ARROW FINANCIAL CORP

Previous wording

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

Current wording

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.

Previous wording

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

Current wording

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.

Previous wording

The vintage and DCF models also consider the need to qualitatively adjust expected loss estimates for information not already captured in the quantitative loss estimation process. Qualitative considerations include limitations inherent in the quantitative model; trends experienced in nonperforming and delinquent loans; changes in value of underlying collateral; changes in lending policies and procedures; nature and composition of loans; portfolio concentrations that may affect loss experience across one or more components or the portfolio; the experience, ability and depth of lending management and staff; Arrow's credit review system; and the effect of external factors such as competition, legal and regulatory requirements. These qualitative factor adjustments may increase or decrease Arrow's estimate of expected credit losses so that the allowance for credit loss is reflective of the estimate of lifetime losses that exist in the loan portfolio at the balance sheet date.

Current wording

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.

Previous wording

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

Excerpt shortened here; the source contains the full paragraph.

Current wording

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.

Previous wording

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, 2024 and the financial condition as of December 31, 2024 and 2023. The discussion below should be read in conjunction with the selected quarterly and annual 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.

Current wording

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

Previous wording

Summary of 2024 Financial Results: Net income for 2024 was $29.7 million, down from $30.1 million for 2023.

Current wording

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

Previous wording

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

Current wording

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.

Previous wording

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

Current wording

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.

Previous wording

Non-interest expense for the year ended December 31, 2024 increased by $4.2 million, or 4.5%, to $97.3 million, as compared to $93.0 million in 2023. The largest component of non-interest expense is salaries and benefits paid to our employees, which totaled $52.7 million in 2024 and increased $5.0 million, or 10.6%, from the prior year. The increase was related to headcount increases to support additional control and compliance initiatives and our growing organization. Salaries and benefits were also impacted by inflation-driven wage increases and rising benefit costs.

Current wording

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.

Previous wording

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

Current wording

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.

Previous wording

Total assets were $4.3 billion at December 31, 2024, an increase of $136.5 million, or 3.3%, compared to December 31, 2023. The increase over the prior year was primarily driven by loan growth.

Current wording

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.

Previous wording

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

Current wording

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.

Previous wording

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

Current wording

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.

Previous wording

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

Current wording

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.

Previous wording

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

Current wording

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.

Previous wording

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

Current wording

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.

Previous wording

Loan quality: Nonperforming loans were $21.0 million at December 31, 2024, a decrease of $0.1 million, or 0.5%, from year-end 2023. The ratio of nonperforming loans to period-end loans at December 31, 2024 was 0.62%, a decrease from 0.66% at December 31, 2023. 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

Current wording

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.

Previous wording

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

Current wording

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.

Previous wording

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

Current wording

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

Previous wording

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

Current wording

◦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.

Previous wording

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

Current wording

◦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.

Previous wording

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

Current wording

◦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.

Previous wording

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

Current wording

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.

Previous wording

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 is expected to create long term operational efficiencies, unify branding and enhance Arrow's ability to pursue its strategic growth objectives.

Current wording

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.

Previous wording

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

Current wording

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.

Previous wording

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

Current wording

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.

Previous wording

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

Current wording

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).

Previous wording

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

Current wording

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.

Previous wording

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

Current wording

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.”

Previous wording

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

Current wording

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.

Previous wording

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

Current wording

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.

Previous wording

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

Current wording

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

Previous wording

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

Current wording

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.

Previous wording

The available-for-sale securities portfolio, held-to-maturity securities portfolio and the equity securities portfolio are further detailed below.

Current wording

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.

Previous wording

In the periods 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.

Current wording

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.

Previous wording

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

Current wording

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.

Previous wording

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, 2024, gross unrealized losses, $36.6 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 period. 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, 2024 and there was no credit loss expense recognized by Arrow with respect to the securities portfolio during the year ended December 31, 2024.

Current wording

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.

Previous wording

At December 31, 2024 and 2023, the weighted average maturity was 4.2 and 3.4 years, respectively, for debt securities in the available-for-sale portfolio.

Current wording

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.

Previous wording

At December 31, 2024 and 2023, the weighted average maturity was 1.1 and 1.5 years, respectively, for the debt securities in the held-to-maturity portfolio.

Current wording

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.

Previous wording

For additional information regarding the fair value of the portfolio of securities held-to-maturity at December 31, 2024, see Note 4, Investment Securities, to the Consolidated Financial Statements.

Current wording

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