Arrow Financial Corp: Form 10-K for the period ended Dec 31, 2025

A. GENERAL

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. As of December 31, 2025 the Company had one wholly-owned banking subsidiary, Arrow Bank National Association. Through Arrow Bank, Arrow indirectly owns various non-bank subsidiaries, including an insurance agency, a registered investment adviser and a REIT. See "The Company and Its Subsidiaries," above.

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. There were 578 full-time equivalent employees, including 40 employees within Arrow's insurance agency subsidiary, at December 31, 2025. See the discussion of our human capital resources in Section G ("HUMAN CAPITAL") of this Item 1.

Arrow offers a broad range of commercial and consumer banking and financial products. The deposit base consists of deposits derived principally from the communities served. The Company targets lending activities to consumers and small- and mid-sized companies in Arrow's regional geographic area. In addition, through an indirect lending program Arrow sources consumer loans from an extensive network of automobile dealers that operate throughout New York and Vermont. Through its trust operations, Arrow Bank provides retirement planning, trust and estate administration services for individuals, and pension, profit-sharing and employee benefit plan administration for corporations.

B. LENDING ACTIVITIES

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. An active indirect lending program is maintained through Arrow Bank's sponsorship of automobile dealer programs under which consumer auto loans, primarily from dealers that meet pre-established specifications are sourced. From time to time, a portion of Arrow Bank's residential real estate loan originations are sold into the secondary market, primarily to the Federal Home Loan Mortgage Corporation ("Freddie Mac") and other governmental agencies. Normally, the Company retains the servicing rights on mortgage loans originated and sold into the secondary markets, subject to periodic determinations on the continuing profitability of such activity. Arrow Bank does not engage in subprime mortgage lending as a business line and does not extend or purchase so-called "Alt A," "negative amortization," "option ARMs" or "negative equity" mortgage loans.

Arrow Bank lends primarily to borrowers within the normal retail service area in upstate New York, with the exception of the indirect consumer lending line of business, where Arrow Bank makes loans through an extensive network of automobile dealers that operate in a larger area of New York and Vermont. The loan portfolio does not include any foreign loans or any other significant risk concentrations. From time to time, Arrow Bank buys and offers participations in individual commercial loans, primarily in upstate New York. The total dollar amount of such participations has fluctuated, but generally represents less than 20% of commercial loans outstanding. The majority of the portfolio is collateralized, and most commercial loans are further supported by personal guarantees.

Generally, Arrow continues to implement lending strategies and policies that are intended to protect the quality of the loan portfolio, including strong underwriting and collateral control procedures and credit review systems. 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. Home equity lines of credit, secured by real property, are systematically placed on nonaccrual status when 120 days past due, and residential real estate loans are placed 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 (See Part II, Item 7.C.II.c. "Risk Elements"). Subsequent cash payments on loans classified as nonaccrual may be applied entirely to principal, although income in some cases may be recognized on a cash basis.

C. SUPERVISION AND REGULATION

The following generally describes the laws and regulations to which Arrow is subject. Bank holding companies, banks and their affiliates are extensively regulated under both federal and state law. To the extent that the following information summarizes statutes or regulations, it is qualified in its entirety by reference to the particular provisions of the various statutes and regulations. Any change in applicable law or regulation may have a material effect on business operations, customers, prospects and investors.

Bank Regulatory Authorities with Jurisdiction over Arrow and Arrow Bank

Arrow is a registered bank holding company within the meaning of the Bank Holding Company Act of 1956 ("BHC Act") and as such is subject to regulation by the Board of Governors of the Federal Reserve System ("FRB"). As a "bank holding company" under New York State law, Arrow is also subject to regulation by the New York State Department of Financial Services. Arrow Bank is a national bank and is subject to supervision and examination by the Office of the Comptroller of the Currency ("OCC"). Arrow Bank is a member of the Federal Reserve System and the deposits of Arrow Bank are insured by the Deposit Insurance Fund of the Federal Deposit Insurance Corporation ("FDIC"). The BHC Act generally prohibits Arrow from engaging, directly or indirectly, in activities other than banking, activities closely related to banking, and certain other financial activities. Under the BHC Act, a bank holding company generally must obtain FRB approval before acquiring, directly or indirectly, voting shares of another bank or bank holding company, if after the acquisition the acquirer would own 5 percent or more of a class of the voting shares of that other bank or bank holding company. Bank holding companies are able to acquire banks or other bank holding companies located in all 50 states, subject to certain limitations. Bank holdings companies that meet certain qualifications may choose to apply to the FRB for designation as “financial holding companies.” Upon receipt of such designation, a financial holding company may engage in a broader array of activities, such as insurance underwriting, securities underwriting and merchant banking. Arrow has not attempted to become, and has not been designated as, a financial holding company.

The FRB and the OCC have broad regulatory, examination and enforcement authority. The FRB and the OCC conduct regular examinations of the entities they regulate. In addition, banking organizations are subject to requirements for periodic reporting to the regulatory authorities. The FRB and OCC have the authority to implement various remedies if they determine that the financial condition, capital, asset quality, management, earnings, liquidity or other aspects of a bank holding company or bank's operations are unsatisfactory or if they determine the banking organization is violating or has violated any law or regulation, respectively. The authority of the federal bank regulators over banking organizations includes, but is not limited to, prohibiting unsafe or unsound practices; requiring affirmative action to correct a violation or unsafe or unsound practice; issuing cease-and-desist orders; requiring the organization to increase capital; requiring the organization to sell subsidiaries or other assets; restricting dividends, distributions and repurchases of the organization's stock; restricting the growth of the organization; assessing civil money penalties; removing officers and directors; and terminating deposit insurance. The FDIC may terminate a depository institution's deposit insurance upon a finding that the institution's financial condition is unsafe or unsound or that the institution has engaged in unsafe or unsound practices for certain other reasons.

Regulatory Supervision of Other Arrow Subsidiaries

The insurance agency subsidiary of Arrow Bank is subject to the licensing and other provisions of New York State Insurance Law and is regulated by the New York State Department of Financial Services. Arrow's investment adviser subsidiary is subject to the licensing and other provisions of the federal Investment Advisers Act of 1940 and is regulated by the SEC.

Regulation of Transactions between Banks and their Affiliates

Transactions between banks and their "affiliates" are regulated by Sections 23A and 23B of the Federal Reserve Act (FRA), and its implementing regulation, Regulation W. The term “affiliate” generally includes any company that controls or is under common control with a bank. Therefore, under Section 23A and Regulation W, Arrow and its investment adviser subsidiary are affiliates of Arrow Bank.

Section 23A of the Federal Reserve Act and Regulation W limit the aggregate outstanding amount of any bank’s loans and other “covered transactions” with any particular affiliate to no more than 10% of the institution’s capital stock and surplus, and limits the aggregate outstanding amount of any bank’s covered transactions with all of its affiliates to no more than 20% of its capital stock and surplus. “Covered transactions” are defined by law and regulation to include a loan or extension of credit to an affiliate, as well as a purchase of securities issued by an affiliate, a purchase of assets from the affiliate, the acceptance of securities issued by the affiliate as collateral for a loan, and the issuance of a guarantee, acceptance or letter of credit on behalf of an affiliate. Section 23A of the Federal Reserve Act and Regulation W also generally requires that bank’s loans to its affiliates be, at a minimum, 100% secured. Section 23B of the Federal Reserve Act and Regulation W generally require that a bank’s transactions with its affiliates, including but not limited to “covered transactions,” be on terms and under circumstances that are substantially the same or at least as favorable to the Bank, as those prevailing for comparable transactions with or involving non-affiliates.

Regulatory Capital Standards

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

The capital requirements applicable to Arrow Bank consist of two basic types of capital measures, a leverage ratio and a set of risk-based capital measures.

Leverage Ratio. The applicable capital requirements require a leverage ratio of 4.0%. The leverage ratio is defined as the ratio of the institution's "Tier 1" capital to total tangible assets.

Risk-Based Capital Measures. Current risk-based capital measures assign various risk weightings to all of the institution's assets, by asset type, and to certain off balance sheet items, and then establish minimum levels of capital to the aggregate dollar amount of such risk-weighted assets. Under the risk-based capital requirements, there are eight major risk-weighted categories of assets (although there are several additional super-weighted categories for high-risk assets that are generally not held by community banking organizations like Arrow Bank). The capital requirements include a measure called the "common equity tier 1 capital ratio" (CET1). For this ratio, only common equity (i.e., common stock plus surplus plus retained earnings) qualifies as capital (i.e., CET1). Preferred stock and trust preferred securities, which qualify as Tier 1 capital, are not included in CET1 capital. Under these rules, CET1 capital also includes most elements of accumulated other comprehensive income (AOCI), including unrealized securities gains and losses, as part of both total regulatory capital (numerator) and total assets (denominator). However, smaller banking organizations like Arrow Bank were given the opportunity to make a one-time irrevocable election to include or not to include certain elements of AOCI, most notably unrealized securities gains or losses. Arrow Bank made such an election, and therefore does not include unrealized securities gains and losses in calculating the CET1 ratio under the capital requirements. The minimum CET1 ratio under these requirements is 4.50%.

The capital requirements require a minimum ratio for Tier 1 risk-based capital to be 6.0%, and the minimum level for total risk-based capital under the capital requirements is 8.0%.

The capital requirements also incorporated a so-called "capital conservation buffer" (set at 2.5%), which must be added to each of the minimum required risk-based capital ratios (i.e., the minimum CET1 ratio, the minimum Tier 1 risk-based capital ratio and the minimum total risk-based capital ratio). When, during economic downturns, an institution's capital begins to erode, the first deductions from a regulatory perspective would be taken against the capital conservation buffer. To the extent that such deductions should erode the buffer below the required level, the institution will not necessarily be required to replace the buffer deficit immediately, but will face restrictions on paying dividends and other negative consequences until the buffer is fully replenished.

Also under the applicable capital requirements, including those imposed through Dodd-Frank, TRUPs issued by small- to medium-sized banking organizations (such as Arrow Bank) that were outstanding on the Dodd-Frank grandfathering date for TRUPS (May 19, 2010) will continue to qualify as tier 1 capital, up to a limit of 25% of tier 1 capital, until the TRUPs mature or are redeemed, subject to certain limitations. See the discussion of grandfathered TRUPs in Section E ("CAPITAL RESOURCES AND DIVIDENDS") of Item 7.

The following is a summary of the definitions of capital under the various risk-based measures in the applicable capital requirements:

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

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

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

The following table presents the Capital Rules applicable to Arrow and Arrow Bank:

At December 31, 2025, Arrow and Arrow Bank exceeded, by a substantial amount, each of the applicable minimum capital ratios established under the applicable capital requirements, including the minimum CET1 Ratio, the minimum Tier 1 Risk-Based Capital Ratio, the minimum Total Risk-Based Capital Ratio, and the minimum Leverage Ratio, and including in the case of each risk-based ratio, the capital buffer. See Note 20. Regulatory Matters to the Consolidated Financial Statements for a presentation of Arrow Bank's period-end ratios for 2025 and 2024.

Regulatory Capital Classifications. Under applicable banking law, federal banking regulators are required to take prompt corrective action with respect to depository institutions that do not meet minimum capital requirements. The regulators have established five capital classifications for banking institutions, ranging from the highest category of "well-capitalized" to the lowest category of "critically under-capitalized". Under the applicable law and regulation, a banking institution is considered "well-capitalized" if it meets the following capitalization standards on the date of measurement: a CET1 risk-based capital ratio of 6.50% or greater, a Tier 1 risk-based capital ratio of 8.0% or greater, and a total risk-based capital ratio of 10.0% or greater, and a leverage ratio of 5.0% or greater, provided the institution is not subject to any written agreement, order, capital directive, or prompt corrective action directive regarding capital maintenance.

As of December 31, 2025, Arrow Bank qualified as "well-capitalized" under applicable prompt corrective action provisions.

Dividend Restrictions; Other Regulatory Sanctions

A holding company's ability to pay dividends or repurchase its outstanding stock, as well as its ability to expand its business, including for example, through acquisitions of additional banking organizations or permitted non-bank companies, may be restricted if its capital falls below minimum regulatory capital ratios or fails to meet other informal capital guidelines that the regulators may apply from time to time to specific banking organizations. In addition to these potential regulatory limitations on payment of dividends, Arrow's ability to pay dividends to shareholders, and Arrow Bank's ability to pay dividends to Arrow are also subject to various restrictions under applicable corporate laws, including banking laws (which affect Arrow Bank) and the New York Business Corporation Law (which affects Arrow). The ability of Arrow and Arrow Bank to pay dividends or repurchase shares in the future is, and is expected to continue to be, influenced by regulatory policies, the capital requirements and other applicable law.

In cases where banking regulators have significant concerns regarding the financial condition, assets or operations of a bank holding company and/or one of its banks, the regulators may take enforcement action or impose enforcement orders, formal or informal, against the holding company or the particular bank. If the ratio of tangible equity to total assets of a bank falls to 2% or below, a bank can be closed and placed in receivership, with the FDIC as receiver.

Privacy and Confidentiality Laws

Arrow and its subsidiaries are subject to a variety of laws that regulate customer privacy and confidentiality. The Gramm-Leach-Bliley Act requires financial institutions to adopt privacy policies, to restrict the sharing of nonpublic customer information with nonaffiliated parties upon the request of the customer, and to implement data security measures to protect customer information. Certain state laws may impose additional privacy and confidentiality restrictions. The Fair Credit Reporting Act, as amended by the Fair and Accurate Credit Transactions Act of 2003, regulates use of credit reports, providing of information to credit reporting agencies and sharing of customer information with affiliates, and sets identity theft prevention standards.

The Bank Secrecy Act and the USA PATRIOT ACT

The Bank Secrecy Act (“BSA”) and the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (“USA PATRIOT Act”), as well as the implementing regulations of the U.S. Treasury Department’s Financial Crimes Enforcement Network (“FinCEN”) and the OCC, require Arrow Bank to implement a compliance program to detect and prevent money laundering, terrorist financing, and illicit financial activities by domestic and international customers. Together, the BSA and USA PATRIOT Act require the Bank to implement internal controls, identify and verify customers, conduct customer due diligence and enhanced due diligence for certain account relationships, identify and verify the identity of beneficial owners of customers that are legal entities, maintain records, and file reports regarding suspicious transactions, among other things. The OCC routinely examines Arrow Bank for compliance with these obligations.

The USA PATRIOT Act also required the federal banking agencies to take into consideration the effectiveness of controls designed to combat money laundering activities in determining whether to approve applications, including applications to engage in a merger or other acquisition. Accordingly, if the Bank engages in certain transactions, including a merger or other acquisition, its controls designed to combat money laundering would be considered as part of the application process.

Arrow Bank has established procedures for compliance with these requirements. Compliance with the provisions of the BSA, the USA PATRIOT Act, and other anti-money laundering laws and regulations results in substantial costs on all financial institutions.

Sanctions

The U.S. Department of the Treasury's Office of Foreign Assets Control (“OFAC”) is responsible for helping to insure that United States persons, including banks, do not engage in transactions with certain sanctioned individuals, entities, organizations, and jurisdictions, as defined by various regulations, Executive Orders and Acts of Congress. OFAC publishes lists of persons, entities, organizations, and countries suspected of aiding, harboring or engaging in terrorist acts or engaging in other sanctioned or prohibited activities, including, but not limited to, the List of Specially Designated Nationals and Blocked Persons. If Arrow Bank finds the name or involvement of any sanctioned person, entity, organization, or jurisdiction on or related to any transaction, account or wire transfer, Arrow Bank must freeze or block such account or transaction, file reports with OFAC, notify the appropriate authorities and maintain appropriate records, among other requirements.

Community Reinvestment Act

Arrow Bank is subject to the Community Reinvestment Act ("CRA") and implementing regulations. CRA regulations establish the framework and criteria by which the bank regulatory agencies assess an institution's record of helping to meet the credit needs of its community, including low and moderate-income individuals. CRA ratings are taken into account by regulators in reviewing certain applications made by Arrow and Arrow Bank. The Bank’s most current CRA rating was “Satisfactory.”

The Dodd-Frank Act

Dodd-Frank significantly changed the regulatory structure for financial institutions and their holding companies, for example, through imposing additional capital requirements. Among other provisions, Dodd-Frank implemented corporate governance revisions that apply to all public companies, not just financial institutions, permanently increased the FDIC’s standard maximum deposit insurance amount to $250,000, changed the FDIC insurance assessment base to assets rather than deposits and increased the reserve ratio for the deposit insurance fund to ensure the future strength of the fund. The federal prohibition on the payment of interest on certain demand deposits was repealed, thereby permitting depository institutions to pay interest on business transaction accounts. Dodd-Frank established a new federal agency, the Consumer Financial Protection Bureau (the “CFPB”), centralizing significant aspects of consumer financial protection under this agency. Limits were imposed for debit card interchange fees for issuers that have assets greater than $10 billion, which also could affect the amount of interchange fees collected by financial institutions with less than $10 billion in assets. Dodd-Frank also imposed new requirements related to mortgage lending, including prohibitions against payment of steering incentives and provisions relating to underwriting standards, disclosures, appraisals and escrows. The Volcker Rule prohibited banks and their affiliates from engaging in proprietary trading and investing in certain unregistered investment companies.

Federal banking regulators and other agencies including, among others, the FRB, the OCC and the CFPB, have been engaged in extensive rule-making efforts under Dodd-Frank, as explained above.

Incentive Compensation

The federal banking agencies have released comprehensive final guidance on incentive compensation policies intended to ensure that the incentive compensation policies of banking organizations do not undermine the safety and soundness of such organizations by encouraging excessive risk-taking. The guidance, which covers all employees that have the ability to materially affect the risk profile of an organization, either individually or as part of a group, is based upon three core principles; (i) balanced risk-taking incentives; (ii) effective internal controls and risk management compatibility, and (iii) strong corporate governance. Management believes the current and past compensation practices of Arrow and Arrow Bank do not encourage excessive risk taking or undermine the safety and soundness of the organization. The federal bank regulators issued proposed rules to address incentive-based compensation arrangements in 2016. In May 2024, several federal banking agencies sought to re-propose the incentive compensation regulation, but some of the agencies did not adopt the proposal; in 2025, the FDIC withdrew its authorization for the proposal.

The FRB will review, as part of the regular, risk-focused examination process, the incentive compensation arrangements of banking organizations, such as Arrow, that are not “large, complex banking organizations.” These reviews will be tailored to each organization based on the scope and complexity of the organization’s activities and the prevalence of incentive compensation arrangements. The findings of the supervisory initiatives will be included in reports of examination. Deficiencies will be incorporated into the organization’s supervisory ratings, which can affect the organization’s ability to make acquisitions and take other actions. Enforcement actions may be taken against a banking organization if its incentive compensation arrangements, or related risk-management control or governance processes, pose a risk to the organization’s safety and soundness and the organization is not taking prompt and effective measures to correct the deficiencies.

Deposit Insurance Laws and Regulations

The Dodd-Frank Act established the minimum required Deposit Insurance Fund Reserve Ratio of 1.35% by September 30, 2028. In response to updated analysis and projections for the fund balance and the Deposit Insurance Fund Reserve Ratio, the FDIC adopted a final rule in October 2022 increasing the initial base deposit insurance assessment rate schedules by two percent effective January 1, 2023 and beginning on the first quarterly assessment period of 2023. The increase is intended to ensure that the reserve ratio meets the minimum ratio of 1.35% by the September 30, 2028 statutory deadline. Arrow is unable to predict whether or to what extent the FDIC may elect to impose additional special assessments on insured institutions in upcoming years, especially in light of high-profile regional bank failures such as those that occurred in 2023.

Reserve Requirements

Pursuant to regulations of the FRB, all banking organizations are required to maintain average daily reserves at mandated ratios against their transaction accounts and certain other types of deposit accounts. These reserves must be maintained in the form of vault cash or in an account at a Federal Reserve Bank. In March 2020, the Federal Reserve Board reduced reserve requirement ratios to zero percent to free up liquidity in the banking industry to support lending to households and businesses.

D. LEGISLATIVE DEVELOPMENTS

From time to time, various legislative and regulatory initiatives are introduced in Congress, state legislatures, and by regulatory authorities. These initiatives may include proposals to expand or contract the powers of bank holding companies and depository institutions or proposals to change the financial institution regulatory environment. Such proposals could change banking laws and regulations and the operating environment of Arrow and Arrow Bank in substantial, but unpredictable ways. Arrow cannot predict whether any such legislation or regulations will be enacted, and, if enacted, the effect that they would have on Arrow or Arrow Bank's financial condition or results of operations.

E. STATISTICAL DISCLOSURE – (Regulation S-K, Subpart 1400)

Set forth below is an index identifying the location in this Report of various items of statistical information required to be included in this Report by the SEC’s industry guide for Bank Holding Companies.

F. COMPETITION

Arrow faces intense competition in all markets served. Competitors include traditional local commercial banks, savings banks and credit unions, non-traditional internet-based lending alternatives, as well as local offices of major regional and money center banks. Like all banks, Arrow Bank encounters strong competition in the mortgage lending space from a wide variety of other mortgage originators, all of whom are principally affected in this business by the rate and terms set, and the lending practices established from time-to-time by the very large government sponsored enterprises ("GSEs") engaged in residential mortgage lending, most importantly, “Fannie Mae” and “Freddie Mac.” For many years, these GSEs have purchased and/or guaranteed a very substantial percentage of all newly-originated mortgage loans in the U.S. Additionally, non-banking financial organizations, such as consumer finance companies, insurance companies, securities firms, money market funds, mutual funds, credit card companies and wealth management enterprises offer substantive equivalents of the various other types of loan and financial products and services and transactional accounts that are offered, even though these non-banking organizations are not subject to the same regulatory restrictions and capital requirements that apply to Arrow. Under federal banking laws, such non-banking financial organizations not only may offer products and services comparable to those offered by commercial banks, but also may establish or acquire their own commercial banks.

G. HUMAN CAPITAL

Arrow has prioritized investment in the well-being, performance, engagement and development of its employees. This includes, but is not limited to, providing access to well-being resources and assistance, offering competitive compensation and benefits to attract and retain top-level talent, empowering team members to take an active role in the formation and execution of the business strategy, and fostering a diverse and inclusive work environment that reflects the many values of the communities that Arrow serves. One example is through Arrow University, through which we are investing in our people by bringing employee learning and development to the forefront. At December 31, 2025, Arrow had 578 full-time equivalent employees.

H. SOCIAL RESPONSIBILITY AND GOVERNANCE

Arrow Financial Corporation remains committed to responsible business practices that create long-term value for our shareholders, customers, employees and communities. Arrow believes these practices are critical to attracting and retaining the best talent, meeting the evolving needs of its customers and being good stewards of its communities.

Arrow integrates corporate responsibility into our operations by fostering a strong governance framework, supporting community engagement and maintaining sound risk management practices.

Community Commitment

Arrow remains dedicated to strengthening the financial well-being of the communities we serve. One of the strongest ways we care for our communities is through our charitable contributions, partnerships and volunteerism. Since 2019, Arrow and our team members have donated more than $4 million to non-profit organizations in our service area. We also engage in community development efforts through measurable and impactful employee volunteerism, financial literacy initiatives and strategic partnerships with local organizations to meet the financial needs of the low- to moderate-income population. To further assist our communities, we have a lending program to facilitate first-time home ownership.

Environmental Considerations

We seek to operate efficiently and responsibly, incorporating sustainability measures and complying with environmental regulations. This includes investments in energy-efficient infrastructure throughout our footprint and providing and encouraging the use of digital banking solutions that reduce environmental impact.

Governance and Risk Management

Arrow maintains a strong corporate governance framework with independent board oversight, sound risk management and a commitment to data security and privacy. We adhere to rigorous compliance standards and proudly maintain a culture of accountability and ethical business practices.

I. EXECUTIVE OFFICERS OF THE REGISTRANT

The names and ages of the executive officers of Arrow and positions held by each are presented in the following table:

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J. AVAILABLE INFORMATION

Arrow's Internet address is www.arrowfinancial.com (http://www.arrowfinancial.com). Information available on our website is not part of, and is not incorporated into, this Annual Report on Form 10-K. The Company makes available, free of charge, on or through Arrow's website, the Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to those reports as soon as practicable after they are filed or furnished with the SEC pursuant to the Exchange Act. We intend to use our website to disclose material non-public information and various other documents related to corporate operations, the charters of principal board committees, and codes of ethics and to comply with our disclosure obligations under Regulation FD. Accordingly, investors should monitor our website, in addition to following and reviewing our news releases, filings with the SEC and other presentations. The Company has adopted a financial code of ethics that applies to Arrow’s chief executive officer, chief financial officer and principal accounting officer and a business code of ethics that applies to all directors, officers and employees of Arrow and its subsidiaries. Both of these can be found at: https://www.arrowfinancial.com/Corporate/Governance.

Arrow's financial results and the market price of its stock are subject to risks arising from many factors, including the risks listed below, as well as other risks and uncertainties. Any of these risks could materially and adversely affect Arrow's business, financial condition or results of operations. Please note that the discussion below regarding the potential impact on Arrow of certain of these factors that may develop in the future is not meant to provide predictions by Arrow's management that such factors will develop, but to acknowledge the possible negative consequences to the Company and business if certain conditions materialize.

MACROECONOMIC AND INDUSTRY RISKS

Arrow remains subject to inflationary risk which could adversely impact our business and our customers. Beginning in the first half of 2022, the FRB steadily increased in benchmark interest rates in response to signs of growing inflation. Although the FRB cut certain benchmark interest rates twice in the second half of 2024 and again in 2025, the inflationary outlook remains uncertain. Should interest rates rise, the value of our investment securities, particularly those with longer maturities, would likely decrease (although this effect may be mitigated for floating rate instruments). Further, continued inflation increases the cost of operational expenses which increases our noninterest expenses. Additionally, our customers may be affected by inflation, which could have a negative impact on their ability to repay loans. Finally, a higher inflationary environment may discourage our customers from pursuing new loans.

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. Arrow's business is highly dependent on the business environment in the markets in which the Company operates as well as the United States as a whole. Arrow's business is dependent upon the financial stability of the Company's borrowers, including their ability to pay interest on and repay the principal amount of outstanding loans, the value of the collateral securing those loans, and the overall demand for loans and other products and services, all of which impact Arrow's stability and future growth. If unpredictable or unfavorable economic conditions unique to the market area should occur in upcoming periods, these conditions will likely have an adverse effect on the quality of the loan portfolio and financial performance. Arrow is less able than larger regional competitors to spread the risk of unfavorable local economic conditions over a larger market area. Further, if the overall U.S. economy deteriorates, then Arrow's business, results of operations, financial condition and prospects could be adversely affected. In particular, financial performance may be adversely affected by short-term and long-term interest rates, the prevailing yield curve, inflation, monetary supply, fluctuations in the debt and equity capital markets, and the strength of the domestic economy and the local economies in the markets in which Arrow operates, all of which are beyond Arrow's control.

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. Revenues from trust and wealth management business are dependent on the level of assets under management. Any significant downturn in the equity markets may lead Arrow's trust and wealth management customers to liquidate their investments, or may diminish account values for those customers who elect to leave their portfolios with Arrow, in either case reducing assets under management and thereby decreasing revenues from this important sector of the business. Other fee-based businesses are also susceptible to a sudden economic or financial downturn.

Moreover, weak or worsening economic conditions often lead to difficulties in other areas of its business, including growth of its business generally, thereby compounding the negative effects on earnings.

Arrow operates in a highly competitive industry and market areas that could negatively affect growth and profitability. Competition for commercial banking and other financial services is fierce in Arrow's market areas. In one or more aspects of business, Arrow Bank competes with other commercial banks, savings and loan associations, credit unions, finance companies, Internet-based financial services companies, mutual funds, insurance companies, brokerage and investment banking companies, and other financial intermediaries. Additionally, due to their size and other factors, many competitors may be able to achieve economies of scale and, as a result, may offer a broader range of products and services, as well as better pricing for those products and services, than Arrow and its subsidiaries can. Technology has lowered barriers to entry and made it possible for non-banks to offer products and services traditionally provided by banks, such as automatic transfer and automatic payment systems. In addition, many of Arrow's competitors are not subject to the same extensive federal regulations that govern bank holding companies and federally insured banks. Failure by Arrow to offer competitive services in Arrow's market areas could significantly weaken Arrow's market position, adversely affecting growth, which, in turn, could have a material adverse effect on Arrow's financial condition and results of operations.

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. Technological advances and changes in the financial services industry are pervasive and constant. The retail financial services sector, like many other retail goods and services sectors, is constantly evolving, involving new delivery and communications systems and technologies that are extraordinarily far-reaching and impactful. For Arrow to remain competitive, Arrow must adapt to these systems and technologies. Proper implementation of new technologies can increase efficiency, decrease costs and help to meet customer demand. However, many competitors have greater resources to invest in technological advances and changes. Arrow may not always be successful in utilizing the latest technological advances in offering its products and services or in otherwise conducting its business. Failure to identify, consider, adapt to and implement technological advances and changes could have a material adverse effect on business.

In particular the use or implementation of artificial intelligence (AI) applications and generative AI technologies are a recent example of an emerging technology providing significant value to operations and service that also present additional risks for consideration. AI models may rely on complex algorithms and vast datasets. Errors, biases, or generating false information in these models, or unexpected system failures, could lead to flawed decisions, financial losses, compliance failures, or degraded customer experiences, impacting profitability and client retention. AI systems also may process sensitive customer data, and security breaches or unauthorized access to these systems could result in data theft, loss of intellectual property, and significant penalties and damages to customer trust. In addition to risks associated with direct adoption of AI applications by us, we face the risk of associates utilizing unauthorized publicly sourced AI tools to complete business functions. Unauthorized use of AI tools could lead to the unintended exposure of confidential data, use of inaccurate results, and a number of other risks. Additionally, third-party service providers are quickly embedding AI capabilities in their technology to provide more robust and efficient services. Some embedded AI capabilities could risk the exposure of confidential company data if being used in a multi-tenant environment or being used to train AI systems. Arrow is still evaluating the potential threats and uses of this technology.

Problems encountered by other financial institutions could adversely affect Arrow. Arrow Bank's ability to engage in routine funding transactions could be adversely affected by financial or commercial problems confronting other financial institutions. Financial services institutions are interrelated as a result of trading, clearing, counterparty and other relationships. Arrow has exposure to many different counterparties in the normal course of business, and routinely executes transactions with counterparties in the financial services industry, including brokers and dealers, other commercial banks, investment banks, mutual and hedge funds, and other financial institutions. As a result, defaults by, or even rumors or questions about, one or more financial services institutions, or the financial services industry generally, could lead to market-wide liquidity problems and losses or defaults by Arrow Bank or by other financial institutions on whom Arrow Bank relies or with whom Arrow Bank interacts. Some of these transactions expose Arrow Bank to credit and other potential risks in the event of default of Arrow Bank's counterparty or client. In addition, credit risk may be exacerbated when the collateral held by Arrow Bank cannot be liquidated or only may be liquidated at prices not sufficient to recover the full amount due Arrow under the underlying financial instrument held by Arrow. There is no assurance that any such losses would not materially and adversely affect the results of operations of 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. Financial institutions have been, and continue to be, targets of terrorist threats aimed at compromising operating and communication systems. Such events could cause significant damage, impact the stability of our facilities and result in additional expenses, impair the ability of our borrowers to repay their loans, reduce the value of collateral securing repayment of our loans, and result in the loss of revenue. Arrow Bank may also be affected by severe weather events or public health emergencies. While we have established and regularly test disaster recovery procedures, the occurrence of any such event could have a material adverse effect on our business, operations and financial condition. Additionally, financial markets may be adversely affected by the actual or anticipated impact of military conflict, terrorism or other geopolitical events, including trade disputes.

RISKS RELATED TO MERGER WITH ADIRONDACK

The market price of Arrow’s common stock may decline as a result of the Merger. The market price of Arrow’s common stock may decline as a result of the Merger if Arrow does not achieve the perceived benefits of the Merger or the effect of the Merger on Arrow’s financial results is not consistent with the expectations of financial or industry analysts.

In addition, the consummation of the Merger will result in the combination of two companies that currently operate as independent companies. While Arrow expects to benefit from certain synergies following the Merger, Arrow may also encounter new risks and liabilities associated with these differences. Following the Merger, shareholders of Arrow and Adirondack will own interests in a combined company operating an expanded business and may not wish to continue to invest in Arrow, or for other reasons may wish to dispose of some or all of Arrow’s common stock. If, following the effective time of the Merger, large amounts of Arrow’s common stock are sold, the price of Arrow’s common stock could decline.

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 benefits and synergies expected to result from the proposed Merger will depend in part on whether the operations of Adirondack can be integrated in a timely and efficient manner with those of Arrow. Arrow will face challenges and costs in consolidating its functions with those of Adirondack, and integrating the organizations, procedures and operations of the two businesses. The integration of Arrow and Adirondack will be complex and time-consuming, and the management of both companies will have to dedicate substantial time and resources to it. Failure to successfully integrate the operations of Arrow and Adirondack could result in the failure to achieve some of the anticipated benefits from the transaction, including cost savings and other operating efficiencies.

The Agreement may be terminated in accordance with its terms and the Merger may not be completed. The Agreement is subject to a number of conditions which must be fulfilled in order to complete the Merger. Those conditions include, among other things: (i) approval of the Agreement by the requisite vote of the shareholders of Adirondack (ii) authorization for listing on Nasdaq of the shares of Arrow’s common stock to be issued in the Merger, (iii) receipt of required regulatory approvals, including the approval of the Federal Reserve Board, the OCC and the New York State Department of Financial Services, without the imposition of any condition or restriction that would be reasonably expected to have a material adverse effect on the continuing corporation and its subsidiaries, taken as a whole, after giving effect to the Merger and the Bank Merger, (iv) effectiveness of the registration statement on Form S-4 for Arrow’s common stock to be issued in the Merger, and (v) the absence of any order, injunction, decree or other legal restraint preventing the completion of the Merger, the Bank Merger or any of the other transactions contemplated by the Merger agreement or making the completion of the Merger, the Bank Merger or any of the other transactions contemplated by the Merger agreement illegal. Each party’s obligation to complete the Merger is also subject to certain additional customary conditions, including (a) subject to certain exceptions, the accuracy of the representations and warranties of the other party, (b) performance in all material respects by the other party of its obligations under the Merger agreement, and (c) receipt by such party of an opinion from its counsel to the effect that the Merger will qualify as a “reorganization” within the meaning of Section 368(a) of the Internal Revenue Code of 1986, as amended. In addition, Arrow’s obligation to complete the Merger is also subject to holders of fewer than 5% of the outstanding shares of Adirondack’s common stock perfecting their appraisal rights under appliable New York law.

These conditions to the closing may not be fulfilled in a timely manner or at all, and, accordingly, the Merger may not be completed. In addition, the parties can mutually decide to terminate the Merger agreement at any time, before or after the requisite vote of the shareholders of Adirondack or Arrow, Arrow Merger Sub, Inc., or Adirondack Inc. may elect to terminate the Merger agreement in certain other circumstances.

Additionally, Arrow has incurred and will incur substantial expenses in connection with the negotiation and completion of the transactions contemplated by the Merger agreement, as well as the costs and expenses of preparing, filing, printing and mailing of a joint proxy statement/prospectus in connection with the Merger, and all filing and other fees paid in connection with the Merger. If the Merger is not completed, Arrow would have to pay these expenses without realizing the expected benefits of the Merger.

OPERATIONAL RISKS

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. In the ordinary course of business, Arrow relies on electronic communications and information systems to conduct its operations and to store sensitive data. Arrow employs an in-depth, layered, defensive approach that leverages people, processes and technology to manage and maintain cybersecurity controls. Arrow employs a variety of preventative and detective tools to monitor, block, and provide alerts regarding suspicious activity, as well as to report on any suspected advanced persistent threats. Arrow has implemented and regularly reviews and updates extensive systems of internal controls and procedures as well as corporate governance policies and procedures intended to protect its business operations, including the security and privacy of all confidential customer information. In addition, Arrow relies on the services of a variety of vendors to meet data processing and communication needs. No matter how well designed or implemented its controls are, Arrow cannot provide an absolute guarantee to protect its business operations from every type of cybersecurity or other security problem in every situation, whether as a result of systems failures, human error or negligence, cyberattacks, security breaches, fraud or misappropriation. Any failure or circumvention of these controls could have a material adverse effect on Arrow's business operations and financial condition. Notwithstanding the strength of defensive measures, the threat from cyberattacks is severe, attacks are sophisticated and increasing in volume, and attackers respond rapidly to changes in defensive measures.

While to date, Arrow has not experienced a significant compromise, significant data loss or any material financial losses related to cybersecurity attacks or other security problems, Arrow's systems and those of its customers and third-party service providers are under constant threat. Risks and exposures related to cybersecurity attacks or other security problems are expected to remain high for the foreseeable future due to the rapidly evolving nature and sophistication of these threats and issues, as well as due to the expanding use of Internet banking, mobile banking and other technology-based products and services by Arrow and customers.

The computer systems and network infrastructure that Arrow uses are always vulnerable to unforeseen disruptions, including theft of confidential customer information (“identity theft”) and interruption of service as a result of fire, natural disasters, explosion, general infrastructure failure, cyberattacks or other security problems. These disruptions may arise in Arrow's internally developed systems, or the systems of our third-party service providers or may originate from the actions of our consumer and business customers who access our systems from their own networks or digital devices to process transactions. Information security and cybersecurity risks have increased significantly in recent years because of consumer demand to use the Internet and other electronic delivery channels to conduct financial transactions. Cybersecurity risk and other security problems are a major concern to financial services regulators and all financial service providers, including Arrow. These risks are further exacerbated due to the increased sophistication and activities of organized crime, hackers, terrorists and other disreputable parties. Arrow regularly assesses and tests security systems and disaster preparedness, including back-up systems, but the risks are substantially escalating. As a result, cybersecurity and the continued enhancement of Arrow's controls and processes to protect its systems, data and networks from attacks or unauthorized access remain a priority. Accordingly, Arrow may be required to expend additional resources to enhance its protective measures or to investigate and remediate any information security vulnerabilities or exposures. Any breach of Arrow's system security could result in disruption of its operations, unauthorized access to confidential customer information, significant regulatory costs, litigation exposure and other possible damages, loss or liability. Such costs or losses could exceed the amount of available insurance coverage, if any, and would adversely affect Arrow's earnings. Also, any failure to prevent a security breach or to quickly and effectively deal with such a breach could negatively impact customer confidence, damaging Arrow's reputation and undermining its ability to attract and keep customers. In addition, if Arrow fails to observe any of the cybersecurity requirements in federal or state laws, regulations or regulatory guidance, Arrow could be subject to various sanctions, including financial penalties. For additional information on Arrow’s cybersecurity protocols and the management and oversight thereof, please see Item 1C. Cybersecurity, below.

Arrow Bank is subject to risks and losses resulting from fraudulent activities that could adversely impact its financial performance and results of operations. As a bank, we are susceptible to fraudulent activity that may be committed against us or our clients, which may result in financial losses or increased costs to us or our clients, disclosure or misuse of our information or our client information, misappropriation of assets, privacy breaches against our clients, litigation or damage to our reputation. Arrow Bank is most subject to fraud and compliance risk in connection with the origination of loans, ACH transactions, wire transactions, ATM transactions, checking transactions, and debit cards that we have issued to customers and through online banking portals.

Business could suffer if Arrow loses key personnel unexpectedly. Arrow's success depends, in large part, on Arrow's ability to retain key personnel for the duration of their expected terms of service. On an ongoing basis, Arrow prepares and reviews back-up plans, in the event key personnel are unexpectedly rendered incapable of performing or depart or resign from their positions. However, any sudden unexpected change at the senior management level may adversely affect business.

FINANCIAL RISKS

Arrow is subject to interest rate risk, which could adversely affect profitability. Profitability depends to a large extent on Arrow's net interest income, which is the difference between interest income on interest-earning assets, such as loans and investment securities, and interest expense on interest-bearing liabilities, such as deposits and borrowings. Changes in monetary policy, including changes in interest rates, could influence not only the interest received on loans and securities and the amount of interest paid on deposits and borrowings, but also (i) Arrow's ability to originate loans and obtain deposits, (ii) the fair value of financial assets and liabilities, and (iii) the average duration of mortgage-backed securities portfolio. If the interest rates Arrow pays on deposits and other borrowings increase at a faster rate than the interest rates received on loans, securities and other interest-earning investments, net interest income, and therefore earnings, could be adversely affected. Earnings could also be adversely affected if the interest rates received on loans and other investments fall more quickly than the interest rates paid on deposits and other borrowings. Changes in interest rates, whether they are increases or decreases, can also trigger repricing and changes in the pace of payments for both assets and liabilities.

Arrow Bank's allowance for expected credit losses may be insufficient, and an increase in the allowance would reduce earnings. Arrow Bank's loan quality is affected by the condition of the economy. Like other financial institutions, Arrow Bank maintains an allowance for credit losses to provide for expected credit losses at the balance sheet date. While Arrow Bank has continued to enjoy a very high level of quality in its loan portfolio generally and very low levels of loan charge-offs and non-performing loans, if the economy in Arrow Bank's geographic market area should deteriorate to the point that recessionary conditions return, or if the regional or national economy experiences a protracted period of stagnation, the quality of our loan portfolio may weaken so significantly that its allowance for loan losses may not be adequate to cover actual or expected loan losses. In such events, Arrow Bank may be required to increase its provisions for credit losses and this could materially and adversely affect financial results. The allowance for credit losses is established through a provision for credit losses based on management’s evaluation of the risks inherent in the loan portfolio and the general economy. The allowance for credit losses is based upon a number of factors, including the size of the loan portfolio, asset classifications, economic trends, industry experience and trends, industry and geographic concentrations, estimated collateral values, management’s assessment of the credit risk inherent in the portfolio, historical loss experience and loan underwriting policies. In addition, Arrow Bank evaluates all loans identified as problem loans and augments the allowance based upon an estimation of the potential loss associated with those problem loans. Additions to the allowance for credit losses decrease net income through provisions for credit losses. Arrow Bank's regulators, in reviewing the loan portfolio as part of a regulatory examination, may from time to time require Arrow Bank to increase the allowance for credit losses, thereby negatively affecting earnings, financial condition and capital ratios at that time. Moreover, additions to the allowance may be necessary based on changes in economic and real estate market conditions, new information regarding existing loans and leases, identification of additional problem loans and other factors, both within and outside of Arrow's control. Additions to the allowance could have a negative impact on Arrow Bank's results of operations, which would impact the Company's results of operations.

The increasing complexity of Arrow's operations presents varied risks that could affect earnings and financial condition. Arrow processes a large volume of transactions on a daily basis and is exposed to numerous types of risks related to internal processes, people and systems. These risks include, but are not limited to, the risk of fraud by persons inside or outside the Company, the execution of unauthorized transactions by employees, errors relating to transaction processing and systems, breaches of data security, human error or negligence, and Arrow's internal control system and compliance with a complex array of consumer protection and safety and soundness regulations. Arrow could also experience additional loss as a result of potential legal actions that could arise as a result of operational deficiencies or as a result of noncompliance with applicable laws and regulations.

Arrow’s financial condition and the results of its operations could be negatively impacted by changes in its liquidity position. Arrow’s liquidity can be significantly and negatively impacted by factors outside the Company’s control, including general disruptions in the financial markets, governmental fiscal and monetary policies, regulatory changes, negative investor perceptions of Arrow’s creditworthiness, unexpected increases in cash or collateral requirements and the consequent inability to monetize available liquidity resources.

As a holding company, Arrow relies on interest, dividends, distributions and other payments from Arrow Bank to fund dividends as well as to satisfy its debt and other obligations. Limitations on the payments that Arrow receives from Arrow Bank could also impact Arrow’s liquidity. A bank holding company is required by law to act as a source of financial and managerial strength for Arrow Bank. As a result, Arrow may be required to commit resources to Arrow Bank, even if doing so is not otherwise in the interests of the Company, its shareholders or its creditors, which could reduce the amount of funds available to meet its obligations.

In addition, Arrow Bank must maintain sufficient funds to respond to the needs of depositors and borrowers. Deposits have traditionally been our primary source of funds for use in lending and investment activities. Arrow Bank also receives funds from loan repayments, investment maturities and income on other interest-earning assets. While we emphasize generating transaction accounts, we cannot guarantee if and when this will occur. Further, the considerable competition for deposits in our market area also has made, and may continue to make, it difficult for us to obtain reasonably priced deposits.

Arrow could recognize losses on securities held in its securities portfolio, particularly if interest rates increase or economic and market conditions deteriorate. Factors beyond Arrow's control can significantly influence and cause potential adverse changes to the fair value of securities in its portfolio. These types of factors include, but are not limited to, rating agency downgrades of the securities, its own analysis of the value of the securities, defaults by the issuers or individual mortgagors with respect to the underlying securities and instability in the credit markets. Any of the foregoing factors, as well as changing economic and market conditions, generally, could cause other-than-temporary impairments, realized or unrealized losses in future periods and declines in other comprehensive income, any of which could have a material adverse effect on the business, financial condition, results of operations and growth prospects.

LOAN PORTFOLIO RISKS

Arrow Bank’s commercial and commercial real estate loans increase its exposure to credit risks. At December 31, 2025, Arrow’s commercial and commercial real estate loans totaled $984 million, or 29% of total loans. We plan to continue to emphasize the origination of these types of loans, which generally expose us to a greater risk of nonpayment and loss than residential real estate or consumer loans because repayment of such loans often depends on the successful business operations and income stream of the borrowers and are generally more sensitive to economic conditions. Additionally, such loans typically involve larger loan balances to single borrowers or groups of related borrowers compared to consumer loans or residential real estate loans, and the collateral securing such loans often cannot be liquidated as easily as residential real estate. A sudden downturn in the economy, or a prolonged downturn for specific industries, could result in borrowers being unable to repay their loans, thus exposing Arrow to increased credit risk.

Arrow Bank’s indirect and consumer lending involves risk elements in addition to normal credit risk. At December 31, 2025, Arrow Bank’s consumer loans totaled $1,076 million, or 33% of total loans. A portion of such lending involves the purchase of consumer automobile installment sales contracts from automobile dealers located throughout New York and Vermont. These loans are for the purchase of new or used automobiles. Arrow Bank serves customers that cover a range of creditworthiness, and the required terms and rates are reflective of those risk profiles. While these loans have higher yields than many of our other loans, such loans involve risk elements in addition to normal credit risk. Additional risk elements associated with indirect lending include the limited personal contact with the borrower as a result of indirect lending through non-bank channels, namely automobile dealers. While indirect automobile loans are secured, such loans are secured by depreciating assets and characterized by loan-to-value ratios that could result in us not recovering the full value of an outstanding loan upon default by the borrower. State and federal laws may further limit our ability to recover outstanding principal balances on such loans. If the losses from our indirect loan portfolio are higher than anticipated, it could have a material adverse effect on Arrow Bank’s financial condition and results of operations.

RISKS RELATED TO OWNING OUR COMMON STOCK

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. Holders of Arrow common stock are only entitled to receive such dividends as our Board of Directors may declare out of funds legally available for such payments. In addition, Arrow is a bank holding company, and its ability to declare and pay dividends is dependent on federal regulatory considerations, including the guidelines of the Federal Reserve regarding capital adequacy and dividends. Although we have historically declared cash dividends on our common stock, we are not required to do so and may reduce or eliminate our common stock dividend in the future. Any change in the level of our dividends or the suspension of the payment thereof could have an adverse effect on the market price of our common stock.

LEGAL, TAX, REGULATORY AND COMPLIANCE RISKS

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. Arrow and Arrow Bank are subject to extensive federal and state banking regulations and supervision. Banking laws and regulations are intended primarily to protect bank depositors’ funds (and indirectly the Federal Deposit Insurance Fund) as well as bank retail customers, who may lack the sophistication to understand or appreciate bank products and services. These laws and regulations generally are not, however, aimed at protecting or enhancing the returns on investment enjoyed by bank shareholders.

Applicable laws and regulations restrict our lending practices, require us to expend substantial additional resources to ensure compliance, and subject Arrow Bank to minimum capital requirements which, in the long run, may serve as a drag on its earnings, growth and ultimately on our dividends and stock price. Regulatory authorities have extensive discretion in their supervisory and enforcement activities, including the imposition of restrictions on our operations, the classification of our assets and determination of the adequacy of the level of our allowance for loan losses. If, as a result of an examination, a federal banking agency were to determine that our financial condition, capital resources, asset quality, earnings prospects, management, liquidity or other aspects of any of our operations had become unsatisfactory, or that we were in violation of any law or regulation, it may take a number of different remedial actions as it deems appropriate. These actions include the power to enjoin “unsafe or unsound” practices, to require affirmative action to correct any conditions resulting from any violation or practice, to issue an administrative order that can be judicially enforced, to direct an increase in our capital, to restrict our growth or merger activity, to assess civil monetary penalties against our officers or directors, to remove officers and directors and, if it is concluded that such conditions cannot be corrected or there is an imminent risk of loss to depositors, to terminate our deposit insurance or to place Arrow Bank into receivership or conservatorship.

Future statutory and regulatory changes, including additional guidance and interpretations of existing rules and requirements, are difficult to predict and could add to the existing regulatory burden imposed on banking organizations like Arrow Bank, resulting in a potential material adverse effect on Arrow's financial condition and results of operations.

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. Capital standards, particularly those adopted as a result of Dodd-Frank, continue to have a significant effect on banks and bank holding companies, including Arrow. The need to maintain more and higher quality capital, as well as greater liquidity, and generally increased regulatory scrutiny with respect to liquidity and capital levels, may at some point limit business activities, including lending, and our ability to expand. It could also result in Arrow being required to take steps to increase regulatory capital and may dilute shareholder value or limit the ability to pay dividends or otherwise return capital to investors through stock repurchases.

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. The Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (the Patriot Act) and the Bank Secrecy Act require financial institutions to develop programs to prevent financial institutions from being used for money laundering and terrorist activities. If such activities are suspected, financial institutions are obligated to file suspicious activity reports with FinCEN. Federal anti-money laundering rules require financial institutions to establish procedures for identifying and verifying the identity of customers seeking to open new financial accounts. Failure to comply with these regulations could result in fines or sanctions, and restrictions on conducting acquisitions or establishing new branches. The policies and procedures Arrow has adopted that are designed to assist in ensuring compliance with these laws and regulations may not be effective in preventing violations of these laws and regulations.

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. CRA, the Equal Credit Opportunity Act, the Fair Housing Act and other fair lending laws and regulations impose nondiscriminatory lending requirements on financial institutions. A successful regulatory challenge to an institution’s performance under the CRA or fair lending laws and regulations could result in a wide variety of sanctions, including the required payment of damages and civil money penalties, injunctive relief, imposition of restrictions on mergers and acquisitions activity and restrictions on expansion. Private parties may also have the ability to challenge an institution’s performance under fair lending laws in private class action litigation. Such actions could have a material adverse effect on Arrow's business, financial condition and results of operations.

Regulatory Supervision

Arrow and its subsidiaries are subject to the provisions in the Gramm-Leach-Bliley Act relating to data security, as well as many federal and state laws, regulations and regulatory interpretations which impose standards and requirements related to cybersecurity.

Cybersecurity Risk Management & Strategy

Arrow has implemented processes designed to oversee and identify risk from cybersecurity breaches. Arrow’s cybersecurity risk management and data security program is an in-depth, layered, defensive approach that leverages people, processes and technology to manage and maintain cybersecurity controls. Arrow employs a variety of preventative and detective tools to monitor, block, and provide alerts regarding suspicious activity, as well as to report on any suspected advanced persistent cybersecurity threats. Our security framework involves processes for detection, identification, protection and response to a cybersecurity incident. Additionally, we are well prepared for recovery in the case of a cybersecurity incident with proper vendor support as well as backups both online and offline. Arrow also regularly assesses and tests its security systems and disaster preparedness, including the adequacy and functionality of its backup systems.

Arrow also regularly reviews and updates its existing internal controls and procedures and corporate governance policies and procedures intended to protect its business operations, which includes the security and privacy of the confidential information of its customers. In addition, Arrow engages a variety of vendors to meet data processing and communication needs, including evaluating our cybersecurity readiness and resilience through ongoing vulnerability assessments and audits. Arrow communicates and works directly with all of our critical information technology ("IT") vendors to resolve issues and install releases. We perform business continuity plan testing on a periodic basis. Additionally, as part of our third-party risk management program, we require specific security standards for third-party providers.

Arrow has not experienced a material effect on the Company’s business strategy, results of operations or financial condition as a result of a significant compromise, significant data loss or any material financial losses related to cybersecurity incidents or other security problems. See Item 1A., Risk Factors, "Operational Risks" above.

Cybersecurity and the continued enhancement of Arrow's controls and processes to protect its systems, data and networks from cybersecurity incidents remain a priority to Arrow.

Governance

Arrow’s senior management regularly considers the impact of cybersecurity risks when developing its business strategy and financial planning. Arrow has various policies and procedures in place to mitigate cybersecurity risks and maintains a layered, defensive program to manage and maintain cybersecurity controls.

Arrow’s Board of Directors, Chief Information Officer, Director of IT and the Enterprise Risk Management (“ERM”) committee at the senior management level all have a role in the cybersecurity risk management program. The Board receives quarterly reports from the ERM committee regarding relevant key risk indicators, which include incident response reporting, information technology and cybersecurity initiatives, and the results of ongoing vulnerability assessments and audits.

The ERM Committee is chaired by the Chief Risk Officer and includes the Chief Information Officer, Director of Information Technology, and Director of Internal Audit. The members of our ERM committee collectively have expertise and insight into cybercrime prevention, social engineering, identity theft, and fraud prevention.

Arrow's main office is at 250 Glen Street, Glens Falls, New York. The building is owned by Arrow Bank National Association and serves as the main office for Arrow and Arrow Bank. Arrow Bank owns 26 branch banking offices, leases 12 branch banking offices, leases two residential loan origination offices and a business development office, all at market rates. Two of the 12 leased locations reflect the long term lease of property upon which Arrow owns buildings. Arrow's insurance agency is co-located in seven bank-owned branches, as well as two leased insurance offices. Arrow also leases a maintenance building and parking lots near the main office in Glens Falls as well as land and additional office space within our footprint to support our business.

In the opinion of management, the physical properties of Arrow and its subsidiaries are suitable and adequate. For more information on Arrow's properties, see Note 2. Summary of Significant Accounting Policies, Note 6. Premises and Equipment, and Note 18. Leases to the Consolidated Financial Statements contained in Part II, Item 8 of this Report.

Arrow, including its subsidiaries, is not currently the subject of any material pending legal proceedings, other than ordinary routine litigation occurring in the normal course of their business. On an ongoing basis, Arrow is often the subject of, or a party to, various legal claims by other parties against Arrow, by Arrow against other parties, or involving Arrow, which arise in the normal course of business. The various pending legal claims against Arrow will not, in the opinion of management based upon consultation with counsel, result in any material liability. Legal expenses incurred in connection with loss contingencies are expensed as incurred.

As announced in the November 5, 2025 Current Report on Form 8-K filed with the SEC, Arrow received preliminary approval of a settlement of the Shareholder Derivative Complaint filed by Stephen Bull as described in various SEC filings over the last 18 months. The Court granted final approval of the settlement on January 22, 2026 and the matter is now closed. There was no material financial impact to results of operations or financial position of Arrow as a result of the settlement.

Quarter Ended 12/31/2025 9/30/2025 6/30/2025 3/31/2025 12/31/2024

Selected Financial Information

Dollars in thousands, except per share amounts

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

Arrow Financial Corporation

Reconciliation of Non-GAAP Financial Information

(Dollars In Thousands, Except Per Share Amounts)

25

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

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 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.

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)

29

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)

30

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.

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):

(Dollars in Thousands)

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.

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.

Equity Securities

34

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.

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 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.

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)

38

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.

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.

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.

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.

General: Arrow's largest component of market risk remains interest rate risk. Arrow is not subject to foreign currency exchange or commodity price risk.

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

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

Interest Rate Risk Exposure Analysis: Economic Value of Equity ("EVE") Analysis. Arrow simulates the impact of interest rate volatility upon EVE using several interest rate scenarios. EVE is the difference between the present value of the expected future cash flows of Arrow's assets and liabilities and the value of any off-balance sheet items, such as derivatives, if applicable.

Traditionally, the fair value of fixed-rate instruments fluctuates inversely with changes in interest rates. Increases in interest rates thus result in decreases in the fair value of interest-earning assets, which could adversely affect Arrow's consolidated results of operations in the event they were to be sold, or, in the case of interest-earning assets classified as available-for-sale, reduce Arrow's consolidated stockholders’ equity, if retained. The changes in the value of assets and liabilities due to fluctuations in interest rates measure the interest rate sensitivity of those assets and liabilities.

In order to measure Arrow's sensitivity to changes in interest rates, EVE is calculated under market interest rates prevailing at a given quarter-end ("Pre-Shock Scenario"), and under various other interest rate scenarios ("Rate Shock Scenarios") representing immediate, permanent, parallel shifts in the term structure of interest rates from the actual term structure observed in the Pre-Shock Scenario, with this shift occurring equally across all points on the yield curve. An increase in the EVE is considered favorable, while a decline is considered unfavorable. The changes in EVE between the Pre-Shock Scenario and various Rate Shock Scenarios due to fluctuations in interest rates reflect the interest rate sensitivity of Arrow's assets, liabilities, and off-balance sheet items that are included in the EVE. Management reports the EVE results to the Board of Directors on a quarterly basis. The report compares Arrow's estimated Pre-Shock Scenario EVE to the estimated EVE calculated under the various Rate Shock Scenarios.

Arrow's valuation model makes various estimates regarding cash flows from principal repayments on loans and deposit decay rates at each level of interest rate change. Arrow's estimates for loan repayment levels are influenced by the recent history of prepayment activity in its loan portfolio, as well as the interest rate composition of the existing portfolio, especially in relation to the existing interest rate environment. Regarding deposit decay rates, Arrow tracks and analyzes the decay rate of its deposits over time, with the assistance of a reputable third-party, and over various interest rate scenarios. Such results are utilized in determining estimates of deposit decay rates in the valuation model. Arrow also generates a series of spot discount rates that are integral to the valuation of the projected monthly cash flows of its assets and liabilities. The valuation model employs discount rates that it considers representative of prevailing market rates of interest with appropriate adjustments it believes are suited to the heterogeneous characteristics of the Company’s various asset and liability portfolios. No matter the care and precision with which the estimates are derived, actual cash flows could differ significantly from Arrow's estimates resulting in significantly different EVE calculations.

The analysis that follows presents, as of December 31, 2025 and 2024, the estimated EVE at both the Pre-Shock Scenario and the -200 Basis Point Rate, -100 Basis Point Rate, +100 Basis Point Rate and +200 Basis Point Rate Shock Scenarios.

(Dollars in thousands)

43

Arrow's Pre-Shock Scenario EVE increased from $592.9 million at December 31, 2024, to $685.0 million at December 31, 2025. The primary factors contributing to the increase in EVE were core deposit growth that occurred during the year, coupled with an increase in the value of the Bank’s loan and investment portfolios.

Arrow's EVE in the +100 Basis Point Rate and +200 Basis Point Rate Shock Scenarios increased from $566.8 million and $534.5 million, respectively, at December 31, 2024, to $693.6 million and $690.7 million, respectively, at December 31, 2025. In the -100 Basis Point Rate and -200 Basis Point Rate Shock Scenarios Arrow;s EVE increased from $606.6 million and $606.3 million, respectively, at December 31, 2024, to $661.2 million and $620.2 million, respectively, at December 31, 2025.

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

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

As of December 31, 2025:

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

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

Evaluation of Disclosure Controls and Procedures

Management, under the supervision and with the participation of the Chief Executive Officer (who is our principal executive officer) and Chief Financial Officer (who is our principal financial officer), evaluated the effectiveness of our disclosure controls and procedures, as defined in Rule 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), as of December 31, 2025.

Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that as of December 31, 2025, our disclosure controls and procedures over financial reporting were effective.

Management’s Report on Internal Control Over Financial Reporting

The Company's management is responsible for establishing and maintaining adequate internal control over financial reporting. As of December 31, 2025, management evaluated the effectiveness of our internal control over financial reporting based on the criteria for effective internal control over financial reporting established by the Committee of Sponsoring Organization of the Treadway Commission (COSO) in Internal Control – Integrated Framework (2013). Based on this evaluation, our management concluded that our internal control over financial reporting was effective as of December 31, 2025. The results of management assessment were reviewed with the Company's Audit and Risk Committee of its Board of Directors. The independent registered public accounting firm that audited the Company’s consolidated financial statements included in this report has issued an attestation report on the Company’s internal control over financial reporting as of December 31, 2025, which is included in Part II, Item 8 of this Report.

Changes in Internal Control Over Financial Reporting

There were no changes in our internal control over financial reporting, as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act, during the quarter ended December 31, 2025 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.