ARROW FINANCIAL CORP

Previous wording

Share and per share amounts have been restated for the September 2023 3% stock dividend

Current wording

2022 share and per share amounts have been restated for the September 2023 3% stock dividend

Previous wording

Allowance for credit losses: The allowance for credit losses consists of the allowance for credit losses and the allowance for losses on unfunded commitments. Arrow adopted on January 1, 2021, Accounting Standards Updates (‘‘ASU’’) 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (‘‘CECL’’) and its related amendments. The CECL approach requires an estimate of the credit losses expected over the life of an exposure (or pool of exposures). The estimate of expected credit losses under the CECL approach is based on relevant information about past events, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amounts. Historical loss experience is generally the starting point for estimating expected credit losses. Arrow then considers whether the historical loss experience should be adjusted for asset-specific risk characteristics or current conditions at the reporting date that did not exist over the period from which historical experience was used. Finally, Arrow considers forecasts about future economic conditions that are reasonable and supportable. The allowance for losses on unfunded commitments represents the expected credit losses on off-balance sheet commitments such as unfunded commitments to extend credit and standby letters of credit. However, a liability is not recognized for commitments unconditionally cancellable by Arrow. The allowance for losses on unfunded commitments is determined by estimating future draws and applying the expected loss rates on those draws. Arrow considers the accounting policy relating to the allowance for credit losses to be a critical accounting estimate given the uncertainty in evaluating the level of the allowance required to cover Arrow's estimate of all expected credit losses over the expected contractual life of our loan portfolio. Determining the appropriateness of the allowance is complex and requires judgment by management about the effect of matters that are inherently uncertain. Subsequent evaluations of the then-existing loan portfolio, in light of the factors then prevailing, may result in significant changes in the allowance for credit losses in those future periods. While management’s current evaluation of the allowance for credit losses indicates that the allowance is appropriate at this time, the allowance may need to be increased in the future due to changes in conditions or assumptions. The impact of utilizing the CECL approach to calculate the reserve for credit losses will be significantly influenced by the composition, characteristics and quality of our loan portfolio, as well as the prevailing economic conditions and forecasts utilized. Material changes to these and other relevant factors may result in greater volatility to the reserve for credit losses, and therefore, greater volatility to our reported earnings. Arrow's policies on the allowance for credit losses, pension …

Excerpt shortened here; the source contains the full paragraph.

Current wording

Allowance for credit losses: The allowance for credit losses consists of the allowance for credit losses and the allowance for losses on unfunded commitments. Arrow adopted on January 1, 2021, Accounting Standards Updates (‘‘ASU’’) 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (‘‘CECL’’) and its related amendments. The CECL approach requires an estimate of the credit losses expected over the life of an exposure (or pool of exposures). The estimate of expected credit losses under the CECL approach is based on relevant information about past events, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amounts. Historical loss experience is generally the starting point for estimating expected credit losses. Arrow then considers whether the historical loss experience should be adjusted for asset-specific risk characteristics or current conditions at the reporting date that did not exist over the period from which historical experience was used. Finally, Arrow considers forecasts about future economic conditions that are reasonable and supportable. The allowance for losses on unfunded commitments represents the expected credit losses on off-balance sheet commitments such as unfunded commitments to extend credit and standby letters of credit. However, a liability is not recognized for commitments unconditionally cancellable by Arrow. The allowance for losses on unfunded commitments is determined by estimating future draws and applying the expected loss rates on those draws. Arrow considers the accounting policy relating to the allowance for credit losses to be a critical accounting estimate given the uncertainty in evaluating the level of the allowance required to cover Arrow's estimate of all expected credit losses over the expected contractual life of our loan portfolio. Determining the appropriateness of the allowance is complex and requires judgment by management about the effect of matters that are inherently uncertain. Subsequent evaluations of the then-existing loan portfolio, in light of the factors then prevailing, may result in significant changes in the allowance for credit losses in those future periods. While management’s current evaluation of the allowance for credit losses indicates that the allowance is appropriate at this time, the allowance may need to be adjusted in the future due to changes in conditions or assumptions. The impact of utilizing the CECL approach to calculate the reserve for credit losses will be significantly influenced by the composition, characteristics and quality of our loan portfolio, as well as the prevailing economic conditions and forecasts utilized. Material changes to these and other relevant factors may result in greater volatility to the reserve for credit losses, and therefore, greater volatility to our reported earnings. Arrow's policy on the allowance for credit losses is disclosed…

Excerpt shortened here; the source contains the full paragraph.

Previous wording

Diluted EPS was $1.77 for 2023, down 38.1% from $2.86 in 2022. Return on average equity (ROE) and return on average assets (ROA) were 8.29% and 0.74%, respectively, as compared to 13.55% and 1.21%, respectively, for 2022.

Current wording

Diluted earnings per share (EPS) was $1.77 for 2024, unchanged from 2023. ROE and ROA were 7.72% and 0.70%, respectively, as compared to 8.29% and 0.74%, respectively, for 2023.

Previous wording

Net interest income for the year ended December 31, 2023 was $104.8 million, a decrease of $13.5 million, or 11.4%, from the prior year. Interest and fees on loans were $142.0 million, an increase of 25.7% from the $113.0 million for the year ended December 31, 2022. Interest expense for the year ended December 31, 2023 was $57.7 million. This is an increase of $46.4 million, or 410.5%, from the $11.3 million in expense for the prior-year period.

Current wording

Net interest income for the year ended December 31, 2024 was $111.7 million, an increase of $6.9 million, or 6.6%, from the prior year. Compared to the prior year, the increase was primarily due to interest income outpacing growth in interest expense. Interest and fees on loans were $171.3 million for the year ended December 31, 2024, an increase of 20.6% from $142.0 million for the year ended December 31, 2023. The increase was primarily driven by loan growth and higher loan rates. Interest expense for the year ended December 31, 2024 was $83.3 million. This represents an increase of $25.5 million, or 44.2%, from $57.7 million in interest expense for the prior-year period. The increase in interest expense was driven primarily by higher deposit rates and changes in deposit composition.

Previous wording

For 2023, the provision for credit losses related to the loan portfolio was $3.4 million, compared to $4.8 million in 2022. The key drivers for the provision for credit losses in 2023 were loan growth and charge-offs, offset by changes to the economic forecast factors embedded in the credit loss allowance model as well as qualitative factors relating to local and Arrow-specific conditions.

Current wording

For the year ended December 31, 2024, the provision for credit losses was $5.2 million, compared to $3.4 million in the prior year. The key drivers for the provision for credit losses in 2024 were loan growth, charge-offs, and changes to the portfolio mix/age due to fourth-quarter commercial loan growth, partially offset by changes to the economic forecast factors embedded in the credit loss allowance model, as well as qualitative factors relating to local and Arrow-specific conditions.

Previous wording

The provision for income taxes for 2023 was $7.4 million, compared to $14.1 million for 2022. The effective income tax rates for 2023 and 2022 were 19.8% and 22.4%, respectively. The reduction in the effective tax rate was the result of substantially similar permanent favorable tax benefits in each year while pre-tax income decreased in 2023.

Current wording

The provision for income taxes for 2024 was $7.6 million, compared to $7.4 million for 2023. The effective income tax rates for 2024 and 2023 were 20.5% and 19.8%, respectively. The increase in the effective tax rate was primarily the result of reduced tax exempt income in 2024.

Previous wording

Total investments were $636.1 million at December 31, 2023, a decrease of $121.0 million, or 16.0%, compared to December 31, 2022. The net change was primarily driven by paydowns and maturities of approximately $119 million, a net decrease from the repositioning of our investment portfolio of approximately $25 million, partially offset by an improvement in the mark-to-market adjustments of $23 million. The proceeds from the decrease in investments were primarily used to fund loan growth and for general corporate purposes. There were no credit quality issues related to the investment portfolio.

Current wording

Total investments were $570.8 million at December 31, 2024, a decrease of $65.4 million, or 10.3%, compared to December 31, 2023. The decrease was driven primarily by paydowns and maturities, the proceeds of which were primarily used to fund loan growth in 2024. The minor repositioning of the investment portfolio in the fourth quarter did not materially impact the overall investment balance. There were no credit quality issues identified related to the investment portfolio.

Previous wording

The allowance for credit losses was $31.3 million at December 31, 2023, an increase of $1.3 million from December 31, 2022. The allowance for credit losses represents 0.97% of loans outstanding, a decrease from 1.00% at year-end 2022. Asset quality remained solid at December 31, 2023. Net loan losses, expressed as an annualized percentage of average loans outstanding, were 0.07% for the year ended December 31, 2023, as compared to 0.08% for the prior year. Nonperforming assets of $21.5 million at December 31, 2023, represented 0.51% of period-end assets, compared to $12.6 million or 0.32% at December 31, 2022. The increase was primarily due to one large loan relationship of approximately $15 million, which is well collateralized.

Current wording

The allowance for credit losses was $33.6 million at December 31, 2024, an increase of $2.3 million from December 31, 2023. The allowance for credit losses at year-end 2024 represented 0.99% of loans outstanding, an increase from 0.97% at year-end 2023. Asset quality remained solid at December 31, 2024. Net loan charge-offs, expressed as an annualized percentage of average loans outstanding, were 0.09% for the year ended December 31, 2024, as compared to 0.07% for the prior year. Nonperforming assets of $21.5 million at December 31, 2024, represented 0.50% of period-end assets, compared to $21.5 million or 0.51% at December 31, 2023.

Previous wording

At December 31, 2023, total deposit balances were $3.7 billion, an increase of $189.2 million, or 5.4%, from the prior-year level. Arrow obtained $175 million of brokered CDs with corresponding three-year swaps as part of a funding hedge to strategically manage its asset-liability profile and cost of funds. Non-municipal deposits, excluding brokered CDs, increased by $45.3 million and municipal deposits decreased by $31.1 million as compared to December 31, 2022. Noninterest-bearing deposits decreased by $78.4 million, or 9.4%, during 2023, and represented 20.6% of total deposits at year-end, as compared to the prior-year level of 23.9%. At December 31, 2023, total time deposits, excluding brokered CDs, increased $278.6 million from the prior-year level. The change in composition of deposits was primarily the result of pressure from competitive rate pricing and the migration from low to higher costing products.

Current wording

At December 31, 2024, total deposit balances were $3.8 billion, an increase of $140.4 million, or 3.8%, from the prior-year level. Non-municipal deposits, excluding brokered CDs, decreased by $57.6 million and municipal deposits decreased by $12.2 million, each as compared to December 31, 2023. Non-interest bearing deposits decreased by $55.4 million, or 7.3%, during 2024, and represented 18.4% of total deposits at year-end, as compared to the prior-year level of 20.6%. At December 31, 2024, total time deposits, excluding brokered CDs, increased $36.0 million from the prior-year level. The change in composition of deposits was primarily due to pressure from competitive rate pricing and the migration from low to higher costing products.

Previous wording

Total shareholders’ equity was $379.8 million at December 31, 2023, an increase of $26.2 million, or 7.4%, from the year-end 2022 balance. Arrow's regulatory capital ratios remained strong in 2023. At December 31, 2023, Arrow's Common Equity Tier 1 Capital Ratio was 13.00% and Total Risk-Based Capital Ratio was 14.74%. The capital ratios of Arrow and both of its subsidiary banks, Glens Falls National Bank and Trust Company and Saratoga National Bank and Trust Company, continued to significantly exceed the “well capitalized” regulatory standards.

Current wording

Total shareholders’ equity was $400.9 million at December 31, 2024, an increase of $21.1 million, or 5.6%, from December 31, 2023. Arrow's regulatory capital ratios remained strong in 2024. At December 31, 2024, Arrow's Common Equity Tier 1 Capital Ratio was 12.71% and the Total Risk-Based Capital Ratio was 14.47%. The capital ratios of Arrow and Arrow Bank continued to significantly exceed the “well capitalized” regulatory standards.

Previous wording

Regulatory Capital and Stockholders' Equity: As of December 31, 2023, Arrow continued to exceed all required minimum capital ratios under the current bank regulatory capital rules as implemented under Dodd-Frank (the "Capital Rules") at both the holding company and bank levels. At that date, both 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.

Current wording

Regulatory Capital and Stockholders' Equity: As of December 31, 2024, Arrow continued to exceed all required minimum capital ratios under the current bank regulatory capital rules as implemented under Dodd-Frank (the "Capital Rules") at both the holding company and bank levels. At that date, both Arrow, as well as Arrow Bank, continued to qualify as "well-capitalized" under the capital classification guidelines as defined by the Capital Rules. Because of continued profitability and strong asset quality, the regulatory capital levels throughout recent years have consistently remained well in excess of the various required regulatory minimums in effect.

Previous wording

Total stockholders' equity was $379.8 million at December 31, 2023, an increase of $26.2 million, or 7.4%, from December 31, 2022. The components of the change in stockholders' equity since year-end 2022 are presented in the Consolidated Statement of Changes in Stockholders' Equity on page 60. Total book value per share increased by 8.1% over the prior year level. The net increase in total stockholders' equity during 2023 principally reflected the following factors: (i) $30.1 million of net income for the year, (ii) other comprehensive income of $16.2 million, (iii) $1.0 million of equity related to various stock-based compensation plans and (iv) $0.5 million of equity resulting from the dividend reinvestment plan, reduced by (v) cash dividends of $18.0 million and (vi) repurchases of common stock of $3.6 million. As of December 31, 2023, Arrow's closing stock price was $27.94, resulting in a trading multiple of 1.33 to Arrow's tangible book value. The Board of Directors declared and Arrow paid a cash dividend of $0.262 per share for the first three quarters of 2023, as adjusted for a 3% stock dividend distributed September 26, 2023, a cash dividend of $0.27 per share for the fourth quarter of 2023, and a $0.27 per share cash dividend for the first quarter of 2024.

Current wording

Total stockholders' equity was $400.9 million at December 31, 2024, an increase of $21.1 million, or 5.6%, from December 31, 2023. The components of the change in stockholders' equity since year-end 2023 are presented in the Consolidated Statement of Changes in Stockholders' Equity on page 50. Total book value per share increased by 6.8% over the prior year level. The net increase in total stockholders' equity during 2024 principally reflected the following factors: (i) $29.7 million of net income for the year, (ii) other comprehensive income of $15.0 million and (iii) $1.5 million of equity related to various stock-based compensation plans, reduced by (iv) cash dividends of $18.3 million and (v) repurchases of common stock of $6.8 million. As of December 31, 2024, Arrow's closing stock price was $28.71, resulting in a trading multiple of 1.28 to Arrow's tangible book value. The Board of Directors declared and Arrow paid a cash dividend of $0.27 per share for the first three quarters of 2024, a cash dividend of $0.28 per share for the fourth quarter of 2024, and a $0.28 per share cash dividend for the first quarter of 2025.

Previous wording

Loan quality: Nonperforming loans were $21.2 million at December 31, 2023, an increase of $9.2 million, or 76.5%, from year-end 2022. The increase was primarily due to one large loan relationship of approximately $15 million, which is well collateralized. The ratio of nonperforming loans to period-end loans at December 31, 2023 was 0.66%, an increase from 0.40% at December 31, 2022. Loans charged-off (net of recoveries) against the allowance for credit losses was $2.1 million for 2023, a decrease of $59 thousand from 2022. The ratio of net charge-offs to average loans was 0.07% for 2023 and 0.08% for 2022. At December 31, 2023, the allowance for credit losses was $31.3 million, representing 0.97% of total loans, a decrease of 3 basis points from the December 31, 2022 ratio.

Current wording

Loans charged-off (net of recoveries) against the allowance for credit losses was $2.8 million for 2024, an increase of $779 thousand from 2023. The ratio of net charge-offs to average loans was 0.09% for 2024 and 0.07% for 2023. At December 31, 2024, the allowance for credit losses was $33.6 million, representing 0.99% of total loans, an increase of 2 basis points from the December 31, 2023 ratio.

Previous wording

Loan Segments: As of December 31, 2023, total loans grew $229.7 million, or 7.7%, as compared to the balance at December 31, 2022.

Current wording

Loans: As of December 31, 2024, total loans grew $181.6 million, or 5.7%, as compared to the balance at December 31, 2023.

Previous wording

◦Commercial and Commercial Real Estate Loans: Combined, these loans comprised 28.1% of the total loan portfolio at period-end. Commercial loans are extended to business primarily located in Arrow's regional market area. There are no commercial real estate loans in major metropolitan areas. In addition, only approximately 2% of the loan portfolio is comprised of office related property. Retail loans were approximately 3% of the loan portfolio and hotels and motels were approximately 4% of the portfolio. Overall, Arrow has minimal exposure to highly sensitive areas where large commercial and retail vacancies exist. Commercial property values in Arrow's region have largely remained stable.

Current wording

◦Commercial and Commercial Real Estate Loans: Combined, these loans comprised 28.1% of the total loan portfolio at period-end. Commercial loans are extended to businesses primarily located in Arrow's regional market area. There are no commercial real estate loans in major metropolitan areas. In addition, only approximately 2% of the total loan portfolio is comprised of office related property. Retail loans were approximately 3% of the total loan portfolio and hotels and motels were approximately 4% of the total loan portfolio. Overall, Arrow has minimal exposure to highly sensitive areas where large commercial and retail vacancies exist. Commercial property values in Arrow's region have largely remained stable. Appraisals on nonperforming and watched CRE loan properties are updated as deemed necessary, usually when the loan is downgraded or when there has been significant market deterioration since the last appraisal.

Previous wording

◦Consumer Loans: These loans (primarily automobile loans) comprised approximately 34.6% of the total loan portfolio at period-end. Consumer automobile loans at December 31, 2023, were $1.1 billion, or 99.6% of this portfolio segment. The vast majority of automobile loans are initiated through the purchase of vehicles by consumers with automobile dealers. Although previous supply chain constraints have lessened, inflation and higher rates may limit the potential growth in this category.

Current wording

◦Consumer Loans: These loans (primarily automobile loans) comprised approximately 33.0% of the total loan portfolio at period-end. Consumer automobile loans at December 31, 2024, were $1.1 billion, or 99.6% of this portfolio segment. The vast majority of automobile loans are initiated through the purchase of vehicles by consumers with automobile dealers. Inflation and an elevated rate environment may limit the potential growth in this category.

Previous wording

◦Residential Real Estate Loans: These loans, including home equity loans, made up 37.3% of the total loan portfolio at period-end. Demand for residential real estate has continued to remain strong. Arrow originated nearly all of the residential real estate loans currently held in the loan portfolio and applies conservative underwriting standards to loan originations. Arrow has historically sold a portion of the residential real estate mortgage originations into the secondary market. The ratio of the sales of originations to total originations tends to fluctuate from period to period based on market conditions and other factors. In recent periods, sales have decreased as 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.

Current wording

◦Residential Real Estate Loans: These loans, including home equity loans, made up 38.9% of the total loan portfolio at period-end. Demand for residential real estate has continued to remain strong. Arrow originated nearly all of the residential real estate loans currently held in the loan portfolio and applies conservative underwriting standards. Arrow has historically sold a portion of the residential real estate mortgage originations into the secondary market. The ratio of the sales of originations to total originations tends to fluctuate from period to period based on market conditions and other factors. The rate at which mortgage loan originations are sold in future periods will depend on various circumstances, including prevailing mortgage rates, other lending opportunities, capital and liquidity needs, and the availability of a market for such transactions.

Previous wording

Liquidity and access to credit markets: Arrow did not experience any liquidity issues in recent years or in 2023. Arrow’s liquidity position should provide the Company with the necessary flexibility to address any unexpected near-term disruptions. Interest-bearing cash balances at December 31, 2023 were $105.8 million which represents a significant increase as compared to $32.8 million at December 31, 2022. Deposit balances are Arrow's primary funding source. Additionally, contingent lines of credit are also available. Arrow has collateralized lines of credit established and available through the FHLBNY and FRB, totaling $1.4 billion. The terms of Arrow's lines of credit have not changed significantly in recent periods (see the general liquidity discussion on page 47). 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 as well as the Bank Term Funding Program). Regular liquidity stress tests and tests of the contingent liquidity plan are performed to ensure that an adequate amount of available funds can be generated to meet a wide variety of potential liquidity crises.

Current wording

Liquidity and access to credit markets: Arrow did not experience any liquidity issues in recent years or in 2024. Arrow’s liquidity position provides the Company with the necessary flexibility to address any unexpected near-term disruptions. Interest-bearing cash balances at December 31, 2024 were $127.1 million which represents a significant increase as compared to $105.8 million at December 31, 2023. Deposit balances of Arrow Bank are Arrow's primary funding source. Additionally, contingent lines of credit are also available. Arrow has collateralized lines of credit established and available through the FHLBNY and FRB, totaling $1.2 billion. The terms of Arrow's lines of credit have not changed significantly in recent periods (see the general liquidity discussion on page 39). Arrow has principally relied on asset-based liquidity (i.e., funds in overnight investments and cash flow from maturing investments and loans) with liability-based liquidity as a secondary source of funds (the main liability-based sources are an overnight borrowing arrangement with correspondent banks, an arrangement for overnight borrowing and term credit advances from the FHLBNY, and an additional arrangement for short-term advances at the Federal Reserve Bank discount window. Regular liquidity stress tests and tests of the contingent liquidity plan are performed to ensure that an adequate amount of available funds can be generated to meet a wide variety of potential liquidity crises.

Previous wording

Visa Class B Common Stock: In the fourth quarter of 2023, Arrow's subsidiary bank, Glens Falls National, sold all 27,771 Visa Class B common stock shares it previously held for a pre-tax gain of $9.3 million. The gain was used to offset a pre-tax loss of $9.2 million related to the sale of approximately $110 million of securities. The sale of securities was driven by the strategic decision to reposition the investment portfolio to higher yielding investments producing an improved interest income run-rate.

Current wording

Visa Class B Common Stock: In the fourth quarter of 2023, Arrow Bank, formerly GFNB, sold all 27,771 shares of Visa Class B common stock it previously held for a pre-tax gain of $9.3 million. The gain was used to offset a pre-tax loss of $9.2 million related to the sale of securities with a amortized cost basis of approximately $110 million. The sale of securities was driven by the strategic decision to reposition the investment portfolio to higher yielding investments producing an improved interest income run-rate.

Previous wording

The following analysis of net interest income, the provision for credit losses, noninterest income, noninterest expense and income taxes, highlights the factors that had the greatest impact on the results of operations for December 31, 2023 and the prior two years. For a comparison of the years ended December 31, 2021 and 2022, see Part II. Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, in our Form 10-K for the year ended December 31, 2022.

Current wording

The following analysis of net interest income, the provision for credit losses, noninterest income, noninterest expense and income taxes, highlights the factors that had the greatest impact on the results of operations for December 31, 2024 and the prior two years. For a comparison of the years ended December 31, 2022 and 2023, see Part II. Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, in our Annual Report on Form 10-K for the year ended December 31, 2023.

Previous wording

Net interest income was $104.8 million in 2023, a decrease of $13.5 million, or 11.4%, from the $118.3 million in 2022. This is in comparison with the increase of $8.0 million, or 7.2%, from 2021 to 2022. Factors contributing to the year-to-year changes in net interest income over the three-year period are discussed in the following portions of this Section B.I.

Current wording

Net interest income was $111.7 million in 2024, an increase of $6.9 million, or 6.6%, from $104.8 million in 2023. This is in comparison with a decrease of $13.5 million, or 11.4%, from 2022 to 2023. Factors contributing to year-to-year changes in net interest income over the three-year period are discussed in the following portions of this Section B.I.

Previous wording

Arrow's earnings are derived predominantly from net interest income, which is interest income, net of interest expense. Changes in balance sheet composition, including interest-earning assets, deposits, and borrowings, combined with changes in market interest rates, impact net interest income. Net interest margin is net interest income divided by average interest-earning assets. Interest-earning assets and funding sources are managed, including noninterest and interest-bearing liabilities, in order to maximize this margin.

Current wording

Arrow's earnings are derived predominantly from net interest income, which is interest income, net of interest expense. Changes in balance sheet composition, including interest-earning assets, deposits, and borrowings, combined with changes in market interest rates, impact net interest income. Net interest margin is net interest income divided by average interest-earning assets. Interest-earning assets and funding sources are managed, including non-interest and interest-bearing liabilities, in order to maximize this margin.

Previous wording

Arrow considers the accounting policy relating to the allowance for credit losses to be a critical accounting policy, given the uncertainty involved in evaluating the level of the allowance required to cover credit losses inherent in the loan portfolio, and the material effect that such judgments may have on the results of operations. The provision for credit losses for 2023 was $3.4 million, compared to the $4.8 million provision for 2022. The analysis of the method employed for determining the amount of the credit loss provision is explained in detail in Notes 2, Summary of Significant Accounting Policies, and 5, Loans, to the Consolidated Financial Statements.

Current wording

Arrow considers the accounting policy relating to the allowance for credit losses to be a critical accounting policy, given the uncertainty involved in evaluating the level of the allowance required to cover credit losses inherent in the loan portfolio, and the material effect that such judgments may have on the results of operations. The provision for credit losses for 2024 was $5.2 million, compared to the $3.4 million provision for 2023. The analysis of the method employed for determining the amount of the credit loss provision is explained in detail in Notes 2, Summary of Significant Accounting Policies, and 5, Loans, to the Consolidated Financial Statements.

Previous wording

Management estimates the allowance using relevant available information from internal and external sources related to past events, current conditions, and a reasonable and supportable single economic forecast. Historical credit loss experience provides the basis for the estimation of expected credit losses. Arrow's historical loss experience was supplemented with peer information when there was insufficient loss data for Arrow. Peer selection was based on a review of institutions with comparable loss experience as well as loan yield, bank size, portfolio concentration and geography. Adjustments to historical loss information are made for differences in current loan-specific risk characteristics such as differences in credit concentrations, delinquency level, collateral values and underwriting standards as well as changes in economic conditions or other relevant factors. Management judgment is required at each point in the measurement process.

Current wording

Management estimates the allowance using relevant available information from internal and external sources related to past events, current conditions, and a reasonable and supportable economic forecast. Historical credit loss experience provides the basis for the estimation of expected credit losses. Arrow's historical loss experience was supplemented with peer information when there was insufficient loss data for Arrow. Peer selection was based on a review of institutions with comparable loss experience as well as loan yield, bank size, portfolio concentration and geography. Adjustments to historical loss information are made for differences in current loan-specific risk characteristics such as differences in credit concentrations, delinquency level, collateral values and underwriting standards as well as changes in economic conditions or other relevant factors. Management judgment is required at each point in the measurement process.

Previous wording

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:

Current wording

Portfolio segment is defined as the level at which an entity develops and documents a systematic methodology to determine its allowance for credit losses. Loans with similar risk characteristics are pooled. Portfolio segments for estimating loss based on type of borrower and collateral are as follows:

Previous wording

Historical credit loss experience for both Arrow and segment-specific peers provides the basis for the estimation of expected credit losses. Arrow utilizes regression analyses of peer data, of which Arrow is included, where observed credit losses and selected economic factors are utilized to determine suitable loss drivers for modeling lifetime probability of default (PD) rates. Arrow uses the discounted cash flow (DCF) method to estimate expected credit losses for the commercial, commercial real estate, and residential segments. For each of these loan segments, Arrow generates cash flow projections at the instrument level wherein payment expectations are adjusted for estimated prepayment speed, curtailments, time to recovery, PD, and segment-specific loss given default (LGD) risk factors. The modeling of expected prepayment speeds, curtailment rates, and time to recovery are based on historical internal data and adjusted, if necessary, based on the reasonable and supportable forecast of economic conditions.

Current wording

Historical credit loss experience for both Arrow and segment-specific peers provides the basis for the estimation of expected credit losses. Arrow utilizes regression analyses of peer data where observed credit losses and selected economic factors are utilized to determine suitable loss drivers for modeling lifetime probability of default (PD) rates. Arrow uses the discounted cash flow (DCF) method to estimate expected credit losses for the commercial, commercial real estate, and residential segments. For each of these loan segments, Arrow generates cash flow projections at the instrument level wherein payment expectations are adjusted for estimated prepayment speed, curtailments, time to recovery, PD, and segment-specific loss given default (LGD) risk factors. The modeling of expected prepayment speeds, curtailment rates, and time to recovery are based on historical internal data and adjusted, if necessary, based on the reasonable and supportable forecast of economic conditions.

Previous wording

For the loan segments utilizing the DCF method, (commercial, commercial real estate, and residential) Management utilizes externally developed economic forecast of the following economic factors as loss drivers: national unemployment, gross domestic product and home price index (HPI). The economic forecast is applied over a reasonable and supportable forecast period. Arrow utilizes a six quarter reasonable and supportable forecast period with an eight quarter reversion to the historic mean on a straight-line basis.

Current wording

For the loan segments utilizing the DCF method, (commercial, commercial real estate, and residential) Management utilizes externally developed economic forecasts of the following economic factors as loss drivers: national unemployment, gross domestic product and home price index (HPI). The economic forecast is applied over a reasonable and supportable forecast period. Arrow utilizes a six quarter reasonable and supportable forecast period with an eight quarter reversion to the historic mean on a straight-line basis.

Previous wording

Arrow uses the vintage analysis method to estimate expected credit losses for the consumer loan segment. The vintage method was selected since the loans within the consumer loan segment are homogeneous, not just by risk characteristic, but by loan structure. Under the vintage analysis method, a loss rate is calculated based on the quarterly net charge-offs to the outstanding loan balance for each vintage year over the lookback period. Once this periodic loss rate is calculated for each quarter in the lookback period, the periodic rates are averaged into the loss rate. The loss rate is then applied to the outstanding loan balances based on the loan's vintage year. Arrow maintains, over the life of the loan, the loss curve by vintage year. If estimated losses computed by the vintage method need to be adjusted based on current conditions and the reasonable and supportable economic forecast, these adjustments would be incorporated over a six quarter reasonable and supportable forecast period, reverting to historical losses using a straight-line method over an eight quarter period. Based on current conditions, and the reasonable and supportable economic forecast, no adjustments are currently required.

Current wording

Arrow uses the vintage analysis method to estimate expected credit losses for the consumer loan segment. The vintage method was selected since the loans within the consumer loan segment are homogeneous, not just by risk characteristic, but by loan structure. Under the vintage analysis method, a loss rate is calculated based on the quarterly net charge-offs to the outstanding loan balance for each vintage year over the lookback period. Once this periodic loss rate is calculated for each quarter in the lookback period, the periodic rates are averaged into the loss rate. The loss rate is then applied to the outstanding loan balances based on the loan's vintage year. Arrow maintains, over the life of the loan, the loss curve by vintage year. If estimated losses computed by the vintage method need to be adjusted based on current conditions and the reasonable and supportable economic forecast, these adjustments would be incorporated over a six quarter reasonable and supportable forecast period, reverting to historical losses using a straight-line method over an eight quarter period.

Previous wording

Arrow's allowance for credit losses was $31.3 million at December 31, 2023, which represented 0.97% of loans outstanding, a decrease from 1.00% at year-end 2022.

Current wording

Arrow's allowance for credit losses was $33.6 million at December 31, 2024, which represented 0.99% of loans outstanding, an increase from 0.97% at year-end 2023.

Previous wording

The majority of the noninterest income constitutes fee income from services, principally fees and commissions from fiduciary services, deposit account service charges, insurance commissions, net gains (losses) on securities transactions, net gains on sales of loans and other recurring fee income.

Current wording

The majority of the non-interest income constitutes fee income from services, principally fees and commissions from fiduciary services, deposit account service charges, insurance commissions, net gains (losses) on securities transactions, net gains on sales of loans and other recurring fee income.

Previous wording

2023 Compared to 2022: Total noninterest income in 2023 was $29.1 million, a decrease of $1.8 million, or 5.8%, from total noninterest income of $30.9 million for 2022. Income from fiduciary activities decreased $267 thousand from 2022 to 2023. Assets under trust administration and investment management at December 31, 2023 were $1.76 billion, an increase of $157.1 million, or 9.8%, from the prior year-end balance of $1.61 billion. Fees for other services to customers were $10.8 million for 2023, a decrease of $828 thousand as compared to 2022. Insurance commissions were flat to the previous year. Net loss on securities in 2023, was $92 thousand as compared to a gain of $427 thousand in 2022.

Current wording

2024 Compared to 2023: Total non-interest income in 2024 was $28.1 million, a decrease of $1.0 million, or 3.6%, from total non-interest income of $29.1 million for 2023. Income from fiduciary activities increased $508 thousand from 2023 to 2024. Fees for other services to customers were $10.9 million for 2024, an increase of $94 thousand as compared to 2023. Insurance commissions increased $649 thousand compared to the previous year driven by the acquisition of the assets of A&B Agency, Inc. as well as increased commissions. Net loss on securities in 2024, was $2.9 million as compared to a loss of $92 thousand in 2023. The loss in 2024 was the result of the minor repositioning of the investment portfolio.

Previous wording

Net gains on the sales of loans in 2023 were $32 thousand. Sales decreased from previously highs in 2021 as a result of the strategic decision to retain more newly originated residential real estate loans. The rate at which mortgage loan originations may be sold in future periods will depend on various circumstances, including prevailing mortgage rates, other lending opportunities, capital and liquidity needs, and the availability of a market for such transactions. Therefore, Arrow is unable to predict what the retention rate of such loans in future periods may be. Servicing rights are generally retained for loans originated and sold, which also generates additional noninterest income in subsequent periods (fees for other services to customers).

Current wording

Net gains on the sales of loans in 2024 were $209 thousand. The rate at which mortgage loan originations may be sold in future periods will depend on various circumstances, including prevailing mortgage rates, other lending opportunities, capital and liquidity needs, and the availability of a market for such transactions. Therefore, Arrow is unable to predict what the retention rate of such loans in future periods may be. Servicing rights are generally retained for loans originated and sold, which also generates additional non-interest income in subsequent periods (fees for other services to customers).

Previous wording

Other operating income decreased by $151 thousand, or 5.8% between the two years primarily due to a reduction in non-marketable securities partially offset by bank-owned life insurance proceeds.

Current wording

Other operating income increased by $344 thousand, or 14.1% between the two years primarily due to gains on non-marketable securities partially offset by bank-owned life insurance proceeds received in 2023.

Previous wording

Noninterest expense is the measure of the delivery cost of services, products and business activities of a company. The key components of noninterest expense are presented in the following table.

Current wording

Non-interest expense is the measure of the delivery cost of services, products and business activities of a company. The key components of non-interest expense are presented in the following table.

Previous wording

2023 compared to 2022: Noninterest expenses for 2023 were $93.0 million, an increase of $11.5 million, or 14.1%, from 2022. For 2023, the efficiency ratio was 68.89%. This ratio, which is a commonly used non-GAAP financial measure in the banking industry, is a comparative measure of a financial institution's operating efficiency. The efficiency ratio (a ratio where lower is better), as defined by Arrow, is the ratio of operating noninterest expense (excluding intangible asset amortization) to net interest income (on a tax-equivalent basis) plus operating noninterest income (excluding net securities gains or losses). See the discussion of the efficiency ratio in this Report under the heading “Use of Non-GAAP Financial Measures.”

Current wording

2024 compared to 2023: Non-interest expense for 2024 was $97.3 million, an increase of $4.2 million, or 4.5%, from 2023. For 2024, the efficiency ratio was 67.68%. This ratio, which is a commonly used non-GAAP financial measure in the banking industry, is a comparative measure of a financial institution's operating efficiency. The efficiency ratio is the ratio of operating non-interest expense (excluding intangible asset amortization) to net interest income (on a tax-equivalent basis) plus operating non-interest income (excluding net securities gains or losses). See the discussion of the efficiency ratio in this Report under the heading “Use of Non-GAAP Financial Measures.”

Previous wording

Salaries and employee benefits expense increased $0.7 million or 1.4%, from 2022. Included within salaries and benefits was a $606 thousand reclassification between salaries and employee benefits and other operating expenses. Under Accounting Standards Update ("ASU") 2017-07 (Compensation-Retirement Benefits), interest cost, expected return on plan assets, amortization of prior service cost and amortization of net loss are required to be reclassified out of salaries and employee benefits. The reclassification was $1.5 million in 2022. Salaries and benefits were also impacted by increased benefit costs and incentive payments.

Current wording

Salaries and employee benefits expense increased $5.0 million or 10.6%, from 2023. Included within salaries and benefits was a $868 thousand reclassification between salaries and employee benefits and other operating expenses. Under Accounting Standards Update ("ASU") 2017-07 (Compensation-Retirement Benefits), interest cost, expected return on plan assets, amortization of prior service cost and amortization of net loss are required to be reclassified out of salaries and employee benefits. The reclassification was $606 in 2023. Salaries and benefits increased primarily due to headcount increases to support additional control and compliance initiatives and our growing organization. Salaries and benefits were also impacted by inflation-driven wage increases and rising benefit costs.

Previous wording

Technology expenses increased $1.5 million, or 9.2%, from 2022 due to the investment in upgrading the core banking system. The expense reflects the strategic focus on a strong technology foundation and paves the way for customer-facing enhancements and more efficient and improved internal operations.

Current wording

Technology expenses increased $1.8 million, or 10.0%, from 2023 due to continued investment in innovation and infrastructure. The expense reflects our strategic focus on a strong technology foundation and our enhancements of customer-facing technology intended to create more efficient and improved internal operations.

Previous wording

Other operating expense increased $8.2 million, or 75.2%, from 2022. The overall increase from the prior year was primarily related to $4.8 million of additional legal and professional fees incurred in 2023 associated with the delay in the filing of the 2022 Form 10-K, and the 2023 Q1 Form 10-Q for the quarter ended March 31, 2023.

Current wording

Other operating expense decreased $4.0 million, or 21.0%, from 2023. The overall decrease from the prior year was primarily related to $4.8 million of additional legal and professional fees incurred in 2023 associated with the delay in the filing of the Annual Report on Form 10-K for the year ended December 31, 2022 (the "2022 Form 10-K"), and the Quarterly Report on Form 10-Q for the quarter ended March 31, 2023 (the "2023 Q1 Form 10-Q").

Previous wording

The provisions for federal and state income taxes amounted to $7.4 million for 2023, $14.1 million for 2022, and $14.5 million for 2021. The effective income tax rates for 2023, 2022 and 2021 were 19.8%, 22.4% and 22.6%, respectively. The effective tax rate declined by 2.6% between 2023 and 2022 The reduction in the 2023 effective tax rate compared to the 2022 effective tax rate was the result of substantially similar permanent favorable tax benefits in each year while pre-tax income decreased in 2023.

Current wording

The provisions for federal and state income taxes amounted to $7.6 million for 2024, $7.4 million for 2023, and $14.1 million for 2022. The effective income tax rates for 2024, 2023 and 2022 were 20.5%, 19.8% and 22.4%, respectively. The effective tax rate increased by 0.7% between 2024 and 2023 The increase in the 2024 effective tax rate compared to the 2023 effective tax rate was primarily the result of reduced tax exempt income in 2024.

Previous wording

The 2023 decrease in the fair value and the related net unrealized (losses) gains on securities available-for-sale is primarily due to the balance sheet repositioning that Arrow executed in November 2023.

Current wording

The 2024 decrease in the fair value and the related net unrealized losses on securities available-for-sale is primarily due to the focus of management to deploy proceeds from maturing investments to loan growth. In December, Arrow repositioned the investment portfolio as previously described on page 30.