UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended March 31, ~~2019~~2020

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number: 0-12507

ARROW FINANCIAL CORPORATION

(Exact name of registrant as specified in its charter)



New York			22-2448962
(State or other jurisdiction of incorporation or organization)			(I.R.S. Employer Identification No.)
250 GLEN STREET, GLENS FALLS, NEW YORK 12801
(Address of principal executive offices) (Zip Code)
Registrant’s telephone number, including area code: (518) 745-1000

Securities registered pursuant to Section 12(b) of the Act:



Title of Each Class	Trading Symbol	Name of Each Exchange on Which Registered
Common Stock, Par Value $1.00 per share	AROW	NASDAQ Global Select Market

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. x Yes No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). x Yes No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.



Large accelerated filer	Accelerated filer x
Non-accelerated filer
Smaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standard provided pursuant to Section 13(a) of the Exchange Act. __

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes x No

~~Securities registered pursuant to Section 12(b) of the Act:~~



~~Title of Each Class~~	~~Trading Symbol~~	~~Name of Each Exchange on Which Registered~~
~~Common Stock, Par Value $1.00 per share~~	~~AROW~~	~~NASDAQ Global Select Market~~

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.



Class		Outstanding as of April 30, ~~2019~~2020
Common Stock, par value $1.00 per share		~~14,484,215~~14,983,674

ARROW FINANCIAL CORPORATION

FORM 10-Q

TABLE OF CONTENTS

PART I - FINANCIAL INFORMATION

Item 1.

FINANCIAL STATEMENTS

ARROW FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (In Thousands, Except Share and Per Share Amounts) (Unaudited)	ARROW FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (In Thousands, Except Share and Per Share Amounts) (Unaudited)									ARROW FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (In Thousands, Except Share and Per Share Amounts) (Unaudited)

	March 31, 2019			December 31, 2018			March 31, 2018			March 31, 2020			December 31, 2019			March 31, 2019
ASSETS
Cash and Due From Banks	$	36,198		$	56,529		$	29,525		$	32,525		$	47,035		$	36,198
Interest-Bearing Deposits at Banks	25,031			27,710			70,747			106,004			23,186			25,031
Investment Securities:
Available-for-Sale	298,812			317,535			305,589
Held-to-Maturity (Approximate Fair Value of $280,414 at March 31, 2019; $280,338 at December 31, 2018; and $324,937 at March 31, 2018)	279,400			283,476			330,124
Available-for-Sale at Fair Value										378,186			357,334			298,812
Held-to-Maturity (Approximate Fair Value of $242,804 at March 31, 2020; $249,618 at December 31, 2019; and $280,414 at March 31, 2019)										238,520			245,065			279,400
Equity Securities	1,850			1,774			1,579			1,689			2,063			1,850
Other Investments	7,878			15,506			4,780
FHLB and Federal Reserve Bank Stock										5,379			10,317			7,878
Loans	2,235,208			2,196,215			1,993,037			2,414,193			2,386,120			2,235,208
Allowance for Loan Losses	(20,373		)	(20,196		)	(19,057		)	(23,637		)	(21,187		)	(20,373		)
Net Loans	2,214,835			2,176,019			1,973,980			2,390,556			2,364,933			2,214,835
Premises and Equipment, Net	34,949			30,446			27,815			40,987			40,629			34,949
Goodwill	21,873			21,873			21,873			21,873			21,873			21,873
Other Intangible Assets, Net	1,777			1,852			2,172			1,640			1,661			1,777
Other Assets	62,280			55,614			58,503			73,973			70,179			62,280
Total Assets	$	2,984,883		$	2,988,334		$	2,826,687		$	3,291,332		$	3,184,275		$	2,984,883
LIABILITIES
Noninterest-Bearing Deposits	$	453,089		$	472,768		$	452,347		$	489,151		$	484,944		$	453,089
Interest-Bearing Checking Accounts	823,301			790,781			944,161			793,425			689,221			823,301
Savings Deposits	866,861			818,048			762,220			1,146,683			1,046,568			866,861
Time Deposits over $250,000	83,834			73,583			85,403			135,854			123,968			83,834
Other Time Deposits	263,012			190,404			167,142			245,892			271,353			263,012
Total Deposits	2,490,097			2,345,584			2,411,273			2,811,005			2,616,054			2,490,097
Federal Funds Purchased and Securities Sold Under Agreements to Repurchase	58,407			54,659			74,957			57,909			51,099			58,407
Federal Home Loan Bank Overnight Advances	74,500			234,000			—			—			130,000			74,500
Federal Home Loan Bank Term Advances	35,000			45,000			45,000			50,000			30,000			35,000
Junior Subordinated Obligations Issued to Unconsolidated Subsidiary Trusts	20,000			20,000			20,000			20,000			20,000			20,000
Finance Leases	2,946			—			—			5,249			5,254			2,946
Other Liabilities	27,324			19,507			22,723			37,771			30,140			27,324
Total Liabilities	2,708,274			2,718,750			2,573,953			2,981,934			2,882,547			2,708,274
STOCKHOLDERS’ EQUITY
Preferred Stock, $5 Par Value; 1,000,000 Shares Authorized	—			—			—
Common Stock, $1 Par Value; 20,000,000 Shares Authorized (19,035,565 Shares Issued at March 31, 2019; 19,035,565 at December 31, 2018 and 18,481,301 at March 31, 2018)	19,035			19,035			18,481
Preferred Stock, $1 Par Value and 1,000,000 Shares Authorized at March 31, 2020 and December 31, 2019; $5 Par Value and 1,000,000 Shares Authorized at March 31, 2019										—			—			—
Common Stock, $1 Par Value; 30,000,000 Shares Authorized at March 31, 2020 and December 31, 2019 and 20,000,000 Shares Authorized at March 31, 2019 (19,606,449 Shares Issued at March 31, 2020 and December 31, 2019 and 19,035,565 at March 31, 2019)										19,606			19,606			19,035
Additional Paid-in Capital	315,262			314,533			290,980			336,021			335,355			315,262
Retained Earnings	34,231			29,257			34,093			37,441			33,218			34,231
Unallocated ESOP Shares (5,001 Shares at March 31, 2019; 5,001 Shares at December 31, 2018 and 9,643 Shares at March 31, 2018)	(100		)	(100		)	(200		)
Unallocated ESOP Shares (None at March 31, 2020 and December 31, 2019 and 5,501 Shares at March 31, 2019)										—			—			(100		)
Accumulated Other Comprehensive Loss	(11,567		)	(13,810		)	(11,285		)	(2,412		)	(6,357		)	(11,567		)
Treasury Stock, at Cost (4,556,083 Shares at March 31, 2019; 4,558,207 Shares at December 31, 2018 and 4,516,444 Shares at March 31, 2018)	(80,252		)	(79,331		)	(79,335		)
Treasury Stock, at Cost (4,624,348 Shares at March 31, 2020; 4,608,258 Shares at December 31, 2019 and 4,556,083 Shares at March 31, 2019)										(81,258		)	(80,094		)	(80,252		)
Total Stockholders’ Equity	276,609			269,584			252,734			309,398			301,728			276,609
Total Liabilities and Stockholders’ Equity	$	2,984,883		$	2,988,334		$	2,826,687		$	3,291,332		$	3,184,275		$	2,984,883

See Notes to Unaudited Interim Consolidated Financial Statements.

ARROW FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (In Thousands, Except Per Share Amounts) (Unaudited)	ARROW FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (In Thousands, Except Per Share Amounts) (Unaudited)				ARROW FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (In Thousands, Except Per Share Amounts) (Unaudited)

	Three Months Ended March 31,				Three Months Ended March 31
	2019		2018		2020			2019
INTEREST AND DIVIDEND INCOME
Interest and Fees on Loans	$	22,403	$	18,858	$	24,874		$	22,403
Interest on Deposits at Banks	195		134		124			195
Interest and Dividends on Investment Securities:
Fully Taxable	2,369		1,893		2,193			2,369
Exempt from Federal Taxes	1,246		1,533		1,035			1,246
Total Interest and Dividend Income	26,213		22,418		28,226			26,213
INTEREST EXPENSE
Interest-Bearing Checking Accounts	482		387		487			482
Savings Deposits	1,601		522		2,471			1,601
Time Deposits over $250,000	396		204		533			396
Other Time Deposits	713		259		1,000			713
Federal Funds Purchased and Securities Sold Under Agreements to Repurchase	22		16		22			22
Federal Home Loan Bank Advances	1,594		414		429			1,594
Junior Subordinated Obligations Issued to Unconsolidated Subsidiary Trusts	269		214		228			269
Interest on Financing Leases	15		—		50			15
Total Interest Expense	5,092		2,016		5,220			5,092
NET INTEREST INCOME	21,121		20,402		23,006			21,121
Provision for Loan Losses	472		746		2,772			472
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES	20,649		19,656		20,234			20,649
NONINTEREST INCOME
Income From Fiduciary Activities	2,107		2,197		2,213			2,107
Fees for Other Services to Customers	2,402		2,380		2,451			2,402
Insurance Commissions	1,719		1,903		1,632			1,719
Net Gain on Securities Transactions	76		18
Net (Loss) Gain on Securities					(374		)	76
Net Gain on Sales of Loans	104		38		213			104
Other Operating Income	479		353		1,559			479
Total Noninterest Income	6,887		6,889		7,694			6,887
NONINTEREST EXPENSE
Salaries and Employee Benefits	9,319		9,369		10,383			9,319
Occupancy Expenses, Net	1,420		1,340		1,449			1,420
Technology and Equipment Expense	3,141		2,698		3,352			3,141
FDIC Assessments	212		217		219			212
Other Operating Expense	2,560		2,332		2,351			2,560
Total Noninterest Expense	16,652		15,956		17,754			16,652
INCOME BEFORE PROVISION FOR INCOME TAXES	10,884		10,589		10,174			10,884
Provision for Income Taxes	2,150		2,058		2,047			2,150
NET INCOME	$	8,734	$	8,531	$	8,127		$	8,734
Average Shares Outstanding ¹:
Basic	14,469		14,354		14,996			14,903
Diluted	14,520		14,436		15,026			14,956
Per Common Share:
Basic Earnings	$	0.60	$	0.59	$	0.54		$	0.59
Diluted Earnings	0.60		0.59		0.54			0.58

¹~~2018~~2019 Share and Per Share Amounts have been restated for the September 27, ~~2018~~2019 3% stock dividend.

See Notes to Unaudited Interim Consolidated Financial Statements.

ARROW FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (In Thousands) (Unaudited)	ARROW FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (In Thousands) (Unaudited)					ARROW FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (In Thousands) (Unaudited)

	Three Months Ended March 31,						Three Months Ended March 31,
	2019		2018				2020			2019
Net Income	$	8,734	$	8,531			$	8,127		$	8,734
Other Comprehensive Income (Loss), Net of Tax:
Net Unrealized Securities Holding Gains (Losses) Arising During the Period	2,080		(2,485		)
Other Comprehensive Income, Net of Tax:
Net Unrealized Securities Holding Gains Arising During the Period							4,098			2,080
Net Unrealized Loss on Cash Flow Hedge Agreements							(219		)	—
Amortization of Net Retirement Plan Actuarial Loss	121		46				27			121
Amortization (Accretion) of Net Retirement Plan Prior Service Cost (Credit)	42		(1		)
Other Comprehensive Income (Loss)	2,243		(2,440		)
Amortization of Net Retirement Plan Prior Service Cost							39			42
Other Comprehensive Income							3,945			2,243
Comprehensive Income	$	10,977	$	6,091			$	12,072		$	10,977

See Notes to Unaudited Interim Consolidated Financial Statements.

ARROW FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

(In Thousands, Except Share and Per Share Amounts)

(Unaudited)

Common
Stock

Additional
Paid-In
Capital

Retained
Earnings

Unallo-cated ESOP
Shares

Accumu-lated
Other Com-
prehensive
Loss

Treasury
Stock
Total
Balance at December 31, 2018 $ 19,035
$ 314,533
$ 29,257
$ (100 ) $ (13,810 ) $ (79,331 ) $ 269,584
Net Income —
—
8,734
—
—
—
8,734
Other Comprehensive Income —
—
—
—
2,243
—
2,243
Cash Dividends Paid, $.26 per Share —
—
(3,760 ) —
—
—
(3,760 )
Stock Options Exercised, Net  (26,135 Shares) —
249
—
—
—
286
535
Shares Issued Under the Employee Stock
  Purchase Plan (3,709 Shares)
—
76
—
—
—
41
117
Shares Issued for Dividend
  Reinvestment Plans (13,132 Shares)
—
309
—
—
—
144
453
Stock-Based Compensation Expense —
95
—
—
—
—
95
Purchase of Treasury Stock
  (40,852 Shares)
—
—
—
—
—
(1,392 ) (1,392 )
Balance at March 31, 2019 $ 19,035
$ 315,262
$ 34,231
$ (100 ) $ (11,567 ) $ (80,252 ) $ 276,609

Balance at December 31, 2017 18,481
290,219
28,818
(200 ) $ (8,514 ) $ (79,201 ) $ 249,603
Net Income —
—
8,531
—
—
—
8,531
Other Comprehensive Loss —
—
—
—
(2,440 ) —
(2,440 )
Impact of the Adoption of ASU 2014-09 (102 ) (102 )
Impact of the Adoption of ASU2016-01 331
(331 ) —
Cash Dividends Paid, $.243 per Share ¹
—
—
(3,485 ) —
—
—
(3,485 )
Stock Options Exercised, Net (27,662 Shares) —
307
—
—
—
303
610
Shares Issued Under the Employee Stock
  Purchase Plan (3,674 Shares)
—
76
—
—
—
40
116
Shares Issued for Dividend
  Reinvestment Plans (12,459 Shares)
—
289
—
—
—
142
431
Stock-Based Compensation Expense —
89
—
—
—
—
89
Purchase of Treasury Stock
(18,715 Shares)
—
—
—
—
—
(619 ) (619 )
Balance at March 31, 2018 $ 18,481
$ 290,980
$ 34,093
$ (200 ) $ (11,285 ) $ (79,335 ) $ 252,734



	Three-Month Period Ended March 31, 2020
	Common Stock		Additional Paid-In Capital		Retained Earnings			Unallo-cated ESOP Shares		Accumu-lated Other Com- prehensive Loss			Treasury Stock			Total
Balance at December 31, 2019	$	19,606	$	335,355	$	33,218		$	—	$	(6,357	)	$	(80,094	)	$	301,728
Net Income	—		—		8,127			—		—			—			8,127
Other Comprehensive Income	—		—		—			—		3,945			—			3,945
Cash Dividends Paid, $.26 per Share	—		—		(3,904		)	—		—			—			(3,904		)
Stock Options Exercised, Net (14,282 Shares)	—		199		—			—		—			144			343
Shares Issued Under the Employee Stock Purchase Plan (3,648 Shares)	—		84		—			—		—			37			121
Shares Issued for Dividend Reinvestment Plans (16,001 Shares)	—		280		—			—		—			162			442
Stock-Based Compensation Expense	—		103		—			—		—			—			103
Purchase of Treasury Stock (50,021 Shares)	—		—		—			—		—			(1,507		)	(1,507		)
Balance at March 31, 2020	$	19,606	$	336,021	$	37,441		$	—	$	(2,412	)	$	(81,258	)	$	309,398



	Three-Month Period Ended March 31, 2019
Balance at December 31, 2018	$	19,035	$	314,533	$	29,257		$	(100	)	$	(13,810	)	$	(79,331	)	$	269,584
Net Income	—		—		8,734			—			—			—			8,734
Other Comprehensive Loss	—		—		—			—			2,243			—			2,243
Cash Dividends Paid, $.252 per Share ¹	—		—		(3,760		)	—			—			—			(3,760		)
Stock Options Exercised, Net (26,135 Shares)	—		249		—			—			—			286			535
Shares Issued Under the Employee Stock Purchase Plan (3,709 Shares)	—		76		—			—			—			41			117
Shares Issued for Dividend Reinvestment Plans (13,132 Shares)	—		309		—			—			—			144			453
Stock-Based Compensation Expense	—		95		—			—			—			—			95
Purchase of Treasury Stock (40,852 Shares)	—		—		—			—			—			(1,392		)	(1,392		)
Balance at March 31, 2019	$	19,035	$	315,262	$	34,231		$	(100	)	$	(11,567	)	$	(80,252	)	$	276,609

¹ Cash dividends paid per share have been adjusted for the September 27, ~~2018~~2019 3% stock dividend.

See Notes to Unaudited Interim Consolidated Financial Statements.

ARROW FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollars in Thousands)


	Three Months Ended March 31,						Three Months Ended March 31,
Cash Flows from Operating Activities:	2019			2018			2020			2019
Net Income	$	8,734		$	8,531		$	8,127		$	8,734
Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities:
Provision for Loan Losses	472			746			2,772			472
Depreciation and Amortization	1,309			1,199			1,597			1,309
Net Gain on Securities Transactions	(76		)	(18		)
Net Loss (Gain) on Securities Transactions							374			(76		)
Loans Originated and Held-for-Sale	(4,223		)	(12,326		)	(9,322		)	(4,223		)
Proceeds from the Sale of Loans Held-for-Sale	3,718			12,520			7,975			3,718
Net Gain on the Sale of Loans	(104		)	(38		)	(213		)	(104		)
Net Loss on the Sale of Premises and Equipment, Other Real Estate Owned and Repossessed Assets	130			32
Net (Gain) Loss on the Sale of Premises and Equipment, Other Real Estate Owned and Repossessed Assets							(91		)	130
Contributions to Retirement Benefit Plans	(153		)	(134		)	(195		)	(153		)
Deferred Income Tax Benefit	(297		)	(220		)	(873		)	(297		)
Stock-Based Compensation Expense	95			89			103			95
Tax Benefit from Exercise of Stock Options	78			112			28			78
Net Increase in Other Assets	(1,565		)	(395		)	(5,719		)	(1,565		)
Net Increase in Other Liabilities	2,613			2,185			8,563			2,613
Net Cash Provided By Operating Activities	10,731			12,283			13,126			10,731
Cash Flows from Investing Activities:
Proceeds from the Maturities and Calls of Securities Available-for-Sale	21,261			9,380			17,444			21,261
Purchases of Securities Available-for-Sale	—			(19,979		)	(33,201		)	—
Proceeds from the Maturities and Calls of Securities Held-to-Maturity	5,319			6,459			7,075			5,319
Purchases of Securities Held-to-Maturity	(1,457		)	(921		)	(717		)	(1,457		)
Net Increase in Loans	(39,545		)	(42,968		)	(27,317		)	(39,545		)
Proceeds from the Sales of Premises and Equipment, Other Real Estate Owned and Repossessed Assets	442			437			781			442
Purchase of Premises and Equipment	(2,099		)	(627		)	(1,072		)	(2,099		)
Net Decrease in Other Investments	7,628			5,169			4,938			7,628
Net Cash Used By Investing Activities	(8,451		)	(43,050		)	(32,069		)	(8,451		)
Cash Flows from Financing Activities:
Net Increase in Deposits	144,513			166,157			194,951			144,513
Net Decrease in Short-Term Federal Home Loan Bank Borrowings	(159,500		)	(105,000		)	(130,000		)	(159,500		)
Net Increase in Short-Term Borrowings	3,748			9,991			6,810			3,748
Finance Lease Payments	(4		)	—			(5		)	(4		)
Federal Home Loan Bank Advances							40,000			—
Repayments of Federal Home Loan Bank Term Advances	(10,000		)	(10,000		)	(20,000		)	(10,000		)
Purchase of Treasury Stock	(1,392		)	(619		)	(1,507		)	(1,392		)
Stock Options Exercised, Net	535			610			343			535
Shares Issued Under the Employee Stock Purchase Plan	117			116			121			117
Shares Issued for Dividend Reinvestment Plans	453			431			442			453
Cash Dividends Paid	(3,760		)	(3,485		)	(3,904		)	(3,760		)
Net Cash (Used) Provided By Financing Activities	(25,290		)	58,201
Net (Decrease) Increase in Cash and Cash Equivalents	(23,010		)	27,434
Net Cash Provided (Used) By Financing Activities							87,251			(25,290		)
Net Increase (Decrease) in Cash and Cash Equivalents							68,308			(23,010		)
Cash and Cash Equivalents at Beginning of Period	84,239			72,838			70,221			84,239
Cash and Cash Equivalents at End of Period	$	61,229		$	100,272		$	138,529		$	61,229

Supplemental Disclosures to Statements of Cash Flow Information:
Interest on Deposits and Borrowings	$	4,924		$	1,949		$	5,264		$	4,924
Income Taxes	311			390			344			311
Non-cash Investing and Financing Activity:
Transfer of Loans to Other Real Estate Owned and Repossessed Assets	728			270			371			728

See Notes to Unaudited Interim Consolidated Financial Statements.

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 1. ACCOUNTING POLICIES

In the opinion of the management of Arrow Financial Corporation (Arrow, the Company, we, or us), the accompanying unaudited interim consolidated financial statements contain all of the adjustments necessary to present fairly the financial position as of March 31, ~~2019,~~2020, December 31, ~~2018~~2019 and March 31, ~~2018;~~2019; the results of operations for the three-month periods ended March 31, ~~2019~~2020 and ~~2018;~~2019; the consolidated statements of comprehensive income for the three-month periods ended March 31, ~~2019~~2020 and ~~2018;~~2019; the changes in stockholders' equity for the three-month periods ended March 31, ~~2019~~2020 and ~~2018;~~2019; and the cash flows for the three-month periods ended March 31, ~~2019~~2020 and ~~2018.~~2019. All such adjustments are of a normal recurring nature.

Management’s Use of Estimates -The preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the United States of America (US GAAP) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of income and expenses during the reporting period. Due to the uncertainty regarding the impact of the COVID-19 pandemic, management utilized estimates and assumptions in its evaluation of potential impairment of the Company's right-of-use lease assets, goodwill and intangible assets. Our most significant estimate is the allowance for loan losses. Other estimates include the evaluation of other-than-temporary impairment of investment securities, ~~goodwill impairment,~~ pension and other ~~postretirement~~post-retirement liabilities and an analysis of a need for a valuation allowance for deferred tax assets. Actual results could differ from those estimates.

A material estimate that is particularly susceptible to significant change in the near term is the allowance for loan losses. In connection with the determination of the allowance for loan losses, management obtains appraisals for properties. The allowance for loan losses is management’s best estimate of probable loan losses incurred as of the balance sheet date. While management uses available information to recognize losses on loans, future adjustments to the allowance for loan losses may be necessary based on changes in economic conditions.

The unaudited interim consolidated financial statements should be read in conjunction with the audited annual consolidated financial statements of Arrow for the year ended December 31, ~~2018~~2019 included in Arrow's Annual Report on Form 10-K for the year ended December 31, ~~2018.~~

~~Recently Adopted and Recently Issued Accounting Standards~~2019.

The following accounting standards have been adopted in the first three months of ~~2019:~~2020:

In ~~March 2017,~~August 2018, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2017-08 "Receivables-Nonrefundable Fees and Other Costs" which amends the amortization period for certain purchased callable debt securities held at a premium. This shortens the amortization period for the premiumASU 2018-13 "Disclosure Framework-Changes to the ~~earliest call date. Under United States generally accepted accounting principles (GAAP), entities generally amortize the premium~~Disclosure Requirements for Fair Value Measurement" as ~~an adjustment~~part of ~~yield over the contractual life of the instrument.~~its disclosure framework, and pursuant to which FASB has eliminated, amended and added disclosure requirements for fair value measurements. For Arrow, the standard ~~was~~became effective, on a prospective basis, on January 1, 2020. The adoption of this change in ~~the first quarter of 2019 and~~fair value disclosure did not have a material impact on its financial position or the results of operations in the ~~current quarter or in future periods.~~

In February 2016, the FASB issued ASU 2016-02, "Leases" (Topic 842) which requires lessees to recognize right-of-use assets and lease liabilities on the balance sheet for all leases with terms longer than 12 months. In January 2018, the FASB issued ASU 2018-01, Leases (Topic 842): "Land Easement Practical Expedient for Transition to Topic 842". In July 2018, the FASB issued ASU 2018-10 "Codification Improvements to Topic 842, Leases" which provided clarification on certain components of the original guidance, including that the rate implicit in the lease cannot be less than zero. Also in July 2018, the FASB issued ASU 2018-11 "Targeted Improvements" to Leases (Topic 842) which amends the original guidance to allow for the adoption of this standard to be applied retrospectively at the beginning of the period ~~of adoption, which was January 1, 2019 for Arrow, without revising prior comparative periods.~~

The Company adopted this standard as of January 1, 2019 using the effective date method, also known as the modified retrospective method, with the cumulative-effect adjustment recorded at the beginning of the period of adoption. As a result of this adoption, the Company's assets increased $7.9 million and the Company's liabilities increased $8.0 million with no adjustment required to retained earnings and no material impact to the Consolidated Statements of Income.

Practical Expedients Elected At Adoption: The package of practical expedients were elected that did not require the Company to reassess whether an existing contract contains a lease, to reassess existing leases between operating leases and finance leases and to not reassess initial direct costs for any existing leases. These practical expedients were applied together. In addition, the Company also elected a practical expedient, which was required to be applied consistently to all of its leases, to use hindsight in determining the lease term when considering lessee options to extend or terminate the lease and in assessing impairment in the right-of-use asset.

Accounting Policy Elections: The Company also made two accounting policy elections related to the adoption of this standard. The first is a determination not to separate lease and non-lease components and account for the resulting combined component as a single lease component. The second election is to account for short-term leases, those leases with a "lease term" of twelve months or less, like an operating lease under current GAAP.

Determination of the Discount Rate to Calculate the Lease Liability: Since the Company was unable to determine the rate implicit in its leases, the secured borrowing rate from the Federal Home Loan Bank of New York as of the January 1, 2019 adoption date was utilized for existing leases for the effective lease term beginning with the effective date of each existing lease. The expected expiration date of each lease was determined on a lease-by-lease basis based on the availability of renewal options in the lease contracts, the amount of leasehold improvements at each location, total branch deposits at each location in addition to the feasibility of growth potential at each location. A similar process is followed to determine the expected lease expiration date for all leases executed subsequent to the January 1, 2019 adoption date.

~~The following accounting standards have been issued and will become effective for the Company at a future date:~~

In June 2016, the FASB issued ASU 2016-13 "Financial Instruments - Credit Losses" (Topic 326) which will change the way financial entities measure expected credit losses for financial assets, primarily loans. Under this ASU, the "incurred loss" model will be replaced with an "expected loss" model which will recognize losses over the life of the instrument and requires consideration of a broader range of reasonable and supportable information. Currently, credit losses on available-for-sale securities reduce the carrying value of the instrument and cannot be reversed. Under this ASU, the amount of the credit loss is carried as a valuation allowance and can be reversed. The standard also requires expanded credit quality disclosures. For Arrow, the standard is effective for the first quarter of 2020 and early adoption is allowed in 2019. The Company plans on adopting the standard in the first quarter of 2020, in order to maximize the accumulation of data needed to calculate the new current expected credit loss (CECL) methodologies. The ASU describes several acceptable methodologies for calculating expected losses on a loan or a pool of loans and requires additional disclosures. The initial adjustment will not be reported in earnings, but as the cumulative effect of a change in accounting principle. The FASB’s Transition Research Group for credit losses still has several outstanding unresolved questions, some of which may have a significant impact on CECL calculations. The Company has continued its implementation efforts with the development and testing of various methods within its core model, and has tentatively identified the discounted cash flow method for determining losses for the commercial loan portfolios and the residential real estate portfolios, and the vintage method for the consumer indirect loan portfolio. Based on further testing, these methods may change prior to adoption. As a result of analyses performed, including the availability of future economic data, the Company plans to utilize a two-year reasonable and supportable forecast period and is in the process of identifying which economic data best correlates with expected loan losses. The Company continues to monitor new regulatory guidance and is updating relevant internal controls and processes. The adoption of this standard will likely have the effect of increasing the allowance for loan and lease losses and reducing shareholders' equity, the extent of which will depend upon the nature and characteristics of the Company's loan portfolio and economic conditions and forecasts at the adoption date. The Company expects to remain a well-capitalized financial institution under current regulatory calculations.

In August 2018, the FASB issued ASU 2018-13 "Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement" which as part of its disclosure framework, the FASB has eliminated, amended and added disclosure requirements for fair value measurements. The following disclosure requirements were eliminated: Amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy; the policy of the timing of transfers between levels of the fair value hierarchy; the valuation processes for Level 3 fair value measurements. For public companies such as Arrow, the following new disclosures will be required: Changes in unrealized gains and losses for the period included in other comprehensive income (OCI); the range and weighted average of significant unobservable inputs used; alternatively, a company may choose to disclose other quantitative information if it determines that it is a more reasonable and rational method that reflects the distribution of unobservable inputs used. For Arrow, the standard becomes effective in the first quarter of 2020. The Company does not expect that the adoption of this change in fair value disclosure will have a material impact on its financial position or the results of operations in periods subsequent to its adoption.

In August 2018, the FASB issued ASU 2018-14 "Disclosure Framework-Changes to the Disclosure Requirements for Defined Benefit Plans" which applies to all companies that provide defined benefit pension or other postretirement benefit plans for their employees. Certain disclosure requirements have been eliminated such as reporting the amounts in accumulated other comprehensive income expected to be recognized as components of net periodic benefit cost over the next year, and reporting the effects of a one-percentage-point change in the assumed healthcare cost trend rate on the aggregate of the service cost and interest cost components of net periodic benefit cost and on the benefit obligation for postretirement healthcare benefits. New required disclosures for reporting the weighted-average interest rate used to credit cash balance and similar plans that have a promised interest credit, the reasons for significant gains and losses affecting benefit obligations and other requirements for reporting aggregate information related to pension plans. For Arrow, the standard becomes effective at December 31, 2020. The Company does not expect that the adoption of this change affecting defined benefit plan disclosures will have a material impact on its financial position or the results of operations.

~~In August 2018, the FASB issued ASU~~Accounting Standards Update (ASU) 2018-15 "Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract" which will require companies to defer potentially significant, specified implementation costs incurred in a cloud computing arrangement that are currently often expensed under ~~current~~ US GAAP. For Arrow, the standard ~~becomes effective at~~was adopted, on a prospective basis, on January 1, 2020. The ~~Company is in the process of assessing the impact~~adoption of this ~~new accounting~~ standard did not have a material impact on its financial position ~~and~~or the results of operations in ~~periods~~the period subsequent to its adoption.

In October 2018, the FASB issued ASU No. 2018-17, Consolidation (Topic 810): Targeted Improvements to Related Party Guidance for Variable Interest Entities ("ASU 2018-17"). ASU 2018-17 provides that indirect interests held through related parties in common control arrangements should be considered on a proportional basis for determining whether fees paid to decision makers and service providers are variable interests. For Arrow, the standard was effective on January 1, 2020 and the adoption of this standard did not have a material impact on its financial position or the results of operations in the period subsequent to its adoption.

In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting ("ASU 2020-04"). ASU 2020-04 provides companies with optional guidance to ease the potential accounting burden associated with transitioning away from reference rates that are expected to be discontinued, such as LIBOR. Companies can apply the ASU immediately. However, the guidance will only be available for a limited time (generally through December 31, 2022), and provides optional relief for contract modifications, hedge accounting and Held-to-maturity debt securities. For Arrow, this standard was effective January 1, 2020 and can be applied prospectively beginning January 1, 2020 for contract modifications and hedging relationships. The one-time election to sell and/or transfer securities classified as Held-to-maturity may be made at any point after March 12, 2020. Arrow is evaluating the impact of this standard as it will provide relief for contracts currently tied to LIBOR and hedge accounting relationships.

Note 2. INVESTMENT SECURITIES (In Thousands)

The following table is the schedule of Available-For-Sale Securities at March 31, ~~2019,~~2020, December 31, ~~2018~~2019 and March 31, ~~2018:~~2019:

																								Available-For-Sale Securities
	U.S. Government & Agency Obligations		State and Municipal Obligations		Mortgage- Backed Securities		Corporate and Other Debt Securities		Total Available- For-Sale Securities		U.S. Government & Agency Obligations		State and Municipal Obligations		Mortgage- Backed Securities			Corporate and Other Debt Securities			Total Available- For-Sale Securities
March 31, 2019
March 31, 2020
Available-For-Sale Securities, at Amortized Cost	$	35,519	$	1,114	$	263,347	$	1,000	$	300,980	$	5,002	$	723	$	365,333		$	1,000		$	372,058
Available-For-Sale Securities, at Fair Value	35,383		1,116		261,513		800		298,812
Gross Unrealized Gains	—		2		657		—		659		179		—		7,484			—			7,663
Gross Unrealized Losses	136		—		2,491		200		2,827		—		—		(1,335		)	(200		)	(1,535		)
Available-For-Sale Securities, Pledged as Collateral									255,028
Available-For-Sale Securities, at Fair Value											5,181		723		371,482			800			378,186
Available-For-Sale Securities, Pledged as Collateral, at Fair Value																					273,124

Maturities of Debt Securities, at Amortized Cost:
Within One Year	$	30,516	$	201	$	494	$	—	$	31,211	$	—	$	26	$	14,201		$	—		$	14,227
From 1 - 5 Years	5,003		433		125,267		—		130,703		5,002		257		325,234			—			330,493
From 5 - 10 Years	—		—		117,616		—		117,616		—		—		25,898			1,000			26,898
Over 10 Years	—		480		19,970		1,000		21,450		—		440		—			—			440

Maturities of Debt Securities, at Fair Value:
Within One Year	$	30,432	$	203	$	498	$	—	$	31,133	$	—	$	26	$	14,616		$	—		$	14,642
From 1 - 5 Years	4,951		433		124,175		—		129,559		5,181		257		331,422			—			336,860
From 5 - 10 Years	—		—		117,008		—		117,008		—		—		25,444			800			26,244
Over 10 Years	—		480		19,832		800		21,112		—		440		—			—			440

Securities in a Continuous Loss Position, at Fair Value:
Less than 12 Months	$	—	$	—	$	53,131	$	—	$	53,131	$	—	$	—	$	18,846		$	—		$	18,846
12 Months or Longer	35,383		—		155,108		800		191,291		—		—		59,262			800			60,062
Total	$	35,383	$	—	$	208,239	$	800	$	244,422	$	—	$	—	$	78,108		$	800		$	78,908
Number of Securities in a Continuous Loss Position	7		—		80		1		88		—		—		27			1			28

Unrealized Losses on Securities in a Continuous Loss Position:
Less than 12 Months	$	—	$	—	$	258	$	—	$	258	$	—	$	—	$	316		$	—		$	316
12 Months or Longer	136		—		2,233		200		2,569		—		—		1,019			200			1,219
Total	$	136	$	—	$	2,491	$	200	$	2,827	$	—	$	—	$	1,335		$	200		$	1,535

Disaggregated Details:
US Treasury Obligations, at Amortized Cost	$	—
US Treasury Obligations, at Fair Value	—
US Agency Obligations, at Amortized Cost	35,519										5,002
US Agency Obligations, at Fair Value	35,383										5,181
US Government Agency Securities, at Amortized Cost					$	70,358									$	58,089
US Government Agency Securities, at Fair Value					70,034										57,091
Government Sponsored Entity Securities, at Amortized Cost					192,989										307,244
Government Sponsored Entity Securities, at Fair Value					191,479										314,391

																								Available-For-Sale Securities
	U.S. Government & Agency Obligations		State and Municipal Obligations		Mortgage- Backed Securities		Corporate and Other Debt Securities		Total Available- For-Sale Securities		U.S. Government & Agency Obligations		State and Municipal Obligations		Mortgage- Backed Securities			Corporate and Other Debt Securities			Total Available- For-Sale Securities
December 31, 2018
December 31, 2019
Available-For-Sale Securities, at Amortized Cost	$	47,071	$	1,193	$	273,227	$	1,000	$	322,491	$	5,002	$	764	$	349,944		$	1,000		$	356,710
Available-For-Sale Securities, at Fair Value	46,765		1,195		268,775		800		317,535
Gross Unrealized Gains	—		2		288		—		290		52		—		1,852			—			1,904
Gross Unrealized Losses	306		—		4,740		200		5,246		—		—		(1,080		)	(200		)	(1,280		)
Available-For-Sale Securities, at Fair Value											5,054		764		350,716			800			357,334
Available-For-Sale Securities, Pledged as Collateral, at Fair Value									236,163												164,426

Securities in a Continuous Loss Position, at Fair Value:
Less than 12 Months	$	—	$	—	$	107,550	$	—	$	107,550	$	—	$	—	$	52,491		$	—		$	52,491
12 Months or Longer	46,765		—		124,627		800		172,192		—		—		97,164			800			97,964
Total	$	46,765	$	—	$	232,177	$	800	$	279,742	$	—	$	—	$	149,655		$	800		$	150,455
Number of Securities in a Continuous Loss Position	10		—		86		1		97		—		—		54			1			55

Unrealized Losses on Securities in a Continuous Loss Position:
Less than 12 Months	$	—	$	—	$	841	$	—	$	841	$	—	$	—	$	317		$	—		$	317
12 Months or Longer	306		—		3,899		200		4,405		—		—		763			200			963
Total	$	306	$	—	$	4,740	$	200	$	5,246	$	—	$	—	$	1,080		$	200		$	1,280

Disaggregated Details:
US Treasury Obligations, at Amortized Cost	$	—
US Treasury Obligations, at Fair Value	—
US Agency Obligations, at Amortized Cost	47,071										5,002
US Agency Obligations, at Fair Value	46,765										5,054
US Government Agency Securities, at Amortized Cost					$	72,095									$	61,102
US Government Agency Securities, at Fair Value					71,800										60,616
Government Sponsored Entity Securities, at Amortized Cost					201,132										288,842
Government Sponsored Entity Securities, at Fair Value					196,975										290,100

																									Available-For-Sale Securities
	U.S. Government & Agency Obligations		State and Municipal Obligations		Mortgage- Backed Securities		Corporate and Other Debt Securities		Total Available- For-Sale Securities		U.S. Government & Agency Obligations			State and Municipal Obligations		Mortgage- Backed Securities			Corporate and Other Debt Securities			Total Available- For-Sale Securities
March 31, 2018
March 31, 2019
Available-For-Sale Securities, at Amortized Cost	$	60,264	$	9,741	$	240,033	$	1,000	$	311,038	$	35,519		$	1,114	$	263,347		$	1,000		$	300,980
Available-For-Sale Securities, at Fair Value	59,657		9,743		235,389		800		305,589
Gross Unrealized Gains	—		7		347		—		354		—			2		657			—			659
Gross Unrealized Losses	607		5		4,991		200		5,803		(136		)	—		(2,491		)	(200		)	(2,827		)
Available-For-Sale Securities, Pledged as Collateral									229,857
Available-For-Sale Securities, at Fair Value											35,383			1,116		261,513			800			298,812
Available-For-Sale Securities, Pledged as Collateral, at Fair Value																						255,028

Securities in a Continuous Loss Position, at Fair Value:
Less than 12 Months	$	17,128	$	7,421	$	112,078	$	—	$	136,627	$	—		$	—	$	53,131		$	—		$	53,131
12 Months or Longer	42,529		—		80,759		800		124,088		35,383			—		155,108			800			191,291
Total	$	59,657	$	7,421	$	192,837	$	800	$	260,715	$	35,383		$	—	$	208,239		$	800		$	244,422
Number of Securities in a Continuous Loss Position	14		29		69		1		113		7			—		80			1			88

Unrealized Losses on Securities in a Continuous Loss Position:
Less than 12 Months	$	266	$	6	$	1,940	$	—	$	2,212	$	—		$	—	$	258		$	—		$	258
12 Months or Longer	341		—		3,050		200		3,591		136			—		2,233			200			2,569
Total	$	607	$	6	$	4,990	$	200	$	5,803	$	136		$	—	$	2,491		$	200		$	2,827

Disaggregated Details:
US Treasury Obligations, at Amortized Cost	$	—
US Treasury Obligations, at Fair Value	—
US Agency Obligations, at Amortized Cost	60,264										35,519
US Agency Obligations, at Fair Value	59,657										35,383
US Government Agency Securities, at Amortized Cost					$	59,446										$	70,358
US Government Agency Securities, at Fair Value					59,469											70,034
Government Sponsored Entity Securities, at Amortized Cost					180,587											192,989
Government Sponsored Entity Securities, at Fair Value					175,920											191,479

The following table is the schedule of Held-To-Maturity Securities at March 31, ~~2019,~~2020, December 31, ~~2018~~2019 and March 31, ~~2018:~~2019:

															Held-To-Maturity Securities
	State and Municipal Obligations		Mortgage- Backed Securities		Total Held-To Maturity Securities		State and Municipal Obligations			Mortgage- Backed Securities		Total Held-To Maturity Securities
March 31, 2019
March 31, 2020
Held-To-Maturity Securities, at Amortized Cost	$	234,454	$	44,946	$	279,400	$	204,148		$	34,372	$	238,520
Held-To-Maturity Securities, at Fair Value	235,576		44,838		280,414
Gross Unrealized Gains	1,695		97		1,792		3,104			1,329		4,433
Gross Unrealized Losses	573		205		778		(149		)	—		(149		)
Held-To-Maturity Securities, Pledged as Collateral					265,465
Held-To-Maturity Securities, at Fair Value							207,103			35,701		242,804
Held-To-Maturity Securities, Pledged as Collateral, at Fair Value												231,539

Maturities of Debt Securities, at Amortized Cost:
Within One Year	$	25,205	$	—	$	25,205	$	16,308		$	2,857	$	19,165
From 1 - 5 Years	94,100		44,946		139,046		115,665			31,515		147,180
From 5 - 10 Years	112,788		—		112,788		70,585			—		70,585
Over 10 Years	2,361		—		2,361		1,590			—		1,590

Maturities of Debt Securities, at Fair Value:
Within One Year	$	25,244	$	—	$	25,244	$	16,329		$	2,964	$	19,293
From 1 - 5 Years	94,590		44,838		139,428		117,119			32,737		149,856
From 5 - 10 Years	113,343		—		113,343		72,031			—		72,031
Over 10 Years	2,399		—		2,399		1,624			—		1,624

Securities in a Continuous Loss Position, at Fair Value:
Less than 12 Months	$	—	$	—	$	—	$	5,625		$	—	$	5,625
12 Months or Longer	71,450		26,021		97,471		1,867			—		1,867
Total	$	71,450	$	26,021	$	97,471	$	7,492		$	—	$	7,492

Number of Securities in a Continuous Loss Position	193		29		222		16			—		16

Unrealized Losses on Securities in a Continuous Loss Position:
Less than 12 Months	$	—	$	—	$	—	$	16		$	—	$	16
12 Months or Longer	573		205		778		133			—		133
Total	$	573	$	205	$	778	$	149		$	—	$	149

Disaggregated Details:
US Government Agency Securities, at Amortized Cost			$	2,069						$	1,594
US Government Agency Securities, at Fair Value			2,012							1,655
Government Sponsored Entity Securities, at Amortized Cost			42,877							32,778
Government Sponsored Entity Securities, at Fair Value			42,826							34,046

																Held-To-Maturity Securities
	State and Municipal Obligations		Mortgage- Backed Securities		Total Held-To Maturity Securities		State and Municipal Obligations			Mortgage- Backed Securities			Total Held-To Maturity Securities
December 31, 2018
December 31, 2019
Held-To-Maturity Securities, at Amortized Cost	$	235,782	$	47,694	$	283,476	$	208,243		$	36,822		$	245,065
Held-To-Maturity Securities, at Fair Value	233,359		46,979		280,338
Gross Unrealized Gains	486		—		486		4,170			477			4,647
Gross Unrealized Losses	2,909		715		3,624		(94		)	—			(94		)
Held-To-Maturity Securities, Pledged as Collateral					266,341
Held-To-Maturity Securities, at Fair Value							212,319			37,299			249,618
Held-To-Maturity Securities, Pledged as Collateral, at Fair Value													237,969

Securities in a Continuous Loss Position, at Fair Value:
Less than 12 Months	$	32,093	$	33,309	$	65,402	$	1,438		$	—		$	1,438
12 Months or Longer	110,947		13,670		124,617		1,994			—			1,994
Total	$	143,040	$	46,979	$	190,019	$	3,432		$	—		$	3,432
Number of Securities in a Continuous Loss Position	411		47		458		10			—			10

Unrealized Losses on Securities in a Continuous Loss Position:
Less than 12 Months	$	162	$	456	$	618	$	85		$	—		$	85
12 Months or Longer	2,747		259		3,006		9			—			9
Total	$	2,909	$	715	$	3,624	$	94		$	—		$	94

Disaggregated Details:
US Government Agency Securities, at Amortized Cost			$	2,180						$	1,703
US Government Agency Securities, at Fair Value			2,143							1,720
Government Sponsored Entity Securities, at Amortized Cost			45,514							35,119
Government Sponsored Entity Securities, at Fair Value			44,836							35,579

March 31, 2018
March 31, 2019
Held-To-Maturity Securities, at Amortized Cost	$	272,938	$	57,186	$	330,124	$	234,454		$	44,946		$	279,400
Held-To-Maturity Securities, at Fair Value	268,604		56,333		324,937
Gross Unrealized Gains	646		—		646		1,695			97			1,792
Gross Unrealized Losses	4,979		853		5,832		(573		)	(205		)	(778		)
Held-To-Maturity Securities, Pledged as Collateral					307,273
Held-To-Maturity Securities, at Fair Value							235,576			44,838			280,414
Held-To-Maturity Securities, Pledged as Collateral, at Fair Value													265,465

Securities in a Continuous Loss Position, at Fair Value:
Less than 12 Months	$	101,695	$	53,076	$	154,771	$	—		$	—		$	—
12 Months or Longer	65,012		3,257		68,269		71,450			26,021			97,471
Total	$	166,707	$	56,333	$	223,040	$	71,450		$	26,021		$	97,471
Number of Securities in a Continuous Loss Position	495		47		542		193			29			222

Unrealized Losses on Securities in a Continuous Loss Position:
Less than 12 Months	$	1,981	$	767	$	2,748
12 Months or Longer	2,998		86		3,084
Total	$	4,979	$	853	$	5,832

											Held-To-Maturity Securities
	State and Municipal Obligations	Mortgage- Backed Securities		Total Held-To Maturity Securities	State and Municipal Obligations		Mortgage- Backed Securities		Total Held-To Maturity Securities
March 31, 2018
Unrealized Losses on Securities in a Continuous Loss Position:
Less than 12 Months					$	—	$	—	$	—
12 Months or Longer					573		205		778
Total					$	573	$	205	$	778

March 31, 2019
Disaggregated Details:
US Government Agency Securities, at Amortized Cost		$	2,530				$	2,069
US Government Agency Securities, at Fair Value		2,483					2,012
Government Sponsored Entity Securities, at Amortized Cost		54,656					42,877
Government Sponsored Entity Securities, at Fair Value		53,850					42,826

In the tables above, maturities of mortgage-backed securities are included based on their expected average lives. Actual maturities will differ because issuers may have the right to call or prepay obligations with or without prepayment penalties.

Securities in a continuous loss position, in the tables above for March 31, ~~2019,~~2020, December 31, ~~2018~~2019 and March 31, ~~2018,~~2019, do not reflect any deterioration of the credit worthiness of the issuing entities.

U.S. government agency securities, including mortgage-backed securities, are all rated AAA by Moody's and AA+ by Standard and Poor's. The state and municipal obligations are general obligations supported by the general taxing authority of the issuer, and in some cases are insured. Obligations issued by school districts are supported by state aid. ~~For any non-rated municipal securities, credit~~Credit analysis is performed in-house based upon data that has been submitted by the issuers to the New York State Comptroller. That analysis shows no deterioration in the credit worthiness of the municipalities. Subsequent to March 31, ~~2019,~~2020, there were no securities downgraded below investment grade.

The unrealized losses on these temporarily impaired securities are primarily the result of changes in interest rates for fixed rate securities where the interest rate received is less than the current rate available for new offerings of similar securities, changes in market spreads as a result of shifts in supply and demand, and/or changes in the level of prepayments for mortgage related securities. Because ~~we do not currently intend~~there is no current intention to sell any of our temporarily impaired securities, and because it is not more ~~likely-than-not we~~likely than not that it would be required to sell the securities prior to recovery, the impairment is considered temporary.

Pledged securities, in the tables above, are primarily used to collateralize state and municipal deposits, as required under New York State law. A ~~small~~ portion of the pledged securities are used to collateralize repurchase agreements and pooled deposits of our trust customers.

The following table is the schedule of Equity Securities at March 31, ~~2019,~~2020, December 31, ~~2018~~2019 and March 31, ~~2018:~~2019:

							Equity Securities

	March 31, 2019	December 31, 2018	March 31, 2018	March 31, 2020	December 31, 2019	March 31, 2019
Equity Securities, at Fair Value	$1,850	$1,774	$1,579	$1,689	$2,063	$1,850

The following is a summary of realized and unrealized gains and losses recognized in net income on equity securities during the three-month ~~period~~periods ended March 31, 2020 and 2019:

Three months ended March 31, 2019
Net Gain on Equity Securities $ 76
Less: Net gain (loss) recognized during the reporting period on equity securities sold during the period —
Unrealized net gain recognized during the reporting period on equity securities still held at the reporting date $ 76



	Quarterly Period Ended:
	March 31, 2020			March 31, 2019
Net (Loss) Gain on Equity Securities	$	(374	)	$	76
Less: Net gain (loss) recognized during the reporting period on equity securities sold during the period	—			—
Unrealized net (loss) gain recognized during the reporting period on equity securities still held at the reporting date	$	(374	)	$	76

Note 3. LOANS (In Thousands)

Loan Categories and Past Due Loans

The following table presents loan balances outstanding as of March 31, ~~2019,~~2020, December 31, ~~2018~~2019 and March 31, ~~2018~~2019 and an analysis of the recorded investment in loans that are past due at these dates. Generally, Arrow considers a loan past due 30 or more days when the borrower is two payments past due. Loans held-for-sale of $1,905, $215 and $201 as of March 31, 2020, December 31, 2019 and March 31, 2019, respectively, are included in the residential real estate balances for current loans.

																					Schedule of Past Due Loans by Loan Category
			Commercial										Commercial
											Commercial		Real Estate		Consumer		Residential		Total
March 31, 2020
Loans Past Due 30-59 Days											$	173	$	461	$	5,636	$	1,630	$	7,900
Loans Past Due 60-89 Days											70		110		1,451		212		1,843
Loans Past Due 90 or more Days											8		911		549		1,525		2,993
Total Loans Past Due											251		1,482		7,636		3,367		12,736
Current Loans											146,849		524,648		817,073		912,887		2,401,457
Total Loans											$	147,100	$	526,130	$	824,709	$	916,254	$	2,414,193

Loans 90 or More Days Past Due and Still Accruing Interest											$	5	$	238	$	93	$	101	$	437
Nonaccrual Loans											63		1,445		715		2,720		4,943

December 31, 2019
Loans Past Due 30-59 Days											$	150	$	—	$	5,670	$	152	$	5,972
Loans Past Due 60-89 Days											42		266		2,700		2,027		5,035
Loans Past Due 90 or more Days											21		326		445		1,807		2,599
Total Loans Past Due											213		592		8,815		3,986		13,606
Current Loans											150,447		509,949		802,383		909,735		2,372,514
Total Loans											$	150,660	$	510,541	$	811,198	$	913,721	$	2,386,120

Loans 90 or More Days Past Due and Still Accruing Interest											$	—	$	—	$	—	$	253	$	253
Nonaccrual Loans											81		326		663		2,935		4,005
	Commercial		Real Estate		Consumer		Residential		Total
March 31, 2019
Loans Past Due 30-59 Days	$	168	$	208	$	4,758	$	1,345	$	6,479	$	168	$	208	$	4,758	$	1,345	$	6,479
Loans Past Due 60-89 Days	—		—		1,387		207		1,594		—		—		1,387		207		1,594
Loans Past Due 90 or more Days	17		108		369		1,610		2,104		17		108		369		1,610		2,104
Total Loans Past Due	185		316		6,514		3,162		10,177		185		316		6,514		3,162		10,177
Current Loans	133,091		493,071		740,285		858,584		2,225,031		133,091		493,071		740,285		858,584		2,225,031
Total Loans	$	133,276	$	493,387	$	746,799	$	861,746	$	2,235,208	$	133,276	$	493,387	$	746,799	$	861,746	$	2,235,208

Loans 90 or More Days Past Due and Still Accruing Interest	$	—	$	—	$	—	$	64	$	64	$	—	$	—	$	—	$	64	$	64
Nonaccrual Loans	415		248		588		3,892		5,143		415		248		588		3,892		5,143

December 31, 2018
Loans Past Due 30-59 Days	$	121	$	108	$	5,369	$	281	$	5,879
Loans Past Due 60-89 Days	49		—		2,136		1,908		4,093
Loans Past Due 90 or more Days	—		789		572		1,844		3,205
Total Loans Past Due	170		897		8,077		4,033		13,177
Current Loans	136,720		483,665		711,433		851,220		2,183,038
Total Loans	$	136,890	$	484,562	$	719,510	$	855,253	$	2,196,215

Loans 90 or More Days Past Due and Still Accruing Interest	$	—	$	—	$	144	$	1,081	$	1,225
Nonaccrual Loans	403		789		658		2,309		4,159

March 31, 2018
Loans Past Due 30-59 Days	$	45	$	156	$	3,673	$	1,711	$	5,585
Loans Past Due 60-89 Days	60		—		751		481		1,292
Loans Past Due 90 or more Days	41		807		252		321		1,421
Total Loans Past Due	146		963		4,676		2,513		8,298
Current Loans	127,528		454,095		621,964		781,152		1,984,739
Total Loans	$	127,674	$	455,058	$	626,640	$	783,665	$	1,993,037

Loans 90 or More Days Past Due and Still Accruing Interest	$	—	$	—	$	—	$	—	$	—
Nonaccrual Loans	652		807		441		2,570		4,470

The Company disaggregates its loan portfolio into the following four categories:

Commercial - The Company offers a variety of loan options to meet the specific needs of commercial customers including term loans, time notes and lines of credit. Such loans are made available to businesses for working capital needs such as inventory and receivables, business expansion and equipment purchases. Generally, a collateral lien is placed on equipment or other assets owned by the borrower. ~~These~~Generally, these loans carry a higher risk than commercial real estate loans, due primarily to the nature of the underlying collateral, which can be business assets such as equipment and accounts receivable and generally have a lower liquidation value than real estate. In the event of default by the borrower, the Company may be required to liquidate collateral at deeply discounted values. To reduce the risk, management usually obtains personal guarantees ofto support the ~~borrowers.~~borrowing, as permitted by applicable law.

Commercial Real Estate - The Company offers commercial real estate loans to finance real estate purchases, refinancings, expansions and improvements to commercial properties. Commercial real estate loans are often made to finance the purchases of real property which generally consists of real estate with completed structures. These commercial real estate loans are typically secured by first liens on the real estate, which may include apartments, commercial structures, housing businesses, healthcare facilities, and both owner- and non-owner-occupied facilities. These loans are typically less risky than commercial loans, since they are secured by real estate and buildings, and are generally originated in amounts of no more than 80% of the appraised value of the property. However, the Company also offers commercial construction and land development loans to finance ~~projects, primarily within the communities that we serve.~~projects. Many projects will ultimately be used by the borrowers' businesses, while others are developed for resale. These real estate loans are also typically secured by first liens on the real estate, which may include apartments, commercial structures, housing ~~business,~~businesses, healthcare facilities and both owner-occupied and non-owner-occupied facilities. There is enhanced risk during the construction period, since the loan is secured by an incomplete project.

Consumer Loans - Included in this category are automobile loans. The Company primarily finances the purchases of automobiles indirectly through dealer relationships located throughout upstate New York and Vermont. Most of these indirect consumer loans carry a fixed rate of interest with principal repayment terms typically ranging from three to seven years. Indirect consumer loans are underwritten on a secured basis using the underlying collateral being financed. The Company also offers a variety of consumer installment loans to finance personal expenditures. Most of these loans carry a fixed rate of interest with principal repayment terms typically ranging from one to five years, based upon the nature of the collateral and the size of the loan. In addition to installment loans, the Company also offers personal lines of credit and overdraft protection. Several loans are unsecured, which carry a higher risk of loss. Also included in this category are automobile loans. The Company primarily finances the purchases of automobiles indirectly through dealer relationships located throughout upstate New York and Vermont. Most of these loans carry a fixed rate of interest with principal repayment terms typically ranging from three to seven years. Indirect consumer loans are underwritten on a secured basis using the underlying collateral being financed.

Residential - Residential real estate loans consist primarily of loans secured by first or second mortgages on primary residences. The Company originates ~~adjustable-rate~~fixed-rate and ~~fixed-rate~~adjustable-rate one-to-four-family residential real estate loans for construction, the ~~construction,~~ purchase of real estate or refinancing of an existing mortgage. These loans are collateralized primarily by owner-occupied properties generally located in the Company’s market area. Loans on one-to-four-family residential real estate are generally originated in amounts of no more than 80% of the purchase price or appraised value (whichever is lower), or have private mortgage insurance. The Company’s underwriting analysis for residential mortgage loans typically includes credit verification, independent appraisals, and a review of the borrower’s financial condition. Mortgage title insurance and hazard insurance are normally required. It is the Company's general practice to underwrite residential real estate loans to secondary market standards. Construction loans have a unique risk, because they are secured by an incomplete dwelling. This risk is reduced through periodic site inspections, including one at each loan draw period. In addition, the Company offers fixed home equity loans, as well as variable rate home equity lines of credit, to consumers to finance home improvements, debt consolidation, education and other uses. The Company's policy allows for a maximum loan to value ratio of 80%, although periodically higher advances are allowed. The Company originates home equity lines of credit and second mortgage loans (loans secured by a second junior lien position on one-to-four-family residential real estate). Risk is generally reduced through underwriting criteria, which include credit verification, appraisals, a review of the borrower's financial condition, and personal cash flows. A security interest, with title insurance when necessary, is taken in the underlying real estate.

Allowance for Loan Losses

The following table presents a roll-forward of the allowance for loan losses and other information pertaining to the allowance for loan losses:

																															Allowance for Loan Losses
				Commercial															Commercial
	Commercial			Real Estate			Consumer			Residential			Total			Commercial			Real Estate			Consumer			Residential			Total
Roll-forward of the Allowance for Loan Losses for the Quarterly Periods:
December 31, 2019																$	1,386		$	5,830		$	9,408		$	4,563		$	21,187
Charge-offs																(14		)	—			(467		)	—			(481		)
Recoveries																—			—			159			—			159
Provision																267			1,235			904			366			2,772
March 31, 2020																$	1,639		$	7,065		$	10,004		$	4,929		$	23,637

December 31, 2018	$	1,218		$	5,644		$	8,882		$	4,452		$	20,196		$	1,218		$	5,644		$	8,882		$	4,452		$	20,196
Charge-offs	(1		)	(29		)	(418		)	(14		)	(462		)	(1		)	(29		)	(418		)	(14		)	(462		)
Recoveries	—			—			167			—			167			—			—			167			—			167
Provision	33			(26		)	778			(313		)	472			33			(26		)	778			(313		)	472
March 31, 2019	$	1,250		$	5,589		$	9,409		$	4,125		$	20,373		$	1,250		$	5,589		$	9,409		$	4,125		$	20,373

December 31, 2017	$	1,873		$	4,504		$	7,604		$	4,605		$	18,586
Charge-offs	(16		)	1			(347		)	(8		)	(370		)
Recoveries	—			9			86			—			95
Provision	311			(151		)	676			(90		)	746
March 31, 2018	$	2,168		$	4,363		$	8,019		$	4,507		$	19,057

																					Allowance for Loan Losses
			Commercial										Commercial
	Commercial		Real Estate		Consumer		Residential		Total		Commercial		Real Estate		Consumer		Residential		Total
March 31, 2019
March 31, 2020
Allowance for loan losses - Loans Individually Evaluated for Impairment	$	—	$	—	$	—	$	—	$	—	$	4	$	—	$	—	$	37	$	41
Allowance for loan losses - Loans Collectively Evaluated for Impairment	1,250		5,589		9,409		4,125		20,373		1,635		7,065		10,004		4,892		23,596
Ending Loan Balance - Individually Evaluated for Impairment	40		387		101		2,417		2,945		34		1,137		111		953		2,235
Ending Loan Balance - Collectively Evaluated for Impairment	$	133,236	$	493,000	$	746,698	$	859,329	$	2,232,263	$	147,066	$	524,993	$	824,598	$	915,301	$	2,411,958

December 31, 2018
December 31, 2019
Allowance for loan losses - Loans Individually Evaluated for Impairment	$	—	$	—	$	—	$	4	$	4	$	5	$	—	$	—	$	42	$	47
Allowance for loan losses - Loans Collectively Evaluated for Impairment	1,218		5,644		8,882		4,448		20,192
Allowance for creditlosses - Loans Collectively Evaluated for Impairment											1,381		5,830		9,408		4,521		21,140
Ending Loan Balance - Individually Evaluated for Impairment	430		793		101		1,899		3,223		35		—		107		959		1,101
Ending Loan Balance - Collectively Evaluated for Impairment	$	136,460	$	483,769	$	719,409	$	853,354	$	2,192,992	$	150,625	$	510,541	$	811,091	$	912,762	$	2,385,019

March 31, 2018
March 31, 2019
Allowance for loan losses - Loans Individually Evaluated for Impairment	$	92	$	42	$	—	$	58	$	192	$	—	$	—	$	—	$	—	$	—
Allowance for loan losses - Loans Collectively Evaluated for Impairment	2,076		4,321		8,019		4,449		18,865
Allowance for credit losses - Loans Collectively Evaluated for Impairment											1,250		5,589		9,409		4,125		20,373
Ending Loan Balance - Individually Evaluated for Impairment	489		815		91		1,564		2,959		40		387		101		2,417		2,945
Ending Loan Balance - Collectively Evaluated for Impairment	$	127,185	$	454,243	$	626,549	$	782,101	$	1,990,078	$	133,236	$	493,000	$	746,698	$	859,329	$	2,232,263

Through the provision for loan losses, an allowance for loan losses is maintained that reflects the best estimate of the incurred risk of loss in the Company’s loan portfolio as of the balance sheet date. Additions are made to the allowance for loan losses through a periodic provision for loan losses. Actual loan losses are charged against the allowance for loan losses when loans are deemed uncollectible and recoveries of amounts previously charged off are recorded as credits to the allowance for loan losses.

Our loan officers and risk managers meet at least quarterly to discuss and review the conditions and risks associated with certain criticized and classified commercial-related relationships. In addition, our independent internal loan review department performs periodic reviews of the credit quality indicators on individual loans in the commercial loan portfolio.

~~We use~~The Company uses a two-step process to determine the provision for loan losses and the amount of the allowance for loan losses. ~~We perform an~~An evaluation of impaired loans is performed on a quarterly basis. Impaired loans are generally nonaccrual loans over $250 thousand and all troubled debt restructured loans. ~~Our~~Specific reserves on individually identified impaired loans that are ~~generally considered to be~~not collateral dependent ~~with the charge-off, if any, determined~~are measured based on the present value of expected future cash flows discounted at the original effective interest rate of each loan. For loans that are collateral dependent, impairment is measured based on the fair value of the collateral less estimated selling costs, and such impaired amounts are generally charged off. In general, Arrow's impaired loans are collateral dependent impaired loans that have limited exposure or require limited specific reserves because of the amount of collateral support with respect to ~~sell.~~these loans. Interest payments on impaired loans are typically applied to principal unless collectability of the principal amount is reasonably assured. In these cases, interest is recognized on a cash basis.

The remainder of the portfolio is evaluated on a pooled basis, as described below. For each homogeneous loan pool, ~~we estimate~~ a total loss factor is estimated based on the historical net loss rates adjusted for applicable qualitative factors. ~~We update the~~The total loss factors assigned to each loan category are updated on a quarterly basis. For the commercial, commercial construction and commercial real estate categories, ~~we further segregate~~ the loan categories are further segregated by credit risk profile (pools of loans graded pass, special mention and accruing substandard). Additional description of the credit risk classifications is detailed in the Credit Quality Indicators section of this note.

~~We determine the~~The historical net loss rate is determined for each loan category using a trailing three-year net charge-off average. While historical net loss experience provides a reasonable starting point for analysis, historical net losses, or even recent trends in net losses, do not by themselves form a sufficient basis to determine the appropriate level of the allowance for loan losses. Therefore, ~~we also consider and adjust~~ historical net loss factors are considered and adjusted for qualitative factors that impact the incurred risk of loss associated with the loan categories within the total loan portfolio. These include:

Changes in the volume and severity of past due, nonaccrual and adversely classified loans

Changes in the nature and volume of the portfolio and in the terms of loans

Changes in the value of the underlying collateral for collateral dependent loans

Changes in lending policies and procedures, including changes in underwriting standards and collection, charge-off, and recovery practices not considered elsewhere in estimating credit losses

Changes in the quality of the loan review system

Changes in the experience, ability, and depth of lending management and other relevant staff

Changes in international, national, regional, and local economic and business conditions and developments that affect the collectibility of the portfolio

The existence and effect of any concentrations of credit, and changes in the level of such concentrations

The effect of other external factors such as competition and legal and regulatory requirements on the level of estimated credit losses in the existing portfolio or pool

Loan Credit Quality Indicators

The following table presents the credit quality indicators by loan category at March 31, ~~2019,~~2020, December 31, ~~2018~~2019 and March 31, ~~2018:~~2019:

																					Loan Credit Quality Indicators
			Commercial										Commercial
											Commercial		Real Estate		Consumer		Residential		Total
March 31, 2020
Credit Risk Profile by Creditworthiness Category:
Satisfactory											$	140,218	$	497,243					$	637,461
Special Mention											28		255						283
Substandard											6,854		28,632						35,486
Doubtful											—		—						—

Credit Risk Profile Based on Payment Activity:
Performing															$	823,901	$	913,433	$	1,737,334
Nonperforming															808		2,821		3,629

December 31, 2019
Credit Risk Profile by Creditworthiness Category:
Satisfactory											$	144,283	$	484,267					$	628,550
Special Mention											32		263						295
Substandard											6,345		26,011						32,356
Doubtful											—		—						—
Credit Risk Profile Based on Payment Activity:
Performing															$	810,535	$	910,533	$	1,721,068
Nonperforming															663		3,188		3,851
	Commercial		Real Estate		Consumer		Residential		Total
March 31, 2019
Credit Risk Profile by Creditworthiness Category:
Satisfactory	$	125,918	$	465,216					$	591,134	$	125,918	$	465,216					$	591,134
Special Mention	133		2,268						2,401		133		2,268						2,401
Substandard	7,225		25,903						33,128		7,225		25,903						33,128
Doubtful	—		—						—		—		—						—
Credit Risk Profile Based on Payment Activity:
Performing					$	746,211	$	857,790	$	1,604,001					$	746,211	$	857,790	$	1,604,001
Nonperforming					588		3,956		4,544						588		3,956		4,544

December 31, 2018
Credit Risk Profile by Creditworthiness Category:
Satisfactory	$	129,584	$	456,868					$	586,452
Special Mention	—		—						—
Substandard	7,306		26,905						34,211
Doubtful	—		789						789
Credit Risk Profile Based on Payment Activity:
Performing					$	718,708	$	851,863	$	1,570,571
Nonperforming					802		3,390		4,192

March 31, 2018
Credit Risk Profile by Creditworthiness Category:
Satisfactory	$	107,838	$	430,121					$	537,959
Special Mention	17,220		611						17,831
Substandard	2,615		23,521						26,136
Doubtful	—		807						807
Credit Risk Profile Based on Payment Activity:
Performing					$	626,198	$	781,095	$	1,407,293
Nonperforming					441		2,570		3,011

For the purposes of the table above, nonperforming consumer and residential loans are those loans on nonaccrual status or are 90 days or more past due and still accruing interest.

For the allowance calculation, ~~we use~~ an internally developed system of five credit quality indicators is used to rate the credit worthiness of each commercial loan defined as follows:

1) Satisfactory - "Satisfactory" borrowers have acceptable financial condition with satisfactory record of earnings and sufficient historical and projected cash flow to service the debt. Borrowers have satisfactory repayment histories and primary and secondary sources of repayment can be clearly identified;

2) Special Mention - Loans in this category have potential weaknesses that deserve management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the asset or in the institution’s credit position at some future date. "Special mention" assets are not adversely classified and do not expose an institution to sufficient risk to warrant adverse classification. Loans which might be assigned this credit quality indicator include loans to borrowers with deteriorating financial strength and/or earnings record and loans with potential for problems due to weakening economic or market conditions;

3) Substandard - Loans classified as “substandard” are inadequately protected by the current sound net worth or paying capacity of the borrower or the collateral pledged, if any. Loans in this category have well defined weaknesses that jeopardize the repayment. They are characterized by the distinct possibility that the ~~bank~~Company will sustain some loss if the deficiencies are not corrected. “Substandard”

loans may include loans which are likely to require liquidation of collateral to effect repayment, and other loans where character or ability to repay has become suspect. Loss potential, while existing in the aggregate amount of substandard assets, does not have to exist in individual assets classified substandard;

4) Doubtful - Loans classified as “doubtful” have all of the weaknesses inherent in those classified as “substandard” with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of current existing facts, conditions, and values, highly questionable and improbable. Although possibility of loss is extremely high, classification of these loans as “loss” has been deferred due to specific pending factors or events which may strengthen the value ~~(i.e.~~(e.g. possibility of additional collateral, injection of capital, collateral liquidation, debt restructure, economic recovery, etc). Loans classified as “doubtful” need to be placed on non-accrual; and

5) Loss - Loans classified as “loss” are considered uncollectible with collateral of such little value that their continuance as bankable assets is not warranted. As of the date of the balance sheet, all loans in this category have been charged-off to the allowance for loan losses.

Commercial loans are generally evaluated on an annual basis depending on the size and complexity of the loan relationship, unless the credit related quality indicator falls to a level of "special mention" or below, when the loan is evaluated quarterly. The credit quality indicator is one of the factors used in assessing the level of incurred risk of loss in our commercial related loan portfolios.

Impaired Loans

The following table presents information on impaired loans as of March 31, 2020, December 31, 2019 and March 31, 2019 based on whether the impaired loan has a recorded related allowance or has no recorded related allowance:

																					Impaired Loans
			Commercial										Commercial
											Commercial		Real Estate		Consumer		Residential		Total
March 31, 2020
Recorded Investment:
With No Related Allowance											$	—	$	1,137	$	112	$	697	$	1,946
With a Related Allowance											33		—		—		256		289
Unpaid Principal Balance:
With No Related Allowance											—		1,137		111		697		1,945
With a Related Allowance											34		—		—		256		290

December 31, 2019
Recorded Investment:
With No Related Allowance											$	—	$	—	$	108	$	699	$	807
With a Related Allowance											34		—		—		260		294
Unpaid Principal Balance:
With No Related Allowance											—		—		107		699		806
With a Related Allowance											35		—		—		260		295
	Commercial		Real Estate		Consumer		Residential		Total
March 31, 2019
Recorded Investment:
With No Related Allowance	$	38	$	389	$	101	$	2,417	$	2,945	$	38	$	389	$	101	$	2,417	$	2,945
With a Related Allowance	—		—		—		—		—		—		—		—		—		—
Unpaid Principal Balance:
With No Related Allowance	424		2		101		2,416		2,943		424		2		101		2,416		$	2,943
With a Related Allowance	—		—		—		—		—		—		—		—		—		—

December 31, 2018
Recorded Investment:
For the Quarter Ended:
March 31, 2020
Average Recorded Balance:
With No Related Allowance	$	430	$	793	$	101	$	1,605	$	2,929	$	—	$	569	$	110	$	698	$	1,377
With a Related Allowance	—		—		—		294		294		34		—		—		258		292
Unpaid Principal Balance:
Interest Income Recognized:
With No Related Allowance											—		10		—		—		10
With a Related Allowance											—		—		—		—		—
Cash Basis Income:
With No Related Allowance	429		793		100		1,606		2,928		—		—		—		—		—
With a Related Allowance	—		—		—		293		293		—		—		—		—		—

March 31, 2018
Recorded Investment:
With No Related Allowance	$	—	$	8	$	90	$	1,276	$	1,374
With a Related Allowance	483		783		—		356		1,622
Unpaid Principal Balance:
With No Related Allowance	—		8		90		1,279		$	1,377
With a Related Allowance	489		807		—		286		1,582

For the Quarter Ended:
March 31, 2019
Average Recorded Balance:
With No Related Allowance	$	234	$	591	$	101	$	2,011	$	2,937	$	234	$	591	$	101	$	2,011	$	2,937
With a Related Allowance	—		—		—		147		147		—		—		—		147		147
Interest Income Recognized:
With No Related Allowance	—		—		—		—		—		—		—		—		—		—
With a Related Allowance	—		—		—		—		—		—		—		—		—		—
Cash Basis Income:
With No Related Allowance	—		—		—		—		—		—		—		—		—		—
With a Related Allowance	—		—		—		—		—		—		—		—		—		—

March 31, 2018
Average Recorded Balance:
With No Related Allowance	$	—	$	395	$	92	$	1,273	$	1,760
With a Related Allowance	484		754		—		345		1,583
Interest Income Recognized:
With No Related Allowance	—		—		—		16		16
With a Related Allowance	—		—		—		24		24
Cash Basis Income:
With No Related Allowance	—		—		—		—		—
With a Related Allowance	—		—		—		—		—

At March 31, ~~2019,~~2020, December 31, ~~2018~~2019 and March 31, ~~2018,~~2019, all impaired loans were considered to be collateral dependent and were therefore evaluated for impairment based on the fair value of collateral less estimated cost to sell. Interest income recognized in the table above represents income earned after the loans became impaired and includes restructured loans in compliance with their modified terms and nonaccrual loans where ~~we have recognized~~ interest income was recognized on a cash basis.

Loans Modified in Trouble Debt Restructurings

The following table presents information on loans modified in trouble debt restructurings during the periods indicated.

																					Loans Modified in Trouble Debt Restructurings During the Period
			Commercial										Commercial
	Commercial		Real Estate		Consumer		Residential		Total		Commercial		Real Estate		Consumer		Residential		Total
For the Quarter Ended:
March 31, 2020
Number of Loans											—		—		1		—		1
Pre-Modification Outstanding Recorded Investment											$	—	$	—	$	16	$	—	$	16
Post-Modification Outstanding Recorded Investment											—		—		16		—		16
Subsequent Default, Number of Contracts											—		—		—		—		—
Subsequent Default, Recorded Investment											—		—		—		—		—

March 31, 2019
Number of Loans	—		—		1		—		1		—		—		1		—		1
Pre-Modification Outstanding Recorded Investment	$	—	$	—	$	13	$	—	$	13	$	—	$	—	$	13	$	—	$	13
Post-Modification Outstanding Recorded Investment	—		—		13		—		13		—		—		13		—		13
Subsequent Default, Number of Contracts	—		—		—		—		—		—		—		—		—		—
Subsequent Default, Recorded Investment	—		—		—		—		—		—		—		—		—		—

March 31, 2018
Number of Loans	—		—		1		—		1
Pre-Modification Outstanding Recorded Investment	$	—	$	—	$	3	$	—	$	3
Post-Modification Outstanding Recorded Investment	—		—		3		—		3
Subsequent Default, Number of Contracts	—		—		—		—		—
Subsequent Default, Recorded Investment	—		—		—		—		—

In general, prior to the COVID-19 pandemic, loans requiring modification are restructured to accommodate the projected cash-flows of the borrower. Such modifications may involve a reduction of the interest rate, a significant deferral of payments or forgiveness of a portion of the outstanding principal balance. As indicated in the table above, no loans modified during the preceding twelve months subsequently defaulted as of March 31, ~~2019.~~2020. In accordance with the Coronavirus Aid, Relief, and Economic Security (CARES) Act, if a short-term loan modification (e.g. six months) is made for a borrower as the result of the COVID-19 pandemic, and who was current on contractual payments as of December 31, 2019, this modification is not considered a troubled debt restructuring (TDR).

Note 4. ~~GUARANTEES~~COMMITMENTS AND CONTINGENCIES (In Thousands)

The following table presents the notional amount and fair value of Arrow's off-balance sheet commitments to extend credit and commitments under standby letters of credit as of March 31, ~~2019,~~2020, December 31, ~~2018~~2019 and March 31, ~~2018:~~2019:

													Commitments to Extend Credit and Letters of Credit
	March 31, 2019		December 31, 2018		March 31, 2018		March 31, 2020		December 31, 2019		March 31, 2019
Notional Amount:
Commitments to Extend Credit	$	310,749	$	321,143	$	328,774	$	376,519	$	349,718	$	310,749
Standby Letters of Credit	4,431		4,466		3,584		3,301		3,129		4,431
Fair Value:
Commitments to Extend Credit	$	—	$	—	$	—	$	—	$	—	$	—
Standby Letters of Credit	20		12		24		29		31		20

Arrow is party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit. Commitments to extend credit include home equity lines of credit, commitments for residential and commercial construction loans and other personal and commercial lines of credit. Those instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the consolidated balance sheets. The contract or notional amounts of those instruments reflect the extent of the involvement Arrow has in particular classes of financial instruments.

Arrow's exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby letters of credit is represented by the contractual notional amount of those instruments. Arrow uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments.

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are not expected to be fully drawn upon, the total commitment amounts do not necessarily represent future cash requirements. Arrow evaluates each customer's creditworthiness on a case-by-case basis. Home equity lines of credit are secured by residential real estate. Construction lines of credit are secured by underlying real estate. For other lines of credit, the amount of collateral obtained, if deemed necessary by Arrow upon extension of credit, is based on management's credit evaluation of the counterparty. Collateral held varies, but may include accounts receivable, inventory, property, plant and equipment, and income-producing commercial properties. Most of the commitments are variable rate instruments.

Arrow does not issue any guarantees that would require liability-recognition or disclosure, other than its standby letters of credit.

Arrow has issued conditional commitments in the form of standby letters of credit to guarantee payment on behalf of a customer and guarantee the performance of a customer to a third party. Standby letters of credit generally arise in connection with commercial lending relationships. The credit risk involved in issuing these instruments is essentially the same as that involved in extending loans to customers. Contingent obligations under standby letters of credit at March 31, ~~2019,~~2020, December 31, ~~2018~~2019 and March 31, ~~2018~~2019 represent the maximum potential future payments Arrow could be required to make. Typically, these instruments have terms of 12 months or less and expire unused; therefore, the total amounts do not necessarily represent future cash requirements. Each customer is evaluated individually for creditworthiness under the same underwriting standards used for commitments to extend credit and on-balance sheet instruments. Company policies governing loan collateral apply to standby letters of credit at the time of credit extension. Loan-to-value ratios will generally range from 50% for movable assets, such as inventory, to 100% for liquid assets, such as bank CD's. Fees for standby letters of credit range from 1% to 3% of the notional amount. Fees are collected upfront and amortized over the life of the commitment. The carrying amount and fair value of Arrow's standby letters of credit at March 31, ~~2019,~~2020, December 31, ~~2018~~2019 and March 31, ~~2018,~~2019, were insignificant. The fair value of standby letters of credit is based on the fees currently charged for similar agreements or the cost to terminate the arrangement with the counterparties.

The fair value of commitments to extend credit is determined by estimating the fees to enter into similar agreements, taking into account the remaining terms and present creditworthiness of the counterparties, and for fixed rate loan commitments, the difference between the current and committed interest rates. Arrow provides several types of commercial lines of credit and standby letters of credit to its commercial customers. The pricing of these services is not isolated as Arrow considers the customer's complete deposit and borrowing relationship in pricing individual products and services. The commitments to extend credit also include commitments under home equity lines of credit, for which Arrow charges no fee. The carrying value and fair value of commitments to extend credit are not material and Arrow does not expect to incur any material loss as a result of these commitments.

In the normal course of business, Arrow and its subsidiary banks become involved in a variety of routine legal proceedings. At present, there are no legal proceedings pending or threatened, which in the opinion of management and counsel, would result in a material loss to Arrow.

Note 5. COMPREHENSIVE INCOME (In Thousands)

The following table presents the components of other comprehensive income for the three-month periods ended March 31, ~~2019~~2020 and ~~2018:~~2019:

																			Schedule of Comprehensive Income
	Three Months Ended March 31,									Three Months Ended March 31,
				Tax									Tax
	Before-Tax			(Expense)			Net-of-Tax			Before-Tax			(Expense)			Net-of-Tax
	Amount			Benefit			Amount			Amount			Benefit			Amount
2020
Net Unrealized Securities Holding Gains on Securities Available-for-Sale Arising During the Period										5,504			$	(1,406	)	4,098
Net Unrealized Losses on Cash Flow Swap										(294		)	75			(219		)
Amortization of Net Retirement Plan Actuarial Loss										36			(9		)	27
Amortization of Net Retirement Plan Prior Service Cost										54			(15		)	39
Other Comprehensive Income										$	5,300		$	(1,355	)	$	3,945

2019
Net Unrealized Securities Holding Gains on Securities Available-for-Sale Arising During the Period	2,788			$	(708	)	2,080			2,788			$	(708	)	2,080
Amortization of Net Retirement Plan Actuarial Loss	163			(42		)	121			163			(42		)	121
Amortization of Net Retirement Plan Prior Service Cost	56			(14		)	42			56			(14		)	42
Other Comprehensive Income	$	3,007		$	(764	)	$	2,243		$	3,007		$	(764	)	$	2,243

2018
Net Unrealized Securities Holding Losses on Securities Available-for-Sale Arising During the Period	(3,332		)	$	847		(2,485		)
Amortization of Net Retirement Plan Actuarial Loss	60			(14		)	46
Accretion of Net Retirement Plan Prior Service Credit	(1		)	—			(1		)
Other Comprehensive Loss	$	(3,273	)	$	833		$	(2,440	)

The following table presents the changes in accumulated other comprehensive income by component:

Changes in Accumulated Other Comprehensive Income (Loss) by Component ⁽¹⁾

Unrealized Defined Benefit Plan Items
Gains and
Losses on Net Prior
Available-for- Net Gain Service
Sale Securities (Loss) (Cost) Credit Total
For the Quarter-To-Date periods ended:

December 31, 2018 $ (3,697 ) $ (8,971 ) $ (1,142 ) $ (13,810 )
Other comprehensive income before reclassifications 2,080
—
—
2,080
Amounts reclassified from accumulated other comprehensive income
121
42
163
Net current-period other comprehensive income 2,080
121
42
2,243
March 31, 2019 $ (1,617 ) $ (8,850 ) $ (1,100 ) $ (11,567 )

December 31, 2017 $ (1,250 ) $ (6,380 ) $ (884 ) $ (8,514 )
Other comprehensive loss before reclassifications (2,485 ) —
—
(2,485 )
Amounts reclassified from accumulated other comprehensive loss —
46
(1 ) 45
Net current-period other comprehensive income (loss) (2,485 ) 46
(1 ) (2,440 )
Reclassification due to the adoption of ASU 2016-01 (331 ) (331 )
March 31, 2018 $ (4,066 ) $ (6,334 ) $ (885 ) $ (11,285 )



Changes in Accumulated Other Comprehensive Income (Loss) by Component ⁽¹⁾

	Unrealized Gains and Losses on Available-for-Sale Securities			Unrealized Loss on Cash Flow Swap			Defined Benefit Plan Items						Total
							Net Actuarial Gain (Loss)			Net Prior Service (Cost) Credit


For the Quarter-To-Date periods ended:

December 31, 2019	$	465		$	—		$	(5,847	)	$	(975	)	$	(6,357	)
Other comprehensive income or loss before reclassifications	4,098			(219		)	—			—			3,879
Amounts reclassified from accumulated other comprehensive income	—			—			27			39			66
Net current-period other comprehensive income	4,098			(219		)	27			39			3,945
March 31, 2020	$	4,563		$	(219	)	$	(5,820	)	$	(936	)	$	(2,412	)

December 31, 2018	$	(3,697	)				$	(8,971	)	$	(1,142	)	$	(13,810	)
Other comprehensive income or loss before reclassifications	2,080						—			—			2,080
Amounts reclassified from accumulated other comprehensive income	—						121			42			163
Net current-period other comprehensive income	2,080						121			42			2,243
March 31, 2019	$	(1,617	)				$	(8,850	)	$	(1,100	)	$	(11,567	)

(1) All amounts are net of tax.

The following table presents the reclassifications out of accumulated other comprehensive income:

											Reclassifications Out of Accumulated Other Comprehensive Income
	Amounts Reclassified					Amounts Reclassified
Details about Accumulated Other	from Accumulated Other				Affected Line Item in the Statement	from Accumulated Other				Affected Line Item in the Statement
Comprehensive Income (Loss) Components	Comprehensive Income				Where Net Income Is Presented	Comprehensive Income				Where Net Income Is Presented

For the Quarter-to-date periods ended:

March 31, 2019
March 31, 2020
Amortization of defined benefit pension items:
Prior-service costs	$	(56	)	⁽¹⁾	Salaries and Employee Benefits	$	(54	)	⁽¹⁾	Salaries and Employee Benefits
Actuarial gains/(losses)	(163		)	⁽¹⁾	Salaries and Employee Benefits
Actuarial loss						(36		)	⁽¹⁾	Salaries and Employee Benefits
	(219		)		Total before Tax	(90		)		Total before Tax
	56				Provision for Income Taxes	24				Provision for Income Taxes
	$	(163	)		Net of Tax	$	(66	)		Net of Tax

Total reclassifications for the period	$	(163	)		Net of Tax	$	(66	)		Net of Tax

March 31, 2018
March 31, 2019
Amortization of defined benefit pension items:
Prior-service costs	$	(1	)	⁽¹⁾	Salaries and Employee Benefits	$	(56	)	⁽¹⁾	Salaries and Employee Benefits
Actuarial gains/(losses)	60			⁽¹⁾	Salaries and Employee Benefits
Actuarial loss						(163		)	⁽¹⁾	Salaries and Employee Benefits
	59				Total before Tax	(219		)		Total before Tax
	(14		)		Provision for Income Taxes	56				Provision for Income Taxes
	$	45			Net of Tax	$	(163	)		Net of Tax

Total reclassifications for the period	$	45			Net of Tax	$	(163	)		Net of Tax

(1) These accumulated other comprehensive income components are included in the computation of net periodic pension cost.

Note 6. STOCK-BASED COMPENSATION (Dollars In Thousands, Except Share and Per Share Amounts)

Arrow has established three stock-based compensation plans: ~~an Incentive and Non-qualified Stock Option Plan (Long~~a Long Term Incentive ~~Plan),~~Plan, an Employee Stock Purchase Plan (ESPP) and an Employee Stock Ownership Plan (ESOP). All share and per share data have been adjusted for the September 27, ~~2018~~2019 3% stock dividend.

Long Term Incentive Plan

The Long Term Incentive Plan provides for the grant of incentive stock options, non-qualified stock options, restricted stock, restricted stock units, performance units and performance shares. The Compensation Committee of the Board of Directors administers the Long Term Incentive Plan.

Stock Options - Options may be granted at a price no less than the greater of the par value or fair market value of such shares on the date on which such option is granted, and generally expire ten years from the date of grant. The options usually vest over a four-year period.

The following table summarizes information about stock option activity for the year to date period ended March 31, ~~2019.~~2020.


	Shares			Weighted Average Exercise Price		Shares			Weighted Average Exercise Price

Outstanding at January 1, 2019	284,522			$	25.67
Outstanding at January 1, 2020						241,242			$	27.58
Granted	52,000			31.71		50,800			35.28
Exercised	(26,135		)	20.46		(14,282		)	24.05
Forfeited	(5,797		)	21.12		(2,752		)	29.65
Outstanding at March 31, 2019	304,590			27.24
Outstanding at March 31, 2020						275,008			29.17
Vested at Period-End	183,685			24.34		155,195			26.23
Expected to Vest	120,905			31.63		119,813			32.97

Stock Options Granted
Weighted Average Grant Date Information:
Fair Value of Options Granted	$	5.75				$	4.99
Fair Value Assumptions:
Dividend Yield	3.26		%			2.90		%
Expected Volatility	22.58		%			20.25		%
Risk Free Interest Rate	2.63		%			1.53		%
Expected Lives (in years)	8.68					6.68

The following table presents information on the amounts expensed related to stock options for the periods ended March 31, ~~2019~~2020 and ~~2018:~~2019:

For the Three Months Ended March 31,
2019 2018
Amount expensed $ 79
$ 83



	For the Three Months Ended March 31,
	2020		2019
Amount expensed	$	76	$	79

Restricted Stock Units - The Company grants restricted stock units which gives the recipient the right to receive shares of Company stock upon vesting. The fair value of each restricted stock unit is the market value of Company stock on the date of grant. 100% of the restricted stock unit awards vest three years from the grant date. Once vested, the restricted stock units become vested ~~units.~~units and are no longer forfeitable. Vested units settle upon retirement of the recipient. Unvested restricted stock unit awards will generally be forfeited if the recipient ceases to be employed by the Company, with limited exceptions.

The following table summarizes information about restricted stock unit activity for the ~~period~~periods ended March 31, 2020 and 2019.


				Restricted Stock Units	Weighted Average Grant Date Fair Value
Non-vested at January 1, 2020				7,496	$	31.18
Granted				3,827	35.28
Non-vested at March 31, 2020				11,323	32.57
	Restricted Stock Units	Weighted Average Grant Date Fair Value
Non-vested at January 1, 2019	3,377	$	32.57	3,478	31.62
Granted	3,901	31.71		4,018	30.79
Non-vested at March 31, 2019	7,278	32.11		7,496	31.18

The following table presents information on the amounts expensed related to restricted stock units for the periods ended March 31, ~~2019~~2020 and ~~2018:~~2019:

For the Three Months Ended March 31,
2019 2018
Amount expensed $ 16
$ 6



	For the Three Months Ended March 31,
	2020		2019
Amount expensed	$	27	$	16

Employee Stock Purchase Plan

Arrow sponsors an ESPP under which employees may purchase Arrow's common stock at a 5% discount below market price. Under current accounting guidance, a stock purchase plan with a discount of 5% or less is not considered a compensatory plan.

Employee Stock Ownership Plan

Arrow maintains an ~~employee stock ownership plan ("ESOP"). Substantially~~ESOP, pursuant to which substantially all employees of Arrow and its subsidiaries are eligible to participate upon satisfaction of applicable service requirements. The ESOP borrowed funds from one of Arrow’s subsidiary banks to purchase outstanding shares of Arrow’s common stock. The notes, ~~require~~which were fully repaid as of December 31, 2019, required annual payments of principal and interest through 2019. As the debt iswas repaid, shares ~~are~~were released from collateral based on the proportion of debt paid to total debt outstanding for the year and allocated to active employees. In addition, the Company makes additional cash contributions to the Plan each year.

Shares pledged as collateral ~~are~~were reported as unallocated ESOP shares in stockholders' equity. As shares ~~are~~were released from collateral, Arrow ~~reports~~reported compensation expense equal to the current average market price of the shares, and the shares ~~become~~became outstanding for earnings per share computations.

Note 7. RETIREMENT BENEFIT PLANS (Dollars in Thousands)

Arrow sponsors qualified and ~~nonqualified~~non-qualified defined benefit pension plans and other postretirement benefit plans for its employees. Arrow maintains a non-contributory pension plan, which covers substantially all employees. Effective December 1, 2002, all active participants in the qualified defined benefit pension plan were given a one-time irrevocable election to continue participating in the traditional plan design, for which benefits were based on years of service and the participant’s final compensation (as defined), or to begin participating in the new cash balance plan design. All employees who participate in the plan after December 1, 2002 automatically participate in the cash balance plan design. The interest credits under the cash balance plan are based on the 30-year U.S. Treasury rate in effect for November of the prior ~~year.~~year with a minimum interest credit of 3%. The service credits under the cash balance plan are equal to 6.0% of eligible salaries for employees who become participants on or after January 1, 2003. For employees in the plan prior to January 1, 2003, the service credits are scaled based on the age of the participant, and range from 6.0% to 12.0%. The funding policy is to contribute up to the maximum amount that can be deducted for federal income tax purposes and to make all payments required under ~~ERISA.~~The Employee Retirement Income Security Act (ERISA). Arrow also maintains a supplemental non-qualified unfunded retirement plan to provide eligible employees of Arrow and its subsidiaries with benefits in excess of qualified plan limits imposed by federal tax law.

Arrow has multiple non-pension postretirement benefit plans. The health care, dental and life insurance plans are contributory, with participants’ contributions adjusted annually. Arrow’s policy is to fund the cost of postretirement benefits based on the current cost of the underlying policies. However, the health care plan provision for automatic increases of Company contributions each year is based on the increase in inflation and is limited to a maximum of 5%.

As of December 31, ~~2018,~~2019, Arrow updated its mortality assumption to the ~~RP-2014 Mortality Table~~Pri-2012 mortality tables for employees, healthy annuitants and ~~non-annuitants with projected generational~~contingent survivors, adjusted for mortality improvements ~~using~~with the Scale ~~MP-2018 for~~MP-2019 mortality improvement scale on a generational basis to reflect newly published mortality tables. The Pension Plan uses the ~~pension plans~~sex-distinct amount-weighted tables, the Select Executive Retirement Plan uses the sex-distinct white collar amount-weighted tables, and the ~~RPH-2014 Mortality Table for annuitants and non-annuitants with projected generational~~Postretirement Benefit Plan uses the sex-distinct headcount-weighted tables. The change in mortality ~~improvements using Scale MP-2018 for the retiree health plan. The revised assumptions~~tables resulted in a decrease in ~~postretirement liabilities. As~~liabilities for the Employee's Pension Plan, the Select Executive Retirement Plan and the Postretirement Benefit Plan.

The mortality table used in determining the present value of ~~December 31, 2018, Arrow also updated its mortality assumption for annuity/~~a lump sum ~~conversions~~payment/annuitizing cash balance accounts was changed to the applicable mortality table for the ~~pension plans to~~determination of present values under Internal Revenue Code (IRC) Section 417(e)(3)(B). This table is currently a 50/50 blend of male and female rates from the ~~2019~~2020 sex distinct optional combined mortality tables, as prescribed under IRC Section ~~417(e)(3)B) applicable~~430. The change in mortality ~~table. The revised assumption results~~table was made to reflect the continued improvement in mortality rates and resulted in an increase in ~~postretirement~~ liabilities for the ~~pension plans.~~Employee's Pension Plan and the Select Executive Retirement Plan.

The interest rates used in determining the present value of a lump sum payment/annuitizing cash balance accounts were changed to the segment rates in effect for the January 1, ~~2019~~2020 plan year ~~(3.43%~~(2.04%, ~~4.46%~~3.09%, ~~4.88%~~3.68%) as of December 31, ~~2018.~~2019. This change ~~was made to more accurately reflect current expected long-term interest rates and~~ resulted in ~~an increase~~a decrease in liability for the ~~Arrow Financial Corporation~~ Employees' Pension Plan and ~~Trust and~~ the ~~Arrow Financial Corporation~~ Select Executive Retirement Plan.

The following tables provide the components of net periodic benefit costs for the three-month periods ended March 31, ~~2019~~2020 and ~~2018.~~2019.


				Select
	Employees'			Executive		Postretirement			Employees'			Select Executive		Postretirement
	Pension			Retirement		Benefit			Pension			Retirement		Benefit
	Plan			Plan		Plans			Plan			Plan		Plans
Net Periodic Benefit Cost
For the Three Months Ended March 31, 2020
Service Cost ¹									$	430		$	103	$	33
Interest Cost ²									417			54		78
Expected Return on Plan Assets ²									(904		)	—		—
Amortization of Prior Service Cost ²									16			11		27
Amortization of Net Loss ²									1			33		2
Net Periodic Cost									$	(40	)	$	201	$	140

Plan Contributions During the Period									$	—		$	117	$	78

For the Three Months Ended March 31, 2019:
Service Cost ¹	$	399		$	97	$	30		$	399		$	97	$	30
Interest Cost ²	397			52		89			397			52		89
Expected Return on Plan Assets ²	(770		)	—		—			(770		)	—		—
Amortization of Prior Service (Credit) Cost ²	17			14		25
Amortization of Prior Service Cost ²									17			14		25
Amortization of Net Loss ²	153			27		(17		)	153			27		(17		)
Net Periodic (Benefit) Cost	$	196		$	190	$	127		$	196		$	190	$	127

Plan Contributions During the Period	$	—		$	116	$	37		$	—		$	116	$	37

For the Three Months Ended March 31, 2018:
Service Cost ¹	$	348		$	11	$	33
Interest Cost ²	525			50		99
Expected Return on Plan Assets ²	(785		)	—		—
Amortization of Prior Service (Credit) Cost ²	(12		)	14		(3		)
Amortization of Net Loss ²	33			33		(6		)
Net Periodic (Benefit) Cost	$	109		$	108	$	123

Plan Contributions During the Period	$	—		$	116	$	17

Footnotes:

1. Included in Salaries and Employee Benefits on the Consolidated Statements of Income

2. Included in Other Operating Expense on the Consolidated Statements of Income

~~We are not required to make a~~A contribution to the qualified pension plan in ~~2019,~~2020 was not required, and currently, ~~we do not expect to make~~ additional contributions in ~~2019.~~2020 are not expected. Arrow makes contributions to its other post-retirement benefit plans in an amount equal to benefit payments for the year.

Note 8. EARNINGS PER COMMON SHARE (In Thousands, Except Per Share Amounts)

The following table presents a reconciliation of the numerator and denominator used in the calculation of basic and diluted earnings per common share (“EPS”) for periods ended March 31, ~~2019~~2020 and ~~2018.~~2019. All share and per share amounts have been adjusted for the September 27, ~~2018,~~2019, 3% stock dividend.

									Earnings Per Share
	Quarterly Period Ended:				Three Months Ended
	March 31, 2019		March 31, 2018		March 31, 2020		March 31, 2019
Earnings Per Share - Basic:
Net Income	$	8,734	$	8,531	$	8,127	$	8,734
Weighted Average Shares - Basic	14,469		14,354		14,996		14,903
Earnings Per Share - Basic	$	0.60	$	0.59	$	0.54	$	0.59

Earnings Per Share - Diluted:
Net Income	$	8,734	$	8,531	$	8,127	$	8,734
Weighted Average Shares - Basic	14,469		14,354		14,996		14,903
Dilutive Average Shares Attributable to Stock Options	51		82		30		53
Weighted Average Shares - Diluted	14,520		14,436		15,026		14,956
Earnings Per Share - Diluted	$	0.60	$	0.59	$	0.54	$	0.58

Note 9. FAIR VALUES (Dollars In Thousands)

FASB ASC Subtopic 820-10 defines fair value, establishes a framework for measuring fair value in GAAP and requires certain disclosures about fair value measurements. ~~We do not have any~~There are no nonfinancial assets or liabilities measured at fair value on a recurring basis. The only assets or liabilities that Arrow measured at fair value on a recurring basis at March 31, ~~2019,~~2020, December 31, ~~2018~~2019 and March 31, ~~2018~~2019 were securities available-for-sale, ~~and~~ equity securities .and derivatives. Arrow held no securities or liabilities for trading on such dates.

The table below presents the financial instrument's fair value and the amounts within the fair value hierarchy based on the lowest level of input that is significant to the fair value measurement:

																	Fair Value of Assets and Liabilities Measured on a Recurring and Nonrecurring Basis
			Fair Value Measurements at Reporting Date Using:								Fair Value Measurements at Reporting Date Using:
	Fair Value		Quoted Prices In Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Fair Value		Quoted Prices In Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Fair Value of Assets and Liabilities Measured on a Recurring Basis:
March 31, 2019
March 31, 2020
Assets:
Securities Available-for Sale:
U.S. Government & Agency Obligations	$	35,383	$	—	$	35,383	$	—	$	5,181	$	—	$	5,181	$	—
State and Municipal Obligations	1,116		—		1,116		—		723		—		723		—
Mortgage-Backed Securities	261,513		—		261,513		—		371,482		—		371,482		—
Corporate and Other Debt Securities	800		—		800		—		800		—		800		—
Total Securities Available-for-Sale	298,812		—		298,812		—		378,186		—		378,186		—
Equity Securities	1,850		—		1,850		—		1,689		—		1,689		—
Total Securities Measured on a Recurring Basis	$	300,662	$	—	$	300,662	$	—	379,875		—		379,875		—
December 31, 2018
Derivatives, included in other assets									5,191		—		5,191		—
Total Measured on a Recurring Basis									$	385,066	$	—	$	385,066	$	—
Liabilities:
Derivatives, included in other liabilities									5,191		—		5,191		—
Total Measured on a Recurring Basis									$	5,191	$	—	$	5,191	$	—
December 31, 2019
Assets:
Securities Available-for Sale:
U.S. Government & Agency Obligations	$	46,765	$	—	$	46,765	$	—	$	5,054	$	—	$	5,054	$	—
State and Municipal Obligations	1,195		—		1,195		—		764		—		764		—
Mortgage-Backed Securities	268,775		—		268,775		—		350,716		—		350,716		—
Corporate and Other Debt Securities	800		—		800		—		800		—		800		—
Total Securities Available-for-Sale	317,535				317,535				357,334				357,334
Equity Securities	1,774		—		1,774		—		2,063		—		2,063		—
Total Securities Measured on a Recurring Basis	$	319,309	$	—	$	319,309	$	—	359,397		—		359,397		—
March 31, 2018
Securities Available-for Sale:
U.S. Government & Agency Obligations	$	59,657	$	—	$	59,657	$	—
State and Municipal Obligations	9,743		—		9,743		—
Mortgage-Backed Securities	235,389		—		235,389		—
Corporate and Other Debt Securities	800		—		800		—
Total Securities Available-for-Sale	305,589				305,589
Equity Securities	1,579		—		1,579		—
Total Securities Measured on a Recurring Basis	$	307,168	$	—	$	307,168	$	—

Fair Value
Quoted Prices
In Active Markets for Identical Assets
(Level 1)

Significant Other
Observable Inputs
(Level 2)

Significant Unobservable Inputs
(Level 3)
Life-to-Date Gains (Losses)
Fair Value of Assets and Liabilities Measured on a Nonrecurring Basis:
March 31, 2019
Collateral Dependent Impaired Loans $ 684
$ —
$ —
$ 684
$ —
Other Real Estate Owned and Repossessed Assets, Net 1,445
—
—
1,445
(826 )
December 31, 2018
Collateral Dependent Impaired Loans $ —
$ —
$ —
$ —
$ —
Other Real Estate Owned and Repossessed Assets, Net 1,260
—
—
1,260
(669 )
March 31, 2018
Collateral Dependent Impaired Loans $ 1,295
$ —
$ —
$ 1,295
$ (58 )
Other Real Estate Owned and Repossessed Assets, Net 1,647
—
—
1,647
(582 )



Fair Value of Assets and Liabilities Measured on a Recurring and Nonrecurring Basis
			Fair Value Measurements at Reporting Date Using:
	Fair Value		Quoted Prices In Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Derivatives, included in other liabilities	69		—		69		—
Total Measured on a Recurring Basis	$	359,466	$	—	$	359,466	$	—
Liabilities:
Derivatives, included in other liabilities	$	69	$	—	$	69	$	—
Total Measured on a Recurring Basis	$	69	$	—	$	69	$	—
March 31, 2019
Assets:
Securities Available-for Sale:
U.S. Government & Agency Obligations	$	35,383	$	—	$	35,383	$	—
State and Municipal Obligations	1,116		—		1,116		—
Mortgage-Backed Securities	261,513		—		261,513		—
Corporate and Other Debt Securities	800		—		800		—
Total Securities Available-for-Sale	298,812				298,812
Equity Securities	1,850		—		1,850		—
Total Securities Measured on a Recurring Basis	$	300,662	$	—	$	300,662	$	—

~~We determine the~~



	Fair Value		Quoted Prices In Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Gains (Losses) Recognized in Earnings
Fair Value of Assets and Liabilities Measured on a Nonrecurring Basis:
March 31, 2020
Collateral Dependent Impaired Loans	$	582	$	—	$	—	$	582
Other Real Estate Owned and Repossessed Assets, Net	942		—		—		942		—
December 31, 2019
Collateral Dependent Impaired Loans	$	285	$	—	$	—	$	285
Other Real Estate Owned and Repossessed Assets, Net	1,261		—		—		1,261		(186	)
March 31, 2019
Collateral Dependent Impaired Loans	$	684	$	—	$	—	$	684
Other Real Estate Owned and Repossessed Assets, Net	1,445		—		—		1,445		(101	)

The fair value of financial instruments is determined under the following hierarchy:

Level 1 - Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities;

Level 2 - Quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, or inputs that are observable, either directly or indirectly, for substantially the full term of the asset or liability;

Level 3 - Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (i.e., supported by little or no market activity).

The Company determined that the previously reported U.S. Government & Agency Obligations of $59.7 million were incorrectly classified as Level 1 securities, instead of the correct classification as Level 2 securities. The Company corrected the fair value leveling disclosure to reflect the correction of this classification in the quarter ended March 31, 2018. This error had no impact on the fair value of U.S. Government & Agency Obligations or the total securities available-for-sale.

~~There were no transfers between Levels 1, 2 and 3 for the three months ended March 31, 2019, December 31, 2018 and March 31, 2018.~~

Fair Value Methodology for Assets and Liabilities Measured on a Recurring Basis

The fair value of Level 1 securities available-for-sale are based on unadjusted, quoted market prices from exchanges in active markets. The fair value of Level 2 securities available-for-sale are based on an independent bond and equity pricing service for identical assets or significantly similar securities and an independent equity pricing service for equity securities not actively traded. The pricing services use a variety of techniques to arrive at fair value including market maker bids, quotes and pricing models. Inputs to the pricing models include recent trades, benchmark interest rates, spreads and actual and projected cash flows. The fair value of Level 2 derivatives is determined using inputs that are observable in the market place obtained from third parties including yield curves, publicly available volatilities, and floating indexes.

Fair Value Methodology for Assets and Liabilities Measured on a Nonrecurring Basis

The fair value of collateral dependent impaired loans and other real estate owned was based on third-party appraisals less estimated cost to sell. The appraisals may be adjusted by management for qualitative factors such as economic conditions and estimated liquidation expenses. Other assets which might have been included in this table include mortgage servicing rights, goodwill and other intangible assets. Arrow evaluates each of these assets for impairment ~~on an annual basis,~~at least annually, with no impairment recognized for these assets at March 31, ~~2019,~~2020, December 31, ~~2018~~2019 and March 31, ~~2018.~~2019.

Fair Value Methodology for Financial Instruments Not Measured on a Recurring or Nonrecurring Basis

The fair value for securities held-to-maturity is determined utilizing an independent bond pricing service for identical assets or significantly similar securities. The pricing service uses a variety of techniques to arrive at fair value including market maker bids, quotes and pricing models. Inputs to the pricing models include recent trades, benchmark interest rates, spreads and actual and projected cash flows.

ASU 2016-01 "Recognition and Measurement of Financial Assets and Financial Liabilities" requires that the fair value for loans must be disclosed using the "exit price" notion which is a reasonable estimate of what another party might pay in an orderly transaction. Fair values for loans are calculated for portfolios of loans with similar financial characteristics. Loans are segregated by type such as commercial,

commercial real estate, residential mortgage, indirect auto and other consumer loans. Each loan category is further segmented into fixed and adjustable interest rate terms and by performing and nonperforming categories. The fair value of performing loans is calculated by determining the estimated future cash flow, which is the contractual cash flow adjusted for estimated prepayments. The discount rate is determined by starting with current market yields, and first adjusting for a liquidity premium. This premium is separately determined for ~~residential real estate loans vs. other loans.~~each loan type. Then a credit loss component is determined utilizing the credit loss assumptions used in the allowance for loan and lease loss model. Finally, a discount spread is applied separately for consumer loans vs. commercial loans based on market information and utilization of the Swap Curve. Fair value for nonperforming loans is generally based on recent external appraisals. If appraisals are not available, estimated cash flows are discounted using a rate commensurate with the risk associated with the estimated cash flows. Assumptions regarding credit risk, cash flows and discount rates are judgmentally determined using available market information and specific borrower information.

The fair value of time deposits is based on the discounted value of contractual cash flows, except that the fair value is limited to the extent that the customer could redeem the certificate after imposition of a premature withdrawal penalty. The discount rates are estimated using the Federal Home Loan Bank of New York ("FHLBNY") yield curve, which is considered representative of Arrow’s time deposit rates. The fair value of all other deposits is equal to the carrying value.

The fair value of FHLBNY advances is ~~estimated based on~~calculated by the ~~discounted~~FHLBNY.

The carrying amount of FHLBNY and FRB stock approximates fair value. If the stock was redeemed, the Company will receive an amount equal to the par value of ~~contractual cash flows. The discount rate is estimated using current rates on FHLBNY advances with similar maturities and call features.~~the stock.

The book value of the outstanding trust preferred securities (Junior Subordinated Obligations Issued to Unconsolidated Subsidiary Trusts) are considered to approximate fair value since the interest rates are variable (indexed to LIBOR) and Arrow is well-capitalized.

Fair Value by Balance Sheet Grouping

The following table presents a summary of the carrying amount, the fair value or an amount approximating fair value and the fair value hierarchy of Arrow’s financial instruments:

																					Schedule of Fair Values by Balance Sheet Grouping
					Fair Value Hierarchy										Fair Value Hierarchy
	Carrying Value		Fair Value		Level 1		Level 2		Level 3		Carrying Value		Fair Value		Level 1		Level 2		Level 3
March 31, 2019
March 31, 2020
Cash and Cash Equivalents	$	61,229	$	61,229	$	61,229	$	—	$	—	$	138,529	$	138,529	$	138,529	$	—	$	—
Securities Available-for-Sale	298,812		298,812		—		298,812		—		378,186		378,186		—		378,186		—
Securities Held-to-Maturity	279,400		280,414		—		280,414		—		238,520		242,804		—		242,804		—
Equity Securities	1,850		1,850		—		1,850		—		1,689		1,689		—		1,689		—
Federal Home Loan Bank and Federal Reserve Bank Stock	7,878		7,878		—		7,878		—		5,379		5,379		—		5,379		—
Net Loans	2,214,835		2,164,298		—		—		2,164,298		2,390,556		2,368,033		—		—		2,368,033
Accrued Interest Receivable	8,180		8,180		—		8,180		—		7,856		7,856		—		7,856		—
Deposits	2,490,097		2,484,479		—		2,484,479		—
Federal Funds Purchased and Securities Sold Under Agreements to Repurchase	58,407		58,407		—		58,407		—
Federal Home Loan Bank Overnight Advances	74,500		74,500		—		74,500		—
Federal Home Loan Bank Term Advances	35,000		34,805		—		34,805		—
Junior Subordinated Obligations Issued to Unconsolidated Subsidiary Trusts	20,000		20,000		—		20,000		—
Accrued Interest Payable	737		737		—		737		—

December 31, 2018
Cash and Cash Equivalents	$	84,239	$	84,239	$	84,239	$	—	$	—
Securities Available-for-Sale	317,535		317,535		—		317,535		—
Securities Held-to-Maturity	283,476		280,338		—		280,338		—
Equity Securities	1,774		1,774				1,774
Federal Home Loan Bank and Federal Reserve Bank Stock	15,506		15,506		—		15,506		—
Net Loans	2,176,019		2,114,372		—		—		2,114,372
Accrued Interest Receivable	7,035		7,035		—		7,035		—
Deposits	2,345,584		2,338,410		—		2,338,410		—
Federal Funds Purchased and Securities Sold Under Agreements to Repurchase	54,659		54,659		—		54,659		—
Federal Home Loan Bank Overnight Advances	234,000		234,000		—		234,000		—
Federal Home Loan Bank Term Advances	45,000		44,652		—		44,652		—
Junior Subordinated Obligations Issued to Unconsolidated Subsidiary Trusts	20,000		20,000		—		20,000		—
Accrued Interest Payable	570		570		—		570		—

March 31, 2018
Cash and Cash Equivalents	$	100,272	$	100,272	$	100,272	$	—	$	—
Securities Available-for-Sale	305,589		305,589		—		305,589		—
Securities Held-to-Maturity	330,124		324,937		—		324,937		—
Equity Securities	1,579		1,579		—		1,579
Federal Home Loan Bank and Federal Reserve Bank Stock	4,780		4,780		—		4,780		—
Net Loans	1,973,980		1,915,978		—		—		1,915,978
Accrued Interest Receivable	7,662		7,692		—		7,692		—
Derivatives, included in other assets											5,191		5,191				5,191
Deposits	2,411,273		2,402,122		—		2,402,122		—		2,811,005		2,811,668		—		2,811,668		—
Federal Funds Purchased and Securities Sold Under Agreements to Repurchase	74,957		74,957		—		74,957		—		57,909		57,909		—		57,909		—
Federal Home Loan Bank Term Advances	45,000		44,484		—		44,484		—		50,000		51,194		—		51,194		—
Junior Subordinated Obligations Issued to Unconsolidated Subsidiary Trusts	20,000		20,000		—		20,000		—		20,000		20,000		—		20,000		—
Accrued Interest Payable	361		361		—		361		—		1,392		1,392		—		1,392		—
Derivatives, included in other liabilities											5,191		5,191		—		5,191		—



Schedule of Fair Values by Balance Sheet Grouping
					Fair Value Hierarchy
	Carrying Value		Fair Value		Level 1		Level 2		Level 3

December 31, 2019
Cash and Cash Equivalents	$	70,221	$	70,221	$	70,221	$	—	$	—
Securities Available-for-Sale	357,334		357,334		—		357,334		—
Securities Held-to-Maturity	245,065		249,618		—		249,618		—
Equity Securities	2,063		2,063		—		2,063
Federal Home Loan Bank and Federal Reserve Bank Stock	10,317		10,317		—		10,317		—
Net Loans	2,364,933		2,332,797		—		—		2,332,797
Accrued Interest Receivable	7,377		7,377		—		7,377		—
Derivatives, included in other assets	69		69		—		69		—
Deposits	2,616,054		2,614,170		—		2,614,170		—
Federal Funds Purchased and Securities Sold Under Agreements to Repurchase	51,099		51,099		—		51,099		—
Federal Home Loan Bank Overnight Advances	130,000		130,000		—		130,000		—
Federal Home Loan Bank Term Advances	30,000		29,993		—		29,993		—
Junior Subordinated Obligations Issued to Unconsolidated Subsidiary Trusts	20,000		20,000		—		20,000		—
Accrued Interest Payable	1,436		1,436		—		1,436		—
Derivatives, included in other liabilities	69		69		—		69		—

March 31, 2019
Cash and Cash Equivalents	$	61,229	$	61,229	$	61,229	$	—	$	—
Securities Available-for-Sale	298,812		298,812		—		298,812		—
Securities Held-to-Maturity	279,400		280,414		—		280,414		—
Equity Securities	1,850		1,850		—		1,850
Federal Home Loan Bank and Federal Reserve Bank Stock	7,878		7,878		—		7,878		—
Net Loans	2,214,835		2,164,298		—		—		2,164,298
Accrued Interest Receivable	8,180		8,180		—		8,180		—
Deposits	2,490,097		2,484,479		—		2,484,479		—
Federal Funds Purchased and Securities Sold Under Agreements to Repurchase	58,407		58,407		—		58,407		—
Federal Home Loan Bank Overnight Advances	74,500		74,500		—		74,500		—
Federal Home Loan Bank Term Advances	35,000		34,805		—		34,805		—
Junior Subordinated Obligations Issued to Unconsolidated Subsidiary Trusts	20,000		20,000		—		20,000		—
Accrued Interest Payable	737		737		—		737		—

Note 10. LEASES (Dollars In Thousands)

The Company is a lessee in its leases, which are mainly for financial services locations in addition to leases for corporate vehicles. These leases generally require the Company to pay third-party expenses on behalf of the Lessor, which are referred to as variable payments. Under some leases, the Company pays the variable payments to the lessor, and in other leases, the Company pays the variable payments directly to the applicable third party. None of the Company's current leases include any residual value guarantees or any subleases, and there are no significant rights and obligations of the Company for leases that have not commenced as of the reporting date.

Arrow leases five of its branch offices, at market rates, from Stewart’s Shops Corp. Mr. Gary C. Dake, President of Stewart’s Shops Corp., serves as a director on ~~both~~ the ~~boards~~board of directors of each of Arrow and Saratoga National Bank and Trust Company.

The following includes quantitative data related to the Company's leases as of and for the three months ended March 31, 2020 and March 31, 2019:


						Three Months Ended
Finance Lease Amounts:	Classification				Classification	March 31, 2020			March 31, 2019
Right-of-use Assets	Premises and Equipment, Net	$	2,922		Premises and Equipment, Net	$	5,124		$	2,922
Lease Liabilities	Finance Leases	2,946			Finance Leases	5,249			2,946

Operating Lease Amounts:
Right-of-use Assets	Other Assets	$	5,587		Other Assets	$	5,529		$	5,587
Lease Liabilities	Other Liabilities	5,639			Other Liabilities	5,602			5,639

Lease Cost:
Finance Lease Cost:
Amortization of Right-of-use assets		$	17
Interest on Lease Liabilities		15
Operating Lease Cost		173
Short-term Lease Cost		33
Variable Lease Cost		56
Total Lease Cost		$	294

Other Information:
Cash Paid For Amounts Included In The Measurement Of Lease Liabilities:
Operating Outgoing Cash Flows From Finance Leases		$	15			$	50		$	15
Operating Outgoing Cash Flows From Operating Leases		173				158			173
Financing Outgoing Cash Flows From Finance Leases		4				5			4
Right-of-use Assets Obtained In Exchange For New Finance Lease Liabilities		2,939				—			2,939
Right-of-use Assets Obtained In Exchange For New Operating Lease Liabilities		5,725				—			5,725
Weighted-average Remaining Lease Term—Finance Leases (Yrs.)		26.91				29.90			26.91
Weighted-average Remaining Lease Term—Operating Leases (Yrs.)		14.63				13.70			14.63
Weighted-average Discount Rate—Finance Leases %		3.82		%		3.75		%	3.82		%
Weighted-average Discount Rate—Operating Leases %		3.50		%		3.36		%	3.50		%



Lease cost information for the Company's leases is as follows:
	Three Months Ended
	March 31, 2020		March 31, 2019
Lease Cost:
Finance Lease Cost:
Amortization of Right-of-use assets	$	44	$	17
Interest on Lease Liabilities	50		15
Operating Lease Cost	207		173
Short-term Lease Cost	7		33
Variable Lease Cost	55		56
Total Lease Cost	$	363	$	294

Future Lease Payments at March 31, 2019 are as follows:

Operating
Leases
Financing
Leases
Twelve Months Ended:
3/31/2020 $ 769
$ 143
3/31/2021 695
146
3/31/2022 557
149
3/31/2023 479
149
3/31/2024 462
149
Thereafter 4,346
4,200
Total Undiscounted Cash Flows $ 7,308
$ 4,936

Less: Net Present Value Adjustment 1,669
1,990

Lease Liability $ 5,639
$ 2,946

~~Arrow adopted ASU 2016-02 using a modified retrospective adoption at January 1. 2019 as discussed in Note 1. The following disclosure is provided for the period prior to the adoption.~~

~~Future minimum lease payments on operating leases at December 31, 2018 were as follows:~~

Operating
Leases
2019 $ 857
2020 626
2021 497
2022 357
2023 286
2024 and beyond 2,776
Total Minimum Lease Payments $ 5,399



Future Lease Payments at March 31, 2020 are as follows:
	Operating Leases		Financing Leases
Twelve Months Ended:
3/31/2021	$	776	$	240
3/31/2022	640		243
3/31/2023	563		132
3/31/2024	548		243
3/31/2025	515		252
Thereafter	4,028		8,110
Total Undiscounted Cash Flows	$	7,070	$	9,220
Less: Net Present Value Adjustment	1,468		3,971
Lease Liability	$	5,602	$	5,249

Note 11. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES (In Thousands)

Arrow is exposed to certain risks arising from both its business operations and economic conditions. Arrow principally manages its exposures to a wide variety of business and operational risks through management of its core business activities. The Bank manages economic risks, including interest rate, primarily by managing the amount, sources and duration of its assets and liabilities and through the use of derivative instruments. Specifically, the Bank enters into derivative financial instruments to manage exposures that arise from business activities that result in the receipt or payment of future known and uncertain cash amounts, the value of which are determined by interest rates. Arrow's derivative financial instruments are used to manage differences in the amount, timing and duration of the Bank’s known or expected cash receipts and its known or expected cash payments principally related to certain fixed rate borrowings. Arrow also has interest rate derivatives that result from a service provided to certain qualifying customers and, therefore, are not used to manage interest rate risk in the Company’s assets or liabilities. The Company manages a matched book with respect to its derivative instruments in order to minimize its net risk exposure resulting from such transactions.

Derivatives Not Designated as Hedging Instruments

Arrow enters into interest rate swap agreements with its commercial customers to provide them with a long-term fixed rate, while simultaneously Arrow entered into offsetting interest rate swap agreements with a counterparty to swap the fixed rate to a variable rate to manage interest rate exposure.

These interest rate swap agreements are not designated as a hedge for accounting purposes. As the interest rate swap agreements have substantially equivalent and offsetting terms, they do not present any material exposure to the Arrow's consolidated statements of income. The Bank records its interest rate swap agreements at fair value and is presented on a gross basis within other assets and other liabilities on the consolidated balance sheets. Changes in the fair value of assets and liabilities arising from these derivatives are included, net, in other income in the consolidated statement of income.

The following table depicts the fair value adjustment recorded related to the notional amount of derivatives outstanding as well as the notional amount of the interest rate swap agreements.



Derivatives Not Designated as Hedging Instruments - Interest Rate Swap Agreements
	March 31, 2020		December 31, 2019		March 31, 2019
Fair value adjustment included in other assets	$	5,191	$	69	$	—
Fair value adjustment included in other liabilities	5,191		69		—
Notional amount	121,559		44,531		—

Derivatives Designated as Hedging Instruments

Arrow has entered into interest rate swaps to synthetically fix the variable rate interest payments associated with $20 million in outstanding subordinated trust securities. These agreements are designated as cash flow hedges.

For derivatives designated and that qualify as cash flow hedges of interest rate risk, the gain or loss on the derivative is recorded in AOCI and subsequently reclassified into interest expense in the same period during which the hedge transaction affects earnings. Amounts reported in AOCI related to derivatives will be reclassified to interest expense as interest payments are made on the Arrow's Junior Subordinated Obligations Issued to Unconsolidated Subsidiary Trusts borrowings.

The following table indicates the effect of cash flow hedge accounting on AOCI and on the unaudited interim consolidated statement of income.



Derivatives Designated as Hedging Instruments - Cash Flow Hedge Agreements
	March 31, 2020			December 31, 2019		March 31, 2019
Amount of loss recognized in AOCI	$	(294	)	$	—	$	—
Amount of gain reclassified from AOCI interest expense	—			—		—

Note 12. COVID-19 PANDEMIC

The outbreak of the novel coronavirus (COVID-19) pandemic has impacted the global economy, including the banking sector and many industries in which our customers operate, in a variety of significant ways. For further discussion of the impact COVID-19 has had and may in the future have on Arrow and its financial results and operations, please refer to the risk factor included in Item 8.01 of Arrow's Current Report on Form 8-K filed April 24, 2020.

Report of Independent Registered Public Accounting Firm

To the Stockholders and Board of Directors

Arrow Financial Corporation:

Results of Review of Interim Financial Information

We have reviewed the consolidated balance sheet of Arrow Financial Corporation andsubsidiaries (the Company) as of March 31, ~~2019~~2020 and ~~2018,~~2019, the related consolidated statements of income, ~~and~~ comprehensive income, ~~consolidated statements of~~ changes in stockholders’ equity and cash flows for the three-month periods ended March 31, ~~2019~~2020 and ~~2018,~~2019, and the related notes (collectively, the consolidated interim financial information). Based on our reviews, we are not aware of any material modifications that should be made to the consolidated interim financial information for it to be in conformity with U.S. generally accepted accounting principles.

We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheet of the Company as of December 31, ~~2018,~~2019, and the related consolidated statements of income, comprehensive income, changes in stockholders’ equity, and cash flows for the year then ended (not presented herein); and in our report dated ~~March 8, 2019,~~February 28, 2020, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying consolidated balance sheet as of December 31, ~~2018,~~2019, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.

Basis for Review Results

This consolidated interim financial information is the responsibility of the Company’s management. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our reviews in accordance with the standards of the PCAOB. A review of consolidated interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the PCAOB, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.

/s/ KPMG LLP

Albany, New York

May ~~9, 2019~~7, 2020

Item 2.

ARROW FINANCIAL CORPORATION AND SUBSIDIARIES

MANAGEMENT'S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

March 31, ~~2019~~2020

NOTE ON TERMINOLOGY

In this Quarterly Report on Form 10-Q (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 Form 10-Q, ~~our~~Arrow's performance is compared with that of ~~our~~the Company's "peer group" of financial institutions. Unless otherwise specifically stated, the peer group for the purposes of this Form 10-Q is comprised of the group of 66146 domestic bank holding companies with $1$3 to $3$10 billion in total consolidated assets as identified in the Federal Reserve Board’s "Bank Holding Company Performance Report" for December 31, ~~2018~~2019 (the most recent such ~~Report~~report currently available), and peer group data contained herein has been derived from such ~~Report.~~report.

THE COMPANY AND ITS SUBSIDIARIES

Arrow is a two-bank holding company headquartered in Glens Falls, New York. ~~Our~~The banking subsidiaries are Glens Falls National Bank and Trust Company (Glens Falls National) whose main office is located in Glens Falls, New York, and Saratoga National Bank and Trust Company (Saratoga National) whose main office is located in Saratoga Springs, New York. Active subsidiaries of Glens Falls National include Upstate Agency, LLC (an insurance agency that sells property and casualty insurance ~~policies~~ 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 ~~our~~Arrow's proprietary mutual funds) and Arrow Properties, Inc. (a real estate investment trust, or REIT). Arrow also owns directly two subsidiary business trusts, organized in 2003 and 2004, ~~to issue~~which issued trust preferred securities (TRUPs), which are still outstanding.

FORWARD LOOKING STATEMENTS

This ~~Quarterly~~ Report on Form 10-Q contains statements that are not historical in nature but rather are based on ~~our~~the Company'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, 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 the Company's asset quality, the level of allowance for ~~loan~~credit losses, the sufficiency of liquidity sources, interest rate change exposure, changes in accounting standards, and the Company'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 ~~our~~Arrow's general perceptions of market conditions and trends in business activity, both ~~our own~~the Company'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, our 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:~~ to the following, which are or may be amplified by the novel coronavirus (COVID-19) pandemic:

the current and rapidly evolving COVID-19 pandemic and its impact on economic, market and social conditions;

other rapid and dramatic changes in economic and market conditions;

sharp fluctuations in interest rates, economic activity, or consumer spending patterns;

sudden changes in the market for products ~~we provide,~~provided, such as real estate loans;

significant changes in banking or other laws and regulations, including both enactment of new legal or regulatory measures ~~(e.g., the Economic Growth, Regulatory Relief and Consumer Protection Act ("Economic Growth Act") and the Dodd-Frank Wall Street Reform and Consumer Protection Act ("Dodd-Frank"))~~ or the modification or elimination of pre-existing measures;

significant changes in U.S. monetary or fiscal policy, including new or revised monetary programs or targets adopted or announced by the Federal Reserve ("monetary tightening or easing") or significant new federal legislation materially affecting the federal budget ("fiscal tightening or expansion");

competition from other sources (e.g., non-bank entities);

similar uncertainties inherent in banking operations or business generally, including technological developments and changes; and

other risks detailed from time to time within our filings with the Securities and Exchange Commission ("SEC").

~~We are~~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 and the documents ~~we incorporate~~incorporated by reference and that are attributable to the Company 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 the Company or any persons acting on our behalf may issue. This ~~Quarterly~~ Report should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, ~~2018~~2019 (the ~~2018~~2019 Annual Report) and our other filings with the SEC.

USE OF NON-GAAP FINANCIAL MEASURES

The SEC has adopted Regulation G, which applies to all public disclosures, including earnings releases, made by registered companies that contain "non-GAAP financial measures." GAAP is 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 are included in public disclosures, supplemental information is not required. The following measures used in this Report, which are commonly utilized by financial institutions, have not been specifically exempted by the SEC and may constitute "non-GAAP financial measures" within the meaning of the SEC's rules, although ~~we are~~the Company is unable to state with certainty that the SEC would so regard them.

Tax-Equivalent Net Interest Income and Net Interest Margin: Net interest income, as a component of the tabular presentation by financial institutions of Selected Financial Information regarding their recently completed operations, as well as disclosures based on that tabular presentation, is commonly presented on a tax-equivalent basis. That is, to the extent that some component of the institution's net interest income, which is presented on a before-tax basis, is exempt from taxation (e.g., is received by the institution as a result of its holdings of state or municipal obligations), an amount equal to the tax benefit derived from that component is added to the actual before-tax net interest income total. This adjustment is considered helpful in comparing one financial institution's net interest income to that of another institution or in analyzing any institution’s net interest income trend line over time, to correct any analytical distortion that might otherwise arise from the fact that financial institutions vary widely in the proportions of their portfolios that are invested in tax-exempt securities, and from the fact that even a single institution may significantly alter over time the proportion of its own portfolio that is invested in tax-exempt obligations. Moreover, net interest income is itself a component of a second financial measure commonly used by financial institutions, net interest margin, which is the ratio of net interest income to average earning assets. For purposes of this measure as well, tax-equivalent net interest income is generally used by financial institutions, again to provide a better basis of comparison from institution to institution and to better demonstrate a single institution’s performance over time. ~~We follow~~The Company follows these practices.

The Efficiency Ratio: Financial institutions often use an "efficiency ratio" as a measure of expense control. The efficiency ratio typically is defined as the ratio of noninterest expense to net interest income and noninterest income. Net interest income as utilized in calculating the efficiency ratio is typically the same as the net interest income presented in Selected Financial Information table discussed in the preceding paragraph, i.e., it is expressed on a tax-equivalent basis. Moreover, many financial institutions, in calculating the efficiency ratio, also adjust both noninterest expense and noninterest income to exclude from these items (as calculated under GAAP) certain recurring component elements of income and expense, such as intangible asset amortization (which is included in noninterest expense under GAAP but may be excluded therefrom for purposes of calculating the efficiency ratio) and securities gains or losses (which are reflected in the calculation of noninterest income under GAAP but may be excluded therefrom for purposes of calculating the efficiency ratio). ~~We make~~The Company makes these adjustments.

Tangible Book Value per Share: Tangible equity is total stockholders’ equity less intangible assets. Tangible book value per share is tangible equity divided by total shares issued and outstanding. Tangible book value per share is often regarded as a more meaningful comparative ratio than book value per share as calculated under GAAP, that is, total stockholders’ equity including intangible assets divided by total shares issued and outstanding. Intangible assets includes many items, but in our case, essentially represents goodwill.

Adjustments for Certain Items of Income or Expense: In addition to our regular utilization in our public filings and disclosures of the various non-GAAP measures commonly utilized by financial institutions discussed above, wethe Company also may elect from time to time, in connection with our presentation of various financial measures prepared in accordance with GAAP, such as net income, earnings per share (i.e. EPS), return on average assets (i.e. ROA), and return on average equity (i.e. ROE), to provide as well certain comparative disclosures that adjust these GAAP financial measures, typically by removing ~~therefrom~~them from the impact of certain transactions or other material items of income or expense that are unusual or unlikely to be repeated. WeThe Company will do so only if ~~we believe~~it believes that provision of the resulting non-GAAP financial measures may improve the average investor's understanding of our results of operations by separating out items that have a disproportional positive or negative impact on the particular period in question or by otherwise permitting a better comparison from period-to-period in our results of operations with respect to our fundamental lines of business, including the commercial banking business.

~~We believe~~The Company believes that the non-GAAP financial measures disclosed ~~by us~~ from time-to-time are useful in evaluating our performance and that such information should be considered as supplemental in nature, and not as a substitute for or superior to, the related financial information prepared in accordance with GAAP. ~~Our non-GAAP~~Non-GAAP financial measures may differ from similar measures presented by other companies.

Arrow Financial Corporation Selected Quarterly Information (Dollars In Thousands, Except Per Share Amounts - Unaudited)	Arrow Financial Corporation Selected Quarterly Information (Dollars In Thousands, Except Per Share Amounts - Unaudited)															Arrow Financial Corporation Selected Quarterly Information (Dollars In Thousands, Except Per Share Amounts - Unaudited)

Quarter Ended	3/31/2019			12/31/2018			9/30/2018			6/30/2018			3/31/2018			3/31/2020			12/31/2019			9/30/2019			6/30/2019			3/31/2019
Net Income	$	8,734		$	8,758		$	9,260		$	9,730		$	8,531		$	8,127		$	9,740		$	10,067		$	8,934		$	8,734
Transactions in Net Income (Net of Tax):
Net Changes in Fair Value of Equity Investments	57			(106		)	85			166			13			(279		)	50			109			—			57

Share and Per Share Data:⁽¹⁾
Share and Per Share Data:¹
Period End Shares Outstanding	14,474			14,472			14,441			14,424			14,368			14,982			14,998			14,969			14,949			14,909
Basic Average Shares Outstanding	14,469			14,451			14,431			14,394			14,354			14,996			14,978			14,955			14,922			14,903
Diluted Average Shares Outstanding	14,520			14,514			14,520			14,480			14,436			15,026			15,026			14,991			14,963			14,956
Basic Earnings Per Share	$	0.60		$	0.61		$	0.64		$	0.68		$	0.59		$	0.54		$	0.65		$	0.67		$	0.60		$	0.59
Diluted Earnings Per Share	0.60			0.60			0.64			0.67			0.59			0.54			0.65			0.67			0.60			0.58
Cash Dividend Per Share	0.260			0.260			0.252			0.243			0.243			0.260			0.260			0.252			0.252			0.252

Selected Quarterly Average Balances:
Interest-Bearing Deposits at Banks	$	26,163		$	34,782		$	30,522		$	28,543		$	27,978		$	32,787		$	28,880		$	27,083		$	25,107		$	26,163
Investment Securities	611,161			637,341			636,847			647,913			642,442			603,748			582,982			545,073			584,679			611,161
Loans	2,210,642			2,160,435			2,089,651			2,026,598			1,971,240			2,394,346			2,358,110			2,308,879			2,255,299			2,210,642
Deposits	2,347,985			2,347,231			2,279,709			2,325,202			2,305,736			2,670,009			2,607,421			2,472,528			2,436,290			2,347,985
Other Borrowed Funds	327,138			315,172			314,304			219,737			184,613			170,987			177,877			231,291			250,283			327,138
Stockholders’ Equity	272,864			268,503			263,139			256,358			251,109			306,527			296,124			289,016			280,247			272,864
Total Assets	2,977,056			2,954,029			2,879,854			2,823,061			2,763,706			3,180,857			3,113,114			3,023,043			2,997,458			2,977,056
Return on Average Assets, annualized	1.19		%	1.18		%	1.28		%	1.38		%	1.25		%	1.03		%	1.24		%	1.32		%	1.20		%	1.19		%
Return on Average Equity, annualized	12.98		%	12.94		%	13.96		%	15.22		%	13.78		%	10.66		%	13.05		%	13.82		%	12.79		%	12.98		%
Return on Average Tangible Equity, annualized ⁽²⁾	14.22		%	14.20		%	15.36		%	16.80		%	15.24		%
Return on Average Tangible Equity, annualized ²																11.55		%	14.18		%	15.05		%	13.96		%	14.22		%
Average Earning Assets	$	2,847,966		$	2,832,558		$	2,757,020		$	2,703,054		$	2,641,660		$	3,030,881		$	2,969,972		$	2,881,035		$	2,865,085		$	2,847,966
Average Paying Liabilities	2,224,403			2,189,233			2,110,924			2,100,085			2,050,661			2,362,515			2,293,804			2,213,642			2,235,462			2,224,403
Interest Income	26,213			26,000			24,495			23,590			22,418			28,226			28,367			27,952			27,227			26,213
Tax-Equivalent Adjustment ⁽³⁾	373			376			376			468			491
Interest Income, Tax-Equivalent ⁽³⁾	26,586			26,376			24,871			24,058			22,909
Tax-Equivalent Adjustment ³																288			321			344			376			373
Interest Income, Tax-Equivalent ³																28,514			28,688			28,296			27,603			26,586
Interest Expense	5,092			4,343			3,498			2,628			2,016			5,220			5,449			5,649			5,520			5,092
Net Interest Income	21,121			21,657			20,997			20,962			20,402			23,006			22,918			22,303			21,707			21,121
Net Interest Income, Tax-Equivalent ⁽³⁾	21,494			22,033			21,373			21,430			20,893
Net Interest Income, Tax-Equivalent ³																23,294			23,239			22,647			22,083			21,494
Net Interest Margin, annualized	3.01		%	3.03		%	3.02		%	3.11		%	3.13		%	3.05		%	3.06		%	3.07		%	3.04		%	3.01		%
Net Interest Margin, Tax Equivalent, annualized ⁽³⁾	3.06		%	3.09		%	3.08		%	3.18		%	3.21		%
Net Interest Margin, Tax Equivalent, annualized ³																3.09		%	3.10		%	3.12		%	3.09		%	3.06		%

Efficiency Ratio Calculation: ⁽⁴⁾
Efficiency Ratio Calculation: ⁴
Noninterest Expense	$	16,652		$	16,881		$	16,026		$	16,192		$	15,956		$	17,754		$	17,099		$	16,791		$	16,908		$	16,652
Less: Intangible Asset Amortization	79			65			65			66			67			58			60			61			44			79
Net Noninterest Expense	$	16,573		$	16,816		$	15,961		$	16,126		$	15,889		$	17,696		$	17,039		$	16,730		$	16,864		$	16,573
Net Interest Income, Tax-Equivalent ⁽³⁾	$	21,494		$	22,033		$	21,373		$	21,430		$	20,893
Net Interest Income, Tax-Equivalent ³																$	23,294		$	23,238		$	22,647		$	22,083		$	21,494
Noninterest Income	6,887			6,799			7,350			7,911			6,888			7,694			7,081			7,691			6,896			6,887
Less: Net Changes in Fair Value of Equity Invest.	76			(142		)	114			223			18			(374		)	67			146			—			76
Net Gross Income	$	28,305		$	28,974		$	28,611		$	29,118		$	27,763		$	31,362		$	30,252		$	30,192		$	28,979		$	28,305
Efficiency Ratio ⁽⁴⁾	58.55		%	58.04		%	55.79		%	55.38		%	57.23		%
Efficiency Ratio ⁴																56.42		%	56.32		%	55.41		%	58.19		%	58.55		%

Period-End Capital Information:
Total Stockholders’ Equity (i.e. Book Value)	$	276,609		$	269,584		$	264,810		$	259,488		$	252,734		$	309,398		$	301,728		$	292,228		$	284,649		$	276,609
Book Value per Share ⁽¹⁾	19.11			18.63			18.34			17.99			17.59
Book Value per Share ¹																20.65			20.12			19.52			19.04			18.55
Goodwill and Other Intangible Assets, net	23,650			23,725			23,827			23,933			24,045			23,513			23,534			23,586			23,603			23,650
Tangible Book Value per Share ^(1,2)	17.48			16.99			16.69			16.33			15.92
Tangible Book Value per Share ^1,2																19.08			18.55			17.95			17.46			16.97

Capital Ratios:⁽⁵⁾
Capital Ratios:⁵
Community Bank Leverage Ratio																9.87		%
Tier 1 Leverage Ratio	9.73		%	9.61		%	9.67		%	9.65		%	9.62		%				9.98		%	10.04		%	9.88		%	9.73		%
Common Equity Tier 1 Capital Ratio	12.98		%	12.89		%	12.89		%	13.01		%	12.97		%				12.94		%	12.93		%	12.99		%	12.98		%
Tier 1 Risk-Based Capital Ratio	13.95		%	13.87		%	13.90		%	14.04		%	14.03		%				13.83		%	13.85		%	13.93		%	13.95		%
Total Risk-Based Capital Ratio	14.93		%	14.86		%	14.90		%	15.06		%	15.04		%				14.78		%	14.81		%	14.91		%	14.93		%
Assets Under Trust Admin. & Investment Mgmt.	$	1,483,259		$	1,385,752		$	1,551,289		$	1,479,753		$	1,470,191		$	1,342,531		$	1,543,653		$	1,485,116		$	1,496,966		$	1,483,259

Arrow Financial Corporation

Selected Quarterly Information - Continued

(Dollars In Thousands, Except Per Share Amounts - Unaudited)


Footnotes:	Footnotes:																Footnotes:

1.	Share and Per Share Data have been restated for the September 27, 2018, 3% stock dividend.																Share and Per Share Data have been restated for the September 27, 2019, 3% stock dividend.

2.	Non-GAAP Financial Measures Reconciliation: Tangible Book Value, Tangible Equity and Return on Tangible Equity exclude goodwill and other intangible assets, net from total equity. These are non-GAAP financial measures which we believe provide investors with information that is useful in understanding our financial performance. See "Use of Non-GAAP Financial Measures" on page 39.																Non-GAAP Financial Measures Reconciliation: Tangible Book Value, Tangible Equity and Return on Tangible Equity exclude goodwill and other intangible assets, net from total equity. These are non-GAAP financial measures which the Company believes provide investors with information that is useful in understanding our financial performance. See "Use of Non-GAAP Financial Measures" on page 43.
		3/31/2019			12/31/2018			9/30/2018			6/30/2018			3/31/2018				3/31/2020			12/31/2019			9/30/2019			6/30/2019			3/31/2019
	Total Stockholders' Equity (GAAP)	$	276,609		$	269,584		$	264,810		$	259,488		$	252,734		Total Stockholders' Equity (GAAP)	$	309,398		$	301,728		$	292,228		$	284,649		$	276,609
	Less: Goodwill and Other Intangible assets, net	23,650			23,725			23,827			23,933			24,045			Less: Goodwill and Other Intangible assets, net	23,513			23,534			23,586			23,603			23,650
	Tangible Equity (Non-GAAP)	$	252,959		$	245,859		$	240,983		$	235,555		$	228,689		Tangible Equity (Non-GAAP)	$	285,885		$	278,194		$	268,642		$	261,046		$	252,959

	Period End Shares Outstanding	14,474			14,472			14,441			14,424			14,368			Period End Shares Outstanding	14,982			14,998			14,969			14,949			14,909
	Tangible Book Value per Share (Non-GAAP)	$	17.48		$	16.99		$	16.69		$	16.33		$	15.92		Tangible Book Value per Share (Non-GAAP)	$	19.08		$	18.55		$	17.95		$	17.46		$	16.97
	Net Income	8,734			8,758			9,260			9,730			8,531			Net Income	8,127			9,740			10,067			8,934			8,734
	Return on Tangible Equity (Net Income/Tangible Equity - Annualized)	14.22		%	14.20		%	15.36		%	16.80		%	15.24		%	Return on Average Tangible Equity (Net Income/Tangible Equity - Annualized)	11.55		%	14.18		%	15.05		%	13.96		%	14.22		%

3.	Non-GAAP Financial Measures Reconciliation: Net Interest Margin is the ratio of our annualized tax-equivalent net interest income to average earning assets. This is also a non-GAAP financial measure which we believe provides investors with information that is useful in understanding our financial performance. See "Use of Non-GAAP Financial Measures" on page 39.																Non-GAAP Financial Measures Reconciliation: Net Interest Margin is the ratio of our annualized tax-equivalent net interest income to average earning assets. This is also a non-GAAP financial measure which the Company believes provides investors with information that is useful in understanding our financial performance. See "Use of Non-GAAP Financial Measures" on page 43.
		3/31/2019			12/31/2018			9/30/2018			6/30/2018			3/31/2018				3/31/2020			12/31/2019			9/30/2019			6/30/2019			3/31/2019
	Interest Income (GAAP)	$	26,213		$	26,000		$	24,495		$	23,590		$	22,418		Interest Income (GAAP)	$	28,226		$	28,367		$	27,952		$	27,227		$	26,213
	Add: Tax-Equivalent adjustment (Non-GAAP)	373			376			376			468			491			Add: Tax-Equivalent adjustment (Non-GAAP)	288			321			344			376			373
	Interest Income - Tax Equivalent (Non-GAAP)	$	26,586		$	26,376		$	24,871		$	24,058		$	22,909		Interest Income - Tax Equivalent (Non-GAAP)	$	28,514		$	28,688		$	28,296		$	27,603		$	26,586
	Net Interest Income (GAAP)	$	21,121		$	21,657		$	20,997		$	20,962		$	20,402		Net Interest Income (GAAP)	$	23,006		$	22,918		$	22,303		$	21,707		$	21,121
	Add: Tax-Equivalent adjustment (Non-GAAP)	373			376			376			468			491			Add: Tax-Equivalent adjustment (Non-GAAP)	288			321			344			376			373
	Net Interest Income - Tax Equivalent (Non-GAAP)	$	21,494		$	22,033		$	21,373		$	21,430		$	20,893		Net Interest Income - Tax Equivalent (Non-GAAP)	$	23,294		$	23,239		$	22,647		$	22,083		$	21,494
	Average Earning Assets	$	2,847,966		$	2,832,558		$	2,757,020		$	2,703,054		$	2,641,660		Average Earning Assets	$	3,030,881		$	2,969,972		$	2,881,035		$	2,865,085		$	2,847,966
	Net Interest Margin (Non-GAAP)*	3.06		%	3.09		%	3.08		%	3.18		%	3.21		%	Net Interest Margin (Non-GAAP)*	3.09		%	3.10		%	3.12		%	3.09		%	3.06		%

4.	Non-GAAP Financial Measures: Financial Institutions often use the "efficiency ratio", a non-GAAP ratio, as a measure of expense control. We believe the efficiency ratio provides investors with information that is useful in understanding our financial performance. We define our efficiency ratio as the ratio of our noninterest expense to our net gross income (which equals our tax-equivalent net interest income plus noninterest income, as adjusted). There is no GAAP financial measure that is closely comparable to the efficiency ratio. See "Use of Non-GAAP Financial Measures" on page 39.																Non-GAAP Financial Measures: Financial Institutions often use the "efficiency ratio", a non-GAAP ratio, as a measure of expense control. The Company believes the efficiency ratio provides investors with information that is useful in understanding our financial performance. The Company defines efficiency ratio as the ratio of our noninterest expense to our net gross income (which equals tax-equivalent net interest income plus noninterest income, as adjusted). There is no GAAP financial measure that is closely comparable to the efficiency ratio. See "Use of Non-GAAP Financial Measures" on page 43.

5.	For the current quarter, all of the regulatory capital ratios in the table above, as well as the Total Risk-Weighted Assets and Common Equity Tier 1 Capital amounts listed in the table below, are estimates based on, and calculated in accordance with, bank regulatory capital rules. All prior quarters reflect actual results. The March 31, 2019 CET1 ratio listed in the tables (i.e., 12.98%) exceeds the sum of the required minimum CET1 ratio plus the fully phased-in Capital Conservation Buffer (i.e., 7.00%).																For the current quarter, the Community Bank Leverage Ratio (CBLR) in the table above is an estimation. The previous Total Risk-Weighted Assets and Common Equity Tier 1 Capital amounts listed in the table below reflect actual results. The CBLR at March 31, 2020 listed below (i.e., 9.87%) exceeds the required minimum CBLR (i.e., 9.00%).
		3/31/2019			12/31/2018			9/30/2018			6/30/2018			3/31/2018				3/31/2020			12/31/2019			9/30/2019			6/30/2019			3/31/2019
	Total Risk Weighted Assets	$	2,075,115		$	2,046,495		$	1,999,849		$	1,934,890		$	1,889,719		Community Bank Leverage Ratio	9.87		%
	Common Equity Tier 1 Capital	269,363			263,863			257,852			251,666			245,015			Total Risk Weighted Assets				$	2,237,127		$	2,184,214		$	2,121,541		$	2,075,115
	Common Equity Tier 1 Capital Ratio	12.98		%	12.89		%	12.89		%	13.01		%	12.97		%	Common Equity Tier 1 Capital				289,409			282,485			275,528			269,363
																	Common Equity Tier 1 Capital Ratio				12.94		%	12.93		%	12.99		%	12.98		%

* Quarterly ratios have been annualized.

																													Average Consolidated Balance Sheets and Net Interest Income Analysis	(GAAP Basis)	(Dollars In Thousands)

Quarter Ended March 31:	2019							2018							2020							2019
				Interest		Rate					Interest		Rate					Interest		Rate					Interest		Rate
	Average			Income/		Earned/		Average			Income/		Earned/		Average			Income/		Earned/		Average			Income/		Earned/
	Balance			Expense		Paid		Balance			Expense		Paid		Balance			Expense		Paid		Balance			Expense		Paid
Interest-Bearing Deposits at Banks	$	26,163		$	195	3.02	%	$	27,978		$	134	1.94	%	$	32,787		$	124	1.52	%	$	26,163		$	195	3.02	%
Investment Securities:
Fully Taxable	378,120			2,369		2.54		359,908			1,893		2.13		399,307			2,193		2.21		378,120			2,369		2.54
Exempt from Federal Taxes ⁽²⁾	233,041			1,246		2.17		282,534			1,533		2.20		204,441			1,035		2.04		233,041			1,246		2.17
Loans ⁽²⁾	2,210,642			22,403		4.11		1,971,240			18,858		3.88		2,394,346			24,874		4.18		2,210,642			22,403		4.11
Total Earning Assets	2,847,966			26,213		3.73		2,641,660			22,418		3.44		3,030,881			28,226		3.75		2,847,966			26,213		3.73
Allowance for Loan Losses	(20,108		)					(18,523		)
Allowance for Credit Losses															(22,186		)					(20,108		)
Cash and Due From Banks	35,125							35,608							34,211							35,125
Other Assets	114,073							104,961							137,951							114,073
Total Assets	$	2,977,056						$	2,763,706						$	3,180,857						$	2,977,056
Deposits:
Interest-Bearing Checking Accounts	$	768,354		482		0.25		$	914,116		387		0.17		$	707,747		487		0.28		$	768,354		482		0.25
Savings Deposits	833,832			1,601		0.78		723,660			522		0.29		1,092,980			2,471		0.91		833,832			1,601		0.78
Time Deposits of $250,000 or More	79,346			396		2.02		63,406			204		1.30		126,046			533		1.70		79,346			396		2.02
Other Time Deposits	212,785			713		1.36		164,866			259		0.64		264,755			1,000		1.52		212,785			713		1.36
Total Interest-Bearing Deposits	1,894,317			3,192		0.68		1,866,048			1,372		0.30		2,191,528			4,491		0.82		1,894,317			3,192		0.68
Short-Term Borrowings	264,471			1,421		2.18		111,835			197		0.71		92,444			208		0.90		264,471			1,421		2.18
FHLBNY Term Advances & Other Long-Term Debt	62,667			464		3.00		72,778			447		2.49		73,297			471		2.58		62,667			464		3.00
Finance Leases	2,948			15		2.06		—			—		—		5,246			50		3.83		2,948			15		2.06
Total Interest-Bearing Liabilities	2,224,403			5,092		0.93		2,050,661			2,016		0.40		2,362,515			5,220		0.89		2,224,403			5,092		0.93
Noninterest-bearing deposits	453,668							439,688							478,481							453,668
Other Liabilities	26,121							22,248							33,334							26,121
Total Liabilities	2,704,192							2,512,597							2,874,330							2,704,192
Stockholders’ Equity	272,864							251,109							306,527							272,864
Total Liabilities and Stockholders’ Equity	$	2,977,056						$	2,763,706						$	3,180,857						$	2,977,056
Net Interest Income				$	21,121						$	20,402						$	23,006						$	21,121
Net Interest Spread						2.80	%						3.04	%						2.86	%						2.80	%
Net Interest Margin						3.01	%						3.13	%						3.05	%						3.01	%

OVERVIEW

The following discussion and analysis focuses on and reviews ~~our~~the results of operations for the ~~three month~~three-month period ended March 31, ~~2019~~2020 and ~~our~~the financial condition as of March 31, ~~2019~~2020 and ~~2018.~~2019. 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.

COVID-19 Pandemic:

In March 2020, the World Health Organization recognized COVID-19 as a pandemic. In response, the United States federal government and various state and local governments have, among other actions, imposed travel and business restrictions and required or advised communities in which we do business to adopt stay-at-home orders and social distancing guidelines, causing some businesses to adjust, reduce or suspend operating activities. Like many businesses, we expect the operations and financial results of Arrow to be adversely impacted by the COVID-19 pandemic. The severity, magnitude and duration of the current pandemic are still uncertain, rapidly changing and hard to predict.

Arrow has been proactive and continually assessing the potential impact of the pandemic. It formed a Business Continuity Task Force in advance of the impending arrival of the pandemic to Upstate New York. The task force, representing leadership from across the organization, has overseen a robust and expansive effort to protect employees and customers while continuing to deliver essential banking services during the pandemic. In that regard, Arrow has been limiting access at all facilities to appointment-only and encouraging customers to use no-contact alternatives such as digital banking, drive-ins and ATMs. Additionally, Arrow expanded remote work arrangements for a large portion of its employee base, discontinued employee travel, minimized in-person meetings, and implemented social distancing for essential employees who remained on-site. Arrow believes that between remote working arrangements and cross training initiatives, current human capital resources should be able to continue operations during the current COVID-19 pandemic, absent unforeseen facts.

Demand for the Small Business Administration’s Paycheck Protection Program has been significant. Both of Arrow’s subsidiary banks are proudly participating in the program as a way to deliver relief for small businesses in Upstate New York. In order to process the large volume of Paycheck Protection Program applications, Arrow reinforced its lending team with resources and support from across the Company. Arrow believes it will be able to effectively manage its liquidity position while being able to satisfy the significant demand for the Small Business Administration’s Paycheck Protection Program.

The COVID-19 pandemic has significantly impacted economic activity and markets around the world, and we expect it will negatively impact Arrow's business in numerous ways. In particular, the rapid rise in unemployment and the mandated closure of non-essential businesses in New York, will most likely reduce loan production as well as impact borrowers' ability to satisfy their obligations. Investments are analyzed to determine if any impairment not considered temporary exists. Municipal investments may be impacted if tax revenue deceases significantly. Management will continue to evaluate investment securities for impairment. Arrow has increased its allowance for loan losses as a result of the uncertainty surrounding the ability of its borrowers to satisfy loan obligations to Arrow. Arrow will continue to assess potential loan losses. Arrow does not anticipate any impairment of its right-of-use lease assets, goodwill or other intangible assets as a result of COVID-19, however, the Company will continue to assess impairment throughout the pandemic.

We continue to monitor closely the Company’s financial health and liquidity and the impact of the pandemic on the Company. As we cannot predict the duration or scope of the pandemic or its impact on economic and financial markets or its impact on our business, we are not able to reasonably estimate the overall impact on the Company. For further discussion of the impact COVID-19 has had and may in the future have on Arrow and its financial results and operations, please refer to the risk factor included in Item 8.01 of Arrow's Current Report on Form 8-K filed April 24, 2020.

Summary of Q1 ~~2019~~2020 Financial Results: Net ~~income was $8.7 million for the first quarter of 2019, an increase of $203 thousand, or 2.4%, over net~~ income for the first quarter of ~~2018.~~ 2020 was $8.1 million, compared to $8.7 million in the first quarter of 2019. Although loan growth slowed in March, primarily as a result of the COVID-19 pandemic, total loans grew in the first quarter by $28.1 million from December 31, 2019 to $2.4 billion. Net interest income increased to $23.0 million in the first quarter of 2020, compared to $21.1 million for the comparable quarter of 2019.

Diluted earnings per share (EPS) for the quarter was ~~$0.60, an increase~~$0.54, a decrease of ~~1.7%~~6.9% from the EPS of ~~$0.59~~$0.58 reported for the first quarter of ~~2018.~~2019. Return on average equity (ROE) for the first quarter of ~~2019~~2020 decreased to ~~12.98%~~10.66%, as compared to a ROE of ~~13.78%~~12.98% for the ~~first~~ quarter ended March 31, ~~2018.~~2019. Return on average assets (ROA) for the ~~2019~~2020 first quarter was ~~1.19%~~1.03%, a decrease from an ROA of ~~1.25%~~1.19% for the ~~first~~ quarter ended March 31, ~~2018.~~2019.

Total loans reached $2.4 billion as of March 31, 2020, which represents an increase of $179.0 million, or 8.0% as compared to March 31, 2019. The consumer loan portfolio grew by $77.9 million, or 10.4%, as compared to March 31, 2019, primarily within the indirect automobile lending program. Total outstanding residential real estate loans increased $54.5 million, or 6.3%, as compared to March 31, 2019. Total outstanding commercial loans increased $46.6 million, or 7.4%, as compared to March 31, 2019.

~~Factors contributing~~At March 31, 2020, deposit balances reached $2.8 billion, up $320.9 million, or 12.9%, from the prior-year level. Noninterest-bearing deposits represented 17.4% of total deposits at March 31, 2020, compared to ~~the solid results for the current quarter~~18.2% of total deposits on March 31, 2019. At March 31, 2020, other time deposits were $245.9 million, a decrease of $17.1 million compared to the ~~comparable~~ prior ~~year~~year. Municipal deposits increased $174.7 million, or 28.1% from March 31, 2019. Total combined Federal Home Loan Bank Overnight and Term Advances declined $110.0 million from December 31, 2019.

First quarter ~~are as follows:~~

~~Net~~2020 net interest income ~~on a GAAP basis~~ increased ~~3.5%~~ to $23.0 million, up 8.9% from $21.1 million ~~primarily due to~~in the ~~increase in total interest and dividend income~~comparable quarter of ~~$3.8 million as a result of strong loan growth.~~ 2019. The net interest margin was ~~3.01%~~3.05% for the quarter, compared to ~~3.13%~~3.01% for the first quarter of ~~2018~~.2019. The ~~decrease~~increase in net interest margin from the prior year was primarily ~~due to the~~ ~~$3.1 million increase in interest expense. This increase was~~ the result of ~~a 3.3% growth~~both the increase in ~~deposits and higher rates paid~~the deposit balances as described above combined with the decrease in market rates. The yield on ~~money market savings, time deposits and other borrowings due to higher short-term market interest rates.~~ earning assets has been consistent between years with increased loan yields offset by declining yields on investments.

Noninterest income for the ~~three-month period~~three months ended March 31, ~~2019,~~2020 was ~~$6.9~~$7.7 million, compared to $6.9 million in the comparable ~~2018~~2019 quarter. ~~Revenue generated from~~For the ~~wealth management and insurance segments, remains consistent, and total noninterest~~first quarter of 2020, the fair value of equity securities at March 31, 2020 decreased $374 thousand primarily as a result of the equity market disruption related to the COVID-19 pandemic. In addition, $866 thousand of interest rate swap income ~~represented 24.6% of total revenues~~was recorded in the first quarter of ~~2019 compared to 25.2% for the same period of 2018.~~2020.

Noninterest expense for the first quarter of ~~2019~~2020 increased ~~4.4%~~6.6% to ~~$16.7~~$17.8 million, from ~~$16.0~~$16.7 million for the first quarter of ~~2018. Technology~~2019. Salaries and ~~equipment expense~~benefits increased ~~$443 thousand~~$1.1 million, primarily the result of increased cost of health insurance benefits.

Asset quality remained strong at March 31, 2020, with continued low levels of nonperforming loans and ~~other operating expense increased $228~~net charge-offs. Nonperforming loans at March 31, 2020, were $5.5 million, up $168 thousand from the ~~comparable quarter in 2018.~~

level at March 31, 2019. Net charge-offs, expressed as an annualized percentage of average loans outstanding, were 0.05% for the three-month period ended March 31, 2020, consistent with March 31, 2019. The allowance for loan losses was $23.6 million at March 31, 2020, which represented 0.98% of loans outstanding, as compared to 0.91% at March 31, 2019. The loss provision expense for ~~income taxes was $2.2 million in~~ the first quarter of ~~2019 versus $2.1~~2020 was $2.8 million, inup $2.3 million from the ~~same quarter of 2018. The effective income tax rates~~provision expense for the ~~three-month periods ended March 31,~~comparable 2019 ~~and 2018 were 19.8% and 19.4%, respectively.~~quarter. Although credit quality remains very strong, the increase in loss provision reflects the uncertainty resulting from the COVID-19 pandemic.

The changes in net income, net interest income and net interest margin between the ~~three month~~three-month periods are discussed in detail under the heading "RESULTS OF OPERATIONS," beginning on page ~~55.~~

~~2018 Regulatory Reform:~~ The Economic Growth Act, was signed into law May 24, 2018. Some of its provisions were written to take effect immediately; others have later specified effective dates and still others are open-ended, to be implemented by rule-making. See the discussion of this item under C. SUPERVISION AND REGULATION, "2018 Regulatory Reform" within the 2018 Annual Report for further details.59.

Regulatory Capital and Increase in Stockholders' Equity: The federal bank regulators have issued a final rule to implement the “community bank leverage ratio”, introducing an optional simplified measure of capital adequacy for qualifying community banking organizations (the CBLR framework). To qualify for the CBLR framework, a community banking organization must satisfy certain requirements, including having a leverage ratio of greater than 9%, less than $10 billion in total consolidated assets, and limited amounts of off-balance-sheet exposures and trading assets and liabilities. A qualifying community banking organization that opts into the CBLR framework and meets all requirements under the CBLR framework will be considered to have met the well-capitalized ratio requirements under the “prompt corrective action” regulations and will not be required to report or calculate risk-based capital ratios. Subsequently, Section 4012 of the Coronavirus Aid, Relief, and Economic Security (CARES) Act required the federal banking agencies to temporarily lower the threshold for election of the CBLR framework, issuing two interim final rules to set the CLBR at 8% as of the second quarter of 2020 and then gradually re-establish the CBLR at 9%.

Under the interim final rules, the CBLR will be set at 8% beginning in the second quarter of 2020 through the end of the year. Thus, community banks that have a leverage ratio of 8% or greater and meet certain other criteria may elect to use the CBLR framework. Beginning in 2021, the CBLR will increase to 8.5% for the calendar year. Community banks will have until January 1, 2022, before the leverage ratio requirement to use the CBLR framework will return to 9%.

The CBLR final rule became effective as of January 1, 2020, and Arrow and both subsidiary banks utilized the CBLR framework for purposes of filing their Form FR Y-9C and call reports for the first quarter of 2020. At March 31, ~~2019, we continued to exceed by a substantial amount all required minimum capital ratios under~~2020, the ~~current bank regulatory capital rules at both~~CBLR ratio for the ~~holding company~~Company and ~~bank levels. At that date,~~ both subsidiary banks ~~as well as~~exceeded the ~~holding company,~~9% minimum threshold and therefore continued to qualify as "well-capitalized" under the regulatory capital classification guidelines as defined by the current bank regulatory capital rules as implemented under Dodd-Frank (the Capital Rules). Because of continued profitability and strong asset quality, our regulatory capital levels throughout recent years have consistently remained well in excess of the various required regulatory minimums in effect from time to time, as they do at present. Pursuant to the Capital Rules under Dodd-Frank, required minimum regulatory capital levels for insured banks and their parent holding companies increased in 2019. Pursuant to Economic Growth Act, the federal bank regulators are required to implement a simplified community bank leverage ratio capital standard that may be applicable to Arrow and its subsidiary banks to allow them to satisfy all applicable capital and leverage requirements, including the currently applicable risk-based capital ratio requirements. The implementation of the new community bank leverage ratio standards will be subject to the notice and comment procedures of rulemaking. The Economic Growth Act does not impose a deadline for this rulemaking. The federal bank regulators have issued a proposed rule to implement the "community bank leverage ratio", but that rule is not yet effective or final, and is subject to change. Upon effectiveness, the final rule may impact Arrow's capital options and requirements, although the potential impact of the final rule on Arrow will remain uncertain until the final rule is issued. Until the rule becomes final and effective, the enhanced Capital Rules promulgated under Dodd-Frank will remain applicable to Arrow.guidelines.

Stockholders’ equity was ~~$276.6~~$309.4 million at March 31, ~~2019,~~2020, an increase of ~~$7.0~~$7.7 million, or ~~2.6%~~2.5%, from the December 31, ~~2018~~2019 level of ~~$269.6~~$301.7 million, and an increase of ~~$23.9~~$32.8 million, or ~~9.4%~~11.9%, from the prior-year level. The increase in stockholders' equity over the first three months of 2020 principally reflected the following factors: (i) $8.13 million of net income for the period, plus (ii) other comprehensive income of $3.95 million, plus (iii) issuance of $1.01 million of common stock through employee benefit and dividend reinvestment plans; reduced by (iv) cash dividends of $3.90 million; and (v) repurchases of common stock of $1.51 million. The components of the change in stockholders’ equity since year-end ~~2018~~2019 are presented in the Consolidated Statement of Changes in Stockholders’ Equity on page 6, and are discussed in more detail in the next section.

At March 31, ~~2019,~~2020, book value per share was ~~$19.11,~~$20.65, up by ~~8.6%~~11.3% over the prior-year level. Tangible book value per share (a non-GAAP measure that deducts intangible assets from stockholders' equity) was ~~$17.48,~~$19.08, an increase of ~~$1.56,~~$2.11, or ~~9.8%~~12.4%, over the level as of March 31, ~~2018.~~2019. See the disclosure on page 3941 related to the use of non-GAAP financial measures including tangible book value. In the first three months of 2019, total stockholders' equity increased by 2.6% and total book value per share increased by 2.6%. The increase in stockholders' equity over the first three months of 2019 principally reflected the following factors: (i) $8.73 million of net income for the period, plus (ii) other comprehensive income of $2.24 million, plus (iii) issuance of $1.20 million of common stock through employee benefit and dividend reinvestment plans; reduced by (iv) cash dividends of $3.76 million; and (v) repurchases of common

~~stock of $1.39 million.~~ On March 31, ~~2019,~~2020, the Company's closing stock price was ~~$32.89,~~$27.87, representing a trading multiple of ~~1.88~~1.46 to tangible book value. In the first quarter of ~~2019,~~2020, the Company paid a quarterly cash dividend of ~~$0.260 was paid.~~$0.26. Further discussion of dividends is included in the Capital Components; Stock Repurchases; Dividends section located on page ~~53.~~56.

Loan Quality: Net charge-offs for the first quarter of ~~2019~~2020 were ~~$295~~$322 thousand as compared to ~~$275~~$295 thousand for the comparable ~~2018~~2019 quarter. The ratio of net charge-offs to average loans (annualized) was 0.05% for the first quarter of ~~2019 compared to 0.06% for~~2020 consistent with the first quarter of ~~2018.~~2019. At March 31, ~~2019,~~2020, the allowance for ~~loan~~credit losses was ~~$20.4~~$23.6 million representing ~~0.91%~~0.98% of total loans, which is ~~a decrease~~an increase from the ~~December~~March 31, ~~2018~~2019 ratio of ~~0.92%~~0.91%. ~~The allowance was determined to be appropriate and~~Although credit quality remains very strong, the increase in loan loss provision expense reflects the ~~continuing strong~~uncertainty resulting from the COVID-19 pandemic. As permitted by the CARES Act, Arrow has elected to defer the adoption of the Current Expected Credit Losses ("CECL") methodology in determining credit ~~quality in the loan portfolio.~~losses.

Nonperforming loans were ~~$5.3~~$5.5 million at March 31, ~~2019,~~2020, representing ~~0.24%~~0.23% of period-end loans, a decrease from the ~~December~~March 31, ~~2018~~2019 ratio of ~~0.25%, which compares~~0.24%. The ratio continues to compare favorably with the weighted average ratio of the peer group of ~~0.56%~~0.53% at December 31, ~~2018.~~2019.

Loan Segments: During the quarter ended March 31, ~~2019,~~2020, total loans grew by ~~$39.0~~$28.1 million, or ~~1.8%~~1.2% as compared to the balance at December 31, ~~2018.~~2019. The largest increase was in ~~consumer~~commercial real estate loans, which increased during the quarter by ~~$27.3~~$15.6 million, or ~~3.8%~~3.1%. In addition, ~~residential real estate~~consumer loans expanded ~~by $6.5~~$13.5 million, or ~~0.8%~~1.7% and ~~the total~~ commercial ~~loan portfolio~~loans increased by ~~$5.2~~$3.6 million, or ~~0.8%~~2.4%. The economic factors resulting from the COVID-19 pandemic will most likely adversely impact loan growth for the remainder of the year.

Commercial ~~Loans:~~ ~~These loans comprised 6.0% of the total loan portfolio at period-end. The business sector in the Company's service area, including small-~~ and ~~mid-sized businesses with headquarters in the area, continued to be in reasonably good financial condition at period-end.~~

Commercial Real Estate Loans: ~~These~~Combined, these loans ~~comprised 22.1%~~comprise 27.9% of the total loan portfolio at period-end. Commercial property values in the Company's region have remained stable in recent ~~periods.~~periods leading to the pandemic. 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. The mandatory closure of nonessential business in New York will impact the Bank's customer base. Government intervention, with programs such as the Small Business Administration’s Paycheck Protection Program, may mitigate the economic risk to both Arrow and its customers, however the full impact cannot be determined at this time.

Consumer Loans: These loans (primarily automobile loans) comprised ~~33.4%~~34.2% of the total loan portfolio at period-end. Consumer automobile loans at March 31, ~~2019,~~2020, were ~~$739~~$819 million, or ~~99.0%~~99.3% of this portfolio segment. In the first three months of ~~2019,~~2020, the Company did not experience any significant increase in the delinquency rate or in the percentage of nonperforming loans in this segment. The vast majority of automobile loans are initiated through the purchase of vehicles by consumers with automobile dealers. The physical sale of vehicles through dealerships has been curtailed and not deemed essential as part of the response to the COVID-19 pandemic in New York and Vermont, our primary dealer network. Thus, the volume of originations of consumer loans will be negatively impacted, although the magnitude of the impact cannot be determined.

Residential Real Estate Loans: These loans, including home equity loans, made up ~~38.5%~~37.9% of the total loan portfolio at period-end. The residential real estate market in the Company's service area has been stable in recent periods. The Company originated nearly all of the residential real estate loans currently held in the loan portfolio and applies conservative underwriting standards to loan originations. The Company typically sells a portion of 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 ~~although this ratio has generally declined somewhat in recent periods.~~based on market conditions. Due to the COVID-19 pandemic, it is not yet possible to determine the long term economic impact of the mandated closure of non-essential business and its resulting impact on our residential real estate loan portfolio.

Liquidity and Access to Credit Markets: The Company has not experienced any liquidity problems or special concerns thus far in ~~2019,~~2020, or at any time in recent history. Arrow’s liquidity position provides the necessary flexibility to address any ~~prior years back~~unexpected near-term disruptions that may develop as a result of the COVID-19 pandemic such as: reduced cash-flows from the investment and loan portfolios and aggressive funding of programs associated with response efforts, including the Small Business Administration’s Paycheck Protection Program. Interest-bearing cash balances at March 31, 2020 were $106.0 million compared to $25.0 million at March 31, 2019. Contingent collateralized lines of credit are established and ~~during~~available through the ~~financial crisis.~~FHLBNY and FRB, totaling $1.2 billion. The terms of ~~the Company's~~Arrow's lines of credit ~~with a correspondent bank, the FHLBNY and the Federal Reserve Bank of New York~~ have not changed significantly in recent periods (see the general liquidity discussion on page ~~54)~~57). Historically, the Company 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 a correspondent ~~bank,~~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 including ~~a severe crisis.~~the current COVID-19 pandemic.

Visa Class B Common Stock: Arrow's subsidiary bank, Glens Falls National, like other Visa member banks, bears some indirect contingent liability for Visa's direct liability arising out of certain antitrust claims involving merchant discounts to the extent that Visa's liability might exceed the amount funded in ~~their~~its litigation escrow account. On September 18, 2018, Visa issued a press release announcing that ~~they~~it and other defendants entered into a settlement agreement with class plaintiffs in the related litigation ~~case, and they expect the damage class plaintiffs to file a motion for preliminary approval~~case. But certain merchants opted out of the class settlement ~~with~~and filed separate litigation cases. Once the ~~court. If the settlement is approved~~class action and other merchant litigation cases are settled and the balance in the litigation escrow account is sufficient to cover the litigation claims and related expenses, Arrow could potentially realize a gain on the receipt of Visa Class A common stock. On September 27, 2019, Visa deposited $300 million into the litigation escrow account that was established pursuant to Visa’s U.S. retrospective responsibility plan, which reduces the conversion rate of Class B shares to Class A shares. This did not have a significant effect on the number of Class B shares currently convertible to Class A shares by Glens Falls National. At March 31, ~~2019,~~2020, Glens Falls National held 27,771 shares of Visa Class B common stock, and utilizing the conversion ratio to Class A common stock at that time, these Class B shares would convert to 45,000 shares of Visa Class A common stock. Since the litigation settlement is not certain, the Company does not recognize any economic value for these shares.

CHANGE IN FINANCIAL CONDITION

Summary of Selected Consolidated Balance Sheet Data

(Dollars in Thousands)


	March 31, 2019		At Period-End December 31, 2018		March 31, 2018		$ Change From December			$ Change From March			% Change From December (not annualized)		% Change From March		March 31, 2020		At Period-End December 31, 2019		March 31, 2019		$ Change From December			$ Change From March			% Change From December (not annualized)		% Change From March
Interest-Bearing Bank Balances	$	25,031	$	27,710	$	70,747	$	(2,679	)	$	(45,716	)	(9.7	)%	(64.6	)%	$	106,004	$	23,186	$	25,031	$	82,818		$	80,973		357.2	%	323.5	%
Securities Available-for-Sale	298,812		317,535		305,589		(18,723		)	(6,777		)	(5.9	)%	(2.2	)%	378,186		357,334		298,812		20,852			79,374			5.8	%	26.6	%
Securities Held-to-Maturity	279,400		283,476		330,124		(4,076		)	(50,724		)	(1.4	)%	(15.4	)%	238,520		245,065		279,400		(6,545		)	(40,880		)	(2.7	)%	(14.6	)%
Equity Securities	1,850		1,774		1,579		76			271							1,689		2,063		1,850		(374		)	(161		)	(18.1	)%	(8.7	)%
Loans⁽¹⁾	2,235,208		2,196,215		1,993,037		38,993			242,171			1.8	%	12.2	%	2,414,193		2,386,120		2,235,208		28,073			178,985			1.2	%	8.0	%
Allowance for Loan Losses	20,373		20,196		19,057		177			1,316			0.9	%	6.9	%
Allowance for loan losses																	23,637		21,187		20,373		2,450			3,264			11.6	%	16.0	%
Earning Assets⁽¹⁾	2,848,179		2,842,216		2,705,856		5,963			142,323			0.2	%	5.3	%	3,143,971		3,024,085		2,848,179		119,886			295,792			4.0	%	10.4	%
Total Assets	$	2,984,883	$	2,988,334	$	2,826,687	$	(3,451	)	$	158,196		(0.1	)%	5.6	%	$	3,291,332	$	3,184,275	$	2,984,883	$	107,057		$	306,449		3.4	%	10.3	%
Noninterest-Bearing Deposits	$	453,089	$	472,768	$	452,347	$	(19,679	)	$	742		(4.2	)%	0.2	%	$	489,151	$	484,944	$	453,089	$	4,207		$	36,062		0.9	%	8.0	%
Interest-Bearing Checking Accounts	823,301		790,781		944,161		32,520			(120,860		)	4.1	%	(12.8	)%	793,425		689,221		823,301		104,204			(29,876		)	15.1	%	(3.6	)%
Savings Deposits	866,861		818,048		762,220		48,813			104,641			6.0	%	13.7	%	1,146,683		1,046,568		866,861		100,115			279,822			9.6	%	32.3	%
Time Deposits over $250,000	83,834		73,583		85,403		10,251			(1,569		)	13.9	%	(1.8	)%	135,854		123,968		83,834		11,886			52,020			9.6	%	62.1	%
Other Time Deposits	263,012		190,404		167,142		72,608			95,870			38.1	%	57.4	%	245,892		271,353		263,012		(25,461		)	(17,120		)	(9.4	)%	(6.5	)%
Total Deposits	$	2,490,097	$	2,345,584	$	2,411,273	$	144,513		$	78,824		6.2	%	3.3	%	$	2,811,005	$	2,616,054	$	2,490,097	$	194,951		$	320,908		7.5	%	12.9	%
Federal Funds Purchased and Securities Sold Under Agreements to Repurchase	$	58,407	$	54,659	$	74,957	$	3,748		$	(16,550	)	6.9	%	(22.1	)%	$	57,909	$	51,099	$	58,407	$	6,810		$	(498	)	13.3	%	(0.9	)%
FHLBNY Advances - Overnight	74,500		234,000		—		(159,500		)	74,500			(68.2	)%	—	%	—		130,000		74,500		(130,000		)	(74,500		)	(100.0	)%	(100.0	)%
FHLBNY Advances - Term	35,000		45,000		45,000		(10,000		)	(10,000		)	(22.2	)%	(22.2	)%	50,000		30,000		35,000		20,000			15,000			66.7	%	42.9	%
Junior Subordinated Obligations Issued to Unconsolidated Subsidiary Trusts	20,000		20,000		20,000		—			—			—	%	—	%	20,000		20,000		20,000		—			—			—	%	—	%
Stockholders' Equity	276,609		269,584		252,734		7,025			23,875			2.6	%	9.4	%	309,398		301,728		276,609		7,670			32,789			2.5	%	11.9	%

(1) Includes Nonaccrual Loans.

Changes in Earning Assets: The loan portfolio at March 31, ~~2019,~~2020, was ~~$2.2~~$2.4 billion, an increase of ~~$39.0~~$28.1 million, or ~~1.8%~~1.2%, from the December 31, ~~2018~~2019 level and up by ~~$242.2~~$179.0 million, or ~~12.2%~~8.0%, from the March 31, ~~2018~~2019 level. The following trends were experienced in our largest segments:

Commercial and commercial real estate ~~loans~~loans:. This segment of the loan portfolio increased by ~~$5.2~~$12.0 million, or ~~0.8%~~1.8%, during the first three months of ~~2019, representing the continued solid demand for such loans.~~2020.

Consumer loans (primarily automobile loans through indirect lending):. As of March 31, ~~2019,~~2020, these loans, primarily auto loans, increased by ~~$27.3~~$13.5 million, or ~~3.8%~~1.7%, from the December 31, ~~2018~~2019 balance, reflecting a ~~continuation of~~ strong demand for new and used vehicles throughout our region-wide dealer ~~network.~~network during the time leading up to COVID-19 pandemic. As previously stated, the physical sale of vehicles through dealerships has been curtailed and not deemed essential as part of the New York State and Vermont responses to the COVID-19 pandemic. The volume of originations of consumer loans will be impacted. The magnitude of the impact cannot be determined at this time.

Residential real estate ~~loans~~loans:. This segment increased during the first three months of ~~2019~~2020 by ~~$6.5~~$2.5 million, or ~~0.8%~~0.3%. ~~Factors contributing~~The likely impact of the COVID-19 pandemic on the volume of residential real estate loans is difficult to determine. We expect that high unemployment and the mandated closure of non-essential businesses in New York State will have an adverse impact on new originations. The rapid decline of interest rates may, however, increase demand for refinancing loans, both with existing and new customers.

Changes in Sources of Funds: Deposit balances reached $2.8 billion, up $320.9 million, or 12.9%, from the prior-year level. Noninterest-bearing deposits represented 17.4% of total deposits at March 31, 2020, compared to 18.2% of total deposits on March 31, 2019. At March 31, 2020, other time deposits were $245.9 million, a decrease of $17.1 million compared to the ~~segment growth include solid originations in the quarter~~prior year. Municipal deposits increased $174.7 million, or 28.1% from March 31, 2019. Total combined Federal Home Loan Bank Overnight and ~~a reduction of prepayments.~~Term Advances declined $110.0 million from December 31, 2019.

Municipal Deposits: Fluctuations in balances of interest-bearing checking accounts are largely the result of timing and behavior of municipal deposits. Municipal deposits on average represent 20% to ~~30%~~25% of total deposits. Municipal deposits are typically placed in interest-bearing checking, ~~and~~ savings ~~accounts, as well as~~and various time ~~deposits.~~deposit accounts.

In general, there is a seasonal pattern to municipal deposits which dip to a low point in August each year. Account balances tend to increase throughout the fall and into early winter from tax deposits, flatten out after the beginning of the ensuing calendar year, and increase again at the end of March from the electronic deposit of NYS Aid payments to school districts. In addition to ~~these~~ seasonal ~~fluctuations within types of accounts,~~behavior, the overall level of municipal deposit balances fluctuates from year-to-year as a result of local economic factors as well as competition from other banks and non-bank entities.

~~Changes in Sources of Funds:~~ Total deposits increased $144.5 million, or 6.2%, from December 31, 2018 to March 31, 2019 mainly due to the following: Other time deposits increased $72.6 million in the first quarter of 2019 mostly due to the acquisition of $66.5 million in brokered deposits as Arrow's subsidiary banks diversified funding at favorable rates relative to FHLBNY overnight advances in order to support the continued loan growth. Interest bearing checking accounts increased $32.5 million. Time deposits over $250,000 increased $10.3 million. These increasing balances were offset by a $19.7 million decrease in Non-Interest Bearing Deposits. The migration within our deposit offerings is due to certain municipal and non-municipal customers seeking a higher return on their deposit balances as a result of the rise in short-term interest rates. The addition of the brokered deposits allowed the banks to decrease overnight FHLBNY advances by $159.5 million. At March 31, 2019, term advances from the FHLBNY were $35 million, reflecting the non-renewal of a $10 million advance that matured during the first quarter of 2019.

FINANCIAL CONDITION

Investment Portfolio Trends

The table below presents the changes in the period-end balances for available-for-sale, held-to-maturity and equity securities from December 31, ~~2018~~2019 to March 31, ~~2019~~2020 (in thousands).

The slight reduction in the portfolios on a combined basis during the period reflected the Company's continued strategy in recent years to reallocate earning assets from investment securities to higher yielding loans to maximize earning asset yields.


	(Dollars in Thousands)															(Dollars in Thousands)
	Fair Value at Period-End							Net Unrealized Gains (Losses) For Period Ended								Fair Value at Period-End							Net Unrealized Gains (Losses) For Period Ended
	3/31/2019		12/31/2018		Change			3/31/2019			12/31/2018			Change		3/31/2020		12/31/2019		Change			3/31/2020			12/31/2019			Change
Securities Available-for-Sale:
U.S. Agency Securities	$	35,383	$	46,765	$	(11,382	)	$	(136	)	$	(306	)	$	170	$	5,181	$	5,054	$	127		$	179		$	52		$	127
State and Municipal Obligations	1,116		1,195		(79		)	2			2			—		723		764		(41		)	—			—			—
Mortgage-Backed Securities	261,513		268,775		(7,262		)	(1,834		)	(4,452		)	2,618		371,482		350,716		20,766			6,149			772			5,377
Corporate and Other Debt Securities	800		800		—			(200		)	(200		)	—		800		800		—			(200		)	(200		)	—
Total	$	298,812	$	317,535	$	(18,723	)	$	(2,168	)	$	(4,956	)	$	2,788	$	378,186	$	357,334	$	20,852		$	6,128		$	624		$	5,504

Securities Held-to-Maturity:
State and Municipal Obligations	$	235,576	$	233,359	$	2,217		$	1,122		$	(2,423	)	$	3,545	$	207,103	$	212,319	$	(5,216	)	$	2,955		$	4,076		$	(1,121	)
Mortgage-Backed Securities	44,838		46,979		(2,141		)	(108		)	(715		)	607		35,701		37,299		(1,598		)	1,329			477			852
Total	$	280,414	$	280,338	$	76		$	1,014		$	(3,138	)	$	4,152	$	242,804	$	249,618	$	(6,814	)	$	4,284		$	4,553		$	(269	)

Equity Securities	$	1,850	$	1,774	$	76		$	—		$	—		$	—	$	1,689	$	2,063	$	(374	)	$	—		$	—		$	—

At March 31, ~~2019,~~2020, the Company held no investment securities in the securities portfolios that consisted of or included, directly or indirectly, obligations of foreign governments or governmental agencies of foreign issuers.

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. 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. The Company's practice has been to purchase pass-through securities and CMOs that are issued or guaranteed by U.S. federal agencies, and the tranches of CMOs purchased are generally those having shorter average lives and/or durations. As a result of payment deferrals on underlying loan collateral that make up mortgage-backed securities, some cashflows may be temporarily impacted.

Other-Than-Temporary Impairment

Each quarter all investment securities with a fair value less than amortized cost are evaluated in the available-for-sale portfolio, the held-to-maturity portfolio and the equity securities portfolio, to determine if there exists other-than-temporary impairment for any such security as defined under generally accepted accounting principles. The evaluation also examined the potential impact of the COVID-19 pandemic on other-than-temporary impairment. There were no other-than-temporary impairment losses in the first three months of ~~2019.~~2020.

Change in Net Unrealized Securities Gains (Losses): Nearly all of the change in ~~our~~ net unrealized gains or losses during recent periods has been attributable to changes in the market ~~yields~~rates during the periods in question, with no change in the credit-worthiness of the issuers. Fixed income valuations increased sharply, while equities dropped, in the period primarily as the result of market disruptions associated with the COVID-19 pandemic.

Investment Sales, Purchases and Maturities

~~We had~~There were no sales of investment securities within the three-month periods ended March 31, ~~2019~~2020 or ~~2018.~~

~~Investment yields in the debt markets experienced some volatility in 2018 and the first three months of~~ 2019. The Company regularly reviews its interest rate risk position along with security holdings to evaluate if market opportunities have arisen that may present an opportunity to reposition certain securities available-for-sale to enhance portfolio performance.

The following table summarizes purchases of investment securities within the available-for-sale and held-to-maturity portfolios for the three-month periods ended March 31, ~~2019~~2020 and ~~2018,~~2019, as well as proceeds from the maturity and calls of investment securities within each portfolio for the respective periods presented:


(In Thousands)	Three Months Ended				Three Months Ended
Purchases:	3/31/2019		3/31/2018		3/31/2020		3/31/2019
Available-for-Sale Portfolio
State and Municipal Obligations	$	—	$	19,979
Mortgage-Backed Securities					$	33,201	$	—

Maturities & Calls	$	21,261	$	9,380	$	17,444	$	21,261


	Three Months Ended				Three Months Ended
Purchases:	3/31/2019		3/31/2018		3/31/2020		3/31/2019
Held-to-Maturity Portfolio
State and Municipal Obligations	$	1,457	$	921	$	717	$	1,457

Maturities & Calls	$	5,319	$	6,459	$	7,075	$	5,319

Loan Trends

The following ~~two~~three tables present, for each of the last five quarters, the quarterly average balances by loan type, ~~and~~ the percentage of total loans represented by each loan ~~type. For purposes~~type and the annualized yield of the following tables only, Home Equity loans have been separately disclosed from Residential Real Estate loans (they are otherwise included in a single category in this Report). Commercial Loans and Commercial Real Estate Loans have been combined into a single category (they are treated as separate categories in other sections of this Report).each loan category. Over the last five quarters, the average balances for Commercial, ~~and~~ Commercial Real Estate, Consumer and Residential Real Estate ~~and Consumer Loans~~ have steadily increased, although at different rates. ~~Average balances for Home Equity Loans have shown a slight contraction~~As result of the economic impact of the COVID-19 pandemic, it is uncertain if this consistent growth will continue in ~~recent quarters.~~the remaining quarters of 2020.

Quarterly Average Loan Balances

(Dollars in Thousands)

Quarter Ended
3/31/2019 12/31/2018 9/30/2018 6/30/2018 3/31/2018
Commercial and Commercial Real Estate $ 609,785
$ 595,359
$ 577,793
$ 576,311
$ 569,126
Consumer Loans
799,174
771,684
736,937
696,586
662,929
Residential Real Estate 673,527
661,423
640,277
616,519
600,076
Home Equity 128,156
131,969
134,644
137,182
139,109
Total Loans $ 2,210,642
$ 2,160,435
$ 2,089,651
$ 2,026,598
$ 1,971,240



	Quarter Ended
	3/31/2020		12/31/2019		9/30/2019		6/30/2019		3/31/2019
Commercial	$	140,486	$	133,550	$	125,498	$	120,979	$	118,634
Commercial Real Estate	518,931		505,639		493,819		492,673		488,836
Consumer	818,892		817,463		809,641		775,634		742,775
Residential Real Estate	916,037		901,458		879,921		866,013		860,397
Total Loans	$	2,394,346	$	2,358,110	$	2,308,879	$	2,255,299	$	2,210,642

Percentage of Total Quarterly Average Loans

Quarter Ended
3/31/2019 12/31/2018 9/30/2018 6/30/2018 3/31/2018
Commercial and Commercial Real Estate 27.6 % 27.6 % 27.7 % 28.4 % 28.9 %
Consumer Loans
36.1
35.7
35.2
34.3
33.5
Residential Real Estate 30.5
30.6
30.7
30.5
30.5
Home Equity 5.8
6.1
6.4
6.8
7.1
Total Loans 100.0 % 100.0 % 100.0 % 100.0 % 100.0 %



	Quarter Ended
	3/31/2020		12/31/2019		9/30/2019		6/30/2019		3/31/2019
Commercial	5.9	%	5.7	%	5.4	%	5.4	%	5.4	%
Commercial Real Estate	21.6	%	21.4	%	21.4	%	21.8	%	22.1	%
Consumer	34.2	%	34.7	%	35.1	%	34.4	%	33.6	%
Residential Real Estate	38.3	%	38.2	%	38.1	%	38.4	%	38.9	%
Total Loans	100.0	%	100.0	%	100.0	%	100.0	%	100.0	%

Quarterly Yield on Loans



	Quarter Ended
	3/31/2020		12/31/2019		9/30/2019		6/30/2019		3/31/2019
Commercial	4.52	%	4.54	%	4.60	%	4.64	%	4.43	%
Commercial Real Estate	4.34	%	4.53	%	4.57	%	4.53	%	4.58	%
Consumer	3.97	%	4.01	%	3.95	%	3.85	%	3.67	%
Residential Real Estate	4.20	%	4.20	%	4.27	%	4.28	%	4.33	%
Total Loans	4.18	%	4.19	%	4.23	%	4.18	%	4.11	%

The average yield of the overall total loan portfolio increased throughout 2019 and remained steady for the large portion of the 1st quarter of 2020. The COVID-19 pandemic and the rapid decline to historic low in market rates will lower loan yields for the remainder of 2020.

Maintenance of High Quality in the Loan Portfolio: In the first three months of ~~2019,~~2020, prior to the COVID-19 pandemic, there were no significant fluctuations in the quality of the loan portfolio or any segment thereof. In general, residential real estate loans have historically been underwritten to secondary market standards for prime loans and the Company has not engaged in subprime mortgage lending as a business line. Similarly, high underwriting standards have generally been applied to commercial and commercial real estate lending operations and generally in the indirect lending program as well. The ~~Company occasionally makes loans, including indirect loans,~~economic events related to the COVID-19 pandemic, specifically high unemployment and the mandated closure of nonessential business, may impact the ability of our borrowers ~~having FICO scores below the highest credit quality classifications. The Company has also made extensions of credit~~ to ~~existing borrowers who have developed credit problems after origination resulting in deterioration of~~satisfy their ~~FICO scores.~~obligations.

Commercial Loans and Commercial Real Estate Loans: ~~For the first three months of 2019, combined~~Combined commercial and commercial real estate loan originations continued to ~~increase.~~grow in the period leading up to the COVID-19 pandemic.

Substantially all commercial and commercial real estate loans in the loan portfolio were extended to businesses or borrowers located in the Company's regional markets. A portion of the loans in the commercial portfolio have variable rates tied to ~~prime~~Prime, LIBOR or FHLBNY rates.

~~Although demand has been steady, it is possible that demand for~~Many of the commercial and commercial real estate loans are in industries heavily impacted by the COVID-19 pandemic. Arrow is working closely with customers who wish to obtain Small Business Administration Paycheck Protection Program funding. Also, additional government intervention, if any, may ~~generally weaken in upcoming periods and/or that~~mitigate the ~~quality~~economic risk to both Arrow and its customers, however, the extent of such intervention and its impact cannot be determined at this ~~segment of the portfolio may experience stress in upcoming periods. Generally, the business sector in the Company's service area, appeared to be in reasonably good financial condition at period-end.~~time.

Consumer Loans: At March 31, ~~2019,~~2020, consumer loans (primarily automobile loans originated through dealerships located primarily in upstate New York and Vermont) ~~represented the largest category of loans in the loan portfolio, and continued~~continues to be a significant component of business, comprising more than a third of ~~the~~this total loan portfolio. The physical sale of vehicles through dealerships has been curtailed and not deemed essential as part of the New York State and Vermont response to the COVID-19 pandemic. Accordingly, we believe, the volume of originations of consumer loans will be adverselyimpacted. However, the magnitude of the impact cannot yet be determined.

New consumer loan volume for the first three months of ~~2019 remained strong, at $100.4~~2020 was $95.9 million, updown from the ~~$88.9~~$100.4 million originated in the first three months of 2018. As a result of these originations, the quarterly average balance of our consumer loan portfolio at March 31, 2019 grew by $27 million, or 3.6% from our quarterly average balance at December 31, 2018.2019.

For credit quality purposes, the Company assigns potential automobile loan customers into one of four tiers, ranging from lower to higher quality in terms of anticipated credit risk. The Company'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. The Company believes that this disciplined approach to evaluating risk has contributed to maintaining the strong ~~loan~~credit quality in this portfolio. ~~However, if weakness in auto demand returns,~~The COVID-19 pandemic has created significant unemployment, which may impact borrowers' ability to satisfy their obligations to the portfolio is likely to experience limited, if any, overall growth regardless of whether the auto company affiliates are offering highly-subsidized loans. If demand levels off, so will the financial performance in this important loan category. Additionally, if the local economy in our consumer lending areas were to experienceCompany. Government intervention may mitigate a significant ~~downturn,~~portion of the ~~quality~~credit risk, however, the extent of ~~our consumer loan portfolio may also~~such intervention and its impact cannot be ~~negatively impacted.~~determined at this time.

Residential Real Estate Loans: In recent years, residential real estate loans, including home equity loans, have represented the ~~second-largest~~largest category of the total loan portfolio. Gross originations for residential real estate loans (including refinancings of mortgage loans) for the first three months of ~~2019~~2020 were ~~$23.3~~$32.4 million. ~~Origination totals exceeded the sum of cash flows received from borrowers in the first quarter and the~~The Company has also sold portions of these originations in the secondary market. In the first three months of ~~2019,~~2020, the Company sold ~~$3.6~~$8.2 million, or ~~15.5%~~25.5%, of originations. In the first three months of ~~2018, $1.2~~2019, $3.6 million, or ~~3.9%~~15.5%, of ~~our~~ originations were sold. The Company expects to continue to sell a portion of mortgage loan originations in upcoming periods ~~although perhaps a decreasing percentage of overall originations~~ if ~~rates continue their slow rise across longer maturities. At~~market conditions warrant. It is not currently possible to determine the same time, if prevailing rates rise substantially, there may be a slowdown in loan growth and perhaps decreasing total originations, particularly if the general economy also falters. At some point, it is possible that the Company may experience a decrease in outstanding loan balances in this segmentlong term economic impact of the ~~loan portfolio. Additionally, if the local economy or real estate market should suffer a major downturn, the quality of the real estate portfolio may also be negatively impacted.~~

~~The following table indicates the annualized tax-equivalent yield of each loan category for the past five quarters.~~

~~Quarterly Taxable Equivalent Yield on Loans~~

Quarter Ended
3/31/2019 12/31/2018 9/30/2018 6/30/2018 3/31/2018
Commercial and Commercial Real Estate 4.51 % 4.50 % 4.42 % 4.47 % 4.38 %
Consumer Loans 3.72
3.64
3.52
3.44
3.34
Residential Real Estate 4.14
4.09
4.05
4.06
4.09
Home Equity 4.75
4.43
4.13
3.93
3.70
Total Loans 4.13
4.05
3.97
3.96
3.90

~~The average yield~~COVID-19 pandemic, which has resulted in the ~~total loan portfolio during the first quarter~~mandated closure of 2019 increased compared to the average yield during the first quarter of 2018. For the quarter, yields on all loan types increased in comparison to the comparable quarter of 2018 with the largest increase being in the home equity portfolio mainly because many of these loans have a variable rate tied to the prime rate.

non-essential business and potential unemployment.

Deposit Trends

The following tables provide information on trends in the balance and mix of ~~our~~the deposit portfolio by presenting, for each of the last five quarters, the quarterly average balances by deposit type and the percentage of total deposits represented by each deposit type. ~~Noninterest-bearing deposit balances have decreased~~Savings deposits and ~~savings~~total time deposits, both over and under $250,000, have increased ~~from~~each of the ~~quarter ended September 30, 2018 through March 31, 2019,~~last five quarters as a result of the migration to higher yielding deposit accounts due to the previous rise in short-term market ~~rates. The volatility in interest-bearing checking account balances was mainly~~rates, which occurred for the ~~result~~majority of 2019. Market rates, beginning to decline prior to the ~~decline in municipal deposits. The increase in Other Time Deposits in the first quarter of 2019 was due to $66.5 million in brokered deposits the Company acquired to diversify its source of funds~~COVID-19 pandemic, reached historic lows at ~~more favorable rates as compared to FHLBNY overnight advances.~~March 31, 2020.

Quarterly Average Deposit Balances

(Dollars in Thousands)


	Quarter Ended										Quarter Ended
	3/31/2019		12/31/2018		9/30/2018		6/30/2018		3/31/2018		3/31/2020		12/31/2019		9/30/2019		6/30/2019		3/31/2019
Noninterest-bearing deposits	$	453,668	$	473,170	$	483,089	$	444,854	$	439,688	$	478,481	$	491,494	$	490,177	$	454,130	$	453,668
Interest-Bearing Checking Accounts	768,354		817,788		801,193		866,996		914,116		707,747		724,668		686,017		733,327		768,354
Savings Deposits	833,832		793,299		744,808		750,352		723,660		1,092,980		1,003,612		924,868		879,026		833,832
Time Deposits over $250,000	79,346		76,640		75,888		96,580		63,406		126,046		120,321		86,018		97,703		79,346
Other Time Deposits	212,785		186,334		174,731		166,420		164,866		264,755		267,326		285,448		272,104		212,785
Total Deposits	$	2,347,985	$	2,347,231	$	2,279,709	$	2,325,202	$	2,305,736	$	2,670,009	$	2,607,421	$	2,472,528	$	2,436,290	$	2,347,985

Percentage of Total Quarterly Average Deposits


	Quarter Ended										Quarter Ended
	3/31/2019		12/31/2018		9/30/2018		6/30/2018		3/31/2018		3/31/2020		12/31/2019		9/30/2019		6/30/2019		3/31/2019
Noninterest-bearing deposits	19.3	%	20.2	%	21.2	%	19.1	%	19.1	%	17.9	%	18.8	%	19.8	%	18.6	%	19.3	%
Interest-Bearing Checking Accounts	32.7		34.8		35.1		37.3		39.6		26.5		27.8		27.7		30.1		32.7
Savings Deposits	35.5		33.8		32.7		32.2		31.4		41.0		38.5		37.5		36.0		35.5
Time Deposits over $250,000	3.4		3.3		3.3		4.2		2.7		4.7		4.6		3.5		4.0		3.4
Other Time Deposits	9.1		7.9		7.7		7.2		7.2		9.9		10.3		11.5		11.2		9.1
Total Deposits	100.0	%	100.0	%	100.0	%	100.0	%	100.0	%	100.0	%	100.0	%	100.0	%	100.0	%	100.0	%

Quarterly Cost of Deposits


	Quarter Ended										Quarter Ended
	3/31/2019		12/31/2018		9/30/2018		6/30/2018		3/31/2018		3/31/2020		12/31/2019		9/30/2019		6/30/2019		3/31/2019
Demand Deposits	—	%	—	%	—	%	—	%	—	%	—	%	—	%	—	%	—	%	—	%
Interest-Bearing Checking Accounts	0.25		0.22		0.19		0.18		0.17		0.28	%	0.30	%	0.29	%	0.25	%	0.25	%
Savings Deposits	0.78		0.66		0.48		0.38		0.29		0.91	%	0.98	%	0.99	%	0.92	%	0.78	%
Time Deposits over $250,000	2.02		1.81		1.57		1.36		1.30		1.70	%	1.88	%	2.08	%	2.11	%	2.02	%
Other Time Deposits	1.36		1.08		0.84		0.68		0.64		1.52	%	1.67	%	1.74	%	1.67	%	1.36	%
Total Deposits	0.55		0.45		0.34		0.29		0.24		0.68	%	0.72	%	0.73	%	0.68	%	0.55	%

During the quarter ended March 31, ~~2019,~~2020, the total cost of deposits ~~continued~~decreased. The Federal Reserve cut the targeted short-term rates on two occasions, one cut was 50 basis points and the other was 100 basis points in response to ~~increase consistent with market rates, including~~ the ~~cost~~economic uncertainty related to the COVID-19 pandemic. The balance sheet of Savings Deposits and both categories of Time Deposits. In the current rate environment, savings and time deposit customers continue to seek a higher rate of return. Given the uncertainty surrounding the future of interest rates, the Company is ~~unable to predict at this time what the short- or long-term effect~~well positioned for a variety of ~~the Federal Reserve’s interest~~ rate ~~policy may be.~~environments, see Part I, Item 3, entitled "Quantitative and Qualitative Disclosures About Market Risk," for further discussion.

Non-Deposit Sources of Funds

The Company's other sources of funds include securities sold under agreements to repurchase, overnight advances and term advances from the FHLBNY. The securities sold under agreements to repurchase are short-term in nature and are collateralized by investment securities. The term advances from the FHLBNY are fixed rate non-callable advances with original maturities of three to five years.

Arrow no longer relies on TRUPs as a source of new funds. As a result of the passage of ~~the~~ Dodd-Frank ~~Act~~ in 2010 and its removal of Tier 1 regulatory capital treatment for TRUPs issued after Dodd-Frank's grandfathering date, the Company, like other banking organizations of Arrow's size or larger, have not issued any TRUPs since that date and are not likely to issue any TRUPs in the future. However, consistent with the grandfathering provision in Dodd-Frank, the $20 million principal amount of Junior Subordinated Obligations Issued to Unconsolidated Subsidiary Trusts listed on the consolidated balance sheet as of March 31, ~~2019~~2020 (i.e., ~~our~~ previously issued TRUPs) will, subject to certain limits, continue to qualify as Tier 1 regulatory capital for Arrow until such TRUPs mature or are redeemed. This is further discussed under "Capital Resources" beginning on page 5255 of this Report. These trust preferred securities are subject to early redemption by the Company if the proceeds cease to qualify as Tier 1 capital of Arrow for any reason, or if certain other unanticipated but negative events should occur. An example ~~is any~~of such an event would be an adverse change in tax laws that might deny the Company the ability to deduct interest paid on these obligations for federal income tax purposes.

ASSET QUALITY

The following table presents information related to ~~our~~the allowance and provision for loan losses for the past five quarters.

Summary of the Allowance and Provision for Loan Losses

(Dollars in Thousands, Loans Stated Net of Unearned Income)


	3/31/2019			12/31/2018			9/30/2018			6/30/2018			3/31/2018			3/31/2020			12/31/2019			9/30/2019			6/30/2019			3/31/2019
Loan Balances:
Period-End Loans	$	2,235,208		$	2,196,215		$	2,126,100		$	2,057,862		$	1,993,037		$	2,414,193		$	2,386,120		$	2,335,591		$	2,280,308		$	2,235,208
Average Loans, Year-to-Date	2,210,642			2,062,575			2,029,597			1,999,072			1,971,240			2,394,346			2,283,707			2,258,633			2,233,094			2,210,642
Average Loans, Quarter-to-Date	2,210,642			2,160,435			2,089,651			2,026,598			1,971,240			2,394,346			2,358,110			2,308,879			2,255,299			2,210,642
Period-End Assets	2,984,883			2,988,334			2,953,220			2,845,171			2,826,687			3,291,332			3,184,275			3,112,822			3,005,750			2,984,883

Allowance for Loan Losses, Year-to-Date:
Allowance for Loan Losses, Beginning of Period	$	20,196		$	18,586		$	18,586		$	18,586		$	18,586
Allowance for loan losses, Year-to-Date:
Allowance for loan losses, Beginning of Period																$	21,187		$	20,196		$	20,196		$	20,196		20,196
Provision for Loan Losses, YTD	472			2,607			1,961			1,375			746			2,772			2,079			1,445			927			472
Loans Charged-off, YTD	(462		)	(1,532		)	(960		)	(634		)	(370		)	(481		)	(1,735		)	(1,232		)	(830		)	(462		)
Recoveries of Loans Previously Charged-off	167			535			416			313			95			159			647			522			402			167
Net Charge-offs, YTD	(295		)	(997		)	(544		)	(321		)	(275		)	(322		)	(1,088		)	(710		)	(428		)	$	(295	)
Allowance for Loan Losses, End of Period	$	20,373		$	20,196		$	20,003		$	19,640		$	19,057
Allowance for loan losses, End of Period																$	23,637		$	21,187		$	20,931		$	20,695		$	20,373

Allowance for Loan Losses, Quarter-to-Date:
Allowance for Loan Losses, Beginning of Period	$	20,196		$	20,003		$	19,640		$	19,057		$	18,586
Allowance for loan losses, Quarter-to-Date:
Allowance for loan losses, Beginning of Period																$	21,187		$	20,931		$	20,695		$	20,373		$	20,196
Provision for Loan Losses, QTD	472			646			586			629			746			2,772			634			518			455			472
Loans Charged-off, QTD	(462		)	(573		)	(325		)	(264		)	(370		)	(481		)	(503		)	(402		)	(368		)	(462		)
Recoveries of Loans Previously Charged-off	167			120			102			218			95			159			125			120			235			167
Net Charge-offs, QTD	(295		)	(453		)	(223		)	(46		)	(275		)	(322		)	(378		)	(282		)	(133		)	(295		)
Allowance for Loan Losses, End of Period	$	20,373		$	20,196		$	20,003		$	19,640		$	19,057
Allowance for loan losses, End of Period																$	23,637		$	21,187		$	20,931		$	20,695		$	20,373

Nonperforming Assets, at Period-End:
Nonaccrual Loans	$	5,143		$	4,159		$	4,468		$	3,880		$	4,470		$	4,943		$	4,005		$	3,465		$	4,949		$	5,143
Loans Past Due 90 or More Days and Still Accruing Interest	64			1,225			1,172			170			—			437			253			1,066			457			64
Restructured and in Compliance with Modified Terms	141			138			115			106			100			136			143			150			142			141
Total Nonperforming Loans	5,348			5,522			5,755			4,156			4,570			5,516			4,401			4,681			5,548			5,348
Repossessed Assets	123			130			47			76			120			160			139			76			115			123
Other Real Estate Owned	1,322			1,130			1,173			1,412			1,525			782			1,122			1,198			1,258			1,322
Total Nonperforming Assets	$	6,793		$	6,782		$	6,975		$	5,644		$	6,215		$	6,458		$	5,662		$	5,955		$	6,921		$	6,793

Asset Quality Ratios:
Allowance to Nonperforming Loans	380.95		%	365.74		%	347.58		%	472.57		%	417.00		%	428.52		%	481.41		%	447.15		%	373.02		%	380.95		%
Allowance to Period-End Loans	0.91		%	0.92		%	0.94		%	0.95		%	0.96		%	0.98		%	0.89		%	0.90		%	0.91		%	0.91		%
Provision to Average Loans (Quarter) ⁽¹⁾	0.09		%	0.12		%	0.11		%	0.12		%	0.15		%	0.47		%	0.11		%	0.09		%	0.08		%	0.09		%
Provision to Average Loans (YTD) ⁽¹⁾	0.09		%	0.13		%	0.13		%	0.14		%	0.15		%	0.47		%	0.09		%	0.09		%	0.08		%	0.09		%
Net Charge-offs to Average Loans (Quarter) ⁽¹⁾	0.05		%	0.08		%	0.04		%	0.01		%	0.06		%	0.05		%	0.06		%	0.05		%	0.02		%	0.05		%
Net Charge-offs to Average Loans (YTD) ⁽¹⁾	0.05		%	0.05		%	0.04		%	0.03		%	0.06		%	0.05		%	0.05		%	0.04		%	0.04		%	0.05		%
Nonperforming Loans to Total Loans	0.24		%	0.25		%	0.27		%	0.20		%	0.23		%	0.23		%	0.18		%	0.20		%	0.24		%	0.24		%
Nonperforming Assets to Total Assets	0.23		%	0.23		%	0.24		%	0.20		%	0.22		%	0.20		%	0.18		%	0.19		%	0.23		%	0.23		%
⁽¹⁾ Annualized

Provision for Loan Losses

Through the provision for loan losses, an allowance is maintained that reflects the Company's best estimate of probable incurred loan losses related to specifically identified impaired loans as well as the inherent risk of loss related to the remaining portfolio. Loan charge-offs are recorded to this allowance when loans are deemed uncollectible, in whole or in part. As loans become past due, consideration is given to the status of those loans and whether or not to classify them as nonaccrual loans. Any loans listed as "past due 90 or more days and still accruing interest" have been evaluated and determined to be secured and is the ~~borrowers have been deemed~~process of collection.

As permitted by the CARES Act, Arrow has elected to ~~have~~defer the ~~capacity to repay all principal and interest and, therefore, have not been classified as nonaccrual.~~

adoption of the Current Expected Credit Losses ("CECL") methodology in determining credit losses.

In the first quarter of ~~2019,~~2020, the Company made a ~~$472 thousand~~$2.77 million provision for loan losses, compared to a provision of ~~$746~~$472 thousand for the first quarter of ~~2018~~2019 and a provision of ~~$646~~$634 thousand for the fourth quarter of ~~2018.~~2019. The significant increase in loss provision ~~expense was largely driven by growth in outstanding~~ for

loan ~~balances. Additional items impacting~~losses reflects the ~~provision included changes to qualitative factors that reflect management’s view on current economic and market risks, and net charge-offs~~uncertainty resulting from the COVID-19 pandemic despite the continued strong asset quality of ~~$295 thousand.~~Arrow. See Note 3 to the unaudited interim consolidated financial statements for a discussion on how the Company classifies credit quality indicators as well as the balance in each category.

The ratio of the allowance for ~~loan~~credit losses to total loans was 0.98% at March 31, 2020, an increase from 0.89% at December 31, 2019 and an increase of 7 basis points from 0.91% at March 31, ~~2019, a decrease from 0.92% at December 31, 2018 and a decrease of 5 basis points from 0.96% at March 31, 2018.~~2019.

The accounting policy relating to the allowance for ~~loan~~credit losses is considered to be a critical accounting policy, given the uncertainty involved in evaluating the level of the allowance required to cover credit losses inherent in the loan portfolio, and the material effect that such judgments may have on ~~our~~the results of operations. The process for determining the provision for loan losses is described in Note 3 to the unaudited interim consolidated financial statements.

Risk Elements

Nonperforming assets at March 31, ~~2019~~2020 amounted to ~~$6.8~~$6.5 million, ~~consistent with~~up from the $5.7 million total at December 31, ~~2018 total~~2019 and ~~an increase~~a decrease of ~~$578 thousand,~~$0.3 million, from ~~the year earlier total.~~March 31, 2019. For the three-month periods ended March 31, ~~2019~~2020 and ~~2018,~~2019, ratios of nonperforming assets to total assets have remained below the average ratios for the peer ~~group, although the average peer group ratios have improved dramatically in recent years.~~group. (See page 3840 for a discussion of the peer group.) At December 31, ~~2018,~~2019, the ratio of loans past due 90 or more days plus nonaccrual loans plus other real estate owned to total assets was ~~0.25%~~0.18%, well below the ~~0.56%~~0.44% ratio of the peer group at such date (the latest date for which peer group information is available). At March 31, ~~2019~~2020 the ratio ~~is 0.23%~~was 0.20%, which is below the most recent ratio for the peer group.

The following table presents the balance of other non-current loans at period-end as to which interest income was being accrued (i.e. loans 30 to 89 days past due, as defined in bank regulatory guidelines). These non-current loans are not included in nonperforming assets, but entail heightened risk.


Loans Past Due 30-89 Days and Accruing Interest ($ in 000's)	Loans Past Due 30-89 Days and Accruing Interest ($ in 000's)						Loans Past Due 30-89 Days and Accruing Interest ($ in 000's)
	3/31/2019		12/31/2018		3/31/2018		3/31/2020		12/31/2019		3/31/2019
Commercial Loans	$	157	$	170	$	90	$	244	$	192	$	157
Commercial Real Estate Loans	208		108		156		—		266		208
Residential Real Estate Loans	1,552		2,190		1,706		1,632		1,960		1,552
Consumer Loans - Primarily Indirect Automobile	6,113		7,414		4,306		7,015		8,305		6,113
Total Loans Past Due 30-89 Days and Accruing Interest	$	8,030	$	9,882	$	6,258	$	8,891	$	10,723	$	8,030

At March 31, ~~2019,~~2020, the loans in the above-referenced category totaled ~~$8.0~~$8.9 million, a decrease of ~~$1.9~~$1.8 million, or ~~18.7%~~17.1%, from the ~~$9.9~~$10.7 million of such loans at December 31, ~~2018.~~2019. The March 31, ~~2019~~2020 total of non-current loans equaled ~~0.36%~~0.37% of loans then outstanding, compared to ~~0.45%~~0.49% at December 31, ~~2018~~2019 and ~~0.31%~~0.36% at March 31, ~~2018.~~2019. The decrease from December 31, ~~2018~~2019 is primarily attributable to a decrease in delinquent automobile loans ~~which tend to reflect seasonally elevated levels in the second half of the year.~~as well as residential real estate loans.

The number and dollar amount of performing loans that demonstrate characteristics of potential weakness from time-to-time (potential problem loans) typically is a very small percentage of the loan portfolio. See the table of Credit Quality Indicators in Note 3 to the unaudited interim consolidated financial statements. The Company considers all performing commercial and commercial real estate loans classified as substandard or lower (as reported in Note 3) to be potential problem loans. The dollar amount of such loans at March 31, ~~2019~~2020 was ~~$33.1~~$35.5 million, ~~down slightly~~up from the dollar amount of such loans at December 31, ~~2018,~~2019, when the amount was ~~$35.0~~$32.4 million. These loans will continue to be closely monitored and the Company expects to collect all payments of contractual ~~interest~~principal and ~~principal~~interest in full on these classified loans. Total nonperforming assets at period-end ~~increased~~decreased by ~~$0.6~~$0.3 million, or ~~9.3%~~4.9% from March 31, ~~2018.~~2019.

The ~~economy in the Company's market area has been relatively strong in recent years, but any general weakening~~economic impact of the ~~U.S. economy~~COVID-19 pandemic, specifically unemployment levels and the mandated closure of nonessential businesses, may impact the borrowers' ability to satisfy their obligations, and may therefore result in ~~upcoming periods would likely~~delinquencies. Government intervention, on both the federal and state level, have ~~an adverse effect~~been deployed to mitigate a significant portion of the credit risk. Arrow cannot make a determination of the overall impact on its business of the ~~economy in~~COVID-19 pandemic at this ~~market area as well, and ultimately on the loan portfolio, particularly the commercial and commercial real estate portfolio.~~time.

As of March 31, ~~2019,~~2020, the Company held for sale ~~three~~one commercial ~~properties~~property and one residential property in other real estate owned. The Company does not expect to acquire a significant number of other real estate properties in the near term as a result of payment defaults or the foreclosure process.

The Company does not currently anticipate significant increases in nonperforming assets, other non-current loans as to which interest income is still being accrued or potential problem loans, but can give no assurances in this regard.

Loan Deferrals Related to COVID-19 Pandemic

The COVID-19 pandemic has created economic uncertainty resulting in increased temporary unemployment as well as the mandated closure of nonessential businesses. In the table below, the loan portfolio is presented with loan deferrals as the result of the COVID-19 pandemic as of March 31, 2020. In accordance with the CARES Act, the deferrals listed below are not considered troubled debt restructuring.



COVID-19 Deferrals by Loan Category at March 31, 2020 ($ in 000's)

	Balances by Sector					Deferrals
		Total		% of Total Loans		Balance		% of Loan Segment		% of Total Loans
Commercial and Commercial Real Estate Loans:
Lessors of Non-Residential Real Estate		$	129,880	5.4	%	$	1,064	0.2	%	—	%
Health Care and Social Assistance		104,177		4.3	%	1,341		0.2	%	0.1	%
Lessors of Residential Real Estate		99,569		4.1	%	527		0.1	%	—	%
Hotels & Motels		97,914		4.1	%	3,787		0.6	%	0.2	%
Arts/Recreation/Restaurants/Vacation Camps		39,385		1.6	%	3,102		0.5	%	0.1	%
Retail		30,226		1.3	%	6,326		0.9	%	0.3	%
Construction & Related		17,551		0.7	%	216		—	%	—	%
Other		154,528		6.4	%	22,312		3.2	%	0.9	%
Total Commercial and Commercial Real Estate Loans		673,230		27.9	%	38,675		5.7	%	1.6	%

Consumer Loans		824,709		34.2	%	2,643		0.3	%	0.1	%

Residential Real Estate Loans		916,254		37.9	%	126		—	%	—	%

Total Loans		2,414,193				41,444				1.7	%

CAPITAL RESOURCES

Regulatory Capital Standards

Capital Adequacy Requirements. 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.

As reported in the Regulatory Reform section above, ~~on May 24, 2018 the Economic Growth Act financial reform bill was signed into law. This new law includes provisions requiring~~ the federal bank ~~regulatory agencies~~regulators have issued a final rule to ~~establish a Community Bank Leverage Ratio (CBLR)~~implement the CBLR, introducing an optional simplified measure of ~~between 8% and 10%, calculated by dividing tangible equity~~ capital ~~by average total consolidated assets of "qualifying~~adequacy for qualifying community ~~banks"~~banks that ~~meet~~satisfy certain requirements, ~~to be set by those regulatory agencies. A qualifying community bank is~~including having a ~~depository institution or bank holding company with~~leverage ratio of greater than 9%, less than $10 billion in total consolidated assets, ~~such as Arrow, that meets other requirements to be established by the regulators. If a~~and limited amounts of off-balance-sheet exposures and trading assets and liabilities. A qualifying community bank ~~exceeds~~that opts into the CBLR itframework and meets all requirements under the CBLR framework will be ~~deemed~~considered to have met ~~all applicable capital~~the well-capitalized ratio requirements under the “prompt corrective action” regulations and ~~leverage requirements, including the generally applicable leverage capital requirements and~~will not be required to report or calculate risk-based capital ~~requirements and (if the community bank~~ratios. The CBLR is a depository institution) the "well capitalized" requirement under the federal "prompt corrective action" capital standards. Upon its implementation, this new CBLR standard is intended to reduce the burden of compliance with regard to regulatory capital adequacy for community banks. However, the implementation of this standard will be subject to the notice and comment procedures of rulemaking, and the Economic Growth Act does not impose a deadline for this rulemaking.

~~On November 21, 2018, federal banking regulators issued a notice of proposed rulemaking under the Economic Growth Act that would set the threshold for the CBLR at greater than 9 percent,~~ calculated as the ratio of ~~“CBLR tangible equity”~~“tier 1 capital” divided by “average total consolidated assets.” ~~Based on the parameters~~This final rule was effective as of ~~this proposed rulemaking,~~January 1, 2020, and qualifying community banks can utilize the CBLR framework for purposes of filing their call reports or Form FR Y-9C, as applicable, for the first quarter of 2020 (i.e., as of March 31, 2020). Arrow ~~and both subsidiary banks is estimated~~elected to ~~exceed~~utilize the ~~9 percent threshold. However,~~CBLR framework beginning with the ~~proposed rule is not yet final, and the terms~~first quarter of 2020.

Subsequently, Section 4012 of the ~~rule may change before becoming final. Upon effectiveness,~~CARES Act required the ~~final rule may impact Arrow’s capital options and requirements, although~~federal banking agencies to temporarily lower the ~~potential impact~~threshold for election of the CBLR framework, issuing two interim final ~~rule on Arrow~~rules to set the CLBR at 8% as of the second quarter of 2020 and then gradually re-establish the CBLR at 9%. Under the interim final rules, the CBLR will ~~remain uncertain until the final rule is issued. Until the rules becomes effective and final, the Capital Rules promulgated under Dodd-Frank will remain applicable to Arrow.~~

~~The following is a summary of certain definitions of capital under the various capital measures~~be set at 8% beginning in the ~~Dodd-Frank Capital Rules:~~

~~Common Equity Tier 1 Capital (CET1):~~ ~~Equals~~second quarter of 2020 through 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 include AOCI, if the organization has exercised its irrevocable option not to include AOCI in capital (we made such an election). Mortgage-servicing assets, deferred tax assets, and investments in financial institutions are limited to 15 percent of CET1 in the aggregate and 10 percent 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 minimum regulatory capital ratios applicable to our holding company and banks under the current Capital Rules:~~



~~Capital Ratio~~
	~~2019~~
~~Minimum CET1 Ratio~~	~~4.500~~	%
~~Capital Conservation Buffer ("Buffer")~~	~~2.500~~	%
~~Minimum CET1 Ratio Plus Buffer~~	~~7.000~~	%
~~Minimum Tier 1 Risk-Based Capital Ratio~~	~~6.000~~	%
~~Minimum Tier 1 Risk-Based Capital Ratio Plus Buffer~~	~~8.500~~	%
~~Minimum Total Risk-Based Capital Ratio~~	~~8.000~~	%
~~Minimum Total Risk-Based Capital Ratio Plus Buffer~~	~~10.500~~	%
~~Minimum Leverage Ratio~~	~~4.000~~	%

These minimum capital ratios, especially the CET1 ratio (4.5%) and the enhanced Tier 1 risk-based capital ratio (6.0%), represent a heightened and more restrictive capital regime than institutions like Arrow previously had to meet under the prior capital rules.

~~At March 31, 2019, Arrow's holding company and both of its subsidiary banks exceeded by a substantial amount each~~end of the ~~applicable minimum capital ratios established under~~year. Thus, community banks that have a leverage ratio of 8% or greater and meet certain other criteria may elect to use the ~~Capital Rules, including~~CBLR framework. Beginning in 2021, the ~~minimum CET1 Ratio,~~CBLR will increase to 8.5% for the ~~minimum Tier~~calendar year. Community banks will have until January 1, ~~Risk-Based Capital Ratio,~~2022, before the ~~minimum Total Risk-Based Capital Ratio, and~~leverage ratio requirement to use the ~~minimum Leverage Ratio, including in the case of each risk-based ratio, the capital buffer.~~CBLR framework will return to 9%.

Prompt Corrective Action Capital Classifications. Under ~~applicable~~the current capital classifications, a banking ~~law,~~institution is considered "well-capitalized" if it meets the minimum CBLR levels. If a banking entity fails to qualify for the CBLR framework or if the banking entity's CBLR ratio falls below the minimum threshold, the banking entity will be subject to the regulatory capital guidelines established under the Dodd Frank legislation. Under the Dodd Frank capital guidelines, federal banking regulators are required to take prompt corrective action with respect to depository institutions that do not meet certain minimum capital requirements. For these purposes, 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 current capital classifications, 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 8.00% or greater, a total risk-based capital ratio of 10.00% or greater, and a Tier 1 leverage ratio of 5.00% or greater, provided the institution is not subject to any regulatory order or written directive regarding capital maintenance. Federal banking law also ties the ability of banking organizations to engage in certain types of activities and to utilize certain procedures to such organizations' continuing to qualify for inclusion in one of the two highest rankings of these capitalization categories, i.e., as "well-capitalized" or "adequately capitalized."

Current Capital Ratios: The table below sets forth the regulatory capital ratios of Arrow's holding company and two subsidiary banks, Glens Falls National and Saratoga National, under the current ~~Capital~~CBLR Rules, as of March 31, ~~2019:~~2020:

Common Tier 1 Total
Equity Risk-Based Risk-Based Tier 1
Tier 1 Capital Capital Capital Leverage
Ratio Ratio Ratio Ratio
Arrow Financial Corporation 12.98 % 13.95 % 14.93 % 9.73 %
Glens Falls National Bank & Trust Co. 13.56 % 13.56 % 14.55 % 9.31 %
Saratoga National Bank & Trust Co. 13.23 % 13.23 % 14.17 % 9.88 %

FDICIA's Prompt Corrective Action - "Well-Capitalized" Standard (2019) 6.500 % 8.000 % 10.000 % 5.000 %
Regulatory Minimum effective 1/1/2019
7.000%⁽¹⁾

8.500%⁽¹⁾

10.500%⁽¹⁾

4.000 %

⁽¹⁾ Including the fully phased-in 2.50% capital conservation buffer



	Community Bank
	Leverage Ratio
Arrow Financial Corporation	9.87%
Glens Falls National Bank & Trust Co.	9.44%
Saratoga National Bank & Trust Co.	9.49%

At March 31, ~~2019,~~2020, Arrow and its subsidiary banks exceeded the minimum regulatory capital ratios established under the ~~current Capital Cules~~CBLR framework and each also qualified as "well-capitalized", the highest category in the new capital classification scheme established by federal bank regulatory agencies, ~~under the "prompt corrective action" standards,~~ as described above.

Capital Components; Stock Repurchases; Dividends

Stockholders' Equity: ~~Stockholders'~~Stockholders’ equity was ~~$276.6~~$309.4 million at March 31, ~~2019,~~2020, an increase of ~~$7.0~~$7.7 million, or ~~2.6%~~2.5%, from the December 31, ~~2018. This~~2019 level of $301.7 million, and an increase ~~was~~of $32.8 million, or 11.9%, from the ~~result~~prior-year level. The increase in stockholders' equity over the first three months of 2020 principally reflected the following factors: (i) $8.13 million of net income for the period, ~~of $8.73 million; increases in book equity from various stock-based compensation and dividend reinvestment plans of $1.20 million; and~~plus (ii) other comprehensive income of ~~$2.24 million. These increases to equity during the quarter were offset~~$3.95 million, plus (iii) issuance of $1.01 million of common stock through employee benefit and dividend reinvestment plans; reduced by ~~a decrease related to~~(iv) cash dividends of ~~$3.76 million~~$3.90 million; and ~~purchases~~(v) repurchases of ~~the Company's own~~ common stock ~~in the aggregate amount~~ of ~~$1.39~~$1.51 million under the Board-approved stock repurchase program described below.

Trust Preferred Securities: In each of 2003 and 2004, the Company 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 the first quarter of 2020, Arrow entered into an interest rate swap agreement to synthetically fix the variable rate interest payments associated with $20 million in outstanding subordinated trust securities. The effective fixed rate is 3.43% until maturity. These agreements are designated as cash flow hedges.

Stock Repurchase Program: In ~~January~~October 2019, the Board of Directors approved a $5.0 million stock repurchase program, effective January 1, 2020 (the ~~2019~~2020 Repurchase Program), under which management is authorized, in its discretion, to ~~cause~~permit the Company to repurchase up to $5 million of shares of Arrow's common stock ~~over the period from January 30, 2019 through December 31, 2019,~~during 2020, in the open market or in privately negotiated transactions, to the extent management believes the Company's stock is reasonably priced and such repurchases appear to be an attractive use of available capital and in the best interests of shareholders. This ~~2019~~2020 Repurchase Program replaced a similar repurchase program which was in effect during ~~2018~~2019 (the ~~2018~~2019 program), which also authorized the repurchase of up to $5.0 million of shares of Arrow's common stock. As of March 31, ~~2019~~2020 approximately ~~$806 thousand~~$1.5 million had been used under the ~~2019 stock repurchase~~ ~~program~~2020 Repurchase Program to repurchase Arrow shares. This total does not include repurchases of Arrow's Common Stock other than through its ~~repurchase program,~~2020 Repurchase Program, i.e., repurchases of Arrow shares on the market utilizing funds accumulated under Arrow's Dividend Reinvestment Plan and the surrender or deemed surrender of Arrow stock to the Company in connection with employees' stock-for-stock exercises of compensatory stock options to buy Arrow stock.

Dividends: The Company's common stock is traded on NasdaqGS^® under the symbol AROW. The high and low stock prices for the past five quarters listed below represent actual sales transactions, as reported by NASDAQ. On April ~~24, 2019,~~29, 2020, the Board of Directors declared a ~~2019~~2020 second quarter cash dividend of $0.26 payable on June ~~14, 2019.~~15, 2020. Per share amounts and share counts in the following ~~table~~tables have been restated for ~~our~~the September 27, ~~2018~~2019 3% stock dividend.


					Cash						Cash
	Market Price				Dividends		Market Price				Dividends
	Low		High		Declared		Low		High		Declared
2018
2019
First Quarter	$	29.91	$	34.53	$	0.243	$	29.57	$	35.19	$	0.252
Second Quarter	31.89		37.23		0.243		30.96		33.93		0.252
Third Quarter	35.19		38.98		0.252		30.26		35.31		0.252
Fourth Quarter	30.45		37.55		0.260		32.03		38.31		0.260
2019
2020
First Quarter	$	30.46	$	36.25	$	0.260	$	20.79	$	38.04	$	0.260
Second Quarter (dividend payable June 14, 2019)	TBD		TBD		0.260
Second Quarter (dividend payable June 15, 2020)							TBD		TBD		0.260


	Quarter Ended March 31,						Quarter Ended March 31
	2019			2018			2020			2019
Cash Dividends Per Share	$	0.260		$	0.243		$	0.260		$	0.252
Diluted Earnings Per Share	0.60			0.59			0.54			0.58
Dividend Payout Ratio	43.33		%	41.19		%	48.15		%	43.45		%
Total Equity (in thousands)	276,609			$	252,734		309,398			$	276,609
Shares Issued and Outstanding (in thousands)	14,474			14,368			14,982			14,909
Book Value Per Share	$	19.11		$	17.59		$	20.65		$	18.55
Intangible Assets (in thousands)	23,650			24,045			23,513			23,650
Tangible Book Value Per Share	$	17.48		$	15.92		$	19.08		$	16.97

LIQUIDITY

The objective of effective liquidity management is to ensure that the Company has the ability to raise cash when needed at a reasonable cost. This includes the capability of meeting expected and unexpected obligations to the Company's customers at any time. Given the uncertain nature of customer demands and the need to maximize earnings, the Company must have available reasonably priced sources of funds, both on- and off-balance sheet, that can be accessed quickly in time of need. With the COVID-19 pandemic, liquidity management is critical for Arrow. Arrow’s liquidity position provides the necessary flexibility to address any unexpected near-term disruptions that may develop as a result of the COVID-19 pandemic such as: reduced cash-flows from the investment and loan portfolios and aggressive funding of programs associated with response efforts, including the Small Business Administration’s Paycheck Protection Program.

The primary sources of available liquidity are overnight investments in federal funds sold, interest bearing bank balances at the Federal Reserve Bank of New York, and cash flow from investment securities and loans. Certain investment securities are selected at purchase as available-for-sale based on their marketability and collateral value, as well as their yield and maturity. The securities available-for-sale portfolio was ~~$298.8~~$378.2 million at March 31, ~~2019, a decrease~~2020, an increase of ~~$18.7~~$20.9 million, from the year-end ~~2018~~2019 level. Due to the potential for volatility in market values, the Company may not always be able to sell securities on short notice at their carrying value, even to provide needed liquidity. Arrow also held interest-bearing cash balances at March 31, 2020 of $106.0 million compared to $25.0 million at March 31, 2019.

In addition to liquidity from cash, short-term investments, investment securities and loans, the Company 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 ~~three~~two correspondent banks totaling ~~$57~~$52 million which were not drawn on during the three months ended March 31, ~~2019.~~2020.

To support the borrowing relationship with the FHLBNY, the Company has pledged collateral, including residential mortgage, ~~and~~ home equity and commercial real estate loans. At March 31, ~~2019,~~2020, the Company had outstanding collateral obligations with the FHLBNY of ~~$169~~$115 million; as of that date, the unused borrowing capacity at the FHLBNY was approximately ~~$391~~$620 million. Brokered deposits have also been identified as an available source of funding accessible in a relatively short time period. At March 31, ~~2019,~~2020, the balance of outstanding brokered deposits totaled ~~$111.6~~$108.1 million. Also, the Company's two bank subsidiaries have each 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 March 31, ~~2019,~~2020, the amount available under this facility was approximately ~~$520~~$593 million, 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 crises including the current COVID-19 pandemic.

The Company measures and monitors basic liquidity as a ratio of liquid assets to total short-term liabilities, both with and without the availability of borrowing arrangements. Based on the level of overnight funds investments, available liquidity from the investment securities portfolio, cash flows from the loan portfolio, the stable core deposit base and the significant borrowing capacity, the Company believes that the available liquidity is sufficient to meet all funding needs that may arise in connection with the COVID-19 pandemic or any other reasonably likely events or ~~occurrences.~~occurrences, although there can be no assurance that it will be sufficient. At March 31, ~~2019,~~2020, the basic liquidity ratio, including the FHLBNY collateralized borrowing capacity, was ~~12.1%~~20.9% of total assets, or ~~$242~~$558 million in excess of the internally-set minimum target ratio of 4%.

~~Because of its consistently favorable credit quality and strong balance sheet, the~~The Company did not experience any significant liquidity constraints in the three-month period ended March 31, ~~2019~~2020 and did not experience any such constraints in recent prior ~~years, back to and including the financial crisis~~ years. The Company 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.

RECENTLY ISSUED ACCOUNTING STANDARDS

The following accounting standards have been issued and become effective for the Company at a future date:

In June 2016, the FASB issued ASU 2016-13 "Financial Instruments - Credit Losses" ("CECL") which will change the way financial entities measure expected credit losses for financial assets, primarily loans. Under this ASU, the "incurred loss" model will be replaced with an "expected loss" model which will recognize losses over the life of the instrument and requires consideration of a broader range of reasonable and supportable information. Currently, credit losses on available-for-sale securities reduce the carrying value of the instrument and cannot be reversed. Under CECL, the amount of the credit loss is carried as a valuation allowance and can be reversed. The standard also requires expanded credit quality disclosures. In April 2019, the FASB issued ASU 2019-04 "Codification Improvements to Topic 326, Financial Instruments-Credit Losses; Topic 815, Derivatives and Hedging; and Topic 825, Financial Instruments," which clarifies that the estimate of expected credit losses should include expected recoveries of financial assets, and that contractual extension or renewal options that are not unconditionally cancellable by the lender are considered when determining the contractual term over which expected credit losses are measured. The Company's loan terms for contractual extensions and renewal options are unconditionally cancellable by the Company (that is, the Company has no obligation to extend or renew existing loans), and therefore are not considered in measuring expected credit losses. In May 2019, the FASB issued ASU 2019-05 "Targeted Transition Relief," which allows entities to irrevocably elect the fair value option for certain financial assets measured at amortized cost, not including held-to-maturity investment securities which will continue to be measured at amortized cost. This will apply to those institutions that elect the fair value option on newly originated or purchased financial assets, to avoid the possibility of dual measurement methodologies for identical or similar financial assets.

As permitted by the Coronavirus Aid, Relief, and Economic Security ("CARES") Act, Arrow has elected to defer the adoption of the Current Expected Credit Losses ("CECL") methodology in determining credit losses. The initial adjustment will not be reported in earnings, but as the cumulative effect of a change in accounting principle and the adoption will require additional disclosures in future periods. The Company has held CECL working group meetings that included individuals from various functional areas relevant to the implementation of CECL. The Company's CECL working group has developed accounting policies for credit losses including, among other things, management’s decisions regarding portfolio segmentation, life of loan considerations, and a reasonable and supportable forecasting methodology. The CECL pronouncement describes several acceptable methodologies for calculating expected losses on a loan or a pool of loans. The Company has identified the discounted cash flow method for determining losses for the commercial loan portfolios and the residential real estate portfolios, and the vintage method for the consumer indirect loan portfolio. As a result of analyses performed, including the availability of future economic data, the Company will utilize an 18-month reasonable and supportable forecast period, and revert to an historic loss rate using the straight-line method over a two year reversion period. The Company has identified the economic data that it believes best correlate with expected loan losses through the use of various regression analyses of historical economic information and loan losses. The adoption of this standard will change the way qualitative factors are determined as compared to the current incurred loss allowance for loan losses model.

The Company has performed a parallel run as of December 31, 2019 and is in process of reviewing the most recent model run, reviewing the results of model back-testing, finalizing certain assumptions including qualitative adjustments, and incorporating the feedback from the third-party model validation process into the model. The Company has also developed a control framework and is in process of finalizing controls. The Company continues to monitor the effect of this guidance, as well as regulatory guidance, and evaluate the effect it will have on the consolidated financial statements, disclosures and processes and internal controls.

Based on the December 31, 2019 parallel run, review of the portfolio, including the composition, characteristics and quality of the underlying loans, and the prevailing economic conditions and forecasts as of the adoption date, the Company believes that the adjustment to retained earnings related to the initial adoption of CECL will result in an immaterial impact. The Company will remain a well-capitalized financial institution under the CBLR framework. Regulators have developed two deferral options related to the adoption of CECL and the resulting computation of regulatory capital ratios. The initial deferral method, the 2019 CECL Rule, allows a financial institution to elect a three-year deferral of the initial CECL adoption amount for the computation of regulatory capital. An additional deferral method, the Interim Final Rule, allows a financial institution that implements CECL before the end of 2020, the option to delay for two years an estimate of CECL's effect on regulatory capital, followed by a three-year transition period. Arrow is in the process of evaluating these deferral methods.

In December 2019, the FASB issued ASU 2019-12 "Simplifying the Accounting for Income Taxes" (Topic 740), which removes certain exceptions to the general principles in Topic 740 and improves consistent application of and simplifies GAAP for other areas of Topic 740 by clarifying and amending existing guidance. This ASU is effective for fiscal years beginning after December 15, 2020 and interim periods within those fiscal years, with early adoption permitted. Arrow will adopt this standard effective on January 1, 2021. The Company does not expect that the adoption of this standard will have a material impact on its financial position or the results of operations in periods subsequent to its adoption.

RESULTS OF OPERATIONS

Three Months Ended March 31, ~~2019~~2020 Compared With

Three Months Ended March 31, ~~2018~~2019

Summary of Earnings Performance

(Dollars in Thousands, Except Per Share Amounts)


	Quarter Ended											Three Months Ended
	3/31/2019			3/31/2018			Change			% Change		March 31, 2020			March 31, 2019			Change			% Change
Net Income	$	8,734		$	8,531		$	203		2.4	%	$	8,127		$	8,734		$	(607	)	(6.9	)%
Diluted Earnings Per Share	0.60			0.59			0.01			1.7	%	0.54			0.58			(0.04		)	(6.9	)%
Return on Average Assets	1.19		%	1.25		%	(0.06		)%	(4.8	)%	1.03		%	1.19		%	(0.16		)%	(13.4	)%
Return on Average Equity	12.98		%	13.78		%	(0.80		)%	(5.8	)%	10.66		%	12.98		%	(2.32		)%	(17.9	)%

Net income was ~~$8.7~~$8.1 million and diluted earnings per share (EPS) of ~~$.60~~$.54 for the first quarter of ~~2019,~~2020, compared to net income of ~~$8.5~~$8.7 million and diluted EPS of ~~$.59~~$.58 for the first quarter of ~~2018.~~2019. Return on average assets (ROA) for the first quarter of ~~2019~~2020 was ~~1.19%~~1.03%, ~~down 6 basis points~~up from ~~1.25%~~1.19% in the first quarter of ~~2018.~~2019. In addition, return on average equity (ROE) decreased to ~~12.98%~~10.66% for the first quarter of ~~2019,~~2020, down ~~80 basis points~~ from ~~13.78%~~12.98% in the first quarter of ~~2018.~~2019.

The following narrative discusses the quarter-to-quarter changes in net interest income, noninterest income, noninterest expense and income taxes.

Net Interest Income

Summary of Net Interest Income

(Dollars in Thousands)

Quarter Ended
3/31/2019 3/31/2018 Change % Change
Interest and Dividend Income (GAAP Basis) $ 26,213
$ 22,418
$ 3,795
16.9 %
Tax-Equivalent Adjustment 373
491
(118 ) (24.0 )%
Interest and Dividend Income (Tax-equivalent Basis) ⁽²⁾
26,586
22,909
3,677
16.1 %

Interest Expense 5,092
2,016
3,076
152.6 %
Net Interest Income (GAAP Basis) 21,121
20,402
719
3.5 %
Net Interest Income (Tax-equivalent Basis) ⁽²⁾
21,494
20,893
601
2.9 %
Average Earning Assets ⁽¹⁾
2,847,966
2,641,660
206,306
7.8 %
Average Interest-Bearing Liabilities 2,224,403
2,050,661
173,742
8.5 %

Yield on Earning Assets (GAAP Basis) ⁽¹⁾
3.73 % 3.44 % 0.29
8.4 %
Yield on Earning Assets (Tax-equivalent Basis) ^{(1) (2)}
3.79
3.52
0.27
7.7
Cost of Interest-Bearing Liabilities 0.93
0.40
0.53
132.5

Net Interest Spread (GAAP Basis) 2.80
3.04
(0.24 ) (7.9 )
Net Interest Spread (Tax-equivalent Basis) ⁽²⁾
2.86
3.12
(0.26 ) (8.3 )

Net Interest Margin (GAAP Basis) 3.01
3.13
(0.12 ) (3.8 )
Net Interest Margin (Tax-equivalent Basis) ⁽²⁾
3.06
3.21
(0.15 ) (4.7 )



	Three Months Ended
	March 31, 2020			March 31, 2019			Change			% Change
Interest and Dividend Income	$	28,226		$	26,213		$	2,013		7.7	%
Interest Expense	5,220			5,092			128			2.5	%
Net Interest Income	23,006			21,121			1,885			8.9	%
Average Earning Assets⁽¹⁾	3,030,881			2,847,966			182,915			6.4	%
Average Interest-Bearing Liabilities	2,362,515			2,224,403			138,112			6.2	%

Yield on Earning Assets⁽¹⁾	3.75		%	3.73		%	0.02			0.5	%
Cost of Interest-Bearing Liabilities	0.89			0.93			(0.04		)	(4.3	)
Net Interest Spread	2.86			2.80			0.06			2.1
Net Interest Margin	3.05			3.01			0.04			1.3

⁽¹⁾ Includes Nonaccrual Loans.

⁽²⁾~~See "Use of Non-GAAP Financial Measures" on page 39; reported on a fully taxable basis using a marginal federal tax rate of 21%.~~

Net interest income for the recently completed quarter ~~on a GAAP basis,~~ increased by ~~$0.7~~$1.9 million, or ~~3.5%~~8.9%, from the first quarter of ~~2018,~~2019, due primarily to ~~continued~~ loan ~~growth.~~growth and balance sheet mix. Total loans increased ~~$39.0~~$28.1 million in the first quarter of ~~2019 and overall~~2020. In addition, average earning assets increased ~~7.8%.~~6.4% from March 31, 2019. In order to fund the consistent loan growth, total average-interest-bearing liabilities increased ~~8.5% in~~6.2% from the first quarter of 2019. ~~The current rate environment has compressed net interest margin.~~ Net interest margin ~~on a GAAP basis decreased 12~~increased 4 basis points in the first quarter of ~~2019~~2020 to ~~3.01%~~3.05%, from ~~3.13%~~3.01% during the first quarter of ~~2018.~~2019. Average earning asset yields were 292 basis points higher as compared to the first quarter of ~~2018~~2019 due primarily to the ~~continued~~ increase ~~in market yields and the higher composition~~ of loans as a percentage of earning assets. ~~Yield on loans specifically increased 23 basis points from the first quarter of 2018. Cost of funds continues to be impacted by the recent rise in short-term rates.~~ The cost of interest-bearing liabilities ~~increased 53~~decreased 4 basis points ~~due to~~from the ~~higher rates paid on money market savings, time deposits and other borrowings, due to higher short-term market interest rates.~~quarter ended March 31, 2019. The Company defines net interest margin as net interest income divided by average earning assets, annualized. The Company defines tax-equivalent net interest margin as net interest income on a tax-equivalent basis divided by average earning assets, annualized. Tax-equivalent net interest margin, as well as tax-equivalent net interest income, from which the margin is derived, are non-GAAP financial

measures. (See the discussion under "Use of Non-GAAP Financial Measures," on page 39, and the tabular information and notes on pages 40 and 41, regarding the Company's reasons for using these and other non-GAAP measures and the reconciliation thereof to comparable GAAP measures.) Further detailed information is presented above under the section entitled "Average Consolidated Balance Sheets and Net Interest Income Analysis." The impact of recent interest rate changes on Arrow's deposit and loan portfolios are discussed above in this Report under the sections entitled "Deposit Trends" and "Loan Trends."

As discussed previously under the heading "Asset Quality" beginning on page ~~50,~~53, the provision for loan losses for the first quarter of ~~2019~~2020 was ~~$472 thousand,~~$2.77 million, compared to a provision of ~~$746~~$472 thousand for the ~~2018 quarter.~~first quarter of 2019.

Noninterest Income

Summary of Noninterest Income

(Dollars in Thousands)


	Quarter Ended									Three Months Ended
	3/31/2019		3/31/2018		Change			% Change		March 31, 2020			March 31, 2019		Change			% Change
Income From Fiduciary Activities	$	2,107	$	2,197	$	(90	)	(4.1	)%	$	2,213		$	2,107	$	106		5.0	%
Fees for Other Services to Customers	2,402		2,380		22			0.9	%	2,451			2,402		49			2.0	%
Insurance Commissions	1,719		1,903		(184		)	(9.7	)%	1,632			1,719		(87		)	(5.1	)%
Net Gain on Securities	76		18		58			322.2	%
Net (Loss) Gain on Securities Transactions										(374		)	76		(450		)	(592.1	)%
Net Gain on the Sale of Loans	104		38		66			173.7	%	213			104		109			104.8	%
Other Operating Income	479		353		126			35.7	%	1,559			479		1,080			225.5	%
Total Noninterest Income	$	6,887	$	6,889	$	(2	)	—	%	$	7,694		$	6,887	$	807		11.7	%

Total noninterest income in the current quarter was ~~$6.9~~$7.7 million, ~~consistent with total noninterest income for~~an increase of $807 thousand from the ~~first~~comparable quarter of ~~2018.~~2019. Income from fiduciary activities for the first quarter of ~~2019 decreased~~2020 increased by ~~$90~~$106 thousand, or ~~4.1% over~~5.0% from the first quarter of ~~2018 due to market performance as well as other competitive factors.~~2019.

Fees for other services to customers ~~increased to $2.4~~were $2.5 million for the first quarter of 2020. Fees were consistent with the first quarter of 2019. ~~In addition~~

Insurance commissions decreased to ~~service charge income~~$1.6 million for the first quarter of 2020 compared to $1.7 million for the first quarter of 2019, due primarily to a decline in the employee benefits sector of the business.

Net loss on ~~deposits, this category also includes debit card interchange income, revenue related to~~security transactions of $374 thousand for the ~~sale~~first quarter of mutual funds to customers by third party providers, and servicing income on sold loans. Debit card usage by customers continues to grow, which has had (and if such growth persists, will continue to have) a positive impact on debit card fee income.

~~The $58 thousand increase~~2020 was the result in ~~net gain on securities between~~ the ~~periods was primarily due to the change~~decrease in the fair value of ~~marketable~~ equity ~~securities as compared to the first quarter of 2018.~~securities.

Net gain on the sale of loans in the first quarter of ~~2019~~2020 increased by ~~$66~~$109 thousand from the first quarter of ~~2018.~~2019. The change was a result of favorable market conditions leading to an increase in loan sale volume. See page 4851 for the discussion of loan sales.

~~Insurance commissions decreased to $1.7~~Other operating income increased $1.1 million ~~for~~from the ~~first~~comparable quarter in 2019, primarily the result of ~~2019 compared to $1.9 million for the first quarter~~fees received as part of ~~2018 due to increased competition for commercial insurance clients in the Company's markets.~~interest rate swap agreements.

Noninterest Expense

Summary of Noninterest Expense

(Dollars in Thousands)


	Quarter Ended											Three Months Ended
	3/31/2019			3/31/2018			Change			% Change		March 31, 2020			March 31, 2019			Change			% Change
Salaries and Employee Benefits	$	9,319		9,369			$	(50	)	(0.5	)%	$	10,383		9,319			$	1,064		11.4	%
Occupancy Expense of Premises, Net	1,420			1,340			80			6.0	%	1,449			1,420			29			2.0	%
Technology and Equipment Expense	3,141			2,698			443			16.4	%	3,352			3,141			211			6.7	%
FDIC and FICO Assessments	212			217			(5		)	(2.3	)%	219			212			7			3.3	%
Amortization	79			67			12			17.9	%	58			79			(21		)	(26.6	)%
Other Operating Expense	2,481			2,265			216			9.5	%	2,293			2,481			(188		)	(7.6	)%
Total Noninterest Expense	$	16,652		$	15,956		$	696		4.4	%	$	17,754		$	16,652		$	1,102		6.6	%
Efficiency Ratio	58.55		%	57.23		%	1.32			2.3	%	56.42		%	58.55		%	(2.13		)	(3.6	)%

Noninterest expense for the first quarter of ~~2019~~2020 was ~~$16.7~~$17.8 million, an increase of ~~$696 thousand,~~$1.1 million, or ~~4.4%~~6.6%, from the first quarter of ~~2018.~~2019. Salaries and benefit expenses ~~remain consistent~~increased $1.1 million, or 11.4%, from the comparable quarter in ~~2018.~~2019. The increase in salaries and benefits was primarily due to the increase in the cost of health insurance benefits. Technology and equipment expenses have increased from the previous year as a result of the ~~implementation of certain~~continued efforts with ongoing projects to ~~achieve~~enhance operational ~~efficiencies while delivering improved customer experiences.~~efficiencies.

The efficiency ratio continues to be solid at ~~58.55%~~56.42% for the first quarter of ~~2019~~2020 and ~~57.23%~~58.55% for the comparable ~~2018~~2019 quarter. The efficiency ratio (a ratio where lower is better), is a commonly used non-GAAP financial measure in the banking industry that purports to reflect an institution's operating efficiency. The Company calculates the efficiency ratio as the ratio of noninterest expense (excluding, under the Company's definition, intangible asset amortization) to (i) net interest income (on a tax-equivalent basis) plus (ii) noninterest income (excluding net securities gains or losses). See the discussion on this non-GAAP measure on page 3941 of this Report under the heading "Use of Non-GAAP Financial Measures" and the related tabular information and notes on pages 4042 and 4143 of this Report. The efficiency ratio included by the Federal Reserve Board in its "Bank Holding Company Performance Reports" excludes net securities gains or losses from the denominator (as does the Company's calculation), but unlike the Company's ratio does not exclude intangible asset

amortization from the numerator. The Company's efficiency ratios in recent periods have generally compared favorably to the ratios of the peer group as disclosed in the Federal Reserve Performance Reports (see page 3840 for a discussion of the peer group). For the three-month period ended December 31, ~~2018~~2019 (the most recent reporting period for which peer group information is available), the peer group's efficiency ratio was ~~65.27%~~60.47% compared to the Company's ratio of ~~58.04%~~56.32% (not adjusted for the definitional difference).

Income Taxes

Summary of Income Taxes

(Dollars in Thousands)


	Quarter Ended										Three Months Ended
	3/31/2019			3/31/2018			Change		% Change		March 31, 2020			March 31, 2019			Change			% Change
Provision for Income Taxes	$	2,150		$	2,058		$	92	4.5	%	$	2,047		$	2,150		$	(103	)	(4.8	)%
Effective Tax Rate	19.8		%	19.4		%	0.4		2.1	%	20.1		%	19.8		%	0.3			1.5	%

The increase in the effective tax rate in the first three months ended March 31, 2020 over the three months ended March 31, 2019 was primary due to the reduction in tax exempt income combined with the reduced tax benefit related to stock based compensation.

Item 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

In addition to credit risk in the loan portfolio and liquidity risk, discussed earlier, the Company's business activities also generate market risk. Market risk is the possibility that changes in future market rates (interest rates) or prices (market value of financial instruments) will make the Company's position (i.e., assets and operations) less valuable. The Company'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.

The Company'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 200 basis point upward and a 100 basis point downward 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 200 basis point increase in interest rate scenario and the 100 basis point decrease in interest rate scenario.

As of March 31, ~~2019:~~2020:


	Change in Interest Rate		Change in Interest Rate
	+ 200 basis points	- 100 basis points	+ 200 basis points	- 100 basis points
Calculated change in Net Interest Income - Year 1	(2.90)%	0.70%	(3.43)%	0.38%
Calculated change in Net Interest Income - Year 2	0.90%	(1.80)%	(0.78)%	(8.99)%

Historically, there has existed an inverse relationship between changes in prevailing rates and the Company's net interest income, suggesting that liabilities and sources of funds generally reprice more quickly than earning assets (near-term liability sensitivity). However, when net interest income is simulated over a longer time frame, this exposure is limited, and actually reverses, as asset yields continue to reprice while the cost of funding reaches assumed ceilings or floors (long-term asset sensitivity).

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, the Company 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. The COVID-19 pandemic may impact markets, rates, behavior and other estimates used in the above scenarios.

Item 4.

CONTROLS AND PROCEDURES

Senior management, including the Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the design and operation of Arrow's disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended) as of March 31, ~~2019.~~2020. Based upon that evaluation, senior management, including the Chief Executive Officer and Chief Financial Officer, concluded that ~~our~~ disclosure controls and procedures were effective. Further, there were no changes made in the Company's internal control over financial reporting that occurred during the most recent fiscal quarter that had materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.

PART II - OTHER INFORMATION

Item 1.

Legal Proceedings

The Company, including its subsidiary banks, 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, the Company is often the subject of, or a party to, various legal claims by other parties against the Company, by the Company against other parties, or involving the Company, which arise in the normal course of business. The various pending legal claims against the Company will not, in the opinion of management based upon consultation with counsel, result in any material liability.

Item 1.A.

Risk Factors

The Risk Factors identified in the Company's Annual Report on Form 10-K for the year ended December 31, ~~2018~~,2019, continue to represent the most significant risks to the Company's future results of operations and financial conditions, without modification or amendment. Please refer to such Risk Factors as listed in Part I, Item 1A, of ~~our~~the Annual Report on Form 10-K for the fiscal year ended December 31, ~~2018~~.2019, as supplemented by the risk factor included in Item 8.01 of the Company's Current Report on Form 8-K filed April 24, 2020.

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

Unregistered Sales of Equity Securities

None.

Issuer Purchases of Equity Securities

The following table presents information about purchases by Arrow during the three months ended March 31, ~~2019~~2020 of common stock (our only class of equity securities registered pursuant to Section 12 of the Securities Exchange Act of 1934):


First Quarter 2019 Calendar Month	(A) Total Number of Shares Purchased ¹	(B) Average Price Paid Per Share ¹		(C) Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs ²	(D) Maximum Approximate Dollar Value of Shares that May Yet be Purchased Under the Plans or Programs ²
First Quarter 2020 Calendar Month							(A) Total Number of Shares Purchased ¹	(B) Average Price Paid Per Share ¹		(C) Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs ²	(D) Maximum Approximate Dollar Value of Shares that May Yet be Purchased Under the Plans or Programs ²
January	9,619	$	32.14	4,474	$	4,859,024	1,091	$	37.17	—	$	5,000,000
February	32,985	34.70		17,700	4,261,092		12,056	33.06		9,448	4,692,520
March	17,681	34.21		2,100	4,194,019		60,000	28.96		40,573	3,493,345
Total	60,285	34.15		24,274			73,147	29.76		50,021

¹ The total number of shares purchased by the Company and the average price paid per share listed in columns (A) and (B) consist of (i) any shares purchased in such periods in open market or private transactions under the Arrow Financial Corporation Automatic Dividend Reinvestment Plan (the "DRIP") by the administrator of the DRIP, (ii) shares surrendered or deemed surrendered to Arrow in such periods by holders of options to acquire Arrow common stock received by them under Arrow's long-term incentive plans ~~("LTIPs")~~ in connection with their stock-for-stock exercise of such options and (iii) shares purchased under the publicly-announced ~~2019~~2020 Repurchase Program. In the months indicated, the listed number of shares purchased included the following number of shares purchased by Arrow through such methods: January - DRIP purchases ~~(2,782~~(1,091 shares)~~, stock-for-stock exercises (2,363~~; February - DRIP purchases (2,608 shares) and repurchased under the ~~2019~~2020 Repurchase Program ~~(4,474 shares.); February - DRIP purchases (1,070 shares), stock-for-stock exercises (14,215 shares) and repurchased under the 2019 Repurchase Program (17,700~~(9,448 shares); and March - DRIP purchases ~~(15,581~~(19,427 shares)and repurchased under the ~~2019~~2020 Repurchase Program ~~(2,100 shares.)~~(40,573 shares)

² Includes only those shares acquired by Arrow pursuant to its publicly-announced stock repurchase programs. Our only publicly-announced stock repurchase program in effect for the first quarter of ~~2019~~2020 was the ~~2019~~2020 Repurchase Program approved by the Board of Directors and announced in ~~January~~October 2019, under which the Board authorized management, in its discretion, to repurchase from time to time ~~from January 30, 2019 through December 31, 2019,~~during calendar year 2020, in the open market or in privately negotiated transactions, up to $5 million of Arrow common stock subject to certain exceptions.

Item 3.

Defaults Upon Senior Securities - None

Item 4.

Mine Safety Disclosures - None

Item 5.

Other Information - None

Item 6.

Exhibits



Exhibit Number	Exhibit
~~10.1~~3.(i)	~~Employment Agreement between~~Certificate of Incorporation of the ~~Company and Thomas J. Murphy effective February 1,~~Registrant as Amended through June 3, 2019, incorporated ~~herein~~ by reference from the Registrant's Current Report on Form 8-K filed ~~February 4,~~June 5, 2019, Exhibit 10.1*3.1
~~10.2~~3.(ii)	~~Employment Agreement between~~By-laws of the ~~Company and Edward J. Campanella effective February 1, 2019~~Registrant, as amended, incorporated herein by reference from the ~~Registrant's~~Registrant’s Current Report on Form 8-K filed ~~February 4, 2019,~~on November 24, 2009, Exhibit 10.2*
~~10.3~~	Employment Agreement between the Company and David S. DeMarco effective February 1, 2019 incorporated herein by reference from the Registrant's Current Report on Form 8-K, filed February 4, 2019, Exhibit 10.3*
~~10.4~~	Employment Agreement between the Company and David D. Kaiser effective February 1, 2019 incorporated herein by reference from the Registrant's Current Report on Form 8-K, filed February 4, 2019, Exhibit 10.4*
~~10.5~~	Employment Agreement between the Registrant and Andrew J. Wise, Chief Operating Officer and Senior Vice President, effective February 1, 2019 incorporated herein by reference from the Registrant's Annual Report on Form 10-K, filed March 8, 2019, Exhibit 10.23*
~~10.6~~	Restricted Share Unit Grant Agreement between the Registrant and Thomas J. Murphy, effective February 1, 2019 incorporated herein by reference from the Registrant's Annual Report on Form 10-K, filed March 8, 2019, Exhibit 10.24*3.(ii)
15	Awareness Letter
31.1	Certification of Chief Executive Officer under SEC Rule 13a-14(a)/15d-14(a)
31.2	Certification of Chief Financial Officer under SEC Rule 13a-14(a)/15d-14(a)
32	Certification of Chief Executive Officer under 18 U.S.C. Section 1350 and Certification of Chief Financial Officer under 18 U.S.C. Section 1350
10.1	Employment Agreement between the Registrant and Thomas J. Murphy, President and Chief Executive Officer, effective February 1, 2020 incorporated herein by reference from the Registrant's Current Report on Form 8-K , filed February 3, 2020, Exhibit 10.1*
10.2	Employment Agreement between the Registrant and Edward J. Campanella, Senior Vice President, Treasurer and Chief Financial Officer, effective February 1, 2020 incorporated herein by reference from the Registrant's Current Report on Form 8-K, filed February 3, 2020, Exhibit 10.2*
10.3	Employment Agreement between the Registrant and David S. DeMarco, Senior Vice President and Chief Banking Officer, effective February 1, 2020 incorporated herein by reference from the Registrant's Current Report on Form 8-K , filed February 3, 2020, Exhibit 10.3*
10.4	Employment Agreement between the Registrant and David D. Kaiser, Senior Vice President, effective February 1, 2020 incorporated herein by reference from the Registrant's Current Report on Form 8-K , filed February 3, 2020, Exhibit 10.4*
10.5	Employment Agreement between the Registrant and Andrew J. Wise, Chief Operating Officer and Senior Vice President, effective February 3, 2020 incorporated herein by reference from the Registrant's Current Report on Form 8-K , filed February 3, 2020, Exhibit 10.5*
101.INS	XBRL Instance Document
101.SCH	XBRL Taxonomy Extension Schema Document
101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF	XBRL Taxonomy Extension Definition Linkbase Document
101.LAB	XBRL Taxonomy Extension Labels Linkbase Document
101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document

* Management contracts or compensation plans required to be filed as an exhibit.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned thereunto duly authorized.

ARROW FINANCIAL CORPORATION

Registrant




May ~~9, 2019~~7, 2020	/s/Thomas J. Murphy
Date	Thomas J. Murphy, President and
	Chief Executive Officer

May ~~9, 2019~~7, 2020	/s/Edward J. Campanella
Date	Edward J. Campanella, Senior Vice President,
	Treasurer and Chief Financial Officer
	(Principal Financial Officer and
	Principal Accounting Officer)

# 6165



	Page
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements	3
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations	3840
Item 3. Quantitative and Qualitative Disclosures About Market Risk	5862
Item 4. Controls and Procedures	5862


PART II - OTHER INFORMATION
Item 1. Legal Proceedings	5963
Item 1.A. Risk Factors	5963
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	5963
Item 3. Defaults Upon Senior Securities	5963
Item 4. Mine Safety Disclosures	5963
Item 5. Other Information	6064
Item 6. Exhibits	6064

SIGNATURES	6165



	Three months ended March 31, 2019
Net Gain on Equity Securities	$	76
Less: Net gain (loss) recognized during the reporting period on equity securities sold during the period	—
Unrealized net gain recognized during the reporting period on equity securities still held at the reporting date	$	76



Changes in Accumulated Other Comprehensive Income (Loss) by Component ⁽¹⁾

	Unrealized			Defined Benefit Plan Items
	Gains and
	Losses on						Net Prior
	Available-for-			Net Gain			Service
	Sale Securities			(Loss)			(Cost) Credit			Total
For the Quarter-To-Date periods ended:

December 31, 2018	$	(3,697	)	$	(8,971	)	$	(1,142	)	$	(13,810	)
Other comprehensive income before reclassifications	2,080			—			—			2,080
Amounts reclassified from accumulated other comprehensive income				121			42			163
Net current-period other comprehensive income	2,080			121			42			2,243
March 31, 2019	$	(1,617	)	$	(8,850	)	$	(1,100	)	$	(11,567	)

December 31, 2017	$	(1,250	)	$	(6,380	)	$	(884	)	$	(8,514	)
Other comprehensive loss before reclassifications	(2,485		)	—			—			(2,485		)
Amounts reclassified from accumulated other comprehensive loss	—			46			(1		)	45
Net current-period other comprehensive income (loss)	(2,485		)	46			(1		)	(2,440		)
Reclassification due to the adoption of ASU 2016-01	(331		)							(331		)
March 31, 2018	$	(4,066	)	$	(6,334	)	$	(885	)	$	(11,285	)



	Common		Tier 1		Total
	Equity		Risk-Based		Risk-Based		Tier 1
	Tier 1 Capital		Capital		Capital		Leverage
	Ratio		Ratio		Ratio		Ratio
Arrow Financial Corporation	12.98	%	13.95	%	14.93	%	9.73	%
Glens Falls National Bank & Trust Co.	13.56	%	13.56	%	14.55	%	9.31	%
Saratoga National Bank & Trust Co.	13.23	%	13.23	%	14.17	%	9.88	%

FDICIA's Prompt Corrective Action - "Well-Capitalized" Standard (2019)	6.500	%	8.000	%	10.000	%	5.000	%
Regulatory Minimum effective 1/1/2019	7.000%⁽¹⁾		8.500%⁽¹⁾		10.500%⁽¹⁾		4.000	%

⁽¹⁾ Including the fully phased-in 2.50% capital conservation buffer