ARROW FINANCIAL CORP

Arrow Financial Corporation operates as a bank holding company within the meaning of the Bank Holding Company Act of 1956, with its business consisting primarily of the ownership, supervision, and control of its wholly-owned banking subsidiary, Arrow Bank National Association, which 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, while also providing retirement planning, trust and estate administration services, and through its insurance subsidiary, selling property and casualty insurance and group health care policies and life insurance. The company faces intense competition in all markets served from traditional local commercial banks, savings banks, credit unions, non-traditional internet-based lending alternatives, and local offices of major regional and money center banks, with Arrow Bank encountering strong competition in the mortgage lending space from a wide variety of other mortgage originators principally affected by the rate and terms set by the very large government sponsored enterprises Fannie Mae and Freddie Mac, and 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 that are offered, even though these non-banking organizations are not subject to the same regulatory restrictions and capital requirements that apply to Arrow.

Arrow's competitive positioning is characterized by its focus on serving consumers and small- to mid-sized companies in its regional geographic area in upstate New York, with the exception of its 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, and while the filing does not name specific primary competitors or provide a quantified market share figure, it notes that Arrow is less able than larger regional competitors to spread the risk of unfavorable local economic conditions over a larger market area and that many competitors may be able to achieve economies of scale and offer a broader range of products and services as well as better pricing due to their size and other factors.

Arrow generates revenue primarily through 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, with the majority of its revenue derived from this source, and it also generates non-interest income from fee-based services including income from fiduciary activities, fees for other services to customers, insurance commissions, net gains or losses on securities transactions, net gains on sales of loans, and other operating income, serving primary customer segments that include consumers and small- to mid-sized businesses in its regional geographic area as well as through an indirect lending program sourcing consumer loans from an extensive network of automobile dealers throughout New York and Vermont.

Arrow's loan portfolio is diversified across four major categories: commercial loans totaling $165,729 thousand ¹ or 5% of total loans, commercial real estate loans totaling $818,259 thousand ² or 24% of total loans, consumer loans totaling $1,076,007 thousand ³ or 31% of total loans, and residential real estate loans totaling $1,393,098 thousand ⁴ or 40% of total loans, with total loans reaching $3,453,093 thousand ⁵ at year-end. The commercial and commercial real estate loans are extended to businesses primarily located in Arrow's regional markets with no commercial real estate loans in major metropolitan areas, and approximately 1% ⁶ of the total loan portfolio is comprised of office related property, retail loans were approximately 2% ⁷ of the total loan portfolio, and hotels and motels were approximately 5% ⁸ of the total loan portfolio. 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, and the vast majority of automobile loans at December 31, 2025 were $1.1 billion ⁹ or 99.6% ¹⁰ of this portfolio segment. Residential real estate loans, including home equity loans, made up 40.3% ¹¹ of the total loan portfolio at year-end, and Arrow has historically sold a portion of residential real estate loan originations into the secondary market, primarily to Freddie Mac and other governmental agencies, normally retaining the servicing rights. The investment portfolio includes available-for-sale securities with a fair value of $495,868 thousand ¹², held-to-maturity securities with a carrying value of $66,975 thousand ¹³, and equity securities at fair value of $5,597 thousand ¹⁴, with the available-for-sale portfolio consisting of U.S. Treasury Securities at $80,563 thousand ¹⁵, U.S. Agency Securities at $24,816 thousand ¹⁶, State and Municipal Obligations at $200 thousand ¹⁷, Mortgage-Backed Securities at $366,681 thousand ¹⁸, and Corporate and Other Debt Securities at $23,608 thousand ¹⁹. The held-to-maturity portfolio consists of State and Municipal Obligations at $62,870 thousand ²⁰ and Mortgage-Backed Securities at $4,105 thousand ²¹. Non-interest income for the year was $32,432 thousand ²², comprised of income from fiduciary activities of $10,304 thousand ²³, fees for other services to customers of $11,098 thousand ²⁴, insurance commissions of $7,666 thousand ²⁵, net gain on securities of $542 thousand ²⁶, net gain on sales of loans of $819 thousand ²⁷, and other operating income of $2,003 thousand ²⁸.

Significant operational developments during the period include the announcement on February 25, 2026 of a merger agreement with Adirondack Bancorp, Inc., the parent company of Adirondack Bank, pursuant to which Adirondack will merge with and into Arrow Merger Sub, Inc., a wholly owned subsidiary of Arrow, with each outstanding share of Adirondack common stock to be converted into 1.8610 ²⁹ shares of Arrow common stock plus $18.72 ³⁰ in cash, and based on the closing stock price of AROW common stock of $34.43 ³¹ as of February 25, 2026, the aggregate implied transaction value was approximately $89.1 million ³², with Adirondack reporting total assets of $942 million ³³, total deposits of $848 million ³⁴, and total loans of $624 million ³⁵ in its unaudited December 31, 2025 financial statements, and closing expected late in the second quarter or early in the third quarter of 2026. On July 23, 2025, the Board increased the available amount for share repurchase by $5 million ³⁶, and as of December 31, 2025, $5,066,228 ³⁷ remained available under the most recent authorization. During 2025, Arrow repurchased approximately $9.9 million ³⁸ (approximately 377 thousand ³⁹ shares of its common stock) under the share repurchase authorization. The Board of Directors declared and Arrow paid a cash dividend of $0.28 ⁴⁰ per share for the first and second quarters of 2025, $0.29 ⁴¹ per share for the third and fourth quarters of 2025, and $0.30 ⁴² per share for the first quarter of 2026. On December 31, 2024, the Company unified its former subsidiary banks, Glens Falls National Bank and Trust Company and Saratoga National Bank and Trust Company, into a single bank holding company headquartered in Glens Falls, New York, with the post-unification banking subsidiary being Arrow Bank National Association. The Company also received preliminary approval of a settlement of the Shareholder Derivative Complaint filed by Stephen Bull, with the Court granting final approval of the settlement on January 22, 2026 and the matter now closed with no material financial impact to results of operations or financial position.

Net income for 2025 was $43,953 thousand ⁴³, up from $29,709 thousand ⁴⁴ for 2024 and $30,075 thousand ⁴⁵ for 2023. Diluted earnings per share was $2.65 ⁴⁶ for 2025, up from $1.77 ⁴⁷ for 2024 and $1.77 ⁴⁸ for 2023. Return on average equity was 10.66% ⁴⁹ for 2025 compared to 7.72% ⁵⁰ for 2024 and 8.29% ⁵¹ for 2023, and return on average assets was 1.00% ⁵² for 2025 compared to 0.70% ⁵³ for 2024 and 0.74% ⁵⁴ for 2023. Net interest income for the year ended December 31, 2025 was $133,164 thousand ⁵⁵, an increase of $21,432 thousand ⁵⁶ or 19.2% ⁵⁷ from $111,732 thousand ⁵⁸ in 2024. Net interest margin was 3.17% ⁵⁹ (3.19% ⁶⁰ on a tax-equivalent basis) for 2025, as compared to 2.72% ⁶¹ (2.74% ⁶² tax-equivalent) for 2024. Total assets were $4,445,862 thousand ⁶³ at December 31, 2025, an increase of $139,514 thousand ⁶⁴ or 3.2% ⁶⁵ compared to December 31, 2024. Total stockholders' equity was $431,852 thousand ⁶⁶ at December 31, 2025, an increase of $30,951 thousand ⁶⁷ or 7.7% ⁶⁸ from December 31, 2024. The provision for credit losses for 2025 was $7,274 thousand ⁶⁹, compared to $5,180 thousand ⁷⁰ in 2024. Non-interest income was $32,432 thousand ⁷¹ for 2025, an increase of $4,358 thousand ⁷² or 15.5% ⁷³ compared to $28,074 thousand ⁷⁴ for 2024. Non-interest expense for 2025 was $102,934 thousand ⁷⁵, an increase of $5,666 thousand ⁷⁶ or 5.8% ⁷⁷ from $97,268 thousand ⁷⁸ in 2024.

A major growth vector is the pending merger with Adirondack Bancorp, Inc., which is expected to close late in the second quarter or early in the third quarter of 2026 following receipt of approvals from regulatory authorities, the approval of Adirondack shareholders, and the satisfaction of other customary closing conditions, with Adirondack operating 19 ⁷⁹ branch locations spanning Oneida, Herkimer, Franklin, Essex and Clinton counties, and a loan production office in Onondaga County, and reporting total assets of $942 million ⁸⁰, total deposits of $848 million ⁸¹, and total loans of $624 million ⁸² in its unaudited December 31, 2025 financial statements, with the aggregate implied transaction value of approximately $89.1 million ⁸³ based on the closing stock price of AROW common stock of $34.43 ⁸⁴ as of February 25, 2026. Another growth vector is the continued emphasis on commercial and commercial real estate lending, with the filing noting that at December 31, 2025, Arrow's commercial and commercial real estate loans totaled $984 million ⁸⁵, or 29% ⁸⁶ of total loans, and the company plans to continue to emphasize the origination of these types of loans, while also maintaining its active indirect lending program through Arrow Bank's sponsorship of automobile dealer programs under which consumer auto loans are sourced from an extensive network of automobile dealers that operate throughout New York and Vermont.

The filing discusses margin trajectory in the context of interest rate risk, noting that the net interest margin increased to 3.17% ⁸⁷ (3.19% ⁸⁸ tax-equivalent) for 2025 from 2.72% ⁸⁹ (2.74% ⁹⁰ tax-equivalent) for 2024, primarily due to continued yield expansion on earning assets combined with the reduced cost of interest-bearing liabilities, and that the cost of deposits decreased throughout 2025. The efficiency ratio improved to 61.97% ⁹¹ for 2025 from 67.68% ⁹² for 2024. The filing also notes that salaries and employee benefits expense increased $3,582 thousand ⁹³ or 6.8% ⁹⁴ from 2024, primarily due to inflation-driven wage increases and rising benefit costs, and that technology expenses increased $1,426 thousand ⁹⁵ or 7.4% ⁹⁶ from 2024 due to continued investment in innovation and infrastructure.

The filing discusses technology infrastructure investments, noting that technology expenses increased $1,426 thousand ⁹⁷ or 7.4% ⁹⁸ from 2024 due to continued investment in innovation and infrastructure, reflecting a strategic focus on a strong technology foundation and enhancements of customer-facing technology intended to create more efficient and improved internal operations. The filing also notes that Arrow had 578 ⁹⁹ full-time equivalent employees at December 31, 2025, including 40 ¹⁰⁰ employees within Arrow's insurance agency subsidiary, and that Arrow has prioritized investment in the well-being, performance, engagement and development of its employees through initiatives including Arrow University.

The filing discusses capital allocation in the context of share repurchases and dividends. On April 24, 2024, the Board authorized management to repurchase up to $5 million ¹⁰¹ of Arrow common stock, and on April 30, 2025, the Board authorized an additional $5 million ¹⁰² of Arrow common stock. On July 23, 2025, the Board increased management's share repurchase authority by another $5 million ¹⁰³. In 2025, Arrow repurchased approximately $9.9 million ¹⁰⁴ (approximately 377 thousand ¹⁰⁵ shares of its common stock) under this authorization. Cash dividends paid were $18,897 thousand ¹⁰⁶ for 2025, or $1.14 ¹⁰⁷ per share, compared to $18,286 thousand ¹⁰⁸ or $1.09 ¹⁰⁹ per share in 2024. The filing does not provide specific R&D spending levels or capital expenditure plans with exact figures.

The filing identifies several headwinds and constraints that management has explicitly flagged. Arrow remains subject to inflationary risk which could adversely impact its business and customers, and although the FRB cut certain benchmark interest rates twice in the second half of 2024 and again in 2025, the inflationary outlook remains uncertain. Market conditions could present significant challenges to the U.S. commercial banking industry and its core business of making and servicing loans, and 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. The filing also notes that Arrow is less able than larger regional competitors to spread the risk of unfavorable local economic conditions over a larger market area. Additionally, the filing identifies risks related to the merger with Adirondack, including that 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, and that the Agreement may be terminated in accordance with its terms and the Merger may not be completed.

The filing identifies regulatory and compliance constraints, noting that Arrow operates in a highly regulated industry and faces risks associated with noncompliance, that federal banking statutes and regulations could change in the future which may adversely affect Arrow, and that 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. The filing also notes that Arrow Bank's commercial and commercial real estate loans increase its exposure to credit risks, and that Arrow Bank's indirect and consumer lending involves risk elements in addition to normal credit risk, including that indirect automobile loans are secured by depreciating assets and characterized by loan-to-value ratios that could result in not recovering the full value of an outstanding loan upon default by the borrower.

Arrow faces material credit risk from its commercial and commercial real estate loan portfolio, which totaled $984 million ¹¹⁰ or 29% ¹¹¹ of total loans at December 31, 2025, as repayment often depends on the successful business operations of borrowers and is more sensitive to economic conditions, with a sudden downturn potentially causing borrowers to be unable to repay their loans. The company also faces significant risk from its indirect and consumer lending portfolio, which totaled $1,076 million ¹¹² or 33% ¹¹³ of total loans at December 31, 2025, involving risk elements such as limited personal contact with borrowers through non-bank channels and loans secured by depreciating assets, with state and federal laws potentially limiting recovery of outstanding principal balances on default. Arrow is subject to interest rate risk that could adversely affect profitability, as changes in monetary policy could influence net interest income, the fair value of financial assets and liabilities, and the average duration of the mortgage-backed securities portfolio, with the company's simulation model showing a calculated change in net interest income of (4.7)% ¹¹⁴ in Year 1 under a +200 basis point interest rate increase scenario. The company faces liquidity risk as its financial condition and results of operations could be negatively impacted by changes in its liquidity position, with estimated uninsured deposits of $917.6 million ¹¹⁵ at December 31, 2025 representing less than 30% ¹¹⁶ of the total deposit base, and as a holding company, Arrow relies on dividends from Arrow Bank to fund its own obligations, with the maximum amount that could have been paid by Arrow Bank to Arrow without special regulatory approval being approximately $27.7 million ¹¹⁷ at December 31, 2025.

The overall tone of management's message, as reflected in the MD&A, emphasizes strong financial performance in 2025 with net income of $43,953 thousand ¹¹⁸ up from $29,709 thousand ¹¹⁹ in 2024, driven by net interest income growth of $21,432 thousand ¹²⁰ or 19.2% ¹²¹, improved net interest margin of 3.17% ¹²² (3.19% ¹²³ tax-equivalent), and strong asset quality with nonperforming assets at 0.20% ¹²⁴ of year-end assets. Key strategic priorities emphasized for the period ahead include the pending merger with Adirondack Bancorp, Inc., which is expected to close late in the second quarter or early in the third quarter of 2026, continued focus on loan growth and maintaining strong asset quality, and investment in technology and innovation as reflected in the 7.4% ¹²⁵ increase in technology expenses.