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 September 30, ~~2017~~2018

[ ] 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

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 ~~and posted on its corporate Web site, if any,~~ every Interactive Data File required to be submitted ~~and posted~~ 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 ~~and post~~ 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	~~(Do not check if a smaller reporting company)~~
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

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 October 31, ~~2017~~2018
Common Stock, par value $1.00 per share		~~13,920,322~~14,452,521

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)

	September 30, 2017			December 31, 2016			September 30, 2016			September 30, 2018			December 31, 2017			September 30, 2017
ASSETS
Cash and Due From Banks	$	55,683		$	43,024		$	66,556		$	57,385		$	42,562		$	55,683
Interest-Bearing Deposits at Banks	24,983			14,331			35,503			34,910			30,276			24,983
Investment Securities:
Available-for-Sale	315,459			346,996			339,190			340,411			300,200			315,459
Held-to-Maturity (Approximate Fair Value of $343,899 at September 30, 2017; $343,751 at December 31, 2016; and $347,441 at September 30, 2016)	341,526			345,427			338,238
Held-to-Maturity (Approximate Fair Value of $282,719 at September 30, 2018; $335,901 at December 31, 2017; and $343,899 at September 30, 2017)										289,952			335,907			341,526
Equity Securities										1,916			—			—
Other Investments	6,704			10,912			5,371			10,866			9,949			6,704
Loans	1,908,799			1,753,268			1,707,216			2,126,100			1,950,770			1,908,799
Allowance for Loan Losses	(17,695		)	(17,012		)	(16,975		)	(20,003		)	(18,586		)	(17,695		)
Net Loans	1,891,104			1,736,256			1,690,241			2,106,097			1,932,184			1,891,104
Premises and Equipment, Net	26,432			26,938			26,718			28,601			27,619			26,432
Goodwill	21,873			21,873			21,873			21,873			21,873			21,873
Other Intangible Assets, Net	2,395			2,696			2,802			1,954			2,289			2,395
Other Assets	58,303			56,789			53,993			59,255			57,606			58,303
Total Assets	$	2,744,462		$	2,605,242		$	2,580,485		$	2,953,220		$	2,760,465		$	2,744,462
LIABILITIES
Noninterest-Bearing Deposits	$	448,515		$	387,280		$	381,760		$	490,469		$	441,945		$	448,515
Interest-Bearing Checking Accounts	967,250			877,988			993,221			899,547			907,315			967,250
Savings Deposits	696,805			651,965			629,201			758,727			694,573			696,805
Time Deposits over $250,000	28,464			32,878			45,237			76,226			38,147			28,464
Other Time Deposits	166,082			166,435			163,768			182,886			163,136			166,082
Total Deposits	2,307,116			2,116,546			2,213,187			2,407,855			2,245,116			2,307,116
Federal Funds Purchased and Securities Sold Under Agreements to Repurchase	61,419			35,836			38,589			62,503			64,966			61,419
Federal Home Loan Bank Overnight Advances	33,000			123,000			—			131,000			105,000			33,000
Federal Home Loan Bank Term Advances	55,000			55,000			55,000			45,000			55,000			55,000
Junior Subordinated Obligations Issued to Unconsolidated Subsidiary Trusts	20,000			20,000			20,000			20,000			20,000			20,000
Other Liabilities	23,279			22,008			24,501			22,052			20,780			23,279
Total Liabilities	2,499,814			2,372,390			2,351,277			2,688,410			2,510,862			2,499,814
STOCKHOLDERS’ EQUITY
Preferred Stock, $5 Par Value; 1,000,000 Shares Authorized	—			—			—			—			—			—
Common Stock, $1 Par Value; 20,000,000 Shares Authorized (18,481,301 Shares Issued and Outstanding at September 30, 2017; 17,943,201 at December 31, 2016 and 17,943,201 at September 30, 2016)	18,481			17,943			17,943
Common Stock, $1 Par Value; 20,000,000 Shares Authorized (19,035,565 Shares Issued at September 30, 2018; 18,481,301 at December 31, 2017 and 18,481,301 at September 30, 2017)										19,035			18,481			18,481
Additional Paid-in Capital	289,294			270,880			269,680			313,763			290,219			289,294
Retained Earnings	22,581			28,644			25,400			24,258			28,818			22,581
Unallocated ESOP Shares (20,050 Shares at September 30, 2017; 19,466 Shares at December 31, 2016 and 38,396 Shares at September 30, 2016)	(400		)	(400		)	(750		)
Unallocated ESOP Shares (9,932 Shares at September 30, 2018; 9,643 Shares at December 31, 2017 and 20,050 Shares at September 30, 2017)										(200		)	(200		)	(400		)
Accumulated Other Comprehensive Loss	(6,135		)	(6,834		)	(5,442		)	(12,621		)	(8,514		)	(6,135		)
Treasury Stock, at Cost (4,570,291 Shares at September 30, 2017; 4,441,093 Shares at December 31, 2016 and 4,479,257 Shares at September 30, 2016)	(79,173		)	(77,381		)	(77,623		)
Treasury Stock, at Cost (4,584,147 Shares at September 30, 2018; 4,541,524 Shares at December 31, 2017 and 4,570,291 Shares at September 30, 2017)										(79,425		)	(79,201		)	(79,173		)
Total Stockholders’ Equity	244,648			232,852			229,208			264,810			249,603			244,648
Total Liabilities and Stockholders’ Equity	$	2,744,462		$	2,605,242		$	2,580,485		$	2,953,220		$	2,760,465		$	2,744,462

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 September 30,				Nine Months Ended September 30,				Three Months Ended September 30,				Nine Months Ended September 30,
	2017		2016		2017		2016		2018		2017		2018		2017
INTEREST AND DIVIDEND INCOME
Interest and Fees on Loans	$	17,996	$	15,833	$	51,693	$	46,565	$	20,839	$	17,996	$	59,606	$	51,693
Interest on Deposits at Banks	104		34		242		100		182		104		474		242
Interest and Dividends on Investment Securities:
Fully Taxable	1,924		1,889		5,927		5,994		2,187		1,924		6,128		5,927
Exempt from Federal Taxes	1,575		1,526		4,660		4,486		1,287		1,575		4,295		4,660
Total Interest and Dividend Income	21,599		19,282		62,522		57,145		24,495		21,599		70,503		62,522
INTEREST EXPENSE
Interest-Bearing Checking Accounts	376		320		1,088		941		390		376		1,165		1,088
Savings Deposits	356		231		963		677		901		356		2,134		963
Time Deposits over $250,000	66		61		187		133		301		66		833		187
Other Time Deposits	241		231		702		677		370		241		911		702
Federal Funds Purchased and Securities Sold Under Agreements to Repurchase	13		9		29		24		15		13		47		29
Federal Home Loan Bank Advances	700		390		1,651		1,013		1,270		700		2,340		1,651
Junior Subordinated Obligations Issued to Unconsolidated Subsidiary Trusts	197		163		564		487		251		197		712		564
Total Interest Expense	1,949		1,405		5,184		3,952		3,498		1,949		8,142		5,184
NET INTEREST INCOME	19,650		17,877		57,338		53,193		20,997		19,650		62,361		57,338
Provision for Loan Losses	800		480		1,580		1,550		586		800		1,961		1,580
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES	18,850		17,397		55,758		51,643		20,411		18,850		60,400		55,758
NONINTEREST INCOME
Income From Fiduciary Activities	2,116		1,923		6,284		5,854		2,262		2,116		7,106		6,284
Fees for Other Services to Customers	2,453		2,491		7,122		7,144		2,605		2,453		7,555		6,875
Insurance Commissions	2,113		2,127		6,426		6,468		2,024		2,113		6,119		6,426
Net Gain on Securities Transactions	10		—		10		144
Net Gain on Securities									114		10		355		10
Net Gain on Sales of Loans	182		310		431		649		54		182		115		431
Other Operating Income	267		263		620		925		291		267		900		867
Total Noninterest Income	7,141		7,114		20,893		21,184		7,350		7,141		22,150		20,893
NONINTEREST EXPENSE
Salaries and Employee Benefits	9,251		8,693		27,343		25,223		9,771		9,382		28,952		27,740
Occupancy Expenses, Net	2,371		2,425		7,410		7,223		2,262		2,371		7,223		7,410
FDIC Assessments	225		217		679		844		218		225		658		679
Other Operating Expense	3,701		3,747		11,229		11,047		3,775		3,570		11,341		10,832
Total Noninterest Expense	15,548		15,082		46,661		44,337		16,026		15,548		48,174		46,661
INCOME BEFORE PROVISION FOR INCOME TAXES	10,443		9,429		29,990		28,490		11,735		10,443		34,376		29,990
Provision for Income Taxes	3,027		2,691		8,735		8,556		2,475		3,027		6,855		8,735
NET INCOME	$	7,416	$	6,738	$	21,255	$	19,934	$	9,260	$	7,416	$	27,521	$	21,255
Average Shares Outstanding ¹:
Basic	13,889		13,810		13,889		13,775		14,431		14,305		14,393		14,306
Diluted	13,966		13,901		13,981		13,842		14,520		14,385		14,479		14,401
Per Common Share:
Basic Earnings	$	0.53	$	0.49	$	1.53	$	1.45	$	0.64	$	0.52	$	1.91	$	1.49
Diluted Earnings	0.53		0.48		1.52		1.44		0.64		0.52		1.90		1.48

¹2017 Share and Per Share Amounts have been restated for the September ~~28, 2017~~27, 2018 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 September 30,						Nine Months Ended September 30,						Three Months Ended September 30,						Nine Months Ended September 30,
	2017			2016			2017			2016			2018			2017			2018			2017
Net Income	$	7,416		$	6,738		$	21,255		$	19,934		$	9,260		$	7,416		$	27,521		$	21,255
Other Comprehensive Income, Net of Tax:
Net Unrealized Securities Holding Gains (Losses) Arising During the Period	9			(810		)	465			2,309			(897		)	9			(4,017		)	465
Reclassification Adjustments for Securities Gains Included in Net Income	(6		)	—			(6		)	(88		)	—			(6		)	—			(6		)
Amortization of Net Retirement Plan Actuarial Loss	64			111			245			314			60			64			181			245
Accretion of Net Retirement Plan Prior Service Credit	(2		)	(1		)	(5		)	(5		)	20			(2		)	60			(5		)
Other Comprehensive Income (Loss)	65			(700		)	699			2,530			(817		)	65			(3,776		)	699
Comprehensive Income	$	7,481		$	6,038		$	21,954		$	22,464		$	8,443		$	7,481		$	23,745		$	21,954

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, 2017																				$	18,481	$	290,219	$	28,818		$	(200	)	$	(8,514	)	$	(79,201	)	$	249,603
Net Income																				—		—		27,521			—			—			—			27,521
Other Comprehensive Loss																				—		—		—			—			(3,776		)	—			(3,776		)
Impact of the Adoption of ASU 2014-09																				—		—		(102		)	—			—			—			(102		)
Impact of the Adoption of ASU 2016-01																				—		—		331			—			(331		)	—			—
3% Stock Dividend (554,264 Shares)																				554		21,126		(21,680		)	—			—			—			—
Cash Dividends Paid, $.728 per Share																				—		—		(10,630		)	—			—			—			(10,630		)
Stock Options Exercised, Net (91,979 Shares)																				—		942		—			—			—			1,035			1,977
Shares Issued Under the Directors’ Stock Plan (2,705 Shares)																				—		72		—			—			—			31			103
Shares Issued Under the Employee Stock Purchase Plan (10,801 Shares)																				—		247		—			—			—			121			368
Shares Issued for Dividend Reinvestment Plans (35,947 Shares)																				—		890		—			—			—			412			1,302
Stock-Based Compensation Expense																				—		267		—			—			—			—			267
Purchase of Treasury Stock (50,697 Shares)																				—		—		—			—			—			(1,823		)	(1,823		)
Balance at September 30, 2018																				$	19,035	$	313,763	$	24,258		$	(200	)	$	(12,621	)	$	(79,425	)	$	264,810
	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, 2016	$	17,943	$	270,880	$	28,644		$	(400	)	$	(6,834	)	$	(77,381	)	$	232,852		$	17,943	$	270,880	$	28,644		$	(400	)	$	(6,834	)	$	(77,381	)	$	232,852
Net Income	—		—		21,255			—			—			—			21,255			—		—		21,255			—			—			—			21,255
Other Comprehensive Income	—		—		—			—			699			—			699			—		—		—			—			699			—			699
3% Stock Dividend (538,100 Shares)	538		16,661		(17,199		)	—			—			—			—			538		16,661		(17,199		)	—			—			—			—
Cash Dividends Paid, $.728 per Share ¹	—		—		(10,119		)	—			—			—			(10,119		)
Cash Dividends Paid, $.707 per Share ¹																				—		—		(10,119		)	—			—			—			(10,119		)
Stock Options Exercised, Net (34,489 Shares)	—		335		—			—			—			399			734			—		335		—			—			—			399			734
Shares Issued Under the Directors’ Stock Plan (3,927 Shares)	—		84		—			—			—			42			126			—		84		—			—			—			42			126
Shares Issued Under the Employee Stock Purchase Plan (10,869 Shares)	—		230		—			—			—			121			351			—		230		—			—			—			121			351
Shares Issued for Dividend Reinvestment Plans (37,525 Shares)	—		843		—			—			—			413			1,256			—		843		—			—			—			413			1,256
Stock-Based Compensation Expense	—		261		—			—			—			—			261			—		261		—			—			—			—			261
Purchase of Treasury Stock (83,256 Shares)	—		—		—			—			—			(2,767		)	(2,767		)	—		—		—			—			—			(2,767		)	(2,767		)
Balance at September 30, 2017	$	18,481	$	289,294	$	22,581		$	(400	)	$	(6,135	)	$	(79,173	)	$	244,648		$	18,481	$	289,294	$	22,581		$	(400	)	$	(6,135	)	$	(79,173	)	$	244,648

Balance at December 31, 2015	$	17,421	$	250,680	$	32,139		$	(1,100	)	$	(7,972	)	$	(77,197	)	$	213,971
Net Income	—		—		19,934			—			—			—			19,934
Other Comprehensive Income	—		—		—			—			2,530			—			2,530
3% Stock Dividend (522,425 Shares)	522		16,415		(16,937		)	—			—			—			—
Cash Dividends Paid, $.707 per Share ¹	—		—		(9,736		)	—			—			—			(9,736		)
Stock Options Exercised, Net (80,449 Shares)	—		980		—			—			—			795			1,775
Shares Issued Under the Directors’ Stock Plan (3,522 Shares)	—		76		—			—			—			36			112
Shares Issued Under the Employee Stock Purchase Plan (13,041 Shares)	—		229		—			—			—			129			358
Shares Issued for Dividend Reinvestment Plans (44,448 Shares)	—		862		—			—			—			440			1,302
Stock-Based Compensation Expense	—		215		—			—			—			—			215
Tax Benefit for Disposition of Stock Options	—		63		—			—			—			—			63
Purchase of Treasury Stock (64,146 Shares)	—		—		—			—			—			(1,826		)	(1,826		)
Allocation of ESOP Stock (17,997 Shares)	—		160		—			350			—			—			510
Balance at September 30, 2016	$	17,943	$	269,680	$	25,400		$	(750	)	$	(5,442	)	$	(77,623	)	$	229,208

¹ Cash dividends paid per share have been adjusted for the September ~~28, 2017~~27, 2018 3% stock dividend.

See Notes to Unaudited Interim Consolidated Financial Statements.

ARROW FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollars in Thousands)

(Unaudited)


	Nine Months Ended September 30,						Nine Months Ended September 30,
Cash Flows from Operating Activities:	2017			2016			2018			2017
Net Income	$	21,255		$	19,934		$	27,521		$	21,255
Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities:
Provision for Loan Losses	1,580			1,550			1,961			1,580
Depreciation and Amortization	4,247			4,605			3,576			4,247
Allocation of ESOP Stock	—			510
Net Gains on the Sale of Securities Available-for-Sale	(10		)	(144		)	—			(10		)
Net Gain on Equity Securities							(355		)	—
Loans Originated and Held-for-Sale	(14,890		)	(20,025		)	(3,378		)	(14,890		)
Proceeds from the Sale of Loans Held-for-Sale	14,481			19,557			3,620			14,481
Net Gains on the Sale of Loans	(431		)	(649		)
Net Losses on the Sale of Premises and Equipment, Other Real Estate Owned and Repossessed Assets	197			120
Net Gain on the Sale of Loans							(115		)	(431		)
Net Loss on the Sale of Premises and Equipment, Other Real Estate Owned and Repossessed Assets							155			197
Contributions to Retirement Benefit Plans	(640		)	(534		)	(524		)	(640		)
Deferred Income Tax Benefit	(20		)	(464		)	(389		)	(20		)
Shares Issued Under the Directors’ Stock Plan	126			112			103			126
Stock-Based Compensation Expense	261			215			267			261
Tax Benefit from Exercise of Stock Options	112			—			205			112
Net Increase in Other Assets	(1,689		)	(3,045		)	(1,030		)	(1,689		)
Net Increase in Other Liabilities	1,819			3,427			1,980			1,819
Net Cash Provided By Operating Activities	26,398			25,169			33,597			26,398
Cash Flows from Investing Activities:
Proceeds from the Sale of Securities Available-for-Sale	10,015			10,568			—			10,015
Proceeds from the Maturities and Calls of Securities Available-for-Sale	43,617			65,965			36,663			43,617
Purchases of Securities Available-for-Sale	(22,503		)	(10,920		)	(84,746		)	(22,503		)
Proceeds from the Maturities and Calls of Securities Held-to-Maturity	39,062			42,295			49,721			39,062
Purchases of Securities Held-to-Maturity	(36,018		)	(60,786		)	(4,506		)	(36,018		)
Net Increase in Loans	(156,643		)	(133,616		)	(176,607		)	(156,643		)
Proceeds from the Sales of Premises and Equipment, Other Real Estate Owned and Repossessed Assets	830			1,743			1,078			830
Purchase of Premises and Equipment	(1,335		)	(1,083		)	(2,371		)	(1,335		)
Proceeds from the Sale of a Subsidiary, Net	72			72			75			72
Net Decrease in Other Investments	4,208			3,468
Net (Increase) Decrease in Other Investments							(917		)	4,208
Net Cash Used By Investing Activities	(118,695		)	(82,294		)	(181,610		)	(118,695		)
Cash Flows from Financing Activities:
Net Increase in Deposits	190,570			182,764			162,739			190,570
Net Increase (Decrease) in Short-Term Federal Home Loan Bank Borrowings	(90,000		)	(82,000		)	26,000			(90,000		)
Net Increase (Decrease) in Short-Term Borrowings	25,583			15,416			(2,463		)	25,583
Repayments of Federal Home Loan Bank Term Advances							(10,000		)	—
Purchase of Treasury Stock	(2,767		)	(1,826		)	(1,823		)	(2,767		)
Stock Options Exercised, Net	734			1,775			1,977			734
Shares Issued Under the Employee Stock Purchase Plan	351			358			368			351
Tax Benefit from Exercise of Stock Options	—			63
Shares Issued for Dividend Reinvestment Plans	1,256			1,302			1,302			1,256
Cash Dividends Paid	(10,119		)	(9,736		)	(10,630		)	(10,119		)
Net Cash Provided By Financing Activities	115,608			108,116			167,470			115,608
Net Increase in Cash and Cash Equivalents	23,311			50,991			19,457			23,311
Cash and Cash Equivalents at Beginning of Period	57,355			51,068			72,838			57,355
Cash and Cash Equivalents at End of Period	$	80,666		$	102,059		$	92,295		$	80,666

Supplemental Disclosures to Statements of Cash Flow Information:
Interest on Deposits and Borrowings	$	5,168		$	3,932		$	7,946		$	5,168
Income Taxes	8,404			9,761			7,493			8,404
Non-cash Investing and Financing Activity:
Transfer of Loans to Other Real Estate Owned and Repossessed Assets	1,055			856			606			1,055

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)~~(Arrow, the Company, we, or us), the accompanying unaudited interim consolidated ~~interim~~ financial statements contain all of the adjustments necessary to present fairly the financial position as of September 30, ~~2017,~~ 2018, December 31, ~~2016~~2017 and September 30, ~~2016;~~2017; the results of operations for the three- and nine-month periods ended September 30, ~~2017~~2018 and ~~2016;~~2017; the consolidated statements of comprehensive income for the three- and nine-month periods ended September 30, ~~2017~~2018 and ~~2016;~~2017; the changes in stockholders' equity for the ~~nine-month~~nine-month periods ended September 30, ~~2017~~2018 and ~~2016~~;2017; and the cash flows for the ~~nine-month~~nine-month periods ended September 30, ~~2017~~2018 and ~~2016~~.2017. All such adjustments are of a normal recurring nature. ~~Certain prior period~~

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 requires management to make estimates and assumptions that affect the reported amounts ~~have been reclassified~~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. 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 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 ~~conform~~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 current presentation, including a new requirement to present time deposits with balances greater than $250,000 which were previously presented as balances of $100,000 or greater. The preparation of financial statements requires the use of management estimates. allowance for loan losses may be necessary based on changes in economic conditions.

The unaudited interim consolidated ~~interim~~ financial statements should be read in conjunction with the audited annual consolidated financial statements of Arrow for the year ended December 31, ~~2016~~,2017, included in Arrow's ~~2016~~Annual Report on Form ~~10-K.~~10-K for the year ended December 31, 2017.

~~New~~Recently Adopted and Recently Issued Accounting Standards ~~Updates (ASU):~~ ~~Effective January 1, 2017, Arrow~~

The following accounting standards have been adopted FASB accounting standard ASU 2016-09 "Improvements to Employee Share-Based Payment Accounting," which makes several revisions to equity compensation accounting. Under the new guidance all excess tax benefits and deficiencies that occur when an award is exercised or expires are recognized in income tax expense as discrete period items. Previously, these transactions were typically recorded directly within equity. Excess tax benefits are also recognized at the time an award is exercised compared to the previous requirement to delay recognition until the deduction reduces taxes payable. All tax related cash flows recognized on stock-based compensation expense are classified as an operating activity in our consolidated statements of cash flows on a prospective basis. Accordingly, prior periods have not been adjusted. ASU 2016-09 also provides an accounting policy election to recognize forfeitures of awards as they occur when estimating stock-based compensation expense rather than the previous requirement to estimate forfeitures from inception. Further, ASU 2016-09 permits employers to use a net-settlement feature to withhold taxes on equity compensation awards up to the maximum statutory tax rate without affecting the equity classification of the award. Under previous guidance, withholding of equity awards in excess of the minimum statutory requirement resulted in liability classification for the entire award. The related cash remittance by the employer for employee taxes is treated as a financing activity in the ~~statement of cash flows.~~

The annual effect of the 2017 tax provision will primarily depend upon the share price of Arrow common stock which affects the probability of exercise of certain stock options and the magnitude of windfalls upon exercise. Income tax benefits from stock options exercised in the period reduced our effective tax rate for thefirst nine months ~~ended September 30, 2017, which resulted in an increase in earnings~~ of ~~approximately $112 thousand, representing earnings per share of less than $0.01.~~2018:

In addition, during 2017, through the date of this report, the FASB issued 13 accounting standards updates. Some of the standards listed below did not have an immediate impact on Arrow, but could in the future.

ASU 2014-09 ~~- Revenue~~"Revenue from Contracts ~~with Customers will change revenue recognition guidance under GAAP and is based on the principle that revenue is recognized to depict the transfer~~With Customers" (Topic 606) was adopted as of goods or services to customers in an amount that reflects consideration to which the entity expects to be entitled in exchange for those goods and services. The ASU also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. For financial reporting purposes, the standard allows for either full retrospective adoption, meaning the standard is applied to all of the periods presented, or modified retrospective adoption, meaning the standard is applied only to the most current period presented in the financial statements with the cumulative effect of initially applying the standard recognized at the date of initial application. Initially, ASU 2014-09 was effective for Arrow on January 1, 2017; however, in August 2015, the FASB issued ASU No. 2015-14 - Revenue from Contracts with Customers - Deferral of the Effective Date, which deferred the effective date to January 1, 2018. Early adoption is not permitted. In addition, the FASB has begun to issue targeted updates to clarify specific implementation issues of ASU 2014-09. These updates include ASU No. 2016-08 - Principal versus Agent Considerations (ReportingFor additional information, see Revenue Gross versus Net), ASU No. 2016-10 - Identifying Performance Obligations and Licensing, ASU No. 2016-12 - Narrow-Scope Improvements and Practical Expedients, and ASU No. 2016-20 - Technical Corrections and Improvements to Top 606 - Revenue from Contract with Customers. We are currentlyRecognition under Significant Accounting Policy Update in ~~the process of identifying any required changes to our revenue recognition policies. We do not expect that the adoption of~~ this ~~change in accounting for revenue will have a material impact on our financial position or the results of operations in periods subsequent to its adoption.~~Note.

ASU 2016-01 "Recognition and Measurement of Financial Assets and Financial Liabilities" ~~will~~(Subtopic 825-10) significantly ~~change~~changed the income statement impact of equity investments. For Arrow, the standard isbecame effective for the first quarter of 2018, and ~~will require~~requires that equity investments be measured at fair value, with changes in fair value ~~measured~~recognized in net income. AsThe cumulative effect of ~~September 30, 2017, we hold $1.5 million~~the January 1, 2018 adoption was an increase to retained earnings of $331 thousand with a corresponding decrease to Accumulated Other Comprehensive Loss. For periods prior to January 1, 2018, equity securities were classified as available-for-sale and stated at fair value with unrealized gains and losses reported as a separate component of accumulated other comprehensive income, net of tax. ASU 2016-01 also emphasized the existing requirement to use exit prices to measure fair value for disclosure purposes and clarifies that entities not make use of a practicability exception in ~~equity investments~~determining the fair value of loans. Accordingly, the Company refined the calculation used to determine the disclosed fair value of its loans as part of adopting this standard. See Note 9 to the unaudited interim consolidated financial statements titled Fair Value of Financial Instruments.

ASU 2016-15 "Statement of Cash Flows - Classification of Certain Cash Receipts and ~~we do not expect that the adoption of~~Cash Payments" (Topic 230) will reduce existing diversity in practice with respect to eight specific cash flow issues. Arrow adopted this ~~change in accounting for equity investments will have a material impact on our financial position or the results of operations in periods subsequent to its adoption.~~

ASU ~~2016-02 "Leases" will require the recognition of operating leases. For Arrow, the standard becomes effective~~ in the first quarter of 2019. We do not expect that the adoption of this change in accounting for operating leases will have a material impact on our financial position or the results of operations in periods subsequent to its adoption. As of September 30, 2017, we have less than $2.6 million in minimum lease payments for existing operating leases of branch and insurance locations with varying expiration dates from 2017 to 2031.

ASU 2016-13 "Financial Instruments - Credit Losses" will change the way we and other financial entities recognize losses on assets measured at amortized costs and change the method for recognizing credit losses on securities available-for-sale. Currently, loan losses are recognized using an "incurred loss" methodology. Under ASU 2016-13, the methodology will change to a current expected loss over the life of the loan. Currently, credit losses on available-for-sale securities reduce the carrying value of the instrument and cannot be reversed. Under ASU 2016-13, the amount of the credit loss is carried as a valuation allowance and can be reversed. For Arrow, the

standard is effective for the first quarter of 2020 and early adoption is allowed in 2019. The Company is currently evaluating the impact of the pending adoption of the ASU on its consolidated financial statements. The initial adjustment will not be reported in earnings, but as the cumulative effect of a change in accounting principle. At this time we have not calculated the estimated impact that this Update will have on our Allowance for Loan Losses, however, we anticipate it will have a significant impact on the methodology process we utilize to calculate the allowance.2018.

ASU 2017-01 "Business Combinations" (Topic 805) defines when a set of assets and activities constitutes a business for the purposes of determining whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. ~~Currently, the three elements required to be present in a business are inputs, processes, and outputs.~~ The amendments in this ~~Update~~update allow for a business to consist of inputs, processes, and the ability to create output. For Arrow, the standard ~~becomes~~became effective in the first quarter of 2018. This ~~Update will likely have~~update had no effect on ~~our~~its accounting for acquisitions and dispositions of businesses.

ASU 2017-04 "Intangibles-Goodwill and Other" changes the procedures for evaluating impairment of goodwill. Prior to this Update, entities were required to perform procedures to determine the fair value of the underlying assets and liabilities following the guidance for determining the fair value of assets and liabilities in a business combination. This additional step to impairment testing has been eliminated. Under the amendments in this Update, entities should perform goodwill impairment testing by comparing the fair value of a reporting unit to its carrying value. This amendment should reduce the cost and complexity of evaluating goodwill for impairment. For Arrow, the standard becomes effective in the first quarter of 2019, however, early adoption is permitted. This amendment will not affect our assessment of goodwill impairment since we currently perform the analysis of comparing carrying value to fair value of our reporting units that have goodwill and we have not had to perform a Step 2 Impairment Test to date.

~~ASU~~ 2017-07 "Compensation-Retirement Benefits" (Topic 715) improves the presentation of net periodic pension cost and net periodic post-retirement benefit cost by requiring that an employer disaggregate the service cost component from the other components of net benefit cost. The amendments also provide explicit guidance on how to present the service cost component and the other components of net benefit cost in the income statement and allow only the service cost component of net benefit cost to be eligible for capitalization. For Arrow, the standard ~~becomes~~became effective in the first quarter of ~~2018, however, early~~2018. In accordance with the practical expedient adoption ~~is permitted. We do not expect that~~method, for all periods presented Arrow used the amounts disclosed in the retirement plans footnote for the prior period retrospective reclassification of the non-service cost components from salaries and benefits to other operating expenses. The adoption of this change in accounting for pension costs ~~will~~did not have a material impact on ~~our~~its financial position or the results of ~~operations in periods subsequent to its adoption.~~

ASU 2017-08 "Receivables-Nonrefundable Fees and Other Costs" amends the amortization period for certain purchased callable debt securities held at a premium. This shortens the amortization period for the premium to the earliest call date. Under current generally accepted accounting principles (GAAP), entities generally amortize the premium as an adjustment of yield over the contractual life of the instrument. For Arrow, the standard becomes effective in the first quarter of 2019, however, early adoption is permitted as early as the first quarter of 2017. We do not expect that the adoption of this change in accounting for certain callable debt securities will have a material impact on our financial position or the results of operations in periods subsequent to its adoption.operations.

ASU 2017-09 "Compensation-Stock Compensation" (Topic 718) provides guidance about which changes to the terms and conditions of a share-based payment award require an entity to apply modification accounting in Topic 718. The guidance highlights the requirements for applying modification accounting and the exception criteria relating to changes in share-based payment terms. For Arrow, the standard ~~becomes~~became effective in the first quarter of ~~2018, however, early adoption is permitted as early as the third quarter of 2017. We do not expect that the~~2018. The adoption of this change in accounting for share-based payment awards ~~will~~did not have a material impact on ~~our~~its financial position or the results of operations in periods subsequent to its adoption.

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

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. For a lease with a term of 12 months or less, a lessee is permitted to make an accounting policy election by class of underlying asset not to recognize a right-of-use asset and lease liability. Additionally, when measuring assets and liabilities arising from a lease, optional payments should be included only if the lessee is reasonably certain to exercise an option to extend the lease, exercise a purchase option or not exercise an option to terminate the lease. 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 will be January 1, 2019 for Arrow, through a cumulative-effect adjustment to the balance sheet, including retained earnings, as of January 1, 2019. Practical expedients may be elected that would not require Arrow 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. If elected, these practical expedients must be applied together. An entity may also elect a practical expedient, which must 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. In addition, a lessor may make an accounting policy election, by class of underlying asset, to not separate nonlease components from lease components and account for these components as a single lease component. Early adoption of this standard is permitted in any interim or annual period. The Company expects to adopt the new lease standard on January 1, 2019 through a cumulative-effect adjustment without revising prior comparative periods, and elect the practical expedients available to effectively account for leases commenced prior to the effective date. The Company expects assets and liabilities to increase between $7 million and $9 million at the January 1, 2019 adoption date, with no material impact to operating lease expense in its Consolidated Statements of Income.

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 continues its implementation efforts with the development and testing of various methods within its core model, developing forecast scenarios, monitoring of guidance interpretations and consideration of relevant internal controls and processes. This 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 January 2017, the FASB issued ASU 2017-04 "Intangibles-Goodwill and Other" (Topic 350) which simplifies the procedures for evaluating impairment of goodwill. Prior to the adoption of this standard, entities were required to perform procedures to determine the fair value of the underlying assets and liabilities for determining the fair value of assets and liabilities in a business combination. This additional step to impairment testing has been eliminated. Under this ASU, entities will perform goodwill impairment testing by comparing the fair value of a reporting unit to its carrying value. For Arrow, the standard becomes effective in the first quarter of 2019, however, early adoption is permitted. This amendment will not affect the assessment of goodwill impairment since the Company currently performs the analysis of comparing carrying value to fair value of its reporting units that have goodwill and the Company has not had to perform a Step 2 Impairment Test to date.

In March 2017, the FASB issued 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 premium to the earliest call date. Under GAAP, entities generally amortize the premium as an adjustment of yield over the contractual life of the instrument. For Arrow, the standard becomes effective in the first quarter of 2019. The Company does not expect that the adoption of this change in accounting for certain callable debt securities 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 2018-13 "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 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 often expensed under current US GAAP. For Arrow, the standard becomes effective at January 1, 2020. The Company is in the process of assessing the impact of this new accounting standard on its financial position and the results of operations in periods subsequent to its adoption.

Significant Accounting Policy Update:

Revenue Recognition - Accounting Standard Codification ("ASC") Topic 606, "Revenue from Contracts with Customers," establishes principles for reporting information about the nature, amount, timing and uncertainty of revenue and cash flows arising from the entity's contracts to provide goods or services to customers. The core principle of Topic 606 requires an entity to recognize revenue in a way that depicts the transfer of goods or services promised to a customer in an amount that reflects the consideration the entity expects to receive in exchange for those goods or services as performance obligations are satisfied.

The Company adopted Topic 606 as of January 1, 2018 using the modified retrospective approach. The Company has determined that revenue from specific types of fiduciary activities and insurance commissions are within the scope of this guidance. Under prior GAAP, revenue from fiduciary activities was recognized from settling client estates over the time period the work was performed. With the adoption of Topic 606, revenue is now recognized when the performance obligation is completed, which is when the settlement of the client estate is closed. The impact of this change in revenue recognition was not material to the Company's consolidated financial statements. Under prior GAAP when clients elected to pay premiums on property and casualty insurance policies in installments, revenue was recognized when the premiums were billed. With the adoption of Topic 606, this type of revenue is recognized when the performance obligation is substantially completed, i.e., when the insurance policy is issued. The impact of this change in revenue recognition was not material to the Company's consolidated financial statements. The cumulative effect of the adoption of Topic 606 related to the previously described fiduciary activities and insurance commissions was a decrease in retained earnings by $102 thousand as of January 1, 2018.

The majority of the Company's revenue-generating transactions are not subject to ASC Topic 606, including revenue generated from financial instruments, such as loans and investment securities which are presented in its consolidated income statements as components of net interest income. The following is a description of principal activities from which the Company generates its revenue from noninterest income sources that are within the scope of ASC Topic 606:

Income from Fiduciary Activities: represents revenue derived mainly through the management of client investments which is based on the market value of the covered assets and the fee schedule contained in the applicable account management agreement. Since the revenue is mainly based on the market value of assets, this amount can be volatile as financial markets increase and decrease based on various economic factors. The terms of the account management agreements generally specify that the performance obligations are completed each quarter. Accordingly, the Company mainly recognizes revenue from fiduciary activities on a quarterly basis.

Fees for Other Services to Customers: represents general service fees for monthly deposit account maintenance and account activity plus fees from other deposit-based services. Revenue is recognized when the performance obligation is completed, which is generally on a monthly basis for account maintenance services, or upon the completion of a deposit-related transaction. Payment for these performance obligations is generally received at the time the performance obligations are satisfied.

Insurance Commissions: represents commissions and fees paid by insurance carriers for both property and casualty insurance policies, and for services performed for employment benefits clients. Revenue from the property and casualty insurance business is recognized when the performance obligation is satisfied, which is generally the effective date of the bound coverage since there are no significant performance obligations remaining. Revenue from the employment benefit brokerage business is recognized when the benefit servicing performance obligations are satisfied, generally on a monthly basis.

Note 2. INVESTMENT SECURITIES (In Thousands)

Management determines the appropriate classification of securities at the time of purchase. Securities reported as held-to-maturity are those debt securities which Arrow has both the positive intent and ability to hold to maturity and are stated at amortized cost. Securities available-for-sale are reported at fair value, with unrealized gains and losses reported in accumulated other comprehensive income or loss, net of taxes. Beginning January 1, 2018, upon adoption of ASU 2016-01, equity securities with readily determinable fair values are stated at fair value with realized and unrealized gains and losses reported in income. For periods prior to January 1, 2018, equity securities were classified as available-for-sale and stated at fair value with unrealized gains and losses reported as a separate component of accumulated other comprehensive income, net of tax.

The following table is the schedule of Available-For-Sale Securities at September 30, ~~2017,~~ 2018, December 31, ~~2016~~2017 and September 30, ~~2016:~~2017:

																									Available-For-Sale Securities
	U.S. Government & Agency Obligations		State and Municipal Obligations		Mortgage- Backed Securities - Residential		Corporate and Other Debt Securities		Mutual Funds and Equity Securities		Total Available- For-Sale Securities		U.S. Government & Agency Obligations		State and Municipal Obligations		Mortgage- Backed Securities		Corporate and Other Debt Securities		Mutual Funds and Equity Securities		Total Available- For-Sale Securities
September 30, 2017
September 30, 2018
Available-For-Sale Securities, at Amortized Cost	$	146,976	$	11,875	$	152,858	$	2,500	$	1,120	$	315,329	$	60,135	$	2,545	$	284,236	$	1,000	$	—	$	347,916
Available-For-Sale Securities, at Fair Value	146,978		11,902		152,806		2,299		1,474		315,459		59,602		2,548		277,461		800		—		340,411
Gross Unrealized Gains	152		27		964		—		354		1,497		—		3		201		—		—		204
Gross Unrealized Losses	150		—		1,016		201		—		1,367		533		—		6,976		200		—		7,709
Available-For-Sale Securities, Pledged as Collateral											206,637												219,587

Maturities of Debt Securities, at Amortized Cost:
Within One Year	$	—	$	9,068	$	3,649	$	1,500			$	14,217	$	42,621	$	1,346	$	1,024	$	—			$	44,991
From 1 - 5 Years	146,976		1,890		114,127		—				262,993		17,514		719		164,808		—				183,041
From 5 - 10 Years	—		397		35,082		—				35,479		—		—		103,597		—				103,597
Over 10 Years	—		520		—		1,000				1,520		—		480		14,807		1,000				16,287

Maturities of Debt Securities, at Fair Value:
Within One Year	$	—	$	9,076	$	3,691	$	1,499			$	14,266	$	42,410	$	1,346	$	1,025	$	—			$	44,781
From 1 - 5 Years	146,978		1,910		114,202		—				263,090		17,192		722		158,846		—				176,760
From 5 - 10 Years	—		396		34,913		—				35,309		—		—		102,800		—				102,800
Over 10 Years	—		520		—		800				1,320		—		480		14,790		800				16,070

Securities in a Continuous Loss Position, at Fair Value:
Less than 12 Months	$	89,563	$	—	$	85,091	$	500	$	—	$	175,154	$	4,831	$	1,120	$	167,718	$	—	$	—	$	173,669
12 Months or Longer	—		—		—		1,800		—		1,800		54,771		—		71,433		800		—		127,004
Total	$	89,563	$	—	$	85,091	$	2,300	$	—	$	176,954	$	59,602	$	1,120	$	239,151	$	800	$	—	$	300,673
Number of Securities in a Continuous Loss Position	23		—		31		3		—		57		14		5		90		1		—		110

Unrealized Losses on Securities in a Continuous Loss Position:
Less than 12 Months	$	150	$	—	$	1,016	$	—	$	—	$	1,166	$	193	$	—	$	3,165	$	—	$	—	$	3,358
12 Months or Longer	—		—		—		201		—		201		340		—		3,811		200		—		4,351
Total	$	150	$	—	$	1,016	$	201	$	—	$	1,367	$	533	$	—	$	6,976	$	200	$	—	$	7,709

Disaggregated Details:
US Treasury Obligations, at Amortized Cost	$	64,711											$	—
US Treasury Obligations, at Fair Value	64,730												—
US Agency Obligations, at Amortized Cost	82,265												60,135
US Agency Obligations, at Fair Value	82,248												59,602
US Government Agency Securities, at Amortized Cost					$	503
US Government Agency Securities, at Fair Value					505
Government Sponsored Entity Securities, at Amortized Cost					152,355
Government Sponsored Entity Securities, at Fair Value					152,301

																									Available-For-Sale Securities
	U.S. Government & Agency Obligations		State and Municipal Obligations		Mortgage- Backed Securities - Residential		Corporate and Other Debt Securities		Mutual Funds and Equity Securities		Total Available- For-Sale Securities		U.S. Government & Agency Obligations		State and Municipal Obligations		Mortgage- Backed Securities		Corporate and Other Debt Securities		Mutual Funds and Equity Securities		Total Available- For-Sale Securities
December 31, 2016
US Government Agency Securities, at Amortized Cost																	$	74,160
US Government Agency Securities, at Fair Value																	74,098
Government Sponsored Entity Securities, at Amortized Cost																	210,076
Government Sponsored Entity Securities, at Fair Value																	203,363

December 31, 2017
Available-For-Sale Securities, at Amortized Cost	$	147,110	$	27,684	$	168,189	$	3,512	$	1,120	$	347,615	$	60,328	$	10,351	$	229,077	$	1,000	$	1,120	$	301,876
Available-For-Sale Securities, at Fair Value	147,377		27,690		167,239		3,308		1,382		346,996		59,894		10,349		227,596		800		1,561		300,200
Gross Unrealized Gains	304		24		986		—		262		1,576		—		9		485		—		441		935
Gross Unrealized Losses	37		18		1,936		204		—		2,195		434		11		1,966		200		—		2,611
Available-For-Sale Securities, Pledged as Collateral, at Fair Value											262,852												183,052

Securities in a Continuous Loss Position, at Fair Value:
Less than 12 Months	$	70,605	$	12,165	$	126,825	$	500	$	—	$	210,095	$	20,348	$	8,498	$	70,930	$	—	$	—	$	99,776
12 Months or Longer	—		7,377		—		2,809		—		10,186		39,546		—		80,759		800		—		121,105
Total	$	70,605	$	19,542	$	126,825	$	3,309	$	—	$	220,281	$	59,894	$	8,498	$	151,689	$	800	$	—	$	220,881
Number of Securities in a Continuous Loss Position	19		84		40		4		—		147		14		36		55		1		—		106

Unrealized Losses on Securities in a Continuous Loss Position:
Less than 12 Months	$	37	$	13	$	1,936	$	1	$	—	$	1,987	$	172	$	11	$	363	$	—	$	—	$	546
12 Months or Longer	—		5		—		203		—		208		262		—		1,603		200		—		2,065
Total	$	37	$	18	$	1,936	$	204	$	—	$	2,195	$	434	$	11	$	1,966	$	200	$	—	$	2,611

Disaggregated Details:
US Treasury Obligations, at Amortized Cost	$	54,701											$	—
US Treasury Obligations, at Fair Value	54,706												—
US Agency Obligations, at Amortized Cost	92,409												60,328
US Agency Obligations, at Fair Value	92,671												59,894
US Government Agency Securities, at Amortized Cost					$	3,694											$	40,832
US Government Agency Securities, at Fair Value					3,724												40,832
Government Sponsored Entity Securities, at Amortized Cost					164,495												188,245
Government Sponsored Entity Securities, at Fair Value					163,515												186,764

																									Available-For-Sale Securities
	U.S. Government & Agency Obligations		State and Municipal Obligations		Mortgage- Backed Securities - Residential		Corporate and Other Debt Securities		Mutual Funds and Equity Securities		Total Available- For-Sale Securities		U.S. Government & Agency Obligations		State and Municipal Obligations		Mortgage- Backed Securities		Corporate and Other Debt Securities		Mutual Funds and Equity Securities		Total Available- For-Sale Securities
September 30, 2016
September 30, 2017
Available-For-Sale Securities, at Amortized Cost	$	152,511	$	31,562	$	144,598	$	4,500	$	1,120	$	334,291	$	146,976	$	11,875	$	152,858	$	2,500	$	1,120	$	315,329
Available-For-Sale Securities, at Fair Value	153,926		31,628		148,087		4,299		1,250		339,190		146,978		11,902		152,806		2,299		1,474		315,459
Gross Unrealized Gains	1,415		69		3,489		—		130		5,103		152		27		964		—		354		1,497
Gross Unrealized Losses	—		3		—		201		—		204		150		—		1,016		201		—		1,367
Available-For-Sale Securities, Pledged as Collateral											277,832												206,637

Securities in a Continuous Loss Position, at Fair Value:
Less than 12 Months	$	—	$	9,237	$	—	$	1,022	$	—	$	10,259	$	89,563	$	—	$	85,091	$	500	$	—	$	175,154
12 Months or Longer	—		—		—		1,800		—		1,800		—		—		—		1,800		—		1,800
Total	$	—	$	9,237	$	—	$	2,822	$	—	$	12,059	$	89,563	$	—	$	85,091	$	2,300	$	—	$	176,954
Number of Securities in a Continuous Loss Position	—		1		2		3		—		6		23		—		31		3		—		57

Unrealized Losses on Securities in a Continuous Loss Position:
Less than 12 Months	$	—	$	3	$	—	$	1	$	—	$	4	$	150	$	—	$	1,016	$	—	$	—	$	1,166
12 Months or Longer	—		—		—		200		—		200		—		—		—		201		—		201
Total	$	—	$	3	$	—	$	201	$	—	$	204	$	150	$	—	$	1,016	$	201	$	—	$	1,367

Disaggregated Details:
US Treasury Obligations, at Amortized Cost													$	64,711
US Treasury Obligations, at Fair Value													$	64,730
US Agency Obligations, at Amortized Cost	$	152,511											$	82,265
US Agency Obligations, at Fair Value	153,926												82,248
US Government Agency Securities, at Amortized Cost					$	10,849											$	503
US Government Agency Securities, at Fair Value					11,003												505						��
Government Sponsored Entity Securities, at Amortized Cost					133,749												152,355
Government Sponsored Entity Securities, at Fair Value					137,084												152,301

The following table is the schedule of Held-To-Maturity Securities at September 30, ~~2017,~~ 2018, December 31, ~~2016~~2017 and September 30, ~~2016:~~2017:

																	Held-To-Maturity Securities
	State and Municipal Obligations		Mortgage- Backed Securities - Residential		Corporate and Other Debt Securities		Total Held-To Maturity Securities		State and Municipal Obligations		Mortgage- Backed Securities		Corporate and Other Debt Securities		Total Held-To Maturity Securities
September 30, 2017
September 30, 2018
Held-To-Maturity Securities, at Amortized Cost	$	277,738	$	63,788	$	—	$	341,526	$	239,367	$	50,585	$	—	$	289,952
Held-To-Maturity Securities, at Fair Value	279,384		64,515		—		343,899		233,557		49,162		—		282,719
Gross Unrealized Gains	2,977		738		—		3,715		261		—		—		261
Gross Unrealized Losses	1,331		11		—		1,342		6,071		1,423		—		7,494
Held-To-Maturity Securities, Pledged as Collateral							325,096								268,229

Maturities of Debt Securities, at Amortized Cost:
Within One Year	$	39,609	$	—	$	—	$	39,609	$	19,381	$	—	$	—	$	19,381
From 1 - 5 Years	79,412		54,504		—		133,916		93,084		48,039		—		141,123
From 5 - 10 Years	154,981		9,284		—		164,265		124,277		2,546		—		126,823
Over 10 Years	3,736		—		—		3,736		2,625		—		—		2,625

Maturities of Debt Securities, at Fair Value:
Within One Year	$	39,782	$	—	$	—	$	39,782	$	19,396	$	—	$	—	$	19,396
From 1 - 5 Years	80,944		55,120		—		136,064		92,199		46,688		—		138,887
From 5 - 10 Years	154,892		9,395		—		164,287		119,356		2,474		—		121,830
Over 10 Years	3,766		—		—		3,766		2,606		—		—		2,606

Securities in a Continuous Loss Position, at Fair Value:
Less than 12 Months	$	78,238	$	3,544	$	—	$	81,782	$	95,944	$	46,375	$	—	$	142,319
12 Months or Longer	13,331		—		—		13,331		86,378		2,787		—		89,165
Total	$	91,569	$	3,544	$	—	$	95,113	$	182,322	$	49,162	$	—	$	231,484

Number of Securities in a Continuous Loss Position	252		7		—		259		535		47		—		582

Unrealized Losses on Securities in a Continuous Loss Position:
Less than 12 Months	$	1,034	$	11	$	—	$	1,045	$	1,443	$	1,303	$	—	$	2,746
12 Months or Longer	297		—		—		297		4,628		120		—		4,748
Total	$	1,331	$	11	$	—	$	1,342	$	6,071	$	1,423	$	—	$	7,494

Disaggregated Details:
US Government Agency Securities, at Amortized Cost			$	2,792							$	3,147
US Government Agency Securities, at Fair Value			2,799								2,222
Government Sponsored Entity Securities, at Amortized Cost			60,996								47,438
Government Sponsored Entity Securities, at Fair Value			61,716								46,940

																	Held-To-Maturity Securities
	State and Municipal Obligations		Mortgage- Backed Securities - Residential		Corporate and Other Debt Securities		Total Held-To Maturity Securities		State and Municipal Obligations		Mortgage- Backed Securities		Corporate and Other Debt Securities		Total Held-To Maturity Securities
December 31, 2016
December 31, 2017
Held-To-Maturity Securities, at Amortized Cost	$	268,892	$	75,535	$	1,000	$	345,427	$	275,530	$	60,377	$	—	$	335,907
Held-To-Maturity Securities, at Fair Value	267,127		75,624		1,000		343,751		275,353		60,548		—		335,901
Gross Unrealized Gains	2,058		258		—		2,316		1,691		269		—		1,960
Gross Unrealized Losses	3,823		169		—		3,992		1,868		98		—		1,966
Held-To-Maturity Securities, Pledged as Collateral							321,202								318,622

Securities in a Continuous Loss Position, at Fair Value:
Less than 12 Months	$	107,255	$	13,306	$	—	$	120,561	$	55,648	$	13,764	$	—	$	69,412
12 Months or Longer	12,363		—		—		12,363		65,152		3,257		—		68,409
Total	$	119,618	$	13,306	$	—	$	132,924	$	120,800	$	17,021	$	—	$	137,821
Number of Securities in a Continuous Loss Position	347		13		—		360		352		14		—		366

Unrealized Losses on Securities in a Continuous Loss Position:
Less than 12 Months	$	3,129	$	169	$	—	$	3,298	$	442	$	56	$	—	$	498
12 Months or Longer	694		—		—		694		1,425		43		—		1,468
Total	$	3,823	$	169	$	—	$	3,992	$	1,867	$	99	$	—	$	1,966

Disaggregated Details:
US Government Agency Securities, at Amortized Cost			$	3,206							$	2,680
US Government Agency Securities, at Fair Value			3,222								2,661
Government Sponsored Entity Securities, at Amortized Cost			72,329								57,697
Government Sponsored Entity Securities, at Fair Value			72,402								57,887

September 30, 2016
September 30, 2017
Held-To-Maturity Securities, at Amortized Cost	$	257,255	$	79,983	$	1,000	$	338,238	$	277,738	$	63,788	$	—	$	341,526
Held-To-Maturity Securities, at Fair Value	263,897		82,544		1,000		347,441		279,384		64,515		—		343,899
Gross Unrealized Gains	6,712		2,561		—		9,273		2,977		738		—		3,715
Gross Unrealized Losses	70		—		—		70		1,331		11		—		1,342
Held-To-Maturity Securities, Pledged as Collateral							320.774								325,096

Securities in a Continuous Loss Position, at Fair Value:
Less than 12 Months	$	11,891	$	—	$	—	$	11,891	$	78,238	$	3,544	$	—	$	81,782
12 Months or Longer	1,172		—		—		1,172		13,331		—		—		13,331
Total	$	13,063	$	—	$	—	$	13,063	$	91,569	$	3,544	$	—	$	95,113
Number of Securities in a Continuous Loss Position	3		—		—		3		252		7		—		259

Unrealized Losses on Securities in a Continuous Loss Position:
Less than 12 Months	$	68	$	—	$	—	$	68	$	1,034	$	11	$	—	$	1,045
12 Months or Longer	2		—		—		2		297		—		—		297
Total	$	70	$	—	$	—	$	70	$	1,331	$	11	$	—	$	1,342

Held-To-Maturity Securities

State and

Municipal

Obligations

Mortgage-

Backed

Securities -

Residential

Corporate

and Other

Debt

Securities

Total

Held-To

Maturity

Securities

State and

Municipal

Obligations

Mortgage-

Backed

Securities

Corporate

and Other

Debt

Securities

Total

Held-To

Maturity

Securities

September 30, 2016

September 30, 2017

Disaggregated Details:

US Government Agency

Securities, at Amortized Cost

3,497

2,792

US Government Agency

Securities, at Fair Value

3,622

2,799

Government Sponsored Entity

Securities, at Amortized Cost

76,486

60,996

Government Sponsored Entity
Securities, at Fair Value

78,922

61,716

In the tables above, maturities of ~~mortgage-backed-securities - residential~~mortgage-backed securities are included based on their expected average lives. Actual maturities will differ from the table above 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 September 30, ~~2017,~~ 2018, December 31, ~~2016~~2017 and September 30, ~~2016,~~2017, do not reflect any deterioration of the credit worthiness of the issuing entities. ~~U.S. Government and Agency issues, including agency-backed collateralized mortgage obligations and mortgage-backed securities, are all rated at least Aaa by Moody's or 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,~~An in-house credit analysis is performed ~~in-house~~for municipal securities based upon data that has been submitted by the issuers to the NYNew York State Comptroller. That analysis reflects satisfactory credit worthiness of the municipalities. ~~Corporate and other debt securities continue to be rated above investment grade according to Moody's and Standard and Poor's.~~ Subsequent to September 30, ~~2017,~~2018, and through the date of the filing of this ~~report, there were~~Quarterly Report on Form 10-Q, Arrow held no securities ~~downgraded below investment grade.~~ with significant credit deterioration.

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~~Arrow does not currently intend to sell any temporarily impaired securities, and because it is not more likely-than-not that wethe Company would be required to sell the securities prior to recovery, the impairment is considered temporary.

The following table is the schedule of Equity Securities at September 30, 2018. Upon the adoption of ASU 2016-01 effective January 1, 2018, Equity Securities are not included in Securities Available-For-Sale since unrealized gains and losses are now recorded in the Consolidated Statements of Income. Prior to January 1, 2018, Equity Securities were included in Securities Available-For-Sale.



Equity Securities

September 30, 2018
Equity Securities, at Fair Value	$	1,916

The following is a summary of realized and unrealized gains and losses recognized in net income on equity securities during the three- and nine-month periods ended September 30, 2018:



	Three months ended September 30, 2018		Nine months ended September 30, 2018
Net Gain on Equity Securities	$	114	$	355
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	$	114	$	355

Note 3. LOANS (In Thousands)

Loan Categories and Past Due Loans

The following table presents loan balances outstanding as of September 30, ~~2017,~~ 2018, December 31, ~~2016~~2017 and September 30, ~~2016~~2017 and an analysis of the recorded investment in loans that are past due at these dates. Generally, Arrow considers an amortizing loan past due 30 or more days when the borrower is two payments past due. Loans held-for-sale of ~~$1,323, $483~~$201, $327 and ~~$1,414~~$1,323 as of September 30, ~~2017,~~ 2018, December 31, ~~2016~~2017 and September 30, ~~2016,~~2017, respectively, are included in the residential real estate balances for current loans.


			Commercial										Commercial
											Commercial		Real Estate		Consumer		Residential		Total
September 30, 2018
Loans Past Due 30-59 Days											$	198	$	—	$	5,651	$	2,896	$	8,745
Loans Past Due 60-89 Days											—		—		1,307		47		1,354
Loans Past Due 90 or more Days											76		807		494		1,523		2,900
Total Loans Past Due											274		807		7,452		4,466		12,999
Current Loans											126,838		469,315		686,736		830,212		2,113,101
Total Loans											$	127,112	$	470,122	$	694,188	$	834,678	$	2,126,100

Loans 90 or More Days Past Due and Still Accruing Interest											$	—	$	—	$	192	$	980	$	1,172
Nonaccrual Loans											674		807		540		2,447		4,468

December 31, 2017
Loans Past Due 30-59 Days											$	139	$	—	$	5,891	$	2,094	$	8,124
Loans Past Due 60-89 Days											19		—		1,215		509		1,743
Loans Past Due 90 or more Days											99		807		513		1,422		2,841
Total Loans Past Due											257		807		7,619		4,025		12,708
Current Loans											128,992		443,441		595,208		770,421		1,938,062
Total Loans											$	129,249	$	444,248	$	602,827	$	774,446	$	1,950,770

Loans 90 or More Days Past Due and Still Accruing Interest											$	—	$	—	$	6	$	313	$	319
Nonaccrual Loans											$	588	$	1,530	$	653	$	2,755	5,526
	Commercial		Real Estate		Consumer		Residential		Total
September 30, 2017
Loans Past Due 30-59 Days	$	122	$	442	$	4,781	$	1,675	$	7,020	$	122	$	442	$	4,781	$	1,675	$	7,020
Loans Past Due 60-89 Days	—		—		914		77		991		—		—		914		77		991
Loans Past Due 90 or more Days	102		807		291		1,742		2,942		102		807		291		1,742		2,942
Total Loans Past Due	224		1,249		5,986		3,494		10,953		224		1,249		5,986		3,494		10,953
Current Loans	125,136		439,467		586,043		747,200		1,897,846		125,136		439,467		586,043		747,200		1,897,846
Total Loans	$	125,360	$	440,716	$	592,029	$	750,694	$	1,908,799	$	125,360	$	440,716	$	592,029	$	750,694	$	1,908,799

Loans 90 or More Days Past Due and Still Accruing Interest	$	—	$	—	$	41	$	926	$	967	$	—	$	—	$	41	$	926	$	967
Nonaccrual Loans	609		1,249		507		3,117		5,482		$	609	$	1,249	$	507	$	3,117	5,482

December 31, 2016
Loans Past Due 30-59 Days	$	112	$	121	$	5,593	$	2,368	$	8,194
Loans Past Due 60-89 Days	29		—		898		142		1,069
Loans Past Due 90 or more Days	148		—		513		1,975		2,636
Total Loans Past Due	289		121		7,004		4,485		11,899
Current Loans	104,866		431,525		530,357		674,621		1,741,369
Total Loans	$	105,155	$	431,646	$	537,361	$	679,106	$	1,753,268

Loans 90 or More Days Past Due and Still Accruing Interest	$	—	$	—	$	158	$	1,043	$	1,201
Nonaccrual Loans	$	155	$	875	$	589	$	2,574	4,193

September 30, 2016
Loans Past Due 30-59 Days	$	38	$	—	$	3,793	$	271	$	4,102
Loans Past Due 60-89 Days	67		—		1,412		1,450		2,929
Loans Past Due 90 or more Days	160		1,106		343		1,467		3,076
Total Loans Past Due	265		1,106		5,548		3,188		10,107
Current Loans	102,789		427,905		518,155		648,260		1,697,109
Total Loans	$	103,054	$	429,011	$	523,703	$	651,448	$	1,707,216

Loans 90 or More Days Past Due and Still Accruing Interest	$	—	$	—	$	—	$	548	$	548
Nonaccrual Loans	$	160	$	3,689	$	532	$	1,726	6,107

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 loans carry a higher risk than commercial real estate loans due 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 of the borrowers.

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 made to finance the purchases of real property which generally consists of real estate with completed structures. These commercial real estate loans are 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~~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. Many projects will ultimately be used by the borrowers' businesses, while others are developed for resale. These real estate loans are also secured by first liens on the real estate, which may include apartments, commercial structures, housing business, 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 - The Company 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 ~~Real Estate Mortgages~~ - Residential real estate loans consist primarily of loans secured by first or second mortgages on primary residences. ~~We originate~~The Company originates adjustable-rate and fixed-rate one-to-four-family residential real estate loans for the construction, purchase 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 ~~85%~~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 home equity lines of credit to consumers to finance home improvements, debt consolidation, education and other uses. ~~Company~~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			Unallocated			Total			Commercial			Real Estate			Consumer			Residential			Total
Roll-forward of the Allowance for Loan Losses for the Quarterly Periods:
June 30, 2018																			$	944		$	5,838		$	8,337		$	4,521		$	19,640
Charge-offs																			—			—			(300		)	(25		)	(325		)
Recoveries																			—			—			102			—			102
Provision																			99			81			551			(145		)	586
September 30, 2018																			$	1,043		$	5,919		$	8,690		$	4,351		$	20,003

June 30, 2017	$	925		$	4,983		$	7,305		$	4,229		$	—		$	17,442		$	925		$	4,983		$	7,305		$	4,229		$	17,442
Charge-offs	—			(342		)	(280		)	—			—			(622		)	—			(342		)	(280		)	—			(622		)
Recoveries	1			—			74			—			—			75			1			—			74			—			75
Provision	(46		)	446			509			(109		)	—			800			(46		)	446			509			(109		)	800
September 30, 2017	$	880		$	5,087		$	7,608		$	4,120		$	—		$	17,695		$	880		$	5,087		$	7,608		$	4,120		$	17,695

June 30, 2016	$	1,128		$	5,816		$	5,742		$	4,026		$	86		$	16,798
Charge-offs	(34		)	—			(243		)	(90		)	—			(367		)
Recoveries	5			—			59			—			—			64
Provision	(76		)	(75		)	513			166			(48		)	480
September 30, 2016	$	1,023		$	5,741		$	6,071		$	4,102		$	38		$	16,975

																																		Allowance for Loan Losses
				Commercial																		Commercial
	Commercial			Real Estate			Consumer			Residential			Unallocated			Total			Commercial			Real Estate			Consumer			Residential			Total
Roll-forward of the Allowance for Loan Losses for the Year-to-Date Periods:
December 31, 2017																			$	1,873		$	4,504		$	7,604		$	4,605		$	18,586
Charge-offs																			(16		)	—			(895		)	(49		)	(960		)
Recoveries																			1			12			403			—			416
Provision																			(815		)	1,403			1,578			(205		)	1,961
September 30, 2018																			$	1,043		$	5,919		$	8,690		$	4,351		$	20,003

December 31, 2016	$	1,017		$	5,677		$	6,120		$	4,198		$	—		$	17,012		$	1,017		$	5,677		$	6,120		$	4,198		$	17,012
Charge-offs	(2		)	(342		)	(847		)	(6		)	—			(1,197		)	(2		)	(342		)	(847		)	(6		)	(1,197		)
Recoveries	8			—			292			—			—			300			8			—			292			—			300
Provision	(143		)	(248		)	2,043			(72		)	—			1,580			(143		)	(248		)	2,043			(72		)	1,580
September 30, 2017	$	880		$	5,087		$	7,608		$	4,120		$	—		$	17,695		$	880		$	5,087		$	7,608		$	4,120		$	17,695

December 31, 2015	$	1,827		$	4,520		$	5,554		$	3,790		$	347		$	16,038
Charge-offs	(86		)	—			(591		)	(107		)	—			(784		)
Recoveries	20			—			150			1			—			171
Provision	(738		)	1,221			958			418			(309		)	1,550
September 30, 2016	$	1,023		$	5,741		$	6,071		$	4,102		$	38		$	16,975
September 30, 2018
Allowance for loan losses - Loans Individually Evaluated for Impairment																			$	84		$	45		$	—		$	48		$	177
Allowance for loan losses - Loans Collectively Evaluated for Impairment																			959			5,874			8,690			4,303			19,826
Ending Loan Balance - Individually Evaluated for Impairment																			489			812			109			2,013			3,423
Ending Loan Balance - Collectively Evaluated for Impairment																			$	126,623		$	469,310		$	694,079		$	832,665		$	2,122,677

December 31, 2017
Allowance for loan losses - Loans Individually Evaluated for Impairment																			$	94		$	2		$	—		$	10		$	106
Allowance for loan losses - Loans Collectively Evaluated for Impairment																			1,779			4,502			7,604			4,595			18,480
Ending Loan Balance - Individually Evaluated for Impairment																			489			1,537			95			1,562			3,683
Ending Loan Balance - Collectively Evaluated for Impairment																			$	128,760		$	442,711		$	602,732		$	772,884		$	1,947,087

September 30, 2017
Allowance for loan losses - Loans Individually Evaluated for Impairment	$	104		$	—		$	—		$	34		$	—		$	138		$	104		$	—		$	—		$	34		$	138
Allowance for loan losses - Loans Collectively Evaluated for Impairment	776			5,087			7,608			4,086			—			17,557			776			5,087			7,608			4,086			17,557
Ending Loan Balance - Individually Evaluated for Impairment	489			1,543			104			1,139			—			3,275			489			1,543			104			1,139			3,275
Ending Loan Balance - Collectively Evaluated for Impairment	$	124,871		$	439,172		$	591,925		$	749,556		$	—		$	1,905,524		$	124,871		$	439,172		$	591,925		$	749,556		$	1,905,524

December 31, 2016
Allowance for loan losses - Loans Individually Evaluated for Impairment	$	—		$	—		$	—		$	—		$	—		$	—
Allowance for loan losses - Loans Collectively Evaluated for Impairment	1,017			5,677			6,120			4,198			—			17,012
Ending Loan Balance - Individually Evaluated for Impairment	—			890			91			1,098			—			2,079
Ending Loan Balance - Collectively Evaluated for Impairment	$	105,155		$	430,756		$	537,270		$	678,008		$	—		$	1,751,189

September 30, 2016
Allowance for loan losses - Loans Individually Evaluated for Impairment	$	—		$	240		$	—		$	—		$	—		$	240
Allowance for loan losses - Loans Collectively Evaluated for Impairment	1,023			5,501			6,071			4,102			38			16,735
Ending Loan Balance - Individually Evaluated for Impairment	—			3,538			90			317			—			3,945
Ending Loan Balance - Collectively Evaluated for Impairment	$	103,054		$	425,473		$	523,613		$	651,131		$	—		$	1,703,271

Through the provision for loan losses, an allowance for loan losses is maintained that reflects the best estimate of the ~~inherent~~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.

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, the Company's independent internal loan review department performs periodic reviews of the ~~risk ratings~~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 measure impairment~~The Company performs an evaluation of impaired loans on a quarterly basis. Impaired loans are generally nonaccrual loans over $250 thousand and all troubled debt restructured loans. ~~Impaired~~These impaired loans are generally considered to be collateral dependent with the ~~specific reserve,~~charge-off, if any, determined based on the value of the collateral less estimated costs to sell.

The remainder of the portfolio is evaluated on a pooled ~~basis.~~basis, as described below. For each homogeneous loan pool, ~~we estimate~~the Company estimates a total loss factor 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 and commercial real estate categories, ~~we further segregate~~ the loan categories are further segregated by credit risk profile (pools of loans graded ~~satisfactory,~~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 annualized historical net loss rate is determined for each loan category using a trailing three-year net charge-off average. ~~We then apply a loss emergence period factor to the historical net loss rate to account for the time it takes to identify the loss after a loss-causing event.~~ 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, wethe Company also ~~consider~~considers and ~~adjust~~adjusts historical net loss factors for qualitative factors that impact the ~~inherent~~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

While not a significant part of the allowance for loan losses methodology, in 2016, we maintained an unallocated portion of the total allowance for loan losses related to the overall level of imprecision inherent in the estimation of the appropriate level of allowance for loan losses.

Credit Quality Indicators

The following table presents the credit quality indicators by loan category at September 30, ~~2017,~~2018, December 31, ~~2016~~2017 and September 30, ~~2016:~~2017:

																					Loan Credit Quality Indicators
			Commercial										Commercial
											Commercial		Real Estate		Consumer		Residential		Total
September 30, 2018
Credit Risk Profile by Creditworthiness Category:
Satisfactory											$	119,217	$	440,114	$	—	$	—	$	559,331
Special Mention											5,949		—		—		—		5,949
Substandard											1,946		29,201		—		—		31,147
Doubtful											—		807		—		—		807
Credit Risk Profile Based on Payment Activity:
Performing											$	—	$	—	$	693,648	$	832,231	$	1,525,879
Nonperforming											—		—		540		2,447		2,987

December 31, 2017
Credit Risk Profile by Creditworthiness Category:
Satisfactory											$	124,961	$	417,362	$	—	$	—	$	542,323
Special Mention											1,341		177		—		—		1,518
Substandard											2,947		25,902		—		—		28,849
Doubtful											—		807		—		—		807
Credit Risk Profile Based on Payment Activity:
Performing											$	—	$	—	$	602,168	$	771,584	$	1,373,752
Nonperforming											—		—		659		3,068		3,727
	Commercial		Real Estate		Consumer		Residential		Total
September 30, 2017
Credit Risk Profile by Creditworthiness Category:
Satisfactory	$	120,622	$	411,685	$	—	$	—	$	532,307	$	120,622	$	411,685	$	—	$	—	$	532,307
Special Mention	1,394		1,401		—		—		2,795		1,394		1,401		—		—		2,795
Substandard	3,344		26,822		—		—		30,166		3,344		26,822		—		—		30,166
Doubtful	—		807		—		—		807		—		807		—		—		807
Credit Risk Profile Based on Payment Activity:
Performing	$	—	$	—	$	591,499	$	746,652	$	1,338,151	$	—	$	—	$	591,499	$	746,652	$	1,338,151
Nonperforming	—		—		530		4,043		4,573		—		—		530		4,043		4,573

December 31, 2016
Credit Risk Profile by Creditworthiness Category:
Satisfactory	$	95,722	$	396,907	$	—	$	—	$	492,629
Special Mention	1,359		7,008		—		—		8,367
Substandard	8,074		27,731		—		—		35,805
Doubtful	—		—		—		—		—
Credit Risk Profile Based on Payment Activity:
Performing	$	—	$	—	$	536,614	$	675,489	$	1,212,103
Nonperforming	—		—		747		3,617		4,364

September 30, 2016
Credit Risk Profile by Creditworthiness Category:
Satisfactory	$	93,903	$	392,697	$	—	$	—	$	486,600
Special Mention	1,274		10,472		—		—		11,746
Substandard	7,877		25,842		—		—		33,719
Doubtful	—		—		—		—		—
Credit Risk Profile Based on Payment Activity:
Performing	$	—	$	—	$	523,171	$	649,093	$	1,172,264
Nonperforming	—		—		532		2,355		2,887

WeFor 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 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~~’smanagement’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the asset or in the ~~institution~~’sinstitution’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 ~~risk rating~~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~~”“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 will sustain some loss if the deficiencies are not corrected. “~~Substandard~~”“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~~”“doubtful” have all of the weaknesses inherent in those classified as “~~substandard~~”“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~~”“loss” has been deferred due to specific pending factors or events which may strengthen the value (i.e. possibility of additional collateral, injection of capital, collateral liquidation, debt restructure, economic recovery, etc). Loans classified as “~~doubtful~~”“doubtful” need to be placed on non-accrual; and

~~non-accrual; and~~ 5) Loss - Loans classified as “~~loss~~”“loss” are considered uncollectible ~~and~~with collateral of such little value that their continuance as a bankable ~~asset~~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. ~~Large commercial~~

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 ~~to determine any~~in assessing the level of incurred risk of loss ~~as further described~~ in ~~this footnote.~~

~~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.~~our commercial related loan portfolios.

Impaired Loans

The following table presents information on impaired loans 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
September 30, 2018
Recorded Investment:
With No Related Allowance											$	—	$	5	$	108	$	1,712	$	1,825
With a Related Allowance											475		801		—		346		1,622
Unpaid Principal Balance:
With No Related Allowance											—		5		109		1,733		1,847
With a Related Allowance											489		807		—		280		1,576

December 31, 2017
Recorded Investment:
With No Related Allowance											$	—	$	781	$	94	$	1,269	$	2,144
With a Related Allowance											485		725		—		333		1,543
Unpaid Principal Balance:
With No Related Allowance											—		816		95		1,274		2,185
With a Related Allowance											489		721		—		288		1,498
	Commercial		Real Estate		Consumer		Residential		Total
September 30, 2017
Recorded Investment:
With No Related Allowance	$	—	$	818	$	104	$	851	$	1,773	$	—	$	818	$	104	$	851	$	1,773
With a Related Allowance	489		725		—		288		1,502		489		725		—		288		1,502
Unpaid Principal Balance:
With No Related Allowance	—		818		90		850		1,758		—		818		90		850		$	1,758
With a Related Allowance	489		723		—		288		1,500		489		723		—		288		1,500

December 31, 2016
Recorded Investment:
For the Quarter Ended:
September 30, 2018
Average Recorded Balance:
With No Related Allowance	$	—	$	890	$	91	$	1,098	$	2,079	$	—	$	7	$	104	$	1,371	$	1,482
With a Related Allowance	—		—		—		—		—		478		794		—		350		1,622
Unpaid Principal Balance:
Interest Income Recognized:
With No Related Allowance											—		—		—		—		—
With a Related Allowance											—		—		—		—		—
Cash Basis Income:
With No Related Allowance	—		890		91		1,098		2,079		—		—		—		—		—
With a Related Allowance	—		—		—		—		—		—		—		—		—		—

September 30, 2016
Recorded Investment:
With No Related Allowance	$	—	$	898	$	90	$	317	$	1,305
With a Related Allowance	—		2,640		—		—		2,640
Unpaid Principal Balance:
With No Related Allowance	—		898		90		317		$	1,305
With a Related Allowance	—		2,640		—		—		2,640

For the Quarter Ended:
September 30, 2017
Average Recorded Balance:
With No Related Allowance	$	—	$	998	$	96	$	827	$	1,921	$	—	$	998	$	96	$	827	$	1,921
With a Related Allowance	496		363		—		288		1,147		496		363		—		288		1,147
Interest Income Recognized:
With No Related Allowance	—		—		1		—		1		—		—		1		—		1
With a Related Allowance	—		—		—		—		—		—		—		—		—		—
Cash Basis Income:
With No Related Allowance	—		—		—		—		—		—		—		—		—		—
With a Related Allowance	—		—		—		—		—		—		—		—		—		—

September 30, 2016
Average Recorded Balance:
With No Related Allowance	$	—	$	1,374	$	92	$	479	$	1,945
With a Related Allowance	—		2,166		—		—		2,166
Interest Income Recognized:
With No Related Allowance	—		3		2		—		5
With a Related Allowance	—		—		—		—		—
Cash Basis Income:
With No Related Allowance	—		—		—		—		—
With a Related Allowance	—		—		—		—		—

																					Impaired Loans
			Commercial										Commercial
	Commercial		Real Estate		Consumer		Residential		Total		Commercial		Real Estate		Consumer		Residential		Total
For the Year-To-Date Period Ended:
September 30, 2018
Average Recorded Balance:
With No Related Allowance											$	—	$	393	$	101	$	1,491	$	1,985
With a Related Allowance											480		763		—		340		1,583
Interest Income Recognized:
With No Related Allowance											—		—		—		—		—
With a Related Allowance											—		—		—		20		20
Cash Basis Income:
With No Related Allowance											—		—		—		—		—
With a Related Allowance											—		—		—		—		—

September 30, 2017
Average Recorded Balance:
With No Related Allowance	$	—	$	854	$	98	$	975	$	1,927	$	—	$	854	$	98	$	975	$	1,927
With a Related Allowance	245		363		—		144		752		245		363		—		144		752
Interest Income Recognized:
With No Related Allowance	—		—		3		—		3		—		—		3		—		3
With a Related Allowance	—		—		—		4		4		—		—		—		4		4
Cash Basis Income:
With No Related Allowance	—		—		—		—		—		—		—		—		—		—
With a Related Allowance	—		—		—		—		—		—		—		—		—		—

September 30, 2016
Average Recorded Balance:
With No Related Allowance	$	78	$	1,635	$	102	$	481	$	2,296
With a Related Allowance	—		1,320		—		—		1,320
Interest Income Recognized:
With No Related Allowance	—		14		4		—		18
With a Related Allowance	—		—		—		—		—
Cash Basis Income:
With No Related Allowance	—		—		—		—		—
With a Related Allowance	—		—		—		—		—

At September 30, ~~2017,~~ 2018, December 31, ~~2016~~2017 and September 30, ~~2016,~~2017, 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 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. ~~All loans were modified under Arrow's own programs. The principal modification, for all the modifications in the table below, involved payment deferrals.~~

																					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:
September 30, 2018
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											—		—		—		—		—

September 30, 2017
Number of Loans	1		—		2		—		3		1		—		2		—		3
Pre-Modification Outstanding Recorded Investment	$	725	$	—	$	25	$	—	$	750	$	725	$	—	$	25	$	—	$	750
Post-Modification Outstanding Recorded Investment	725		—		25		—		750		725		—		25		—		750
Subsequent Default, Number of Contracts	—		—		—		—		—		—		—		—		—		—
Subsequent Default, Recorded Investment	—		—		—		—		—		—		—		—		—		—

September 30, 2016
For the Year-To-Date Period Ended:
September 30, 2018
Number of Loans	—		—		1		—		1		—		—		5		—		5
Pre-Modification Outstanding Recorded Investment	$	—	$	—	$	15	$	—	$	15	$	—	$	—	$	44	$	—	$	44
Post-Modification Outstanding Recorded Investment	—		—		15		—		15		—		—		44		—		44
Subsequent Default, Number of Contracts	—		—		—		—		—		—		—		—		—		—
Subsequent Default, Recorded Investment	—		—		—		—		—		—		—		—		—		—

For the Year-To-Date Period Ended:
September 30, 2017
Number of Loans	2		—		6		—		8		2		—		6		—		8
Pre-Modification Outstanding Recorded Investment	$	1,228	$	—	$	51	$	—	$	1,279	$	1,228	$	—	$	51	$	—	$	1,279
Post-Modification Outstanding Recorded Investment	1,228		—		51		—		1,279		1,228		—		51		—		1,279
Subsequent Default, Number of Contracts	—		—		—		—		—		—		—		—		—		—
Subsequent Default, Recorded Investment	—		—		—		—		—		—		—		—		—		—

September 30, 2016
Number of Loans	—		—		2		—		2
Pre-Modification Outstanding Recorded Investment	$	—	$	—	$	23	$	—	$	23
Post-Modification Outstanding Recorded Investment	—		—		23		—		23
Subsequent Default, Number of Contracts	—		—		—		—		—
Subsequent Default, Recorded Investment	—		—		—		—		—

In general, loans requiring modification are restructured to accommodate the projected ~~cashflows~~cash-flows of the borrower. NoSuch 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 September 30, ~~2017. In addition, no commitments have been made to extend credit to borrowers whose loans have been modified in a troubled debt restructuring.~~2018.

Note 4. GUARANTEES (In Thousands)

The following table presents the ~~balance for~~notional amount and fair value of Arrow's off-balance sheet commitments to extend credit and commitments under standby letters of credit ~~for the periods ended~~as of September 30, ~~2017,~~ 2018, December 31, ~~2016~~2017 and September 30, ~~2016:~~2017:

													Commitments to Extend Credit and Letters of Credit
	September 30, 2017		December 31, 2016		September 30, 2016		September 30, 2018		December 31, 2017		September 30, 2017
Notional Amount:
Commitments to Extend Credit	$	316,449	$	296,442	$	300,439	$	335,587	$	315,256	$	316,449
Standby Letters of Credit	3,672		3,445		3,483		4,016		3,526		3,672
Fair Value:
Commitments to Extend Credit	$	—	$	—	$	—	$	—	$	—	$	—
Standby Letters of Credit	18		30		31		4		23		18

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. These 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 expected to expire without being 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 commitments 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 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 September 30, ~~2017,~~ 2018, December 31, ~~2016~~2017 and September 30, ~~2016~~2017 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 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 typically range from 1% to 3% of the notional amount. Fees are collected upfront and are amortized over the life of the commitment. The carrying amount and fair values of Arrow's standby letters of credit at September 30, ~~2017,~~ 2018, December 31, ~~2016~~2017 and September 30, ~~2016, in the table above,~~2017, were ~~the same as the carrying amounts.~~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 period~~three- and nine-month periods ended September 30, ~~2017~~2018 and ~~2016~~:2017:

																																						Schedule of Comprehensive Income
	Three Months Ended September 30,										Nine Months Ended September 30,									Three Months Ended September 30,									Nine Months Ended September 30,
				Tax										Tax									Tax									Tax
	Before-Tax			(Expense)			Net-of-Tax				Before-Tax			(Expense)			Net-of-Tax			Before-Tax			(Expense)			Net-of-Tax			Before-Tax			(Expense)			Net-of-Tax
	Amount			Benefit			Amount				Amount			Benefit			Amount			Amount			Benefit			Amount			Amount			Benefit			Amount
2018
Net Unrealized Securities Holding Losses on Securities Available-for-Sale Arising During the Period																				(1,203		)	$	306		(897		)	(5,388		)	$	1,371		(4,017		)
Amortization of Net Retirement Plan Actuarial Loss																				81			(21		)	60			244			(63		)	181
Accretion of Net Retirement Plan Prior Service Credit																				27			(7		)	20			81			(21		)	60
Other Comprehensive Loss																				$	(1,095	)	$	278		$	(817	)	$	(5,063	)	$	1,287		$	(3,776	)

2017
Net Unrealized Securities Holding (Losses) Gains Arising During the Period	6			$	3		9				749			$	(284	)	465
Net Unrealized Securities Holding Gains on Securities Available-for-Sale Arising During the Period																				6			$	3		9			749			$	(284	)	465
Reclassification Adjustment for Securities Gains Included in Net Income	(10		)	4			(6		)		(10		)	4			(6		)	(10		)	4			(6		)	(10		)	4			(6		)
Amortization of Net Retirement Plan Actuarial Loss	179			(115		)	64				537			(292		)	245			179			(115		)	64			537			(292		)	245
Accretion of Net Retirement Plan Prior Service Credit	(3		)	1			(2		)		(8		)	3			(5		)	(3		)	1			(2		)	(8		)	3			(5		)
Other Comprehensive Income (Loss)	$	172		$	(107	)	$	65			$	1,268		$	(569	)	$	699

2016
Net Unrealized Securities Holding Gains (Losses) Arising During the Period	(1,264		)	$	454		(810		)		3,868			$	(1,559	)	2,309
Reclassification Adjustment for Securities Gains Included in Net Income	—			—			—			��	(144		)	56			(88		)
Amortization of Net Retirement Plan Actuarial Loss	181			(70		)	111				503			(189		)	314
Accretion of Net Retirement Plan Prior Service Credit	(3		)	2			(1		)		(7		)	2			(5		)
Other Comprehensive Income (Loss)	$	(1,086	)	$	386		$	(700	)		$	4,220		$	(1,690	)	$	2,530
Other Comprehensive Income																				$	172		$	(107	)	$	65		$	1,268		$	(569	)	$	699

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


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

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

June 30, 2018													$	(4,701	)	$	(6,259	)	$	(844	)	$	(11,804	)
Other comprehensive income or loss before reclassifications													(897		)	—			—			(897		)
Amounts reclassified from accumulated other comprehensive income																60			20			80
Net current-period other comprehensive income (loss)													(897		)	60			20			(817		)
September 30, 2018													$	(5,598	)	$	(6,199	)	$	(824	)	$	(12,621	)

June 30, 2017	$	74		$	(5,556	)	$	(718	)	$	(6,200	)	$	74		$	(5,556	)	$	(718	)	$	(6,200	)
Other comprehensive income or loss before reclassifications	9			—			—			9			9			—			—			9
Amounts reclassified from accumulated other comprehensive income	(6		)	64			(2		)	56			(6		)	64			(2		)	56
Net current-period other comprehensive income	3			64			(2		)	65
Net current-period other comprehensive income (loss)													3			64			(2		)	65
September 30, 2017	$	77		$	(5,492	)	$	(720	)	$	(6,135	)	$	77		$	(5,492	)	$	(720	)	$	(6,135	)

June 30, 2016	$	3,660		$	(7,690	)	$	(712	)	$	(4,742	)

For the Year-To-Date periods ended:

December 31, 2017													$	(1,250	)	$	(6,380	)	$	(884	)	$	(8,514	)
Other comprehensive income or loss before reclassifications	(810		)	—			—			(810		)	(4,017		)	—			—			(4,017		)
Amounts reclassified from accumulated other comprehensive income	—			111			(1		)	110			—			181			60			241
Net current-period other comprehensive income	(810		)	111			(1		)	(700		)	(4,017		)	181			60			(3,776		)
September 30, 2016	$	2,850		$	(7,579	)	$	(713	)	$	(5,442	)


For the Year-To-Date periods ended:
Amounts reclassified from accumulated other comprehensive income													$	(331	)							$	(331	)
September 30, 2018													$	(5,598	)	$	(6,199	)	$	(824	)	$	(12,621	)

December 31, 2016	$	(382	)	$	(5,737	)	$	(715	)	$	(6,834	)	$	(382	)	$	(5,737	)	$	(715	)	$	(6,834	)
Other comprehensive income or loss before reclassifications	465			—			—			465			465			—			—			465
Amounts reclassified from accumulated other comprehensive income	(6		)	245			(5		)	234			(6		)	245			(5		)	234
Net current-period other comprehensive income	459			245			(5		)	699			459			245			(5		)	699
September 30, 2017	$	77		$	(5,492	)	$	(720	)	$	(6,135	)	$	77		$	(5,492	)	$	(720	)	$	(6,135	)

December 31, 2015	$	629		$	(7,893	)	$	(708	)	$	(7,972	)
Other comprehensive income or loss before reclassifications	2,309			—			—			2,309
Amounts reclassified from accumulated other comprehensive income	(88		)	314			(5		)	221
Net current-period other comprehensive income	2,221			314			(5		)	2,530
September 30, 2016	$	2,850		$	(7,579	)	$	(713	)	$	(5,442	)

(1) All amounts are net of tax. ~~Amounts in parentheses indicate debits.~~

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

											Reclassifications Out of Accumulated Other Comprehensive Income ⁽¹⁾
	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:

September 30, 2018
Unrealized gains and losses on available-for-sale securities						$	—			Gain on Securities Transactions
						—				Total before Tax
						—				Provision for Income Taxes
						$	—			Net of Tax

Amortization of defined benefit pension items:
Prior-service costs						$	(27	)	⁽¹⁾	Salaries and Employee Benefits
Actuarial gains/(losses)						(81		)	⁽¹⁾	Salaries and Employee Benefits
						(108		)		Total before Tax
						28				Provision for Income Taxes
						$	(80	)		Net of Tax

Total reclassifications for the period						$	(80	)		Net of Tax

September 30, 2017
Unrealized gains and losses on available-for-sale securities	$	10			Gain on Securities Transactions	$	10			Gain on Securities Transactions
	10				Total before Tax	10				Total before Tax
	(4		)		Provision for Income Taxes	(4		)		Provision for Income Taxes
	$	6			Net of Tax	$	6			Net of Tax

Amortization of defined benefit pension items:
Prior-service costs	$	3		⁽²⁾	Salaries and Employee Benefits	$	3		⁽¹⁾	Salaries and Employee Benefits
Actuarial gains/(losses)	(179		)	⁽²⁾	Salaries and Employee Benefits	(179		)	⁽¹⁾	Salaries and Employee Benefits
	(176		)		Total before Tax	(176		)		Total before Tax
	114				Provision for Income Taxes	114				Provision for Income Taxes
	$	(62	)		Net of Tax	$	(62	)		Net of Tax

Total reclassifications for the period	$	(56	)		Net of Tax	$	(56	)		Net of Tax

September 30, 2016
For the Year-to-date periods ended:

September 30, 2018
Unrealized gains and losses on available-for-sale securities	$	—			Gain on Securities Transactions	$	—			Gain on Securities Transactions
	—				Total before Tax	—				Total before Tax
	—				Provision for Income Taxes	—				Provision for Income Taxes
	$	—			Net of Tax	$	—			Net of Tax

Amortization of defined benefit pension items:
Prior-service costs	$	3		⁽²⁾	Salaries and Employee Benefits	$	(81	)	⁽¹⁾	Salaries and Employee Benefits
Actuarial gains/(losses)	(181		)	⁽²⁾	Salaries and Employee Benefits	(244		)	⁽¹⁾	Salaries and Employee Benefits
	(178		)		Total before Tax	(325		)		Total before Tax
	68				Provision for Income Taxes	84				Provision for Income Taxes
	$	(110	)		Net of Tax	$	(241	)		Net of Tax

Total reclassifications for the period	$	(110	)		Net of Tax	$	(241	)		Net of Tax


For the Year-to-date periods ended:

September 30, 2017
Unrealized gains and losses on available-for-sale securities	$	10			Gain on Securities Transactions
	10				Total before Tax
	(4		)		Provision for Income Taxes
	$	6			Net of Tax

Amortization of defined benefit pension items:
Prior-service costs	$	8		⁽²⁾	Salaries and Employee Benefits
Actuarial gains/(losses)	(537		)	⁽²⁾	Salaries and Employee Benefits
	(529		)		Total before Tax
	289				Provision for Income Taxes
	$	(240	)		Net of Tax

Total reclassifications for the period	$	(234	)		Net of Tax

											Reclassifications Out of Accumulated Other Comprehensive Income ⁽¹⁾
	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


September 30, 2016
September 30, 2017
Unrealized gains and losses on available-for-sale securities	$	144			Gain on Securities Transactions	$	10			Gain on Securities Transactions
	144				Total before Tax	10				Total before Tax
	(56		)		Provision for Income Taxes	(4		)		Provision for Income Taxes
	$	88			Net of Tax	$	6			Net of Tax

Amortization of defined benefit pension items:
Prior-service costs	7			⁽²⁾	Salaries and Employee Benefits	8			⁽¹⁾	Salaries and Employee Benefits
Actuarial gains/(losses)	$	(503	)	⁽²⁾	Salaries and Employee Benefits	$	(537	)	⁽¹⁾	Salaries and Employee Benefits
	(496		)		Total before Tax	(529		)		Total before Tax
	187				Provision for Income Taxes	289				Provision for Income Taxes
	$	(309	)		Net of Tax	$	(240	)		Net of Tax

Total reclassifications for the period	$	(221	)		Net of Tax	$	(234	)		Net of Tax

(1) ~~Amounts in parentheses indicate debits to profit/loss.~~

~~(2)~~ These accumulated other comprehensive income components are included in the computation of net periodic pension cost.

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

~~Under~~Arrow has established three stock-based compensation plans: an Incentive and Non-qualified Stock Option Plan (Long Term Incentive 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 ~~2013 Long-Term~~September 27, 2018 3% stock dividend.

Long Term Incentive Plan

The Long Term Incentive Plan ~~Arrow~~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 inusually vest over a four-year period.

The following table presents the ~~first quarter~~roll forward of ~~2017~~stock options issued pursuant to ~~purchase~~the Long Term Incentive Plan by Shares and Weighted Average Exercise Prices.




Roll-Forward of Shares Outstanding:
Outstanding at January 1, 2018	356,540
Granted	56,843
Exercised	(94,742		)
Forfeited	(14,953		)
Outstanding at September 30, 2018	303,688
Exercisable at Period-End	185,547
Vested and Expected to Vest	118,141

Roll-Forward of Shares Outstanding - Weighted Average Exercise Price:
Outstanding at January 1, 2018	$	23.42
Granted	29.95
Exercised	20.85
Forfeited	26.61
Outstanding at September 30, 2018	25.24
Exercisable at Period-End	22.47
Vested and Expected to Vest	29.59

Schedule of Other Long Term Incentive Plan Information
Grants Issued During 2018 - Weighted Average Information:
Fair Value	$	5.59
Fair Value Assumptions:
Dividend Yield	2.98		%
Expected Volatility	21.55		%
Risk Free Interest Rate	2.68		%
Expected Lives (in years)	6.98

Restricted Stock Units - The Company grants restricted stock units which gives the recipient the right to receive shares of ~~common stock.~~Company stock upon vesting. The fair ~~values~~value of each restricted stock unit is the ~~options were estimated~~market value of Company stock on the date of grant. 100% of the restricted stock unit awards vest three years from the grant ~~using~~date. Once vested, the ~~Black-Scholes option-pricing model. The fair value of grants is expensed over~~restricted stock units become vested units. Unvested restricted stock unit awards will generally be forfeited if the ~~four year vesting period.~~recipient ceases to be employed by the Company, with limited exceptions.

The following table presents ~~a roll-forward~~the roll forward of restricted stock ~~option plans~~units by units and ~~grants issued during 2017:~~weighted average grant-date fair value.

Schedule of Share-based Compensation Arrangements
Stock Option Plans
Roll-Forward of Shares Outstanding:
Outstanding at January 1, 2017 366,329
Granted 55,621
Exercised (35,937 )
Forfeited —
Outstanding at September 30, 2017 386,013
Exercisable at Period-End 242,706
Vested and Expected to Vest 143,307

Roll-Forward of Shares Outstanding - Weighted Average Exercise Price:
Outstanding at January 1, 2017 $ 21.86
Granted 36.12
Exercised 20.46
Forfeited —
Outstanding at September 30, 2017 24.05
Exercisable at Period-End 21.34
Vested and Expected to Vest 28.62

Grants Issued During 2017 - Weighted Average Information:
Fair Value $ 6.25
Fair Value Assumptions:
Dividend Yield 2.72 %
Expected Volatility 21.40 %
Risk Free Interest Rate 2.25 %
Expected Lives (in years) 6.88




Roll-Forward of Restricted Stock Units
Non-vested at January 1, 2018	—
Granted	3,377
Vested	—
Canceled	—
Non-vested at September 30, 2018	3,377

Roll-Forward of Non-vested Restricted Stock Units - Weighted Average Fair Value:
Non-vested at January 1, 2018	$	—
Granted	32.57
Vested	—
Canceled	—
Non-vested at September 30, 2018	32.57

The following table presents information on the amounts expensed for the periods ended September 30, ~~2017~~2018 and ~~2016~~:2017:


Share-Based Compensation Expense	Share-Based Compensation Expense									Share-Based Compensation Expense
		For the Three Months Ended September 30,				For the Nine Months Ended September 30,					For the Three Months Ended September 30,				For the Nine Months Ended September 30,
		2017		2016		2017		2016			2018		2017		2018		2017
Share-Based Compensation Expense		$	90	$	71	$	262	$	215		$	89	$	90	$	267	$	262

~~Arrow also sponsors an~~

Employee Stock Purchase Plan

Arrow sponsors an ESPP under which employees 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 ESOP. 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 annual payments of principal and interest through 2018. As the debt is repaid, shares are 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 reported as unallocated ESOP shares in stockholders' equity. As shares are released from collateral, Arrow reports compensation expense equal to the current average market price of the shares, and the shares become outstanding for earnings per share computations.

Note 7. RETIREMENT PLANS (Dollars in Thousands)

Arrow sponsors qualified and nonqualified 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. 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. 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, 2017, Arrow utilized the mortality assumption from the RP-2014 Mortality Table for annuitants and non-annuitants but updated the projected generational mortality improvements by using Scale MP-2017. Revision of this assumption effective December 31, 2016 resulted in a decrease in the Company's pension and postretirement liabilities.

The following tables provide the components of net periodic benefit costs for the ~~three~~three- and nine-month periods ended September 30, ~~2017~~2018 and ~~2016.~~2017.

Select
Employees' Executive Postretirement
Pension Retirement Benefit
Plan Plan Plans
Net Periodic Benefit Cost
For the Three Months Ended September 30, 2017:
Service Cost $ 350
$ 10
$ 37
Interest Cost 362
55
75
Expected Return on Plan Assets (800 ) —
—
Amortization of Prior Service (Credit) Cost (14 ) 14
(3 )
Amortization of Net Loss 148
31
—
Net Periodic Benefit Cost $ 46
$ 110
$ 109

Plan Contributions During the Period $ —
$ 116
$ 65

For the Three Months Ended September 30, 2016:
Service Cost $ 376
$ 8
$ 63
Interest Cost 420
56
83
Expected Return on Plan Assets (828 ) —
—
Amortization of Prior Service (Credit) Cost (14 ) 14
(3 )
Amortization of Net Loss 140
28
—
Net Periodic Benefit Cost $ 94
$ 106
$ 143

Plan Contributions During the Period $ —
$ 131
$ 47

Net Periodic Benefit Cost
For the Nine Months Ended September 30, 2017:
Service Cost $ 1,050
$ 30
$ 110
Interest Cost 1,085
164
224
Expected Return on Plan Assets (2,399 ) —
—
Amortization of Prior Service Cost (Credit) (43 ) 43
(8 )
Amortization of Net Loss 443
94
—
Net Periodic Benefit Cost $ 136
$ 331
$ 326

Plan Contributions During the Period $ —
$ 345
$ 295

Estimated Future Contributions in the Current Fiscal Year $ —
$ 115
$ 98

For the Nine Months Ended September 30, 2016:
Service Cost $ 1,127
$ 24
$ 188
Interest Cost 1,262
163
178
Expected Return on Plan Assets (2,483 ) —
—
Amortization of Prior Service (Credit) Cost (42 ) 43
(8 )
Amortization of Net Loss 419
84
—
Net Periodic Benefit Cost $ 283
$ 314
$ 358

Plan Contributions During the Period $ —
$ 350
$ 197



				Select
	Employees'			Executive		Postretirement
	Pension			Retirement		Benefit
	Plan			Plan		Plans
Net Periodic Benefit Cost
For the Three Months Ended September 30, 2018:
Service Cost ¹	$	389		$	104	$	34
Interest Cost ²	400			48		81
Expected Return on Plan Assets ²	(841		)	—		—
Amortization of Prior Service (Credit) Cost ²	(12		)	14		25
Amortization of Net Loss ²	48			33		—
Net Periodic (Benefit) Cost	$	(16	)	$	199	$	140

Plan Contributions During the Period	$	—		$	116	$	56

For the Three Months Ended September 30, 2017:
Service Cost ¹	$	350		$	10	$	37
Interest Cost ²	362			55		75
Expected Return on Plan Assets ²	(800		)	—		—
Amortization of Prior Service (Credit) Cost ²	(14		)	14		(3		)
Amortization of Net Loss ²	148			31		—
Net Periodic (Benefit) Cost	$	46		$	110	$	109

Plan Contributions During the Period	$	—		$	116	$	65

Net Periodic Benefit Cost
For the Nine Months Ended September 30, 2018:
Service Cost ¹	$	1,168		$	311	$	102
Interest Cost ²	1,199			152		248
Expected Return on Plan Assets ²	(2,522		)	—		—
Amortization of Prior Service (Credit) Cost ²	(37		)	43		75
Amortization of Net Loss ²	145			99		—
Net Periodic (Benefit) Cost	$	(47	)	$	605	$	425

Plan Contributions During the Period	$	—		$	349	$	175

Estimated Future Contributions in the Current Fiscal Year	$	—		$	—	$	—



For the Nine Months Ended September 30, 2017:
Service Cost ¹	$	1,050		$	30	$	110
Interest Cost ²	1,085			164		224
Expected Return on Plan Assets ²	(2,399		)	—		—
Amortization of Prior Service (Credit) Cost ²	(43		)	43		(8		)
Amortization of Net Loss ²	443			94		—
Net Periodic (Benefit) Cost	$	136		$	331	$	326

Plan Contributions During the Period	$	—		$	345	$	295

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 ~~were~~are not required to make a contribution to the qualified pension plan in ~~2017,~~2018, and currently, we do not expect to make additional contributions in ~~2017.~~2018. 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~~”(“EPS”) for periods ended September 30, ~~2017~~2018 and ~~2016~~.2017. All share and per share amounts have been adjusted for the September ~~28, 2017~~27, 2018 3% stock dividend.

																	Earnings Per Share
	Quarterly Period Ended:				Year-to-Date Period Ended:				Quarterly Period Ended:				Year-to-Date Period Ended:
	September 30, 2017		September 30, 2016		September 30, 2017		September 30, 2016		September 30, 2018		September 30, 2017		September 30, 2018		September 30, 2017
Earnings Per Share - Basic:
Net Income	$	7,416	$	6,738	$	21,255	$	19,934	$	9,260	$	7,416	$	27,521	$	21,255
Weighted Average Shares - Basic	13,889		13,810		13,889		13,775		14,431		14,305		14,393		14,306
Earnings Per Share - Basic	$	0.53	$	0.49	$	1.53	$	1.45	$	0.64	$	0.52	$	1.91	$	1.49

Earnings Per Share - Diluted:
Net Income	$	7,416	$	6,738	$	21,255	$	19,934	$	9,260	$	7,416	$	27,521	$	21,255
Weighted Average Shares - Basic	13,889		13,810		13,889		13,775		14,431		14,305		14,393		14,306
Dilutive Average Shares Attributable to Stock Options	77		91		92		67		89		80		86		95
Weighted Average Shares - Diluted	13,966		13,901		13,981		13,842		14,520		14,385		14,479		14,401
Earnings Per Share - Diluted	$	0.53	$	0.48	$	1.52	$	1.44	$	0.64	$	0.52	$	1.90	$	1.48

Note 9. FAIR VALUE OF FINANCIAL INSTRUMENTS (In Thousands)

FASB ASC Subtopic 820-10 defines fair value, establishes a framework for measuring fair value in ~~Generally Accepted Accounting Principles (GAAP)~~GAAP and requires certain disclosures about fair value measurements. We do not have any 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 September 30, ~~2017,~~ 2018 were securities available-for-sale and equity securities and for December 31, ~~2016~~2017 and September 30, ~~2016 were~~2017 securities available-for-sale. 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)		Total Gains (Losses)			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 Recurring Basis:
September 30, 2018
Securities Available-for Sale:
U.S. Government & Agency Obligations												$	59,602	$	—	$	59,602	$	—
State and Municipal Obligations												2,548		—		2,548		—
Mortgage-Backed Securities												277,461		—		277,461		—
Corporate and Other Debt Securities												800		—		800		—
Total Securities Available-for-Sale												340,411		—		340,411		—
Equity Securities												1,916		—		1,916		—
Total Securities Measured on a Recurring Basis												$	342,327	$	—	$	342,327	$	—
December 31, 2017
Securities Available-for Sale:
U.S. Government & Agency Obligations												$	59,894	$	—	$	59,894	$	—
State and Municipal Obligations												10,349		—		10,349		—
Mortgage-Backed Securities												227,596		—		227,596		—
Corporate and Other Debt Securities												800		—		800		—
Equity Securities												1,561		—		1,561		—
Total Securities Available-for Sale												$	300,200	$	—	$	300,200	$	—
September 30, 2017
Securities Available-for Sale:
U.S. Government & Agency Obligations	$	146,978	$	64,730	$	82,248	$	—				$	146,978	$	64,730	$	82,248	$	—
State and Municipal Obligations	11,902		—		11,902		—					11,902		—		11,902		—
Mortgage-Backed Securities - Residential	152,806		—		152,806		—
Mortgage-Backed Securities												152,806		—		152,806		—
Corporate and Other Debt Securities	2,299		—		2,299		—					2,299		—		2,299		—
Mutual Funds and Equity Securities	1,474		—		1,474		—
Total Securities Available-for-Sale	$	315,459	$	64,730	$	250,729	$	—
December 31, 2016
Securities Available-for Sale:
U.S. Government & Agency Obligations	$	147,377	$	54,706	$	92,671	$	—
State and Municipal Obligations	27,690		—		27,690		—
Mortgage-Backed Securities - Residential	167,239		—		167,239		—
Corporate and Other Debt Securities	3,308		—		3,308		—
Mutual Funds and Equity Securities	1,382		—		1,382		—
Total Securities Available-for Sale	$	346,996	$	54,706	$	292,290	$	—
September 30, 2016
Securities Available-for Sale:
U.S. Government & Agency Obligations	$	153,926	$	—	$	153,926	$	—
State and Municipal Obligations	31,628		—		31,628		—
Mortgage-Backed Securities - Residential	148,087		—		148,087		—
Corporate and Other Debt Securities	4,299		—		4,299		—
Mutual Funds and Equity Securities	1,250		—		1,250		—
Equity Securities												1,474		—		1,474		—
Total Securities Available-for Sale	$	339,190	$	—	$	339,190	$	—				$	315,459	$	64,730	$	250,729	$	—

Fair Value of Assets and Liabilities Measured on a Nonrecurring Basis:
September 30, 2018
Collateral Dependent Impaired Loans												$	857	$	—	$	—	$	857	$	(58	)
Other Real Estate Owned and Repossessed Assets, Net												1,220		—		—		1,220		(559		)
December 31, 2017
Collateral Dependent Impaired Loans												$	—	$	—	$	—	$	—	$	—
Other Real Estate Owned and Repossessed Assets, Net												$	1,847	$	—	—		1,847		$	(569	)
September 30, 2017
Collateral Dependent Impaired Loans	$	1,502	$	—	$	—	$	1,502	$	(138	)	$	1,502	$	—	$	—	$	1,502	$	(138	)
Other Real Estate Owned and Repossessed Assets, Net	1,713		—		—		1,713		(655		)	1,713		—		—		1,713		(655		)
December 31, 2016
Collateral Dependent Impaired Loans	$	—	$	—	$	—	$	—	$	—
Other Real Estate Owned and Repossessed Assets, Net	$	1,686	$	—	—		1,686		$	(587	)
September 30, 2016
Collateral Dependent Impaired Loans	$	2,640	$	—	$	—	$	2,640	$	(240	)
Other Real Estate Owned and Repossessed Assets, Net	1,016		—		—		1,016		(319		)

We determine the fair value of financial instruments 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; ~~and~~

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 $59,894 were incorrectly classified as Level 1 securities, instead of the correct classification as Level 2 securities. The Company corrected the fair value leveling disclosure the year ended December 31, 2017 to reflect the correction of this classification. 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 September 30, ~~2017,~~2018, December 31, ~~2016~~2017 and September 30, ~~2016.~~2017.

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 ~~service uses~~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.

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

~~The Company uses the fair value of underlying collateral to estimate the specific reserves for collateral dependent impaired loans.~~ The fair value of ~~underlying~~ collateral ~~is generally determined through independent~~dependent impaired loans and other real estate owned was based on third-party appraisals ~~which generally include various Level 3 inputs which are not identifiable.~~less estimated cost to sell. The appraisals may be adjusted by management for qualitative factors such as economic conditions and estimated liquidation ~~expenses ranging from 15% to 25%. Based on the valuation techniques used, the fair value measurements for collateral dependent impaired loans are classified as Level 3.~~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 ~~a quarterly~~an annual basis, with no impairment recognized for these assets at September 30, ~~2017,~~ 2018, December 31, ~~2016~~2017 and September 30, ~~2016.~~2017.

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, effective for the first quarter of 2018, 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. 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 the discounted value of contractual cash flows. The discount rate is estimated using current rates on FHLBNY advances with similar maturities and call features.

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

Carrying
Amount

Fair
Value
Level 1 Level 2 Level 3
September 30, 2017
Cash and Cash Equivalents $ 80,666
$ 80,666
$ 80,666
$ —
$ —
Securities Available-for-Sale 315,459
315,459
64,730
250,729
—
Securities Held-to-Maturity 341,526
343,899
—
343,899
—
Federal Home Loan Bank and Federal
  Reserve Bank Stock
6,704
6,704
—
6,704
—
Net Loans 1,891,104
1,870,379
—
—
1,870,379
Accrued Interest Receivable 7,692
7,692
—
7,692
—
Deposits 2,307,116
2,299,011
—
2,299,011
—
Federal Funds Purchased and Securities
  Sold Under Agreements to Repurchase
61,419
61,419
—
61,419
—
Federal Home Loan Bank Overnight Advances 33,000
33,000
—
33,000
—
Federal Home Loan Bank Term Advances 55,000
55,110
—
55,110
—
Junior Subordinated Obligations Issued
  to Unconsolidated Subsidiary Trusts
20,000
20,000
—
20,000
—
Accrued Interest Payable 260
260
—
260
—

December 31, 2016
Cash and Cash Equivalents $ 57,355
$ 57,355
$ 57,355
$ —
$ —
Securities Available-for-Sale 346,996
346,996
54,706
292,290
—
Securities Held-to-Maturity 345,427
343,751
—
343,751
—
Federal Home Loan Bank and Federal
  Reserve Bank Stock
10,912
10,912
—
10,912
—
Net Loans 1,736,256
1,720,078
—
—
1,720,078
Accrued Interest Receivable 6,684
6,684
—
6,684
—
Deposits 2,116,546
2,109,557
—
2,109,557
—
Federal Funds Purchased and Securities
  Sold Under Agreements to Repurchase
35,836
35,836
—
35,836
—
Federal Home Loan Bank Overnight Advances 123,000
123,000
—
123,000
—
Federal Home Loan Bank Term Advances 55,000
55,118
—
55,118
—
Junior Subordinated Obligations Issued
  to Unconsolidated Subsidiary Trusts
20,000
20,000
—
20,000
—
Accrued Interest Payable 247
247
—
247
—

September 30, 2016
Cash and Cash Equivalents $ 102,059
$ 102,059
$ 102,059
$ —
$ —
Securities Available-for-Sale 339,190
339,190
—
339,190
—
Securities Held-to-Maturity 338,238
347,441
—
347,441
—
Federal Home Loan Bank and Federal
  Reserve Bank Stock
5,371
5,371
—
5,371
—
Net Loans 1,690,241
1,696,929
—
—
1,696,929
Accrued Interest Receivable 7,046
7,046
—
7,046
—
Deposits 2,213,187
2,207,985
—
2,207,985
—
Federal Funds Purchased and Securities
  Sold Under Agreements to Repurchase
38,589
38,589
—
38,589
—
Federal Home Loan Bank Overnight Advances —
—
—
—
—
Federal Home Loan Bank Term Advances 55,000
55,955
—
55,955
—
Junior Subordinated Obligations Issued
  to Unconsolidated Subsidiary Trusts
20,000
20,000
—
20,000
—
Accrued Interest Payable 247
247
—
247
—

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

Securities held-to-maturity are fair valued 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.

Fair values for loans are estimated for portfolios of loans with similar financial characteristics. Loans are segregated by type such as commercial, commercial real estate, residential mortgage, indirect 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 discounting scheduled cash flows through the estimated maturity using estimated market discount rates that reflect the credit and interest rate risk inherent in the loan. The estimate of maturity is based on historical experience with repayments for each loan classification, modified, as required, by an estimate of the effect of current economic and lending conditions. 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.~~

~~Based on Arrow~~’s capital adequacy, 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.



Schedule of Fair Values by Balance Sheet Grouping
					Fair Value Hierarchy
	Book Value		Fair Value		Level 1		Level 2		Level 3
September 30, 2018
Cash and Cash Equivalents	$	92,295	$	92,295	$	92,295	$	—	$	—
Securities Available-for-Sale	340,411		340,411		—		340,411		—
Securities Held-to-Maturity	289,952		282,719		—		282,719		—
Equity Securities	1,916		1,916		—		1,916		—
Federal Home Loan Bank and Federal Reserve Bank Stock	10,866		10,866		—		10,866		—
Net Loans	2,106,097		2,030,278		—		—		2,030,278
Accrued Interest Receivable	8,028		8,028		—		8,028		—
Deposits	2,407,855		2,398,987		—		2,398,987		—
Federal Funds Purchased and Securities Sold Under Agreements to Repurchase	62,503		62,503		—		62,503		—
Federal Home Loan Bank Overnight Advances	131,000		131,000		—		131,000		—
Federal Home Loan Bank Term Advances	45,000		44,488		—		44,488		—
Junior Subordinated Obligations Issued to Unconsolidated Subsidiary Trusts	20,000		20,000		—		20,000		—
Accrued Interest Payable	485		485		—		485		—

December 31, 2017
Cash and Cash Equivalents	$	72,838	$	72,838	$	72,838	$	—	$	—
Securities Available-for-Sale	300,200		300,200		—		300,200		—
Securities Held-to-Maturity	335,907		335,901		—		335,901		—
Federal Home Loan Bank and Federal Reserve Bank Stock	9,949		9,949		—		9,949		—
Net Loans	1,932,184		1,901,046		—		—		1,901,046
Accrued Interest Receivable	6,753		6,753		—		6,753		—
Deposits	2,245,116		2,236,548		—		2,236,548		—
Federal Funds Purchased and Securities Sold Under Agreements to Repurchase	64,966		64,966		—		64,966		—
Federal Home Loan Bank Overnight Advances	105,000		105,000		—		105,000		—
Federal Home Loan Bank Term Advances	55,000		54,781		—		54,781		—
Junior Subordinated Obligations Issued to Unconsolidated Subsidiary Trusts	20,000		20,000		—		20,000		—
Accrued Interest Payable	410		410		—		410		—

September 30, 2017
Cash and Cash Equivalents	$	80,666	$	80,666	$	80,666	$	—	$	—
Securities Available-for-Sale	315,459		315,459		64,730		250,729		—
Securities Held-to-Maturity	341,526		343,899		—		343,899		—
Federal Home Loan Bank and Federal Reserve Bank Stock	6,704		6,704		—		6,704		—
Net Loans	1,891,104		1,870,379		—		—		1,870,379
Accrued Interest Receivable	6,563		7,692		—		7,692		—
Deposits	2,307,116		2,299,011		—		2,299,011		—
Federal Funds Purchased and Securities Sold Under Agreements to Repurchase	61,419		61,419		—		61,419		—
Federal Home Loan Bank Overnight Advances	33,000		33,000		—		33,000		—
Federal Home Loan Bank Term Advances	55,000		55,110		—		55,110		—
Junior Subordinated Obligations Issued to Unconsolidated Subsidiary Trusts	20,000		20,000		—		20,000		—
Accrued Interest Payable	260		260		—		260		—

Report of Independent Registered Public Accounting Firm

~~The~~To the Stockholders and Board of Directors ~~and Stockholders~~

Arrow Financial Corporation:

Results of Review of Interim Financial Information

We have reviewed the consolidated balance ~~sheets~~sheet of Arrow Financial Corporation and subsidiaries (the Company) as of September 30, ~~2017~~2018 and ~~2016,~~2017, the related consolidated statements of income and comprehensive income for the three-month and nine-month periods ended September 30, ~~2017~~2018 and ~~2016,~~2017, and the related consolidated statements of changes in stockholders’ equity and cash flows for the nine-month periods ended September 30, 2018 and 2017, and ~~2016. These~~the related notes (collectively, the consolidated interim financial ~~statements~~information). Based on our reviews, we are not aware of any material modifications that should be made to the ~~responsibility of the Company’s management.~~

consolidated interim financial information for it to be in conformity with U.S. generally accepted accounting principles.

We ~~conducted our reviews~~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, 2017, 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 12, 2018, 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, 2017, 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 ~~Public Company Accounting Oversight Board (United States),~~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~~

Based on our reviews, we are not aware of any material modifications that should be made to the consolidated financial statements referred to above for them to be in conformity with U.S. generally accepted accounting principles.

We have previously audited, in accordance with standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of Arrow Financial Corporation and subsidiaries as of December 31, 2016, 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 14, 2017, 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, 2016, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.opinion.

/s/ KPMG LLP

Albany, New York

November ~~7, 2017~~8, 2018

Item 2.

ARROW FINANCIAL CORPORATION AND SUBSIDIARIES

MANAGEMENT'S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

September 30, ~~2017~~2018

Note on Terminology - In this Quarterly Report on Form 10-Q, the terms ~~“Arrow,” “the~~"Arrow," "the registrant,~~” “the~~" "the company,~~” “we,” “us,”~~" "we," "us," and ~~“our”~~"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 performance is compared with that of our ~~“peer group”~~"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 ~~338~~329 domestic bank holding companies with $1 to $3 billion in total consolidated assets as identified in the Federal Reserve Board’s ~~“Bank~~"Bank Holding Company Performance ~~Report”~~Report" for June 30, ~~2017~~2018 (the most recent such Report currently available), and peer group data contained herein has been derived from such Report.

The Company and Its Subsidiaries - Arrow is a two-bank holding company headquartered in Glens Falls, New York. Our 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. Our non-bank subsidiaries include ~~Capital Financial Group, Inc. (an insurance agency specializing in selling and servicing group health care policies);~~ Upstate Agency, LLC (an insurance agency specializing in property insurance, casualty insurance and ~~casualty insurance)~~selling and servicing group health care policies); North Country Investment Advisers, Inc. (a registered investment adviser that provides investment advice to our proprietary mutual funds); Glens Falls National Community Development Corporation (which invests in qualifying community development projects); and Arrow Properties, Inc. (a real estate investment trust, or REIT). Our holding company also owns directly two subsidiary business trusts, organized in 2003 and 2004 to issue 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 beliefs, assumptions, expectations, estimates and projections about the future. These statements are ~~“forward-looking statements”~~"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 ~~“expects,” “believes,” “anticipates,” “estimates”~~"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 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~~"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 general perceptions of market conditions and trends in business activity, both our own and in the banking industry generally, as well as current management strategies for future operations and development.



~~Examples of Forward-Looking Statements:~~
~~Topic~~	~~Page~~	~~Location~~
~~Future compliance with regulatory capital standards~~	46	~~First paragraph under "Regulatory Capital and Increase in Stockholders' Equity"~~
~~VISA~~	47	~~"VISA Class B Common Stock"~~
~~Impact of market rate structure on net interest margin, loan yields and deposit rates~~	51	~~All paragraphs under "Quarterly Taxable Equivalent Yield on Loans"~~
~~Impact of market rate structure on net interest margin, loan yields and deposit rates~~	65	~~Last paragraph under "Quantitative and Qualitative Disclosures about Market Risk~~
~~Future level of residential real estate loans~~	50	~~Both paragraphs under "Residential Real Estate Loans"~~
~~Future level of indirect consumer loans~~	51	~~Last paragraph under "Consumer Loans"~~
~~Future level of commercial loans~~	51	~~Third paragraph under "Commercial Loans, and Commercial Real Estate Loans"~~
~~Impact of changes in mortgage rates~~	53	~~First paragraph under "Investment Sales, Purchases and Maturities"~~
~~Provision for loan losses~~	54	~~First paragraph in section~~
~~Future level of nonperforming assets~~	55	~~Last four paragraphs under "Risk Elements"~~
~~Liquidity~~	58	~~Last paragraph under "LIQUIDITY"~~
~~Fees for other services to customers~~	~~60, 63~~	~~Second paragraph under "Noninterest Income"~~

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


a.	rapid and dramatic changes in economic and market conditions ~~such as the U.S. economy experienced during the financial crisis of 2008-2010;~~

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

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

significant changes in banking ~~corporate income tax,~~ 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 ("EGRRCPA"), the Dodd-Frank ~~Act)~~Wall Street Reform and Consumer Protection Act ("Dodd-Frank") and the Tax Cuts and Jobs Act of 2017 (the "Tax Act")) or the modification or elimination of pre-existing measures;


e.	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");


f.	~~enhanced competition from unforeseen sources (e.g., so-called Fintech enterprises);~~cyber and physical security breaches;


g.	competition from other sources (e.g., so-called Fintech enterprises);


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


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

Readers are cautioned not to place undue reliance on forward-looking statements in this Report, which speak only as of the date hereof. We undertake no general obligation to revise or update the forward-looking statements contained in this Report to reflect the occurrence of unanticipated events at any point in the future. This Quarterly Report should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, ~~2016~~.2017 and our other filings with the SEC.

USE OF NON-GAAP FINANCIAL MEASURES

The ~~Securities and Exchange Commission (SEC)~~SEC has adopted Regulation G, which applies to all public disclosures, including earnings releases, made by registered companies that contain “~~non-GAAP~~"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~~’sCompany’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~~"non-GAAP financial ~~measures~~”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 ~~new~~ rules, although we are 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~~Historically, this adjustment ishas been considered helpful in comparing the financial institution's net interest income (before tax) to that of another institution or in analyzing the ~~institution~~’sinstitution’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, or 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 (before tax) 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/or to better demonstrate a single ~~institution~~’sinstitution’s performance over time. ~~We follow~~Arrow follows these practices. As a result of the reduced federal corporate tax rates enacted by the Tax Act, tax-equivalent net interest income and the resulting net interest margin on a tax-equivalent basis have become less comparable to prior period levels when analyzing a financial institution’s performance over time. While Arrow continues to calculate, publish, and monitor these tax-equivalent financial performance measures, all users of this information should be aware of the non-comparative nature of post-Tax Act period results. Arrow presents net interest income and net interest margin on a GAAP basis in the relative sections of this Report in order to provide a consistently comparable performance measure over time as these measures are not effected by federal income tax rates.

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 these adjustments.

Tangible Book Value per Share: Tangible equity is total ~~stockholders~~’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~~’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, we 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 the impact of certain transactions or other material items of income or expense that are unusual or unlikely to be repeated. We do so only if we believe 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 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 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	9/30/2017			6/30/2017			3/31/2017			12/31/2016			9/30/2016			9/30/2018			6/30/2018			3/31/2018			12/31/2017			9/30/2017
Net Income	$	7,416		$	7,208		$	6,631		$	6,600		$	6,738		$	9,260		$	9,730		$	8,531		$	8,071		$	7,416
Transactions Recorded in Net Income (Net of Tax):
Net Gain (Loss) on Securities Transactions	6			—			—			(101		)	—
Net Realized Gain (Loss) on Available-for-Sale Securities																—			—			—			(278		)	6
Net Unrealized Gain on Equity Securities																85			166			13			—			—
Tax Benefit from Net Deferred Tax Liability Revaluation																—			—			—			1,116			—

Share and Per Share Data:⁽¹⁾
Period End Shares Outstanding	13,891			13,900			13,886			13,887			13,828			14,441			14,424			14,368			14,348			14,308
Basic Average Shares Outstanding	13,889			13,890			13,889			13,844			13,810			14,431			14,394			14,354			14,322			14,305
Diluted Average Shares Outstanding	13,966			13,975			14,001			13,972			13,901			14,520			14,480			14,436			14,426			14,385
Basic Earnings Per Share	$	0.53		$	0.52		$	0.48		$	0.48		$	0.49		$	0.64		$	0.68		$	0.59		$	0.56		$	0.52
Diluted Earnings Per Share	0.53			0.52			0.47			0.47			0.48			0.64			0.67			0.59			0.56			0.52
Cash Dividend Per Share	0.243			0.243			0.243			0.243			0.236			0.252			0.243			0.243			0.243			0.236

Selected Quarterly Average Balances:
Interest-Bearing Deposits at Banks	27,143			24,480			23,565			34,731			21,635			30,522			28,543			27,978			27,047			27,143
Investment Securities	677,368			684,570			695,615			684,906			696,712			636,847			647,913			642,442			660,043			677,368
Loans	1,892,766			1,842,543			1,781,113			1,726,738			1,680,850			2,089,651			2,026,598			1,971,240			1,930,590			1,892,766
Deposits	2,193,778			2,206,365			2,161,798			2,160,156			2,063,832			2,279,709			2,325,202			2,305,736			2,284,206			2,193,778
Other Borrowed Funds	262,864			207,270			205,436			157,044			209,946			314,304			219,737			184,613			187,366			262,864
Stockholders’ Equity	243,801			239,396			235,257			230,198			228,048			263,139			256,358			251,109			247,253			243,801
Total Assets	2,725,653			2,677,843			2,626,470			2,572,425			2,528,124			2,879,854			2,823,061			2,763,706			2,744,180			2,725,653
Return on Average Assets, annualized	1.08		%	1.08		%	1.02		%	1.02		%	1.06		%	1.28		%	1.38		%	1.25		%	1.17		%	1.08		%
Return on Average Equity, annualized	12.07		%	12.08		%	11.43		%	11.41		%	11.75		%	13.96		%	15.22		%	13.78		%	12.95		%	12.07		%
Return on Tangible Equity, annualized ⁽²⁾	13.40		%	13.45		%	12.76		%	12.77		%	13.18		%
Return on Average Tangible Equity, annualized ⁽²⁾																15.36		%	16.80		%	15.24		%	14.36		%	13.40		%
Average Earning Assets	2,597,277			2,551,593			2,500,293			2,446,375			2,399,197			2,757,020			2,703,054			2,641,660			2,617,680			2,597,277
Average Paying Liabilities	2,012,802			2,005,421			1,977,628			1,933,974			1,892,583			2,110,924			2,100,085			2,050,661			2,029,811			2,012,802
Interest Income																24,495			23,590			22,418			22,135			21,599
Tax-Equivalent Adjustment ⁽³⁾																376			468			491			980			966
Interest Income, Tax-Equivalent ⁽³⁾	22,565			21,875			20,945			20,709			20,222			24,871			24,058			22,909			23,115			22,565
Interest Expense	1,949			1,699			1,536			1,404			1,405			3,498			2,628			2,016			1,821			1,949
Net Interest Income																20,997			20,962			20,402			20,314			19,650
Net Interest Income, Tax-Equivalent ⁽³⁾	20,616			20,176			19,409			19,305			18,817			21,373			21,430			20,893			21,294			20,616
Tax-Equivalent Adjustment ⁽³⁾	966			949			948			939			940
Net Interest Margin, annualized ⁽³⁾	3.15		%	3.17		%	3.15		%	3.14		%	3.12		%
Net Interest Margin, annualized																3.02		%	3.11		%	3.13		%	3.08		%	3.00		%
Net Interest Margin, Tax Equivalent, annualized ⁽³⁾																3.08		%	3.18		%	3.21		%	3.23		%	3.15		%

Efficiency Ratio Calculation: ⁽⁴⁾
Noninterest Expense	$	15,548		$	15,637		$	15,475		$	15,272		$	15,082		$	16,026		$	16,192		$	15,955		$	16,045		$	15,548
Less: Intangible Asset Amortization	69			70			71			73			74			65			66			67			69			69
Net Noninterest Expense	15,479			15,567			15,404			15,199			15,008			15,961			16,126			15,888			15,976			15,479
Net Interest Income, Tax-Equivalent ⁽³⁾	20,616			20,176			19,409			19,305			18,817			21,373			21,430			20,893			21,294			20,616
Noninterest Income	7,141			7,057			6,695			6,648			7,114			7,350			7,911			6,888			6,752			7,141
Less: Net Securities Gain (Loss)	10			—			—			(166		)	—			—			—			—			(458		)	10
Less: Net Gain on Equity Securities																114			223			18			—			—
Net Gross Income	27,747			27,233			26,104			26,119			25,931			28,609			29,118			27,763			28,504			27,747
Efficiency Ratio (Non-GAAP)	55.79		%	57.16		%	59.01		%	58.19		%	57.88		%
Efficiency Ratio ⁽⁴⁾																55.79		%	55.38		%	57.23		%	56.05		%	55.79		%

Period-End Capital Information:
Total Stockholders’ Equity (i.e. Book Value)	$	244,648		$	240,752		$	236,111		$	232,852		$	229,208		$	264,810		$	259,488		$	252,734		$	249,603		$	244,648
Book Value per Share ⁽¹⁾	17.61			17.32			17.00			16.77			16.58			18.34			17.99			17.59			17.40			17.10
Goodwill and Other Intangible Assets, net	24,268			24,355			24,448			24,569			24,675			23,827			23,933			24,045			24,162			24,268
Tangible Book Value per Share ^(1,2)	15.86			15.57			15.24			15.00			14.79			16.69			16.33			15.92			15.71			15.40

Capital Ratios:⁽⁵⁾
Tier 1 Leverage Ratio	9.30		%	9.35		%	9.37		%	9.47%			9.44%			9.67		%	9.65		%	9.62		%	9.49		%	9.30		%
Common Equity Tier 1 Capital Ratio	12.70		%	12.68		%	12.84		%	12.97%			12.80%			12.89		%	13.01		%	12.97		%	12.89		%	12.70		%
Tier 1 Risk-Based Capital Ratio	13.79		%	13.79		%	13.99		%	14.14%			13.98%			13.90		%	14.04		%	14.03		%	13.97		%	13.79		%
Total Risk-Based Capital Ratio	14.77		%	14.77		%	14.98		%	15.15%			14.99%			14.90		%	15.06		%	15.04		%	14.99		%	14.77		%

Assets Under Trust Administration and Investment Management	$	1,411,608		$	1,356,262		$	1,333,690		$	1,301,408		$	1,284,051
Assets Under Trust Administration & Investment Mgmt																$	1,551,289		$	1,479,753		$	1,470,191		$	1,452,994		$	1,411,608

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 28, 2017, 3% stock dividend.																Share and Per Share Data have been restated for the September 27, 2018, 3% stock dividend.

2.	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 38.																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 40.
		9/30/2017			6/30/2017			3/31/2017			12/31/2016			9/30/2016
	Total Stockholders' Equity (GAAP)	$	244,648		$	240,752		$	236,111		$	232,852		$	229,208			9/30/2018			6/30/2018			3/31/2018			12/31/2017			9/30/2017
	Less: Goodwill and Other Intangible assets, net	24,268			24,355			24,448			24,569			24,675			Total Stockholders' Equity (GAAP)	$	264,810		$	259,488		$	252,734		$	249,603		$	244,648
	Tangible Equity (Non-GAAP)	$	220,380		$	216,397		$	211,663		$	208,283		$	204,533		Less: Goodwill and Other Intangible assets, net	23,827			23,933			24,045			24,162			24,268
																	Tangible Equity (Non-GAAP)	$	240,983		$	235,555		$	228,689		$	225,441		$	220,380
	Period End Shares Outstanding	13,891			13,900			13,886			13,887			13,828
	Tangible Book Value per Share (Non-GAAP)	$	15.86		$	15.57		$	15.24		$	15.00		$	14.79		Period End Shares Outstanding	14,441			14,424			14,368			14,348			14,308
	Net Income	7,416			7,208			6,631			6,600			6,738			Tangible Book Value per Share (Non-GAAP)	$	16.69		$	16.33		$	15.92		$	15.71		$	15.40
	Return on Tangible Equity (Net Income/Tangible Equity - Annualized)	13.40		%	13.45		%	12.76		%	12.77		%	13.18		%
3.	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 38.																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 40.
		9/30/2017			6/30/2017			3/31/2017			12/31/2016			9/30/2016				9/30/2018			6/30/2018			3/31/2018			12/31/2017			9/30/2017
	Interest Income (GAAP)	$	21,599		$	20,926		$	19,997		$	19,770		$	19,282		Net Interest Income (GAAP)	$	20,997		$	20,962		$	20,402		$	20,314		$	19,650
	Add: Tax-Equivalent adjustment (Non-GAAP)	966			949			948			939			940			Add: Tax-Equivalent adjustment (Non-GAAP)	376			468			491			980			966
	Interest Income - Tax Equivalent (Non-GAAP)	$	22,565		$	21,875		$	20,945		$	20,709		$	20,222		Net Interest Income - Tax Equivalent (Non-GAAP)	$	21,373		$	21,430		$	20,893		$	21,294		$	20,616
	Net Interest Income (GAAP)	$	19,650		$	19,227		$	18,461		$	18,366		$	17,877		Average Earning Assets	$	2,757,020		$	2,703,054		$	2,641,660		$	2,617,680		$	2,597,277
	Add: Tax-Equivalent adjustment (Non-GAAP)	966			949			948			939			940			Net Interest Margin (Non-GAAP)*	3.08		%	3.18		%	3.21		%	3.23		%	3.15		%
	Net Interest Income - Tax Equivalent (Non-GAAP)	$	20,616		$	20,176		$	19,409		$	19,305		$	18,817
	Average Earning Assets	$	2,597,277		$	2,551,593		$	2,500,293		$	2,446,375		$	2,399,197
	Net Interest Margin (Non-GAAP)*	3.15		%	3.17		%	3.15		%	3.14		%	3.12		%

4.	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 38.																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 40.

5.	For the recently-completed quarter, all of the regulatory capital ratios in the table on page 40 and the table in this Note 5, below, 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. The Common Equity Tier 1 Capital Ratio (CET1 Ratio) of Arrow as of 9/30/2017 that is listed in the tables (i.e., 12.70%) not only exceeds the currently required minimum CET1 Ratio (including Conservation Buffer) of 5.750%, but also exceeds the minimum CET1 Ratio that will be required when the Conservation Buffer is fully phased-in, on January 1, 2019, of 7.00% (including the ultimate required Conservation Buffer of 2.50%).																For the current quarter, all of the regulatory capital ratios in the table on page 40 and the table in this Note 5, below, 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. The Common Equity Tier 1 Capital Ratio (CET1 Ratio) of Arrow as of September 30, 2018 that is listed in the tables (i.e., 12.89%) not only exceeds the currently required minimum CET1 Ratio (including Conservation Buffer) of 6.375%, but also exceeds the minimum CET1 Ratio that will be required when the Conservation Buffer is fully phased-in, on January 1, 2019, of 7.00% (including the ultimate required Conservation Buffer of 2.50%).
		9/30/2017			6/30/2017			3/31/2017			12/31/2016			9/30/2016				9/30/2018			6/30/2018			3/31/2018			12/31/2017			9/30/2017
	Total Risk Weighted Assets	$	1,830,730		$	1,802,455		$	1,747,318		$	1,707,829		$	1,690,646		Total Risk Weighted Assets	$	1,999,849		$	1,934,890		$	1,889,719		$	1,856,242		$	1,830,730
	Common Equity Tier 1 Capital	232,473			228,586			224,369			221,472			216,382			Common Equity Tier 1 Capital	257,852			259,488			265,066			259,378			232,473
	Common Equity Tier 1 Capital Ratio	12.70		%	12.68		%	12.84		%	12.97		%	12.80		%	Common Equity Tier 1 Capital Ratio	12.89		%	13.01		%	12.97		%	12.89		%	12.70		%

* Quarterly ratios have been annualized.

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

Nine Months Ended	9/30/2017			9/30/2016			9/30/2018			9/30/2017
Net Income	$	21,255		$	19,934		$	27,521		$	21,255
Transactions Recorded in Net Income (Net of Tax):
Net Gain on Securities Transactions	6			88			—			6

Share and Per Share Data:⁽¹⁾
Period End Shares Outstanding	13,891			13,828			14,441			14,308
Basic Average Shares Outstanding	13,889			13,775			14,393			14,306
Diluted Average Shares Outstanding	13,981			13,842			14,479			14,401
Basic Earnings Per Share	$	1.53		$	1.45		$	1.91		$	1.49
Diluted Earnings Per Share	1.52			1.44			1.90			1.48
Cash Dividend Per Share	0.73			0.71			0.74			0.71

Selected Year-to-Date Average Balances:
Interest-Bearing Deposits at Banks	25,076			21,665			$	29,024		$	25,076
Investment Securities	685,784			704,890			642,380			685,784
Loans	1,839,216			1,641,899			2,029,597			1,839,216
Deposits	2,187,431			2,072,052			2,303,454			2,187,431
Other Borrowed Funds	225,400			173,159			240,027			225,400
Stockholders’ Equity	239,516			223,214			256,913			239,516
Total Assets	2,677,018			2,493,909			2,822,635			2,677,018
Return on Average Assets, annualized	1.06		%	1.07		%	1.30		%	1.06		%
Return on Average Equity, annualized	11.86		%	11.93		%	14.32		%	11.86		%
Return on Tangible Equity, annualized (Non-GAAP) ⁽²⁾	13.21		%	13.42		%
Return on Average Tangible Equity, annualized ⁽²⁾							15.80		%	13.21		%
Average Earning Assets	2,550,076			2,368,454			2,701,001			2,550,076
Average Paying Liabilities	1,998,746			1,883,717			2,087,445			1,998,746
Interest Income, Tax-Equivalent (Non-GAAP) ⁽³⁾	65,385			59,925
Interest Income							70,503			62,522
Tax-Equivalent Adjustment ⁽³⁾							1,335			2,863
Interest Income, Tax-Equivalent ⁽³⁾							71,838			65,385
Interest Expense	5,184			3,952			8,142			5,184
Net Interest Income, Tax-Equivalent (Non-GAAP) ⁽³⁾	60,201			55,973
Tax-Equivalent Adjustment (Non-GAAP) ⁽³⁾	2,863			2,780
Net Interest Margin, annualized (Non-GAAP) ⁽³⁾	3.16		%	3.16		%
Net Interest Income							62,361			57,338
Net Interest Income, Tax-Equivalent ⁽³⁾							63,696			60,201
Net Interest Margin, annualized							3.09		%	3.01		%
Net Interest Margin, Tax Equivalent, annualized ⁽³⁾							3.15		%	3.16		%

Efficiency Ratio Calculation: ⁽⁴⁾
Noninterest Expense	46,661			44,337			$	48,174		$	46,661
Less: Intangible Asset Amortization	210			223			197			210
Net Noninterest Expense	46,451			44,114			47,977			46,451
Net Interest Income, Tax-Equivalent (Non-GAAP) ⁽³⁾	60,201			55,973
Net Interest Income, Tax-Equivalent ⁽³⁾							63,696			60,201
Noninterest Income	20,893			21,184			22,150			20,893
Less: Net Securities Gain	10			144			—			10
Less: Net Gain on Equity Securities							355			—
Net Gross Income	81,084			77,013			85,491			81,084
Efficiency Ratio (Non-GAAP)	57.29		%	57.28		%
Efficiency Ratio ⁽⁴⁾							56.12		%	57.29		%

Arrow Financial Corporation

Selected Year-to-Date 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 28, 2017, 3% stock dividend.							Share and Per Share Data have been restated for the September 27, 2018, 3% stock dividend.

2.	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 38.							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 40.
		9/30/2017			9/30/2016				9/30/2018			9/30/2017
	Total Stockholders' Equity (GAAP)	$	244,648		$	229,208		Total Stockholders' Equity (GAAP)	$	264,810		$	244,648
	Less: Goodwill and Other Intangible assets, net	24,268			24,675			Less: Goodwill and Other Intangible assets, net	23,827			24,268
	Tangible Equity (Non-GAAP)	$	220,380		$	204,533		Tangible Equity (Non-GAAP)	$	240,983		$	220,380

	Period End Shares Outstanding	13,891			13,828			Period End Shares Outstanding	14,441			14,308
	Tangible Book Value per Share (Non-GAAP)	$	15.86		$	14.79		Tangible Book Value per Share (Non-GAAP)	$	16.69		$	15.40
	Net Income	21,255			19,934			Net Income	27,521			21,255
	Return on Tangible Equity (Net Income/Tangible Equity - Annualized)	13.21		%	13.42		%	Return on Tangible Equity (Net Income/Tangible Equity - Annualized)	15.80		%	13.21		%

3.	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 38.							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 40.
		9/30/2017			9/30/2016				9/30/2018			9/30/2017
	Interest Income (GAAP)	$	62,522		$	57,145		Interest Income (GAAP)	$	70,503		$	62,522
	Add: Tax-Equivalent adjustment (Non-GAAP)	$	2,863		$	2,780		Add: Tax-Equivalent adjustment (Non-GAAP)	$	1,335		$	2,863
	Net Interest Income - Tax Equivalent (Non-GAAP)	$	65,385		$	59,925		Net Interest Income - Tax Equivalent (Non-GAAP)	$	71,838		$	65,385
	Net Interest Income (GAAP)	$	57,338		$	53,193		Net Interest Income (GAAP)	$	62,361		$	57,338
	Add: Tax-Equivalent adjustment (Non-GAAP)	2,863			2,780			Add: Tax-Equivalent adjustment (Non-GAAP)	1,335			2,863
	Net Interest Income - Tax Equivalent (Non-GAAP)	$	60,201		$	55,973		Net Interest Income - Tax Equivalent (Non-GAAP)	$	63,696		$	60,201
	Average Earning Assets	$	2,550,076		$	2,368,454		Average Earning Assets	$	2,701,001		$	2,550,076
	Net Interest Margin (Non-GAAP)*	3.16		%	3.16		%	Net Interest Margin (Non-GAAP)*	3.15		%	3.16		%

4.	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). See "Use of Non-GAAP Financial Measures" on page 38.							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). See "Use of Non-GAAP Financial Measures" on page 40.

* Year-to-date ratios have been annualized.

																																	Average Consolidated Balance Sheets and Net Interest Income Analysis
(see “Use of Non-GAAP Financial Measures” on page 38)
(Fully Taxable Basis using a marginal tax rate of 35%)
(see "Use of Non-GAAP Financial Measures" on page 40)																	(see "Use of Non-GAAP Financial Measures" on page 40)

(Dollars In Thousands)

Quarter Ended September 30:	2017								2016								2018								2017
				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	$	27,143		$	104		1.52	%	$	21,635		$	34		0.63	%	$	30,522		$	182		2.37	%	$	27,143		$	104		1.52	%
Investment Securities:
Fully Taxable	389,092			1,928			1.97		409,355			1,893			1.84		394,072			2,189			2.20		389,092			1,928			1.97
Exempt from Federal Taxes(2)	288,276			2,404			3.31		287,357			2,332			3.23		242,775			1,583			2.59		288,276			2,404			3.31
Loans(2)	1,892,766			18,129			3.80		1,680,850			15,963			3.78		2,089,651			20,917			3.97		1,892,766			18,129			3.80
Total Earning Assets	2,597,277			22,565			3.45		2,399,197			20,222			3.35		2,757,020			24,871			3.58		2,597,277			22,565			3.45
Allowance for Loan Losses	(17,393		)						(16,696		)						(19,596		)						(17,393		)
Cash and Due From Banks	37,592								36,041								38,344								37,592
Other Assets	108,177								109,582								104,086								108,177
Total Assets	$	2,725,653							$	2,528,124							$	2,879,854							$	2,725,653
Deposits:
Interest-Bearing Checking Accounts	$	869,748		376			0.17		$	869,439		320			0.15		$	801,193		390			0.19		$	869,748		376			0.17
Savings Deposits	682,347			356			0.21		607,850			231			0.15		744,808			901			0.48		682,347			356			0.21
Time Deposits of $250,000 or More	31,067			66			0.84		75,388			128			0.68		75,888			301			1.57		31,067			66			0.84
Other Time Deposits	166,776			241			0.57		129,960			164			0.50		174,731			370			0.84		166,776			241			0.57
Total Interest-Bearing Deposits	1,749,938			1,039			0.24		1,682,637			843			0.20		1,796,620			1,962			0.43		1,749,938			1,039			0.24
Short-Term Borrowings	187,864			465			0.98		134,946			152			0.45		249,304			1,075			1.71		187,864			465			0.98
FHLBNY Term Advances and Other Long-Term Debt	75,000			445			2.35		75,000			410			2.17		65,000			461			2.81		75,000			445			2.35
Total Interest-Bearing Liabilities	2,012,802			1,949			0.38		1,892,583			1,405			0.30		2,110,924			3,498			0.66		2,012,802			1,949			0.38
Demand Deposits	443,840								381,195
Noninterest-bearing deposits																	483,089								443,840
Other Liabilities	25,210								26,298								22,702								25,210
Total Liabilities	2,481,852								2,300,076								2,616,715								2,481,852
Stockholders’ Equity	243,801								228,048								263,139								243,801
Total Liabilities and Stockholders’ Equity	$	2,725,653							$	2,528,124							$	2,879,854							$	2,725,653
Net Interest Income (Tax-equivalent Basis) (Non-GAAP) ⁽¹⁾				20,616								18,817
Net Interest Income (Tax-equivalent Basis) (Non-GAAP) ^{(1) (2)}																				21,373								20,616
Reversal of Tax Equivalent Adjustment				(966		)	(0.15	)%				(940		)	(0.16	)%				(376		)	(0.05	)%				(966		)	(0.15	)%
Net Interest Income				$	19,650							$	17,877							$	20,997							$	19,650
Net Interest Spread (Non-GAAP) ⁽¹⁾							3.07	%							3.05	%
Net Interest Margin (Non-GAAP) ⁽¹⁾							3.15	%							3.12	%
Net Interest Spread (Non-GAAP) ^{(1) (2)}																							2.92	%							3.07	%
Net Interest Margin (Non-GAAP) ^{(1) (2)}																							3.08	%							3.15	%

¹See Note 3 on p. ~~43.~~44.

²Fully taxable basis using a marginal federal tax rate of 35% for 2017, 21% for 2018.

																																	Average Consolidated Balance Sheets and Net Interest Income Analysis
(see “Use of Non-GAAP Financial Measures” on page 38)
(Fully Taxable Basis using a marginal tax rate of 35%)
(see "Use of Non-GAAP Financial Measures" on page 40)																	(see "Use of Non-GAAP Financial Measures" on page 40)


(Dollars In Thousands)
Nine-Month Period Ended September 30:	2017								2016
Nine Months Ended September 30:																	2018								2017
				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	$	25,076		$	242		1.29	%	$	21,665		$	100		0.62	%	$	29,024		$	474		2.18	%	$	25,076		$	242		1.29	%
Investment Securities:
Fully Taxable	398,231			5,940			1.99		427,937			6,006			1.87		376,869			6,134			2.18		398,231			5,940			1.99
Exempt from Federal Taxes	287,553			7,116			3.31		276,953			6,861			3.31
Loans	1,839,216			52,087			3.79		1,641,899			46,958			3.82
Exempt from Federal Taxes ⁽²⁾																	265,511			5,389			2.71		287,553			7,116			3.31
Loans ⁽²⁾																	2,029,597			59,841			3.94		1,839,216			52,087			3.79
Total Earning Assets	2,550,076			65,385			3.43		2,368,454			59,925			3.38		2,701,001			71,838			3.56		2,550,076			65,385			3.43
Allowance for Loan Losses	(17,172		)						(16,316		)						(19,065		)						(17,172		)
Cash and Due From Banks	36,056								32,327								36,306								36,056
Other Assets	108,058								109,444								104,392								108,058
Total Assets	$	2,677,018							$	2,493,909							$	2,822,634							$	2,677,018
Deposits:
Interest-Bearing Checking Accounts	$	894,206		1,088			0.16		$	909,268		941			0.14		$	860,355		1,165			0.18		$	894,206		1,088			0.16
Savings Deposits	680,419			963			0.19		604,886			677			0.15		739,684			2,134			0.39		680,419			963			0.19
Time Deposits of $250,000 or More	31,974			187			0.78		66,230			313			0.63		78,671			833			1.42		31,974			187			0.78
Other Time Deposits	166,747			702			0.56		130,174			497			0.51		168,708			911			0.72		166,747			702			0.56
Total Interest-Bearing Deposits	1,773,346			2,940			0.22		1,710,558			2,428			0.19		1,847,418			5,043			0.36		1,773,346			2,940			0.22
Short-Term Borrowings	150,400			946			0.84		98,159			303			0.41		172,463			1,736			1.35		150,400			946			0.84
FHLBNY Term Advances and Other Long-Term Debt	75,000			1,298			2.31		75,000			1,221			2.17		67,564			1,363			2.70		75,000			1,298			2.31
Total Interest-Bearing Liabilities	1,998,746			5,184			0.35		1,883,717			3,952			0.28		2,087,445			8,142			0.52		1,998,746			5,184			0.35
Demand Deposits	414,085								361,494
Noninterest-bearing deposits																	456,036								414,085
Other Liabilities	24,671								25,484								22,240								24,671
Total Liabilities	2,437,502								2,270,695								2,565,721								2,437,502
Stockholders’ Equity	239,516								223,214								256,913								239,516
Total Liabilities and Stockholders’ Equity	$	2,677,018							$	2,493,909							$	2,822,634							$	2,677,018
Net Interest Income (Tax-equivalent Basis) (Non-GAAP)				60,201								55,973
Net Interest Income (Tax-equivalent Basis) (Non-GAAP) ^{(1) (2)}																				63,696								60,201
Reversal of Tax Equivalent Adjustment				(2,863		)	(0.15	)%				(2,780		)	(0.16	)%				(1,335		)	(0.07	)%				(2,863		)	(0.15	)%
Net Interest Income				$	57,338							$	53,193							$	62,361							$	57,338
Net Interest Spread (Non-GAAP) ⁽¹⁾							3.08	%							3.10	%
Net Interest Margin (Non-GAAP) ⁽¹⁾							3.16	%							3.16	%
Net Interest Spread (Non-GAAP) ^{(1) (2)}																							3.04	%							3.08	%
Net Interest Margin (Non-GAAP) ^{(1) (2)}																							3.15	%							3.16	%

¹See Note 3 on p. ~~43.~~44.

²Fully taxable basis using a marginal federal tax rate of 35% for 2017, 21% for 2018.

OVERVIEW

~~We reported~~

Net income of $9.3 million continued the favorable trend for the third quarter of 2018, an increase of $1.8 million, or 24.9%, over net income for the third quarter of ~~2017 of $7.4 million, an increase of $678 thousand, or 10.1%, over our net income for the third quarter of 2016.~~2017. Diluted earnings per share (EPS) for the quarter was ~~$0.53,~~$0.64, an increase of ~~10.4%~~23.1% from the EPS of ~~$0.48~~$0.52 reported for the third quarter of ~~2016.~~2017. Return on average equity (ROE) for the third quarter of ~~2017~~2018 continued to be strong at ~~12.07%~~13.96%, up from an ROE of ~~11.75%~~12.07% for the third quarter ended September 30, ~~2016.~~2017. Return on average assets (ROA) for the ~~2017~~2018 third quarter was ~~1.08%~~1.28%, an increase from an ROA of ~~1.06%~~1.08% for the third quarter ended September 30, ~~2016. Tax-equivalent net~~2017.

Factors contributing to the positive results for the current quarter compared to the comparable prior year quarter are as follows:

Net interest income ~~(a non-GAAP measure)~~on a GAAP basis increased ~~between the respective quarters by approximately 9.6%, mainly~~6.9% to $21.0 million primarily due to the ~~8.3%~~ increase in ~~average earning assets in~~total interest and dividend income of $2.9 million. Net interest margin improved slightly to 3.02% for the third quarter of 2018 from 3.00% for the third quarter of 2017. ~~The composition~~Interest and fees on loans increased $2.8 million for the 2018 quarter mainly due to strong loan growth and higher market rates. Interest expense increased $1.5 million as a result of ~~earning assets changed~~4.4% deposit growth, higher market rates and some shifting in the ~~current quarter through an~~overall funding mix toward higher costing sources. Consistent with prior years, seasonal municipal deposits increased late in the quarter. Total noninterest income increased $209 thousand mainly due to a $146 thousand increase in higher yielding loans and a decrease in lower yielding investment securities. Total loans increased between the respective period ends by $201.6 million, or 11.8%, while investment securities decreased by $18.4 million, or 2.7%. Salaries and employee benefits expenses increased by 6.4% in the third quarter of 2017 compared to the 2016 quarter, due to increased staffing levels, normal salary increases, and increases in medical claims under our health benefit plans. Total assets were $2.74 billion at September 30, 2017, which represented an increase of $139.2 million, or 5.3%,income from ~~the level at December 31, 2016,~~fiduciary activities and an increase of ~~$164.0 million,~~$152 thousand in service fee revenue, while total noninterest expense increased $478 thousand in the current year quarter. In addition to the above, the provision for income taxes decreased $552 thousand, or ~~6.4%~~18%, ~~from~~due to the ~~September 30, 2016 level.~~reduction of tax rates as a result of the Tax Act.

The changes in net income, net interest income and net interest margin between the three ~~and nine-month~~month periods are discussed in detail under the heading "RESULTS OF OPERATIONS," beginning on page ~~59.~~61.

~~Stockholders’~~

Regulatory Reform: The first bipartisan financial regulatory reform bill to be enacted in nearly a decade, the Economic Growth, Regulatory Relief, and Consumer Protection Act (EGRRCPA), 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.

This legislation includes a variety of provisions that are likely to affect community banking institutions such as Arrow, including the following:

The federal bank regulatory agencies are directed to establish a "community bank leverage ratio" of between 8% and 10%, calculated by dividing tangible equity ~~was $244.6 million at September 30, 2017,~~capital by average total consolidated assets of "qualifying community banks" that meet certain requirements to be set by those regulatory agencies. A qualifying community bank is a depository institution or bank holding company with less than $10 billion in total assets, such as Arrow. If a qualifying community bank exceeds the community bank leverage ratio, it will be deemed to have met all applicable capital and leverage requirements, including the generally applicable leverage capital requirements and risk-based capital requirements and the "well capitalized" requirement under the federal "prompt corrective action" capital standards. This new community bank leverage ratio is expected to reduce the burden of compliance with regard to regulatory capital adequacy.

The definition of "high volatility commercial real estate" loans that trigger heightened risk-based capital requirements, has been modified and limited to ease the burden of those requirements.

The total asset threshold for qualifying insured financial institutions eligible for an ~~increase~~18-month examination cycle has been increased from $1 billion to $3 billion.

The new law provides that reciprocal deposits of ~~$11.8 million, or 5.1%,~~certain institutions shall not be considered "brokered deposits," subject to certain limitations.

Some community banks will be exempt from mortgage escrow requirements, and an expanded "qualified mortgage" exemption for community banks has been implemented to ease the burden of the "ability to repay" requirements in the Truth in Lending Act.

Financial institutions with less than $10 billion in total assets that meet certain requirements will be exempt from the December 31, 2016 level of $232.9 million, and an increase of $15.4 million, or 6.7%, from the prior-year level. The components of the change in stockholders’ equity since year-end 2016 are presented in the Consolidated Statement of Changes in Stockholders’ Equity on page 6, and are discussed in more detail in the next section.Volcker Rule proprietary trading requirements implemented under Dodd Frank.

Regulatory Capital and Increase in Stockholders' Equity: At September 30, ~~2017,~~2018, we continued to exceed by a substantial amount all required minimum capital ratios under the ~~new~~ bank regulatory capital rules at both the holding company and bank levels. At that date, both of our banks, as well as our holding company, continued to qualify as "well-capitalized" under the ~~revised~~ capital classification guidelines ~~that became effective contemporaneously with~~as defined by the ~~new~~current bank regulatory capital ~~rules in 2015.~~rules. Because of our 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. ~~As a result of~~Pursuant to the Dodd-Frank Act, ~~however,~~ required minimum regulatory capital levels for insured banks and their parent holding companies ~~will continue~~were scheduled to increase asin 2019. As explained above, pursuant to EGRRCPA, the federal bank regulators are required to implement a ~~percentage~~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 ~~risk-based assets~~the new community bank leverage ratio standards will be subject to the notice and comment procedures of rulemaking. EGRRCPA does not impose a deadline for this rulemaking. The federal bank regulators have announced their intention to initiate this rulemaking process to define and implement the "community bank leverage ratio" in the ~~upcoming years through 2019.~~near future. The Company anticipates that, when this new standard is implemented, it will simplify capital adequacy compliance requirements for community banks and holding companies such as Arrow.

Stockholders’ equity was $264.8 million at September 30, 2018, an increase of $15.2 million, or 6.1%, from the December 31, 2017 level of $249.6 million, and an increase of $20.2 million, or 8.2%, from the prior-year level. The components of the change in stockholders’ equity since year-end 2017 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 September 30, ~~2017, our~~2018, book value per share was ~~$17.61,~~$18.34, up by ~~6.2%~~7.3% over the prior-year ~~level, and our tangible~~level. Tangible book value per share (a non-GAAP measure that deducts intangible assets from stockholders' equity) was ~~$15.86,~~$16.69, an increase of ~~$1.07,~~$1.29, or ~~7.2%~~8.4%, over the level as of September 30, ~~2016.~~2017. See the disclosure on page 3840 related to our use of non-GAAP financial measures ~~generally, and~~including tangible book ~~value, specifically.~~value. In the first nine months of ~~2017,~~2018, total stockholders' equity increased by ~~5.1% (not annualized)~~6.1% and ~~our~~ total book value per share ~~also~~ increased by ~~5.0%~~9.4%. The increase in stockholders' equity over the first nine months of ~~2017~~2018 principally reflected the following factors: (i) ~~$21.3~~$27.5 million of net income for the period and (ii) issuance of ~~$2.7~~$4.0 million of common stock through ~~our~~ employee benefit and dividend reinvestment plans; reduced by (iii) cash dividends of ~~$10.1~~$10.6 million; and (iv) repurchases of ~~our~~the Company's own common stock, primarily in connection with ~~our~~the approved treasury stock repurchase plan of ~~$2.8~~$1.8 million. On September 30, ~~2017, our~~2018, the Company's closing stock price was ~~$34.35,~~$37.00, representing a trading multiple of ~~2.17~~2.22 to ~~our~~ tangible book value. As adjusted for a 3.0% stock dividend distributed September ~~28, 2017,~~27, 2018, the Company paid a quarterly cash dividend of $0.236 per share for each of the ~~third quarter~~first three quarters of ~~2016, and~~2017, a cash dividend of $0.243 per share for the last quarter of ~~2016~~2017 and the first ~~second,~~ and ~~third~~second quarters of ~~2017.~~2018, and a cash dividend of $0.252 for the third quarter of 2018.

Loan Quality: ~~Our net~~Net charge-offs for the third quarter of ~~2017~~2018 were ~~$547~~$223 thousand as compared to ~~$303~~$547 thousand for the comparable ~~2016~~2017 quarter. ~~Our~~The ratio of net charge-offs to average loans (annualized) was 0.04% for the third quarter of 2018 compared to 0.11% for the third quarter of ~~2017 compared to 0.07% for the third quarter of 2016. Our peer group's weighted average ratio of net charge-offs to average loans was 0.07% for the quarter ended June 30,~~ 2017. ~~See page 37 for a discussion of our peer group.~~ At September 30, ~~2017, our~~2018, the allowance for loan losses was ~~$17.7~~$20.0 million representing ~~0.93%~~0.94% of total loans, ~~down 4~~which is a 1 basis ~~points~~point increase from the ~~December 31, 2016 ratio. We believe~~September 30, 2017 ratio of 0.93%. The Company believes this allowance is appropriate and reflects the continuing strong credit quality in the loan portfolio.

Nonperforming loans were ~~$7.3~~$5.8 million at September 30, ~~2017,~~2018, representing ~~0.38%~~0.27% of period-end loans, a decrease of 211 basis points from ~~our~~the prior year comparable quarter ratio, which compares favorably with the weighted average ratio of our peer group of ~~0.72%~~0.64% at June 30, ~~2017.~~2018.

Loan Segments: During the ~~third~~ quarter of 2017, we experienced increases in outstanding balances in consumer loan and residential real estate loan segments of our loan portfolio, without any significant deterioration in our credit quality. During the quarter, ourended September 30, 2018, total loans grew by ~~$30.2~~$68.2 million, or ~~1.6%.~~3.3% as compared to the balance at June 30, 2018. The largest ~~portion of such~~ increase was in ~~residential real estate~~consumer loans which ~~expanded by $18.9 million, or 2.6%. Consumer loans also~~ increased during the quarter by ~~$13.3~~$32.3 million, or ~~2.3%~~4.9%. ~~The total~~In addition, residential real estate loans expanded by $22.0 million, or 2.7% and the commercial loan portfolio ~~decreased slightly~~increased by ~~$2.0~~$14.0 million, or ~~0.4%~~2.4%.

Commercial Loans: These loans comprised ~~6.6%~~6.0% of ~~our~~the total loan portfolio at period-end. The business sector in ~~our~~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, and some lines of business appear to be experiencing modest improvement during the year.~~period-end.

Commercial Real Estate Loans: These loans comprised ~~23.1%~~22.1% of ~~our~~the total loan portfolio at period-end. Commercial property values in ~~our~~the Company's region have remained stable in recent periods. ~~We update the appraisals~~Appraisals on our nonperforming and watched CRE loan properties are updated as deemed necessary, usually when the loan is downgraded or when ~~we perceive~~there has been significant market deterioration since ~~our~~the last appraisal.

Consumer Loans: These loans (primarily automobile loans) comprised ~~31.0%~~32.7% of ~~our~~the total loan portfolio at period-end. Consumer automobile loans at September 30, ~~2017,~~2018, were ~~$585~~$687 million, or ~~98.8%~~99.0% of this portfolio segment. In the first nine months of ~~2017, we~~2018, the Company did not experience any significant increase in ~~our~~the delinquency rate or in the percentage of nonperforming loans in this segment.

Residential Real Estate Loans: These loans, including home equity loans, made up 39.3% of ~~our~~the total loan portfolio at period-end. The residential real estate market in ~~our~~the Company's service area has been stable in recent periods. ~~During the first nine months of 2017, refinancings of our own loans represented about 20% of our total originations. We~~The Company originated nearly all of the residential real estate loans currently held in ~~our~~the loan portfolio and apply conservative underwriting standards to ~~our~~loan originations. WeThe Company typically ~~sell~~sells a portion of ~~our~~ residential real estate mortgage originations into the secondary market. The ratio of ~~our~~the sales of originations to total originations tends to fluctuate from period to period, although this ratio has generally declined somewhat in recent periods.

Liquidity and Access to Credit Markets: ~~We have~~The Company has not experienced any liquidity problems or special concerns thus far in ~~2017, nor did we~~2018, or in any prior years back to and during the financial crisis. The terms of ~~our lines~~the Company's line of credit with ~~our~~a correspondent ~~banks,~~bank, the FHLBNY and the Federal Reserve Bank of New York have not changed significantly in recent periods (see ~~our~~the general liquidity discussion on page ~~58), although rates on such borrowings have begun to move a little recently in response to gradual tightening of short-term rates.~~60). Historically, ~~we have~~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 ~~(our~~(the main liability-based sources are an overnight borrowing ~~arrangements~~arrangement with ~~our~~a correspondent ~~banks,~~bank, 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). ~~We regularly perform a~~Regular liquidity stress ~~test~~tests and ~~periodically test our~~tests of the contingent liquidity plan are performed to ensure that ~~we can generate~~ an adequate amount of available funds can be generated to meet a wide variety of potential liquidity crises, including a severe crisis.

Visa Class B Common Stock: ~~We,~~Arrow's subsidiary bank, Glens Falls National Bank, like other ~~former~~ Visa member banks, ~~bear~~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 ~~remaining~~amount funded in their litigation escrow account. On September 18, 2018, Visa issued a press release announcing that they 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 of the settlement with the court. If the settlement is approved and the balance in the litigation escrow account ~~amount. In light of the current state of covered litigation at Visa, which~~ is ~~winding down, as well as the substantial remaining dollar amounts in Visa's escrow fund, we determined that the balance that Visa maintains in its escrow fund is substantially~~ sufficient to ~~satisfy Visa's remaining direct liability to such~~cover the litigation claims ~~without further resort to~~and related expenses, Arrow could

potentially realize a gain on the ~~contingent liability~~receipt of ~~the former~~ Visa ~~member banks such as ours.~~Class A common stock. At September 30, ~~2017, the Company~~2018, Arrow held 27,771 shares of Visa Class B common ~~stock.~~stock, and utilizing the conversion ratio to Class A ~~potential future conversion~~common stock at that time, these Class B shares would convert to 45,000 shares of ~~these shares into~~ Visa Class A common ~~stock could result in our receiving approximately 46 thousand shares of~~stock. Since the ~~latter. There continue to be restrictions remaining on Visa Class B shares held by us. We continue~~litigation settlement is not tocertain, 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)


	At Period-End						$ Change			$ Change			% Change		% Change
	September 30, 2017		December 31, 2016		September 30, 2016		From December			From September			From December (not annualized)		From September		September 30, 2018		At Period-End December 31, 2017		September 30, 2017		$ Change From December			$ Change From September			% Change From December (not annualized)		% Change From September
Interest-Bearing Bank Balances	$	24,983	$	14,331	$	35,503	$	10,652		$	(10,520	)	74.3	%	(29.6	)%	$	34,910	$	30,276	$	24,983	$	4,634		$	9,927		15.3	%	39.7	%
Securities Available-for-Sale	315,459		346,996		339,190		(31,537		)	(23,731		)	(9.1	)%	(7.0	)%	340,411		300,200		315,459		40,211			24,952			13.4	%	7.9	%
Securities Held-to-Maturity	341,526		345,427		338,238		(3,901		)	3,288			(1.1	)%	1.0	%	289,952		335,907		341,526		(45,955		)	(51,574		)	(13.7	)%	(15.1	)%
Equity Securities ⁽¹⁾																	1,916		—		—		1,916			1,916
Loans⁽¹⁾⁽²⁾	1,908,799		1,753,268		1,707,216		155,531			201,583			8.9	%	11.8	%	2,126,100		1,950,770		1,908,799		175,330			217,301			9.0	%	11.4	%
Allowance for Loan Losses	17,695		17,012		16,975		683			720			4.0	%	4.2	%	20,003		18,586		17,695		1,417			2,308			7.6	%	13.0	%
Earning Assets⁽¹⁾⁽²⁾	2,597,471		2,470,934		2,425,518		126,537			171,953			5.1	%	7.1	%	2,804,155		2,627,102		2,597,471		177,053			206,684			6.7	%	8.0	%
Total Assets	$	2,744,462	$	2,605,242	$	2,580,485	$	139,220		$	163,977		5.3	%	6.4	%	$	2,953,220	$	2,760,465	$	2,744,462	$	192,755		$	208,758		7.0	%	7.6	%
Demand Deposits	$	448,515	$	387,280	$	381,760	$	61,235		$	66,755		15.8	%	17.5	%
Noninterest-Bearing Deposits																	$	490,469	$	441,945	$	448,515	$	48,524		$	41,954		11.0	%	9.4	%
Interest-Bearing Checking Accounts	967,250		877,988		993,221		89,262			(25,971		)	10.2	%	(2.6	)%	899,547		907,315		967,250		(7,768		)	(67,703		)	(0.9	)%	(7.0	)%
Savings Deposits	696,805		651,965		629,201		44,840			67,604			6.9	%	10.7	%	758,727		694,573		696,805		64,154			61,922			9.2	%	8.9	%
Time Deposits over $250,000	28,464		32,878		45,237		(4,414		)	(16,773		)	(13.4	)%	(37.1	)%	76,226		38,147		28,464		38,079			47,762			99.8	%	167.8	%
Other Time Deposits	166,082		166,435		163,768		(353		)	2,314			(0.2	)%	1.4	%	182,886		163,136		166,082		19,750			16,804			12.1	%	10.1	%
Total Deposits	$	2,307,116	$	2,116,546	$	2,213,187	$	190,570		$	93,929		9.0	%	4.2	%	$	2,407,855	$	2,245,116	$	2,307,116	$	162,739		$	100,739		7.2	%	4.4	%
Federal Funds Purchased and Securities Sold Under Agreements to Repurchase	$	61,419	$	35,836	$	38,589	$	25,583		$	22,830		71.4	%	59.2	%	$	62,503	$	64,966	$	61,419	$	(2,463	)	$	1,084		(3.8	)%	1.8	%
FHLBNY Advances - Overnight	33,000		123,000		—		(90,000		)	33,000			(73.2	)%	—	%	131,000		105,000		33,000		26,000			98,000			24.8	%	297.0	%
FHLBNY Advances - Term	55,000		55,000		55,000		—			—			—	%	—	%	45,000		55,000		55,000		(10,000		)	(10,000		)	(18.2	)%	(18.2	)%
Junior Subordinated Obligations Issued to Unconsolidated Subsidiary Trusts																	20,000		20,000		20,000		—			—			—	%	—	%
Stockholders' Equity	244,648		232,852		229,208		11,796			15,440			5.1	%	6.7	%	264,810		249,603		244,648		15,207			20,162			6.1	%	8.2	%

(1) Equity Securities were included in Securities Available-for-Sale prior to the January 1, 2018 adoption of ASU 2016-01.

(2) Includes Nonaccrual ~~Loans~~Loans.

Municipal Deposits: Fluctuations in balances of ~~our~~ interest-bearing checking accounts are largely the result of municipal deposit fluctuations. Municipal deposits on average represent ~~28%~~22% to ~~34%~~32% of ~~our~~ total deposits. Municipal deposits are typically placed in interest-bearing checking and savings accounts, as well as various time deposits.

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, the overall level of municipal deposit balances fluctuates from year-to-year as some municipalities move their accounts in and out of ~~our~~the Company's banks due to competitive factors. Often, the balances of municipal deposits at the end of a quarter are not representative of the average balances for that quarter.

If in the future, interest rates begin to rise significantly or the competition for municipal deposits otherwise becomes more intense, wethe Company may ~~experience an elevation in the rates we are~~be forced to pay higher rates on such deposits above ~~our~~its normal rates or ~~if we decline to pay such rates, we may experience a sustained decrease in~~ municipal deposit ~~levels.~~levels may decrease if competitive rates exceed what the Company offers.

Changes in Sources of Funds: ~~Our total~~Total deposits increased ~~$190.6~~$162.7 million, or ~~9.0%~~7.2%, from December 31, ~~2016~~2017 to September 30, ~~2017. Our municipal deposits increased by 14.5% during the period,~~2018 mainly due to the ~~collection of school taxes, while our consumer~~following: the $48.5 million increase in Non-Interest Bearing Deposits was from personal and business deposits; the $64.2 million increase in Savings Deposits, which was mainly due to the use of brokered deposits beginning in the first quarter of 2018 to diversify balance sheet funding and an increase in business money market savings balances; and the $38.1 million increase in Time Deposits over $250,000 which was due to certain municipal and non-municipal customers seeking a higher return on their deposit balances ~~increased by 6.7%. Our significant loan growth during~~as compared to the first nine months of 2017 and our reduction in FHLBNY Advances-Overnight was funded by a combination of our increase in deposits and our securities sold under agreements to repurchase, in addition to a reduction in our investment securities portfolio.rates on non-maturity deposits. At September 30, ~~2017, our~~2018, term advances from the FHLBNY were ~~$55~~$45 million, ~~unchanged from both our year-end 2016 balance and our September 30, 2016 balance.~~reflecting the non-renewal of a $10 million advance that matured during the first quarter of 2018.

Changes in Earning Assets: ~~Our~~The loan portfolio at September 30, ~~2017,~~2018, was ~~$1.91~~$2.1 billion, ~~up by $155.5~~an increase of $175.3 million, or ~~8.9%~~9.0%, from the December 31, ~~2016~~2017 level and up by ~~$201.6~~$217.3 million, or ~~11.8%~~11.4%, from the September 30, ~~2016~~2017 level. ~~We experienced the~~The following trends were experienced in our four largest segments:


1.	Commercial loans. This segment of ~~our~~the loan portfolio ~~increased significantly~~decreased by ~~$20.2~~$2.1 million, or ~~19.2%~~1.7%, during the first nine months of ~~2017, representing the impact of demand for such loans during the period.~~2018, which was due to loan prepayments.

2. Commercial real estate loans. This segment of ~~our~~the loan portfolio increased by ~~$9.1~~$25.9 million, or ~~2.1%~~5.8%, during the first nine months of ~~2017,~~2018, representing the continued strong demand for such ~~loans offset in part by a few large payoffs during the period.~~loans.


3.	Consumer loans (primarily automobile loans through indirect lending). As of September 30, ~~2017,~~2018, these loans, primarily auto loans, ~~had~~ increased by ~~$54.7~~$91.4 million, or ~~10.2%~~15.2%, from the December 31, ~~2016~~2017 balance, reflecting a continuation of strong demand for new and used vehicles region-wide and an expansion of our dealer network for indirect lending.

4. Residential real estate loans. This segment increased during the first nine months of ~~2017,~~2018 by ~~$71.6~~$60.2 million, or ~~10.5%~~7.8%. ~~As in prior periods, we elected to sell a portion of the~~Fewer residential mortgage loans we originated during the 2018 period ~~to Freddie Mac. Gross originations~~ were ~~up during the period, compared~~sold to the ~~comparable 2016~~secondary market than in the 2017 period ~~and we retained a higher percentage of our originations than~~due to rising residential mortgage interest rates experienced thus far in 2018.

~~the year earlier period. Nevertheless, demand for new mortgage loans remained strong throughout the first nine months, reflecting continuing low rates and a stable local economy with low unemployment.~~

Deposit Trends

The following ~~two~~ tables provide information on trends in the balance and mix of our 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. ~~The principal change in~~Noninterest-bearing deposit balances ~~over~~remained consistent for the ~~period was~~quarters ended September 30, 2017 through June 30, 2018, and increased in the ~~steady and significant increase~~quarter ended September 30, 2018 due to increases in ~~demand deposits and savings deposits and little or no increase in other types of deposits, including time~~business customer deposits. ~~As mentioned previously, the~~The volatility in interest-bearing checking ~~deposit~~ account balances iswas a result of the seasonality in municipal deposits. The increase in savings deposits in the quarters ended March 31 and June 30, 2018 were mainly due to ~~seasonal fluctuations~~the $45 million of brokered deposits obtained in the first quarter of 2018. The increase in Time Deposits over $250,000 and in Other Time Deposits beginning in the first quarter of 2018 was due to the increase in the market rates of time deposits as compared to non-maturity deposits. The increase in Time Deposits over $250,000 in the quarter ended June 30, 2018 was from municipal ~~deposits.~~deposits, which decreased in the next quarter. If and to the extent that interest rates and corresponding deposit rates across all maturities ~~begin~~continue to increase in future periods, ~~from their current continuing very low rates, even if such increases are very gradual,~~ we would expect ~~this multi-year migration~~ to ~~lower-rate deposits to change, as depositors shift back to higher-rate, longer term deposits, putting heightened pressure on our net interest margin.~~see further growth in time deposits.

Quarterly Average Deposit Balances

(Dollars in Thousands)


	Quarter Ended										Quarter Ended
	9/30/2017		6/30/2017		3/31/2017		12/31/2016		9/30/2016		9/30/2018		6/30/2018		3/31/2018		12/31/2017		9/30/2017
Demand Deposits	$	443,840	$	408,214	$	389,606	$	383,226	$	381,195
Noninterest-bearing deposits											$	483,089	$	444,854	$	439,688	$	441,761	$	443,840
Interest-Bearing Checking Accounts	869,748		918,235		894,911		921,971		869,439		801,193		866,996		914,116		945,414		869,748
Savings Deposits	682,347		681,197		677,662		649,928		607,850		744,808		750,352		723,660		701,694		682,347
Time Deposits over $250,000	31,067		31,126		33,758		39,058		41,267		75,888		96,580		63,406		32,430		31,067
Other Time Deposits	166,776		167,593		165,861		165,973		164,081		174,731		166,420		164,866		162,907		166,776
Total Deposits	$	2,193,778	$	2,206,365	$	2,161,798	$	2,160,156	$	2,063,832	$	2,279,709	$	2,325,202	$	2,305,736	$	2,284,206	$	2,193,778

Percentage of Total Quarterly Average Deposits


	Quarter Ended										Quarter Ended
	9/30/2017		6/30/2017		3/31/2017		12/31/2016		9/30/2016		9/30/2018		6/30/2018		3/31/2018		12/31/2017		9/30/2017
Demand Deposits	20.2	%	18.5	%	18.0	%	17.7	%	18.5	%
Noninterest-bearing deposits											21.2	%	19.1	%	19.1	%	19.3	%	20.2	%
Interest-Bearing Checking Accounts	39.6	%	41.6	%	41.4	%	42.7	%	42.1	%	35.1		37.3		39.6		41.4		39.6
Savings Deposits	31.2	%	30.9	%	31.3	%	30.1	%	29.4	%	32.7		32.2		31.4		30.8		31.2
Time Deposits over $250,000	1.4	%	1.4	%	1.6	%	1.8	%	2.0	%	3.3		4.2		2.7		1.4		1.4
Other Time Deposits	7.6	%	7.6	%	7.7	%	7.7	%	8.0	%	7.7		7.2		7.2		7.1		7.6
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
	9/30/2017		6/30/2017		3/31/2017		12/31/2016		9/30/2016		9/30/2018		6/30/2018		3/31/2018		12/31/2017		9/30/2017
Demand Deposits	—	%	—	%	—	%	—	%	—	%
Noninterest-bearing deposits											—	%	—	%	—	%	—	%	—	%
Interest-Bearing Checking Accounts	0.17		0.17		0.15		0.15		0.15		0.19		0.18		0.17		0.18		0.17
Savings Deposits	0.21		0.19		0.17		0.16		0.15		0.48		0.38		0.29		0.23		0.21
Time Deposits over $250,000	0.84		0.85		0.66		0.55		0.59		1.57		1.36		1.30		1.17		0.84
Other Time Deposits	0.57		0.56		0.56		0.60		0.56		0.84		0.68		0.64		0.60		0.57
Total Deposits	0.19		0.18		0.17		0.16		0.16		0.34		0.29		0.24		0.20		0.19

During the quarter ended September 30, ~~2017, our average deposit~~2018, the total cost ~~on our interest bearing deposit~~of deposits continued to increase as market rates increased, including the cost of Savings Deposits and both categories ~~increased slightly due to certain~~of Time Deposits. Savings and time deposit customers ~~shifting funds to~~are seeking a higher rate ~~deposit products. This shift may represent the beginning~~ of ~~a general increase~~return in ~~deposit rates for banks in response to the program initiated by the Federal Reserve in late 2015 to drive up short term rates through a series~~this environment of ~~gradual rate increases.~~rising rates. Given the uncertainty surrounding the future of interest rates, ~~we are~~the Company is unable to predict at this time what the short- or long-term effect of the Federal Reserve’s interest rate ~~determinations~~policy may be.

Non-Deposit Sources of Funds

~~We have several~~The Company's other sources of ~~funding other than new deposits. Historically, we have borrowed~~ funds include securities sold under agreements to repurchase, overnight advances and term advances from the ~~FHLBNY~~FHLBNY. The securities sold under ~~a variety of programs, including fixed~~agreements to repurchase are short-term in nature and ~~variable rate short-term borrowings and borrowings in the form of "structured advances." These structured advances typically have original maturities of 3 to 10 years with some advances being callable~~are collateralized by ~~the FHLBNY at certain dates. If the advances are called, we may elect to receive replacement~~investment securities. The term advances from the FHLBNY ~~at the then prevailing FHLBNY rates~~are fixed rate non-callable advances with original maturities of ~~interest. We currently do not have, and have not had in recent periods, any structured advances in this portfolio.~~three to five years.

WeArrow no longer ~~rely~~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 the Act's grandfathering date, wethe Company, like ~~all insured financial institutions~~other banking organizations of ~~our~~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 ~~our~~the consolidated balance sheet as of September 30, ~~2017 (i.e., our previously issued TRUPS)~~2018 will, subject to certain limits, continue to qualify as Tier 1 regulatory capital for Arrow until such TRUPs mature or are ~~redeemed, as~~redeemed. This is further discussed under ~~“Capital Resources”~~"Capital Resources" beginning on page 5558 of this Report. These trust preferred securities are subject to early redemption by usthe Company if the proceeds cease to qualify as Tier 1 capital of Arrow for any reason, or if any of certain other unanticipated but negative events should ~~occur, such as~~occur. An example is any adverse change in tax laws that might deny the Company the ability to deduct interest paid on these obligations for federal income tax purposes.

Loan Trends

The following two 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 of the following tables only, ~~we have broken out~~ Home Equity loans have been separately disclosed from Residential Real Estate loans (they are otherwise included in a single category in this Report). ~~We have also combined~~ 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). Over the last five quarters, the average balances for ~~all of the below-listed categories of loans~~Commercial and Commercial Real Estate, Residential Real Estate and Consumer Loans have steadily increased, although at different rates. Average balances for Home Equity Loans have shown a slight contraction during the quarters ended June 30 and September 30, 2018.

Quarterly Average Loan Balances

(Dollars in Thousands)


	Quarter Ended										Quarter Ended
	9/30/2017		6/30/2017		3/31/2017		12/31/2016		9/30/2016		9/30/2018		6/30/2018		3/31/2018		12/31/2017		9/30/2017
Commercial and Commercial Real Estate	$	561,260	$	556,014	$	541,187	$	532,456	$	524,523	$	577,793	$	576,311	$	569,126	$	564,073	$	561,260
Residential Real Estate	563,793		538,884		518,263		490,427		470,865		640,277		616,519		600,076		584,981		563,793
Home Equity	137,251		138,125		135,910		135,939		133,009		134,644		137,182		139,109		137,975		137,251
Consumer Loans⁽¹⁾	630,462		609,520		585,753		567,916		552,454		736,937		696,585		662,929		643,562		630,462
Total Loans	$	1,892,766	$	1,842,543	$	1,781,113	$	1,726,738	$	1,680,851	$	2,089,651	$	2,026,597	$	1,971,240	$	1,930,591	$	1,892,766

Percentage of Total Quarterly Average Loans

Quarter Ended
9/30/2017 6/30/2017 3/31/2017 12/31/2016 9/30/2016
Commercial and Commercial Real Estate 29.7 % 30.2 % 30.4 % 30.8 % 31.2 %
Residential Real Estate 29.8 % 29.2 % 29.1 % 28.4 % 28.0 %
Home Equity 7.3 % 7.5 % 7.6 % 7.9 % 7.9 %
Consumer Loans⁽¹⁾
33.2 % 33.1 % 32.9 % 32.9 % 32.9 %
Total Loans 100.0 % 100.0 % 100.0 % 100.0 % 100.0 %

⁽¹⁾The category “Other Consumer Loans”, in the tables above, includes home improvement loans secured by mortgages, which are otherwise included by us as part of our residential real estate loans in this Report.



	Quarter Ended
	9/30/2018		6/30/2018		3/31/2018		12/31/2017		9/30/2017
Commercial and Commercial Real Estate	27.7	%	28.4	%	28.9	%	29.2	%	29.7	%
Residential Real Estate	30.7		30.5		30.5		30.3		29.8
Home Equity	6.4		6.8		7.1		7.1		7.3
Consumer Loans	35.2		34.3		33.5		33.4		33.2
Total Loans	100.0	%	100.0	%	100.0	%	100.0	%	100.0	%

Maintenance of High Quality in the Loan Portfolio: In the first nine months of ~~2017, we did~~2018, there were not ~~experience~~ any ~~material weakening~~significant fluctuations in the quality of ~~our~~the loan portfolio or any segment thereof. In general, ~~we have historically underwritten our~~ residential real estate loans have historically been underwritten to secondary market standards for prime loans and ~~have~~the Company has not engaged in subprime mortgage lending as a business line. Similarly, ~~we have historically applied~~ high underwriting standards ~~in our~~have been applied to commercial and commercial real estate lending operations and generally in ~~our~~the indirect (automobile) lending program as well. ~~We have~~The Company has occasionally made loans, including indirect loans, to borrowers having FICO scores below the highest credit quality classifications, where special circumstances such as competitive considerations have led us to conclude it was appropriate to do so, with suitable protections against any enhanced perceived risk in such loans. Weclassifications. The Company has also ~~have had~~made extensions of credit ~~outstanding~~ to existing borrowers who have developed credit problems after origination resulting in deterioration of their FICO scores.

Residential Real Estate Loans: In recent years, residential real estate and home equity loans have represented the largest single segment of ~~our~~the total loan portfolio (comprising 39.3% of the entire portfolio at September 30, 2017), eclipsing both our commercial and commercial real estate loans, which represented 29.7% of the portfolio on that date, and our consumer loans (primarily automobile loans), which were 31.0% of the portfolio. ~~Our gross~~Gross originations for residential real estate loans (including refinancings of ~~pre-existing~~ mortgage loans) ~~were $151.7 million and $113.4 million~~ for the first nine months of ~~2017 and 2016, respectively. We expect this trend (i.e., substantially increased originations over the prior year periods) to continue through 2017 and into 2018.~~2018 were $103.8 million. Origination totals ~~substantially~~ exceeded the sum of ~~repayments and prepayments~~cash flows received from borrowers in the third ~~quarters of both years, but in each period we~~quarter and the Company has also sold ~~a portion~~portions of these originations onin the secondary market. In the first nine months of 2018, the Company sold $3.5 million, or ~~immediately after origination.~~3.4%, of originations. In the first nine months of 2017, ~~we sold~~ $13.7 million, or 9.0%, of our ~~originations. In the first nine months of 2016, we~~originations were sold ~~a larger dollar amount, $19.3 million, or 17.1%, of our originations, and~~ at a higher premium. ~~During recent~~The Company expects to continue to sell a portion of mortgage loan originations in upcoming periods, ~~commencing~~although perhaps a decreasing percentage of overall originations if rates continue their slow rise across longer maturities. At the same time, if prevailing rates rise substantially, there may be a slowdown in ~~2014, we have offered additional competitive products for variable rate (adjustable) residential real estate~~loan growth and ~~construction loans. These variable rate loans have not been subprime loans. We have not sold any of these variable rate loans into~~perhaps decreasing total originations, particularly if the ~~secondary market.~~general economy also falters. At some point, it is possible that the Company may experience a decrease in outstanding loan balances in this largest segment

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.

Commercial Loans and Commercial Real Estate Loans: For the first nine months of ~~2017,~~2018, combined commercial and commercial real estate loan originations continued to ~~be strong, with an annualized growth rate of 7.3%.~~increase.

Substantially all commercial and commercial real estate loans in ~~our~~the loan portfolio were extended to businesses or borrowers located in ~~our~~the Company's regional ~~market. Less than 12%~~markets. Many of the loans in the commercial portfolio have variable rates tied to prime or FHLBNY ~~rates or U.S. Treasury indices. We have not experienced any significant weakening in the quality of our commercial loan portfolio in recent years.~~rates.

~~Growth in our commercial loans and commercial real estate loans~~Although demand has ~~slowed in recent periods. It~~been steady, it is ~~entirely~~ possible that demand for commercial and commercial real estate loans may generally weaken in upcoming periods and/or that the quality of this segment of the portfolio may experience stress in upcoming periods. This is particularly likely if the ultimate effect of the Fed's current rate hike program triggers a significant and long-lasting increase in prevailing interest rates for medium- or long-term credits. Generally, ~~however,~~ the business sector ~~at least~~ in ~~our~~the Company's service area, appeared to be in reasonably good financial condition at period-end.

Consumer Loans (primarily automobile loans through indirect lending): At September 30, ~~2017, our~~2018, automobile loans (primarily loans originated through dealerships located in upstate New York and Vermont) represented the ~~third~~second largest category of loans in ~~our~~the loan portfolio, and continued to be a significant component of ~~our~~ business comprising almost a third of ~~our~~the total loan portfolio.

~~Our new~~New automobile loan volume for the first nine months of ~~2017~~2018 remained strong, at ~~$234.6~~$291.8 million, up from the ~~$218.5~~$234.6 million originated in the first nine months of ~~2016.~~2017. As a result of these originations, the quarterly average balance of our consumer loan portfolio ~~also~~at September 30, 2018 grew ~~in the first nine months of 2017,~~ by ~~$54.7~~$93 million, or ~~10.2%,~~14.5% from our quarterly average balance at December 31, ~~2016 balance.~~2017.

For credit quality purposes, ~~we assign our~~the Company assigns potential automobile loan customers into one of four tiers, ranging from lower to higher quality in terms of anticipated credit risk. ~~Our~~The Company's lending staff not only utilizes credit evaluation software tools but also reviews and evaluates each loan ~~individually. We believe our~~individually and believes that a disciplined approach to evaluating risk has contributed to maintaining ~~our~~the strong loan quality in this segment of our portfolio.

Recently, ~~several~~ market ~~indicators have~~data has suggested that auto loan demand is weakening somewhat on a national scale, although not in every market area. ~~Our~~The average maturity for automobile loan originations has expanded in recent ~~years, reflective of a larger market development.~~years. If ~~we encounter~~there is some weakening in auto demand in ~~our~~the Company's service area, ~~(and we have not, to date), we~~there may ~~experience~~be limited, if any, overall growth in this segment of ~~our~~the loan portfolio in upcoming ~~periods, regardless of whether the auto company lending affiliates continue to offer highly-subsidized loans. Of course, in this segment of our portfolio, as~~periods. As in the other segments, any substantial increase in prevailing interest rates in upcoming periods, presumably in response to the Fed's rate rise program, would likely have some negative impact on ~~our~~loan originations. The same also may occur if economic conditions in ~~our~~the Company's indirect loan service area should generally weaken in upcoming periods.

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										Quarter Ended
	9/30/2017		6/30/2017		3/31/2017		12/31/2016		9/30/2016		9/30/2018		6/30/2018		3/31/2018		12/31/2017		9/30/2017
Commercial and Commercial Real Estate	4.32	%	4.30	%	4.25	%	4.29	%	4.28	%	4.42	%	4.47	%	4.38	%	4.36	%	4.32	%
Residential Real Estate	3.98	%	4.03	%	4.10	%	4.09	%	4.20	%	4.05	%	4.06	%	4.09	%	3.99	%	3.98	%
Home Equity	3.55	%	3.41	%	3.28	%	3.11	%	3.13	%	4.13	%	3.93	%	3.70	%	3.57	%	3.55	%
Consumer Loans	3.23	%	3.21	%	3.14	%	3.18	%	3.19	%	3.52	%	3.44	%	3.34	%	3.29	%	3.23	%
Total Loans	3.80	%	3.79	%	3.76	%	3.78	%	3.82	%	3.97	%	3.96	%	3.90	%	3.83	%	3.80	%

The average yield in ~~our~~the total loan portfolio during the third quarter of ~~2017 was down slightly~~2018 increased compared to the average yield during the third quarter of ~~2016.~~2017. For the quarter, yields on all loan types increased in comparison to the ~~immediately preceding~~comparable quarter of 2017 with the ~~exception of the residential real estate portfolio. The residential real estate portfolio's overall yield continues to decline as cash flow from the portfolio is replaced with new production~~largest increase being in the ~~current~~home equity portfolio mainly because many of these loans have a variable rate ~~environment. However,~~tied to the average rates on newly-originated loans made by us in all segments of our portfolio were at least equal to, and in most cases slightly above, the average rates for comparable loans originated by us in the year-earlier quarter.prime rate.

Regardless of the future direction or magnitude of changes in prevailing interest rates, such changes will ultimately have an impact on the yield on ~~our~~the loan portfolio and the impact of such changes which will ~~ultimately~~ be ~~impacted by such changes. However, the timing and degree of responsiveness, in loans generally and as between various categories of loans, will also be influenced by a variety of other~~dependent on many factors including the ~~extent of federal government participation in the home mortgage market, the~~ makeup of ~~our~~the loan portfolio, the shape of the yield curve, consumer expectations and preferences, and the rate at which the portfolio expands.

Investment Portfolio Trends

The table below presents the changes in the period-end balances for ~~the~~available-for-sale, held-to-maturity and equity securities ~~available-for-sale and the securities held-to-maturity investment portfolios~~ from December 31, ~~2016~~2017 to September 30, ~~2017~~2018 (in thousands).

The ~~net~~slight reduction in the ~~two~~ portfolios on a combined basis during the period ~~(of $31.5 million, or 4.8%)~~ reflected ~~our~~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
	9/30/2017		12/31/2016		Change			9/30/2017			12/31/2016			Change			9/30/2018		12/31/2017		Change			9/30/2018			12/31/2017			Change
Securities Available-for-Sale:
U.S. Treasury Securities	$	64,730	$	54,706	$	10,024		$	19		$	5		$	14
U.S. Agency Securities	82,248		92,671		(10,423		)	(17		)	262			(279		)	$	59,602	$	59,894	$	(292	)	$	(533	)	$	(434	)	$	(99	)
State and Municipal Obligations	11,902		27,690		(15,788		)	27			6			21			2,548		10,349		(7,801		)	3			(2		)	5
Mortgage-Backed Securities-Residential	152,806		167,239		(14,433		)	(52		)	(950		)	898
Mortgage-Backed Securities																	277,461		227,596		49,865			(6,775		)	(1,481		)	(5,294		)
Corporate and Other Debt Securities	2,299		3,308		(1,009		)	(201		)	(204		)	3			800		800		—			(200		)	(200		)	—
Mutual Funds and Equity Securities	1,474		1,382		92			354			262			92
Equity Securities ¹																	—		1,561		(1,561		)	—			441			(441		)
Total	$	315,459	$	346,996	$	(31,537	)	$	130		$	(619	)	$	749		$	340,411	$	300,200	$	40,211		$	(7,505	)	$	(1,676	)	$	(5,829	)

Securities Held-to-Maturity:
State and Municipal Obligations	$	279,384	$	267,127	$	12,257		$	1,646		$	(1,765	)	$	3,411		$	233,557	$	275,353	$	(41,796	)	$	(5,810	)	$	(177	)	$	(5,633	)
Mortgage-Backed Securities-Residential	64,515		75,624		(11,109		)	727			89			638
Corporate and Other Debt Securities	—		1,000		(1,000		)	—			—			—
Mortgage-Backed Securities																	49,162		60,548		(11,386		)	(1,423		)	171			(1,594		)
Total	$	343,899	$	343,751	$	148		$	2,373		$	(1,676	)	$	4,049		$	282,719	$	335,901	$	(53,182	)	$	(7,233	)	$	(6	)	$	(7,227	)

Equity Securities ¹																	$	1,916	$	—	$	1,916		$	—		$	—		$	—

Footnote:

1. Beginning January 1, 2018, upon adoption of ASU 2016-01, equity securities with readily determinable fair values are reported separately from Available-for-Sale securities.

At September 30, ~~2017, we~~2018, the Company held no investment securities in ~~either of our~~the securities portfolios that consisted of or included, directly or indirectly, obligations of foreign governments or governmental agencies orof foreign issuers.

AsIn the periods referenced above, Mortgage-Backed Securities consisted solely of ~~both period-ends presented in the above table, all listed Mortgage-Backed Securities-Residential consisted of mortgage-backed security pools~~mortgage pass-through securities and ~~collateralized mortgage obligations (CMOs) that were~~Collateralized Mortgage Obligations ("CMOs") issued or guaranteed by U.S. ~~Government Agency or government sponsored enterprises (GSEs), such as Fannie Mae or Freddie Mac. Mortgage-backed security pools~~federal agencies. Mortgage pass-through securities provide to the investor monthly portions of principal and interest ~~payments~~ pursuant to the contractual obligations of the underlying mortgages. InCMOs are pools of mortgage-backed securities, the ~~case of most CMOs, the principal and interest payments~~repayments on ~~the pooled mortgages are~~which have generally been separated into two or more components (tranches), ~~with~~where each tranche ~~having~~has a separate estimated life ~~risk profile~~ and yield. Our practice has been to purchase only ~~those~~floating rate securities, pass-through securities and CMOs that are issued or guaranteed by ~~GSEs or other~~U.S. federal agencies, and ~~only~~the tranches of CMOs that we purchase generally are those ~~CMO tranches with~~having shorter maturities and no more than moderate extension risk. Included in corporate and other debt securities are trust preferred securities issued by other financial institutions prior to May 19, 2010, the grandfathering date for TRUPs in Dodd Frank, that were highly rated at the time of purchase.average lives and/or durations.

Other-Than-Temporary Impairment

Each quarter ~~we evaluate~~ all investment securities with a fair value less than amortized cost ~~both~~are evaluated in the available-for-sale portfolio, the held-to-maturity portfolio and the ~~held-to-maturity~~equity securities portfolio, to determine if there exists other-than-temporary impairment for any such security as defined under generally accepted accounting principles. There were no other-than-temporary impairment losses in the first nine months of ~~2017.~~2018.

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 during the periods in question, with little or no change in the credit-worthiness of the issuers.

Investment Sales, Purchases and Maturities

~~(In Thousands)~~

The following table summarizes sales of investment securities within the available-for-sale and held-to-maturity portfolios for the ~~three~~three- and nine-month periods ended September 30, ~~2017~~2018 and ~~2016:~~2017.


	Three Months Ended				Nine Months Ended				Three Months Ended				Nine Months Ended
Sales	9/30/2017		9/30/2016		9/30/2017		9/30/2016		9/30/2018		9/30/2017		9/30/2018		9/30/2017
Available-For-Sale Portfolio:
Mortgage-Backed Securities-Residential	$	—	$	—	$	—	$	—
U.S. Treasury Securities	—		—		—		—
U.S. Agency Securities	10,005		—		10,005		4,793		$	—	$	10,005	$	—	$	10,005
Corporate Bonds and Other	—		—		—		5,631
Total	10,005		—		10,005		10,424		$	—	$	10,005	$	—	$	10,005
Net Gains on Securities Transactions	10		—		10		144		—		10		—		10
Proceeds on the Sales of Securities	$	10,015	$	—	$	10,015	$	10,568	$	—	$	10,015	$	—	$	10,015

Held-to-Maturity Portfolio:
State and Municipal Obligations	$	—	$	—	$	—	$	2
Net Gains on Securities Transactions	—		—		—		—
Proceeds on the Sales of Securities	$	—	$	—	$	—	$	2

Investment yields in the debt markets experienced some volatility in ~~the fourth quarter of 2016~~2017 and the first nine months of ~~2017. We~~2018. The Company regularly ~~review our~~reviews its interest rate risk position along with ~~our~~ security holdings to evaluate if market opportunities have arisen that may ~~permit us~~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~~three- and nine-month periods ended September 30, ~~2017~~2018 and ~~2016,~~2017, as well as proceeds from the maturity and calls of investment securities within each portfolio for the respective periods presented:


	Three Months Ended				Nine Months Ended
(In Thousands)									Three Months Ended				Nine Months Ended
Purchases:	9/30/2017		9/30/2016		9/30/2017		9/30/2016		9/30/2018		9/30/2017		9/30/2018		9/30/2017
Available-for-Sale Portfolio
U.S. Treasury Securities	$	10,179	$	—	$	10,179	$	—	$	—	$	10,179	$	—	$	10,179
U.S. Agency Securities	—		—		—		—
State and Municipal Obligations	—		—		—		10,920
Mortgage-Backed Securities-Residential	—		—		12,324		—
Other	—		—		—		—
Mortgage-Backed Securities									28,148		—		84,746		12,324
Total Purchases	$	10,179	$	—	$	22,503	$	10,920	$	28,148	$	10,179	$	84,746	$	22,503

Maturities & Calls	$	11,750	$	22,185	$	43,617	$	65,965	$	27,283	$	11,750	$	36,663	$	43,617


	Three Months Ended				Nine Months Ended				Three Months Ended				Nine Months Ended
Purchases:	9/30/2017		9/30/2016		9/30/2017		9/30/2016		9/30/2018		9/30/2017		9/30/2018		9/30/2017
Held-to-Maturity Portfolio
State and Municipal Obligations	$	2,583	$	850	$	36,018	$	60,786	$	2,401	$	2,583	$	4,506	$	36,018
Mortgage-Backed Securities-Residential	—		—		—		—
Total Purchases	$	2,583	$	850	$	36,018	$	60,786	$	2,401	$	2,583	$	4,506	$	36,018

Maturities & Calls	$	8,800	$	17,699	$	39,062	$	42,295	$	10,105	$	8,800	$	49,721	$	39,062

Asset Quality

The following table presents information related to our 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)


	9/30/2017			6/30/2017			3/31/2017			12/31/2016			9/30/2016			9/30/2018			6/30/2018			3/31/2018			12/31/2017			9/30/2017
Loan Balances:
Period-End Loans	$	1,908,799		$	1,878,632		$	1,810,805		$	1,753,268		$	1,707,216		$	2,126,100		$	2,057,862		$	1,993,037		$	1,950,770		$	1,908,799
Average Loans, Year-to-Date	1,839,216			1,811,998			1,781,113			1,663,225			1,641,899			2,029,597			1,999,072			1,971,240			1,862,247			1,839,216
Average Loans, Quarter-to-Date	1,892,766			1,842,543			1,781,113			1,726,738			1,680,850			2,089,651			2,026,598			1,971,240			1,930,590			1,892,766
Period-End Assets	2,744,462			2,721,721			2,656,386			2,605,242			2,580,485			2,953,220			2,845,171			2,826,687			2,760,465			2,744,462

Allowance for Loan Losses, Year-to-Date:
Allowance for Loan Losses, Beginning of Period	$	17,012		$	17,012		$	17,012		$	16,038		$	16,038		$	18,586		$	18,586		$	18,586		$	17,012		$	17,012
Provision for Loan Losses, YTD	1,580			780			358			2,033			1,550			1,961			1,375			746			2,736			1,580
Loans Charged-off, YTD	(1,197		)	(574		)	(270		)	(1,270		)	(784		)	(960		)	(634		)	(370		)	(1,559		)	(1,197		)
Recoveries of Loans Previously Charged-off	300			224			116			211			171			416			313			95			397			300
Net Charge-offs, YTD	(897		)	(350		)	(154		)	(1,059		)	(613		)	(544		)	(321		)	(275		)	(1,162		)	(897		)
Allowance for Loan Losses, End of Period	$	17,695		$	17,442		$	17,216		$	17,012		$	16,975		$	20,003		$	19,640		$	19,057		$	18,586		$	17,695

Allowance for Loan Losses, Quarter-to-Date:
Allowance for Loan Losses, Beginning of Period	$	17,442		$	17,216		$	17,012		$	16,975		$	16,798		$	19,640		$	19,057		$	18,586		$	17,695		$	17,442
Provision for Loan Losses, QTD	800			422			358			483			480			586			629			746			1,157			800
Loans Charged-off, QTD	(622		)	(305		)	(270		)	(486		)	(367		)	(325		)	(264		)	(370		)	(363		)	(622		)
Recoveries of Loans Previously Charged-off	75			109			116			40			64			102			218			95			97			75
Net Charge-offs, QTD	(547		)	(196		)	(154		)	(446		)	(303		)	(223		)	(46		)	(275		)	(266		)	(547		)
Allowance for Loan Losses, End of Period	$	17,695		$	17,442		$	17,216		$	17,012		$	16,975		$	20,003		$	19,640		$	19,057		$	18,586		$	17,695

Nonperforming Assets, at Period-End:
Nonaccrual Loans	$	5,482		$	5,222		$	4,273		$	4,193		$	6,107		$	4,468		$	3,880		$	4,470		$	5,526		$	5,482
Loans Past Due 90 or More Days and Still Accruing Interest	967			1,821			—			1,201			548			1,172			170			—			319			967
Restructured and in Compliance with Modified Terms	828			101			101			106			107			115			106			100			105			828
Total Nonperforming Loans	7,277			7,144			4,374			5,500			6,762			5,755			4,156			4,570			5,950			7,277
Repossessed Assets	62			90			103			101			149			47			76			120			109			62
Other Real Estate Owned	1,651			1,523			1,631			1,585			868			1,173			1,412			1,525			1,738			1,651
Total Nonperforming Assets	$	8,990		$	8,757		$	6,108		$	7,186		$	7,779		$	6,975		$	5,644		$	6,215		$	7,797		$	8,990

Asset Quality Ratios:
Allowance to Nonperforming Loans	243.16		%	244.15		%	393.60		%	309.31		%	251.04		%	347.58		%	472.57		%	417.00		%	312.37		%	243.16		%
Allowance to Period-End Loans	0.93		%	0.93		%	0.95		%	0.97		%	0.99		%	0.94		%	0.95		%	0.96		%	0.95		%	0.93		%
Provision to Average Loans (Quarter) ⁽¹⁾	0.17		%	0.09		%	0.08		%	0.11		%	0.11		%	0.11		%	0.12		%	0.15		%	0.24		%	0.17		%
Provision to Average Loans (YTD) ⁽¹⁾	0.11		%	0.09		%	0.08		%	0.12		%	0.13		%	0.13		%	0.14		%	0.15		%	0.15		%	0.11		%
Net Charge-offs to Average Loans (Quarter) ⁽¹⁾	0.11		%	0.04		%	0.04		%	0.10		%	0.07		%	0.04		%	0.01		%	0.06		%	0.05		%	0.11		%
Net Charge-offs to Average Loans (YTD) ⁽¹⁾	0.07		%	0.04		%	0.04		%	0.06		%	0.05		%	0.04		%	0.03		%	0.06		%	0.06		%	0.07		%
Nonperforming Loans to Total Loans	0.38		%	0.38		%	0.24		%	0.31		%	0.40		%	0.27		%	0.20		%	0.23		%	0.31		%	0.38		%
Nonperforming Assets to Total Assets	0.33		%	0.32		%	0.23		%	0.28		%	0.30		%	0.24		%	0.20		%	0.22		%	0.28		%	0.33		%
⁽¹⁾ Annualized

Provision for Loan Losses

Through the provision for loan losses, an allowance is maintained that reflects ~~our~~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 the borrowers have been deemed to have the capacity to repay all principal and interest and, therefore, have not been classified as nonaccrual.

In the third quarter of ~~2017, we~~2018, the Company made a ~~$800~~$586 thousand provision for loan losses, compared to a provision of ~~$480~~$800 thousand for the third quarter of ~~2016~~2017 and a provision of ~~$422~~$629 thousand for the second quarter of ~~2017.~~2018. The provision expense was ~~primarily~~largely driven by ~~net charge-offs of $547 thousand,~~ growth in outstanding loan ~~balances,~~balances. Additional items impacting the provision included changes to qualitative factors

that reflect management’s view on current economic and ~~minor changes in qualitative factors.~~market risks, and net charge-offs of $223 thousand. See Note 3 to ~~our~~

the unaudited interim consolidated financial statements for a discussion on how ~~we classify our~~the Company classifies credit quality indicators as well as the balance in each category.

The ratio of the allowance for loan losses to total loans was 0.94% at September 30, 2018, a decrease from 0.95% at December 31, 2017 and an increase of 1 basis point from 0.93% at September 30, ~~2017, a decrease of 4 basis points from the 0.97% ratio at December 31, 2016 and a decrease of 6 basis points from the 0.99% ratio at September 30, 2016.~~2017.

~~We consider our~~The accounting policy relating to the allowance for loan 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 results of operations. ~~Our~~The process for determining the provision for loan losses is described in Note 3 to ~~our~~the unaudited interim consolidated financial statements.

Risk Elements

~~Our nonperforming~~Nonperforming assets at September 30, ~~2017~~2018 amounted to ~~$9.0~~$7.0 million, ~~an increase~~a decrease of ~~$1.8~~$0.8 million, from the December 31, ~~2016~~2017 total and ~~an increase~~a decrease of ~~$1.2~~$2.0 million, from the year earlier total. ~~In all recent~~For the nine-month periods ~~our~~ended September 30, 2018 and 2017, ratios of nonperforming assets to total assets have remained below the average ratios for ~~our~~the peer group, although the average peer group ratios have improved dramatically in recent ~~years, from post-crisis levels that were substantially higher than their current levels (and substantially higher than our ratios during such periods).~~years. (See page 3739 for a discussion of ~~our~~the peer group.) At June 30, ~~2017, our~~2018, the ratio of loans past due 90 or more days plus nonaccrual loans plus other real estate owned to total assets was ~~0.32%~~0.19%, well below the ~~0.68%~~0.59% ratio of ~~our~~the peer group at such date (the latest date for which peer group information is available). At September 30, ~~2017 our~~2018 the ratio ~~increased slightly to 0.33%~~is 0.24%, ~~however, this~~which is ~~still far~~ below the most recent ratio for ~~our~~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 ~~our~~ 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)
	9/30/2017		12/31/2016		9/30/2016		9/30/2018		12/31/2017		9/30/2017
Commercial Loans	$	122	$	134	$	105	$	198	$	158	$	122
Commercial Real Estate Loans	—		121		—		—		—		—
Residential Real Estate Loans	1,063		2,461		1,693		2,663		1,696		1,063
Consumer Loans - Primarily Indirect Automobile	5,615		6,369		5,144		6,863		7,064		5,615
Total Delinquent Loans	$	6,800	$	9,085	$	6,942
Total Loans Past Due 30-89 Days and Accruing Interest							$	9,724	$	8,918	$	6,800

At September 30, ~~2017, our~~2018, the loans in this category totaled ~~$6.8~~$9.7 million,~~, a decrease~~ an increase of ~~$2.3~~$0.8 million, or ~~25.1%~~9.0%, from the ~~$9.1~~$8.9 million of such loans at December 31, ~~2016~~.2017. The September 30, ~~2017~~2018 total of non-current loans equaled ~~0.36%~~0.46% of loans then outstanding, ~~whereas~~unchanged from the year-end ~~2016~~ ~~total equaled 0.52%~~2017 percentage and up from the September 30, 2017 level of ~~loans then outstanding.~~0.36%. The ~~decrease~~increase from December 31, ~~2016~~2017 is primarily attributable to ~~a decrease~~an increase in delinquent automobile loans, which ~~were at a~~tend to reflect seasonally elevated ~~level at year-end~~ ~~2016~~ ~~but declined (improved) during~~levels in the ~~first nine months~~second half of ~~2017.~~the year.

The number and dollar amount of ~~our~~ performing loans that demonstrate characteristics of potential weakness from time-to-time (potential problem loans) typically is a very small percentage of our portfolio. See the table of Credit Quality Indicators in Note 3 to ~~our~~the unaudited interim consolidated financial statements. ~~We consider~~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 September 30, ~~2017~~2018 was ~~$31.0~~$31.95 million, ~~down~~up slightly from the dollar amount of such loans at December 31, ~~2016,~~2017, when the amount was ~~$35.8 million, due primarily to the upgrade of several commercial borrowers.~~$29.66 million. These loans will continue to be closely monitored and ~~we do expect~~the Company expects to collect all payments of contractual interest and principal in full on these classified loans. Total nonperforming assets at period-end ~~increased~~decreased by ~~$1.2~~$2.0 million, or ~~15.6%~~22.4% from September 30, ~~2016. This change resulted primarily from several commercial loans moving to nonaccrual status.~~2017.

The economy in ~~our~~the Company's market area has been relatively strong in recent ~~years, compared to the immediate post-crisis~~ years, but any general weakening of the U.S. economy in upcoming periods would likely have an adverse effect on the economy in ~~our~~this market area as well, and ultimately on ~~our~~the loan portfolio, particularly ~~our~~the commercial and commercial real estate portfolio.

As of September 30, ~~2017, we~~2018, the Company held for sale ~~three residential real estate~~two commercial properties ~~and one commercial property~~ in other real estate owned. ~~We do~~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.

~~We do~~The Company does not currently anticipate significant increases in ~~our~~ 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.

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 EGRRCPA financial reform bill was signed into law. This new law includes provisions requiring the federal bank regulatory agencies to establish a community bank leverage ratio of between 8% and 10%, calculated by dividing tangible equity capital by average total consolidated assets of "qualifying community banks" that meet certain requirements to be set by those regulatory agencies. A qualifying community bank is a depository institution or bank holding company with less than $10 billion in total assets, such as Arrow. If a qualifying community bank exceeds the community bank leverage ratio, it will be deemed to have met all applicable capital and leverage requirements, including the generally applicable leverage capital requirements and risk-based capital requirements and the "well capitalized" requirement under the federal "prompt corrective action" capital standards. Upon its implementation, this new community bank leverage ratio standard is expected to reduce the burden of compliance with regard to regulatory capital adequacy. However, the implementation of this standard will be subject to the notice and comment procedures of rulemaking, and EGRRCPA does not impose a deadline for this rulemaking. The federal bank regulators have announced their intention to initiate this rulemaking process to define and implement the "community bank leverage ratio" in the near future. Until this rulemaking is finalized, the following capital adequacy requirements, as implemented under Dodd Frank, are the applicable capital standards for the Company and its bank subsidiaries.

The following is a summary of certain definitions of capital under the various ~~new~~ capital measures in the ~~revised~~ capital ~~rules:~~rules under Dodd-Frank:

Common Equity Tier 1 Capital (CET1): Equals the sum of common stock instruments and related surplus (net of treasury stock), retained earnings, accumulated other comprehensive income (AOCI), and qualifying minority interests, minus applicable regulatory adjustments and deductions. Such deductions will 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 percent~~1.25% of risk-weighted assets) minus applicable regulatory adjustments and deductions.

The following table presents the current minimum regulatory capital ratios applicable to our holding company and banks under the revised capital rules (as of January 1, ~~2017)~~2018), as well as the increased minimum capital ratios that will apply at certain dates over the remaining portion of the phase-in period (i.e., as of January 1, ~~2018 and January 1,~~ 2019):


Capital Ratio	Year, as of January 1						Year, as of January 1
	2017		2018		2019		2018		2019
Minimum CET1 Ratio	4.500	%	4.500	%	4.500	%	4.500	%	4.500	%
Capital Conservation Buffer ("Buffer")	1.250	%	1.875	%	2.500	%	1.875	%	2.500	%
Minimum CET1 Ratio Plus Buffer	5.750	%	6.375	%	7.000	%	6.375	%	7.000	%
Minimum Tier 1 Risk-Based Capital Ratio	6.000	%	6.000	%	6.000	%	6.000	%	6.000	%
Minimum Tier 1 Risk-Based Capital Ratio Plus Buffer	7.250	%	7.875	%	8.500	%	7.875	%	8.500	%
Minimum Total Risk-Based Capital Ratio	8.000	%	8.000	%	8.000	%	8.000	%	8.000	%
Minimum Total Risk-Based Capital Ratio Plus Buffer	9.250	%	9.875	%	10.500	%	9.875	%	10.500	%
Minimum Leverage Ratio	4.000	%	4.000	%	4.000	%	4.000	%	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 ~~ours~~Arrow previously had to meet under the prior capital rules.

At September 30, ~~2017, our~~2018, Arrow's holding company and both of ~~our~~its subsidiary banks exceeded by a substantial amount each of the applicable minimum capital ratios established under the revised capital rules, including the minimum CET1 Ratio, the minimum Tier 1 Risk-Based Capital Ratio, the minimum Total Risk-Based Capital Ratio, and the minimum Leverage Ratio, including in the case of each risk-based ratio, the phased-in portion of the capital buffer.

Prompt Corrective Action Capital Classifications. Under applicable banking law, federal banking regulators are required to take prompt corrective action with respect to depository institutions that do not meet 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". As a result of the regulators' adoption of the revised capital rules, the definitions for determining which of the five capital classifications a particular banking organization will fall into were changed, effective as of January 1, 2015. Under the ~~revised~~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 ~~ranking~~rankings of these capitalization categories, i.e., as "well-capitalized" or "adequately capitalized."

~~Our~~ Current Capital Ratios: The table below sets forth the regulatory capital ratios of ~~our~~Arrow's holding company and ~~our~~ two subsidiary banks, Glens Falls National and Saratoga National, under the current capital rules, as of September 30, ~~2017:~~2018:


	Common		Tier 1		Total				Common		Tier 1		Total
	Equity		Risk-Based		Risk-Based		Tier 1		Equity		Risk-Based		Risk-Based		Tier 1
	Tier 1 Capital		Capital		Capital		Leverage		Tier 1 Capital		Capital		Capital		Leverage
	Ratio		Ratio		Ratio		Ratio		Ratio		Ratio		Ratio		Ratio
Arrow Financial Corporation	12.70	%	13.79	%	14.77	%	9.30	%	12.89	%	13.90	%	14.90	%	9.67	%
Glens Falls National Bank & Trust Co.	13.35	%	13.36	%	14.33	%	8.88	%	13.49	%	13.49	%	14.49	%	9.24	%
Saratoga National Bank & Trust Co.	13.20	%	13.20	%	14.15	%	9.42	%	13.02	%	13.02	%	14.04	%	9.53	%

Current Regulatory Minimum (2017)	5.750%⁽¹⁾		7.250%⁽¹⁾		9.250%⁽¹⁾		4.000	%
FDICIA's Prompt Corrective Action - "Well-Capitalized" Standard (2017)	6.500	%	8.000	%	10.000	%	5.000	%
Current Regulatory Minimum (2018)									6.375%⁽¹⁾		7.875%⁽¹⁾		9.875%⁽¹⁾		4.000	%
FDICIA's Prompt Corrective Action - "Well-Capitalized" Standard (2018)									6.500	%	8.000	%	10.000	%	5.000	%
Final Regulatory Minimum (1/1/2019)	7.000%⁽²⁾		8.500%⁽²⁾		10.500%⁽²⁾		4.000	%	7.000%⁽²⁾		8.500%⁽²⁾		10.500%⁽²⁾		4.000	%

⁽¹⁾ Including currently phased-in 1.25% capital conservation buffer
⁽¹⁾ Including currently phased-in 1.875% capital conservation buffer									⁽¹⁾ Including currently phased-in 1.875% capital conservation buffer
⁽²⁾ Including the fully phased-in 2.50 % capital conservation buffer									⁽²⁾ Including the fully phased-in 2.50 % capital conservation buffer

At September 30, ~~2017, our~~2018, Arrow's holding company and both banks exceeded the minimum regulatory capital ratios established under the current capital rules 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' equity was ~~$244.6~~$264.8 million at September 30, ~~2017,~~2018, an increase of ~~$11.8~~$15.2 million, or ~~5.1%~~6.1%, from December 31, ~~2016.~~2017. This increase was the result of net income for the period of ~~$21.3 million, an increase in other comprehensive income of $0.7~~$27.5 million, and increases in book equity from ~~our~~ various stock-based compensation and dividend reinvestment plans of ~~$2.7~~$3.9 million. These equity enhancing developments during the quarter were offset ~~in part,~~ by a decrease related to other comprehensive loss of $3.8 million, cash dividends of ~~$10.1~~$10.6 million, and purchases of ~~our~~the Company's own common stock of ~~$2.8 million.~~$1.8 million under the Board-approved stock repurchase program described below.

Trust Preferred Securities: In each of 2003 and 2004, wethe 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 ours, 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 ~~no longer~~not qualify as Tier 1 capital under bank regulatory capital ~~guidelines, whereas~~guidelines. 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, ~~our~~Arrow's outstanding TRUPs continue to qualify as Tier 1 regulatory capital, subject to such limitations.

Stock Repurchase Program: In October ~~2016,~~2017, the Board of Directors approved a $5.0 million stock repurchase program, effective January 1, ~~2017~~2018 (the ~~2017~~2018 stock repurchase program)~~, under which management~~. Management is authorized, in its discretion, to repurchase from time-to-time during ~~2017,~~2018, in the open market or in privately negotiated transactions, up to $5 million of Arrow common stock, to the extent management believes purchase of the Company's stock is an attractive use of available capital and in the best interests of stockholders. ~~This 2017~~The 2018 stock repurchase program replaced a similar repurchase program which was in effect during ~~2016~~2017 (the ~~2016~~2017 stock repurchase program), which also authorized the repurchase of up to $5.0 million of Arrow common stock. As of September 30, ~~2017~~2018 approximately ~~$2.1 million~~$595 thousand had been used under the ~~2017~~2018 stock repurchase program to repurchase Arrow shares. This total does not include repurchases of Arrow's Common Stock other than through its 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.

In October 2017, the Board of Directors approved a new stock repurchase program authorizing the repurchase, at the discretion of senior management, of up to $5 million of Arrow common stock over the 12-month period starting January 1, 2018, in open market or negotiated transactions. This new repurchase program will replace the existing 2017, which expires December 31, 2017 program.

Dividends: ~~Our~~The Company's common stock is traded on NasdaqGS^® under the symbol AROW. The high and low stock prices for the past seven quarters listed below represent actual sales transactions, as reported by NASDAQ. On October ~~25, 2017, our~~31, 2018, the Board of Directors declared a ~~2017~~2018 fourth quarter cash dividend of ~~$0.250~~$0.26 payable on December ~~15, 2017.~~14, 2018. Per share amounts in the following table have been restated for our September ~~28, 2017~~27, 2018 3% stock dividend.


					Cash						Cash
	Market Price				Dividends		Market Price				Dividends
	Low		High		Declared		Low		High		Declared
2016
2017
First Quarter	$	23.13	$	25.96	$	0.236	$	30.87	$	38.60	$	0.236
Second Quarter	24.42		28.65		0.236		29.27		33.93		0.236
Third Quarter	27.79		33.08		0.236		28.94		33.98		0.236
Fourth Quarter	29.67		40.49		0.243		32.52		37.48		0.243
2017
2018
First Quarter	$	31.80	$	39.76	$	0.243	$	29.91	$	34.53	$	0.243
Second Quarter	30.15		34.95		0.243		31.89		37.23		0.243
Third Quarter	29.81		35.00		0.243		35.19		38.98		0.252
Fourth Quarter (dividend payable December 15, 2017)	TBD		TBD		0.250
Fourth Quarter (dividend payable December 14, 2018)							TBD		TBD		0.260


	Quarter Ended September 30,						Quarter Ended September 30,
	2017			2016			2018			2017
Cash Dividends Per Share	$	0.243		$	0.236		$	0.252		$	0.236
Diluted Earnings Per Share	0.53			0.48			0.64			0.52
Dividend Payout Ratio	45.85		%	49.17		%	39.38		%	45.38		%
Total Equity (in thousands)	244,648			$	229,208		264,810			$	244,648
Shares Issued and Outstanding (in thousands)	13,891			13,828			14,441			14,308
Book Value Per Share	$	17.61		$	16.58		$	18.34		$	17.10
Intangible Assets (in thousands)	24,268			24,675			23,827			24,268
Tangible Book Value Per Share	$	15.86		$	14.79		$	16.69		$	15.40

LIQUIDITY

The objective of effective liquidity management is to ensure that ~~we have~~the Company has the ability to raise cash when ~~we need it~~needed at a reasonable cost. ~~We must be capable~~This includes the capability of meeting expected and unexpected obligations to ~~our~~the Company's customers at any time. Given the uncertain nature of customer demands ~~as well as~~and the need to maximize earnings, wethe Company must have available reasonably priced sources of funds, both on- and off-balance sheet, that can be accessed quickly in time of need.

~~Our~~The primary sources of available liquidity are overnight investments in federal funds sold, interest bearing bank balances at the Federal Reserve Bank, 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. ~~Our~~The securities available-for-sale portfolio was ~~$315.5~~$340.4 million at September 30, ~~2017, a decrease~~2018, an increase of ~~$31.5~~$40.2 million, from the year-end ~~2016~~2017 level. Due to the potential for volatility in market values, ~~we are~~the Company may not always be able to ~~assume that~~sell securities ~~may be sold~~ on short notice at their carrying value, even to provide needed liquidity.

In addition to liquidity from short-term investments, investment securities and loans, ~~we have~~the Company has supplemented available operating liquidity with additional off-balance sheet sources such as a federal funds lines of credit with one correspondent ~~banks~~bank and credit lines with the FHLBNY. ~~Our~~The federal funds ~~lines~~line of credit ~~are~~is with ~~two~~a correspondent ~~banks~~bank totaling ~~$35 million; we did~~$15 million which was not ~~draw~~drawn on ~~these lines~~ during the three months ended September 30, ~~2017.~~2018.

To support ~~our~~the borrowing relationship with the FHLBNY, ~~we have~~the Company has pledged collateral, including residential mortgage and home equity loans. At September 30, ~~2017, we~~2018, the Company had outstanding collateral obligations with the FHLBNY of ~~$258~~$306 million; ~~on such~~as of that date, ~~our~~the unused borrowing capacity at the FHLBNY was approximately ~~$242~~$233 million. ~~In addition we~~Brokered deposits have also been identified ~~brokered certificates of deposit~~ as an ~~appropriate off-balance sheet~~available source of funding accessible in a relatively short time period. At September 30, 2018, the balance of outstanding brokered deposits totaled $45 million. Also, ~~our~~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 ~~we maintain~~are maintained for contingency liquidity purposes. At September 30, ~~2017,~~2018, the amount available under this facility was approximately ~~$416~~$487 million, and there were no advances then outstanding.

~~We measure~~The Company measures and ~~monitor our~~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 ~~our~~the investment securities portfolio, cash flows from ~~our~~the loan portfolio, ~~our~~the stable core deposit base and ~~our~~the significant borrowing capacity, ~~we believe~~the Company believes that ~~our~~the available liquidity is sufficient to meet all funding needs that may arise in connection with any reasonably likely events or occurrences. At September 30, ~~2017, our~~2018, the basic liquidity ratio, including ~~our FHLB~~the FHLBNY collateralized borrowing capacity, was ~~11.0%~~9.3% of total assets, or ~~$192~~$158 million in excess of ~~our~~the internally-set minimum target ratio of 4%.

Because of ~~our~~its consistently favorable credit quality and strong balance sheet, wethe Company did not experience any significant liquidity constraints in the three-month period ended September 30, ~~2017~~2018 and did not experience any such constraints in ~~any~~recent prior ~~year,~~years, back to and including the financial crisis years. ~~We have~~The Company has not at any time during such period been forced to pay ~~premium~~above-market rates to obtain retail deposits or other funds from any source.

RESULTS OF OPERATIONS

Three Months Ended September 30, ~~2017~~2018 Compared With

Three Months Ended September 30, ~~2016~~2017

Summary of Earnings Performance

(Dollars in Thousands, Except Per Share Amounts)


	Quarter Ended											Quarter Ended
	9/30/2017			9/30/2016			Change			% Change		9/30/2018			9/30/2017			Change			% Change
Net Income	$	7,416		$	6,738		$	678		10.1	%	$	9,260		$	7,416		$	1,844		24.9	%
Diluted Earnings Per Share	0.53			0.48			0.05			10.4		0.64			0.52			0.12			23.1	%
Return on Average Assets	1.08		%	1.06		%	0.02		%	1.9		1.28		%	1.08		%	0.20		%	18.5	%
Return on Average Equity	12.07		%	11.75		%	0.32		%	2.7		13.96		%	12.07		%	1.89		%	15.7	%

~~We reported net~~Net income ~~of $7.4~~was $9.3 million and diluted earnings per share (EPS) of ~~$.53~~$.64 for the third quarter of ~~2017~~,2018, compared to net income of ~~$6.7~~$7.4 million and diluted EPS of ~~$.48~~$.52 for the third quarter of ~~2016~~.2017. Return on average assets (ROA) for the third quarter of ~~2017~~2018 was ~~1.08%~~1.28%, up 220 basis points from ~~1.06%~~1.08% in the third quarter of ~~2016.~~2017. In addition, ~~our~~ return on average equity (ROE) increased to ~~12.07%~~

13.96% for the third quarter of ~~2017,~~2018, up 32189 basis points from ~~11.75%~~12.07% in the third quarter of ~~2016.~~2017.

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

(~~Taxable Equivalent Basis,~~ Dollars in Thousands)


	Quarter Ended											Quarter Ended
	9/30/2017			9/30/2016			Change			% Change		9/30/2018			9/30/2017			Change			% Change
Interest and Dividend Income	$	22,565		$	20,222		$	2,343		11.6	%	$	24,495		$	21,599		$	2,896		13.4	%
Tax-Equivalent Adjustment												376			966			(590		)	(61.1	)%
Interest and Dividend Income (Tax-equivalent) ⁽²⁾												24,871			22,565			2,306			10.2	%

Interest Expense	1,949			1,405			544			38.7	%	3,498			1,949			1,549			79.5	%
Net Interest Income	20,616			18,817			1,799			9.6	%	20,997			19,650			1,347			6.9	%
Tax-Equivalent Adjustment	966			940			26			2.8	%
Net Interest Income (Tax-equivalent) ⁽²⁾												21,373			20,616			757			3.7	%
Average Earning Assets ⁽¹⁾	2,597,277			2,399,197			198,080			8.3	%	2,757,020			2,597,277			159,743			6.2	%
Average Interest-Bearing Liabilities	2,012,802			1,892,583			120,219			6.4	%	2,110,924			2,012,802			98,122			4.9	%

Yield on Earning Assets ⁽¹⁾	3.45		%	3.35		%	0.10		%	3.0	%	3.52		%	3.30		%	0.22		%	6.7	%
Yield on Earning Assets (Tax-equivalent) ^{(1) (2)}												3.58			3.45			0.13		%	3.8	%
Cost of Interest-Bearing Liabilities	0.38			0.30			0.08		%	26.7	%	0.66			0.38			0.28		%	73.7	%

Net Interest Spread	3.07			3.05			0.02		%	0.7	%	2.86			2.92			(0.06		)%	(2.1	)%
Net Interest Spread (Tax-equivalent) ⁽²⁾												2.92			3.07			(0.15		)%	(4.9	)%

Net Interest Margin	3.15			3.12			0.03		%	1.0	%	3.02			3.00			0.02		%	0.7	%
Net Interest Margin (Tax-equivalent) ⁽²⁾												3.08			3.15			(0.07		)%	(2.2	)%

⁽¹⁾ Includes Nonaccrual ~~Loans~~Loans.

⁽²⁾See "Use of Non-GAAP Financial Measures" on page 40; reported on a fully taxable basis using a marginal federal tax rate of 35% for 2017, 21% for 2018.

Net interest income for the just completed quarter, on a ~~taxable equivalent~~GAAP basis, increased by ~~$1.8~~$1.3 million, or ~~9.6%~~6.9%, from the third quarter of ~~2016, largely~~2017, due, in part, to an increase in ~~our~~ average earning assets of ~~8.3%~~6.2%, as compared to the ~~6.4%~~4.9% increase in ~~our~~ average interest-bearing liabilities. In addition, ~~our~~ net interest margin increased 32 basis points in the third quarter of ~~2017~~2018 to ~~3.15%~~3.02%, from ~~3.12%~~3.00% during the third quarter of ~~2016. Due to our strong loan growth, the~~2017. The composition of ~~our~~ average earning assets during the ~~2017~~2018 period includes more relatively higher yielding loans ~~and slightly~~again this quarter, with less relatively lower yielding investment securities due to the strategy of not reinvesting a portion of the securities maturing ~~securities. As a result,~~during the ~~yield on average earning assets increased 10~~quarter. Earning asset yields were 22 basis points higher in the ~~current year period. While our growth in non-interest bearing demand deposits during~~2018 quarter due to the ~~2017 period has resulted in slowing the~~continued increase in ~~our~~market yields and the higher composition of loans in earning assets. The cost of interest-bearing liabilities ~~the additional 53~~increased 28 basis points inquarter over quarter due to rate-sensitive deposit customers continuing to reallocate their deposit investments to higher yielding money market savings products and time deposits, especially time deposits over $250,000. In this rising rate environment, the cost of ~~short-term~~brokered deposits and overnight borrowings ~~utilized to fund our loan growth resulted in an increase~~from the FHLBNY increased in the ~~cost of interest-bearing liabilities of 8 basis points. We define~~2018 quarter. The Company defines net interest margin as ~~our~~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. ~~Our~~Tax-equivalent net interest margin, as well as ~~our~~ tax-equivalent net interest income, from

which the margin is derived, are non-GAAP financial measures. (See the discussion under ~~“Use~~"Use of Non-GAAP Financial Measures,”" on page ~~38,~~40, and the tabular information and notes on pages 4041 through ~~43,~~44, regarding ~~our~~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~~"Average Consolidated Balance Sheets and Net Interest Income Analysis.”" The impact of recent interest rate changes on ~~our~~Arrow's deposit and loan portfolios are discussed above in this Report under the sections entitled ~~“Deposit Trends”~~"Deposit Trends" and ~~“Loan~~"Loan Trends.”"

As discussed previously under the heading "Asset Quality" beginning on page ~~54,~~56, the provision for loan losses for the third quarter of ~~2017~~2018 was ~~$800~~$586 thousand, compared to a provision of ~~$480~~$800 thousand for the ~~2016~~2017 quarter.

Noninterest Income

Summary of Noninterest Income

(Dollars in Thousands)


	Quarter Ended									Quarter Ended
	9/30/2017		9/30/2016		Change			% Change		9/30/2018		9/30/2017		Change			% Change
Income From Fiduciary Activities	$	2,116	$	1,923	$	193		10.0	%	$	2,262	$	2,116	$	146		6.9	%
Fees for Other Services to Customers	2,453		2,491		(38		)	(1.5	)%	2,605		2,453		152			6.2	%
Insurance Commissions	2,113		2,127		(14		)	(0.7	)%	2,024		2,113		(89		)	(4.2	)%
Net Gain on Securities Transactions	10		—		10			—	%
Net Gain on Securities										114		10		104			1,040.0	%
Net Gain on the Sale of Loans	182		310		(128		)	(41.3	)%	54		182		(128		)	(70.3	)%
Other Operating Income	267		263		4			1.5	%	291		267		24			9.0	%
Total Noninterest Income	$	7,141	$	7,114	$	27		0.4	%	$	7,350	$	7,141	$	209		2.9	%

Total noninterest income in the current quarter was ~~$7.1~~$7.4 million, up ~~slightly~~$209 thousand from total noninterest income for the third quarter of ~~2016~~. 2017. �� Income from fiduciary activities for the third quarter of 2018 increased by $146 thousand, or 6.9% over the third quarter of 2017 due to favorable equity market returns.

Fees for other services to customers ~~the largest segment of our noninterest income, remained consistent at $2.5~~increased to $2.6 million for the third quarter of ~~2017, as compared to the third quarter of 2016.~~2018. In addition to service charge income on deposits, this category also includes debit card interchange income, ~~revenues~~revenue related to the sale of mutual funds to ~~our~~ customers by third party providers, and servicing income on sold loans. Debit card usage by ~~our~~ customers ~~has continued~~continues to grow, ~~in recent periods,~~ which has ~~generally offset the negative effect of reduced debit interchange rates. Generally, we do not believe that the limits~~had (and if such growth persists, will continue to have) a positive impact on debit ~~interchange fees resulting from Dodd-Frank will have a material adverse impact~~card fee income.

The $104 thousand increase in net gain on ~~our financial condition or results~~securities between the periods was primarily due to the change in the fair value of ~~operations in future periods.~~

~~Income from fiduciary activities for~~marketable equity securities as compared to the third quarter of ~~2017 increased by $193 thousand, or 10.0% over the third quarter~~2017. For periods prior to 2018, accounting guidance resulted in these gains being recorded as a component of 2016. This growth in income from fiduciary activities can be attributed to market performance and customer account acquisition and retention strategies. Insurance commissions remained consistent at $2.1 million for the third quarter of 2017.

~~The $10 thousand increase in net securities gains between the periods was due to the fact that we did not sell any securities in the third quarter of 2016.~~accumulated comprehensive income.

Net gain on the sale of loans in the third quarter of ~~2017~~2018 decreased by $128 thousand from the third quarter of ~~2016.~~2017. This decrease was a result of ~~both~~ a decrease in loan sale volume and a slight reduction in the premium achieved by those sales. The slight reduction in premium is consistent with our yield trend from residential real estate loans and the reduction in volume in loan sales is a reflection of our business strategy to sell fewer earning assets, in favor of retaining them in our portfolio.volume. See page 5051 for ~~our~~the discussion of loan sales.

Insurance commissions decreased to $2.0 million for the third quarter of 2018 compared to $2.1 million for the third quarter of 2017 due to the increased competition for commercial insurance clients in the Company's markets.

~~Noninterest Expense~~

~~Summary of Noninterest Expense~~

~~(Dollars in Thousands)~~

Quarter Ended
9/30/2017 9/30/2016 Change % Change
Salaries and Employee Benefits $ 9,251
$ 8,693
$ 558
6.4 %
Occupancy Expense of Premises, Net 1,145
1,257
(112 ) (8.9 )
Furniture and Equipment Expense 1,226
1,168
58
5.0
FDIC and FICO Assessments 225
217
8
3.7
Amortization 69
74
(5 ) (6.8 )
Other Operating Expense 3,632
3,673
(41 ) (1.1 )
Total Noninterest Expense $ 15,548
$ 15,082
$ 466
3.1
Efficiency Ratio 55.79 % 57.88 % (2.09 )% (3.6 )

~~Noninterest expense for the third quarter of~~ ~~2017~~ ~~was $15.5 million, an increase of $0.5 million, or 3.1%, from the expense for the third quarter of~~ ~~2016~~. However, the rate of increase in expense on a year-over-year basis was less than the rate of growth in average total loans or in average total assets between the same two periods. This favorable comparison of rates of increase was reflected in our efficiency ratio, which was 55.79% for the third quarter of 2017, down 209 basis points from our ratio for the comparable 2016 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. We calculate our efficiency ratio as the ratio of noninterest expense (excluding, under our 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 38 of this Report under the heading “Use of Non-GAAP Financial Measures” and the related tabular information and notes on pages 40 through 43 of this Report. The efficiency ratio included by the Federal Reserve Board in its "Peer Holding Company Performance Reports" excludes net securities gains or losses from the denominator (as does our calculation), but unlike our ratio does not exclude intangible asset amortization from the numerator. Our efficiency ratios in recent periods have generally compared favorably to the ratios of our peer group as disclosed in the Fed's Performance Reports (see page 37 for a discussion of our peer group). For the three-month period ended ~~June 30, 2017~~ ~~(the most recent reporting period for which peer group information is available), the peer group's efficiency ratio was~~ ~~66.14%, and our ratio was~~ ~~57.16%~~ ~~(not adjusted for the definitional difference).~~

Salaries and employee benefits expense increased 6.4% in the third quarter of 2017 compared to the 2016 quarter. The primary reason for the increase is increased staffing levels and normal salary increases. Employee benefit expenses increased by $184 thousand or 10.2% primarily related to increases in medical claims under our health benefit plans.

~~Income Taxes~~

~~Summary of Income Taxes~~

~~(Dollars in Thousands)~~

Quarter Ended
9/30/2017 9/30/2016 Change % Change
Provision for Income Taxes $ 3,027
$ 2,691
$ 336
12.5 %
Effective Tax Rate 29.0 % 28.5 % 0.5
1.8

~~The effective tax rate did not materially change in the third quarter of 2017 compared to the 2016 quarter.~~

~~RESULTS OF OPERATIONS~~

~~Nine Months Ended September 30, 2017 Compared With~~

~~Nine Months Ended September 30, 2016~~

~~Summary of Earnings Performance~~

~~(Dollars in Thousands, Except Per Share Amounts)~~

Nine Months Ended
9/30/2017
9/30/2016 Change % Change
Net Income $ 21,255
$ 19,934
$ 1,321
6.6 %
Diluted Earnings Per Share 1.52
1.44
0.08
5.6
Return on Average Assets 1.06 % 1.07 % (0.01 )% (0.9 )
Return on Average Equity 11.86 % 11.93 % (0.07 )% (0.6 )

We reported net income of $21.3 million and diluted earnings per share (EPS) of $1.52 for the first nine months of 2017, compared to net income of $19.9 million and diluted EPS of $1.44 for the first nine months of 2016. Return on average assets (ROA) for the first nine months of 2017 was 1.06%, down slightly from 1.07% for the first nine months of 2016. In addition, our return on average equity (ROE) decreased slightly to 11.86% for the first nine months of 2017 from 11.93% for the first nine months of 2016.

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

~~Net Interest Income~~

~~Summary of Net Interest Income~~

~~(Taxable Equivalent Basis, Dollars in Thousands)~~

Nine Months Ended
9/30/2017 9/30/2016 Change % Change
Interest and Dividend Income $ 65,385
$ 59,925
$ 5,460
9.1 %
Interest Expense 5,184
3,952
1,232
31.2 %
Net Interest Income 60,201
55,973
4,228
7.6 %
Tax-Equivalent Adjustment 2,863
2,780
83
3.0 %
Average Earning Assets ⁽¹⁾
2,550,076
2,368,454
181,622
7.7 %
Average Interest-Bearing Liabilities 1,998,746
1,883,717
115,029
6.1 %

Yield on Earning Assets ⁽¹⁾
3.43 % 3.38 % 0.05 % 1.5 %
Cost of Interest-Bearing Liabilities 0.35
0.28
0.07 % 25.0 %
Net Interest Spread 3.08
3.10
(0.02 )% (0.6 )%
Net Interest Margin 3.16
3.16
— % — %

⁽¹⁾ ~~Includes Nonaccrual Loans~~

Net interest income dollars for the just completed nine-month period, on a taxable equivalent basis, increased by $4.2 million, or 7.6%, over the 2016 amount, principally due to the above mentioned positive impact of a 7.7% increase in the level of our average earning assets as compared to the 6.1% increase in average interest-bearing liabilities. For the first nine months of 2017, net interest margin was unchanged from the 3.16% for the first nine months of 2016. Due to our strong loan growth, the composition of our average earning assets during the 2017 period includes more loans earning higher yields and slightly less lower yielding investment securities, due to the strategy of not reinvesting a portion of the maturing securities. As a result, the yield on average earning assets increased 5 basis points in the current year period. Although our growth in non-interest bearing demand deposits during the 2017 period has resulted in slowing the increase in our cost of interest-bearing liabilities, the additional 43 basis points in the cost of short-term borrowings utilized to fund our loan growth resulted in an increase in the cost of interest bearing liabilities of 7 basis points. We define net interest margin as our net interest income on a tax-equivalent basis divided by average earning assets, annualized. Our net interest margin, as well as our tax-equivalent net interest income from which the margin is derived, are non-GAAP measures. (See the discussion under “Use of Non-GAAP Financial Measures,” on page 38, and the tabular information and notes on pages 40 through 43, regarding our net interest margin and tax-equivalent net interest income, which are commonly used non-GAAP financial 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 our 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 54, the provision for loan losses for the first nine months of 2017 was $1.58 million, compared to a provision of $1.55 million for the 2016 period.

~~Noninterest Income~~

~~Summary of Noninterest Income~~

~~(Dollars in Thousands)~~

Nine Months Ended
9/30/2017 9/30/2016 Change % Change
Income From Fiduciary Activities $ 6,284
$ 5,854
$ 430
7.3 %
Fees for Other Services to Customers 7,122
7,144
(22 ) (0.3 )
Insurance Commissions 6,426
6,468
(42 ) (0.6 )
Net Gain on Securities Transactions 10
144
(134 ) (93.1 )
Net Gain on the Sale of Loans 431
649
(218 ) (33.6 )
Other Operating Income 620
925
(305 ) (33.0 )
Total Noninterest Income $ 20,893
$ 21,184
$ (291 ) (1.4 )

Total noninterest income in the first nine months of 2017 was $20.9 million, a small decrease of $291 thousand, or 1.4%, from total noninterest income of $21.2 million for the first nine months of 2016. Fees for other services to customers, the largest segment of our noninterest income, remained consistent at $7.1 million for the first nine months of 2017, as compared to the first nine months of 2016.

Income from fiduciary activities for the first nine months of 2017 increased by $430 thousand, or 7.3% over the first nine months of 2016. This growth in income from fiduciary activities can be attributed to market performance and customer account acquisition and retention strategies. Insurance commissions remained materially consistent at $6.4 million for the first nine months of 2017, as compared to the first nine months of 2016.

Net securities gains between the periods decreased $134 thousand due to the opportunities available to reposition our available-for-sale securities portfolio during the 2016 period that were not available during the 2017 period. See our discussion on our investment securities portfolio beginning on page 53 of this Report. The decrease in other operating income between the periods was due to the fact that we recognized significant income in the 2016 period from our investment in regional business incubation enterprises (limited partnerships), which was not recognized by us in the 2017 period.

~~Net gain on the sale of loans in the first nine months of 2017~~decreased by $218 thousand, or 33.6% from the first nine months of 2016. This decrease was a result of both lower loan sale volume and a slight reduction in the average premium achieved by those sales. The slight reduction in premium is consistent with our yield trend from residential real estate loans (i.e.: yields were not dropping as fast during this period) and the reduction in volume in loan sales is a reflection of our business strategy to sell fewer earning assets, in favor of retaining them in our portfolio. See page 50 for our discussion of loan sales.

Noninterest Expense

Summary of Noninterest Expense

(Dollars in Thousands)


	Nine Months Ended											Quarter Ended
	9/30/2017			9/30/2016			Change			% Change		9/30/2018			9/30/2017			Change			% Change
Salaries and Employee Benefits	$	27,343		$	25,223		$	2,120		8.4	%	$	9,771		9,382			$	389		4.1	%
Occupancy Expense of Premises, Net	3,761			3,819			(58		)	(1.5	)	1,132			1,145			(13		)	(1.1	)%
Furniture and Equipment Expense	3,649			3,404			245			7.2		1,130			1,226			(96		)	(7.8	)%
FDIC and FICO Assessments	679			844			(165		)	(19.5	)	218			225			(7		)	(3.1	)%
Amortization	210			223			(13		)	(5.8	)	65			69			(4		)	(5.8	)%
Other Operating Expense	11,019			10,824			195			1.8		3,710			3,501			209			6.0	%
Total Noninterest Expense	$	46,661		$	44,337		$	2,324		5.2		$	16,026		$	15,548		$	478		3.1	%
Efficiency Ratio	57.29		%	57.28		%	0.01		%	—		55.79		%	55.79		%	—		%	—	%

Noninterest expense for the ~~first nine months~~third quarter of ~~2017~~2018 was ~~$46.7~~$16.0 million, an increase of ~~$2.3 million,~~$478 thousand, or ~~5.2%~~3.1%, from the expense for the ~~first nine months~~third quarter of ~~2016. This~~2017. The increase in salaries and benefits quarter-over-quarter was due to salary increases. Pursuant to ASU 2017-07 Compensation-Retirement Benefits, Arrow has reclassified the non-service cost components of its retirement plans from salaries and benefits to other operating expenses. The increase in other operating expense was due to increased loan costs combined with increased spending on ~~a year-over-year basis represents less than~~technology. The reductions in the ~~growth in average total loans or in average total assets between~~other noninterest expense categories were due to the ~~same two periods. Our~~ongoing expense control program.

The efficiency ratio was ~~57.29%~~55.79% for both the ~~first nine months~~third quarter of ~~2017, up by 1 basis point (a slight drop in efficiency) from our ratio~~2018 and for the comparable ~~2016 period. This~~2017 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. ~~We calculate our~~The Company calculates the efficiency ratio as the ratio of noninterest expense (excluding, under ~~our~~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 3840 of this Report under the heading ~~“Use~~"Use of Non-GAAP Financial ~~Measures”~~Measures" and the related tabular information and notes on pages 41 through 44 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 Fed's Performance Reports (see page 39 for a discussion of the peer group). For the three-month period ended June 30, 2018 (the most recent reporting period for which peer group information is available), the peer group's efficiency ratio was 65.87% compared to the Company's ratio of 55.38% (not adjusted for the definitional difference).

Income Taxes

Summary of Income Taxes

(Dollars in Thousands)



	Quarter Ended
	9/30/2018			9/30/2017			Change			% Change
Provision for Income Taxes	$	2,475		$	3,027		$	(552	)	(18.2	)%
Effective Tax Rate	21.1		%	29.0		%	(7.9		)	(27.2	)

The effective tax rate for the 2018 quarter reflects the impact of the Tax Act which decreased the federal statutory income tax rate from 35% in 2017 to 21% in 2018.

RESULTS OF OPERATIONS

Nine Months Ended September 30, 2018 Compared With

Nine Months Ended September 30, 2017

Summary of Earnings Performance

(Dollars in Thousands, Except Per Share Amounts)



	Nine Months Ended
	9/30/2018			9/30/2017			Change			% Change
Net Income	$	27,521		$	21,255		$	6,266		29.5	%
Diluted Earnings Per Share	1.90			1.48			0.42			28.4
Return on Average Assets	1.30		%	1.06		%	0.24		%	22.6
Return on Average Equity	14.32		%	11.86		%	2.46		%	20.7

Net income was $27.5 million and diluted earnings per share (EPS) of $1.90 for the first nine months of 2018, compared to net income of $21.3 million and diluted EPS of $1.48 for the first nine months of 2017. Return on average assets (ROA) for the first nine months of 2018 was 1.30%, an increase of 22.6% from 1.06% for the first nine months of 2017. In addition, return on average equity (ROE) increased to 14.32% for the first nine months of 2018 from 11.86% for the first nine months of 2017.

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

Net Interest Income

Summary of Net Interest Income

(Taxable Equivalent Basis, Dollars in Thousands)



	Nine Months Ended
	9/30/2018			9/30/2017			Change			% Change
Interest and Dividend Income	$	70,503		$	62,522		$	7,981		12.8	%
Tax-Equivalent Adjustment	1,335			2,863			(1,528		)	(53.4	)%
Interest and Dividend Income (Tax-equivalent) ⁽²⁾	71,838			65,385			6,453			9.9	%

Interest Expense	8,142			5,184			2,958			57.1	%
Net Interest Income	62,361			57,338			5,023			8.8	%
Net Interest Income (Tax-equivalent) ⁽²⁾	63,696			60,201			3,495			5.8	%
Average Earning Assets ⁽¹⁾	2,701,001			2,550,076			150,925			5.9	%
Average Interest-Bearing Liabilities	2,087,445			1,998,746			88,699			4.4	%

Yield on Earning Assets ⁽¹⁾	3.49		%	3.28		%	0.21		%	6.4	%
Yield on Earning Assets (Tax-equivalent) ^{(1) (2)}	3.56			3.43			0.13		%	3.8	%
Cost of Interest-Bearing Liabilities	0.52			0.35			0.17		%	48.6	%

Net Interest Spread	2.97			2.93			0.04		%	1.4	%
Net Interest Spread (Tax-equivalent) ⁽²⁾	3.04			3.08			(0.04		)%	(1.3	)%

Net Interest Margin	3.09			3.01			0.08		%	2.7	%
Net Interest Margin (Tax-equivalent) ⁽²⁾	3.15			3.16			(0.01		)%	(0.3	)%

⁽¹⁾ Includes Nonaccrual Loans

⁽²⁾See "Use of Non-GAAP Financial Measures" on page 40; reported on a fully taxable basis using a marginal federal tax rate of 35% for 2017, 21% for 2018.

Net interest income on a GAAP basis, for the nine-month period ended September 30, 2018 increased by $5.0 million, or 8.8%, over the 2017 amount due to the positive impact of a 5.9% increase in the level of average earning assets as compared to the 4.4% increase in average interest-bearing liabilities, and due to an increase in net interest margin for the period. For the first nine months of 2018, net interest margin increased to 3.09% from the 3.01% for the first nine months of 2017. The composition of average earning assets during the 2018 period continued to include more relatively higher yielding loans and less relatively lower yielding investment securities due to the strategy of not reinvesting a portion of the maturing securities. Earning assets yields were 21 basis points higher in the 2018 period due to the continued increase in market yields and the higher composition of loans in earning assets. The cost of interest-bearing liabilities increased 17 basis points in the 2018 period due to rate-sensitive deposit customers continuing to reallocate their deposit investments to higher yielding money market savings products and time deposits, especially time deposits over $250,000. In this continued rising rate environment, the cost of brokered deposits and overnight borrowings from the FHLBNY increased in the 2018 period. 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 40, and the tabular information and notes on pages 41 through 4344, regarding net interest margin and tax-equivalent net interest income, which are commonly used non-GAAP financial 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 56, the provision for loan losses for the first nine months of 2018 was $1.96 million, compared to a provision of $1.58 million for the 2017 period.

Noninterest Income

Summary of Noninterest Income

(Dollars in Thousands)



	Nine Months Ended
	9/30/2018		9/30/2017		Change			% Change
Income From Fiduciary Activities	7,106		6,284		$	822		13.1	%
Fees for Other Services to Customers	7,555		6,875		680			9.9
Insurance Commissions	6,119		6,426		(307		)	(4.8	)
Net Gain on Securities	355		10		345			3,450.0
Net Gain on the Sale of Loans	115		431		(316		)	(73.3	)
Other Operating Income	900		867		33			3.8
Total Noninterest Income	$	22,150	$	20,893	$	1,247		6.0	%

Total noninterest income in the first nine months of 2018 was $22.2 million, an increase of $1.3 million, or 6.0%, from total noninterest income of $20.9 million for the first nine months of 2017. Fees for other services to customers, the largest segment of noninterest income, increased 9.9% to $7.6 million for the first nine months of 2018, as compared to $6.9 million the first nine months of 2017.

Income from fiduciary activities for the first nine months of 2018 increased by $822 thousand, or 13.1% over the first nine months of 2017 due to the closing of a large estate in the second quarter of 2018 and favorable equity market returns. Insurance commissions declined 4.8% to $6.1 million for the first nine months of 2018, compared to $6.4 million in the first nine months of 2017 due to the increased competition for commercial insurance clients in the Company's markets.

The $345 thousand increase in net gain on securities between the periods was primarily due to a change in the fair value of marketable equity securities as compared to the third quarter of 2017, pursuant to Accounting Standards Update 2016-01. See the discussion on the investment securities portfolio beginning on page 54 of this Report.

The increase in other operating income between the periods was due to the fact that the Company recognized losses in the 2017 period from the investment in regional business incubation enterprises (limited partnerships), and a small gain in the 2018 period, in addition to various credits and fees collected, none of which were individually material.

Net gain on the sale of loans in the first nine months of 2018 decreased by $316 thousand, or 73.3% from the first nine months of 2017. This decrease was a result of lower loan sale volume which is consistent with the Company's business strategy to sell fewer earning assets, in favor of retaining them in the loan portfolio. See page 51 for the discussion of loan sales.

Noninterest Expense

Summary of Noninterest Expense

(Dollars in Thousands)



	Nine Months Ended
	9/30/2018			9/30/2017			Change			% Change
Salaries and Employee Benefits	$	28,952		$	27,740		$	1,212		4.4	%
Occupancy Expense of Premises, Net	3,742			3,761			(19		)	(0.5	)
Furniture and Equipment Expense	3,481			3,649			(168		)	(4.6	)
FDIC and FICO Assessments	658			679			(21		)	(3.1	)
Amortization	197			210			(13		)	(6.2	)
Other Operating Expense	11,144			10,622			522			4.9
Total Noninterest Expense	$	48,174		$	46,661		$	1,513		3.2
Efficiency Ratio	56.12		%	57.29		%	(1.17		)%	(2.0	)

Noninterest expense for the first nine months of 2018 was $48.2 million, an increase of $1.5 million, or 3.2%, from the expense for the first nine months of 2017. This increase on a year-over-year basis represents less than the growth in average total loans or in average total assets between the same two periods. The Company's efficiency ratio was 56.12% for the first nine months of 2018, down by 1.17%, representing an improvement as compared to the ratio for the comparable 2017 period. This ratio (a ratio where lower is better), is a commonly used non-GAAP financial measure in the banking industry that purports to reflect 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 40 of this Report under the heading "Use of Non-GAAP Financial Measures" and the related tabular information and notes on pages 41 through 44 of this Report.

Salaries and employee benefits expense increased ~~8.4%~~4.4% in the first nine months of ~~2017~~2018 over the ~~2016~~2017 period, reflecting an increase of ~~7.1%~~4.8% in salaries and an increase of ~~12.1%~~3.2% in benefits. The increase in salary expense was due in part to staffing expansion and ~~normal~~ merit increases. The increase in ~~our benefit expenses~~the benefits expense was primarily due to ~~medical claims incurred under~~increases in pension expense combined with awards related to the ~~company's minimum premium health insurance~~Company's short term incentive plan during the 2018 period. Pursuant to ASU 2017-07 Compensation-Retirement Benefits Arrow has reclassified the non-service cost components of retirement plans from salaries and benefits to other operating expenses.

Other operating expenses increased 4.9% in the first nine months of 2018 compared to the 2017 period primarily due to increased loan costs combined with increased spending on technology.

Furniture and Equipment Expense decreased by 4.6% due to reduced depreciation expense recorded in the first first nine months of 2018 compared to the 2017 period.

FDIC and FICO assessments decreased by ~~$165~~$21 thousand for the first nine months of ~~2017,~~2018, as compared to the first nine months of ~~2016.~~2017. This decrease is primarily the result of a reduction in the requirements for community banks of ~~our~~Arrow's size and a repositioning of ~~our~~ balance sheet components on which the assessment is based.

Income Taxes

Summary of Income Taxes

(Dollars in Thousands)


	Nine Months Ended											Nine Months Ended
	9/30/2017			9/30/2016			Change			% Change		9/30/2018			9/30/2017			Change			% Change
Provision for Income Taxes	$	8,735		$	8,556		$	179		2.1	%	$	6,855		$	8,735		$	(1,880	)	(21.5	)%
Effective Tax Rate	29.1		%	30.0		%	(0.9		)	(3.0	)	19.9		%	29.1		%	(9.2		)	(31.6	)

The decrease in the effective tax rate in the first nine months of ~~2017~~2018 over the first nine months of ~~2016,~~2017, was primarily attributable to ~~a change in state tax law that reduced our state tax expense combined with~~ the impact of the ~~adoption of new guidance on~~Tax Act which decreased the ~~accounting for share-based payment transactions. The new guidance resulted~~federal statutory income tax rate from 35% in ~~excess tax benefits from these transactions~~2017 to ~~be recorded as a reduction~~21% in ~~the provision for income taxes.~~2018.

Item 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

In addition to credit risk in ~~our~~the loan portfolio and liquidity risk, discussed ~~on page 58 of this Report, we have~~earlier, the Company's business activities also generate market ~~risk in our business activities.~~risk. Market risk is the possibility that changes in future market rates (interest rates) or prices (market value of ~~our~~ financial instruments) will make the Company's position (i.e., our ~~position~~assets and operations) less valuable. The Company's primary market risk is interest rate volatility. The ongoing monitoring and management of ~~market risk, principally~~ interest rate risk is an important component of ~~our~~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~~management's Asset/Liability Committee ~~(“ALCO”~~("ALCO"). In this capacity ALCO develops guidelines and strategies impacting ~~our~~the asset/liability profile based upon estimated market risk sensitivity, policy limits and overall market interest rate levels and trends. As

Changes in market interest rates, whether increases or decreases, can trigger repricing and changes in the pace of ~~the date of this Report, we are not using,~~payments for both assets and ~~have not~~liabilities (prepayment risk). This may individually or in ~~recent periods used, derivatives, such as interest rate swaps, in our risk management process.~~

~~Interest rate risk is the exposure of our~~combination affect net interest income, ~~to changes in~~net interest ~~rates. Interest rate risk is directly related to the different maturities~~margin, and repricing characteristics of interest-bearing assets and liabilities, as well as to the risk of prepayment of loans and early withdrawal of time deposits, and the fact that the speed and magnitude of responses to interest rate changes vary by product.

~~The~~ultimately net income, either positively or negatively. ALCO utilizes the results of a detailed and dynamic simulation model to quantify ~~the estimated exposure of~~this interest rate risk by projecting net interest income ~~to sustained~~in various interest rate ~~changes. While ALCO routinely monitors simulated net~~scenarios.

The Company's standard simulation model applies a parallel shift in interest ~~income sensitivity~~rates, ramped over a ~~rolling two-year horizon, it also utilizes additional tools~~12-month period, to ~~monitor potential longer-term interest rate risk.~~

~~Our current simulation model captures~~capture the impact of changing interest rates on ~~the~~net interest ~~income received and interest expense paid on all interest rate-sensitive assets and liabilities reflected on our consolidated balance sheet. This sensitivity analysis is~~income. The results are compared to ~~pre-established~~ ALCO policy limits which specify a maximum tolerance level for net interest income exposure over a ~~one~~one- year horizon. Our current sensitivity analysis model examines both a hypothetical upward shift of interest rates (currently, 200 basis points) and a hypothetical downward shift in interest rates (currently, 100 basis points, subject to certain zero rate limitations), and assumes (i)horizon, assuming no balance sheet growth and ~~(ii)~~ a ~~repricing of interest-bearing assets~~200 basis point upward and ~~liabilities at their earliest reasonably predictable repricing dates following the shift. For repricing purposes, we normally assume~~ a ~~parallel and pro-rata shift in rates for both assets and liabilities, over a 12 month period.~~

We occasionally need to make ad hoc adjustments to our model. During recent years, the Federal Reserve's targeted federal funds rate has remained at historically low levels. From 2010-2015 it was within a range of 0 to .50%; since then, the range has increased by 75 basis points to a range of 1.00% to 1.25%, but remains very low. The low prevailing short-term rate environment has led us to revise our standard model for the decreasing interest rate simulation for short-term liabilities and assets. Under our revised model, we have continued to apply our usual 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 ~~liabilities and assets on the long end~~each of the yield curve, but we have begun to assume, for purposes of modeling our short-term liabilities and assets bearing interest rates of less than 1.00%, a hypothetical downward shift of less that the normal rate utilized (i.e., less than 100 basis points) and in some cases have made no downward shift at all in the modeled interest rates if such rates only slightly exceed zero at the measurement date. As under our old model, we continue to assume that hypothetical interest rate shifts, upward or downward, affect assets and liabilities simultaneously, depending solely upon the contractual maturitiesfirst two years of the ~~particular assets and liabilities in question.~~

~~Applying~~simulation period for the ~~revised simulation model analysis as of September 30, 2017, a~~ 200 basis point increase in ~~all~~ interest ~~rates demonstrated a 2.8% decrease in net interest income over~~rate scenario and the ~~ensuing 12 month period, and a~~ 100 basis point decrease ~~(adjusted,~~in interest rate scenario. These results are well within the ALCO policy limits as ~~described above) demonstrated a 0.5% increase~~shown.

As of September 30, 2018:



	Change in Interest Rate		Policy Limit
	+ 200 basis points	- 100 basis points
Calculated change in Net Interest Income - Year 1	(2.70)%	1.20%	(10.00)%
Calculated change in Net Interest Income - Year 2	2.20%	2.00%	(15.00)%

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 ~~compared with our base projection. These amounts were well within our ALCO policy limits. The preceding sensitivity analysis does not represent~~net interest income is simulated over a ~~forecast on our part~~longer time frame, this exposure is limited, and ~~should not be relied upon~~actually reverses, as ~~being indicative~~asset yields continue to reprice while the cost of ~~expected operating results in the event of actual rate changes.~~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, wethe 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 ~~may~~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 ~~including a so-called "flattening" or even a possible "inversion" of the yield curve,~~ and other internal/external variables. Furthermore, the sensitivity analysis does not reflect ~~balance sheet growth or~~ actions that ALCO might take in responding to or anticipating changes in interest rates.

In general, we expect that our interest-bearing liabilities, which are primarily deposit liabilities, many of them having no minimum contractual term and bearing a very low interest rate, will likely reprice upward. In many cases, these deposit liabilities will reprice upward more rapidly than our short-term assets, if and as prevailing rates begin to rise, which may have a negative short-term impact on our net interest margin and net interest income, beyond that reported in the simulation analysis, above. However, many of our interest-earning assets also have relatively short maturities such that, following a rise in rates, they too will likely commence to reprice upward, relatively quickly, which will then have an offsetting positive impact on net interest income in ensuing periods.

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 September 30, ~~2017.~~2018. 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 ~~our~~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, ~~our~~the Company's internal control over financial reporting.

PART II - OTHER INFORMATION

Item 1.

Legal Proceedings

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

Item 1.A.

Risk Factors

~~We believe that the~~The Risk Factors identified in ~~our~~the Company's Annual Report on Form 10-K for the year ended December 31, ~~2016~~2017, continue to represent the most significant risks to ~~our~~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 Annual Report on Form 10-K for the fiscal year ended December 31, ~~2016~~2017.

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

Unregistered Sales of Equity Securities

There were no unregistered sales of the Company's equity securities by or on behalf of the Company during the just-completed quarter.

Issuer Purchases of Equity Securities

The following table presents information about purchases by Arrow of its common stock during the quarter ended September 30, ~~2017:~~2018:


Third Quarter 2017 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 ³
Third Quarter 2018 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
July	8,138	$	31.28	6,180	$	3,502,520	2,594	$	37.56	—	$	4,610,800
August	22,678	31.34		20,600	2,856,516		2,888	38.55		—	4,610,800
September	14,456	31.88		—	2,856,516		22,168	37.40		5,500	4,404,627
Total	45,272	31.50		26,780			27,650	37.54		5,500

¹The total number of shares ~~of Common Stock~~ purchased by the Company ~~in each month in the quarter~~ and the average price paid per share ~~are~~ listed in columns A(A) and ~~B, respectively. All shares identified in column A were either~~(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 ~~(DRIP) on behalf of participating stockholders, under~~(the "DRIP") by the ~~general supervision~~administrator of the ~~Board as administrator,~~DRIP, and (ii) shares surrendered ~~(or~~or deemed ~~surrendered)~~surrendered to Arrow in such periods by holders of options to acquire Arrow common stock ~~options~~received by them under Arrow's long-term incentive plans ("LTIPs") in connection with ~~such holders'~~their stock-for-stock ~~exercises~~exercise of such options. ~~and (iii) shares repurchased under the publicly announced Repurchase Program.~~ ~~Specifically, in~~In the months indicated, the ~~total~~listed number of shares ~~identified in column A includes~~purchased included the following number of shares purchased ~~on the open market on behalf of~~by Arrow through such methods: July - DRIP ~~participants as well as shares delivered to (or deemed delivered) by option holders in connection with~~purchases (1,574 shares) and stock-for-stock exercises ~~of their options, as follows: in July,~~(1,020 shares); August - DRIP purchases ~~(1,958~~(2,298 shares) and stock-for-stock exercises (590 shares); and September - DRIP purchases (12,934 shares), ~~stock option~~stock-for-stock exercises ~~(6,180~~(3,734 shares), and repurchased under the publicly-announced Repurchase Program (6,180 shares); in August, DRIP purchases (2,078 shares), stock option exercises (20,600 shares), and repurchased under the publicly-announced Repurchase Program (20,600 shares); and in September, DRIP purchases (14,098 shares), and stock option exercises (358 shares).(5,500 shares.)

² ~~Represents total number of~~Includes only those shares ~~repurchased~~acquired by ~~the Company during the quarter under the~~Arrow pursuant to its 2018 stock repurchase program. The only publicly-announced ~~2017 Repurchase Program (i.e., the $5 million~~ stock repurchase program ~~authorized~~in effect for the third quarter of 2018 was the program approved by the Board of Directors and announced in October ~~2016 and effective January 1, 2017).~~

³ ~~Represents~~2017, under which the ~~maximum dollar amount~~Board authorized management, in its discretion, to repurchase from time to time during 2018, in the open market or in privately negotiated transactions, up to $5 million of Arrow common stock subject to certain exceptions (the "2018 stock repurchase ~~authority remaining at each month-end during the quarter under the 2017 Repurchase Program.~~program").

Item 3.

Defaults Upon Senior Securities - None

Item 4.

Mine Safety Disclosures - None

Item 5.

Other Information

~~Separation Agreement~~

As previously disclosed in Current Reports on Form 8-K filed with the Securities and Exchange Commission February 7, 2017 and August 16, 2017, Terry R. Goodemote, then Executive Vice President, Treasurer and Chief Financial Officer of Arrow Financial Corporation (the “Company”), announced his intention to retire from all positions he held as an officer of the Company and its subsidiaries upon the hiring of his successor, Edward J. Campanella, which became effective September 5, 2017. In connection with Mr. Goodemote’s departure, on November 1, 2017, the Company and Mr. Goodemote signed an Executive Separation Agreement and Release (the “Separation Agreement”). The Separation Agreement is subject to revocation on the part of Mr. Goodemote no later than November 8, 2017.

Pursuant to the Separation Agreement, the Company will pay Mr. Goodemote a separation payment of $260,000 in installments over the 2018 calendar year. He will also be eligible to receive certain additional benefits, including, among other things, (1) continued medical, dental and life insurance contributions; (2) benefits under the Company’s retirement plans as set forth by the terms of the applicable plans; (3) any award to be paid according to the Company’s short-term incentive plan, pro-rated for the term of his service as an officer during 2017; and (4) continued rights of indemnification and directors and officers liability insurance with respect to the period of his service as an officer of the Company. Treatment of any outstanding equity awards held by Mr. Goodemote on his last day of employment with the Company will be governed by the applicable award agreement and underlying long-term incentive plan. Additionally, Mr. Goodemote will continue to be employed as a non-officer employee of the Company through December 31, 2017, unless earlier terminated by the Company for cause, to assist in an advisory capacity with the transition to his successor.

The benefits specified in the Separation Agreement, including the separation payment, will be provided by the Company in consideration of and contingent upon compliance with certain releases, representations, warranties, covenants and agreements made by Mr. Goodemote, including, but not limited to, covenants of confidentiality and non-solicitation. Pursuant to the Separation Agreement, the Company waived its rights to enforce a non-competition covenant set forth in the Employment Agreement dated January 27, 2016 by and among Mr. Goodemote, the Company and its wholly owned subsidiary, Glens Falls National Bank and Trust Company.

The foregoing description of the Separation Agreement is qualified in its entirety by reference to the complete text of the Separation Agreement, a copy of which is attached as Exhibit 10.1 hereto and is incorporated herein by reference.

- None

Item 6.

Exhibits



Exhibit Number	Exhibit
~~10.1~~	Executive Separation Agreement and Release between the Company and Terry R. Goodemote signed November 1, 2017*
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
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




November ~~7, 2017~~8, 2018	/s/Thomas J. Murphy
Date	Thomas J. Murphy, President and
	Chief Executive Officer

November ~~7, 2017~~8, 2018	/s/Edward J. Campanella
Date	Edward J. Campanella, Senior Vice President,
	Treasurer and Chief Financial Officer
	(Principal Financial Officer and
	Principal Accounting Officer)

# 6970



	Page
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements	3
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations	3739
Item 3. Quantitative and Qualitative Disclosures About Market Risk	6567
Item 4. Controls and Procedures	6667


PART II - OTHER INFORMATION
Item 1. Legal Proceedings	6768
Item 1.A. Risk Factors	6768
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	6768
Item 3. Defaults Upon Senior Securities	6768
Item 4. Mine Safety Disclosures	6768
Item 5. Other Information	6869
Item 6. Exhibits	6869

SIGNATURES	6970



Schedule of Share-based Compensation Arrangements
	Stock Option Plans
Roll-Forward of Shares Outstanding:
Outstanding at January 1, 2017	366,329
Granted	55,621
Exercised	(35,937		)
Forfeited	—
Outstanding at September 30, 2017	386,013
Exercisable at Period-End	242,706
Vested and Expected to Vest	143,307

Roll-Forward of Shares Outstanding - Weighted Average Exercise Price:
Outstanding at January 1, 2017	$	21.86
Granted	36.12
Exercised	20.46
Forfeited	—
Outstanding at September 30, 2017	24.05
Exercisable at Period-End	21.34
Vested and Expected to Vest	28.62

Grants Issued During 2017 - Weighted Average Information:
Fair Value	$	6.25
Fair Value Assumptions:
Dividend Yield	2.72		%
Expected Volatility	21.40		%
Risk Free Interest Rate	2.25		%
Expected Lives (in years)	6.88



Schedule of Fair Values by Balance Sheet Grouping
					Fair Value Hierarchy
	Carrying Amount		Fair Value		Level 1		Level 2		Level 3
September 30, 2017
Cash and Cash Equivalents	$	80,666	$	80,666	$	80,666	$	—	$	—
Securities Available-for-Sale	315,459		315,459		64,730		250,729		—
Securities Held-to-Maturity	341,526		343,899		—		343,899		—
Federal Home Loan Bank and Federal Reserve Bank Stock	6,704		6,704		—		6,704		—
Net Loans	1,891,104		1,870,379		—		—		1,870,379
Accrued Interest Receivable	7,692		7,692		—		7,692		—
Deposits	2,307,116		2,299,011		—		2,299,011		—
Federal Funds Purchased and Securities Sold Under Agreements to Repurchase	61,419		61,419		—		61,419		—
Federal Home Loan Bank Overnight Advances	33,000		33,000		—		33,000		—
Federal Home Loan Bank Term Advances	55,000		55,110		—		55,110		—
Junior Subordinated Obligations Issued to Unconsolidated Subsidiary Trusts	20,000		20,000		—		20,000		—
Accrued Interest Payable	260		260		—		260		—

December 31, 2016
Cash and Cash Equivalents	$	57,355	$	57,355	$	57,355	$	—	$	—
Securities Available-for-Sale	346,996		346,996		54,706		292,290		—
Securities Held-to-Maturity	345,427		343,751		—		343,751		—
Federal Home Loan Bank and Federal Reserve Bank Stock	10,912		10,912		—		10,912		—
Net Loans	1,736,256		1,720,078		—		—		1,720,078
Accrued Interest Receivable	6,684		6,684		—		6,684		—
Deposits	2,116,546		2,109,557		—		2,109,557		—
Federal Funds Purchased and Securities Sold Under Agreements to Repurchase	35,836		35,836		—		35,836		—
Federal Home Loan Bank Overnight Advances	123,000		123,000		—		123,000		—
Federal Home Loan Bank Term Advances	55,000		55,118		—		55,118		—
Junior Subordinated Obligations Issued to Unconsolidated Subsidiary Trusts	20,000		20,000		—		20,000		—
Accrued Interest Payable	247		247		—		247		—

September 30, 2016
Cash and Cash Equivalents	$	102,059	$	102,059	$	102,059	$	—	$	—
Securities Available-for-Sale	339,190		339,190		—		339,190		—
Securities Held-to-Maturity	338,238		347,441		—		347,441		—
Federal Home Loan Bank and Federal Reserve Bank Stock	5,371		5,371		—		5,371		—
Net Loans	1,690,241		1,696,929		—		—		1,696,929
Accrued Interest Receivable	7,046		7,046		—		7,046		—
Deposits	2,213,187		2,207,985		—		2,207,985		—
Federal Funds Purchased and Securities Sold Under Agreements to Repurchase	38,589		38,589		—		38,589		—
Federal Home Loan Bank Overnight Advances	—		—		—		—		—
Federal Home Loan Bank Term Advances	55,000		55,955		—		55,955		—
Junior Subordinated Obligations Issued to Unconsolidated Subsidiary Trusts	20,000		20,000		—		20,000		—
Accrued Interest Payable	247		247		—		247		—