ARROW FINANCIAL CORP (AROW)

Item 2.

ARROW FINANCIAL CORPORATION AND SUBSIDIARIES

MANAGEMENT'S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

March 31, 2026

NOTE ON TERMINOLOGY

In this Report, the terms "Arrow," "the registrant," "the Company," "we," "us," and "our" generally refer to Arrow Financial Corporation and its subsidiaries as a group, except where the context indicates otherwise. At certain points in this Report, Arrow's performance is compared with that of the Company's "peer group" of financial institutions. Unless otherwise specifically stated, the peer group for the purposes of this Report is comprised of the group of 200 domestic bank holding companies with $3 to $10 billion in total consolidated assets as identified in the FRB’s "Bank Holding Company Performance Report" for December 31, 2025 (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 was incorporated on March 21, 1983 and is registered as a bank holding company within the meaning of the Bank Holding Company Act of 1956.  Through Arrow Bank, Arrow indirectly owns various non-bank subsidiaries, including an insurance agency, a registered investment adviser and a REIT.

Arrow’s business consists primarily of the ownership, supervision and control of Arrow Bank, including the bank's subsidiaries.  Arrow provides various advisory and administrative services and coordinates the general policies and operation of Arrow Bank. Arrow Bank engages in a wide range of lending activities, including commercial and industrial lending primarily to small and mid-sized companies; mortgage lending for residential and commercial properties; and consumer installment and home equity financing. Arrow Bank also provides retirement planning, trust and estate administration services for individuals, and pension, profit-sharing and employee benefit plan administration for corporations and, through its insurance subsidiary, sells property and casualty insurance and sells and services group health care policies and life insurance.

Effective December 31, 2024, the Company unified its former subsidiary banks, Glens Falls National Bank and Trust Company ("GFNB") and Saratoga National Bank and Trust Company ("SNB"), and became a single bank holding company headquartered in Glens Falls, New York.  The post-unification banking subsidiary is Arrow Bank National Association® ("Arrow Bank™") whose main office is located in Glens Falls, New York. Active subsidiaries of Arrow Bank 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 fund) and Arrow Properties, Inc. (a real estate investment trust, or REIT). Arrow also directly owns two subsidiary business trusts, organized in 2003 and 2004 to issue trust preferred securities (TRUPs), which are still outstanding.

Adirondack Bancorp, Inc. Merger: On February 25, 2026, Arrow and Adirondack, the parent company of Adirondack Bank, entered into a definitive agreement pursuant to which Adirondack and Adirondack Bank will merge with and into into Arrow and Arrow Bank, respectively.

Adirondack Bank is a New York state-chartered financial institution headquartered in Utica, New York. Adirondack Bank operates 19 branch locations spanning Oneida, Herkimer, Franklin, Essex and Clinton counties, and a loan production office in Onondaga County. As of December 31, 2025, Adirondack reported total consolidated assets of $942 million, total deposits of $848 million, total loans of $624 million and total equity of $67 million.

Upon the terms and subject to the conditions of the Agreement, Adirondack shareholders will receive a combination of stock and cash upon closing of the Merger with Arrow. Each outstanding share of Adirondack common stock will be converted into 1.8610 shares of Arrow common stock plus $18.72 in cash.

Closing of the transaction is expected early in the third quarter of 2026 following receipt of approvals from regulatory authorities, the approval of Adirondack shareholders, and the satisfaction of other customary closing conditions.

FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q (this "Report") 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 ("Exchange Act"), 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, 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:

•Arrow remains subject to inflationary risk which could adversely impact our business and our customers.

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•Market conditions could present significant challenges to the U.S. commercial banking industry and its core business of making and servicing loans. Any substantial downturn in the regional markets in which Arrow operates or in the U.S. economy generally could adversely affect Arrow's ability to maintain and/or grow earnings.

•Any future economic or financial downturn, including any significant correction in the equity markets, could adversely affect Arrow's volume of income attributable to, and demand for, fee-based services of Arrow Bank, including the Company's fiduciary business, which could negatively impact Arrow's financial condition and results of operations.

•Arrow operates in a highly competitive industry and market areas that could negatively affect growth and profitability.

•The financial services industry is faced with technological advances and changes on a continuing basis, and failure to adapt to these advances and changes could have a material adverse impact on Arrow's business.

•Problems encountered by other financial institutions could adversely affect Arrow.

•Geopolitical and other external events, such as severe weather, natural disasters, public health emergencies and pandemics, acts of war or terrorism, and other external events could impact Arrow Bank’s ability to conduct business.

•The market price of Arrow’s common stock may decline as a result of the Merger.

•Combining Arrow and Adirondack may be more difficult, costly or time-consuming than expected, and Arrow may fail to realize the anticipated benefits of the Merger.

•The Agreement may be terminated in accordance with its terms and the Merger may not be completed.

•Arrow faces continuing and growing security risks to its information base including the information maintained relating to customers, and any breaches in the security systems implemented to protect this information could have a material negative effect on Arrow's business operations and financial condition.

•Arrow Bank is subject to risks and losses resulting from fraudulent activities that could adversely impact its financial performance and results of operations.

•Business could suffer if Arrow loses key personnel unexpectedly.

•Arrow is subject to interest rate risk, which could adversely affect profitability.

•Arrow Bank's allowance for possible credit losses may be insufficient, and an increase in the allowance would reduce earnings.

•The increasing complexity of Arrow's operations presents varied risks that could affect earnings and financial condition.

•Arrow’s financial condition and the results of its operations could be negatively impacted by changes in its liquidity position.

•Arrow could recognize losses on securities held in its securities portfolio, particularly if interest rates increase or economic and market conditions deteriorate.

•Arrow Bank’s commercial and commercial real estate loans increase its exposure to credit risks.

•Arrow Bank’s indirect and consumer lending involves risk elements in addition to normal credit risk.

•Arrow may not pay or may reduce the dividends paid on shares of its common stock, and its ability to pay dividends is subject to certain restrictions.

•Arrow operates in a highly regulated industry and face risks associated with noncompliance. Federal banking statutes and regulations could change in the future, which may adversely affect Arrow.

•Capital and liquidity standards require banks and bank holding companies to maintain more and higher quality capital and greater liquidity than has historically been the case.

•Non-compliance with the Patriot Act, Bank Secrecy Act, or other anti-money laundering laws and regulations could result in fines or sanctions and restrictions on conducting acquisitions or establishing new branches.

•Arrow, through Arrow Bank, is subject to the CRA and fair lending laws, and failure to comply with these laws could lead to material penalties.

The Company 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 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 its behalf may issue. This Report should be read in conjunction with the 2025 Form 10-K and our other filings with the Securities and Exchange Commission ("SEC").

USE OF NON-GAAP FINANCIAL MEASURES

The Securities and Exchange Commission ("SEC") has adopted Regulation G, which applies to all public disclosures made by registered companies that contain “non-GAAP financial measures.”  "GAAP" refers to 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 the Company’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 b

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Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations

Selected Financial Information

Dollars in thousands, except per share amounts

*See "Use of Non-GAAP Financial Measures" on page 5.

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Arrow Financial Corporation

Reconciliation of Non-GAAP Financial Information

(Dollars In Thousands, Except Per Share Amounts)

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CRITICAL ACCOUNTING ESTIMATES

The significant accounting policies, as described in Note 2. Summary of Significant Accounting Policies to the Consolidated Financial Statements are essential in understanding the Management Discussion and Analysis. Many of the significant accounting policies require complex judgments to estimate the values of assets and liabilities. Arrow has procedures and processes in place to facilitate making these judgments. The more judgmental estimates are summarized in the following discussion. In many cases, there are numerous alternative judgments that could be used in the process of determining the inputs to the models. Where alternatives exist, Arrow has used the factors that are believed to represent the most reasonable value in developing the inputs. Actual performance that differs from estimates of the key variables could impact the results of operations.

Allowance for credit losses: The allowance for credit losses consists of the allowance for credit losses on loans and unfunded loan commitments. The Current Expected Credit Loss ("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.

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, probability of default ("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. An allowance for credit loss is established for the difference between the instrument’s net present value of expected cash flows and amortized cost basis.

Arrow utilized regression analyses of peer data where observed credit losses and selected economic factors were utilized to determine suitable loss drivers for modeling lifetime PD rates. For the loan segments utilizing the DCF method, management utilizes externally developed economic forecasts for the selected loss drivers.

Arrow uses the vintage analysis method to estimate expected credit losses for the consumer loan segment. Under the vintage analysis method, an average loss rate is calculated based on the quarterly net charge-offs to the outstanding loan balance for each vintage year and applied to the outstanding loan balances based on the loan's vintage year.

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.

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.

One of the most significant judgments involved in estimating the Company’s allowance for credit losses relates to the macroeconomic forecasts used to estimate expected credit losses over the forecast period. The quantitative model utilizes a six-quarter economic forecast sourced from reputable third-parties that projects an increase of approximately 0.17% in the forecasted national unemployment rate and projects forecasted GDP to improve by approximately 0.05% from the previous year economic forecast.

To demonstrate the sensitivity of the allowance for credit losses estimate to macroeconomic forecast assumptions, the Company increased the projected rate of unemployment and reduced projected GDP growth by an additional 25, 50 and 100 bps causing a 3%, 6% and 13% increase in the overall estimated allowance for credit losses, respectively.

Arrow's policy on the allowance for credit losses is disclosed in Note 2. Summary of Significant Accounting Policies to the consolidated financial statements of this Form 10-K.

A. OVERVIEW

The following discussion and analysis focuses on and reviews Arrow's results of operations for each of the years in the three-year period ended December 31, 2025 and the financial condition as of December 31, 2025 and 2024.  The discussion below should be read in conjunction with the selected annual financial information set forth above and the Consolidated Financial

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Statements and other financial data presented elsewhere in this Report.  When necessary, prior-year financial information has been reclassified to conform to the current-year presentation.

Summary of 2025 Financial Results: Net income for 2025 was $44.0 million, up from $29.7 million for 2024.

Diluted earnings per share (EPS) was $2.65 for 2025, up from $1.77 for 2024. ROE and ROA for 2025 were 10.66% and 1.00%, respectively, as compared to 7.72% and 0.70%, respectively, for 2024.

Net interest income for the year ended December 31, 2025 was $133.2 million, an increase of $21.4 million, or 19.2%, from the prior year. Compared to the prior year, the increase was primarily due to the combination of increased interest income and decreased interest expense. Interest and fees on loans were $184.1 million for the year ended December 31, 2025, an increase of 7.4% from $171.3 million for the year ended December 31, 2024. The increase was primarily driven by loan growth and higher average loan rates. Interest expense for the year ended December 31, 2025 was $77.0 million. This represents a decrease of $6.3 million, or 7.5%, from the $83.3 million in interest expense for the prior year. The decrease in interest expense was driven primarily by lower average deposit rates and changes in deposit composition to lower-cost core deposits.

Net interest margin was 3.17% (3.19% FTE) for the year ended December 31, 2025, as compared to 2.72% (2.74% FTE) for the year ended December 31, 2024. The increase in net interest margin compared to the prior year was primarily the result of continued yield expansion on earning assets combined with the reduced cost of interest-bearing liabilities.

For the year ended December 31, 2025, the provision for credit losses related to the loan portfolio was $7.3 million, compared to $5.2 million in the prior year. The key drivers for the increase in provision for credit losses for 2025 were primarily the second quarter charge-off of the specific reserve of $3.75 million related to the CRE Participation and overall loan growth. The aforementioned CRE Participation was reclassified to Other Assets after the participating banks assumed control of the collateral properties and appointed a property manager to manage the day-to-day activities while exploring further options. The properties are being held in an unconsolidated limited liability company (LLC) in which Arrow has an ownership interest equivalent to its rights under the former CRE Participation. As previously disclosed, the properties are generating positive net operating income and the majority is tenant occupied.

Non-interest income was $32.4 million for the year ended December 31, 2025, an increase of 15.5%, as compared to $28.1 million for the year ended December 31, 2024. The increase in non-interest income from the previous year was primarily driven by a 2024 net loss on securities from the repositioning of the investment portfolio which reduced the 2024 non-interest income as well as increases in 2025 revenue related to wealth management, insurance and interchange fees.

Non-interest expense for the year ended December 31, 2025 increased by $5.7 million, or 5.8%, to $102.9 million, as compared to $97.3 million in 2024. The largest component of non-interest expense is salaries and benefits paid to our employees, which totaled $56.3 million in 2025 and increased $3.6 million, or 6.8%, from the prior year. Salaries and benefits were impacted by inflation-driven wage increases and rising benefit costs.

The provision for income taxes for 2025 was $11.4 million, compared to $7.6 million for 2024. The effective income tax rates for 2025 and 2024 were 20.6% and 20.5%, respectively.

Total assets were $4.4 billion at December 31, 2025, an increase of $139.5 million, or 3.2%, compared to December 31, 2024. The increase over the prior year end was primarily driven by loan growth and an overall increase in interest-earning deposits at banks.

Total investments were $572.8 million at December 31, 2025, an increase of $2.0 million, or 0.4%, compared to December 31, 2024. The increase reflected the reinvestment of the cash generated from paydowns and maturities of investments into higher yielding investments, and net unrealized gains of $19.5 million. There were no credit quality issues related to the investment portfolio.

At December 31, 2025, total loan balances reached $3.5 billion. Loan growth for the year was $59 million or 1.7%. The allowance for credit losses was $34.3 million at December 31, 2025, an increase of $0.7 million from December 31, 2024. The allowance for credit losses at December 31, 2025 represented 0.99% of loans outstanding, unchanged from 0.99% at year end 2024. Asset quality remained strong at December 31, 2025. Net loan charge-offs, expressed as an annualized percentage of average loans outstanding, were 0.19% for the year ended December 31, 2025, as compared to 0.09% for the prior year. The increase was the result of a charge-off of a previously reserved commercial loan participation in the second quarter of 2025. Nonperforming assets of $8.7 million at December 31, 2025, represented 0.20% of year end assets, compared to $21.5 million or 0.50% at December 31, 2024.

At December 31, 2025, total deposit balances were $3.9 billion, an increase of $111.5 million, or 2.9%, from the prior-year end level. Non-municipal deposits, excluding brokered CDs, increased by $131.6 million and municipal deposits decreased by $20.1 million, each as compared to December 31, 2024. Non-interest bearing deposits increased by $19.4 million, or 2.8%, during 2025. At December 31, 2025, total time deposits, excluding brokered CDs, increased $3.2 million from the prior-year end level.

Total borrowings were $4.3 million at December 31, 2025, a decrease of $4.3 million, or 50.4%, compared to December 31, 2024.

Total shareholders’ equity was $431.9 million at December 31, 2025, an increase of $31.0 million, or 7.7%, from December 31, 2024. Arrow's regulatory capital ratios remained strong in 2025. At December 31, 2025, Arrow's Common Equity Tier 1 Capital Ratio was 13.01% and the Total Risk-Based Capital Ratio was 14.76%. The capital ratios of Arrow and Arrow Bank continued to significantly exceed the “well capitalized” regulatory standards.

The changes in net income, net interest income and net interest margin between the current and prior year are discussed in detail under the heading "Results of Operations," beginning on page 29.

Regulatory Capital and Stockholders' Equity: As of December 31, 2025, 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

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both the holding company and bank levels.  At that date Arrow Bank, continued to qualify as "well-capitalized" under the capital classification guidelines as defined by the Capital Rules.  Because of continued profitability and strong asset quality, the regulatory capital levels throughout recent years have consistently remained well in excess of the various required regulatory minimums in effect.

Total stockholders' equity was $431.9 million at December 31, 2025, an increase of $31.0 million, or 7.7%, from December 31, 2024. The components of the change in stockholders' equity since year-end 2024 are presented in the Consolidated Statement of Changes in Stockholders' Equity on page 49. Total book value per share increased by 17.1% over the prior year-end level. The net increase in total stockholders' equity during 2025 principally reflected the following factors: (i) $44.0 million of net income for the year, (ii) other comprehensive income of $14.4 million and (iii) $1.7 million of equity related to various stock-based compensation plans, reduced by (iv) cash dividends of $18.9 million and (v) repurchases of common stock of 10.0 million. The Board of Directors declared and Arrow paid a cash dividend of $0.28 per share for the first and second quarters of 2025, $0.29 per share for the third and fourth quarters of 2025 and $0.30 per share for the first quarter of 2026.

Loan quality: Nonperforming loans were $8.5 million at December 31, 2025, a decrease of $12.6 million, or 59.8%, from year-end 2024. The ratio of nonperforming loans to year-end loans at December 31, 2025 was 0.24%, a decrease from 0.62% at December 31, 2024. Nonperforming loans are in various stages of work-out activities including, but not limited to, ongoing negotiations with the borrowers, borrowers looking to refinance with other lenders, potential foreclosures, as well as periodic updates to appraisals and cash flow analyses generated by the underlying collateral. Any future developments related to such activities may have a potential impact on financial results, however, the impact cannot be determined at this time.

Loans charged-off (net of recoveries) against the allowance for credit losses was $6.6 million for 2025, an increase of $3.7 million from 2024. The ratio of net charge-offs to average loans was 0.19% for 2025 and 0.09% for 2024. At December 31, 2025, the allowance for credit losses was $34.3 million, representing 0.99% of total loans, was unchanged from the December 31, 2024 ratio.

Loans: As of December 31, 2025, total loans grew $58.6 million, or 1.7%, as compared to the balance at December 31, 2024.

◦    Commercial and Commercial Real Estate Loans: Combined, these loans comprised 28.5% of the total loan portfolio at year-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 1% of the total loan portfolio is comprised of office related property. Retail loans were approximately 2% of the total loan portfolio and hotels and motels were approximately 5% of the total loan portfolio. Overall, Arrow has minimal exposure to highly sensitive areas where large commercial and retail vacancies exist. Commercial property values in Arrow's region have largely remained stable. Appraisals on nonperforming and watched CRE loan properties are updated as deemed necessary, usually when the loan is downgraded or when there has been significant market deterioration since the last appraisal.

◦    Consumer Loans: These loans (primarily automobile loans) comprised approximately 31.2% of the total loan portfolio at period-end. Consumer automobile loans at December 31, 2025, 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. Competition and other macro economic factors may limit the potential growth in this category.

◦    Residential Real Estate Loans: These loans, including home equity loans, made up 40.3% of the total loan portfolio at year-end. Demand for residential real estate has continued to remain strong. Arrow originated nearly all of the residential real estate loans currently held in the loan portfolio and applies conservative underwriting standards. Arrow has historically sold a portion of the residential real estate mortgage originations into the secondary market. The ratio of the sales of originations to total originations tends to fluctuate from period to period based on market conditions and other factors. The rate at which mortgage loan originations are sold in future periods will depend on various circumstances, including prevailing mortgage rates, other lending opportunities, capital and liquidity needs, and the availability of a market for such transactions.

Liquidity and access to credit markets: Arrow has not experienced any liquidity concerns in recent years or in 2025. Arrow’s liquidity position provides the Company with the necessary flexibility to address any unexpected near-term disruptions.  Interest-earning cash balances at December 31, 2025 were $185.1 million which represents a significant increase as compared to $127.1 million at December 31, 2024. 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 $1.4 billion. The terms of Arrow's lines of credit have not changed significantly in recent periods (see the general liquidity discussion on page 40). 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 primary liability-based sources are overnight borrowing arrangements 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.

Subsidiary Bank Unification: On December 31, 2024, Arrow merged its two subsidiary banks, GFNB and SNB, into one bank, with GFNB as the survivor, and renamed the unified institution Arrow Bank. The unification has created operational efficiencies, unified branding and enhanced Arrow's ability to pursue its strategic growth objectives.

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B. RESULTS OF OPERATIONS

The following analysis of net interest income, the provision for credit losses, noninterest income, noninterest expense and income taxes, highlights the factors that had the greatest impact on the results of operations for December 31, 2025 and the prior two years. For a comparison of the years ended December 31, 2023 and 2024, 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, 2024.

I. NET INTEREST INCOME

Net interest income represents the difference between interest, dividends and fees earned on loans, securities and other earning assets and interest paid on deposits and other sources of funds.  Changes in net interest income result from changes in the level and mix of earning assets and sources of funds (volume) and changes in the yields earned and interest rates paid (rate). Net interest margin is the ratio of net interest income to average earning assets.  Net interest income may also be described as the product of average earning assets and the net interest margin.

CHANGE IN NET INTEREST INCOME

(Dollars In Thousands) (GAAP Basis)

Net interest income was $133.2 million in 2025, an increase of $21.4 million, or 19.2%, from $111.7 million in 2024.  This is in comparison with an increase of $6.9 million, or 6.6%, from 2023 to 2024.  Factors contributing to year-to-year changes in net interest income over the three-year period are discussed in the following portions of this Section B.I.

The following tables reflect the components of net interest income for the years ended December 31, 2025, 2024 and 2023: (i) average balances of assets, liabilities and stockholders' equity, (ii) interest and dividend income earned on earning assets and interest expense incurred on interest-bearing liabilities, (iii) average yields on earning assets and average rates paid on interest-bearing liabilities, (iv) the net interest spread (average yield less average cost) and (v) the net interest margin (yield) on earning assets. The yield on securities available-for-sale is based on the amortized cost of the securities. Nonaccrual loans are included in average loans.

Average Consolidated Balance Sheets and Net Interest Income Analysis

(GAAP basis)

(Dollars in Thousands)

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Changes between periods are attributed to movement in either the average daily balances or average rates for both earning assets and interest-bearing liabilities.  Changes attributable to both volume and rate have been allocated proportionately between the categories.

Net Interest Income Rate and Volume Analysis

(Dollars in Thousands) (GAAP basis)

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

II. PROVISION FOR CREDIT LOSSES AND ALLOWANCE FOR CREDIT LOSSES

The provision for credit losses for 2025 was $7.3 million, compared to the $5.2 million provision for 2024. The key drivers for the increase in provision for credit losses for 2025 were primarily net charge-offs of $6.6 million, which includes the $3.75 million charge-off of the previously disclosed commercial loan participation in the second quarter of 2025, and overall loan growth. Arrow's allowance for credit losses was $34.3 million at December 31, 2025, which represented 0.99% of loans outstanding, unchanged from 0.99% at year-end 2024.

III. NON-INTEREST INCOME

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

ANALYSIS OF NON-INTEREST INCOME

(Dollars In Thousands)

2025 Compared to 2024:  Total non-interest income in 2025 was $32.4 million, an increase of $4.4 million, or 15.5%, from total non-interest income of $28.1 million for 2024. Income from fiduciary activities increased $352 thousand from 2024 to 2025 primarily driven by market performance. Fees for other services to customers were $11.1 million for 2025, an increase of $206 thousand as compared to 2024. Insurance commissions increased $519 thousand compared to the previous year. Net gain on securities in 2025, was $542 thousand as compared to a loss of $2.9 million in 2024. The loss in 2024 was the result of the minor repositioning of the investment portfolio.

Net gains on the sales of loans in 2025 were $819 thousand. The rate at which mortgage loan originations may be sold in future periods will depend on various circumstances, including prevailing mortgage rates, other lending opportunities, capital and liquidity needs, and the availability of a market for such transactions. Therefore, Arrow is unable to predict what the retention rate of such loans in future periods may be. Servicing rights are generally retained for loans originated and sold, which also generates additional non-interest income in subsequent periods (fees for other services to customers).

Other operating income decreased by $778 thousand, or 28.0% between the two years primarily due to gains on non-marketable securities recognized in 2024.

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IV. NON-INTEREST EXPENSE

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

ANALYSIS OF NON-INTEREST EXPENSE

(Dollars In Thousands)

2025 compared to 2024:  Non-interest expense for 2025 was $102.9 million, an increase of $5.7 million, or 5.8%, from 2024.  For 2025, the efficiency ratio was 61.97% compared to 67.68% for 2024. 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.”

Salaries and employee benefits expense increased $3.6 million or 6.8%, from 2024, primarily due to inflation-driven wage increases and rising benefit costs.

Technology expenses increased $1.4 million, or 7.4%, from 2024 due to continued investment in innovation and infrastructure. The expense reflects our strategic focus on a strong technology foundation and our enhancements of customer-facing technology intended to create more efficient and improved internal operations.

Other operating expense decreased $0.3 million, or 1.7%, from 2024.

2025 included unification expenses of approximately $2.3 million. Unification expenses were primarily comprised of project management and information technology costs related to the July 2025 system conversion.

V. INCOME TAXES

The following table sets forth the provision for income taxes and effective tax rates for the years presented.

INCOME TAXES AND EFFECTIVE RATES

(Dollars In Thousands)

The provisions for federal and state income taxes amounted to $11.4 million for 2025, $7.6 million for 2024, and $7.4 million for 2023. The effective income tax rates for 2025, 2024 and 2023 were 20.6%, 20.5% and 19.8%, respectively. The increase in the 2025 effective tax rate compared to 2024 was primarily attributable to higher pre-tax income, which diluted the proportional impact of tax-exempt income. This was partially offset by tax credits recognized from energy production tax credit investments made in 2025. See Note 15. Income Taxes to the Consolidated Financial Statements for more information about the 2025 purchase of energy production tax credits as well as items that impacted the effective tax rate for each year.

C. FINANCIAL CONDITION

I. INVESTMENT PORTFOLIO

The available-for-sale securities portfolio, held-to-maturity securities portfolio and the equity securities portfolio are further detailed below. During 2025 and 2024, Arrow held no trading securities.

The table below presents the changes in the period-end balances for available-for-sale, held-to-maturity and equity securities from December 31, 2024 to December 31, 2025 (in thousands):

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The 2025 increase in the fair value of the investment portfolio and the related improvement of net unrealized losses on securities available-for-sale is primarily due to the reinvestment of the cash generated from paydowns and maturities into higher yielding investments and lower interest rate environment.

The table below presents the weighted average yield for available-for-sale and held-to-maturity securities as of December 31, 2025 (in thousands). The weighted-average yields are calculated by breaking down each investment segment by maturity date and calculating based on book value (amortized cost) against each corresponding rate. Yields on tax-exempt obligations are not presented on a tax-equivalent basis.

For the years above, Arrow held no investment securities in the securities portfolio that consisted of or included, directly or indirectly, obligations of foreign governments or government agencies of foreign issuers.

In the years referenced above, mortgage-backed securities consisted solely of mortgage pass-through securities and collateralized mortgage obligations (CMOs) issued or guaranteed by U.S. federal agencies or by government-sponsored enterprises (GSEs). Mortgage pass-through securities provide to the investor monthly portions of principal and interest pursuant to the contractual obligations of the underlying mortgages. CMOs are pools of mortgage-backed securities, the repayments on which have generally been separated into two or more components (tranches), where each tranche has a separate estimated life and yield. Arrow's practice has been to purchase pass-through securities and CMOs that are issued or guaranteed by U.S. federal agencies or GSEs, and the tranches of CMOs purchased are generally those having shorter average lives and/or durations. Lower market interest rates and/or payment deferrals on underlying loans that make up mortgage-backed security collateral may impact cashflows.

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In the years referenced above, U.S. Government & Agency Obligations consisted solely of agency bonds issued by GSEs. These securities generally pay fixed semi-annual coupons with principle payments at maturity. For some, callable options are included that may impact the timing of these principal payments. Arrow's practice has been to purchase agency securities that are issued or guaranteed by GSEs with limited embedded optionality (call features). Final maturities are generally less than 5 years.

The yields on obligations of states and municipalities exempt from federal taxation were computed on a tax-equivalent basis. The yields on other debt securities shown in the table above are calculated by dividing annual interest, including accretion of discounts and amortization of premiums, by the amortized cost of the securities at December 31, 2025.

Arrow evaluates available-for-sale debt securities in unrealized loss positions at each measurement date to determine whether the decline in the fair value below the amortized cost basis (impairment) is due to credit-related factors or non-credit related factors. Any impairment that is not credit related is recognized in other comprehensive income, net of applicable taxes. Credit-related impairment is recognized within the allowance for credit losses on the balance sheet, limited to the amount by which the amortized cost basis exceeds the fair value, with a corresponding adjustment to earnings via credit loss expense. Arrow determined that at December 31, 2025, gross unrealized losses, $17.0 million, were primarily attributable to changes in interest rates, relative to when the investment securities were purchased, and not due to the credit quality of the investment securities. In 2024, both the investment portfolio restructuring as well as interest rates plateauing resulted in a decrease in unrealized losses versus the comparable prior year. Arrow does not intend to sell, nor is it more likely than not that Arrow will be required to sell, any securities before recovery of its amortized cost basis, which may be at maturity. Arrow carried no allowance for credit loss at December 31, 2025 and there was no credit loss expense recognized by Arrow with respect to the securities portfolio during the year ended December 31, 2025.

At December 31, 2025 and 2024, the weighted average maturity was 10.5 and 4.2 years, respectively, for debt securities in the available-for-sale portfolio.

For further information regarding the portfolio of securities available-for-sale, see Note 4. Investment Securities to the Consolidated Financial Statements.

Securities Held-to-Maturity:

The following table sets forth the carrying value of the portfolio of securities held-to-maturity at December 31 of each of the last two years.

SECURITIES HELD-TO-MATURITY

(Dollars In Thousands)

Arrow's held-to-maturity debt securities are comprised of GSEs and state and municipal obligations. GSE securities carry the explicit and/or implicit guarantee of the U.S. government, are widely recognized as “risk free,” and have a long history of zero credit loss. Arrow performs an analysis of the credit worthiness of municipal obligations to determine if a security is of investment grade. The analysis may include, but may not solely rely upon credit analysis conducted by external credit rating agencies. Arrow determined that the expected credit loss on its held to maturity debt portfolio was immaterial and, therefore, no allowance for credit loss was recorded as of December 31, 2025.

At December 31, 2025 and 2024, the weighted average maturity was 1.5 and 1.1 years, respectively, for the debt securities in the held-to-maturity portfolio.

For additional information regarding the fair value of the portfolio of securities held-to-maturity at December 31, 2025, see Note 4. Investment Securities to the Consolidated Financial Statements.

EQUITY SECURITIES

(Dollars In Thousands)

The following table is the schedule of Equity Securities at December 31 of each of the last two years. Equity Securities primarily consist of common stock of companies within the financial sector.

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II. LOAN PORTFOLIO

The amounts and respective percentages of loans outstanding represented by each principal category on the dates indicated were as follows:

a. Types of Loans

(Dollars In Thousands)

Commercial and Commercial Real Estate Loans: Commercial and commercial real estate loans in the loan portfolio were extended to businesses or borrowers primarily located in Arrow's regional markets. There are no commercial real estate loans in major metropolitan areas. Approximately 1% of the loan portfolio are comprised of office related property. Retail loans were approximately 2% of the loan portfolio and hotels and motels were approximately 5% of the portfolio. Overall, Arrow has minimal exposure to highly sensitive areas that currently have elevated office and retail vacancy rates. A portion of the loans in the commercial portfolio have variable rates tied to market indices, such as Prime, SOFR or FHLBNY.

Consumer Loans: At December 31, 2025, consumer loans (primarily automobile loans originated through dealerships located in New York and Vermont) continue to be a significant component of Arrow's business, comprising approximately one third of the total loan portfolio.

For credit quality purposes, Arrow assigns potential automobile loan customers into one of four tiers, ranging from lower to higher quality in terms of anticipated credit risk. Arrow's experienced lending staff not only utilizes credit evaluation software tools but also reviews and evaluates each loan individually prior to the loan being funded. Arrow believes that this disciplined approach to evaluating credit risk has contributed to maintaining the strong credit quality in this portfolio.

Residential Real Estate Loans: Demand for residential real estate has continued to remain strong even with elevated interest rates. Arrow has historically sold portions of these originations in the secondary market. The rate at which mortgage loan originations may be sold in future periods will depend on a variety of factors, including demand for residential mortgages in our operating markets, market conditions for mortgage sales and strategic balance sheet and interest-rate risk management decisions.

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b. Maturities and Sensitivities of Loans to Changes in Interest Rates (Dollars in Thousands)

The table below shows the maturity of loans outstanding as of December 31, 2025. Also provided are the amounts due after one year, classified according to fixed interest rates and variable interest rates (in thousands):

COMMITMENTS AND LINES OF CREDIT

Stand-by letters of credit represent extensions of credit granted in the normal course of business, which are not reflected in the financial statements at a given date because the commitments are not funded at that time.  As of December 31, 2025, the total contingent liability for standby letters of credit amounted to $3.6 million.  In addition to these instruments, there are lines of credit to customers, including home equity lines of credit, commitments for residential and commercial construction loans and other personal and commercial lines of credit, which also may be unfunded or only partially funded from time-to-time. Commercial lines, generally issued for a period of one year, are usually extended to provide for the working capital requirements of the borrower. At December 31, 2025, outstanding unfunded loan commitments in the aggregate amount were approximately $462.9 million compared to $449.5 million at December 31, 2024.

c. Risk Elements

1. Nonaccrual, Past Due and Restructured Loans

The amounts of nonaccrual, past due and restructured loans at year-end for each of the past two years are presented in the table on page 38 under the heading "Summary of the Allowance and Provision for Credit Losses."

Loans are placed on nonaccrual status either due to the delinquency status of principal and/or interest or a judgment by Management that the full repayment of principal and interest is unlikely. Unless already placed on nonaccrual status, loans secured by home equity lines of credit are put on nonaccrual status when 120 days past due and residential real estate loans are put on nonaccrual status when 150 days past due. Commercial and commercial real estate loans are evaluated on a loan-by-loan basis and are placed on nonaccrual status when 90 days past due if the full collection of principal and interest is uncertain. Under the Uniform Retail Credit Classification and Account Management Policy established by banking regulators, fixed-maturity consumer loans not secured by real estate must generally be charged-off no later than when 120 days past due. Loans secured with non-real estate collateral in the process of collection are charged-down to the value of the collateral, less cost to sell.  Arrow had no material commitments to lend additional funds on outstanding nonaccrual loans at December 31, 2025.  Loans past due 90 days or more and still accruing interest are those loans which were contractually past due 90 days or more but because of expected repayments, were still accruing interest.

The balance of loans 30-89 days past due and still accruing interest totaled $28.9 million at December 31, 2025 and represented 0.84% of loans outstanding at that date, as compared to approximately $20.5 million, or 0.60% of loans outstanding at December 31, 2024. These non-current loans at December 31, 2025 were composed of approximately $21.0 million of consumer loans (principally indirect automobile loans), $4.2 million of residential real estate loans and $3.7 million of commercial and commercial real estate loans.

The method for measuring all other loans is described in detail in Note 2. Summary of Significant Accounting Policies, and Note 5. Loans, to the Consolidated Financial Statements. Note 5. Loans, to the Consolidated Financial Statements also contains detailed information on modified loans and impaired loans.

2. Potential Problem Loans

On at least a quarterly basis, the internal credit quality rating is re-evaluated for commercial loans that are either past due or fully performing but exhibit certain characteristics that could reflect potential weaknesses.  Loans are placed on nonaccrual

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status when the likely amount of future principal and interest payments are expected to be less than the contractual amounts, even if such loans are not past due.

Periodically, Arrow reviews the loan portfolio for evidence of potential problem loans.  Potential problem loans are loans that are currently performing in accordance with contractual terms, but where known information about possible credit problems of the borrower may jeopardize loan repayment and result in a non-performing loan.  In the credit monitoring program, Arrow treats loans that are classified as substandard but continue to accrue interest as potential problem loans.  At December 31, 2025, Arrow identified 33 commercial loans totaling $25.5 million as potential problem loans.  At December 31, 2024, Arrow identified 33 commercial loans totaling $21.0 million as potential problem loans.  For these loans, although positive factors such as payment history, value of supporting collateral, and/or personal or government guarantees led Arrow to conclude that accounting for them as non-performing at year-end was not warranted, other factors, specifically, certain risk factors related to the loan or the borrower justified concerns that they may become nonperforming at some point in the future.

3. Foreign Loans

None

4. Loan Concentrations

The loan portfolio is well diversified.  There are no concentrations of credit that exceed 10% of the portfolio, other than the general categories reported in the preceding Section C.II.a. of this Item 7, beginning on page 35.  For further discussion, see Note 1. Risks and Uncertainties, to the Consolidated Financial Statements.

5. Other Real Estate Owned and Repossessed Assets

Other real estate owned ("OREO") primarily consists of real property acquired in foreclosure.  When held, OREO is carried at fair value less estimated cost to sell. Arrow establishes allowances for OREO losses, which are determined and monitored on a property-by-property basis and reflect the ongoing estimate of the property's estimated fair value less costs to sell. All Repossessed Assets for each of the years in the table below consist of motor vehicles.

The following table summarizes changes in the net carrying amount of OREO and the number of properties for each of the years presented.

III. SUMMARY OF CREDIT LOSS EXPERIENCE

The CECL approach requires an estimate of the credit losses expected over the life of a loan (or pool of loans). The allowance for credit losses is a valuation account that is deducted from, or added to, the loans’ amortized cost basis to reflect the net, lifetime amount expected to be collected on the loans. Loan losses are charged off against the allowance when Arrow believes a loan balance is confirmed to be uncollectible. Expected recoveries do not exceed the aggregate of amounts previously charged off and expected to be charged off.

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

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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.

Arrow's allowance for credit losses was $34.3 million at December 31, 2025, which represented 0.99% of loans outstanding, unchanged from 0.99% at year-end 2024.

SUMMARY OF THE ALLOWANCE AND PROVISION FOR CREDIT LOSSES

(Dollars In Thousands) (Loans, Net of Unearned Income)

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ALLOCATION OF THE ALLOWANCE FOR CREDIT LOSSES

(Dollars in Thousands)

Arrow's allowance for credit losses was $34.3 million at December 31, 2025, which represented 0.99% of loans outstanding, unchanged from 0.99% at year-end 2024.

The overall change in the allowance from December 31, 2024 was primarily driven by net charge-offs of $6.6 million and net loan growth by $1.2 million, offset by model calculation, including mix and aging, which decreased the allowance by $537 thousand. The 2025 provision for credit losses was $7.3 million. Management's evaluation considers the allowance for credit losses for loans to be adequate as of December 31, 2025.

The percentage of loans in each loan category is presented in the table of loan types in the preceding section on page 35 of this Report.

IV. DEPOSITS

The following table sets forth the average balances of and average rates paid on deposits for the periods indicated.

AVERAGE DEPOSIT BALANCES

(Dollars In Thousands)

Average total deposit balances increased by $174.8 million, or 4.7% in 2025. The change in composition of deposits was primarily the result of an additional brokered CDs and the migration from low to higher costing products.

Arrow used reciprocal deposits for a select group of municipalities to reduce the amount of investment securities required to be pledged as collateral for municipal deposits where municipal deposits in excess of the FDIC insurance coverage limits were transferred to other participating banks, divided into portions so as to qualify such transferred deposits for FDIC insurance coverage at each transferee bank. In return, reciprocal amounts are transferred to Arrow in equal amounts of deposits from the participant banks. Reciprocal deposits were $614.9 million and $648.5 million at December 31, 2025 and 2024, respectively. Municipal deposits were $787.1 million and $684.8 million at December 31, 2025 and 2024, respectively. Brokered CDs were $300 million and $270 million at December 31, 2025 and 2024, respectively.

Uninsured deposits represents the portion of deposit accounts that exceed FDIC insurance limits. Arrow calculates its uninsured deposit balances based on the same methodologies and assumptions used for regulatory reporting requirements. Estimated uninsured deposits as reported in the Call Report were $917.6 million at December 31, 2025, which includes intercompany account balances of $57.5 million, and collateralized deposits of $276.1 million. Estimated uninsured deposits as recorded in the Call Report were $861.4 million at December 31, 2024, which includes intercompany account balances of $67.9 million, and collateralized deposits of $280.6 million.

The cost of deposits decreased throughout 2025. While the Federal Funds rate was cut thrice in 2025, the timing and magnitude of future rate adjustments are unknown. Arrow believes it is well positioned for a variety of rate environments.

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The maturities of time deposits of $250,000 or more at December 31, 2025 are presented below.  (Dollars In Thousands)

V. SHORT-TERM BORROWINGS (Dollars in Thousands)

D. LIQUIDITY

The objective of effective liquidity management is to ensure that Arrow has the ability to raise cash when needed at a reasonable cost.  This includes the capability of meeting expected and unexpected obligations to Arrow's customers at any time. Given the uncertain nature of customer demands and the need to maximize earnings, Arrow must have available reasonably priced sources of funds, both on- and off-balance sheet, that can be accessed quickly in times of need. Arrow’s liquidity position should provide the Company with the necessary flexibility to address any unexpected near-term disruptions such as reduced cash flows from the investment and loan portfolio, unexpected deposit runoff, or increased loan originations.

Arrow's primary sources of available liquidity are overnight investments in federal funds sold, interest earning 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 $495.9 million at year-end 2025, an increase of $32.8 million from the year-end 2024 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 earning cash balances at December 31, 2025 of $185.1 million compared to $127.1 million at December 31, 2024.

In addition to liquidity from cash, short-term investments, investment securities and loans, Arrow has supplemented available operating liquidity with additional off-balance sheet sources such as a federal funds lines of credit with correspondent banks and credit lines with the FHLBNY. The federal funds lines of credit are with two correspondent banks totaling $23 million which were not drawn on in 2025.

To support the borrowing relationship with the FHLBNY, Arrow has pledged collateral, including residential mortgage, home equity and commercial real estate loans. At December 31, 2025, Arrow had outstanding collateralized obligations with the FHLBNY of $4 million; as of that date, the unused borrowing capacity at the FHLBNY was approximately $723 million. Brokered deposits have also been identified as an available source of funding accessible in a relatively short time period. At December 31, 2025, there were $300 million in brokered CD deposits. In addition, Arrow Bank has established a borrowing facility with the Federal Reserve Bank of New York, pledging certain consumer loans as collateral for potential "discount window" advances, which are maintained for contingency liquidity purposes. At December 31, 2025, the amount available under this facility was approximately $708 million in the aggregate, and there were no advances then outstanding.

Arrow performs regular liquidity stress tests and tests of the contingent liquidity plan to ensure that an adequate amount of available funds can be generated to meet a wide variety of potential liquidity events. Additionally, Arrow continually monitors levels and composition of uninsured deposits. Uninsured deposit balances in excess of the FDIC insurance limit at December 31, 2025 and 2024, were less than 30% of the total deposit base.

Arrow measures and monitors liquidity both with and without the availability of borrowing arrangements. Based on the level of overnight investments, available liquidity from the investment securities portfolio, cash flows from the loan portfolio, the stable core deposit base and the significant borrowing capacity, Arrow believes that the available liquidity is sufficient to meet all reasonably likely events or occurrences. At December 31, 2025, Arrow's primary liquidity ratio was 10.7% of total assets, well in excess of the internal policy limit of 5%. Total primary liquidity was $477.8 million, comprised of unencumbered cash and securities.

Arrow did not experience any liquidity constraints in 2025 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.

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E. CAPITAL RESOURCES AND DIVIDENDS

Important Regulatory Capital Standards: Dodd-Frank, enacted in 2010, directed U.S. bank regulators to promulgate revised bank organization capital standards. These Capital Rules are summarized in an earlier section of this Report, "Regulatory Capital Standards," beginning on page 8.

The table below sets forth the various capital ratios achieved by Arrow and Arrow Bank as of December 31, 2025, as determined under the bank regulatory capital standards in effect on that date, as well as the minimum levels for such capital ratios that bank holding companies and banks are required to maintain under the Capital Rules (not including the "capital conservation buffer"). As demonstrated in the table, all of Arrow's and the banks' capital ratios at year-end were well in excess of the minimum required levels for such ratios, as established by the regulators. (See Item 1, Section C, under "Regulatory Capital Standards" and Item 8, Note 19. Derivative Instruments and Hedging Activities to the Consolidated Financial Statements, for information regarding the "capital conservation buffer.") In addition, on December 31, 2025, Arrow Bank qualified as "well-capitalized", the highest capital classification category under the revised capital classification scheme recently established by the federal bank regulators, that was in effect on that date.

Stockholders' Equity at Year-end 2025: Total stockholders' equity was $431.9 million at December 31, 2025, an increase of $31.0 million, or 7.7%, from December 31, 2024. The net increase in total stockholders' equity during 2025 principally reflected the following factors: (i) $44.0 million of net income for the year, (ii) other comprehensive income of $14.4 million and (iii) $1.7 million of equity related to various stock-based compensation plans, reduced by (iv) cash dividends of $18.9 million and (v) repurchases of common stock of $10.2 million.

Trust Preferred Securities: In each of 2003 and 2004, Arrow issued $10 million of trust preferred securities (TRUPs) in a private placement. Under the Federal Reserve Board's regulatory capital rules then in effect, TRUPs proceeds typically qualified as Tier 1 capital for bank holding companies such as Arrow, but only in amounts up to 25% of Tier 1 capital, net of goodwill less any associated deferred tax liability. Under the Dodd-Frank Act, any trust preferred securities that Arrow might issue on or after the grandfathering date set forth in Dodd-Frank (May 19, 2010) would not qualify as Tier 1 capital under bank regulatory capital guidelines. For Arrow, TRUPs outstanding prior to the grandfathering cutoff date set forth in Dodd-Frank (May 19, 2010) would continue to qualify as Tier 1 capital until maturity or redemption, subject to limitations. Thus, Arrow's outstanding TRUPs continue to qualify as Tier 1 regulatory capital, subject to such limitations.

In 2020, Arrow entered into interest rate swap agreements to synthetically fix the variable rate interest payments associated with $20 million in outstanding subordinated trust securities. The effective fixed rate is approximately 3.43% until maturity. These agreements are designated as cash flow hedges.

Dividends: The source of funds for the payment of Arrow's cash dividends to shareholders consists primarily of dividends declared and paid to it by Arrow Bank, NA. In addition to legal and regulatory limitations on payments of dividends by Arrow (i.e., the need to maintain adequate regulatory capital), there are also legal and regulatory limitations applicable to the payment of dividends by a bank subsidiary to its parent bank holding company. As of December 31, 2025, under the statutory limitations in national banking law, the maximum amount that could have been paid by Arrow Bank, NA to Arrow, without special regulatory approval, was approximately $27.7 million. The ability of Arrow and Arrow Bank to pay dividends in the future is and will continue to be influenced by regulatory policies, capital guidelines and applicable laws.

See Part II, Item 5, "Market for the Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities" for a recent history of its cash dividend payments.

Stock Repurchase Program: On April 24, 2024, the Board authorized management, in its discretion, to repurchase from time to time, in the open market or in privately negotiated transactions, up to $5 million of Arrow common stock. In addition, on April 30, 2025, the Board authorized management, in its discretion, to repurchase from time to time, in the open market or in privately negotiated transactions, an additional $5 million of Arrow common stock.

In 2025, Arrow repurchased approximately $9.9 million (approximately 377 thousand shares of its common stock) under this authorization.

On July 23, 2025, the Board increased management's share repurchase authority by another $5 million.

From time to time, Arrow may establish a written trading plan in accordance with Rule 10b5-1 of the Exchange Act, pursuant to which it may repurchase shares of its common stock. Repurchases may be made by Arrow, at times and in amounts as it deems appropriate, and may be made through open market transactions in compliance with Rule 10b-18 of the Exchange Act, subject to market conditions, applicable legal requirements, and other factors.

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In addition, a de minimis portion of Arrow's common stock was purchased during 2025 other than through its repurchase program, i.e., through purchases in the open market under the ESOP and the surrender or deemed surrender of Arrow common stock to Arrow in connection with employees' stock-for-stock exercises of compensatory stock options granted as equity incentives.

F. OFF-BALANCE SHEET ARRANGEMENTS

In the normal course of operations, Arrow may engage in a variety of financial transactions or arrangements, including derivative transactions or arrangements, that in accordance with GAAP are not recorded in the financial statements, or are recorded in amounts that differ from the notional amounts. These transactions or arrangements involve, to varying degrees, elements of credit, interest rate, and liquidity risk. Such transactions or arrangements may be used by Arrow or Arrow's customers for general corporate purposes, such as managing credit, interest rate, or liquidity risk or to optimize capital, or may be used by Arrow or Arrow's customers to manage funding needs. See Note 19. Derivative Instruments and Hedging Activities to the Consolidated Financial Statements for a detailed discussion derivative transactions.

The Company makes contractual commitments to extend credit, which include unused lines of credit, which are subject to the Company’s credit approval and monitoring procedures. At December 31, 2025 and 2024, commitments to extend credit in the form of loans, including unused lines of credit, amounted to $462.9 million and $449.5 million, respectively. In the opinion of management, there are no material commitments to extend credit, including unused lines of credit that represent unusual risks. All commitments to extend credit in the form of loans, including unused lines of credit, expire within one year.

G. RECENTLY ISSUED ACCOUNTING STANDARDS

See Note 2. Summary of Significant Accounting Policies to the Consolidated Financial Statements for a detailed discussion of new accounting pronouncements.

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