yield curve, which is considered representative of Arrow’s time deposit rates. The fair value of all other deposits is equal to the carrying value.

The fair value of FHLBNY advances is calculated by the FHLBNY.

The carrying amount of FHLBNY and FRB stock approximates fair value. If the stock was redeemed, the Company will receive an amount equal to the par value of the stock.

The book value of the outstanding trust preferred securities (Junior Subordinated Obligations Issued to Unconsolidated Subsidiary Trusts) are considered to approximate fair value since the interest rates are variable (indexed to ~~LIBOR)~~the London Inter-Bank Offered Rate (LIBOR)) and Arrow is well-capitalized.

4039

Fair Value by Balance Sheet Grouping

The following table presents a summary of the carrying amount, the fair value or an amount approximating fair value and the fair value hierarchy of Arrow’s financial instruments:


Schedule of Fair Values by Balance Sheet Grouping	Schedule of Fair Values by Balance Sheet Grouping											Schedule of Fair Values by Balance Sheet Grouping
						Fair Value Hierarchy											Fair Value Hierarchy
													Carrying Value		Fair Value		Level 1		Level 2		Level 3
September 30, 2022												September 30, 2022
Cash and Cash Equivalents												Cash and Cash Equivalents	$	373,429	$	373,429	$	373,429	$	—	$	—
Securities Available-for-Sale												Securities Available-for-Sale	575,054		575,054		—		575,054		—
Securities Held-to-Maturity												Securities Held-to-Maturity	182,178		175,800		—		175,800		—
Equity Securities												Equity Securities	2,126		2,126		—		2,126		—
Federal Home Loan Bank and Federal Reserve Bank Stock												Federal Home Loan Bank and Federal Reserve Bank Stock	4,720		4,720		—		4,720		—
Net Loans												Net Loans	2,895,562		2,714,587		—		—		2,714,587
Accrued Interest Receivable												Accrued Interest Receivable	8,549		8,549		—		8,549		—
Derivatives, included in other assets												Derivatives, included in other assets	8,508		8,508				8,508
Deposits												Deposits	3,795,105		3,785,960		—		3,785,960		—

Federal Home Loan Bank Term Advances												Federal Home Loan Bank Term Advances	25,000		24,833		—		24,833		—
Junior Subordinated Obligations Issued to Unconsolidated Subsidiary Trusts												Junior Subordinated Obligations Issued to Unconsolidated Subsidiary Trusts	20,000		20,000		—		20,000		—
Accrued Interest Payable												Accrued Interest Payable	202		202		—		202		—
Derivatives, included in other liabilities												Derivatives, included in other liabilities	8,508		8,508		—		8,508		—

December 31, 2021												December 31, 2021
Cash and Cash Equivalents												Cash and Cash Equivalents	$	457,696	$	457,696	$	457,696	$	—	$	—
Securities Available-for-Sale												Securities Available-for-Sale	559,316		559,316		—		559,316		—
Securities Held-to-Maturity												Securities Held-to-Maturity	196,566		201,292		—		201,292		—
Equity Securities												Equity Securities	1,747		1,747		—		1,747
Federal Home Loan Bank and Federal Reserve Bank Stock												Federal Home Loan Bank and Federal Reserve Bank Stock	5,380		5,380		—		5,380		—
Net Loans												Net Loans	2,640,660		2,618,311		—		—		2,618,311
Accrued Interest Receivable												Accrued Interest Receivable	7,384		7,384		—		7,384		—
Derivatives, included in other assets												Derivatives, included in other assets	2,083		2,083		—		2,083		—
Deposits												Deposits	3,550,497		3,548,554		—		3,548,554		—

Federal Home Loan Bank Term Advances												Federal Home Loan Bank Term Advances	45,000		45,518		—		45,518		—

Junior Subordinated Obligations Issued to Unconsolidated Subsidiary Trusts												Junior Subordinated Obligations Issued to Unconsolidated Subsidiary Trusts	20,000		20,000		—		20,000		—
Accrued Interest Payable												Accrued Interest Payable	138		138		—		138		—
Derivatives, included in other liabilities												Derivatives, included in other liabilities	2,083		2,083		—		2,083		—
		Carrying Value		Fair Value		Level 1		Level 2		Level 3
September 30, 2021	September 30, 2021											September 30, 2021
Cash and Cash Equivalents	Cash and Cash Equivalents	$	598,366	$	598,366	$	598,366	$	—	$	—	Cash and Cash Equivalents	$	598,366	$	598,366	$	598,366	$	—	$	—
Securities Available-for-Sale	Securities Available-for-Sale	486,900		486,900		—		486,900		—		Securities Available-for-Sale	486,900		486,900		—		486,900		—
Securities Held-to-Maturity	Securities Held-to-Maturity	198,337		203,936		—		203,936		—		Securities Held-to-Maturity	198,337		203,936		—		203,936		—
Equity Securities	Equity Securities	1,886		1,886		—		1,886		—		Equity Securities	1,886		1,886		—		1,886
Federal Home Loan Bank and Federal Reserve Bank Stock	Federal Home Loan Bank and Federal Reserve Bank Stock	5,380		5,380		—		5,380		—		Federal Home Loan Bank and Federal Reserve Bank Stock	5,380		5,380		—		5,380		—
Net Loans	Net Loans	2,627,795		2,632,843		—		—		2,632,843		Net Loans	2,627,795		2,632,843		—		—		2,632,843
Accrued Interest Receivable	Accrued Interest Receivable	7,899		7,899		—		7,899		—		Accrued Interest Receivable	7,899		7,899		—		7,899		—
Derivatives, included in other assets	Derivatives, included in other assets	2,287		2,287		0		2,287		0		Derivatives, included in other assets	2,287		2,287		—		2,287		—
Deposits	Deposits	3,605,563		3,604,271		—		3,604,271		—		Deposits	3,605,563		3,604,271		—		3,604,271		—
Federal Funds Purchased and Securities Sold Under Agreements to Repurchase	Federal Funds Purchased and Securities Sold Under Agreements to Repurchase	2,426		2,426		—		2,426		—		Federal Funds Purchased and Securities Sold Under Agreements to Repurchase	2,426		2,426		—		2,426		—

Federal Home Loan Bank Term Advances	Federal Home Loan Bank Term Advances	45,000		45,906		—		45,906		—		Federal Home Loan Bank Term Advances	45,000		45,906		—		45,906		—
Junior Subordinated Obligations Issued to Unconsolidated Subsidiary Trusts	Junior Subordinated Obligations Issued to Unconsolidated Subsidiary Trusts	20,000		20,000		—		20,000		—		Junior Subordinated Obligations Issued to Unconsolidated Subsidiary Trusts	20,000		20,000		—		20,000		—
Accrued Interest Payable	Accrued Interest Payable	137		137		—		137		—		Accrued Interest Payable	137		137		—		137		—
Derivatives, included in other liabilities	Derivatives, included in other liabilities	2,287		2,287		—		2,287		—		Derivatives, included in other liabilities	2,287		2,287		—		2,287		—

Schedule of Fair Values by Balance Sheet Grouping
Fair Value Hierarchy
Carrying Value Fair Value Level 1 Level 2 Level 3
December 31, 2020
Cash and Cash Equivalents $ 380,991 $ 380,991 $ 380,991 $ — $ —
Securities Available-for-Sale 365,287 365,287 — 365,287 —
Securities Held-to-Maturity 218,405 226,576 — 226,576 —
Equity Securities 1,636 1,636 — 1,636 0
Federal Home Loan Bank and Federal
  Reserve Bank Stock 5,349 5,349 — 5,349 —
Net Loans 2,565,798 2,558,903 — — 2,558,903
Accrued Interest Receivable 7,495 7,495 — 7,495 —
Derivatives, included in other assets 5,080 5,080 — 5,080 —
Deposits 3,234,726 3,234,387 — 3,234,387 —
Federal Funds Purchased and Securities
  Sold Under Agreements to Repurchase 17,486 17,486 — 17,486 —
Federal Home Loan Bank Term Advances 45,000 46,474 — 46,474 —
Junior Subordinated Obligations Issued
  to Unconsolidated Subsidiary Trusts 20,000 20,000 — 20,000 —
Accrued Interest Payable 326 326 — 326 —
Derivatives, included in other liabilities 5,080 5,080 — 5,080 —
September 30, 2020
Cash and Cash Equivalents $ 450,666 $ 450,666 $ 450,666 $ — $ —
Securities Available-for-Sale 374,928 374,928 — 374,928 —
Securities Held-to-Maturity 224,799 233,501 — 233,501 —
Equity Securities 1,511 1,511 — 1,511 0
Federal Home Loan Bank and Federal
  Reserve Bank Stock 5,574 5,574 — 5,574 —
Net Loans 2,564,009 2,560,043 — — 2,560,043
Accrued Interest Receivable 7,962 7,962 — 7,962 —
Derivatives, included in other assets 6,366 6,366 — 6,366 —
Deposits 3,264,858 3,265,208 — 3,265,208 —
Federal Funds Purchased and Securities
  Sold Under Agreements to Repurchase 73,949 73,949 — 73,949 —
Federal Home Loan Bank Term Advances 50,000 51,576 — 51,576 —
Junior Subordinated Obligations Issued
  to Unconsolidated Subsidiary Trusts 20,000 20,000 — 20,000 —
Accrued Interest Payable 841 841 — 841 —
Derivatives, included in other liabilities 6,366 6,366 — 6,366 —

4240

Note 11. LEASES (Dollars In Thousands)

~~The Company~~Arrow is a lessee in its leases, which are mainly for financial services locations in addition to leases for corporate vehicles. These leases generally require ~~the Company~~Arrow to pay third-party expenses on behalf of the Lessor, which are referred to as variable payments. Under some leases, ~~the Company~~Arrow pays the variable payments to the lessor, and in other leases, ~~the Company~~Arrow pays the variable payments directly to the applicable third party. None of ~~the Company's~~Arrow's current leases include any residual value guarantees or any subleases, and there are no significant rights and obligations of ~~the Company~~Arrow for leases that have not commenced as of the reporting date.

Arrow leases 4two of its branch offices, at market rates, from Stewart’s Shops Corp. Mr. Gary C. Dake, President of Stewart’s Shops Corp., serves as a ~~director~~Director on the ~~board~~Board of ~~directors~~Directors of ~~each of~~ Arrow, Glens Falls National and Saratoga National. Arrow also leases 1one administrative office from an entity controlled by Elizabeth Miller, who serves as a ~~director~~Director on the ~~board~~Board of ~~directors~~Directors of ~~each of~~ Arrow, ~~and~~ Glens Falls National ~~Bank~~ and ~~Trust Company.~~Saratoga National.

The following includes quantitative data related to ~~the Company's~~Arrow's leases as of and for the nine months ended September 30, ~~2021~~2022 and September 30, ~~2020:~~2021:


			Nine Months Ended								Nine Months Ended
Finance Lease Amounts:	Finance Lease Amounts:	Classification	September 30, 2021			September 30, 2020			Finance Lease Amounts:	Classification	September 30, 2022			September 30, 2021
Right-of-Use Assets	Right-of-Use Assets	Premises and Equipment, Net	$	4,859		$	5,036		Right-of-Use Assets	Premises and Equipment, Net	$	4,681		$	4,859
Lease Liabilities	Lease Liabilities	Finance Leases	5,181			5,228			Lease Liabilities	Finance Leases	5,131			5,181

Operating Lease Amounts:	Operating Lease Amounts:								Operating Lease Amounts:
Right-of-Use Assets	Right-of-Use Assets	Other Assets	$	6,786		$	5,496		Right-of-Use Assets	Other Assets	$	5,889		$	6,786
Lease Liabilities	Lease Liabilities	Other Liabilities	6,965			5,577			Lease Liabilities	Other Liabilities	6,082			6,965

Other Information:	Other Information:								Other Information:

Cash Paid For Amounts Included In The Measurement Of Lease Liabilities:	Cash Paid For Amounts Included In The Measurement Of Lease Liabilities:								Cash Paid For Amounts Included In The Measurement Of Lease Liabilities:
Operating Outgoing Cash Flows From Finance Leases	Operating Outgoing Cash Flows From Finance Leases		$	146		$	148		Operating Outgoing Cash Flows From Finance Leases		$	145		$	146
Operating Outgoing Cash Flows From Operating Leases	Operating Outgoing Cash Flows From Operating Leases		571			567			Operating Outgoing Cash Flows From Operating Leases		1,041			571
Financing Outgoing Cash Flows From Finance Leases	Financing Outgoing Cash Flows From Finance Leases		36			26			Financing Outgoing Cash Flows From Finance Leases		38			36
Right-of-Use Assets Obtained In Exchange For New Finance Lease Liabilities	Right-of-Use Assets Obtained In Exchange For New Finance Lease Liabilities		—			—			Right-of-Use Assets Obtained In Exchange For New Finance Lease Liabilities		—			—
Right-of-Use Assets Obtained In Exchange For New Operating Lease Liabilities	Right-of-Use Assets Obtained In Exchange For New Operating Lease Liabilities		2,126			294			Right-of-Use Assets Obtained In Exchange For New Operating Lease Liabilities		—			2,126
Weighted-average Remaining Lease Term - Finance Leases (Yrs.)	Weighted-average Remaining Lease Term - Finance Leases (Yrs.)		28.46			29.40			Weighted-average Remaining Lease Term - Finance Leases (Yrs.)		27.50			28.46
Weighted-average Remaining Lease Term - Operating Leases (Yrs.)	Weighted-average Remaining Lease Term - Operating Leases (Yrs.)		11.76			13.10			Weighted-average Remaining Lease Term - Operating Leases (Yrs.)		11.36			11.76
Weighted-average Discount Rate—Finance Leases	Weighted-average Discount Rate—Finance Leases		3.75		%	3.75		%	Weighted-average Discount Rate—Finance Leases		3.75		%	3.75		%
Weighted-average Discount Rate—Operating Leases	Weighted-average Discount Rate—Operating Leases		2.85		%	3.27		%	Weighted-average Discount Rate—Operating Leases		2.87		%	2.85		%


Lease cost information for the Company's leases is as follows:
Lease cost information for Arrow's leases is as follows:										Lease cost information for Arrow's leases is as follows:
		Three Months Ended				Nine Months Ended					Three Months Ended				Nine Months Ended
		September 30, 2021		September 30, 2020		September 30, 2021		September 30, 2020			September 30, 2022		September 30, 2021		September 30, 2022		September 30, 2021
Lease Cost:	Lease Cost:									Lease Cost:
Finance Lease Cost:	Finance Lease Cost:									Finance Lease Cost:
Reduction of Right-of-Use Assets	Reduction of Right-of-Use Assets	$	44	$	44	$	133	$	133	Reduction of Right-of-Use Assets	$	44	$	44	$	133	$	133
Interest on Lease Liabilities	Interest on Lease Liabilities	48		49		146		148		Interest on Lease Liabilities	48		48		145		146
Operating Lease Cost	Operating Lease Cost	238		214		737		624		Operating Lease Cost	305		238		925		737
Short-term Lease Cost	Short-term Lease Cost	15		11		28		32		Short-term Lease Cost	9		15		32		28
Variable Lease Cost	Variable Lease Cost	69		77		203		165		Variable Lease Cost	86		69		253		203
Total Lease Cost	Total Lease Cost	$	414	$	395	$	1,247	$	1,102	Total Lease Cost	$	492	$	414	$	1,488	$	1,247

4341

Future Lease Payments at September 30, 2021 are as follows:
Operating
Leases
Financing
Leases
Twelve Months Ended:
9/30/2022 $ 964 $ 243
9/30/2023 928 243
9/30/2024 780 247
9/30/2025 705 259
9/30/2026 648 268
Thereafter 4,359 7,599
Total Undiscounted Cash Flows $ 8,384 $ 8,859
Less: Net Present Value Adjustment 1,419 3,678
Lease Liability $ 6,965 $ 5,181


Future Lease Payments at September 30, 2022 are as follows:
	Operating Leases		Financing Leases
Twelve Months Ended:
9/30/2023	$	1,077	$	243
9/30/2024	723		247
9/30/2025	648		259
9/30/2026	590		268
9/30/2027	561		268
Thereafter	3,698		7,331
Total Undiscounted Cash Flows	$	7,297	$	8,616
Less: Net Present Value Adjustment	1,215		3,485
Lease Liability	$	6,082	$	5,131

Note 12. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES (In Thousands)

Arrow is exposed to certain risks arising from both its business operations and economic conditions. Arrow principally manages its exposures to a wide variety of business and operational risks through management of its core business activities. Arrow manages economic risks, including interest rate, primarily by managing the amount, sources and duration of its assets and liabilities and through the use of derivative instruments. Specifically, Arrow enters into derivative financial instruments to manage exposures that arise from business activities that result in the receipt or payment of future known and uncertain cash amounts, the value of which are determined by interest rates. Arrow's derivative financial instruments are used to manage differences in the amount, timing and duration of known or expected cash receipts and its known or expected cash payments principally related to certain fixed rate borrowings. Arrow also has interest rate derivatives that result from a service provided to certain qualifying customers and, therefore, are not used to manage interest rate risk in the Company’s assets or liabilities. The Company manages a matched book with respect to its derivative instruments in order to minimize its net risk exposure resulting from such transactions.

Derivatives Not Designated as Hedging Instruments

Arrow enters into interest rate swap agreements with its 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 ~~the~~ 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.

The following table depicts the fair value adjustment recorded related to the notional amount of derivatives outstanding as well as the notional amount of the interest rate swap ~~agreements.~~agreements:


Derivatives Not Designated as Hedging Instruments - Interest Rate Swap Agreements	Derivatives Not Designated as Hedging Instruments - Interest Rate Swap Agreements							Derivatives Not Designated as Hedging Instruments - Interest Rate Swap Agreements
		September 30, 2021		December 31, 2020		September 30, 2020			September 30, 2022		December 31, 2021		September 30, 2021
Fair value adjustment included in other assets	Fair value adjustment included in other assets	$	2,287	$	5,080	$	6,366	Fair value adjustment included in other assets	$	8,508	$	2,083	$	2,287
Fair value adjustment included in other liabilities	Fair value adjustment included in other liabilities	2,287		5,080		6,366		Fair value adjustment included in other liabilities	8,508		2,083		2,287
Notional amount	Notional amount	172,026		176,637		166,329		Notional amount	134,406		172,668		172,026

Derivatives Designated as Hedging Instruments

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")~~(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.

The following table indicates the effect of cash flow hedge accounting on AOCI and on the unaudited interim consolidated statement of ~~income.~~income:

Derivatives Designated as Hedging Instruments - Cash Flow Hedge Agreements
Nine Months Ended Twelve Months Ended Nine Months Ended
September 30, 2021 December 31, 2020 September 30, 2020
Amount of gain recognized in AOCI $ 1,281 $ 651 $ 48
Amount of gain reclassified from AOCI to interest expense 92 — —


Derivatives Designated as Hedging Instruments - Cash Flow Hedge Agreements
	Nine Months Ended		Twelve Months Ended		Nine Months Ended
	September 30, 2022		December 31, 2021		September 30, 2021
Amount of gain recognized in AOCI	$	3,737	$	1,249	$	1,281
Amount of (loss) gain reclassified from AOCI to interest expense	(57)		126		92

Note 13. COVID-19 PANDEMIC

The COVID-19 pandemic caused significant disruptions in the United States economy, which impacted the activities and operations of Arrow and its customers. The pandemic also caused disruption in the financial markets both globally and in the United States.

Arrow continues to monitor the impact of the pandemic, both during recovery as well as any potential setbacks, including emerging variants, and continues to mitigate the risk of harm to its employees and customers and to its ~~operations from the pandemic.~~operations. Arrow encourages customers to use contact-free alternatives such as digital banking and ATMs.

Report of Independent Registered Public Accounting Firm

To the Stockholders and Board of Directors

Arrow Financial Corporation:

Results of Review of Interim Financial Information

We have reviewed the consolidated balance ~~sheets~~sheet of Arrow Financial Corporation and subsidiaries (the Company) as of September 30, ~~2021 and 2020,~~2022, the related consolidated statements of income, comprehensive income, ~~and~~ changes in stockholders’ equity and cash flows for the ~~three‑month~~three-month and ~~nine‑month~~nine-month periods ended September 30, ~~2021~~2022 and ~~2020, and the related consolidated statement of cash flows for the nine‑month periods ended September 30,~~ 2021, ~~and 2020,~~ and the related notes (collectively, the consolidated interim financial information). Based on our reviews, we are not aware of any material modifications that should be made to the consolidated interim financial information for it to be in conformity with U.S. generally accepted accounting principles.

We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheet of the Company as of December 31, ~~2020,~~2021, and the related consolidated statements of income, comprehensive income, changes in stockholders’ equity, and cash flows for the year then ended (not presented herein); and in our report dated March ~~10, 2021,~~11, 2022, we expressed an unqualified opinion on those consolidated financial statements.In our opinion, the information set forth in the accompanying consolidated balance sheet as of December 31, ~~2020,~~2021, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.

Change in Accounting Principle

As discussed in Note 1 to the consolidated ~~interim~~ financial ~~information,~~statements, the Company has changed its method of accounting for the recognition and measurement of credit losses as of January 1, 2021 due to the adoption of Accounting Standards Codification Topic 326, Financial Instruments – Credit Losses.

Basis for Review Results

This consolidated interim financial information is the responsibility of the Company’s management. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our reviews in accordance with the standards of the PCAOB. A review of consolidated interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the PCAOB, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.

/s/ KPMG LLP

Albany, New York

November ~~4, 2021~~7, 2022

4644

Item 2.

ARROW FINANCIAL CORPORATION AND SUBSIDIARIES

MANAGEMENT'S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

September 30, ~~2021~~2022

NOTE ON TERMINOLOGY

In this Quarterly Report on Form 10-Q (this Report), the terms "Arrow," "the registrant," "the Company," "we," "us," and "our" generally refer to Arrow Financial Corporation and its subsidiaries as a group, except where the context indicates otherwise. At certain points in this Form 10-Q, Arrow's performance is compared with that of the Company's "peer group" of financial institutions. Unless otherwise specifically stated, the peer group for the purposes of this Form 10-Q is comprised of the group of ~~145~~164 domestic bank holding companies with $3 to $10 billion in total consolidated assets as identified in the Federal Reserve Board’s "Bank Holding Company Performance Report" for June 30, ~~2021~~2022 (the most recent such report currently available), and peer group data contained herein has been derived from such report.

THE COMPANY AND ITS SUBSIDIARIES

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

FORWARD LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains statements that are not historical in nature but rather are based on Arrow's beliefs, assumptions, expectations, estimates and projections about the future. These statements are "forward-looking statements" within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, and involve a degree of uncertainty and attendant risk. Words such as "may," "will," "expect," "believe," "anticipate," "estimate," "continue," and variations of such words and similar expressions are intended to identify such forward-looking statements. Examples of forward-looking statements include statements regarding Arrow's asset quality, the level of allowance for credit losses, the sufficiency of liquidity sources, interest rate change exposure, changes in accounting standards, and Arrow's tax plans and strategies. Some of these statements, such as those included in the interest rate sensitivity analysis in Part I, Item 3, entitled "Quantitative and Qualitative Disclosures About Market Risk," are merely presentations of what future performance or changes in future performance would look like based on hypothetical assumptions and on simulation models. Other forward-looking statements are based on Arrow's general perceptions of market conditions and trends in business activity, both Arrow's and in the banking industry generally, as well as current management strategies for future operations and development.

These forward-looking statements may not be exhaustive, are not guarantees of future performance and involve certain risks and uncertainties that are difficult to quantify or, in some cases, to identify. You should not place undue reliance on any such forward-looking statements. In the case of all forward-looking statements, our actual outcomes and results may differ materially from what the statements predict or forecast. Factors that could cause or contribute to such differences include, but are not limited to the ~~following, some of which may be amplified by the COVID-19 pandemic, including emerging variants:~~following:

•the COVID-19 pandemic and its impact on economic, market and social conditions;

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

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

•sudden changes in the market for products provided, such as real estate loans;

•significant changes in banking or other laws and regulations, including both enactment of new legal or regulatory measures or the modification or elimination of pre-existing measures;

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

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

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

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

Arrow is under no duty to update any of the forward-looking statements after the date of this Report to conform such statements to actual results. All forward-looking statements, express or implied, included in this Report and the documents incorporated by reference and that are attributable to Arrow are expressly qualified in their entirety by this cautionary statement. This cautionary statement should also be considered in connection with any subsequent written or oral forward-looking statements that Arrow or any persons acting on ~~our~~its behalf may issue. This Report should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, ~~2020~~2021 (the ~~2020~~2021 Annual Report) and our other filings with the SEC.

4745

USE OF NON-GAAP FINANCIAL MEASURES

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

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

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

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

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

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

4846

Arrow Financial Corporation

Selected Quarterly Information

(Dollars In Thousands, Except Per Share Amounts - Unaudited)


Quarter Ended	Quarter Ended	9/30/2021			6/30/2021			3/31/2021			12/31/2020			9/30/2020			Quarter Ended	9/30/2022			6/30/2022			3/31/2022			12/31/2021			9/30/2021
Net Income	Net Income	$	12,989		$	13,279		$	13,280		$	12,495		$	11,046		Net Income	$	12,163		$	11,974		$	12,575		$	10,309		$	12,989
Transactions in Net Income (Net of Tax):	Transactions in Net Income (Net of Tax):																Transactions in Net Income (Net of Tax):

Net Changes in Fair Value of Equity Investments	Net Changes in Fair Value of Equity Investments	(79)			145			119			66			(53)			Net Changes in Fair Value of Equity Investments	70			114			96			(104)			(79)

Share and Per Share Data:1	Share and Per Share Data:1																Share and Per Share Data:1
Period End Shares Outstanding	Period End Shares Outstanding	16,020			16,039			16,009			15,981			15,954			Period End Shares Outstanding	16,523			16,503			16,493			16,522			16,500
Basic Average Shares Outstanding	Basic Average Shares Outstanding	16,027			16,024			15,994			15,964			15,936			Basic Average Shares Outstanding	16,512			16,494			16,511			16,509			16,508
Diluted Average Shares Outstanding	Diluted Average Shares Outstanding	16,085			16,085			16,030			15,981			15,946			Diluted Average Shares Outstanding	16,558			16,535			16,566			16,574			16,568
Basic Earnings Per Share	Basic Earnings Per Share	$	0.81		$	0.83		$	0.83		$	0.78		$	0.69		Basic Earnings Per Share	$	0.74		$	0.72		$	0.76		$	0.62		$	0.79
Diluted Earnings Per Share	Diluted Earnings Per Share	0.81			0.83			0.82			0.78			0.69			Diluted Earnings Per Share	0.74			0.72			0.76			0.61			0.78
Cash Dividend Per Share	Cash Dividend Per Share	0.252			0.252			0.252			0.252			0.245			Cash Dividend Per Share	0.262			0.262			0.262			0.252			0.245

Selected Quarterly Average Balances:	Selected Quarterly Average Balances:																Selected Quarterly Average Balances:
Interest-Bearing Deposits at Banks	Interest-Bearing Deposits at Banks	$	416,500		$	369,034		$	334,155		$	349,430		$	242,928		Interest-Bearing Deposits at Banks	$	209,001		$	232,545		$	410,644		$	551,890		$	416,500
Investment Securities	Investment Securities	675,980			668,089			593,822			590,151			592,457			Investment Securities	821,052			822,112			797,347			681,732			675,980
Loans	Loans	2,641,726			2,651,449			2,618,362			2,610,834			2,582,253			Loans	2,872,066			2,804,180			2,678,796			2,660,665			2,641,726
Deposits	Deposits	3,435,933			3,395,271			3,254,815			3,256,238			3,082,499			Deposits	3,598,519			3,569,754			3,582,256			3,590,766			3,435,933
Other Borrowed Funds	Other Borrowed Funds	72,187			74,957			82,659			95,047			136,117			Other Borrowed Funds	50,125			50,140			68,596			70,162			72,187
Stockholders’ Equity	Stockholders’ Equity	359,384			350,203			340,708			331,899			324,269			Stockholders’ Equity	361,675			357,228			370,264			364,409			359,384
Total Assets	Total Assets	3,902,041			3,851,921			3,712,020			3,721,954			3,583,322			Total Assets	4,047,738			4,012,999			4,054,943			4,060,540			3,902,041
Return on Average Assets, annualized	Return on Average Assets, annualized	1.32		%	1.38		%	1.45		%	1.34		%	1.23		%	Return on Average Assets, annualized	1.19		%	1.20		%	1.26		%	1.01		%	1.32		%
Return on Average Equity, annualized	Return on Average Equity, annualized	14.34		%	15.21		%	15.81		%	14.98		%	13.55		%	Return on Average Equity, annualized	13.34		%	13.44		%	13.77		%	11.22		%	14.34		%
Return on Average Tangible Equity, annualized 2	Return on Average Tangible Equity, annualized 2	15.36		%	16.32		%	17.00		%	16.13		%	14.61		%	Return on Average Tangible Equity, annualized 2	14.27		%	14.40		%	14.72		%	12.01		%	15.36		%
Average Earning Assets	Average Earning Assets	$	3,734,206		$	3,688,572		$	3,546,339		$	3,550,415		$	3,417,638		Average Earning Assets	$	3,902,119		$	3,858,837		$	3,886,787		$	3,894,287		$	3,734,206
Average Paying Liabilities	Average Paying Liabilities	2,705,283			2,721,961			2,639,240			2,674,795			2,545,435			Average Paying Liabilities	2,781,985			2,808,287			2,855,884			2,841,304			2,705,283
Interest Income	Interest Income	29,807			29,695			27,694			28,372			27,296			Interest Income	34,207			30,593			28,947			28,354			29,807
Tax-Equivalent Adjustment 3	Tax-Equivalent Adjustment 3	292			293			235			251			284			Tax-Equivalent Adjustment 3	268			269			270			285			292
Interest Income, Tax-Equivalent 3	Interest Income, Tax-Equivalent 3	30,099			29,988			27,929			28,623			27,580			Interest Income, Tax-Equivalent 3	34,475			30,862			29,217			28,639			30,099
Interest Expense	Interest Expense	1,169			1,335			1,539			1,918			2,396			Interest Expense	3,306			1,555			1,122			1,152			1,169
Net Interest Income	Net Interest Income	28,638			28,360			26,155			26,454			24,900			Net Interest Income	30,901			29,038			27,825			27,202			28,638
Net Interest Income, Tax-Equivalent 3	Net Interest Income, Tax-Equivalent 3	28,930			28,653			26,390			26,705			25,184			Net Interest Income, Tax-Equivalent 3	31,169			29,307			28,095			27,487			28,930
Net Interest Margin, annualized	Net Interest Margin, annualized	3.04		%	3.08		%	2.99		%	2.96		%	2.90		%	Net Interest Margin, annualized	3.14		%	3.02		%	2.90		%	2.77		%	3.04		%
Net Interest Margin, Tax Equivalent, annualized 3	Net Interest Margin, Tax Equivalent, annualized 3	3.07		%	3.12		%	3.02		%	2.99		%	2.93		%	Net Interest Margin, Tax Equivalent, annualized 3	3.17		%	3.05		%	2.93		%	2.80		%	3.07		%

Efficiency Ratio Calculation: 4	Efficiency Ratio Calculation: 4																Efficiency Ratio Calculation: 4
Noninterest Expense	Noninterest Expense	$	19,423		$	19,087		$	18,678		$	18,192		$	17,487		Noninterest Expense	$	21,448		$	20,345		$	18,945		$	20,860		$	19,423
Less: Intangible Asset Amortization	Less: Intangible Asset Amortization	51			53			54			56			56			Less: Intangible Asset Amortization	48			48			49			52			51
Net Noninterest Expense	Net Noninterest Expense	$	19,372		$	19,034		$	18,624		$	18,136		$	17,431		Net Noninterest Expense	$	21,400		$	20,297		$	18,896		$	20,808		$	19,372
Net Interest Income, Tax-Equivalent 3	Net Interest Income, Tax-Equivalent 3	$	28,930		$	28,653		$	26,390		$	26,705		$	25,184		Net Interest Income, Tax-Equivalent 3	$	31,169		$	29,307		$	28,095		$	27,487		$	28,930
Noninterest Income	Noninterest Income	7,694			8,478			8,608			9,103			8,697			Noninterest Income	7,827			7,744			8,162			7,589			7,694

Less: Net Changes in Fair Value of Equity Invest.	Less: Net Changes in Fair Value of Equity Invest.	(106)			196			160			88			(72)			Less: Net Changes in Fair Value of Equity Invest.	95			154			130			(139)			(106)
Net Gross Income	Net Gross Income	$	36,730		$	36,935		$	34,838		$	35,720		$	33,953		Net Gross Income	$	38,901		$	36,897		$	36,127		$	35,215		$	36,730
Efficiency Ratio 4	Efficiency Ratio 4	52.74		%	51.53		%	53.46		%	50.77		%	51.34		%	Efficiency Ratio 4	55.01		%	55.01		%	52.30		%	59.09		%	52.74		%

Period-End Capital Information:	Period-End Capital Information:																Period-End Capital Information:
Total Stockholders’ Equity (i.e. Book Value)	Total Stockholders’ Equity (i.e. Book Value)	$	360,171		$	353,033		$	342,413		$	334,392		$	325,660		Total Stockholders’ Equity (i.e. Book Value)	$	345,550		$	356,498		$	357,243		$	371,186		$	360,171
Book Value per Share 1	Book Value per Share 1	22.48			22.01			21.39			20.91			20.41			Book Value per Share 1	20.91			21.60			21.66			22.47			21.83
Goodwill and Other Intangible Assets, net	Goodwill and Other Intangible Assets, net	23,879			23,955			23,922			23,823			23,662			Goodwill and Other Intangible Assets, net	23,477			23,583			23,691			23,791			23,879
Tangible Book Value per Share 1,2	Tangible Book Value per Share 1,2	20.99			20.52			19.89			19.43			18.93			Tangible Book Value per Share 1,2	19.49			20.17			20.22			21.03			20.38

Capital Ratios:5	Capital Ratios:5																Capital Ratios:5

Tier 1 Leverage Ratio	Tier 1 Leverage Ratio	9.39		%	9.29		%	9.37		%	9.07		%	9.17		%	Tier 1 Leverage Ratio	9.71		%	9.60		%	9.37		%	9.20		%	9.39		%
Common Equity Tier 1 Capital Ratio	Common Equity Tier 1 Capital Ratio	13.71		%	13.79		%	13.56		%	13.39		%	13.20		%	Common Equity Tier 1 Capital Ratio	13.14		%	13.14		%	13.48		%	13.77		%	13.71		%
Tier 1 Risk-Based Capital Ratio	Tier 1 Risk-Based Capital Ratio	14.51		%	14.61		%	14.39		%	14.24		%	14.06		%	Tier 1 Risk-Based Capital Ratio	13.85		%	13.86		%	14.23		%	14.55		%	14.51		%
Total Risk-Based Capital Ratio	Total Risk-Based Capital Ratio	15.66		%	15.78		%	15.55		%	15.48		%	15.28		%	Total Risk-Based Capital Ratio	14.93		%	14.93		%	15.33		%	15.69		%	15.66		%

Assets Under Trust Admin. & Investment Mgmt.	Assets Under Trust Admin. & Investment Mgmt.	$	1,778,659		$	1,804,854		$	1,725,754		$	1,659,029		$	1,537,128		Assets Under Trust Admin. & Investment Mgmt.	$	1,515,994		$	1,589,178		$	1,793,747		$	1,851,101		$	1,778,659

4947

Arrow Financial Corporation

Selected Quarterly Information - Continued

(Dollars In Thousands, Except Per Share Amounts - Unaudited)

Footnotes:
1. Share and Per Share Data have been restated for the September 24, 2021, 3% stock dividend.
2. Non-GAAP Financial Measures Reconciliation: Tangible Book Value, Tangible Equity and Return on Tangible Equity exclude goodwill and other intangible assets, net from total equity. These are non-GAAP financial measures which Arrow believes provide investors with information that is useful in understanding our financial performance. See "Use of Non-GAAP Financial Measures" on page 48.
9/30/2021 6/30/2021 3/31/2021 12/31/2020 9/30/2020
Total Stockholders' Equity (GAAP) $ 360,171 $ 353,033 $ 342,413 $ 334,392 $ 325,660
Less: Goodwill and Other Intangible assets, net 23,879 23,955 23,922 23,823 23,662
Tangible Equity (Non-GAAP) $ 336,292 $ 329,078 $ 318,491 $ 310,569 $ 301,998
Period End Shares Outstanding 16,020 16,039 16,009 15,981 15,954
Tangible Book Value per Share
     (Non-GAAP) $ 20.99 $ 20.52 $ 19.89 $ 19.43 $ 18.93
Net Income 12,989 13,279 13,280 12,495 11,046
Return on Average Tangible Equity (Net Income/Tangible Equity - Annualized) 15.36 % 16.32 % 17.00 % 16.13 % 14.61 %
3. Non-GAAP Financial Measures Reconciliation: Net Interest Margin, Tax-Equivalent is the ratio of our annualized tax-equivalent net interest income to average earning assets. This is also a non-GAAP financial measure which Arrow believes provides investors with information that is useful in understanding our financial performance. See "Use of Non-GAAP Financial Measures" on page 48.
9/30/2021 6/30/2021 3/31/2021 12/31/2020 9/30/2020
Interest Income (GAAP) $ 29,807 $ 29,695 $ 27,694 $ 28,372 $ 27,296
Add: Tax-Equivalent adjustment
     (Non-GAAP) 292 293 235 251 284
Interest Income - Tax Equivalent
     (Non-GAAP) $ 30,099 $ 29,988 $ 27,929 $ 28,623 $ 27,580
Net Interest Income (GAAP) $ 28,638 $ 28,360 $ 26,155 $ 26,454 $ 24,900
Add: Tax-Equivalent adjustment
     (Non-GAAP) 292 293 235 251 284
Net Interest Income - Tax Equivalent
     (Non-GAAP) $ 28,930 $ 28,653 $ 26,390 $ 26,705 $ 25,184
Average Earning Assets $ 3,734,206 $ 3,688,572 $ 3,546,339 $ 3,550,415 $ 3,417,638
Net Interest Margin (Non-GAAP)* 3.07 % 3.12 % 3.02 % 2.99 % 2.93 %
4. Non-GAAP Financial Measures: Financial Institutions often use the "efficiency ratio", a non-GAAP ratio, as a measure of expense control. Arrow believes that the efficiency ratio provides investors with information that is useful in understanding our financial performance. Arrow defines efficiency ratio as the ratio of our noninterest expense to our net gross income (which equals tax-equivalent net interest income plus noninterest income, as adjusted). There is no GAAP financial measure that is closely comparable to the efficiency ratio. See "Use of Non-GAAP Financial Measures" on page 48.
5. For the current quarter, all of the regulatory capital ratios in the table above, as well as the Total Risk-Weighted Assets and Common Equity Tier 1 Capital amounts listed in the table below, are estimates based on, and calculated in accordance with, bank regulatory capital rules. All prior quarters reflect actual results. The CET1 ratio at September 30, 2021 listed in the tables (i.e., 13.71%) exceeds the sum of the required minimum CET1 ratio plus the fully phased-in Capital Conservation Buffer (i.e., 7.00%).
9/30/2021 6/30/2021 3/31/2021 12/31/2020 9/30/2020
Total Risk Weighted Assets $ 2,511,910 $ 2,438,445 $ 2,404,456 $ 2,357,094 $ 2,321,637
Common Equity Tier 1 Capital 344,507 336,265 326,039 315,696 306,356
Common Equity Tier 1 Capital Ratio 13.71 % 13.79 % 13.56 % 13.39 % 13.20 %
* Quarterly ratios have been annualized.


Footnotes:

1.	Share and Per Share Data have been restated for the September 23, 2022, 3% stock dividend.

2.	Non-GAAP Financial Measures Reconciliation: Tangible Book Value, Tangible Equity and Return on Tangible Equity exclude goodwill and other intangible assets, net from total equity. These are non-GAAP financial measures which Arrow believes provide investors with information that is useful in understanding our financial performance. See "Use of Non-GAAP Financial Measures" on page 46.
		9/30/2022			6/30/2022			3/31/2022			12/31/2021			9/30/2021
	Total Stockholders' Equity (GAAP)	$	345,550		$	356,498		$	357,243		$	371,186		$	360,171
	Less: Goodwill and Other Intangible assets, net	23,477			23,583			23,691			23,791			23,879
	Tangible Equity (Non-GAAP)	$	322,073		$	332,915		$	333,552		$	347,395		$	336,292

	Period End Shares Outstanding	16,523			16,503			16,493			16,522			16,500
	Tangible Book Value per Share (Non-GAAP)	$	19.49		$	20.17		$	20.22		$	21.03		$	20.38
	Net Income	12,163			11,974			12,575			10,309			12,989
	Return on Average Tangible Equity (Net Income/Tangible Equity - Annualized)	14.27		%	14.40		%	14.72		%	12.01		%	15.36		%

3.	Non-GAAP Financial Measures Reconciliation: Net Interest Margin, Tax-Equivalent is the ratio of our annualized tax-equivalent net interest income to average earning assets. This is also a non-GAAP financial measure which Arrow believes provides investors with information that is useful in understanding our financial performance. See "Use of Non-GAAP Financial Measures" on page 46.
		9/30/2022			6/30/2022			3/31/2022			12/31/2021			9/30/2021
	Interest Income (GAAP)	$	34,207		$	30,593		$	28,947		$	28,354		$	29,807
	Add: Tax-Equivalent adjustment (Non-GAAP)	268			269			270			285			292
	Interest Income - Tax Equivalent (Non-GAAP)	$	34,475		$	30,862		$	29,217		$	28,639		$	30,099
	Net Interest Income (GAAP)	$	30,901		$	29,038		$	27,825		$	27,202		$	28,638
	Add: Tax-Equivalent adjustment (Non-GAAP)	268			269			270			285			292
	Net Interest Income - Tax Equivalent (Non-GAAP)	$	31,169		$	29,307		$	28,095		$	27,487		$	28,930
	Average Earning Assets	$	3,902,119		$	3,858,837		$	3,886,787		$	3,894,287		$	3,734,206
	Net Interest Margin (Non-GAAP)*	3.17		%	3.05		%	2.93		%	2.80		%	3.07		%

4.	Non-GAAP Financial Measures: Financial Institutions often use the "efficiency ratio", a non-GAAP ratio, as a measure of expense control. Arrow believes that the efficiency ratio provides investors with information that is useful in understanding our financial performance. Arrow defines efficiency ratio as the ratio of our noninterest expense to our net gross income (which equals tax-equivalent net interest income plus noninterest income, as adjusted). There is no GAAP financial measure that is closely comparable to the efficiency ratio. See "Use of Non-GAAP Financial Measures" on page 46.

5.	For the current quarter, all of the regulatory capital ratios in the table above, as well as the Total Risk-Weighted Assets and Common Equity Tier 1 (CET1) Capital amounts listed in the table below, are estimates based on, and calculated in accordance with, bank regulatory capital rules. All prior quarters reflect actual results. The CET1 ratio at September 30, 2022 listed in the tables (i.e., 13.14%) exceeds the sum of the required minimum CET1 ratio plus the fully phased-in Capital Conservation Buffer (i.e., 7.00%).
		9/30/2022			6/30/2022			3/31/2022			12/31/2021			9/30/2021

	Total Risk Weighted Assets	$	2,856,224		$	2,790,520		$	2,661,952		$	2,552,812		$	2,511,910
	Common Equity Tier 1 Capital	375,394			366,798			358,738			351,497			344,507
	Common Equity Tier 1 Capital Ratio	13.14		%	13.14		%	13.48		%	13.77		%	13.71		%

* Quarterly ratios have been annualized.

5048

Arrow Financial Corporation

Selected Year-to-Date Information

(Dollars In Thousands, Except Per Share Amounts - Unaudited)


Nine Months Ended	Nine Months Ended	9/30/2021			9/30/2020			Nine Months Ended	9/30/2022			9/30/2021
Net Income	Net Income	$	39,548		$	28,332		Net Income	$	36,712		$	39,548
Transactions Recorded in Net Income (Net of Tax):	Transactions Recorded in Net Income (Net of Tax):							Transactions Recorded in Net Income (Net of Tax):
Net Changes in Fair Value of Equity Investments	Net Changes in Fair Value of Equity Investments	186			(412)			Net Changes in Fair Value of Equity Investments	280			186

Share and Per Share Data: 1	Share and Per Share Data: 1							Share and Per Share Data: 1
Period End Shares Outstanding	Period End Shares Outstanding	16,020			15,954			Period End Shares Outstanding	16,523			16,500
Basic Average Shares Outstanding	Basic Average Shares Outstanding	16,015			15,917			Basic Average Shares Outstanding	16,506			16,495
Diluted Average Shares Outstanding	Diluted Average Shares Outstanding	16,072			15,931			Diluted Average Shares Outstanding	16,553			16,554
Basic Earnings Per Share	Basic Earnings Per Share	$	2.47		$	1.78		Basic Earnings Per Share	$	2.22		$	2.40
Diluted Earnings Per Share	Diluted Earnings Per Share	2.46			1.78			Diluted Earnings Per Share	2.22			2.39
Cash Dividend Per Share	Cash Dividend Per Share	0.76			0.74			Cash Dividend Per Share	0.79			0.74

Selected Year-to-Date Average Balances:	Selected Year-to-Date Average Balances:							Selected Year-to-Date Average Balances:
Interest-Bearing Deposits at Banks	Interest-Bearing Deposits at Banks	$	373,531		$	144,244		Interest-Bearing Deposits at Banks	$	289,681		$	373,531
Investment Securities	Investment Securities	646,264			601,069			Investment Securities	813,590			646,264
Loans	Loans	2,637,265			2,498,573			Loans	2,785,721			2,637,265
Deposits	Deposits	3,362,670			2,902,307			Deposits	3,583,570			3,362,670
Other Borrowed Funds	Other Borrowed Funds	76,563			145,463			Other Borrowed Funds	56,219			76,563
Stockholders’ Equity	Stockholders’ Equity	350,167			315,757			Stockholders’ Equity	363,024			350,167
Total Assets	Total Assets	3,822,689			3,401,114			Total Assets	4,038,533			3,822,689
Return on Average Assets, annualized	Return on Average Assets, annualized	1.38		%	1.11		%	Return on Average Assets, annualized	1.22		%	1.38		%
Return on Average Equity, annualized	Return on Average Equity, annualized	15.10		%	11.99		%	Return on Average Equity, annualized	13.52		%	15.10		%
Return on Average Tangible Equity, annualized 2	Return on Average Tangible Equity, annualized 2	16.21		%	12.95		%	Return on Average Tangible Equity, annualized 2	14.46		%	16.21		%
Average Earning Assets	Average Earning Assets	3,657,060			3,243,886			Average Earning Assets	3,888,992			3,657,060
Average Paying Liabilities	Average Paying Liabilities	2,689,070			2,455,544			Average Paying Liabilities	2,815,115			2,689,070
Interest Income	Interest Income	87,196			83,524			Interest Income	93,747			87,196
Tax-Equivalent Adjustment 3	Tax-Equivalent Adjustment 3	820			853			Tax-Equivalent Adjustment 3	807			820
Interest Income, Tax-Equivalent 3	Interest Income, Tax-Equivalent 3	88,016			84,377			Interest Income, Tax-Equivalent 3	94,554			88,016
Interest Expense	Interest Expense	4,043			10,776			Interest Expense	5,983			4,043
Net Interest Income	Net Interest Income	83,153			72,748			Net Interest Income	87,764			83,153
Net Interest Income, Tax-Equivalent 3	Net Interest Income, Tax-Equivalent 3	83,973			73,601			Net Interest Income, Tax-Equivalent 3	88,571			83,973
Net Interest Margin, annualized	Net Interest Margin, annualized	3.04		%	3.00		%	Net Interest Margin, annualized	3.02		%	3.04		%
Net Interest Margin, Tax Equivalent, annualized 3	Net Interest Margin, Tax Equivalent, annualized 3	3.07		%	3.03		%	Net Interest Margin, Tax Equivalent, annualized 3	3.04		%	3.07		%

Efficiency Ratio Calculation: 4	Efficiency Ratio Calculation: 4							Efficiency Ratio Calculation: 4
Noninterest Expense	Noninterest Expense	$	57,188		$	52,486		Noninterest Expense	$	60,738		$	57,188
Less: Intangible Asset Amortization	Less: Intangible Asset Amortization	158			171			Less: Intangible Asset Amortization	145			158
Net Noninterest Expense	Net Noninterest Expense	57,030			52,315			Net Noninterest Expense	60,593			57,030
Net Interest Income, Tax-Equivalent 3	Net Interest Income, Tax-Equivalent 3	83,973			73,601			Net Interest Income, Tax-Equivalent 3	88,571			83,973
Noninterest Income	Noninterest Income	24,780			23,555			Noninterest Income	23,733			24,780

Less: Net Changes in Fair Value of Equity Securities	Less: Net Changes in Fair Value of Equity Securities	250			(552)			Less: Net Changes in Fair Value of Equity Securities	379			250
Net Gross Income	Net Gross Income	108,503			97,708			Net Gross Income	111,925			108,503
Efficiency Ratio 4	Efficiency Ratio 4	52.56		%	53.54		%	Efficiency Ratio 4	54.14		%	52.56		%

5149

Arrow Financial Corporation

Selected Year-to-Date Information - Continued

(Dollars In Thousands, Except Per Share Amounts - Unaudited)


Footnotes:	Footnotes:								Footnotes:

1.	1.	Share and Per Share Data have been restated for the September 24, 2021, 3% stock dividend.							1.	Share and Per Share Data have been restated for the September 23, 2022, 3% stock dividend.

2.	2.	Tangible Book Value, Tangible Equity and Return on Tangible Equity exclude goodwill and other intangible assets, net from total equity. These are non-GAAP financial measures which Arrow believes provide investors with information that is useful in understanding our financial performance. See "Use of Non-GAAP Financial Measures" on page 48.							2.	Tangible Book Value, Tangible Equity and Return on Tangible Equity exclude goodwill and other intangible assets, net from total equity. These are non-GAAP financial measures which Arrow believes provide investors with information that is useful in understanding our financial performance. See "Use of Non-GAAP Financial Measures" on page 46.
			9/30/2021			9/30/2020					9/30/2022			9/30/2021
		Total Stockholders' Equity (GAAP)	$	360,171		$	325,660			Total Stockholders' Equity (GAAP)	$	345,550		$	360,171
		Less: Goodwill and Other Intangible assets, net	23,879			23,662				Less: Goodwill and Other Intangible assets, net	23,477			23,879
		Tangible Equity (Non-GAAP)	$	336,292		$	301,998			Tangible Equity (Non-GAAP)	$	322,073		$	336,292

		Period End Shares Outstanding	16,020			15,954				Period End Shares Outstanding	16,523			16,500
		Tangible Book Value per Share (Non-GAAP)	$	20.99		$	18.93			Tangible Book Value per Share (Non-GAAP)	$	19.49		$	20.38
		Net Income	39,548			28,332				Net Income	36,712			39,548
		Return on Average Tangible Equity (Net Income/Tangible Equity - Annualized)	16.21		%	12.95		%		Return on Average Tangible Equity (Net Income/Tangible Equity - Annualized)	14.46		%	16.21		%

3.	3.	Net Interest Margin is the ratio of our annualized tax-equivalent net interest income to average earning assets. This is also a non-GAAP financial measure which Arrow believes provides investors with information that is useful in understanding our financial performance. See "Use of Non-GAAP Financial Measures" on page 48.							3.	Net Interest Margin is the ratio of our annualized tax-equivalent net interest income to average earning assets. This is also a non-GAAP financial measure which Arrow believes provides investors with information that is useful in understanding our financial performance. See "Use of Non-GAAP Financial Measures" on page 46.
			9/30/2021			9/30/2020					9/30/2022			9/30/2021
		Interest Income (GAAP)	$	87,196		$	83,524			Interest Income (GAAP)	$	93,747		$	87,196
		Add: Tax-Equivalent adjustment (Non-GAAP)	820			853				Add: Tax-Equivalent adjustment (Non-GAAP)	806			820
		Net Interest Income - Tax Equivalent (Non-GAAP)	88,016			84,377				Net Interest Income - Tax Equivalent (Non-GAAP)	94,553			88,016
		Net Interest Income (GAAP)	83,153			72,748				Net Interest Income (GAAP)	87,764			83,153
		Add: Tax-Equivalent adjustment (Non-GAAP)	820			853				Add: Tax-Equivalent adjustment (Non-GAAP)	806			820
		Net Interest Income - Tax Equivalent (Non-GAAP)	$	83,973		$	73,601			Net Interest Income - Tax Equivalent (Non-GAAP)	$	88,570		$	83,973
		Average Earning Assets	$	3,657,060		$	3,243,886			Average Earning Assets	$	3,888,992		$	3,657,060
		Net Interest Margin (Non-GAAP)*	3.07		%	3.03		%		Net Interest Margin (Non-GAAP)*	3.04		%	3.07		%

4.	4.	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 financial performance. The efficiency ratio is defined as the ratio of our noninterest expense to our net gross income (which equals our tax-equivalent net interest income plus noninterest income, as adjusted). See "Use of Non-GAAP Financial Measures" on page 48.							4.	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 financial performance. The efficiency ratio is defined as the ratio of our noninterest expense to our net gross income (which equals our tax-equivalent net interest income plus noninterest income, as adjusted). See "Use of Non-GAAP Financial Measures" on page 46.

* Year-to-date ratios have been annualized.	* Year-to-date ratios have been annualized.								* Year-to-date ratios have been annualized.

5250


Average Consolidated Balance Sheets and Net Interest Income Analysis	Average Consolidated Balance Sheets and Net Interest Income Analysis													Average Consolidated Balance Sheets and Net Interest Income Analysis

(Dollars In Thousands)	(Dollars In Thousands)													(Dollars In Thousands)

Quarter Ended September 30:	Quarter Ended September 30:	2021						2020						Quarter Ended September 30:	2022						2021
				Interest		Rate				Interest		Rate					Interest		Rate				Interest		Rate
		Average		Income/		Earned/		Average		Income/		Earned/			Average		Income/		Earned/		Average		Income/		Earned/
		Balance		Expense		Paid		Balance		Expense		Paid			Balance		Expense		Paid		Balance		Expense		Paid
Interest-Bearing Deposits at Banks	Interest-Bearing Deposits at Banks	$	416,500	$	163	0.16	%	$	242,928	$	64	0.10	%	Interest-Bearing Deposits at Banks	$	209,001	$	1,201	2.28	%	$	416,500	$	163	0.16	%
Investment Securities:	Investment Securities:													Investment Securities:
Fully Taxable	Fully Taxable	494,869		1,632		1.31		395,349		1,557		1.57		Fully Taxable	651,899		2,603		1.58		494,869		1,632		1.31
Exempt from Federal Taxes	Exempt from Federal Taxes	181,111		855		1.87		197,108		969		1.96		Exempt from Federal Taxes	169,153		785		1.84		181,111		855		1.87
Loans	Loans	2,641,726		27,157		4.08		2,582,253		24,706		3.81		Loans	2,872,066		29,618		4.09		2,641,726		27,157		4.08
Total Earning Assets	Total Earning Assets	3,734,206		29,807		3.17		3,417,638		27,296		3.18		Total Earning Assets	3,902,119		34,207		3.48		3,734,206		29,807		3.17
Allowance for Credit Losses	Allowance for Credit Losses	(27,040)						(26,310)						Allowance for Credit Losses	(28,006)						(27,040)
Cash and Due From Banks	Cash and Due From Banks	38,036						37,905						Cash and Due From Banks	32,475						38,036
Other Assets	Other Assets	156,839						154,089						Other Assets	141,150						156,839
Total Assets	Total Assets	$	3,902,041					$	3,583,322					Total Assets	$	4,047,738					$	3,902,041
Deposits:	Deposits:													Deposits:
Interest-Bearing Checking Accounts	Interest-Bearing Checking Accounts	$	923,002	156		0.07		$	764,614	264		0.14		Interest-Bearing Checking Accounts	$	996,116	267		0.11		$	923,002	155		0.07
Savings Deposits	Savings Deposits	1,496,938		424		0.11		1,314,241		806		0.24		Savings Deposits	1,549,451		2,469		0.63		1,496,938		424		0.11
Time Deposits of $250,000 or More	Time Deposits of $250,000 or More	71,435		39		0.22		121,027		292		0.96		Time Deposits of $250,000 or More	49,459		89		0.71		71,435		39		0.22
Other Time Deposits	Other Time Deposits	141,721		133		0.37		209,436		576		1.09		Other Time Deposits	136,834		150		0.43		141,721		133		0.37
Total Interest-Bearing Deposits	Total Interest-Bearing Deposits	2,633,096		751		0.11		2,409,318		1,938		0.32		Total Interest-Bearing Deposits	2,731,860		2,975		0.43		2,633,096		751		0.11
Short-Term Borrowings	Short-Term Borrowings	2,012		—		—		60,894		17		0.11		Short-Term Borrowings	—		—				2,012		—		—
FHLBNY Term Advances & Other Long-Term Debt	FHLBNY Term Advances & Other Long-Term Debt	65,000		370		2.26		70,000		392		2.23		FHLBNY Term Advances & Other Long-Term Debt	45,000		283		2.50		65,000		370		2.26
Finance Leases	Finance Leases	5,175		48		3.68		5,223		49		3.73		Finance Leases	5,125		48		3.72		5,175		48		3.68
Total Interest-Bearing Liabilities	Total Interest-Bearing Liabilities	2,705,283		1,169		0.17		2,545,435		2,396		0.37		Total Interest-Bearing Liabilities	2,781,985		3,306		0.47		2,705,283		1,169		0.17
Noninterest-bearing deposits	Noninterest-bearing deposits	802,837						673,181						Noninterest-bearing deposits	866,659						802,837
Other Liabilities	Other Liabilities	34,537						40,437						Other Liabilities	37,419						34,537
Total Liabilities	Total Liabilities	3,542,657						3,259,053						Total Liabilities	3,686,063						3,542,657
Stockholders’ Equity	Stockholders’ Equity	359,384						324,269						Stockholders’ Equity	361,675						359,384
Total Liabilities and Stockholders’ Equity	Total Liabilities and Stockholders’ Equity	$	3,902,041					$	3,583,322					Total Liabilities and Stockholders’ Equity	$	4,047,738					$	3,902,041

Net Interest Income	Net Interest Income			$	28,638					$	24,900			Net Interest Income			$	30,901					$	28,638
Net Interest Spread	Net Interest Spread					3.00	%					2.81	%	Net Interest Spread					3.01	%					3.00	%
Net Interest Margin	Net Interest Margin					3.04	%					2.90	%	Net Interest Margin					3.14	%					3.04	%


Average Consolidated Balance Sheets and Net Interest Income Analysis
(GAAP Basis)
(Dollars In Thousands)

Nine Months Ended September 30:	2022						2021
			Interest		Rate				Interest		Rate
	Average		Income/		Earned/		Average		Income/		Earned/
	Balance		Expense		Paid		Balance		Expense		Paid
Interest-Bearing Deposits at Banks	$	289,681	$	1,826	0.84	%	$	373,531	$	351	0.13	%
Investment Securities:
Fully Taxable	638,504		7,236		1.52		459,527		4,809		1.40
Exempt from Federal Taxes	175,086		2,422		1.85		186,737		2,682		1.92
Loans	2,785,721		82,263		3.95		2,637,265		79,354		4.02
Total Earning Assets	3,888,992		93,747		3.22		3,657,060		87,196		3.19
Allowance for Credit Losses	(27,579)						(27,235)
Cash and Due From Banks	30,370						36,272
Other Assets	146,750						156,592
Total Assets	$	4,038,533					$	3,822,689
Deposits:
Interest-Bearing Checking Accounts	$	1,024,087	629		0.08		$	902,772	566		0.08
Savings Deposits	1,549,610		3,778		0.33		1,471,467		1,490		0.14
Time Deposits of $250,000 or More	52,251		143		0.37		92,111		228		0.33
Other Time Deposits	132,948		370		0.37		146,157		511		0.47
Total Interest-Bearing Deposits	2,758,896		4,920		0.24		2,612,507		2,795		0.14
Short-Term Borrowings	(1)		—				6,375		3		0.06
FHLBNY Term Advances & Other Long-Term Debt	51,081		918		2.40		65,000		1,099		2.26
Finance Leases	5,139		145		3.77		5,188		146		3.76
Total Interest-Bearing Liabilities	2,815,115		5,983		0.28		2,689,070		4,043		0.20
Noninterest-bearing deposits	824,674						750,163
Other Liabilities	35,720						33,289
Total Liabilities	3,675,509						3,472,522
Stockholders’ Equity	363,024						350,167
Total Liabilities and Stockholders’ Equity	$	4,038,533					$	3,822,689


Net Interest Income			$	87,764					$	83,153
Net Interest Spread					2.94	%					2.99	%
Net Interest Margin					3.02	%					3.04	%

Average Consolidated Balance Sheets and Net Interest Income Analysis
(GAAP Basis)
(Dollars In Thousands)
Nine Months Ended September 30: 2021 2020
Interest Rate Interest Rate
Average Income/ Earned/ Average Income/ Earned/
Balance Expense Paid Balance Expense Paid
Interest-Bearing Deposits at Banks $ 373,531 $ 351 0.13 % $ 144,244 $ 229 0.21 %
Investment Securities:
Fully Taxable 459,527 4,809 1.40 % 399,958 5,621 1.88 %
Exempt from Federal Taxes 186,737 2,682 1.92 % 201,111 3,017 2.00 %
Loans 2,637,265 79,354 4.02 % 2,498,573 74,657 3.99 %
Total Earning Assets 3,657,060 87,196 3.19 % 3,243,886 83,524 3.44 %
Allowance for Credit Losses (27,235) (24,037)
Cash and Due From Banks 36,272 34,624
Other Assets 156,592 146,641
Total Assets $ 3,822,689 $ 3,401,114
Deposits:
Interest-Bearing Checking Accounts $ 902,772 566 0.08 $ 737,647 1,061 0.19
Savings Deposits 1,471,467 1,490 0.14 1,207,896 4,450 0.49
Time Deposits of $250,000 or More 92,111 228 0.33 127,659 1,263 1.32
Other Time Deposits 146,157 511 0.47 236,879 2,360 1.33
Total Interest-Bearing Deposits 2,612,507 2,795 0.14 2,310,081 9,134 0.53
Short-Term Borrowings 6,375 3 0.06 69,132 241 0.47
FHLBNY Term Advances & Other Long-Term Debt 65,000 1,099 2.26 71,095 1,253 2.35
Finance Leases 5,188 146 3.76 5,236 148 3.78
Total Interest-Bearing Liabilities 2,689,070 4,043 0.20 2,455,544 10,776 0.59
Noninterest-bearing deposits 750,163 592,226
Other Liabilities 33,289 37,587
Total Liabilities 3,472,522 3,085,357
Stockholders’ Equity 350,167 315,757
Total Liabilities and Stockholders’ Equity $ 3,822,689 $ 3,401,114
Net Interest Income $ 83,153 $ 72,748
Net Interest Spread 2.99 % 2.85 %
Net Interest Margin 3.04 % 3.00 %

5452

OVERVIEW

The following discussion and analysis focuses on and reviews the results of operations for the three-month ~~and nine-month~~ period ended September 30, ~~2021~~2022 and the financial conditions as of September 30, ~~2021~~2022 and ~~2020.~~2021. The discussion below should be read in conjunction with the selected quarterly and annual information set forth above and the Unaudited Interim 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.

COVID-19 Pandemic:

~~In the third quarter of 2021,~~ Arrow ~~complied with the New York State HERO Act by implementing required face coverings for employees. The Arrow Business Continuity Plan Committee~~ continues to meet regularly to evaluate pandemic metrics and our response, including our plans with respect to the pending Occupational Safety and Health Administration ("OSHA") guidance concerning vaccination requirements for large employers, which is being issued in response to President Biden's COVID-19 Action Plan announced on September 9, 2021.

~~As Arrow cannot predict the duration or scope of~~monitor the pandemic ~~or its impact on economic~~ and ~~financial markets or its impact~~all the challenges it presents on the business, ~~including with respect to emerging variants, Arrow is currently unable to reasonably estimate~~operations and the ~~overall impact on the Company.~~health and safety of our employees and customers.

Summary of Q3 ~~2021~~2022 Financial Results: Net income for the third quarter of ~~2021~~2022 was ~~$13.0~~$12.2 million, compared to ~~$11.0~~$13.0 million for the third quarter of 2021. The year-over-year decline in third-quarter net income was primarily due to the decrease of $2.4 million in income earned on loans made under the Paycheck Protection Program (PPP) and an increase in the provision expense for credit losses to $1.7 million as compared to $99 thousand in the third quarter of ~~2020.~~2021. Other factors impacting the net income for the third quarter of 2022 include: the impact of non-interest expenses of $550 thousand relating to additional actuarial pension expense recognized in the quarter as a result of exceeding the threshold amount of lump sum distributions during the year; the addition of $536 thousand related to an amortization adjustment of indirect loans; and a decrease of $193 thousand in the net gain on sale of loans when compared to the prior-year quarter.

Diluted earnings per share (EPS) for the quarter was ~~$0.81, an increase~~$0.74, a decrease of ~~17.4%~~5.1% from EPS of ~~$0.69~~$0.78 reported for the third quarter of ~~2020.~~2021. Return on average equity (ROE) for the third quarter of ~~2021 increased~~2022 decreased to ~~14.34%~~13.34%, as compared to a ROE of ~~13.55%~~14.34% for the quarter ended September 30, ~~2020.~~2021. Return on average assets (ROA) for the third quarter of ~~2021~~2022 was ~~1.32%~~1.19%, ~~an increase~~a decrease from an ROA of ~~1.23%~~1.32% for the quarter ended September 30, ~~2020.~~2021.

Total loans were ~~$2.7~~$2.9 billion as of September 30, ~~2021.~~2022 reaching a record high for Arrow. Loan growth for the third quarter of ~~2021~~2022 was ~~$10.7~~$80.0 million and increased ~~$62.3~~$270.0 million, or ~~2.4%~~10.2%, from September 30, ~~2020. Total~~2021. In the third quarter, total outstanding commercial loans ~~decreased $37.8~~increased $16.3 million, or ~~4.5%, in the third quarter. PPP loans, included in the commercial portfolio, decreased $56.7 million in the third quarter.~~2.0%. The consumer loan portfolio grew by ~~$28.6~~$24.5 million, or ~~3.2%~~2.4%, in the third quarter, primarily within the indirect automobile lending program. Total outstanding residential real estate loans ~~net of approximately $4.0~~increased $39.2 million, ~~of loans sold, increased $19.8 million~~or 3.9%, for the third quarter of ~~2021.~~2022.

At September 30, ~~2021,~~2022, deposit balances were ~~$3.6~~$3.8 billion. Deposits ~~increased~~ in the third quarter of ~~2021~~2022 increased by ~~$167.5~~$249.4 million from the prior quarter and increased by ~~$340.7~~$189.5 million, or ~~10.4%~~5.3%, from the prior-year level. Municipal deposits increased ~~$118.4~~$127.3 million in the third quarter and ~~$134.0~~$13.8 million, or ~~15.8%~~1.4%, from September 30, ~~2020.~~2021. Non-municipal deposits increased ~~$49.1~~$122.1 million for the quarter and $175.7 million, or ~~8.6%~~6.7%, from September 30, ~~2020.~~2021. Noninterest-bearing deposits represented 24.0% of total deposits at September 30, 2022, compared to 23.4% of total deposits at September 30, ~~2021, compared to 21.1% of total deposits at September 30, 2020.~~2021. At September 30, ~~2021, other~~2022, total time deposits were ~~$138.7 million, a decrease of $55.4 million compared to the prior year.~~$186.7 million.

Net interest income for the third quarter was ~~$28.6~~$30.9 million, up ~~15.0%~~7.9% from ~~$24.9~~$28.6 million in the comparable quarter of ~~2020.~~2021. Interest and fees on loans were ~~$27.2~~$29.6 million for the third quarter of ~~2021,~~2022, an increase of ~~9.9%~~9.1% from ~~$24.7~~$27.2 million for the quarter ending September 30, ~~2020.~~2021. The increase was primarily due to loan growth and higher market rates. Interest and fees related to PPP loans, included in the ~~$27.2~~$29.6 million total, were ~~$2.5 million~~$70 thousand in the third quarter of ~~2021.~~2022, a decrease of $2.4 million from the third quarter of 2021 primarily resulting from the wind-down of the PPP loan program. Interest expense for the third quarter of ~~2021~~2022 was ~~$1.2~~$3.3 million, ~~a decrease~~an increase of ~~$1.2~~$2.1 million, or ~~51.2%~~182.8%, from ~~the $2.4~~$1.2 million in expense for the comparable quarter ending September 30, ~~2020.~~2021. The ~~net~~increase was primarily the result of year-over-year deposit growth and higher deposit rates.

Net interest margin was ~~3.04%~~3.14% for the quarter, compared to ~~2.90%~~3.04% for the third quarter of ~~2020.~~2021. The increase in net interest margin ~~from the prior year~~ was due to a variety of factors including higher market rates impacting asset yields, a reduction in cash balances and a one-time adjustment related to indirect loan fees. Net interest margin, excluding PPP income, increased to 3.14% from 2.84% in the ~~timing~~comparable prior-year quarter. The cost of interest-bearing liabilities increased primarily due to the ~~forgiveness~~repricing of ~~PPP loans partially offset by lower interest rates~~municipal deposits and ~~increased cash balances.~~retail CD specials.

Noninterest income for the three months ended September 30, ~~2021~~2022, was ~~$7.7~~$7.8 million, compared to ~~$8.7~~$7.7 million in the comparable ~~2020~~2021 quarter. Income from fiduciary activities for the three months ended September 30, ~~2021, increased~~2022, decreased by ~~$306~~$230 thousand over the comparable quarter of ~~2020.~~2021, primarily driven by market conditions. Fees and other services to customers increased ~~$347~~$105 thousand over the comparable quarter of ~~2020. Interchange fees related to increased customer activity of debit card usage was the largest driver of the increase.~~2021. Gain on sales of loans decreased ~~$1.2 million~~$193 thousand from the third quarter of ~~2020 as~~2021. Other operating income increased $176 thousand from the comparable quarter of 2021 due to a ~~result~~variety of ~~the strategic decision to retain more newly originated real estate loans.~~factors, including bank-owned life insurance proceeds.

Noninterest expense for the third quarter of ~~2021~~2022 was ~~$19.4~~$21.4 million, an increase from ~~$17.5~~$19.4 million for the third quarter of ~~2020.~~2021. The largest component of noninterest expense was salaries and benefits paid to ~~our~~ employees, which totaled ~~$11.4~~$12.4 million for the third quarter of ~~2021. The increase was due to a special employee recognition bonus of approximately $500 thousand in the aggregate which occurred in~~2022. In the third ~~quarter. Technology expenses increased from~~quarter of 2022, $550 thousand relating to additional actuarial pension expense was recognized as a result of exceeding the ~~prior year in part due to variable costs related to increased utilization~~threshold amount of ~~consumer banking technology. Other non-interest~~lump sum distributions during the year. The expense ~~included an increase in the reserve~~ for estimated credit losses on off-balance sheet credit exposures ~~of $300 thousand~~included in ~~the third quarter.~~other expenses was $30 thousand.

For the third quarter of ~~2021,~~2022, the provision for credit losses was ~~$99 thousand. The allowance for credit losses was $27.0~~$1.7 million, ~~on September 30, 2021, which represented 1.02% of loans outstanding, as~~ compared to ~~1.10% on September 30, 2020.~~

$99 thousand in provision expense in the prior-year quarter. The key drivers for the increase were strong loan growth and a deterioration in forecasted economic conditions. The changes in net income, net interest income and net interest margin between the three-month and nine-month periods are discussed in detail under the heading "RESULTS OF OPERATIONS," beginning on page ~~69.~~68.

Regulatory Capital and ~~Increase~~Change in Stockholders' Equity: At September 30, ~~2021,~~2022, Arrow continued to exceed all required minimum capital ratios under the current bank regulatory capital rules as implemented under the Dodd-Frank Wall Street Reform and Consumer Protection Act (the "Capital Rules") at both the holding company and bank levels. At that date, both subsidiary banks, as well as the holding company, continued to qualify as "well-capitalized" under the capital classification guidelines as defined by the

Capital Rules. Because of continued profitability and strong asset quality, the regulatory capital levels throughout recent years have consistently remained well in excess of the various required regulatory minimums in effect from time to time, as they do at present.

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

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

Stockholders’ equity was ~~$360.2~~$345.6 million at September 30, ~~2021, an increase~~2022, a decrease of ~~$25.8~~$25.6 million, or ~~7.7%~~6.9%, from the December 31, ~~2020~~2021 level of ~~$334.4~~$371.2 million, and ~~an increase~~a decrease of ~~$34.5~~$14.6 million, or ~~10.6%~~4.1%, from the prior-year level. The ~~increase~~decrease in stockholders' equity over the first nine months of ~~2021~~2022 principally reflected the following factors: the addition of (i) ~~$39.5~~$36.7 million of net income for the period plus (ii) issuance of ~~$3.8~~$2.8 million of common stock through employee benefit and dividend reinvestment plans ~~plus (iii) cumulative impact of adoption of ASU 2016-13 of $120 thousand;~~ reduced by ~~(iv)~~(iii) other comprehensive ~~income~~loss of ~~$2.9~~$49.4 million, ~~(v)~~(iv) cash dividends of ~~$12.1~~$13.0 million and ~~(vi)~~(v) repurchases of common stock of ~~$2.6~~$2.7 million. The majority of other comprehensive loss, $52.8 million, relates to net unrealized losses on AFS debt securities as a result of rising interest rates which occurred during 2022. The components of the change in stockholders’ equity since year-end ~~2020~~2021 are presented in the Consolidated Statement of Changes in Stockholders’ Equity on page 6, and are discussed in more detail in the next section.

At September 30, ~~2021,~~2022, book value per share was ~~$22.48, up~~$20.91, down by ~~10.1%~~4.2% over the prior-year level. Tangible book value per share (a non-GAAP measure that deducts intangible assets from stockholders' equity) was ~~$20.99, an increase~~$19.49, a decrease of ~~$2.06,~~$0.89,or ~~10.9%~~4.4%, over the level as of September 30, ~~2020.~~2021. See the disclosure on page 4846 related to the use of non-GAAP financial measures including tangible book value.

On September 30, ~~2021,~~2022, Arrow's closing stock price was ~~$34.36,~~$28.82, representing a trading multiple of ~~1.64~~1.48 to tangible book value. In the third quarter of ~~2021,~~2022, Arrow paid a quarterly cash dividend of ~~$0.25. On September 24, 2021, a~~$0.27 which is $0.26, as adjusted for the 3% stock dividend ~~was distributed. This is the 13th consecutive year Arrow has declared a stock dividend.~~distributed on September 23, 2022 Further discussion of dividends is included in the Capital Components; Stock Repurchases; Dividends section located on page ~~67.~~66.

Loan Quality: Net charge-offs for the third quarter of ~~2021~~2022 were ~~$153~~$573 thousand as compared to ~~$125~~$153 thousand for the comparable ~~2020~~2021 quarter. The ratio of net charge-offs to average loans (annualized) was 0.08% for the three month period ended September 30, 2022, an increase from 0.02% for the three month period ended September 30, ~~2021, a decrease from 0.07% for the three month period ended December 31, 2020 and consistent with the three month period ended September 30, 2020.~~2021.

For the third quarter of ~~2021,~~2022, the provision for credit losses was ~~$99 thousand~~$1.7 million and the expense for estimated credit losses on off-balance sheet credit exposures was ~~$300~~$30 thousand. The allowance for credit losses was ~~$27.0~~$29.2 million on September 30, ~~2021,~~2022, which represented ~~1.02%~~1.00% of loans outstanding, as compared to ~~1.10%~~1.02% on September 30, ~~2020.~~2021.

Nonperforming loans were ~~$11.3~~$9.4 million at September 30, ~~2021,~~2022, representing ~~0.43%~~0.32% of period-end loans, ~~an increase~~a decrease from the September 30, ~~2020~~2021 ratio of ~~0.24%~~0.43% and a decrease from the December 31, 2021 ratio of 0.44%. ~~The increase was due to two commercial real estate loans being classified as nonaccrual during 2021.~~ The ratio continues to compare favorably with the weighted average ratio of the peer group of ~~0.58%~~0.42% at June 30, ~~2021.~~2022. Nonperforming assets of ~~$11.7~~$10.0 million at September 30, ~~2021~~2022 represented ~~0.29%~~0.24% of period-end assets updown from ~~0.17%~~0.29% at December 31, 2021 and September 30, ~~2020.~~2021.

Loan Segments: As of September 30, ~~2021,~~2022, total loans grew by ~~$59.7~~$256.9 million, or ~~2.3%~~9.6%, as compared to the balance at December 31, ~~2020.~~2021. The largest increase was in consumer loans which increased ~~$61.4~~$135.0 million, or ~~7.1%~~14.7%, primarily comprised of automobile loans. Commercial and commercial real estate loans, ~~decreased~~increased by ~~$9.1~~$16.7 million, or ~~1.1%~~2.1%, from December 31, ~~2020.~~2021. PPP loans, included in the commercial portfolio, decreased ~~$54.6~~$43.6 million from December 31, ~~2020, which includes $91.2 million of new loans originated and $145.8 million of loans forgiven.~~2021. The residential real estate loan portfolio increased ~~$7.4~~$105.1 million, ~~in 2021. The increase is net of approximately $48.7 million of loans sold in~~or 11.1%, from December 31, 2021.

•Commercial and Commercial Real Estate Loans: Combined, these loans comprise ~~30.3%~~28.0% of the total loan portfolio at period-end. Commercial property values in Arrow's ~~service area~~region have largely remained stable, however, there remains uncertainty surrounding market conditions due to the ~~pandemic.~~inflation and the rising interest rate environment. Appraisals on nonperforming and watched ~~commercial real estate~~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 ~~34.7%~~36.1% of the total loan portfolio at period-end. Consumer automobile loans at September 30, ~~2021,~~2022, were ~~99.4%~~99.5% of this portfolio ~~segment. In the first nine months of 2021, Arrow did not experience any significant increase in the delinquency rate or in the percentage of nonperforming loans in this~~ segment. The vast majority of automobile loans are initiated through the purchase of vehicles by consumers with automobile dealers. As of September 30, ~~2021,~~2022, demand ~~is strong. However,~~has remained stable. Although supply constraints ~~with both new~~have lessened, inflation and ~~used vehicles,~~higher rates may limit the potential growth in this category.

•Residential Real Estate Loans: These loans, including home equity loans, made up ~~35.0%~~35.9% of the total loan portfolio at period-end. The residential real estate market in Arrow's service area has been stable in recent periods. Arrow originated nearly all of the residential real estate loans currently held in the loan portfolio and applies conservative underwriting standards to loan originations. Arrow typically sells a portion of residential real estate mortgage originations into the secondary market. The ratio of the sales of originations to total originations tends to fluctuate from period to period based on market conditions and other factors. ~~Sales increased for~~Since the majority of 2021, due to a variety of factors, including strong demand for residential mortgages in our operating markets, favorable market conditions for mortgage sales and strategic balance sheet and interest-rate risk management decisions. In the third quarter ofsecond half 2021, sales have decreased as ~~the~~a result of the strategic decision to grow the residential loan portfolio. The rate at which mortgage loan originations are sold in future periods will depend on various circumstances, including prevailing mortgage rates, other lending opportunities, capital and liquidity needs, and the availability of a market for such transactions.

Liquidity and Access to Credit Markets: Arrow has not experienced any liquidity events or special concerns in recent years or thus far in ~~2021.~~2022. Arrow’s liquidity position provides the necessary flexibility to address any unexpected near-term disruptions. Interest-bearing cash balances at September 30, ~~2021~~2022 were ~~$548.9~~$328.6 million compared to ~~$396.4~~$548.9 million at September 30, ~~2020. Deposit~~2021 driven by loan growth ~~provided an abundance of liquidity to fund Arrow's asset growth. However, contingent~~outpacing deposit growth as well as redeploying cash into the investment portfolio. Contingent lines of credit are also available.

Operating collateralized lines of credit are established and available through the FHLBNY and FRB, totaling ~~$1.4~~approximately $1.5 billion. The general terms of Arrow's lines of credit have not changed significantly in recent periods (see the general liquidity discussion on page ~~67)~~66). Historically, Arrow has principally relied on asset-based liquidity (i.e., funds in overnight investments and cash flow from maturing investments and loans) with liability-based liquidity as a secondary source of funds (the main liability-based sources are an overnight borrowing arrangement with correspondent banks, an arrangement for overnight borrowing and term credit advances from the FHLBNY, and an additional arrangement for short-term advances at the 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.

Reference Rate Reform: On March 5, 2021, the ICE Benchmark Administration (the IBA), the administrator of ~~London Interbank Offered Rate (LIBOR) (the "IBA"),~~LIBOR, and the United Kingdom’s Financial Conduct Authority, the regulatory supervisor for the IBA, announced certain future dates that LIBOR settings will cease to be provided by any administrator. ~~For Arrow, U.S. Dollar LIBOR indices utilized by its existing financial instruments will cease after June 30, 2023.~~ In addition, regulators have issued statements indicating that financial institutions should not issue new LIBOR-based financial instruments after January 1, 2022. To prepare for the upcoming cessation of LIBOR, Arrow established a committee in 2020 comprised of bank management to prepare for the discontinuance of LIBOR, which is widely used to reprice floating rate financial instruments. Based on a review of existing floating rate financial instruments, management has determined that the financial products tied to LIBOR will not be subject to cessation until June 30, 2023. This review also identified that only a few legacy contracts do not include appropriate fallback language. ~~Management anticipates that~~On March 15, 2022, the ~~appropriate fallback provisions~~“Adjustable Interest Rate (LIBOR) Act” was enacted by Congress. The law provides basic framework for ~~these contracts will be implemented and allow for an orderly transition prior to~~addressing the ~~June 30, 2023 cessation~~discontinuation of U.S. Dollar ~~LIBOR. In addition, management is evaluating~~LIBOR under federal law. The law establishes a clear uniform process, on a nationwide basis, for replacing LIBOR in existing contracts that do not provide for the use of a clearly defined or practicable replacement benchmark rate (so-called “tough legacy” contracts), without affecting the ability of parties to use any appropriate benchmark rate in new contracts. Arrow no longer issues new LIBOR-based financial instruments. Furthermore, U.S. Dollar LIBOR indices ~~other than LIBOR, for new~~utilized by Arrow's existing financial instruments ~~issued after~~shall cease on or before June 30, 2023. On January 1, ~~2022.~~2022, Arrow ~~is confident that~~began using the ~~transition from LIBOR will be completed in~~CME Term Secured Overnight Financing Rate (SOFR) as the primary index for financial instruments and the Bloomberg Short Term Bank Yield Index (BSBY) as a ~~timely manner and will not have a material impact on the consolidated financial statements or Arrow's operations.~~secondary index.

Visa Class B Common Stock: Arrow's subsidiary bank, Glens Falls National, like other Visa member banks, bears some indirect contingent liability for Visa's direct liability arising out of certain antitrust claims involving merchant discounts to the extent that Visa's liability might exceed the amount funded in its litigation escrow account. On December 13, 2019, the Court granted final approval to a settlement in this class action lawsuit. ~~But, on~~On January 3, 2020 an appeal of the final-approved order was filed with the court. On December 16, 2021, the second circuit court of appeals set oral arguments regarding objections to final approval of the settlement for March 16, 2022. On March 16, 2022, the Second Circuit Court of Appeals heard oral arguments regarding objections to final approval of the Settlement. It is currently unknown ~~how long~~when the appeals ~~process~~ will ~~take.~~be decided. When the appeals process is resolved and assuming the balance in the litigation escrow account is sufficient to cover the litigation claims and related expenses, Arrow could potentially realize a gain on the receipt of Visa Class A common stock. At September 30, ~~2021,~~2022, Glens Falls National held 27,771 shares of Visa Class B common stock, and utilizing the conversion ratio to Class A common stock at that time, these Class B shares would convert to approximately 45,000 shares of Visa Class A common stock. Since the litigation settlement is not certain, Arrow has not recognized any economic value for these shares.

5755

CHANGE IN FINANCIAL CONDITION

Summary of Selected Consolidated Balance Sheet Data

(Dollars in Thousands)


		At Period-End															At Period-End
		9/30/2021		12/31/2020		9/30/2020		$ Change From December		$ Change From September		% Change From December (not annualized)		% Change From September			9/30/2022		12/31/2021		9/30/2021		$ Change From December		$ Change From September		% Change From December (not annualized)		% Change From September
Interest-Bearing Bank Balances	Interest-Bearing Bank Balances	$	548,936	$	338,875	$	396,380	$	210,061	$	152,556	62.0	%	38.5	%	Interest-Bearing Bank Balances	$	328,557	$	430,718	$	548,936	$	(102,161)	$	(220,379)	(23.7)	%	(40.1)	%
Securities Available-for-Sale	Securities Available-for-Sale	486,900		365,287		374,928		121,613		111,972		33.3	%	29.9	%	Securities Available-for-Sale	575,054		559,316		486,900		15,738		88,154		2.8	%	18.1	%
Securities Held-to-Maturity	Securities Held-to-Maturity	198,337		218,405		224,799		(20,068)		(26,462)		(9.2)	%	(11.8)	%	Securities Held-to-Maturity	182,178		196,566		198,337		(14,388)		(16,159)		(7.3)	%	(8.1)	%
Equity Securities	Equity Securities	1,886		1,636		1,511		250		375		15.3	%	24.8	%	Equity Securities	2,126		1,747		1,886		379		240		21.7	%	12.7	%
Loans (1)	Loans (1)	2,654,751		2,595,030		2,592,455		59,721		62,296		2.3	%	2.4	%	Loans (1)	2,924,794		2,667,941		2,654,751		256,853		270,043		9.6	%	10.2	%
Allowance for loan losses		26,956		29,232		28,446		(2,276)		(1,490)		(7.8)	%	(5.2)	%
Allowance for Credit Losses																Allowance for Credit Losses	29,232		27,281		26,956		1,951		2,276		7.2	%	8.4	%
Earning Assets (1)	Earning Assets (1)	3,896,190		3,524,582		3,595,647		371,608		300,543		10.5	%	8.4	%	Earning Assets (1)	4,017,429		3,861,668		3,896,190		155,761		121,239		4.0	%	3.1	%
Total Assets	Total Assets	$	4,071,104	$	3,688,636	$	3,777,684	$	382,468	$	293,420	10.4	%	7.8	%	Total Assets	$	4,232,778	$	4,027,952	$	4,071,104	$	204,826	$	161,674	5.1	%	4.0	%
Noninterest-Bearing Deposits	Noninterest-Bearing Deposits	$	841,910	$	701,341	$	690,232	$	140,569	$	151,678	20.0	%	22.0	%	Noninterest-Bearing Deposits	$	910,221	$	810,274	$	841,910	$	99,947	$	68,311	12.3	%	8.1	%
Interest-Bearing Checking Accounts	Interest-Bearing Checking Accounts	1,035,358		832,434		912,980		202,924		122,378		24.4	%	13.4	%	Interest-Bearing Checking Accounts	1,113,850		994,391		1,035,358		119,459		78,492		12.0	%	7.6	%
Savings Deposits	Savings Deposits	1,515,692		1,423,358		1,354,956		92,334		160,736		6.5	%	11.9	%	Savings Deposits	1,584,373		1,531,287		1,515,692		53,086		68,681		3.5	%	4.5	%
Time Deposits over $250,000	Time Deposits over $250,000	73,889		123,622		112,555		(49,733)		(38,666)		(40.2)	%	(34.4)	%	Time Deposits over $250,000	59,059		82,811		73,889		(23,752)		(14,830)		(28.7)	%	(20.1)	%
Other Time Deposits	Other Time Deposits	138,714		153,971		194,135		(15,257)		(55,421)		(9.9)	%	(28.5)	%	Other Time Deposits	127,602		131,734		138,714		(4,132)		(11,112)		(3.1)	%	(8.0)	%
Total Deposits	Total Deposits	$	3,605,563	$	3,234,726	$	3,264,858	$	370,837	$	340,705	11.5	%	10.4	%	Total Deposits	$	3,795,105	$	3,550,497	$	3,605,563	$	244,608	$	189,542	6.9	%	5.3	%
Federal Funds Purchased and Securities Sold Under Agreements to Repurchase	Federal Funds Purchased and Securities Sold Under Agreements to Repurchase	$	2,426	$	17,486	$	73,949	$	(15,060)	$	(71,523)	(86.1)	%	(96.7)	%	Federal Funds Purchased and Securities Sold Under Agreements to Repurchase	$	—	$	—	$	2,426	$	—	$	(2,426)	—	%	(100.0)	%

FHLBNY Advances - Term	FHLBNY Advances - Term	45,000		45,000		50,000		—		(5,000)		—	%	(10.0)	%	FHLBNY Advances - Term	25,000		45,000		45,000		(20,000)		(20,000)		(44.4)	%	(44.4)	%
Junior Subordinated Obligations Issued to Unconsolidated Subsidiary Trusts	Junior Subordinated Obligations Issued to Unconsolidated Subsidiary Trusts	20,000		20,000		20,000		—		—		—	%	—	%	Junior Subordinated Obligations Issued to Unconsolidated Subsidiary Trusts	20,000		20,000		20,000		—		—		—	%	—	%
Stockholders' Equity	Stockholders' Equity	360,171		334,392		325,660		25,779		34,511		7.7	%	10.6	%	Stockholders' Equity	345,550		371,186		360,171		(25,636)		(14,621)		(6.9)	%	(4.1)	%

(1) Includes Nonaccrual Loans.

Changes in Earning Assets: The loan portfolio at September 30, ~~2021,~~2022, was ~~$2.7~~$2.9 billion, an increase of ~~$59.7~~$256.9 million, or ~~2.3%~~9.6%, from the December 31, ~~2020~~2021 level and up by ~~$62.3~~$270.0 million, or ~~2.4%~~10.2%, from the September 30, ~~2020~~2021 level. The following trends were experienced in our largest segments:

•Commercial and commercial real estate loans: This segment of the loan portfolio ~~decreased~~increased by ~~$9.1~~$16.7 million, or ~~1.1%~~2.1%, during the first nine months of ~~2021. The primary factor in the decrease is the net change in PPP loans. Over $91.2 million of new PPP loans were originated and $145.8 million loans forgiven during~~2022. In the first nine months of ~~2021.~~2022, $43.6 million of PPP loans were forgiven.

•Consumer loans (primarily automobile loans through indirect lending): As of September 30, ~~2021,~~2022, these loans, primarily auto loans originated through dealerships in New York ~~State~~ and Vermont, increased by ~~$61.4~~$135.0 million, or ~~7.1%~~14.7%, from the December 31, ~~2020~~2021 balance. ~~Current demand for auto loans is strong, however,~~Inflation and rising rates may slow the ~~volume of loan originations may be impacted by supply constraints currently affecting the entire industry.~~current high demand.

•Residential real estate loans: This segment increased during the first nine months of ~~2021~~2022 by ~~$7.4~~$105.1 million, or ~~0.8%~~11.1%. In the first nine months of ~~2021,~~2022, Arrow sold ~~$48.7~~$4.1 million, or ~~27.9%~~2.3%, of originations. Arrow may continue to sell a portion of mortgage loan originations in upcoming periods if market conditions and strategic balance sheet and interest-rate risk management decisions warrant. Rising rates may reduce loan production in the near future.

Changes in Sources of Funds: Deposit balances reached ~~$3.6~~$3.8 billion, up ~~$340.7~~$189.5 million, or ~~10.4%~~5.3%, from the prior-year ~~level.~~level and increased $244.6 million from December 31, 2021. Deposits increased in the third quarter of ~~2021~~2022 by ~~$167.5~~$249.4 million. Noninterest-bearing deposits represented ~~23.4%~~24.0% of total deposits at September 30, ~~2021,~~2022, compared to ~~21.1%~~23.4% of total deposits on September 30, ~~2020.~~2021. At September 30, ~~2021, other~~2022, total time deposits were ~~$138.7 million, a decrease of $55.4 million compared to the prior year.~~$186.7 million. Municipal deposits increased ~~$134.0~~$13.8 million, or ~~15.8%~~1.4% from September 30, ~~2020.~~2021. Federal home loan term advances were ~~$45.0~~$25.0 million, a decrease from ~~$50.0~~$45.0 million at September 30, ~~2020.~~2021.

5856

Municipal Deposits: Fluctuations in balances of interest-bearing checking accounts are ~~largely~~often the result of timing and behavior of municipal deposits. Municipal deposits have historically averaged between 20% to 25% of total deposits. ~~In the most recent quarters, that percentage has increased.~~ Municipal deposits are typically placed in interest-bearing checking, savings and various time deposit accounts.

In general, there is a seasonal pattern to municipal deposits which dip to a low point in August each year. Account balances tend to increase throughout the fall and into early winter from tax deposits, flatten out after the beginning of the ensuing calendar year, and increase again at the end of March from the electronic deposit of NYS ~~Aid~~aid payments to school districts. In addition to seasonal behavior, the overall level of municipal deposit balances fluctuates from year-to-year as a result of local economic factors as well as competition from other banks and non-bank entities. Municipal deposits have been impacted by increased stimulus payments in response to the COVID-19 pandemic including the American Rescue Plan Act of 2021. Stimulus related funding is expected to decline over time.

Arrow uses reciprocal deposits for a select group of municipalities to reduce the amount of investment securities required to be pledged as collateral for municipal deposits where municipal deposits in excess of the FDIC insurance coverage limits were transferred to other participating banks, divided into portions so as to qualify such transferred deposits for FDIC insurance coverage at each transferee bank. In return, reciprocal amounts are transferred to Arrow in equal amounts of deposits from the participant banks. The balances of reciprocal deposits were $557.6 million and $533.5 million at September 30, 2022 and September 30, 2021, respectively.

FINANCIAL CONDITION

Investment Portfolio Trends

The table below presents the changes in the period-end balances for available-for-sale, held-to-maturity and equity securities from December 31, ~~2020~~2021 to September 30, ~~2021~~2022 (in thousands):


	(Dollars in Thousands)
	Fair Value at Period-End						Net Unrealized Gains (Losses) For Period Ended
	9/30/2022		12/31/2021		Change		9/30/2022		12/31/2021		Change
Securities Available-for-Sale:

U.S. Agency Securities	$	163,965	$	108,365	$	55,600	$	(16,035)	$	(1,635)	$	(14,400)
State and Municipal Obligations	340		400		(60)		—		—		—
Mortgage-Backed Securities	409,949		449,751		(39,802)		(55,536)		1,009		(56,545)
Corporate and Other Debt Securities	800		800		—		(200)		(200)		—

Total	$	575,054	$	559,316	$	15,738	$	(71,771)	$	(826)	$	(70,945)

Securities Held-to-Maturity:
State and Municipal Obligations	$	163,849	$	184,374	$	(20,525)	$	(5,770)	$	4,179	$	(9,949)
Mortgage-Backed Securities	11,951		16,918		(4,967)		(608)		547		(1,155)

Total	$	175,800	$	201,292	$	(25,492)	$	(6,378)	$	4,726	$	(11,104)

Equity Securities	$	2,126	$	1,747	$	379	$	—	$	—	$	—

The table below presents the weighted average yield for available-for-sale and held-to-maturity securities as of September 30, 2022 (in thousands).


		(Dollars in Thousands)													September 30, 2022
		Fair Value at Period-End						Net Unrealized Gains (Losses) For Period Ended							Within One Year				After One But Within Five Years				After Five But Within Ten Years				After Ten Years				Total
		9/30/2021		12/31/2020		Change		9/30/2021		12/31/2020		Change			Amount		Yield		Amount		Yield		Amount		Yield		Amount		Yield		Amount			Yield
Securities Available-for-Sale:	Securities Available-for-Sale:													Securities Available-for-Sale:

U.S. Agency Securities	U.S. Agency Securities	$	109,305	$	65,112	$	44,193	$	(696)	$	110	$	(806)	U.S. Agency Securities	$	5,000	2.0	%	$	175,000	1.4	%	$	—	—	%	$	—	—	%	$	180,000	180000000	1.4	%
State and Municipal Obligations	State and Municipal Obligations	400		528		(128)		—		—		—		State and Municipal Obligations	20		—	%	—		—	%	320		—	%			—	%	340			—	%
Mortgage-Backed Securities	Mortgage-Backed Securities	376,395		298,847		77,548		3,353		7,880		(4,527)		Mortgage-Backed Securities	817		1.8	%	254,104		1.9	%	210,564		1.6	%	—		—	%	465,485			1.8	%
Corporate and Other Debt Securities	Corporate and Other Debt Securities	800		800		—		(200)		(200)		—		Corporate and Other Debt Securities			—	%			—	%	1,000		5.0	%	—		—	%	1,000			5.0	%

Total	Total	$	486,900	$	365,287	$	121,613	$	2,457	$	7,790	$	(5,333)	Total	$	5,837	1.9	%	$	429,104	1.7	%	$	211,884	1.6	%	$	—	—	%	$	646,825		1.7	%

Securities Held-to-Maturity:	Securities Held-to-Maturity:													Securities Held-to-Maturity:
State and Municipal Obligations	State and Municipal Obligations	$	184,786	$	199,429	$	(14,643)	$	4,834	$	7,077	$	(2,243)	State and Municipal Obligations	$	50,423	1.3	%	$	115,113	2.3	%	$	4,044	2.7	%	$	39	—	%	$	169,619		2.0	%
Mortgage-Backed Securities	Mortgage-Backed Securities	19,150		27,147		(7,997)		765		1,094		(329)		Mortgage-Backed Securities	—		—	%	12,559		2.5	%	—		—	%	—		—	%	12,559			2.5	%

Corporate and Other Debt Securities														Corporate and Other Debt Securities	—		—	%	—		—	%	—		—	%	—		—	%	—			—	%
Total	Total	$	203,936	$	226,576	$	(22,640)	$	5,599	$	8,171	$	(2,572)	Total	$	50,423	1.3	%	$	127,672	2.3	%	$	4,044	2.7	%	$	39	—	%	$	182,178		2.0	%

Equity Securities		$	1,886	$	1,636	$	250	$	—	$	—	$	—

At September 30, ~~2021,~~2022, Arrow held no investment securities in the securities portfolios that consisted of or included, directly or indirectly, obligations of foreign governments or governmental agencies of foreign issuers.

In the periods referenced above, ~~Mortgage-Backed Securities~~mortgage-backed securities consisted solely of mortgage pass-through securities and ~~Collateralized Mortgage Obligations ("CMOs")~~collateralized mortgage obligations (CMOs) issued or guaranteed by U.S. federal ~~agencies.~~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.

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.

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 ~~noncredit-related~~non-credit related factors. Any impairment that is not credit related is recognized in other comprehensive income, net of applicable taxes. Credit-related impairment is recognized within the allowance for credit losses on the balance sheet, limited to the amount by which the amortized cost basis exceeds the fair value, with a corresponding adjustment to earnings via credit loss expense. Arrow determined that at September 30, ~~2021,~~2022, gross unrealized losses were primarily attributable to changes in interest rates, relative to when the investment securities were purchased, and not due to the credit quality of the investment securities. In 2022, the rising interest rate environment resulted in an increase in unrealized losses versus the comparable prior period. Arrow does not intend to sell, nor is it more likely than not that Arrow will be required to sell ~~the security~~any securities before recovery of its amortized cost basis, which may be at maturity. Therefore, Arrow carried no allowance for credit loss at September 30, ~~2021~~2022 and there was no credit loss expense recognized by Arrow with respect to the securities portfolio during the ~~three~~nine months ended September 30, ~~2021.~~2022.

Arrow's ~~held to maturity~~held-to-maturity debt securities are comprised of ~~U.S. government agencies, U.S. government-sponsored enterprises~~GSEs and state and municipal obligations. ~~U.S. government agencies and U.S. government-sponsored enterprise~~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 September 30, ~~2021.~~2022.

Changes in net unrealized gains or losses during recent periods ~~has~~have been primarily attributable to changes in ~~the~~ market rates during the periods in question ~~with no change in~~and not due to the credit-worthiness of the issuers.

Investment Sales, Purchases and Maturities

There were no sales of investment securities within the nine month periods ended September 30, ~~2021~~2022 or ~~2020.~~2021.

The following table summarizes purchases of investment securities within the available-for-sale and held-to-maturity portfolios for the nine month periods ended September 30, ~~2021~~2022 and ~~2020,~~2021, as well as proceeds from the maturity and calls of investment securities within each portfolio for the respective periods presented:


(In Thousands)	(In Thousands)	Three Months Ended				Nine Months Ended				(In Thousands)	Three Months Ended				Nine Months Ended
Purchases:	Purchases:	9/30/2021		9/30/2020		9/30/2021		9/30/2020		Purchases:	9/30/2022		9/30/2021		9/30/2022		9/30/2021
Available-for-Sale Portfolio	Available-for-Sale Portfolio									Available-for-Sale Portfolio

U.S. Agency Securities	U.S. Agency Securities	$	15,000	$	—	$	60,000	—		U.S. Agency Securities	$	15,000	$	15,000	$	70,000	$	60,000

Mortgage-Backed Securities	Mortgage-Backed Securities	76,608		30,000		162,089		$	86,832	Mortgage-Backed Securities	24,625		76,608		79,674		162,089

Total Purchases	Total Purchases	$	91,608	$	30,000	$	222,089	$	86,832	Total Purchases	$	39,625	$	91,608	$	149,674	$	222,089

Maturities & Calls	Maturities & Calls	$	40,245	$	32,809	$	93,332	$	75,449	Maturities & Calls	$	18,960	$	40,245	$	61,620	$	93,332


(In Thousands)	(In Thousands)	Three Months Ended				Nine Months Ended				(In Thousands)	Three Months Ended				Nine Months Ended
Purchases:	Purchases:	9/30/2021		9/30/2020		9/30/2021		9/30/2020		Purchases:	9/30/2022		9/30/2021		9/30/2022		9/30/2021
Held-to-Maturity Portfolio	Held-to-Maturity Portfolio									Held-to-Maturity Portfolio
State and Municipal Obligations	State and Municipal Obligations	$	991	$	1,842	$	4,695	$	6,848	State and Municipal Obligations	$	4,802	$	991	$	10,293	$	4,695

Maturities & Calls	Maturities & Calls	$	6,985	$	10,384	$	24,266	$	26,570	Maturities & Calls	$	4,575	$	6,985	$	24,231	$	24,266

Loan Trends

The following three tables present, for each of the last five quarters, the quarterly average balances by loan type, the percentage of total loans represented by each loan type and the annualized yield of each loan ~~category.~~category:

Quarterly Average Loan Balances

(Dollars in Thousands)


		Quarter Ended											Quarter Ended
		9/30/2021		6/30/2021		3/31/2021		12/31/2020		9/30/2020			9/30/2022		6/30/2022		3/31/2022		12/31/2021		9/30/2021
Commercial		$	215,490	$	265,391	$	267,758	$	260,527	$	276,296
Commercial excluding PPP Loans												Commercial excluding PPP Loans	$	134,986	$	130,177	$	135,472	$	127,346	$	133,448
PPP Loans												PPP Loans	637		11,267		26,086		48,778		82,042
Commercial Real Estate	Commercial Real Estate	606,661		591,718		579,506		569,309		538,914		Commercial Real Estate	661,471		645,968		631,255		623,273		606,661
Consumer	Consumer	903,869		884,986		860,954		856,903		841,009		Consumer	1,047,470		1,013,361		932,401		921,376		903,869
Residential Real Estate	Residential Real Estate	915,706		909,354		910,144		924,095		926,034		Residential Real Estate	1,027,502		1,003,407		953,582		939,892		915,706
Total Loans	Total Loans	$	2,641,726	$	2,651,449	$	2,618,362	$	2,610,834	$	2,582,253	Total Loans	$	2,872,066	$	2,804,180	$	2,678,796	$	2,660,665	$	2,641,726

Percentage of Total Quarterly Average Loans

Quarter Ended
9/30/2021 6/30/2021 3/31/2021 12/31/2020 9/30/2020
Commercial 8.1 % 10.0 % 10.2 % 10.0 % 9.3 %
Commercial Real Estate 23.0 % 22.3 % 22.1 % 21.8 % 21.1 %
Consumer 34.2 % 33.4 % 32.9 % 32.8 % 33.4 %
Residential Real Estate 34.7 % 34.3 % 34.8 % 35.4 % 36.2 %
Total Loans 100.0 % 100.0 % 100.0 % 100.0 % 100.0 %


	Quarter Ended
	9/30/2022		6/30/2022		3/31/2022		12/31/2021		9/30/2021
Commercial excluding PPP Loans	4.7	%	4.6	%	5.0	%	4.8	%	5.0	%
PPP Loans	—	%	0.4	%	1.0	%	1.8	%	3.1	%
Commercial Real Estate	23.0	%	23.0	%	23.6	%	23.4	%	23.0	%
Consumer	36.5	%	36.2	%	34.8	%	34.6	%	34.2	%
Residential Real Estate	35.8	%	35.8	%	35.6	%	35.4	%	34.7	%
Total Loans	100.0	%	100.0	%	100.0	%	100.0	%	100.0	%

Quarterly Yield on Loans


		Quarter Ended											Quarter Ended
		9/30/2021		6/30/2021		3/31/2021		12/31/2020		9/30/2020			9/30/2022		6/30/2022		3/31/2022		12/31/2021		9/30/2021
Commercial		4.81	%	6.35	%	4.17	%	4.50	%	3.63	%
Commercial (Total Portfolio)												Commercial (Total Portfolio)	4.17	%	3.93	%	4.17	%	3.97	%	4.81	%
Commercial excluding PPP loans	Commercial excluding PPP loans	3.91	%	3.89	%	3.91	%	3.99	%	4.02	%	Commercial excluding PPP loans	4.17	%	3.90	%	3.87	%	3.83	%	3.91	%
Commercial Real Estate	Commercial Real Estate	3.80	%	3.80	%	3.81	%	3.84	%	3.91	%	Commercial Real Estate	4.60	%	3.82	%	3.80	%	3.78	%	3.80	%
Consumer	Consumer	3.93	%	3.92	%	3.94	%	3.95	%	3.95	%	Consumer	4.10	%	3.83	%	3.84	%	3.87	%	3.93	%
Residential Real Estate	Residential Real Estate	3.76	%	3.77	%	3.79	%	3.83	%	3.86	%	Residential Real Estate	3.78	%	3.70	%	3.71	%	3.73	%	3.76	%
Total Loans	Total Loans	4.08	%	4.04	%	3.90	%	3.94	%	3.81	%	Total Loans	4.09	%	3.85	%	3.90	%	3.82	%	4.08	%

The average yield on the loan portfolio ~~decreased to 4.08%~~was 4.09% for the ~~first~~third quarter of ~~2021~~2022 up 24 basis points from ~~3.81% for~~ the ~~first~~second quarter of ~~2020.~~2022. Market rates ~~declined in 2020 and~~ have increased in ~~2021,~~2022, which impacts new loan yields for fixed rate loans, and variable loan yields as these loans ~~reached~~reach their repricing dates. Commercial loan yields in the third quarter were affected by ~~PPP loans originated in 2020~~higher market rates and ~~the first quarter of 2021. In 2021, PPP loans generated $7.0 million in revenue. The majority of PPP revenue, over $6 million, is the result of~~ fees received ~~many accelerated due to three quarters of~~on a loan prepayment. Consumer loan yields were affected by a $536 thousand amortization adjustment that occurred in the ~~PPP loan portfolio forgiven as of September 30, 2021.~~quarter. Residential real estate yields ~~declined in each~~are anticipated to increase for the remainder of ~~the five quarters presented~~2022, consistent with recent overall market behavior as well as the effect of variable home equity loans.

The table below shows the maturity of loans outstanding as of September 30, 2022. Also provided are the amounts due after one year, classified according to fixed interest rates and variable interest rates (in thousands):


	September 30, 2022
	Within One Year		After One But Within Five Years		After Five But Within 15 Years		After 15 Years		Total
Commercial	$	26,376	$	73,962	$	38,530	$	105	$	138,973
Commercial Real Estate	165,626		212,427		197,190		103,974		679,217
Consumer	34,776		485,441		534,887		481		1,055,585
Residential Real Estate	159,979		52,046		207,456		631,538		1,051,019
Total	$	386,757	$	823,876	$	978,063	$	736,098	$	2,924,794

			After One But Within Five Years		After Five But Within 15 Years		After 15 Years		Total
Loans maturing with:
Fixed Interest Rates			$	562,013	$	933,889	$	638,900	$	2,134,802
Variable Interest Rates			261,863		44,174		97,198		403,235
Total			$	823,876	$	978,063	$	736,098	$	2,538,037

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

Commercial Loans and Commercial Real Estate Loans: Substantially all commercial and commercial real estate loans in the loan portfolio were extended to businesses or borrowers located in Arrow's regional markets. A portion of the loans in the commercial portfolio have variable rates tied to market indices, such as Prime, LIBOR or FHLBNY.

~~Many of the commercial and commercial real estate~~ PPP loans ~~are in industries that have been heavily impacted by the COVID-19 pandemic, especially~~were previously included within ~~the hospitality and service industries. Arrow believes~~ the commercial loan ~~portfolio will maintain its strong credit quality~~portfolio. There were no PPP loans outstanding as ~~the Company expects tourism to normalize and economic conditions to continue to improve.~~of September 30, 2022.

Consumer Loans: At September 30, ~~2021,~~2022, consumer loans (primarily automobile loans originated through dealerships located in upstate New York and Vermont) continue to be a significant component of Arrow's business, comprising approximately one third of the total loan portfolio.

New consumer loan volume for the first nine months of ~~2021~~2022 was ~~$364.8~~$467.0 million, up from the ~~$292.8~~$364.8 million originated in the first nine months of ~~2020.~~2021.

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 risk has contributed to maintaining the strong credit quality in this portfolio.

Residential Real Estate Loans: Gross originations for residential real estate loans (including refinancings of mortgage loans) for the first nine months of ~~2021~~2022 were ~~$174.2~~$175.0 million, as compared to ~~$157.0~~$174.2 million for the first nine months of ~~2020 as a result of historically low interest rates and strong~~2021. Strong demand for residential real ~~estate.~~estate has continued even as interest rates have increased. The projected ongoing rise in the interest rates may impact future demand. Arrow has also sold portions of these originations in the secondary market. In the first nine months of ~~2021,~~2022, Arrow sold ~~$48.7~~$4.1 million, or ~~27.9%~~2.3%, of originations while retaining the mortgage servicing rights. In the first nine months of ~~2020, $50.5~~2021, $48.7 million, or ~~32.2%~~27.9%, of originations were sold. ~~In the third quarter of 2021, sales~~Sales decreased as the result of the strategic decision to grow the residential loan portfolio. The rate at which mortgage loan originations are sold in future periods will depend on 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.

Deposit Trends

The following tables provide information on trends in the balance and mix of the deposit portfolio by presenting, for each of the last five quarters, the quarterly average balances by deposit type and the percentage of total deposits represented by each deposit type. The quarterly average balances of both noninterest-bearing deposits and interest-bearing checking and savings accounts have increased ~~significantly~~ from prior year levels. Time deposits over $250,000 and other time deposits have decreased ~~throughout~~for the ~~five quarter period. Market rates have remained near historic lows in~~four quarters leading into the third quarter of ~~2021.~~2022. In the current quarter, the balance of time deposits has increased as the result of a strategic initiative to grow certificate of deposit balances.

~~Quarterly Average Deposit Balances~~

~~(Dollars in Thousands)~~


Quarterly Average Deposit Balances
(Dollars in Thousands)

	Quarter Ended
	9/30/2022		6/30/2022		3/31/2022		12/31/2021		9/30/2021
Noninterest-Bearing Deposits	$	866,659	$	811,607	$	794,968	$	819,624	$	802,837
Interest-Bearing Checking Accounts	996,116		1,048,752		1,027,740		998,398		923,002
Savings Deposits	1,549,451		1,541,616		1,557,855		1,562,318		1,496,938
Time Deposits over $250,000	49,459		37,418		70,101		71,965		71,435
Other Time Deposits	136,834		130,361		131,592		138,461		141,721
Total Deposits	$	3,598,519	$	3,569,754	$	3,582,256	$	3,590,766	$	3,435,933

Quarter Ended
9/30/2021 6/30/2021 3/31/2021 12/31/2020 9/30/2020
Noninterest-Bearing Deposits $ 802,837 $ 748,267 $ 698,234 $ 676,490 $ 673,181
Interest-Bearing Checking Accounts 923,002 924,651 859,972 874,314 764,614
Savings Deposits 1,496,938 1,481,232 1,435,555 1,407,837 1,314,241
Time Deposits over $250,000 71,435 95,673 109,644 115,492 121,027
Other Time Deposits 141,721 145,448 151,410 182,105 209,436
Total Deposits $ 3,435,933 $ 3,395,271 $ 3,254,815 $ 3,256,238 $ 3,082,499


	Quarter Ended
	9/30/2022		6/30/2022		3/31/2022		12/31/2021		9/30/2021
Non-Municipal Deposits	$	2,719,591	$	2,662,052	$	2,639,258	$	2,629,553	$	2,590,678
Municipal Deposits	879,228		907,702		942,998		961,213		845,255
Total Deposits	$	3,598,819	$	3,569,754	$	3,582,256	$	3,590,766	$	3,435,933

Percentage of Total Quarterly Average Deposits


		Quarter Ended											Quarter Ended
		9/30/2021		6/30/2021		3/31/2021		12/31/2020		9/30/2020			9/30/2022		6/30/2022		3/31/2022		12/31/2021		9/30/2021
Noninterest-Bearing Deposits	Noninterest-Bearing Deposits	23.4	%	22.0	%	21.5	%	20.8	%	21.8	%	Noninterest-Bearing Deposits	24.1	%	22.7	%	22.2	%	22.8	%	23.4	%
Interest-Bearing Checking Accounts	Interest-Bearing Checking Accounts	26.9		27.2		26.4		27.0		24.8		Interest-Bearing Checking Accounts	27.7	%	29.4	%	28.7	%	27.8	%	26.9	%
Savings Deposits	Savings Deposits	43.5		43.7		44.0		43.1		42.7		Savings Deposits	43.0	%	43.2	%	43.4	%	43.5	%	43.5	%
Time Deposits over $250,000	Time Deposits over $250,000	2.1		2.8		3.4		3.5		3.9		Time Deposits over $250,000	1.4	%	1.0	%	2.0	%	2.0	%	2.1	%
Other Time Deposits	Other Time Deposits	4.1		4.3		4.7		5.6		6.8		Other Time Deposits	3.8	%	3.7	%	3.7	%	3.9	%	4.1	%
Total Deposits	Total Deposits	100.0	%	100.0	%	100.0	%	100.0	%	100.0	%	Total Deposits	100.0	%	100.0	%	100.0	%	100.0	%	100.0	%

Quarterly Cost of Deposits


		Quarter Ended											Quarter Ended
		9/30/2021		6/30/2021		3/31/2021		12/31/2020		9/30/2020			9/30/2022		6/30/2022		3/31/2022		12/31/2021		9/30/2021
Demand Deposits	Demand Deposits	—	%	—	%	—	%	—	%	—	%	Demand Deposits	—	%	—	%	—	%	—	%	—	%
Interest-Bearing Checking Accounts	Interest-Bearing Checking Accounts	0.07	%	0.08	%	0.10	%	0.11	%	0.14	%	Interest-Bearing Checking Accounts	0.11	%	0.08	%	0.06	%	0.07	%	0.07	%
Savings Deposits	Savings Deposits	0.11	%	0.14	%	0.16	%	0.18	%	0.24	%	Savings Deposits	0.63	%	0.23	%	0.11	%	0.10	%	0.11	%
Time Deposits over $250,000	Time Deposits over $250,000	0.22	%	0.29	%	0.44	%	0.70	%	0.96	%	Time Deposits over $250,000	0.71	%	0.28	%	0.16	%	0.18	%	0.22	%
Other Time Deposits	Other Time Deposits	0.37	%	0.43	%	0.59	%	0.92	%	1.09	%	Other Time Deposits	0.43	%	0.34	%	0.33	%	0.35	%	0.37	%
Total Deposits	Total Deposits	0.09	%	0.11	%	0.14	%	0.18	%	0.25	%	Total Deposits	0.33	%	0.14	%	0.08	%	0.08	%	0.09	%

~~During~~For the quarter ended September 30, ~~2021,~~2022, the total cost of deposits ~~continued to decrease. In response to~~increased 19 basis points from the ~~economic uncertainty related to the COVID-19 pandemic, in 2020, the~~previous quarter. The Federal ~~Reserve lowered the target overnight borrowing rate, the "Fed Funds" rate, to a range of 0.00%-0.25%. Although the Fed~~ Funds rate began to increase in the first quarter of 2022 and is ~~widely expected~~anticipated to ~~remain unchanged for the remainder of 2021,~~continue to increase into 2023. Arrow is well positioned for a variety of rate environments, see Part I, Item 3, entitled "Quantitative and Qualitative Disclosures About Market Risk," on page 72 for further discussion.

Non-Deposit Sources of Funds

Arrow's other sources of funds ~~include~~have previously included securities sold under agreements to repurchase and term advances from the FHLBNY. The securities sold under agreements to repurchase are offered to existing customers, short-term in nature and are collateralized by investment securities. The term advances from the FHLBNY are fixed rate non-callable advances with original maturities of three to five years.

The $20 million principal amount of Junior Subordinated Obligations Issued to Unconsolidated Subsidiary Trusts listed on the consolidated balance sheet as of September 30, ~~2021~~2022 (i.e., previously issued TRUPs) will, subject to certain limits, continue to qualify as Tier 1 regulatory capital for Arrow until such TRUPs mature or are redeemed. This is further discussed under "Capital Resources" beginning on page 6564 of this Report. In the first quarter of 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.

6261

ASSET QUALITY

The following table presents information related to the allowance and provision for credit losses for the past five ~~quarters.~~quarters:

Summary of the Allowance and Provision for Credit Losses

(Dollars in Thousands, Loans Stated Net of Unearned Income)


		9/30/2021			6/30/2021			3/31/2021			12/31/2020			9/30/2020				9/30/2022			6/30/2022			3/31/2022			12/31/2021			9/30/2021
Loan Balances:	Loan Balances:																Loan Balances:
Period-End Loans	Period-End Loans	$	2,654,751		$	2,644,082		$	2,639,243		$	2,595,030		$	2,592,455		Period-End Loans	$	2,924,794		$	2,844,802		$	2,737,267		$	2,667,941		$	2,654,751
Average Loans, Year-to-Date	Average Loans, Year-to-Date	2,637,265			2,634,997			2,618,362			2,526,791			2,498,573			Average Loans, Year-to-Date	2,785,721			2,741,834			2,678,796			2,643,163			2,637,265
Average Loans, Quarter-to-Date	Average Loans, Quarter-to-Date	2,641,726			2,651,449			2,618,362			2,610,834			2,582,253			Average Loans, Quarter-to-Date	2,872,066			2,804,180			2,678,796			2,660,665			2,641,726
Period-End Assets	Period-End Assets	4,071,104			3,896,191			3,903,711			3,688,636			3,777,684			Period-End Assets	4,232,778			3,991,205			4,156,402			4,027,952			4,071,104

Allowance for credit losses, Year-to-Date:
Allowance for credit losses, Beginning of Period		$	29,232		$	29,232		$	29,232		$	21,187		21,187
Allowance for Credit Losses, Year-to-Date:																	Allowance for Credit Losses, Year-to-Date:
Allowance for Credit Losses, Beginning of Period																	Allowance for Credit Losses, Beginning of Period	$	27,281		$	27,281		$	27,281		$	29,232		$	29,232
Impact of the Adoption of ASU 2016-13	Impact of the Adoption of ASU 2016-13	(1,300)			(1,300)			(1,300)			—			—			Impact of the Adoption of ASU 2016-13	—			—			—			(1,300)			(1,300)
Provision for Credit Losses, YTD	Provision for Credit Losses, YTD	(286)			(385)			(648)			9,319			8,083			Provision for Credit Losses, YTD	3,389			1,674			769			272			(286)
Loans Charged-off, YTD	Loans Charged-off, YTD	(1,520)			(1,076)			(633)			(1,989)			(1,360)			Loans Charged-off, YTD	(2,883)			(1,736)			(829)			(2,239)			(1,520)
Recoveries of Loans Previously Charged-off	Recoveries of Loans Previously Charged-off	830			539			189			715			536			Recoveries of Loans Previously Charged-off	1,445			871			440			1,316			830
Net Charge-offs, YTD	Net Charge-offs, YTD	(690)			(537)			(444)			(1,274)			$	(824)		Net Charge-offs, YTD	(1,438)			(865)			(389)			(923)			(690)
Allowance for credit losses, End of Period		$	26,956		$	27,010		$	26,840		$	29,232		$	28,446
Allowance for Credit Losses, End of Period																	Allowance for Credit Losses, End of Period	$	29,232		$	28,090		$	27,661		$	27,281		$	26,956

Allowance for credit losses, Quarter-to-Date:
Allowance for credit losses, Beginning of Period		$	27,010		$	26,840		$	29,232		$	28,446		$	26,300
Impact of the Adoption of ASU 2016-13		—			—			1,300			—			—
Allowance for Credit Losses, Quarter-to-Date:																	Allowance for Credit Losses, Quarter-to-Date:
Allowance for Credit Losses, Beginning of Period																	Allowance for Credit Losses, Beginning of Period	$	28,090		$	27,661		$	27,281		$	26,956		$	27,010

Provision for Credit Losses, QTD	Provision for Credit Losses, QTD	99			263			(648)			1,237			2,271			Provision for Credit Losses, QTD	1,715			905			769			558			99
Loans Charged-off, QTD	Loans Charged-off, QTD	(444)			(443)			(633)			(630)			(392)			Loans Charged-off, QTD	(1,147)			(907)			(829)			(719)			(444)
Recoveries of Loans Previously Charged-off	Recoveries of Loans Previously Charged-off	291			350			189			179			267			Recoveries of Loans Previously Charged-off	574			431			440			486			291
Net Charge-offs, QTD	Net Charge-offs, QTD	(153)			(93)			(444)			(451)			(125)			Net Charge-offs, QTD	(573)			(476)			(389)			(233)			(153)
Allowance for credit losses, End of Period		$	26,956		$	27,010		$	26,840		$	29,232		$	28,446
Allowance for Credit Losses, End of Period																	Allowance for Credit Losses, End of Period	$	29,232		$	28,090		$	27,661		$	27,281		$	26,956

Nonperforming Assets, at Period-End:	Nonperforming Assets, at Period-End:																Nonperforming Assets, at Period-End:
Nonaccrual Loans	Nonaccrual Loans	$	10,723		$	7,102		$	8,087		$	6,033		$	6,004		Nonaccrual Loans	$	8,812		$	7,999		$	9,750		$	10,764		$	10,723
Loans Past Due 90 or More Days and Still Accruing Interest	Loans Past Due 90 or More Days and Still Accruing Interest	555			595			242			228			121			Loans Past Due 90 or More Days and Still Accruing Interest	514			1,641			55			823			555
Restructured and in Compliance with Modified Terms	Restructured and in Compliance with Modified Terms	67			78			97			145			157			Restructured and in Compliance with Modified Terms	82			77			74			77			67
Total Nonperforming Loans	Total Nonperforming Loans	11,345			7,775			8,426			6,406			6,282			Total Nonperforming Loans	9,408			9,717			9,879			11,664			11,345
Repossessed Assets	Repossessed Assets	272			99			242			155			126			Repossessed Assets	604			297			180			126			272
Other Real Estate Owned	Other Real Estate Owned	79			99			—			—			—			Other Real Estate Owned	—			—			—			—			79
Total Nonperforming Assets	Total Nonperforming Assets	$	11,696		$	7,973		$	8,668		$	6,561		$	6,408		Total Nonperforming Assets	$	10,012		$	10,014		$	10,059		$	11,790		$	11,696

Asset Quality Ratios:	Asset Quality Ratios:																Asset Quality Ratios:
Allowance to Nonperforming Loans	Allowance to Nonperforming Loans	237.60		%	347.40		%	318.54		%	456.32		%	452.82		%	Allowance to Nonperforming Loans	310.71		%	289.08		%	280.00		%	233.89		%	237.60		%
Allowance to Period-End Loans	Allowance to Period-End Loans	1.02		%	1.02		%	1.02		%	1.13		%	1.10		%	Allowance to Period-End Loans	1.00		%	0.99		%	1.01		%	1.02		%	1.02		%
Provision to Average Loans (Quarter) (1)	Provision to Average Loans (Quarter) (1)	0.01		%	0.04		%	(0.10)		%	0.19		%	0.35		%	Provision to Average Loans (Quarter) (1)	0.24		%	0.13		%	0.12		%	0.08		%	0.01		%
Provision to Average Loans (YTD) (1)	Provision to Average Loans (YTD) (1)	(0.01)		%	(0.06)		%	(0.10)		%	0.37		%	0.43		%	Provision to Average Loans (YTD) (1)	0.16		%	0.12		%	0.12		%	0.01		%	(0.01)		%
Net Charge-offs to Average Loans (Quarter) (1)	Net Charge-offs to Average Loans (Quarter) (1)	0.02		%	0.01		%	0.07		%	0.07		%	0.02		%	Net Charge-offs to Average Loans (Quarter) (1)	0.08		%	0.07		%	0.06		%	0.03		%	0.02		%
Net Charge-offs to Average Loans (YTD) (1)	Net Charge-offs to Average Loans (YTD) (1)	0.03		%	0.08		%	0.07		%	0.05		%	0.04		%	Net Charge-offs to Average Loans (YTD) (1)	0.07		%	0.06		%	0.06		%	0.03		%	0.03		%
Nonperforming Loans to Total Loans	Nonperforming Loans to Total Loans	0.43		%	0.29		%	0.32		%	0.25		%	0.24		%	Nonperforming Loans to Total Loans	0.32		%	0.34		%	0.36		%	0.44		%	0.43		%
Nonperforming Assets to Total Assets	Nonperforming Assets to Total Assets	0.29		%	0.20		%	0.22		%	0.18		%	0.17		%	Nonperforming Assets to Total Assets	0.24		%	0.25		%	0.24		%	0.29		%	0.29		%
(1) Annualized	(1) Annualized																(1) Annualized

Provision for Credit Losses

Through the provision for credit losses, an allowance for credit losses is maintained that reflects the best estimate of the calculated expected credit losses in Arrow's loan portfolio as of the balance sheet date. Additions are made to the allowance for credit losses through a periodic provision for credit losses. Actual credit losses are charged against the allowance for credit losses when loans are deemed uncollectible and recoveries of amounts previously charged off are recorded as credits to the allowance for credit losses.

Arrow loan officers and risk managers meet at least quarterly to discuss and review the conditions and risks associated with certain criticized and classified commercial-related relationships. In addition, the independent internal loan review department performs periodic reviews of the credit quality indicators on individual loans in the commercial loan portfolio.

Arrow adopted CECL on January 1, 2021. ~~The transition adjustment included a $1.3 million decrease to the allowance for credit losses on loans.~~ CECL calculates losses over the life of a loan or financial instrument. Arrow and its subsidiaries utilize a loss

projection model updated with data from our core systems, and incorporates various assumptions to produce the CECL reserve. A CECL Steering Committee was created to provide a management governance function to review, critically

challenge and approve components of the CECL reporting process. One key responsibility of the CECL Steering Committee is to review annually the key assumptions utilized in the CECL calculation including loan segmentation, loan loss regression analysis, reasonable and supportable forecast period, reversion period, discounted cash flow inputs including economic forecast data and prepayment and curtailment speeds and qualitative factors.

The September 30, 2022 allowance for credit losses calculation incorporated a reasonable and supportable forecast period to account for economic conditions utilized in the measurement. The quantitative model utilized an economic forecast sourced from reputable third-parties that reflects the economic conditions with a slight deterioration of approximately 0.45% in the national unemployment rate during the six-quarter forecast period, while forecasted gross domestic product are projected to decline approximately 1.0%. The home price index (HPI) forecast declined approximately 4.63% from the previous quarter level. Driven by current economic forecasts, loan growth and net charge offs, ~~during the quarter,~~ the third quarter provision for credit losses was ~~$99 thousand.~~$1.7 million. The provision is directionally consistent with both the latest economic forecasts as well as third quarter 2022 activity. For the the third quarter of ~~2020,~~2021, a provision of ~~$2.3 million~~$99 thousand was recorded. In addition, Arrow recorded an expense for estimated credit losses on off-balance sheet credit exposures in other liabilities of ~~$300~~$30 thousand in the third quarter of ~~2021.~~2022.

See Notes 1 and 4 to the unaudited interim consolidated financial statements for additional discussion related to ~~the adoption of~~ CECL.

The ratio of the allowance for credit losses to total loans was ~~1.02%~~1.00% at September 30, ~~2021,~~2022, a decrease from ~~1.13%~~1.02% at December 31, ~~2020~~2021 and ~~a decrease of 8 basis points from 1.10% at September 30, 2020. Net of outstanding PPP loans, the allowance for credit losses was 1.04% of loans outstanding as of~~ September 30, 2021.

The accounting policy relating to the allowance for credit losses is considered to be a critical accounting policy, given the uncertainty involved in evaluating the level of the allowance required to cover credit losses in the loan portfolio, and the material effect that such judgments may have on the results of operations. The process for determining the provision for credit losses is described in Note 4 to the unaudited interim consolidated financial statements.

Risk Elements

Nonperforming assets at September 30, ~~2021~~2022 amounted to ~~$11.7~~$10.0 million, upa decrease from the ~~$6.6~~$11.8 million total at December 31, ~~2020~~2021 and ~~an increase of $5.3~~the $11.7 million ~~from $6.4 million~~total at September 30, 2020 as a result of two commercial real estate loans being classified as nonaccrual during 2021. One commercial loan was placed was placed on non-accrual status in the third quarter since it required additional deferral assistance. The current arrangement calls for past due accrued interest being deferred and for ongoing interest-only payments through April 2022 after which full payments are slated to begin. As this loan was made under the SBA program, Arrow's loan to value is 55% of September 30, 2021. For the three month periods ended September 30, ~~2021~~2022 and ~~2020,~~2021, ratios of nonperforming assets to total assets have remained below the average ratios for the peer group. (See page 4745 for a discussion of the peer group.) At June 30, ~~2021,~~2022, the ratio of loans past due 90 or more days plus nonaccrual loans plus other real estate owned to total assets was ~~0.20%~~0.25%, below the ~~0.43%~~0.31% ratio of the peer group at such date (the latest date for which peer group information is available). At September 30, ~~2021~~2022 the ratio was ~~0.29%, which is below the most recent ratio for the peer group.~~0.24%.

The following table presents the balance of other non-current loans at period-end as to which interest income was being accrued (i.e., loans 30 to 89 days past due, as defined in bank regulatory guidelines). These non-current loans are not included in nonperforming assets, but entail heightened ~~risk.~~risk:


Loans Past Due 30-89 Days and Accruing Interest ($ in 000's)	Loans Past Due 30-89 Days and Accruing Interest ($ in 000's)							Loans Past Due 30-89 Days and Accruing Interest ($ in 000's)
		9/30/2021		12/31/2020		9/30/2020			9/30/2022		12/31/2021		9/30/2021
Commercial Loans	Commercial Loans	$	792	$	215	$	122	Commercial Loans	$	156	$	205	$	792
Commercial Real Estate Loans	Commercial Real Estate Loans	—		—		85		Commercial Real Estate Loans	—		—		—
Residential Real Estate Loans	Residential Real Estate Loans	1,663		1,337		1,224		Residential Real Estate Loans	1,456		2,663		1,663
Consumer Loans - Primarily Indirect Automobile	Consumer Loans - Primarily Indirect Automobile	7,287		7,651		6,963		Consumer Loans - Primarily Indirect Automobile	13,268		9,302		7,287
Total Loans Past Due 30-89 Days and Accruing Interest	Total Loans Past Due 30-89 Days and Accruing Interest	$	9,742	$	9,203	$	8,394	Total Loans Past Due 30-89 Days and Accruing Interest	$	14,880	$	12,170	$	9,742

At September 30, ~~2021,~~2022, the loans in the above-referenced category totaled ~~$9.7~~$14.9 million, an increase of ~~$0.5~~$2.7 million, or ~~5.9%~~22.3%, from the ~~$9.2~~$12.2 million of such loans at December 31, ~~2020.~~2021. The September 30, ~~2021~~2022 total of non-current loans equaled ~~0.37%~~0.51% of loans then outstanding, compared to ~~0.35%~~0.46% at December 31, ~~2020~~2021 and ~~0.32%~~0.37% at September 30, ~~2020.~~2021. The change from ~~December 31, 2020~~September 30, 2021 is primarily attributable to ~~a decrease~~COVID-19 pandemic stimulus which occurred in ~~delinquent automobile loans loans offset by an increase in commercial and residential real estate loans.~~2021.

The number and dollar amount of performing loans that demonstrate characteristics of potential weakness from time-to-time (potential problem loans) typically is a very small percentage of the loan portfolio. See the table of Credit Quality Indicators in Note 4 to the unaudited interim consolidated financial statements. Arrow considers all performing commercial and commercial real estate loans classified as substandard or lower (as reported in Note 4) to be potential problem loans. These loans will continue to be closely monitored and Arrow expects to collect all payments of contractual principal and interest in full on these classified loans. Total nonperforming assets at period-end increased by $5.1 million from December 31, 2020 and $5.3 million from September 30, 2020. The majority of the increase is due to two commercial real estate loans being classified as nonaccrual during 2021.

The COVID-19 pandemic may impact the borrowers' ability to satisfy their obligations, and may therefore result in increased delinquencies. Government interventions, on both the federal and state level, have been deployed to mitigate a significant portion of the credit risk. Arrow cannot make a determination as to the overall impact on its business of the COVID-19 pandemic at this time.

As of September 30, ~~2021,~~2022, Arrow held ~~one residential property in~~no other real estate owned. At this time, Arrow does not expect to acquire a significant number of other real estate properties in the near term as a result of payment defaults or the foreclosure process.

6463

~~Loan Deferrals Related to COVID-19 Pandemic~~

In the table below, loans deferred by industry sector as the result of the COVID-19 pandemic are presented and compared to total loans by sector as of September 30, 2021. In accordance with the CARES Act, the deferrals listed below are not considered troubled debt restructurings. As of September 30, 2021, PPP Loans

Arrow originated ~~an additional $91.4~~approximately $234.2 million of PPP loans in 2020 and 2021. ~~These~~The PPP loans had an interest rate of 1%. The original term on the PPP loans is two years, however the borrower has the option to apply for forgiveness. Subsequent to the funding of the loans, additional guidance was provided that the term of the loan may be extended to five years if both parties agree to the revised terms. Arrow recognizes the fees earned over the life of the loan and accelerates recognition of the fees as the loans are ~~included in~~forgiven by the ~~loan balances by sector as listed below, however, these loans are not considered deferred as~~Small Business Administration. As of September 30, ~~2021.~~

COVID-19 Deferrals by Loan Category at September 30, 2021
(Dollars in Thousands)
Balances by Sector Deferrals
Total % of Total Loans Balance % of Loan Segment % of Total Loans
Commercial and Commercial Real Estate Loans:
Lessors of Non-Residential Real Estate $ 169,183 6.4 % $ — — % — %
Lessors of Residential Real Estate 142,314 5.4 % — — % — %
Health Care and Social Assistance 111,383 4.2 % — — % — %
Hotels and Motels 107,227 4.0 % 4,733 0.6 % 0.2 %
Arts/Recreation/Restaurants/Vacation Camps 47,060 1.8 % — — % — %
Retail 35,426 1.3 % — — % — %
Construction & Related 18,705 0.7 % — — % — %
Other 171,973 6.5 % — — % — %
Total Commercial and Commercial Real Estate Loans 803,271 30.3 % 4,733 0.6 % 0.2 %
Consumer Loans 921,189 34.7 % 480 0.1 % — %
Residential Real Estate Loans 930,291 35.0 % 1,043 0.1 % — %
Total Loans $ 2,654,751 $ 6,256 0.2 %
2022, there were no PPP loans outstanding.


Outstanding PPP Loans as of September 30, ~~2021~~2022 (Dollars In Thousands)
PPP ~~Funding~~Loans Funded to Date	$	~~234,195~~234,196
PPP Loans ~~Fully~~ Forgiven ~~to Date~~	~~(170,445)~~
~~Loans Partially Forgiven to Date~~	~~(3,652)~~(234,196)
Outstanding PPP Loans	$	~~60,098~~—


Income Earned on PPP Loans for the Periods Ended September 30, 2021 (Dollars In Thousands)
Income Earned on PPP Loans for the Periods Ended September 30, 2022 (Dollars In Thousands)						Income Earned on PPP Loans for the Periods Ended September 30, 2022 (Dollars In Thousands)
		Three Months Ended		Nine Months Ended			Three Months Ended		Nine Months Ended
Interest Earned at Rate of 1%	Interest Earned at Rate of 1%	$	212	$	928	Interest Earned at Rate of 1%	$	1	$	97
Fees Recognized	Fees Recognized	2,318		6,029		Fees Recognized	69		1,477

Income Earned on PPP Loans	Income Earned on PPP Loans	$	2,530	$	6,957	Income Earned on PPP Loans	$	70	$	1,574

CAPITAL RESOURCES

Regulatory Capital Standards

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

As reported in the Regulatory Reform section above, Arrow elected to opt out of utilizing the CBLR framework. The Capital Rules ~~promulgated under Dodd-Frank~~ will remain applicable to Arrow.

The following is a summary of certain definitions of capital under the various capital measures in the ~~Dodd-Frank~~ Capital Rules:

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

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

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

The following table presents the minimum regulatory capital ratios applicable to ~~the holding company~~Arrow and its subsidiary banks under the current Capital Rules:


Capital Ratio	~~2021~~2022
Minimum CET1 Ratio	4.500	%
Capital Conservation Buffer ("Buffer")	2.500	%
Minimum CET1 Ratio Plus Buffer	7.000	%
Minimum Tier 1 Risk-Based Capital Ratio	6.000	%
Minimum Tier 1 Risk-Based Capital Ratio Plus Buffer	8.500	%
Minimum Total Risk-Based Capital Ratio	8.000	%
Minimum Total Risk-Based Capital Ratio Plus Buffer	10.500	%
Minimum Leverage Ratio	4.000	%

These minimum capital ratios, especially the minimum CET1 ratio (4.5%) and the enhanced minimum Tier 1 risk-based capital ratio (6.0%), represent a heightened and more restrictive capital regime than institutions like Arrow previously had to meet under the prior capital rules.

At September 30, ~~2021, Arrow's holding company~~2022, Arrow and ~~both of~~ its subsidiary banks exceeded by a substantial amount each of the applicable minimum capital ratios established under the Capital Rules, including the minimum CET1 Ratio, the minimum Tier 1 Risk-Based Capital Ratio, the minimum Total Risk-Based Capital Ratio, and the minimum Leverage Ratio, including in the case of each risk-based ratio, the capital buffer.

Prompt Corrective Action Capital Classifications. Under applicable banking law, federal banking regulators are required to take prompt corrective action with respect to depository institutions that do not meet certain minimum capital requirements. For these purposes, the regulators have established five capital classifications for banking institutions, ranging from the highest category of "well-capitalized" to the lowest category of "critically under-capitalized". Under the current capital classifications, a banking institution is considered "well-capitalized" if it meets the following capitalization standards on the date of measurement: a CET1 risk-based capital ratio of 6.50% or greater, a Tier 1 risk-based capital ratio of 8.00% or greater, a total risk-based capital ratio of 10.00% or greater, and a Tier 1 leverage ratio of 5.00% or greater, provided the institution is not subject to any regulatory order or written directive regarding capital maintenance. Federal banking law also ties the ability of banking organizations to engage in certain types of activities and to utilize certain procedures to such organizations' continuing to qualify for inclusion in one of the two highest rankings of these capitalization categories, i.e., as "well-capitalized" or "adequately capitalized."

Current Capital Ratios: The table below sets forth the regulatory capital ratios of ~~Arrow's holding company~~Arrow and ~~two~~its subsidiary banks ~~Glens Falls National and Saratoga National,~~ under the current Capital Rules, as of September 30, ~~2021:~~2022:


		Common Equity Tier 1 Capital Ratio		Tier 1 Risk-Based Capital Ratio		Total Risk-Based Capital Ratio		Tier 1 Leverage Ratio			Common Equity Tier 1 Capital Ratio		Tier 1 Risk-Based Capital Ratio		Total Risk-Based Capital Ratio		Tier 1 Leverage Ratio
Arrow Financial Corporation	Arrow Financial Corporation	13.71	%	14.51	%	15.66	%	9.39	%	Arrow Financial Corporation	13.14	%	13.85	%	14.93	%	9.71	%
Glens Falls National Bank & Trust Co.	Glens Falls National Bank & Trust Co.	14.16	%	14.16	%	15.24	%	8.94	%	Glens Falls National Bank & Trust Co.	13.05	%	13.05	%	14.09	%	9.05	%
Saratoga National Bank & Trust Co.	Saratoga National Bank & Trust Co.	13.53	%	13.53	%	14.79	%	9.50	%	Saratoga National Bank & Trust Co.	14.47	%	14.47	%	15.72	%	10.35	%

FDICIA's Prompt Corrective Action - "Well-Capitalized" Standard (2019)	FDICIA's Prompt Corrective Action - "Well-Capitalized" Standard (2019)	6.50	%	8.00	%	10.00	%	5.00	%	FDICIA's Prompt Corrective Action - "Well-Capitalized" Standard (2019)	6.50	%	8.00	%	10.00	%	5.00	%
Regulatory Minimum	Regulatory Minimum	7.00%(1)		8.50%(1)		10.50%(1)		4.00	%	Regulatory Minimum	7.00%(1)		8.50%(1)		10.50%(1)		4.00	%

(1) Including the fully phased-in 2.50% capital conservation buffer	(1) Including the fully phased-in 2.50% capital conservation buffer									(1) Including the fully phased-in 2.50% capital conservation buffer

At September 30, ~~2021,~~2022, Arrow and its subsidiary banks exceeded the minimum regulatory capital ratios established under the current Capital Rules and each also qualified as "well-capitalized", the highest category in the new capital classification scheme established by federal bank regulatory agencies under the "prompt corrective action" standards, as described above.

Capital Components; Stock Repurchases; Dividends

Stockholders' Equity: Stockholders’ equity was ~~$360.2~~$345.6 million at September 30, ~~2021, an increase~~2022, a decrease of ~~$25.8~~$25.6 million, or ~~7.7%~~6.9%, from the December 31, ~~2020~~2021 level of ~~$334.4~~$371.2 million, and ~~an increase~~a decrease of ~~$34.5~~$14.6 million, or ~~10.6%~~4.1%, from the prior-year level. The ~~increase~~decrease in stockholders' equity over the first nine months of ~~2021~~2022 principally reflected the following factors: the addition of (i) ~~$39.5~~$36.7 million of net income for the period plus (ii) issuance of ~~$3.8~~$2.8 million of common stock through employee benefit and dividend reinvestment plans ~~plus (iii) cumulative impact of adoption of ASU 2016-13 of $120 thousand;~~ reduced by (iv) other comprehensive ~~income~~loss of ~~$2.9~~$49.4 million, (v) cash dividends of ~~$12.1~~$13.0 million and (vi) repurchases of common stock of ~~$2.6~~$2.7 million. The majority of other comprehensive loss, $52.8 million, relates to net unrealized losses on AFS debt securities which occurred during the first half of 2022, partially offset by a net unrealized gain on cash flow swap and amortization related to defined benefit pension items.

Trust Preferred Securities: In each of 2003 and 2004, Arrow issued $10 million of ~~trust preferred securities (TRUPs)~~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 the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank), any trust preferred securities that Arrow might issue on or after the grandfathering date of May 19, 2010 set forth in Dodd-Frank ~~(May 19, 2010)~~(the Grandfathering Cutoff) 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)~~Grandfathering Cutoff 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 the first quarter of 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 3.43% until maturity. These agreements are designated as cash flow hedges.

Stock Repurchase Program: In ~~January~~October 2021, the Board of Directors approved a ~~$5.0~~$5 million stock repurchase program, effective for the period January ~~27, 2021~~1, 2022 through December 31, ~~2021~~2022 (the ~~2021~~2022 Repurchase Program), under which management is authorized, in its discretion, to permit Arrow to repurchase up to $5 million of shares of Arrow's common stock, in the open market or in privately negotiated transactions, to the extent management believes Arrow's stock is reasonably priced and such repurchases appear to be an attractive use of available capital and in the best interests of shareholders. As of September 30, ~~2021,~~2022, Arrow repurchased ~~$1.5~~$2.5 million of common stock under the ~~2021~~2022 Repurchase Program. This repurchase arrangement does not include repurchases of Arrow's ~~Common Stock~~common stock other than through its ~~2021~~2022 Repurchase Program, i.e., repurchases of Arrow shares on the market utilizing funds accumulated under Arrow's Dividend Reinvestment Plan and the surrender or deemed surrender of Arrow stock to the Company in connection with

employees' stock-for-stock exercises of compensatory stock options to buy Arrow stock. The Board of Directors of Arrow recently approved a new stock repurchase program authorizing the repurchase, at the discretion of senior management, of up to $5 million of the Company’s common stock over the 2023 calendar year, in open-market or negotiated transactions.

Dividends: Arrow's common stock is traded on NasdaqGS® under the symbol AROW. The high and low stock prices for the past seven quarters listed below represent actual sales transactions, as reported by NASDAQ. On October ~~27, 2021,~~26, 2022, the Board of Directors declared a ~~2021~~2022 fourth quarter cash dividend of ~~$0.26~~$0.27 payable on December 15, ~~2021.~~2022. Per share amounts and share counts in the following tables have been restated for the September ~~24, 2021~~23, 2022 3% stock dividend.


						Cash							Cash
		Market Price				Dividends			Market Price				Dividends
		Low		High		Declared			Low		High		Declared
2020
2021								2021
First Quarter	First Quarter	$	19.59	$	35.86	$	0.245	First Quarter	$	27.01	$	34.39	$	0.245
Second Quarter	Second Quarter	22.21		29.86		0.245		Second Quarter	31.31		36.06		0.245
Third Quarter	Third Quarter	23.86		28.28		0.245		Third Quarter	31.78		35.42		0.245
Fourth Quarter	Fourth Quarter	23.80		31.07		0.252		Fourth Quarter	32.77		37.13		0.252
2021
2022								2022
First Quarter	First Quarter	$	27.82	$	35.42	$	0.252	First Quarter	$	31.19	$	35.91	$	0.262
Second Quarter	Second Quarter	32.25		37.15		0.252		Second Quarter	29.61		32.79		0.262
Third Quarter	Third Quarter	32.73		36.49		0.252		Third Quarter	28.68		34.91		0.262
Fourth Quarter (dividend payable December 15, 2021)		TBD		TBD		0.260
Fourth Quarter (dividend payable December 15, 2022)								Fourth Quarter (dividend payable December 15, 2022)	TBD		TBD		0.270


		Quarter Ended September 30							Quarter Ended September 30
		2021			2020				2022			2021
Cash Dividends Per Share	Cash Dividends Per Share	$	0.252		$	0.245		Cash Dividends Per Share	$	0.262		$	0.245
Diluted Earnings Per Share	Diluted Earnings Per Share	0.81			0.69			Diluted Earnings Per Share	0.74			0.78
Dividend Payout Ratio	Dividend Payout Ratio	31.11		%	35.51		%	Dividend Payout Ratio	35.41		%	31.41		%
Total Equity (in thousands)	Total Equity (in thousands)	360,171			$	325,660		Total Equity (in thousands)	345,550			$	360,171
Shares Issued and Outstanding (in thousands)	Shares Issued and Outstanding (in thousands)	16,020			15,954			Shares Issued and Outstanding (in thousands)	16,523			16,500
Book Value Per Share	Book Value Per Share	$	22.48		$	20.41		Book Value Per Share	$	20.91		$	21.83
Intangible Assets (in thousands)	Intangible Assets (in thousands)	23,879			23,662			Intangible Assets (in thousands)	23,477			23,879
Tangible Book Value Per Share	Tangible Book Value Per Share	$	20.99		$	18.93		Tangible Book Value Per Share	$	19.49		$	20.38

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 provides 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, 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 ~~$486.9~~$575.1 million at September 30, ~~2021,~~2022, an increase of ~~$121.6~~$15.7 million, from the year-end ~~2020~~2021 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 September 30, ~~2021~~2022 of ~~$548.9~~$328.6 million compared to ~~$338.9~~$430.7 million at December 31, ~~2020.~~2021.

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 $52 million which were not drawn on during the three months ended September 30, ~~2021.~~2022.

To support the borrowing relationship with the FHLBNY, Arrow has pledged collateral, including residential mortgage, home equity and commercial real estate loans. At September 30, ~~2021,~~2022, Arrow had outstanding collateralized obligations with the FHLBNY of ~~$45~~$25 million; as of that date, the unused borrowing capacity at the FHLBNY was approximately ~~$731~~$775 million. Brokered deposits have also been identified as an available source of funding accessible in a relatively short time period. At September 30, ~~2021,~~2022, there were no outstanding brokered deposits. ~~Arrow paid down $45 million in brokered deposits in the first half of 2021.~~ Also, Arrow's two bank subsidiaries have each 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 September 30, ~~2021,~~2022, the amount available under this facility was approximately ~~$641~~$651 million in the aggregate, and there were no advances then outstanding.

Arrow performs regular liquidity stress tests and ~~tests of the~~maintains a contingent liquidity plan to ensure that an adequate amount of available funds can be generated to meet a wide variety of potential liquidity events.

Arrow measures and monitors basic liquidity as a ratio of liquid assets to total short-term liabilities, both with and without the availability of borrowing arrangements. Based on the level of overnight funds 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 September 30, ~~2021,~~2022, Arrow's basic liquidity ratio, including FHLBNY collateralized borrowing capacity, was ~~32.3%~~26.5% of total assets, or ~~$1.15 billion~~$952 million in excess of Arrow's internally-set minimum target ratio of 4%.

Arrow did not experience any significant liquidity constraints in the three month period ended September 30, ~~2021~~2022 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.

RECENTLY ISSUED ACCOUNTING STANDARDS

The following accounting standards have been issued and become effective for the Company at a future date:

In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. On January 7, 2021, the FASB issued ASU 2021-01, which refines the scope of ASC 848 and clarifies some of its guidance. The ASU and related amendments provide temporary optional expedients and exceptions to the existing guidance for applying GAAP to affected contract modifications and hedge accounting relationships in the transition away from the LIBOR or other interbank offered rate on financial reporting. The guidance also allows a one-time election to sell and/or reclassify to AFS or trading HTM debt securities that reference an interest rate affected by reference rate reform. The amendments in this ASU are effective March 12, 2020 through December 31, 2022 and permit relief solely for reference rate reform actions and different elections over the effective date for legacy and new activity. Arrow ~~has evaluated~~is evaluating the ~~accounting standards that have been issued~~impact of adopting the new guidance on the consolidated financial statements and ~~effective at a future date and determined that these standards~~does not expect it will ~~not~~ have a material impact on the consolidated financial statements.

In March 2022, the FASB issued ASU 2022-02, Financial Instruments-Credit Losses (Topic 326), Troubled Debt Restructurings and Vintage Disclosures. ASU 2022-02 addresses areas identified by the FASB as part of its post-implementation review of the credit losses standard (ASU 2016-13) that introduced the CECL model. The amendments eliminate the accounting guidance for troubled debt restructurings by creditors that have adopted the CECL model and enhance the disclosure requirements for loan refinancings and restructurings made with borrowers experiencing financial ~~position or~~difficulty. For Arrow, ASU 2022-02 is effective for fiscal years beginning after December 15, 2022. Arrow does not expect it will have a material impact on the ~~results of operations.~~consolidated financial statements.

6867

RESULTS OF OPERATIONS

Three Months Ended September 30, ~~2021~~2022 Compared With

Three Months Ended September 30, ~~2020~~2021

Summary of Earnings Performance

(Dollars in Thousands, Except Per Share Amounts)


		Three Months Ended												Three Months Ended
		September 30, 2021			September 30, 2020			Change			% Change			September 30, 2022			September 30, 2021			Change			% Change
Net Income	Net Income	$	12,989		$	11,046		$	1,943		17.6	%	Net Income	$	12,163		$	12,989		$	(826)		(6.4)	%
Diluted Earnings Per Share	Diluted Earnings Per Share	0.81			0.69			0.12			17.4	%	Diluted Earnings Per Share	0.74			0.78			(0.04)			(5.1)	%
Return on Average Assets	Return on Average Assets	1.32		%	1.23		%	0.09		%	7.3	%	Return on Average Assets	1.19		%	1.32		%	(0.13)		%	(9.8)	%
Return on Average Equity	Return on Average Equity	14.34		%	13.55		%	0.79		%	5.8	%	Return on Average Equity	13.34		%	14.34		%	(1.00)		%	(7.0)	%

Net income was ~~$13.0~~$12.2 million and diluted earnings per share (EPS) of ~~$.81~~$0.74 for the third quarter of ~~2021,~~2022, compared to net income of ~~$11.0~~$13.0 million and diluted EPS of ~~$.69~~$0.78 for the third quarter of ~~2020.~~2021. Return on average assets for the third quarter of ~~2021~~2022 was ~~1.32%~~1.19%, upa decrease from ~~1.23%~~1.32% in the third quarter of ~~2020.~~2021. In addition, return on average equity ~~increased~~decreased to ~~14.34%~~13.34% for the third quarter of ~~2021,~~2022, from ~~13.55%~~14.34% in the third quarter of ~~2020.~~2021.

The following narrative discusses the quarter-to-quarter changes in net interest income, noninterest income, noninterest expense and income ~~taxes.~~taxes:

Net Interest Income

Summary of Net Interest Income

(Dollars in Thousands)


		Three Months Ended												Three Months Ended
		September 30, 2021			September 30, 2020			Change			% Change			September 30, 2022			September 30, 2021			Change			% Change
Interest and Dividend Income	Interest and Dividend Income	$	29,807		$	27,296		$	2,511		9.2	%	Interest and Dividend Income	$	34,207		$	29,807		$	4,400		14.8	%

Interest Expense	Interest Expense	1,169			2,396			(1,227)			(51.2)	%	Interest Expense	3,306			1,169			2,137			182.8	%
Net Interest Income	Net Interest Income	28,638			24,900			3,738			15.0	%	Net Interest Income	30,901			28,638			2,263			7.9	%

Average Earning Assets(1)	Average Earning Assets(1)	3,734,206			3,417,638			316,568			9.3	%	Average Earning Assets(1)	3,902,119			3,734,206			167,913			4.5	%
Average Interest-Bearing Liabilities	Average Interest-Bearing Liabilities	2,705,283			2,545,435			159,848			6.3	%	Average Interest-Bearing Liabilities	2,781,985			2,705,283			76,702			2.8	%

Yield on Earning Assets(1)	Yield on Earning Assets(1)	3.17		%	3.18		%	(0.01)		%	(0.3)	%	Yield on Earning Assets(1)	3.48		%	3.17		%	0.31		%	9.8	%

Cost of Interest-Bearing Liabilities	Cost of Interest-Bearing Liabilities	0.17			0.37			(0.20)			(54.1)		Cost of Interest-Bearing Liabilities	0.47			0.17			0.30			176.5	%

Net Interest Spread	Net Interest Spread	3.00			2.81			0.19			6.8		Net Interest Spread	3.01			3.00			0.01			0.3	%

Net Interest Margin	Net Interest Margin	3.04			2.90			0.14			4.8		Net Interest Margin	3.14			3.04			0.10			3.3	%

Income Earned on PPP Loans included Net Interest Income													Income Earned on PPP Loans included Net Interest Income	$	70		$	2,530		$	(2,460)		(97.2)	%
Net Interest Income excluding PPP loans	Net Interest Income excluding PPP loans	$	26,109		$	23,779		$	2,330		9.8	%	Net Interest Income excluding PPP loans	30,831			26,108			4,723			18.1	%
Net Interest Margin excluding PPP loans	Net Interest Margin excluding PPP loans	2.84		%	2.88		%	(0.04)		%	(1.4)	%	Net Interest Margin excluding PPP loans	3.14		%	2.84		%	0.30		%	10.6	%

(1) Includes Nonaccrual Loans.	(1) Includes Nonaccrual Loans.												(1) Includes Nonaccrual Loans.

Net interest income for the recently completed quarter increased by ~~$3.7~~$2.3 million, or ~~15.0%~~7.9%, from the third quarter of ~~2020,~~2021, due to a variety of factors including ~~the timing of~~loan growth offset by the forgiveness of PPP loans ~~offset by lower~~and an increase in interest ~~rates~~expense. Income earned on PPP loans decreased $2.5 million, or 97.2%, from the quarter ending September 30, 2021. Cost of interest-bearing liabilities increased as the result of the raising rate environment and ~~increased cash balances.~~repricing of municipal deposits. Interest and fees on loans generated ~~$27.2~~$29.6 million in income for the third quarter of ~~2021, an increase of 9.9% from the $24.7~~2022 as compared to $27.2 million from the quarter ending September 30, ~~2020.~~2021. In the third quarter of 2022, a $536 thousand amortization adjustment of indirect loan fees was recognized as part of loan income. Interest expense for the third quarter of ~~2021~~2022 was ~~$1.2~~$3.3 million, ~~a decrease~~an increase of ~~$1.2~~$2.1 million, or ~~51.2%~~182.8% from the ~~$2.4~~$1.2 million in expense for the comparable quarter ending September 30, ~~2020.~~2021. Net interest margin increased 1410 basis points in the third quarter of ~~2021~~2022 to ~~3.04%~~3.14%, from ~~2.90%~~3.04% during the third quarter of ~~2020.~~2021. Excluding PPP loans, net interest margin increased 30 basis points in the third quarter of 2022 to 3.14%, from 2.84% during the third quarter of 2021. Average earning asset yields were 131 basis ~~point lower~~points higher as compared to the third quarter of ~~2020.~~2021. The cost of interest-bearing liabilities ~~decreased 20~~increased 30 basis points from the quarter ended September 30, ~~2020.~~2021. Arrow defines net interest margin as net interest income divided by average earning assets, annualized. Further detailed information is presented above under the section entitled "Average Consolidated Balance Sheets and Net Interest Income ~~Analysis."~~Analysis" on page 51 The impact of recent interest rate changes on Arrow's deposit and loan portfolios are discussed above in this Report under the sections entitled "Deposit Trends" on page 60 and "Loan ~~Trends."~~Trends" on page 62.

As discussed previously under the heading "Asset Quality" beginning on page ~~63,~~62, the provision for loan losses for the third quarter of ~~2021~~2022 was ~~$99 thousand,~~$1.7 million, compared to a provision of ~~$2.3 million~~$99 thousand for the third quarter of ~~2020.~~2021.

6968

Noninterest Income

Summary of Noninterest Income

(Dollars in Thousands)


		Three Months Ended									Three Months Ended
		September 30, 2021		September 30, 2020		Change		% Change			September 30, 2022		September 30, 2021		Change		% Change
Income From Fiduciary Activities	Income From Fiduciary Activities	$	2,571	$	2,265	$	306	13.5	%	Income From Fiduciary Activities	$	2,341	$	2,571	$	(230)	(8.9)	%
Fees for Other Services to Customers	Fees for Other Services to Customers	2,966		2,619		347		13.2	%	Fees for Other Services to Customers	3,071		2,966		105		3.5	%
Insurance Commissions	Insurance Commissions	1,576		1,713		(137)		(8.0)	%	Insurance Commissions	1,650		1,576		74		4.7	%

Net Loss on Securities Transactions		(106)		(72)		(34)		(47.2)	%
Net Gain (Loss) on Securities										Net Gain (Loss) on Securities	95		(106)		201		189.6	%
Net Gain on the Sale of Loans	Net Gain on the Sale of Loans	211		1,433		(1,222)		(85.3)	%	Net Gain on the Sale of Loans	18		211		(193)		(91.5)	%
Other Operating Income	Other Operating Income	476		739		(263)		(35.6)	%	Other Operating Income	652		476		176		37.0	%
Total Noninterest Income	Total Noninterest Income	$	7,694	$	8,697	$	(1,003)	(11.5)	%	Total Noninterest Income	$	7,827	$	7,694	$	133	1.7	%

Total noninterest income in the current quarter was ~~$7.7~~$7.8 million, a decrease of ~~$1.0 million~~$133 thousand from the comparable quarter of ~~2020.~~2021. Income from fiduciary activities for the third quarter of ~~2021 increased~~2022 decreased by ~~13.5%~~8.9% from the third quarter of ~~2020.~~ 2021, primarily driven by market conditions. Assets under trust administration and investment management at September 30, 2022 were $1.52 billion.

Fees for other services to customers were ~~$3.0~~$3.1 million for the third quarter of ~~2021,~~2022, an increase of ~~$347~~$105 thousand or ~~13.2%~~3.5% from the third quarter of ~~2020. Interchange fees related to increased customer activity of debit card usage was the largest driver of the increase.~~ 2021.

Insurance commissions were ~~$1.6~~$1.7 million for the third quarter of ~~2021, a decrease~~2022, an increase of ~~$137~~$74 thousand ~~or 8.0%~~ from the third quarter of ~~2020. The decrease is related to a decline in the employee benefits sector~~2021.

Net gain on securities of ~~the business. Net loss on security transactions of $106~~$95 thousand for the third quarter of ~~2021~~2022 was the result of ~~a decrease~~an increase in the fair value of equity ~~securities.~~securities from June 30, 2022. Net gain on the sale of loans in the third quarter of ~~2021~~2022 decreased by ~~$1.2 million~~$193 thousand from the third quarter of ~~2020 as a result of a strategic decision to retain more residential~~2021 on fewer loan ~~originations.~~sales. See page 5654 for the discussion of loan sales.

Other operating income ~~decreased $263~~increased $176 thousand from the comparable quarter in ~~2020, due to a variety of factors including fees received as part of interest rate swap agreements decreasing $306 thousand and an increase in income of $57 thousand~~2021, primarily related to ~~additional bank owned~~bank-owned life ~~insurance.~~insurance proceeds.

~~Noninterest Expense~~RESULTS OF OPERATIONS

Three Months Ended September 30, 2022 Compared With

Three Months Ended September 30, 2021

Summary of ~~Noninterest Expense~~Earnings Performance

(Dollars in Thousands, Except Per Share Amounts)


	Three Months Ended
	September 30, 2022			September 30, 2021			Change			% Change
Net Income	$	12,163		$	12,989		$	(826)		(6.4)	%
Diluted Earnings Per Share	0.74			0.78			(0.04)			(5.1)	%
Return on Average Assets	1.19		%	1.32		%	(0.13)		%	(9.8)	%
Return on Average Equity	13.34		%	14.34		%	(1.00)		%	(7.0)	%

Net income was $12.2 million and diluted earnings per share (EPS) of $0.74 for the third quarter of 2022, compared to net income of $13.0 million and diluted EPS of $0.78 for the third quarter of 2021. Return on average assets for the third quarter of 2022 was 1.19%, a decrease from 1.32% in the third quarter of 2021. In addition, return on average equity decreased to 13.34% for the third quarter of 2022, from 14.34% in the third quarter of 2021.

The following narrative discusses the quarter-to-quarter changes in net interest income, noninterest income, noninterest expense and income taxes:

Net Interest Income

Summary of Net Interest Income

(Dollars in Thousands)

Three Months Ended
September 30, 2021 September 30, 2020 Change % Change
Salaries and Employee Benefits $ 11,377 $ 10,408 $ 969 9.3 %
Occupancy Expense of Premises, Net 1,403 1,427 (24) (1.7) %
Technology and Equipment Expense 3,833 3,228 605 18.7 %
FDIC and FICO Assessments 249 309 (60) (19.4) %
Amortization 52 56 (4) (7.1) %
Other Operating Expense 2,509 2,059 450 21.9 %
Total Noninterest Expense $ 19,423 $ 17,487 $ 1,936 11.1 %
Efficiency Ratio 52.74 % 51.34 % 1.4 % 2.7 %


	Three Months Ended
	September 30, 2022			September 30, 2021			Change			% Change
Interest and Dividend Income	$	34,207		$	29,807		$	4,400		14.8	%



Interest Expense	3,306			1,169			2,137			182.8	%
Net Interest Income	30,901			28,638			2,263			7.9	%

Average Earning Assets(1)	3,902,119			3,734,206			167,913			4.5	%
Average Interest-Bearing Liabilities	2,781,985			2,705,283			76,702			2.8	%

Yield on Earning Assets(1)	3.48		%	3.17		%	0.31		%	9.8	%

Cost of Interest-Bearing Liabilities	0.47			0.17			0.30			176.5	%

Net Interest Spread	3.01			3.00			0.01			0.3	%


Net Interest Margin	3.14			3.04			0.10			3.3	%

Income Earned on PPP Loans included Net Interest Income	$	70		$	2,530		$	(2,460)		(97.2)	%
Net Interest Income excluding PPP loans	30,831			26,108			4,723			18.1	%
Net Interest Margin excluding PPP loans	3.14		%	2.84		%	0.30		%	10.6	%

(1) Includes Nonaccrual Loans.

~~Noninterest~~Net interest income for the recently completed quarter increased by $2.3 million, or 7.9%, from the third quarter of 2021, due to a variety of factors including loan growth offset by the forgiveness of PPP loans and an increase in interest expense. Income earned on PPP loans decreased $2.5 million, or 97.2%, from the quarter ending September 30, 2021. Cost of interest-bearing liabilities increased as the result of the raising rate environment and repricing of municipal deposits. Interest and fees on loans generated $29.6 million in income for the third quarter of 2022 as compared to $27.2 million from the quarter ending September 30, 2021. In the third quarter of 2022, a $536 thousand amortization adjustment of indirect loan fees was recognized as part of loan income. Interest expense for the third quarter of ~~2021~~2022 was ~~$19.4~~$3.3 million, an increase of ~~$1.9~~$2.1 million, or ~~11.1%~~182.8% from the $1.2 million in expense for the comparable quarter ending September 30, 2021. Net interest margin increased 10 basis points in the third quarter of 2022 to 3.14%, from 3.04% during the third quarter of 2021. Excluding PPP loans, net interest margin increased 30 basis points in the third quarter of 2022 to 3.14%, from 2.84% during the third quarter of 2021. Average earning asset yields were 31 basis points higher as compared to the third quarter of 2021. The cost of interest-bearing liabilities increased 30 basis points from the quarter ended September 30, 2021. Arrow defines net interest margin as net interest income divided by average earning assets, annualized. Further detailed information is presented above under the section entitled "Average Consolidated Balance Sheets and Net Interest Income Analysis" on page 51 The impact of recent interest rate changes on Arrow's deposit and loan portfolios are discussed above in this Report under the sections entitled "Deposit Trends" on page 60 and "Loan Trends" on page 62.

As discussed previously under the heading "Asset Quality" beginning on page 62, the provision for loan losses for the third quarter of 2022 was $1.7 million, compared to a provision of $99 thousand for the third quarter of 2021.

Noninterest Income

Summary of Noninterest Income

(Dollars in Thousands)


	Three Months Ended
	September 30, 2022		September 30, 2021		Change		% Change
Income From Fiduciary Activities	$	2,341	$	2,571	$	(230)	(8.9)	%
Fees for Other Services to Customers	3,071		2,966		105		3.5	%
Insurance Commissions	1,650		1,576		74		4.7	%

Net Gain (Loss) on Securities	95		(106)		201		189.6	%
Net Gain on the Sale of Loans	18		211		(193)		(91.5)	%
Other Operating Income	652		476		176		37.0	%
Total Noninterest Income	$	7,827	$	7,694	$	133	1.7	%

Total noninterest income in the current quarter was $7.8 million, a decrease of $133 thousand from the comparable quarter of 2021. Income from fiduciary activities for the third quarter of 2022 decreased by 8.9% from the third quarter of ~~2020. Salaries~~2021, primarily driven by market conditions. Assets under trust administration and ~~benefit expenses increased $969~~investment management at September 30, 2022 were $1.52 billion.

Fees for other services to customers were $3.1 million for the third quarter of 2022, an increase of $105 thousand or ~~9.3%,~~3.5% from the third quarter of 2021.

Insurance commissions were $1.7 million for the third quarter of 2022, an increase of $74 thousand from the third quarter of 2021.

Net gain on securities of $95 thousand for the third quarter of 2022 was the result of an increase in the fair value of equity securities from June 30, 2022. Net gain on the sale of loans in the third quarter of 2022 decreased by $193 thousand from the third quarter of 2021 on fewer loan sales. See page 54 for the discussion of loan sales.

Other operating income increased $176 thousand from the comparable quarter in ~~2020. The increase is~~2021, primarily ~~due to a special employee recognition bonus which occurred in the third quarter. Technology expenses increased $605 thousand, or 18.7%, from the third quarter of 2020 in part due to variable costs~~ related to increased utilization of consumer banking technology. Other non-interest expense includes the expense for estimated credit losses on off-balance sheet credit exposures of $300 thousand in the third quarter.bank-owned life insurance proceeds.

~~Income Taxes~~

~~Summary of Income Taxes~~

~~(Dollars in Thousands)~~

Three Months Ended
September 30, 2021 September 30, 2020 Change % Change
Provision for Income Taxes $ 3,821 $ 2,793 $ 1,028 36.8 %
Effective Tax Rate 22.7 % 20.2 % 2.5 % 12.4 %

The increase in the effective tax rate in the first three months ended September 30, 2021 compared to the three-months ended September 30, 2020 was primarily due to the reduction of tax exempt investments held and the related investment income combined with the increase in the New York State corporate tax rate which was effective January 1, 2021.

RESULTS OF OPERATIONS

~~Nine~~Three Months Ended September 30, 2022 Compared With

Three Months Ended September 30, 2021 ~~Compared With~~

~~Nine Months Ended September 30, 2020~~

Summary of Earnings Performance

(Dollars in Thousands, Except Per Share Amounts)


		Nine Months Ended												Three Months Ended
		September 30, 2021			September 30, 2020			Change			% Change			September 30, 2022			September 30, 2021			Change			% Change
Net Income	Net Income	$	39,548		$	28,332		$	11,216		39.6	%	Net Income	$	12,163		$	12,989		$	(826)		(6.4)	%
Diluted Earnings Per Share	Diluted Earnings Per Share	2.46			1.78			0.68			38.2		Diluted Earnings Per Share	0.74			0.78			(0.04)			(5.1)	%
Return on Average Assets	Return on Average Assets	1.38		%	1.11		%	0.27		%	24.3		Return on Average Assets	1.19		%	1.32		%	(0.13)		%	(9.8)	%
Return on Average Equity	Return on Average Equity	15.10		%	11.99		%	3.11		%	25.9		Return on Average Equity	13.34		%	14.34		%	(1.00)		%	(7.0)	%

Net income was ~~$39.5~~$12.2 million and diluted earnings per share (EPS) of ~~$2.46~~$0.74 for the ~~first nine months~~third quarter of ~~2021,~~2022, compared to net income of ~~$28.3~~$13.0 million and diluted EPS of ~~$1.78~~$0.78 for the ~~first nine months~~third quarter of ~~2020.~~2021. Return on average assets for the ~~first nine months~~third quarter of ~~2021~~2022 was ~~1.38%~~1.19%, ~~an increase~~a decrease from ~~1.11% for~~1.32% in the ~~first nine months~~third quarter of ~~2020.~~2021. In addition, return on average equity ~~increased~~decreased to ~~15.10%~~13.34% for the ~~first nine months~~third quarter of ~~2021~~2022, from ~~11.99% for~~14.34% in the ~~first nine months~~third quarter of ~~2020.~~2021.

The following narrative discusses the ~~period-to-period~~quarter-to-quarter changes in net interest income, noninterest income, noninterest expense and income ~~taxes.~~taxes:

Net Interest Income

Summary of Net Interest Income

(Dollars in Thousands)


		Nine Months Ended												Three Months Ended
		September 30, 2021			September 30, 2020			Change			% Change			September 30, 2022			September 30, 2021			Change			% Change
Interest and Dividend Income	Interest and Dividend Income	$	87,196		$	83,524		$	3,672		4.4	%	Interest and Dividend Income	$	34,207		$	29,807		$	4,400		14.8	%

Interest Expense	Interest Expense	4,043			10,776			(6,733)			(62.5)	%	Interest Expense	3,306			1,169			2,137			182.8	%
Net Interest Income	Net Interest Income	83,153			72,748			10,405			14.3	%	Net Interest Income	30,901			28,638			2,263			7.9	%

Average Earning Assets (1)	Average Earning Assets (1)	3,657,060			3,243,886			413,174			12.7	%	Average Earning Assets(1)	3,902,119			3,734,206			167,913			4.5	%
Average Interest-Bearing Liabilities	Average Interest-Bearing Liabilities	2,689,070			2,455,544			233,526			9.5	%	Average Interest-Bearing Liabilities	2,781,985			2,705,283			76,702			2.8	%

Yield on Earning Assets (1)	Yield on Earning Assets (1)	3.19		%	3.44		%	(0.25)		%	(7.3)	%	Yield on Earning Assets(1)	3.48		%	3.17		%	0.31		%	9.8	%

Cost of Interest-Bearing Liabilities	Cost of Interest-Bearing Liabilities	0.20			0.59			(0.39)			(66.10)		Cost of Interest-Bearing Liabilities	0.47			0.17			0.30			176.5	%

Net Interest Spread	Net Interest Spread	2.99			2.85			0.14			4.91		Net Interest Spread	3.01			3.00			0.01			0.3	%

Net Interest Margin	Net Interest Margin	3.04			3.00			0.04			1.33		Net Interest Margin	3.14			3.04			0.10			3.3	%

Income Earned on PPP Loans included Net Interest Income													Income Earned on PPP Loans included Net Interest Income	$	70		$	2,530		$	(2,460)		(97.2)	%
Net Interest Income excluding PPP loans	Net Interest Income excluding PPP loans	$	76,196		$	71,627		$	4,569		6.4	%	Net Interest Income excluding PPP loans	30,831			26,108			4,723			18.1	%
Net Interest Margin excluding PPP loans	Net Interest Margin excluding PPP loans	2.88		%	2.99		%	(0.11)		%	(3.7)	%	Net Interest Margin excluding PPP loans	3.14		%	2.84		%	0.30		%	10.6	%

(1) Includes Nonaccrual Loans.	(1) Includes Nonaccrual Loans.												(1) Includes Nonaccrual Loans.

Net interest income for the ~~first nine months of 2021~~recently completed quarter increased ~~$10.4~~by $2.3 million, or ~~14.3%~~7.9%, from the ~~first nine months~~third quarter of ~~2020. The~~2021, due to a variety of factors including loan growth offset by the forgiveness of PPP loans and an increase ~~is due~~ in ~~part to $7.0~~interest expense. Income earned on PPP loans decreased $2.5 million, ~~of revenue related to PPP loans. Other factors offsetting net interest income include lower market rates and increased cash balances. Total loans at~~or 97.2%, from the quarter ending September 30, ~~2021~~2021. Cost of interest-bearing liabilities increased ~~$62.3~~as the result of the raising rate environment and repricing of municipal deposits. Interest and fees on loans generated $29.6 million in income for the third quarter of 2022 as compared to $27.2 million from the quarter ending September 30, ~~2020. Investments increased $85.9~~2021. In the third quarter of 2022, a $536 thousand amortization adjustment of indirect loan fees was recognized as part of loan income. Interest expense for the third quarter of 2022 was $3.3 million, an increase of $2.1 million, or 182.8% from the $1.2 million in expense for the comparable quarter ending September 30, ~~2020. At September 30, 2021, deposit balances reached $3.6 billion. Deposit growth from September 30, 2020 to September 30, 2021 was $340.7 million, or 10.4%.~~2021. Net interest margin ~~for the first nine months of 2021~~ increased 410 basis points in the third quarter of 2022 to ~~3.04%~~3.14%, from ~~3.00% for~~3.04% during the ~~first nine months~~third quarter of ~~2020.~~2021. Excluding PPP loans, net interest margin increased 30 basis points in the third quarter of 2022 to 3.14%, from 2.84% during the third quarter of 2021. Average earning asset yields were 2531 basis points ~~lower~~higher as compared to the ~~first nine months~~third quarter of ~~2020 due primarily to the increased cash balances and lower market rates partially offset by revenue related to PPP loans.~~2021. The cost of interest-bearing liabilities ~~decreased 39~~increased 30 basis points from the ~~first nine months of 2020.~~quarter ended September 30, 2021. Arrow defines net interest margin as net interest income divided by average earning assets, annualized. Further detailed information is presented above under the section entitled "Average Consolidated Balance Sheets and Net Interest Income ~~Analysis."~~Analysis" on page 51 The impact of recent interest rate changes on Arrow's deposit and loan portfolios are discussed above in this Report under the sections entitled "Deposit Trends" on page 60 and "Loan ~~Trends."~~Trends" on page 62.

As discussed previously under the heading "Asset Quality" beginning on page ~~63,~~62, the provision for loan losses for the ~~first nine months~~third quarter of ~~2021~~2022 was ~~$(286) thousand,~~$1.7 million, compared to a provision of ~~$8.1 million~~$99 thousand for the ~~first nine months~~third quarter of ~~2020.~~2021.

7168

Noninterest Income

Summary of Noninterest Income

(Dollars in Thousands)


		Nine Months Ended									Three Months Ended
		September 30, 2021		September 30, 2020		Change		% Change			September 30, 2022		September 30, 2021		Change		% Change
Income From Fiduciary Activities	Income From Fiduciary Activities	7,538		6,613		$	925	14.0	%	Income From Fiduciary Activities	$	2,341	$	2,571	$	(230)	(8.9)	%
Fees for Other Services to Customers	Fees for Other Services to Customers	8,494		7,348		1,146		15.6		Fees for Other Services to Customers	3,071		2,966		105		3.5	%
Insurance Commissions	Insurance Commissions	4,842		5,077		(235)		(4.6)		Insurance Commissions	1,650		1,576		74		4.7	%

Net Gain (Loss) on Securities	Net Gain (Loss) on Securities	250		(552)		802		(145.3)		Net Gain (Loss) on Securities	95		(106)		201		189.6	%
Net Gain on the Sale of Loans	Net Gain on the Sale of Loans	2,251		2,193		58		2.6		Net Gain on the Sale of Loans	18		211		(193)		(91.5)	%
Other Operating Income	Other Operating Income	1,405		2,876		(1,471)		(51.1)		Other Operating Income	652		476		176		37.0	%
Total Noninterest Income	Total Noninterest Income	$	24,780	$	23,555	$	1,225	5.2	%	Total Noninterest Income	$	7,827	$	7,694	$	133	1.7	%

Total noninterest income ~~for~~in the ~~first nine months~~current quarter was $7.8 million, a decrease of ~~2021 was $24.8 million, an increase of $1.2 million~~$133 thousand from the ~~first nine months~~comparable quarter of ~~2020.~~2021. Income from fiduciary activities for the ~~first nine months~~third quarter of 2022 decreased by 8.9% from the third quarter of 2021, ~~increased~~primarily driven by ~~14.0% from the first nine months of 2020 due to~~ market ~~performance~~conditions. Assets under trust administration and ~~stable customer base.~~ investment management at September 30, 2022 were $1.52 billion.

Fees for other services to customers were ~~$8.5~~$3.1 million for the ~~first nine months~~third quarter of ~~2021 representing~~2022, an increase of ~~$1.1 million,~~$105 thousand or ~~15.6%,~~3.5% from the ~~prior year comparative period. The growth was driven by interchange fees related to increased debit card usage.~~ third quarter of 2021.

Insurance commissions were ~~$4.8~~$1.7 million for the ~~first nine months~~third quarter of ~~2021. The decrease in insurance commissions as compared to~~2022, an increase of $74 thousand from the ~~first nine months~~third quarter of 2020 is primarily related to continued competition and the loss of some employee benefit relationships. Expense control initiatives are ongoing to ensure expenses appropriately align with the decrease in revenue. 2021.

Net gain on ~~security transactions~~securities of ~~$250~~$95 thousand for the ~~first nine months~~third quarter of ~~2021~~2022 was the result of ~~the~~an increase in the fair value of equity ~~securities.~~securities from June 30, 2022. Net gain on the sale of loans ~~for the first nine months of 2021 was flat to the comparable period~~ in 2020. For the majority of the year, loan sale activity exceeded prior year activity due in part to strong demand for residential mortgages in our operating markets and favorable market conditions for mortgage sales. In the third quarter ~~sales slowed as a result~~ of 2022 decreased by $193 thousand from the ~~decision to grow the residential~~third quarter of 2021 on fewer loan ~~portfolio.~~sales. See page 5654 for the discussion of loan sales.

Other operating income ~~decreased $1.5 million~~increased $176 thousand from the comparable ~~period~~quarter in ~~2020, due~~2021, primarily related to ~~fees received as part of interest rate swap agreements decreasing by $1.4 million.~~bank-owned life insurance proceeds.

Noninterest Expense

Summary of Noninterest Expense

(Dollars in Thousands)


		Nine Months Ended												Three Months Ended
		September 30, 2021			September 30, 2020			Change			% Change			September 30, 2022			September 30, 2021			Change			% Change
Salaries and Employee Benefits	Salaries and Employee Benefits	$	33,360		$	31,003		$	2,357		7.6	%	Salaries and Employee Benefits	$	12,427		$	11,377		$	1,050		9.2	%
Occupancy Expense of Premises, Net	Occupancy Expense of Premises, Net	4,480			4,221			259			6.1		Occupancy Expense of Premises, Net	1,521			1,403			118			8.4	%
Technology and Equipment Expense	Technology and Equipment Expense	11,002			9,807			1,195			12.2		Technology and Equipment Expense	4,049			3,833			216			5.6	%
FDIC and FICO Assessments	FDIC and FICO Assessments	764			770			(6)			(0.8)		FDIC and FICO Assessments	295			249			46			18.5	%
Amortization	Amortization	158			171			(13)			(7.6)		Amortization	48			52			(4)			(7.7)	%
Other Operating Expense	Other Operating Expense	7,424			6,514			910			14.0		Other Operating Expense	3,108			2,509			599			23.9	%
Total Noninterest Expense	Total Noninterest Expense	$	57,188		$	52,486		$	4,702		9.0		Total Noninterest Expense	$	21,448		$	19,423		$	2,025		10.4	%
Efficiency Ratio	Efficiency Ratio	52.56		%	53.54		%	(0.98)		%	(1.8)	%	Efficiency Ratio	55.01		%	52.74		%	2.3		%	4.4	%

Noninterest expense for the ~~first nine months~~third quarter of ~~2021~~2022 was ~~$57.2~~$21.4 million, an increase of ~~$4.7~~$2.0 million, or ~~9.0%~~10.4%, from the ~~first nine months~~third quarter of ~~2020.~~2021. Salaries and benefit expenses increased ~~$2.4~~$1.1 million, or ~~7.6%~~9.2%, from the comparable ~~period~~quarter in ~~2020.~~2021. In the third quarter of 2022, additional actuarial pension expense of $550 thousand was recognized within salaries and employee benefits as a result of exceeding the threshold amount of lump sum distributions during the year. Arrow awarded a special ~~employee recognition~~ bonus ~~occurred.~~in the third quarter of 2022, similar to special pandemic bonuses awarded in 2021 and 2020. Technology expenses in the third quarter of increased ~~$1.2 million,~~$216 thousand, or ~~12.2%~~5.6%, from the ~~first nine months~~third quarter of ~~2020 due to variable costs related to increased utilization of consumer banking technology as well as additional expenses to optimize digital delivery channels.~~2021. Other ~~non-interest expense increased $910 thousand for the first nine months of 2021 as compared to the first nine months of 2020. Other non-interest~~operating expense includes ~~the~~an expense for estimated credit losses on off-balance sheet ~~credit~~ exposures of ~~$655~~$30 thousand ~~for~~in the ~~first nine months~~second quarter of ~~2021.~~2022 .

Income Taxes

Summary of Income Taxes

(Dollars in Thousands)


		Nine Months Ended												Three Months Ended
		September 30, 2021			September 30, 2020			Change			% Change			September 30, 2022			September 30, 2021			Change			% Change
Provision for Income Taxes	Provision for Income Taxes	$	11,483		$	7,402		$	4,081		55.1	%	Provision for Income Taxes	$	3,402		$	3,821		$	(419)		(11.0)	%
Effective Tax Rate	Effective Tax Rate	22.5		%	20.7		%	1.8		%	8.7	%	Effective Tax Rate	21.9		%	22.7		%	(0.8)		%	(3.5)	%

RESULTS OF OPERATIONS

Nine Months Ended September 30, 2022 Compared With

Nine Months Ended September 30, 2021

Summary of Earnings Performance

(Dollars in Thousands, Except Per Share Amounts)


	Nine Months Ended
	September 30, 2022			September 30, 2021			Change			% Change
Net Income	$	36,712		$	39,548		$	(2,836)		(7.2)	%
Diluted Earnings Per Share	2.22			2.39			(0.17)			(7.1)
Return on Average Assets	1.22		%	1.38		%	(0.16)		%	(11.6)
Return on Average Equity	13.52		%	15.10		%	(1.58)		%	(10.5)

Net income was $36.7 million and diluted earnings per share (EPS) of $2.22 for the first nine months of 2022, compared to net income of $39.5 million and diluted EPS of $2.39 for the first nine months of 2021. Return on average assets for the first nine months of 2022 was 1.22%, a decrease from 1.38% for the first nine months of 2021. In addition, return on average equity decreased to 13.52% for the first nine months of 2022 from 15.10% for the first nine months of 2021.

The following narrative discusses the period-to-period changes in net interest income, noninterest income, noninterest expense and income taxes:

Net Interest Income

Summary of Net Interest Income

(Dollars in Thousands)


	Nine Months Ended
	September 30, 2022			September 30, 2021			Change			% Change
Interest and Dividend Income	$	93,747		$	87,196		$	6,551		7.5	%



Interest Expense	5,983			4,043			1,940			48.0	%
Net Interest Income	87,764			83,153			4,611			5.5	%

Average Earning Assets (1)	3,888,992			3,657,060			231,932			6.3	%
Average Interest-Bearing Liabilities	2,815,115			2,689,070			126,045			4.7	%

Yield on Earning Assets (1)	3.22		%	3.19		%	0.03		%	0.9	%

Cost of Interest-Bearing Liabilities	0.28			0.20			0.08			40.0	%

Net Interest Spread	2.94			2.99			(0.05)			(1.7)	%


Net Interest Margin	3.02			3.04			(0.02)			(0.7)	%

Income Earned on PPP Loans included Net Interest Income	$	1,574		$	6,957		$	(5,383)		(77.4)	%
Net Interest Income excluding PPP loans	86,190			76,196			9,994			13.1	%
Net Interest Margin excluding PPP loans	2.97		%	2.88		%	0.09		%	3.1	%

(1) Includes Nonaccrual Loans.

Net interest income for the first nine months of 2022 increased $4.6 million, or 5.5%, from the first nine months of 2021. Excluding PPP loans, net interest income for the first nine months of 2022 increased $10.0 million, or 13.1%, from the first nine months of 2021. Net interest margin, excluding PPP loans was 2.97% for the first nine months of 2022, an increase inof 9 basis points over the ~~effective tax rate in~~prior year. Total loans at September 30, 2022 increased $270.0 million from September 30, 2021. Investments increased $72.2 million from September 30, 2021. At September 30, 2022, deposit balances reached $3.8 billion. Deposit growth from September 30, 2021 to September 30, 2022 was $189.5 million, or 5.3%. Net interest margin for the first nine months of 2022 decreased 2 basis points to 3.02%, from 3.04% for the first nine months of 2021. Average earning asset yields were 3 basis points higher as compared to the first nine months of 2021 ~~over~~due to changes in balance sheet mix, as cash was deployed into loans, combined with higher market rates, offset by the timing of PPP loan forgiveness. The cost of interest-bearing liabilities increased 8 basis points from the first nine months of ~~2020~~2021. Arrow defines net interest margin as net interest income divided by average earning assets, annualized. Further detailed information is presented above under the section entitled "Average Consolidated Balance Sheets and Net Interest Income Analysis." The impact of recent interest rate changes on Arrow's deposit and loan portfolios are discussed above in this Report under the sections entitled "Deposit Trends" on page 60 and "Loan Trends" on page 62.

As discussed previously under the heading "Asset Quality" beginning on page 62, the provision for loan losses for the first nine months of 2022 was $3.4 million, compared to a provision of $(286) thousand for the first nine months of 2021.

Noninterest Income

Summary of Noninterest Income

(Dollars in Thousands)


	Nine Months Ended
	September 30, 2022		September 30, 2021		Change		% Change
Income From Fiduciary Activities	7,454		7,538		$	(84)	(1.1)	%
Fees for Other Services to Customers	8,916		8,494		422		5.0
Insurance Commissions	4,783		4,842		(59)		(1.2)

Net Gain on Securities	379		250		129		51.6
Net Gain on the Sale of Loans	80		2,251		(2,171)		(96.4)
Other Operating Income	2,121		1,405		716		51.0
Total Noninterest Income	$	23,733	$	24,780	$	(1,047)	(4.2)	%

Total noninterest income for the first nine months of 2022 was $23.7 million, a decrease of $1.0 million from the first nine months of 2021. Income from fiduciary activities for the first nine months of 2022 decreased by 1.1% from the first nine months of 2021, primarily due to market performance. Arrow has been able to maintain a stable customer base.

Fees for other services to customers were $8.9 million for the ~~reduction~~first nine months of ~~tax exempt investments held and~~2022 representing an increase of $0.4 million, or 5.0%, from the ~~related investment income combined with~~prior year comparative period.

Insurance commissions were $4.8 million for the first nine months of 2022, which was relatively unchanged from the prior year comparable period.

Net gain on security transactions of $379 thousand for the first nine months of 2022 was the result of the increase in the ~~New York State corporate tax rate which~~fair value of equity securities.

Net gain on the sale of loans for the first nine months of 2022 decreased $2.2 million from the comparable period in 2021 as a result of the decision to grow the residential loan portfolio. See page 54 for the discussion of loan sales.

Other operating income increased $716 thousand from the comparable period in 2021, due primarily to bank-owned life insurance proceeds and gains on other assets.

Noninterest Expense

Summary of Noninterest Expense

(Dollars in Thousands)


	Nine Months Ended
	September 30, 2022			September 30, 2021			Change			% Change
Salaries and Employee Benefits	$	35,400		$	33,360		$	2,040		6.1	%
Occupancy Expense of Premises, Net	4,721			4,480			241			5.4
Technology and Equipment Expense	11,802			11,002			800			7.3
FDIC and FICO Assessments	893			764			129			16.9
Amortization	309			158			151			95.6
Other Operating Expense	7,613			7,424			189			2.5
Total Noninterest Expense	$	60,738		$	57,188		$	3,550		6.2
Efficiency Ratio	54.14		%	52.56		%	1.58		%	3.0	%

Noninterest expense for the first nine months of 2022 was ~~effective January 1,~~$60.7 million, an increase of $3.6 million, or 6.2%, from the first nine months of 2021. Salaries and benefit expenses increased $2.0 million, or 6.1%, from the comparable period in 2021. The increase was partially the result of the inclusion of $550 thousand relating to additional actuarial pension expense. Technology expenses increased $800 thousand, or 7.3%, from the first nine months of 2021. Other non-interest expense increased $189 thousand for the first nine months of 2022, as compared to the first nine months of 2021. Other non-interest expense includes a credit for estimated credit losses on off-balance sheet credit exposures of $235 thousand for the first nine months of 2022.

Income Taxes

Summary of Income Taxes

(Dollars in Thousands)


	Nine Months Ended
	September 30, 2022			September 30, 2021			Change			% Change
Provision for Income Taxes	$	10,658		$	11,483		$	(825)		(7.2)	%
Effective Tax Rate	22.5		%	22.5		%	—		%	—	%

7271

Item 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

In addition to credit risk in the loan portfolio and liquidity risk, discussed earlier, Arrow's business activities also generate market risk. Market risk is the possibility that changes in future market rates (interest rates) or prices (market value of financial instruments) will make Arrow's position (i.e., assets and operations) less valuable. Arrow's primary market risk is interest rate volatility. The ongoing monitoring and management of interest rate risk is an important component of the asset/liability management process, which is governed by policies that are reviewed and approved annually by the Board of Directors. The Board of Directors delegates responsibility for carrying out asset/liability oversight and control to management's Asset/Liability Committee ~~("ALCO")~~(ALCO). In this capacity ALCO develops guidelines and strategies impacting the asset/liability profile based upon estimated market risk sensitivity, policy limits and overall market interest rate levels and trends.

Changes in market interest rates, whether increases or decreases, can trigger repricing and changes in the pace of payments for both assets and liabilities (prepayment risk). This may individually or in combination affect net interest income, net interest margin, and ultimately net income, either positively or negatively. ALCO utilizes the results of a detailed and dynamic simulation model to quantify this interest rate risk by projecting net interest income in various interest rate scenarios.

~~Arrow''s~~Arrow's standard simulation model applies a parallel shift in interest rates, ramped over a 12-month period, to capture the impact of changing interest rates on net interest income. The results are compared to ALCO policy limits which specify a maximum tolerance level for net interest income exposure over a one-year horizon, assuming no balance sheet growth and a 200 basis point upward and a 100 basis point downward shift in interest rates. Additional tools to monitor potential longer-term interest rate risk, including periodic stress testing involving hypothetical sudden and significant interest rate spikes, are also evaluated.

The following table summarizes the percentage change in net interest income as compared to the base scenario, which assumes no change in market interest rates as generated from the standard simulation model. The results are presented for each of the first two years of the simulation period for the 200 basis point increase in interest rate scenario and the 100 basis point decrease in interest rate scenario. These results are well within the ALCO policy limits as shown:

As of September 30, ~~2021:~~2022:


		Change in Interest Rate			Change in Interest Rate
		+ 200 basis points	- 100 basis points		+ 200 basis points	- 100 basis points
Calculated change in Net Interest Income - Year 1	Calculated change in Net Interest Income - Year 1	1.38%	(2.19)%	Calculated change in Net Interest Income - Year 1	(1.50)%	(0.59)%
Calculated change in Net Interest Income - Year 2	Calculated change in Net Interest Income - Year 2	6.35%	(13.02)%	Calculated change in Net Interest Income - Year 2	11.91%	5.45%

Historically, there has existed an inverse relationship between changes in prevailing rates and ~~Arrow's~~the Company's net interest income, suggesting that liabilities and sources of funds generally reprice more quickly than earning ~~assets (near-term liability sensitivity).~~assets. In recent months, ~~sharply~~ higher cash balances ~~funded by an increase in~~and core deposits ~~has~~have contributed to a ~~more pronounced~~ shift toward asset sensitivity. ~~As the economy continues to recover from the COVID-19 pandemic, a reversal of this trend may, or may not, occur.~~ When net interest income is simulated over a longer time frame, the balance sheet shows a relatively neutral profile with a long-term bias toward asset sensitivity, as asset yields continue to reprice while the cost of funding reaches assumed ceilings or floors (long-term asset sensitivity). Additionally, short-term interest rates are at historic lows, at or near zero. Accordingly, the results in the -100 basis points scenario effectively represents a flattening of the yield curve, with all rate terms dropping to zero, rather than a parallel shift in interest rates across the entire yield curve.floors.

The hypothetical estimates underlying the sensitivity analysis are based upon numerous assumptions, including: the nature and timing of changes in interest rates including yield curve shape, prepayments on loans and securities, deposit decay rates, pricing decisions on loans and deposits, reinvestment/replacement of asset and liability cash flows, and others. While assumptions are developed based upon current economic and local market conditions, Arrow cannot make any assurance as to the predictive nature of these assumptions including how customer preferences or competitor influences might change.

Also, as market conditions vary from those assumed in the sensitivity analysis, actual results will differ due to: prepayment/refinancing levels likely deviating from those assumed, the varying impact of interest rate changes on caps or floors on adjustable rate assets, the potential effect of changing debt service levels on customers with adjustable rate loans, depositor early withdrawals and product preference changes, unanticipated shifts in the yield curve and other internal/external variables. Furthermore, the sensitivity analysis does not reflect actions that ALCO might take in responding to or anticipating changes in interest rates. ~~The COVID-19 pandemic may impact markets, rates, behavior and other estimates used in the above scenarios.~~

Item 4.

CONTROLS AND PROCEDURES

Senior management, including the Chief Executive Officer and Interim Chief Financial Officer, has evaluated the effectiveness of the design and operation of Arrow's disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended) as of September 30, ~~2021.~~2022. Based upon that evaluation, senior management, including the Chief Executive Officer and Interim Chief Financial Officer, concluded that disclosure controls and procedures were effective. ~~Arrow adopted ASU No. 2016-13, "Financial Instruments: Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments" on January 1, 2021.~~During the quarter ended September 30, 2022, Arrow implemented a new core banking system and internal controls over financial reporting were revised in connection with this change. Arrow's pre- and ~~modified existing~~post-implementation internal controls ~~as part of the adoption. The new controls~~over financial reporting were ~~implemented~~both evaluated by management and deemed to ~~account for the additional complexity of the expected credit loss model, review of economic forecasts, and other assumptions used in the estimation of the model. There~~be operating effectively. Further, there were no other changes in Arrow's internal control over financial reporting that occurred during the quarter ended September 30, ~~2021,~~2022, that materially affected, or are reasonably likely to materially affect, Arrow's internal control over financial reporting.

7372

PART II - OTHER INFORMATION

Item 1.

Legal Proceedings

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

On July 1, 2020, Daphne Richard, a customer of GFNB filed a putative class action complaint against GFNB in the United States District Court for the Northern District of New York. The complaint alleges that GFNB assessed overdraft fees on certain transactions drawn on her checking account without having sufficiently disclosed its overdraft-fee practices in its account agreement. Ms. Richard, on behalf of two purported classes, seeks compensatory damages, disgorgement of profits, statutory damages, treble damages, enjoinment of the conduct complained of, and costs and fees. ~~The complaint is similar~~On July 22, 2022, the court approved a settlement agreement among Arrow, GFNB, SNB and the plaintiffs, pursuant to ~~complaints filed against~~which, among other ~~financial institutions pertaining~~things, during the quarter ended June 30, 2022, Arrow established a settlement fund of approximately $1.5 million, which had been accrued for in 2021. Arrow expects the fund to ~~overdraft fees.~~be fully disbursed by April 2023, after which the case will be closed. Arrow expressly denies any ~~wrongdoing. The parties engaged~~wrongdoing in ~~an initial mediation session~~connection with the matters claimed in ~~September 2021. Settlement discussions are ongoing.~~the complaint.

Item 1.A.

Risk Factors

~~The~~Except as set forth below, the Risk Factors identified in Arrow's Annual Report on Form 10-K for the year ended December 31, ~~2020~~2021 continue to represent the most significant risks to Arrow's future results of operations and financial ~~conditions, without further modification or amendment.~~conditions.

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

Arrow relies extensively on information systems and technology to manage the company's business and summarize operating results. During September 2022, Arrow completed the implementation of a new core banking system which replaced the prior system. The new core system will enable future enhancements to our digital experience, improve efficiency for our teams and customers, and empower data-driven decisions. This upgrade constitutes a major investment in Arrow’s technology needs and is a key initiative within its strategic plan. The new core system implementation process has required, and will continue to require, the investment of significant personnel and financial resources. We are now using the new core system. We encountered some limited issues and worked to minimize any inconvenience to customers, but there can be no assurance that such issues will not arise in the future.

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

Unregistered Sales of Equity Securities

None.

Issuer Purchases of Equity Securities

The following table presents information about purchases by Arrow during the three months ended September 30, ~~2021~~2022 of common stock (our only class of equity securities registered pursuant to Section 12 of the Securities Exchange Act of 1934):


Third Quarter 2021 Calendar Month		(A) Total Number of Shares Purchased 1	(B) Average Price Paid Per Share 1		(C) Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs 2	(D) Maximum Approximate Dollar Value of Shares that May Yet be Purchased Under the Plans or Programs 2
Third Quarter 2022 Calendar Month								Third Quarter 2022 Calendar Month	(A) Total Number of Shares Purchased 1	(B) Average Price Paid Per Share 1		(C) Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs 2	(D) Maximum Approximate Dollar Value of Shares that May Yet be Purchased Under the Plans or Programs 2
July	July	1,584	$	35.34	—	$	5,000,000	July	3,653	$	32.22	—	$	2,614,973
August	August	68,836	35.07		41,241	3,539,562		August	1,435	34.67		—	2,614,973
September	September	16,158	34.43		—	3,539,562		September	19,187	32.26		2,508	2,535,669
Total	Total	86,578	34.95		41,241			Total	24,275	32.40		2,508

1 The total number of shares purchased by Arrow and the average price paid per share listed in columns (A) and (B) consist of (i) any shares purchased in such periods in open market or private transactions under the Arrow Financial Corporation Automatic Dividend Reinvestment Plan (the "DRIP") by the administrator of the DRIP, (ii) shares surrendered or deemed surrendered to Arrow in such periods by holders of options to acquire Arrow common stock received by them under Arrow's long-term incentive plans in connection with their stock-for-stock exercise of such options and (iii) shares purchased under the publicly-announced ~~2021~~2022 Repurchase Program. In the months indicated, the listed number of shares purchased included the following number of shares purchased by Arrow through

such methods: July - DRIP purchases ~~(1,584~~(3,653 shares); August - DRIP purchases ~~(964~~(589 shares), and stock-for-stock option exercises ~~(26,631~~(846 shares) ~~and repurchased under the 2021 Repurchase Program (41,241 shares)~~.; and September - DRIP purchases ~~(14,351~~(16,679 shares) and ~~stock-for stock option exercises (1,807 shares.)~~repurchased under the 2022 Repurchase Program (2,508 shares)

2 Includes only those shares acquired by Arrow pursuant to its publicly-announced stock repurchase programs. Arrow's only publicly-announced stock repurchase program in effect for the third quarter of ~~2021~~2022 was the ~~2021~~2022 Repurchase Program approved by the Board of Directors and announced in ~~January~~October 2021, under which the Board authorized management, in its discretion, to repurchase from time to time ~~from the period January 27, 2021 through December 31, 2021,~~over calendar year 2022, in the open market or in privately negotiated transactions, up to $5 million of Arrow common stock subject to certain exceptions. The Board of Directors of Arrow recently approved a new stock repurchase program authorizing the repurchase, at the discretion of senior management, of up to $5 million of the Company’s common stock over the 2023 calendar year, in open-market or negotiated transactions. This new repurchase program will replace the prior $5 million repurchase program authorized on October 27, 2021, which expires December 31, 2022.

Item 3.

Defaults Upon Senior Securities - None

Item 4.

Mine Safety Disclosures - None

Item 5.

Other Information - None

Item 6.

Exhibits


Exhibit Number			Exhibit
3.(i)			Certificate of Incorporation of the Registrant as Amended through June 3, 2019, incorporated by reference from the Registrant's Current Report on Form 8-K filed June 5, 2019, Exhibit 3.1
3.(ii)			By-laws of the Registrant, as amended, incorporated herein by reference from the Registrant’s Current Report on Form 8-K filed on November 24, 2009, Exhibit 3.(ii)
10.1			Professional Services Agreement, dated as of October 1, 2022, by and between Arrow Financial Corporation and Edward J. Campanella, incorporated herein by reference from the Registrant’s Current Report on Form 8-K filed on October 6, 2022. *
15			Awareness Letter
31.1			Certification of Chief Executive Officer under SEC Rule 13a-14(a)/15d-14(a)
31.2			Certification of Chief Financial Officer under SEC Rule 13a-14(a)/15d-14(a)
32			Certification of Chief Executive Officer under 18 U.S.C. Section 1350 and Certification of Chief Financial Officer under 18 U.S.C. Section 1350
101.INS			XBRL Instance Document
101.SCH			XBRL Taxonomy Extension Schema Document
101.CAL			XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF			XBRL Taxonomy Extension Definition Linkbase Document
101.LAB			XBRL Taxonomy Extension Labels Linkbase Document
101.PRE			XBRL Taxonomy Extension Presentation Linkbase Document

* Management contracts or compensation plans required to be filed as an exhibit.

7574

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned thereunto duly authorized.

ARROW FINANCIAL CORPORATION

Registrant



November ~~4, 2021~~7, 2022			/s/Thomas J. Murphy
Date			Thomas J. Murphy
			President and Chief Executive Officer

November ~~4, 2021~~7, 2022			/s/~~Edward~~Thomas J. ~~Campanella~~Murphy
Date			~~Edward~~Thomas J. ~~Campanella~~Murphy
			~~Senior Vice President, Treasurer and~~
			Interim Chief Financial Officer
			(Principal Financial Officer and
			Principal Accounting Officer)

7675


			Page
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements			3
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations			4745
Item 3. Quantitative and Qualitative Disclosures About Market Risk			7372
Item 4. Controls and Procedures			7372


PART II - OTHER INFORMATION
Item 1. Legal Proceedings			7473
Item 1.A. Risk Factors			7473
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			7473
Item 3. Defaults Upon Senior Securities			74
Item 4. Mine Safety Disclosures			7574
Item 5. Other Information			7574
Item 6. Exhibits			7574

SIGNATURES			7675


Impaired Loans
			Commercial
	Commercial		Real Estate		Consumer		Residential		Total








December 31, 2020
Recorded Investment:
With No Related Allowance	$	—	$	1,124	$	112	$	1,174	$	2,410
With a Related Allowance	46		—		—		244		290
Unpaid Principal Balance:
With No Related Allowance	—		1,128		111		1,174		2,413
With a Related Allowance	47		—		—		244		291

September 30, 2020
Recorded Investment:
With No Related Allowance	$	—	$	1,124	$	124	$	1,178	$	2,426
With a Related Allowance	46		—		—		249		295
Unpaid Principal Balance:
With No Related Allowance	—		1,128		124		1,178		$	2,430
With a Related Allowance	47		—		—		249		296













September 30, 2020
Average Recorded Balance:
With No Related Allowance	$	2	$	1,127	$	120	$	938	$	2,187
With a Related Allowance	46		—		—		253		299
Interest Income Recognized:
With No Related Allowance	—		—		—		—		—
With a Related Allowance	—		—		—		—		—
Cash Basis Income:
With No Related Allowance	—		—		—		—		—
With a Related Allowance	—		—		—		—		—


Changes in Accumulated Other Comprehensive Income (Loss) by Component (1)

	Unrealized (Loss) and Gain on Available-for-Sale Securities		Unrealized Gain (Loss) on Cash Flow Swap		Defined Benefit Plan Items				Total
					Net Actuarial Loss		Net Prior Service Cost


For the Quarter-To-Date periods ended:

June 30, 2021	$	3,109	$	1,213	$	(5,895)	$	(1,085)	$	(2,658)
Other comprehensive income or loss before reclassifications	(1,279)		183		—		—		(1,096)
Amounts reclassified from accumulated other comprehensive income	—		(25)		17		43		35
Net current-period other comprehensive income	(1,279)		158		17		43		(1,061)

September 30, 2021	$	1,830	$	1,371	$	(5,878)	$	(1,042)	$	(3,719)

June 30, 2020	$	6,584	$	(201)	$	(5,762)	$	(897)	$	(276)
Other comprehensive income or loss before reclassifications	(296)		238		—		—		(58)
Amounts reclassified from accumulated other comprehensive income	—		—		42		39		81
Net current-period other comprehensive income	(296)		238		42		39		23

September 30, 2020	$	6,288	$	37	$	(5,720)	$	(858)	$	(253)


For the Year-To-Date periods ended:

December 31, 2020	$	5,799	$	485	$	(5,929)	$	(1,171)	$	(816)
Other comprehensive income or loss before reclassifications	(3,969)		954		—		—		(3,015)
Amounts reclassified from accumulated other comprehensive income	—		(68)		51		129		112
Net current-period other comprehensive income	(3,969)		886		51		129		(2,903)

September 30, 2021	$	1,830	$	1,371	$	(5,878)	$	(1,042)	$	(3,719)

December 31, 2019	$	465	$	—	$	(5,847)	$	(975)	$	(6,357)
Other comprehensive income or loss before reclassifications	5,823		37		—		—		5,860
Amounts reclassified from accumulated other comprehensive income	—		—		127		117		244
Net current-period other comprehensive income	5,823		37		127		117		6,104

September 30, 2020	$	6,288	$	37	$	(5,720)	$	(858)	$	(253)


	Shares			Weighted Average Exercise Price

Outstanding at January 1, 2021	272,024			$	28.00
Granted	57,165			28.69
Exercised	(54,189)			28.81
Forfeited	(1,580)			22.25
Outstanding at September 30, 2021	273,420			28.42

Vested at Period-End	140,690			26.77
Expected to Vest	132,730			30.16

Stock Options Granted
Weighted Average Grant Date Information:
Fair Value of Options Granted	$	4.71
Fair Value Assumptions:
Dividend Yield	3.41		%
Expected Volatility	26.53		%
Risk Free Interest Rate	0.49		%
Expected Lives (in years)	8.75


COVID-19 Deferrals by Loan Category at September 30, 2021 (Dollars in Thousands)

	Balances by Sector					Deferrals
		Total		% of Total Loans		Balance		% of Loan Segment		% of Total Loans
Commercial and Commercial Real Estate Loans:
Lessors of Non-Residential Real Estate		$	169,183	6.4	%	$	—	—	%	—	%
Lessors of Residential Real Estate		142,314		5.4	%	—		—	%	—	%
Health Care and Social Assistance		111,383		4.2	%	—		—	%	—	%
Hotels and Motels		107,227		4.0	%	4,733		0.6	%	0.2	%
Arts/Recreation/Restaurants/Vacation Camps		47,060		1.8	%	—		—	%	—	%
Retail		35,426		1.3	%	—		—	%	—	%
Construction & Related		18,705		0.7	%	—		—	%	—	%
Other		171,973		6.5	%	—		—	%	—	%
Total Commercial and Commercial Real Estate Loans		803,271		30.3	%	4,733		0.6	%	0.2	%

Consumer Loans		921,189		34.7	%	480		0.1	%	—	%

Residential Real Estate Loans		930,291		35.0	%	1,043		0.1	%	—	%

Total Loans		$	2,654,751			$	6,256			0.2	%