ARROW FINANCIAL CORP (AROW)

Item 2.

ARROW FINANCIAL CORPORATION AND SUBSIDIARIES

MANAGEMENT'S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

June 30, 2026

NOTE ON TERMINOLOGY

In this Report, the terms "Arrow," "the registrant," "the Company," "we," "us," and "our" generally refer to Arrow Financial Corporation and its subsidiaries as a group, except where the context indicates otherwise. At certain points in this Report, Arrow's performance is compared with that of the Company's "peer group" of financial institutions. Unless otherwise specifically stated, the peer group for the purposes of this Report is comprised of the group of 207 domestic bank holding companies with $3 to $10 billion in total consolidated assets as identified in the FRB’s "Bank Holding Company Performance Report" for March 31, 2026 (the most recent such report currently available), and peer group data contained herein has been derived from such report.

THE COMPANY AND ITS SUBSIDIARIES

Arrow was incorporated on March 21, 1983 and is registered as a bank holding company within the meaning of the Bank Holding Company Act of 1956. Through Arrow Bank, Arrow indirectly owns various non-bank subsidiaries, including an insurance agency, a registered investment adviser and a REIT.

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

Effective December 31, 2024, the Company unified its former subsidiary banks, Glens Falls National Bank and Trust Company ("GFNB") and Saratoga National Bank and Trust Company ("SNB"), and became a single bank holding company headquartered in Glens Falls, New York.  The post-unification banking subsidiary is Arrow Bank National Association® ("Arrow Bank™") whose main office is located in Glens Falls, New York. Active subsidiaries of Arrow Bank include Upstate Agency, LLC (an insurance agency that sells property and casualty insurance and also specializes in selling and servicing group health care policies and life insurance), North Country Investment Advisers, Inc. (a registered investment adviser that provides investment advice to Arrow's proprietary mutual fund) and Arrow Properties, Inc. (a real estate investment trust, or REIT). Arrow also directly owns two subsidiary business trusts, organized in 2003 and 2004 to issue trust preferred securities (TRUPs), which are still outstanding.

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

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

The transaction was completed on July 1, 2026 and therefore, this Quarterly Report on Form 10-Q does not include the assets, liabilities or operating results of Adirondack. Under the terms of the merger agreement, Arrow acquired 100% of the outstanding voting equity interests of Adirondack. At the effective date, each share of Adirondack common stock outstanding immediately prior to the effective date, was converted into the right to receive 1.8610 shares of Arrow common stock and $18.72 in cash. Total consideration paid was $101 million.

FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q (this "Report") contains statements that are not historical in nature but rather are based on Arrow's beliefs, assumptions, expectations, estimates and projections about the future. These statements are "forward-looking statements" within the meaning of Section 21E of the Securities Exchange Act of 1934 ("Exchange Act"), as amended, and involve a degree of uncertainty and attendant risk. Words such as "may," "will," "expect," "believe," "anticipate," "estimate," "continue," and variations of such words and similar expressions are intended to identify such forward-looking statements. Examples of forward-looking statements include statements regarding Arrow's asset quality, the level of allowance for credit losses, the sufficiency of liquidity sources, interest rate change exposure, changes in accounting standards, and Arrow's tax plans and strategies. Some of these statements, such as those included in the interest rate sensitivity analysis in Part I, Item 3, entitled "Quantitative and Qualitative Disclosures About Market Risk," are merely presentations of what future performance or changes in future performance would look like based on hypothetical assumptions and on simulation models. Other forward-looking statements are based on Arrow's general perceptions of market conditions and trends in business activity, both Arrow's and in the banking industry generally, as well as current management strategies for future operations and development.

These forward-looking statements may not be exhaustive, are not guarantees of future performance and involve certain risks and uncertainties that are difficult to quantify or, in some cases, to identify. You should not place undue reliance on any such forward-looking statements. In the case of all forward-looking statements, actual outcomes and results may differ materially from what the statements predict or forecast. Factors that could cause or contribute to such differences include, but are not limited to the following:

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

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

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

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

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

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

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

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

•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 acquisition of Adirondack.

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

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

•Business could suffer if Arrow loses key personnel unexpectedly.

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

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

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

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

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

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

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

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

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

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

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

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

The Company is under no duty to update any of the forward-looking statements after the date of this Report to conform such statements to actual results. All forward-looking statements, express or implied, included in this Report are expressly qualified in their entirety by this cautionary statement. This cautionary statement should also be considered in connection with any subsequent written or oral forward-looking statements that Arrow or any persons acting on its behalf may issue. This Report should be read in conjunction with the 2025 Form 10-K and our other filings with the Securities and Exchange Commission ("SEC").

USE OF NON-GAAP FINANCIAL MEASURES

The Securities and Exchange Commission ("SEC") has adopted Regulation G, which applies to all public disclosures made by registered companies that contain “non-GAAP financial measures.”  "GAAP" refers to generally accepted accounting principles in the United States of America.  Under Regulation G, companies making public disclosures containing non-GAAP financial measures must also disclose, along with each non-GAAP financial measure, certain additional information, including a reconciliation of the non-GAAP financial measure to the closest comparable GAAP financial measure and a statement of the Company’s reasons for utilizing the non-GAAP financial measure as part of its financial disclosures.  The SEC has exempted from the definition of “non-GAAP financial measures” certain commonly used financial measures that are not based on GAAP.  When these exempted measures ar

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

Selected Financial Information

Dollars in thousands, except per share amounts

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

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Arrow Financial Corporation

Reconciliation of Non-GAAP Financial Information

(Dollars In Thousands, Except Per Share Amounts)

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CRITICAL ACCOUNTING ESTIMATES

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

Allowance for credit losses: The allowance for credit losses consists of the allowance for credit losses on loans and unfunded loan commitments. The Current Expected Credit Loss ("CECL") approach requires an estimate of the credit losses expected over the life of an exposure (or pool of exposures). The estimate of expected credit losses under the CECL approach is based on relevant information about past events, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amounts. Historical loss experience is generally the starting point for estimating expected credit losses. Arrow then considers whether the historical loss experience should be adjusted for asset-specific risk characteristics or current conditions at the reporting date that did not exist over the period from which historical experience was used. Finally, Arrow considers forecasts about future economic conditions that are reasonable and supportable.

Arrow uses the discounted cash flow ("DCF") method to estimate expected credit losses for the commercial, commercial real estate, and residential segments. For each of these loan segments, Arrow generates cash flow projections at the instrument level wherein payment expectations are adjusted for estimated prepayment speed, curtailments, time to recovery, probability of default ("PD"), and segment-specific loss given default ("LGD") risk factors. The modeling of expected prepayment speeds, curtailment rates, and time to recovery are based on historical internal data and adjusted, if necessary, based on the reasonable and supportable forecast of economic conditions. An allowance for credit loss is established for the difference between the instrument’s net present value of expected cash flows and amortized cost basis.

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

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

Arrow considers the need to qualitatively adjust expected credit loss estimates for information not already captured in the loss estimation process. These qualitative factor adjustments may increase or decrease management’s estimate of expected credit losses. Adjustments are not made for information that has already been considered and included in the loss estimation process.

The allowance for losses on unfunded commitments represents the expected credit losses on off-balance sheet commitments such as unfunded commitments to extend credit and standby letters of credit. However, a liability is not recognized for commitments unconditionally cancellable by Arrow. The allowance for losses on unfunded commitments is determined by estimating future draws and applying the expected loss rates on those draws.

Arrow considers the accounting policy relating to the allowance for credit losses to be a critical accounting estimate given the uncertainty in evaluating the level of the allowance required to cover Arrow's estimate of all expected credit losses over the expected contractual life of our loan portfolio. Determining the appropriateness of the allowance is complex and requires judgment by management about the effect of matters that are inherently uncertain. Subsequent evaluations of the then-existing loan portfolio, in light of the factors then prevailing, may result in significant changes in the allowance for credit losses in those future periods. While management’s current evaluation of the allowance for credit losses indicates that the allowance is appropriate at this time, the allowance may need to be adjusted in the future due to changes in conditions or assumptions. The impact of utilizing the CECL approach to calculate the reserve for credit losses will be significantly influenced by the composition, characteristics and quality of our loan portfolio, as well as the prevailing economic conditions and forecasts utilized. Material changes to these and other relevant factors may result in greater volatility to the reserve for credit losses, and therefore, greater volatility to our reported earnings.

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

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

Arrow's policy on t

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