UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended March 31, ~~2018~~2019

[ ] 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

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



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

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



Class		Outstanding as of April 30, ~~2018~~2019
Common Stock, par value $1.00 per share		~~13,969,371~~14,484,215

ARROW FINANCIAL CORPORATION

FORM 10-Q

TABLE OF CONTENTS

PART I - FINANCIAL INFORMATION

Item 1.

FINANCIAL STATEMENTS

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

	March 31, 2018			December 31, 2017			March 31, 2017			March 31, 2019			December 31, 2018			March 31, 2018
ASSETS
Cash and Due From Banks	$	29,525		$	42,562		$	50,158		$	36,198		$	56,529		$	29,525
Interest-Bearing Deposits at Banks	70,747			30,276			14,645			25,031			27,710			70,747
Investment Securities:
Available-for-Sale	305,589			300,200			347,159			298,812			317,535			305,589
Held-to-Maturity (Approximate Fair Value of $324,937 at March 31, 2018; $335,901 at December 31, 2017; and $335,105 at March 31, 2017)	330,124			335,907			335,211
Held-to-Maturity (Approximate Fair Value of $280,414 at March 31, 2019; $280,338 at December 31, 2018; and $324,937 at March 31, 2018)										279,400			283,476			330,124
Equity Securities	1,579			—			—			1,850			1,774			1,579
Other Investments	4,780			9,949			6,826			7,878			15,506			4,780
Loans	1,993,037			1,950,770			1,810,805			2,235,208			2,196,215			1,993,037
Allowance for Loan Losses	(19,057		)	(18,586		)	(17,216		)	(20,373		)	(20,196		)	(19,057		)
Net Loans	1,973,980			1,932,184			1,793,589			2,214,835			2,176,019			1,973,980
Premises and Equipment, Net	27,815			27,619			26,585			34,949			30,446			27,815
Goodwill	21,873			21,873			21,873			21,873			21,873			21,873
Other Intangible Assets, Net	2,172			2,289			2,575			1,777			1,852			2,172
Other Assets	58,503			57,606			57,765			62,280			55,614			58,503
Total Assets	$	2,826,687		$	2,760,465		$	2,656,386		$	2,984,883		$	2,988,334		$	2,826,687
LIABILITIES
Noninterest-Bearing Deposits	$	452,347		$	441,945		$	402,506		$	453,089		$	472,768		$	452,347
Interest-Bearing Checking Accounts	944,161			907,315			959,170			823,301			790,781			944,161
Savings Deposits	762,220			694,573			696,625			866,861			818,048			762,220
Time Deposits over $250,000	85,403			38,147			30,993			83,834			73,583			85,403
Other Time Deposits	167,142			163,136			167,242			263,012			190,404			167,142
Total Deposits	2,411,273			2,245,116			2,256,536			2,490,097			2,345,584			2,411,273
Federal Funds Purchased and Securities Sold Under Agreements to Repurchase	74,957			64,966			32,035			58,407			54,659			74,957
Federal Home Loan Bank Overnight Advances	—			105,000			32,000			74,500			234,000			—
Federal Home Loan Bank Term Advances	45,000			55,000			55,000			35,000			45,000			45,000
Junior Subordinated Obligations Issued to Unconsolidated Subsidiary Trusts	20,000			20,000			20,000			20,000			20,000			20,000
Finance Leases										2,946			—			—
Other Liabilities	22,723			20,780			24,704			27,324			19,507			22,723
Total Liabilities	2,573,953			2,510,862			2,420,275			2,708,274			2,718,750			2,573,953
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 March 31, 2018; 18,481,301 at December 31, 2017 and 17,943,201 at March 31, 2017)	18,481			18,481			17,943
Common Stock, $1 Par Value; 20,000,000 Shares Authorized (19,035,565 Shares Issued at March 31, 2019; 19,035,565 at December 31, 2018 and 18,481,301 at March 31, 2018)										19,035			19,035			18,481
Additional Paid-in Capital	290,980			290,219			271,517			315,262			314,533			290,980
Retained Earnings	34,093			28,818			31,901			34,231			29,257			34,093
Unallocated ESOP Shares (9,643 Shares at March 31, 2018; 9,643 Shares at December 31, 2017 and 19,466 Shares at March 31, 2017)	(200		)	(200		)	(400		)
Unallocated ESOP Shares (5,001 Shares at March 31, 2019; 5,001 Shares at December 31, 2018 and 9,643 Shares at March 31, 2018)										(100		)	(100		)	(200		)
Accumulated Other Comprehensive Loss	(11,285		)	(8,514		)	(6,680		)	(11,567		)	(13,810		)	(11,285		)
Treasury Stock, at Cost (4,516,444 Shares at March 31, 2018; 4,541,524 Shares at December 31, 2017 and 4,442,292 Shares at March 31, 2017)	(79,335		)	(79,201		)	(78,170		)
Treasury Stock, at Cost (4,556,083 Shares at March 31, 2019; 4,558,207 Shares at December 31, 2018 and 4,516,444 Shares at March 31, 2018)										(80,252		)	(79,331		)	(79,335		)
Total Stockholders’ Equity	252,734			249,603			236,111			276,609			269,584			252,734
Total Liabilities and Stockholders’ Equity	$	2,826,687		$	2,760,465		$	2,656,386		$	2,984,883		$	2,988,334		$	2,826,687

See Notes to Unaudited Interim Consolidated Financial Statements.

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

	Three Months Ended March 31,				Three Months Ended March 31,
	2018		2017		2019		2018
INTEREST AND DIVIDEND INCOME
Interest and Fees on Loans	$	18,858	$	16,402	$	22,403	$	18,858
Interest on Deposits at Banks	134		60		195		134
Interest and Dividends on Investment Securities:
Fully Taxable	1,893		1,990		2,369		1,893
Exempt from Federal Taxes	1,533		1,545		1,246		1,533
Total Interest and Dividend Income	22,418		19,997		26,213		22,418
INTEREST EXPENSE
Interest-Bearing Checking Accounts	387		331		482		387
Savings Deposits	522		291		1,601		522
Time Deposits over $250,000	204		55		396		204
Other Time Deposits	259		228		713		259
Federal Funds Purchased and Securities Sold Under Agreements to Repurchase	16		7		22		16
Federal Home Loan Bank Advances	414		445		1,594		414
Junior Subordinated Obligations Issued to Unconsolidated Subsidiary Trusts	214		179		269		214
Interest on Financing Leases					15		—
Total Interest Expense	2,016		1,536		5,092		2,016
NET INTEREST INCOME	20,402		18,461		21,121		20,402
Provision for Loan Losses	746		358		472		746
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES	19,656		18,103		20,649		19,656
NONINTEREST INCOME
Income From Fiduciary Activities	2,197		2,018		2,107		2,197
Fees for Other Services to Customers	2,380		2,256		2,402		2,380
Insurance Commissions	1,903		2,198		1,719		1,903
Net Unrealized Gain on Equity Securities	18		—
Net Gain on Securities Transactions					76		18
Net Gain on Sales of Loans	38		45		104		38
Other Operating Income	353		178		479		353
Total Noninterest Income	6,889		6,695		6,887		6,889
NONINTEREST EXPENSE
Salaries and Employee Benefits	9,369		9,147		9,319		9,369
Occupancy Expenses, Net	2,541		2,544		1,420		1,340
Technology and Equipment Expense					3,141		2,698
FDIC Assessments	217		226		212		217
Other Operating Expense	3,829		3,558		2,560		2,332
Total Noninterest Expense	15,956		15,475		16,652		15,956
INCOME BEFORE PROVISION FOR INCOME TAXES	10,589		9,323		10,884		10,589
Provision for Income Taxes	2,058		2,692		2,150		2,058
NET INCOME	$	8,531	$	6,631	$	8,734	$	8,531
Average Shares Outstanding ¹:
Basic	13,936		13,889		14,469		14,354
Diluted	14,016		14,001		14,520		14,436
Per Common Share:
Basic Earnings	$	0.61	$	0.48	$	0.60	$	0.59
Diluted Earnings	0.61		0.47		0.60		0.59

¹~~2017~~ 2018 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 March 31,						Three Months Ended March 31,
	2018			2017			2019		2018
Net Income	$	8,531		$	6,631		$	8,734	$	8,531
Other Comprehensive Income, Net of Tax:
Other Comprehensive Income (Loss), Net of Tax:
Net Unrealized Securities Holding Gains (Losses) Arising During the Period	(2,485		)	47			2,080		(2,485		)
Amortization of Net Retirement Plan Actuarial Loss	46			109			121		46
Accretion of Net Retirement Plan Prior Service Credit	(1		)	(2		)
Amortization (Accretion) of Net Retirement Plan Prior Service Cost (Credit)							42		(1		)
Other Comprehensive Income (Loss)	(2,440		)	154			2,243		(2,440		)
Comprehensive Income	$	6,091		$	6,785		$	10,977	$	6,091

See Notes to Unaudited Interim Consolidated Financial Statements.

ARROW FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN ~~STOCKHOLDERS~~’STOCKHOLDERS’ EQUITY

(In Thousands, Except Share and Per Share Amounts)

(Unaudited)


																				Common Stock		Additional Paid-In Capital		Retained Earnings			Unallo-cated ESOP Shares			Accumu-lated Other Com- prehensive Loss			Treasury Stock			Total
Balance at December 31, 2018																				$	19,035	$	314,533	$	29,257		$	(100	)	$	(13,810	)	$	(79,331	)	$	269,584
Net Income																				—		—		8,734			—			—			—			8,734
Other Comprehensive Income																				—		—		—			—			2,243			—			2,243
Cash Dividends Paid, $.26 per Share																				—		—		(3,760		)	—			—			—			(3,760		)
Stock Options Exercised, Net (26,135 Shares)																				—		249		—			—			—			286			535
Shares Issued Under the Employee Stock Purchase Plan (3,709 Shares)																				—		76		—			—			—			41			117
Shares Issued for Dividend Reinvestment Plans (13,132 Shares)																				—		309		—			—			—			144			453
Stock-Based Compensation Expense																				—		95		—			—			—			—			95
Purchase of Treasury Stock (40,852 Shares)																				—		—		—			—			—			(1,392		)	(1,392		)
Balance at March 31, 2019																				$	19,035	$	315,262	$	34,231		$	(100	)	$	(11,567	)	$	(80,252	)	$	276,609
	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		18,481		290,219		28,818			(200		)	$	(8,514	)	$	(79,201	)	$	249,603
Net Income	—		—		8,531			—			—			—			8,531			—		—		8,531			—			—			—			8,531
Other Comprehensive Loss	—		—		—			—			(2,440		)	—			(2,440		)	—		—		—			—			(2,440		)	—			(2,440		)
Impact of the Adoption of ASU 2014-09	—		—		(102		)	—			—			—			(102		)					(102		)										(102		)
Impact of the Adoption of ASU 2016-01	—		—		331			—			(331		)	—			—
Cash Dividends Paid, $.25 per Share	—		—		(3,485		)	—			—			—			(3,485		)
Impact of the Adoption of ASU2016-01																								331						(331		)				—
Cash Dividends Paid, $.243 per Share ¹																				—		—		(3,485		)	—			—			—			(3,485		)
Stock Options Exercised, Net (27,662 Shares)	—		307		—			—			—			303			610			—		307		—			—			—			303			610
Shares Issued Under the Employee Stock Purchase Plan (3,674 Shares)	—		76		—			—			—			40			116			—		76		—			—			—			40			116
Shares Issued for Dividend Reinvestment Plans (12,459 Shares)	—		289		—			—			—			142			431			—		289		—			—			—			142			431
Stock-Based Compensation Expense	—		89		—			—			—			—			89			—		89		—			—			—			—			89
Purchase of Treasury Stock (18,715 Shares)	—		—		—			—			—			(619		)	(619		)	—		—		—			—			—			(619		)	(619		)
Balance at March 31, 2018	$	18,481	$	290,980	$	34,093		$	(200	)	$	(11,285	)	$	(79,335	)	$	252,734		$	18,481	$	290,980	$	34,093		$	(200	)	$	(11,285	)	$	(79,335	)	$	252,734

Balance at December 31, 2016	$	17,943	$	270,880	$	28,644		$	(400	)	$	(6,834	)	$	(77,381	)	$	232,852
Net Income	—		—		6,631			—			—			—			6,631
Other Comprehensive Income	—		—		—			—			154			—			154
Cash Dividends Paid, $.243 per Share ¹	—		—		(3,374		)	—			—			—			(3,374		)
Stock Options Exercised, Net (16,721 Shares)	—		187		—			—			—			201			388
Shares Issued Under the Directors’ Stock Plan (554 Shares)	—		14		—			—			—			8			22
Shares Issued Under the Employee Stock Purchase Plan (3,049 Shares)	—		69		—			—			—			37			106
Shares Issued for Dividend Reinvestment Plans (12,447 Shares)	—		284		—			—			—			141			425
Stock-Based Compensation Expense	—		83		—			—			—			—			83
Purchase of Treasury Stock (33,970 Shares)	—		—		—			—			—			(1,176		)	(1,176		)
Balance at March 31, 2017	$	17,943	$	271,517	$	31,901		$	(400	)	$	(6,680	)	$	(78,170	)	$	236,111

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)~~


	Three Months Ended March 31,						Three Months Ended March 31,
Cash Flows from Operating Activities:	2018			2017			2019			2018
Net Income	$	8,531		$	6,631		$	8,734		$	8,531
Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities:
Provision for Loan Losses	746			358			472			746
Depreciation and Amortization	1,199			1,524			1,309			1,199
Net Unrealized Gains on Equity Securities	(18		)	—
Net Gain on Securities Transactions							(76		)	(18		)
Loans Originated and Held-for-Sale	(12,326		)	(2,186		)	(4,223		)	(12,326		)
Proceeds from the Sale of Loans Held-for-Sale	12,520			1,818			3,718			12,520
Net Gains on the Sale of Loans	(38		)	(45		)
Net Losses on the Sale of Premises and Equipment, Other Real Estate Owned and Repossessed Assets	32			7
Net Gain on the Sale of Loans							(104		)	(38		)
Net Loss on the Sale of Premises and Equipment, Other Real Estate Owned and Repossessed Assets							130			32
Contributions to Retirement Benefit Plans	(134		)	(165		)	(153		)	(134		)
Deferred Income Tax Benefit	(220		)	(82		)	(297		)	(220		)
Shares Issued Under the Directors’ Stock Plan	—			22
Stock-Based Compensation Expense	89			83			95			89
Tax Benefit from Exercise of Stock Options	112			45			78			112
Net Increase in Other Assets	(395		)	(886		)	(1,565		)	(395		)
Net Increase in Other Liabilities	2,185			2,817			2,613			2,185
Net Cash Provided By Operating Activities	12,283			9,941			10,731			12,283
Cash Flows from Investing Activities:
Proceeds from the Maturities and Calls of Securities Available-for-Sale	9,380			11,826			21,261			9,380
Purchases of Securities Available-for-Sale	(19,979		)	(12,324		)	—			(19,979		)
Proceeds from the Maturities and Calls of Securities Held-to-Maturity	6,459			10,474			5,319			6,459
Purchases of Securities Held-to-Maturity	(921		)	(556		)	(1,457		)	(921		)
Net Increase in Loans	(42,968		)	(57,637		)	(39,545		)	(42,968		)
Proceeds from the Sales of Premises and Equipment, Other Real Estate Owned and Repossessed Assets	437			304			442			437
Purchase of Premises and Equipment	(627		)	(247		)	(2,099		)	(627		)
Proceeds from the Sale of a Subsidiary, Net	—			23
Net Decrease in Other Investments	5,169			4,086			7,628			5,169
Net Cash Used By Investing Activities	(43,050		)	(44,051		)	(8,451		)	(43,050		)
Cash Flows from Financing Activities:
Net Increase in Deposits	166,157			139,990			144,513			166,157
Net Decrease in Short-Term Federal Home Loan Bank Borrowings	(105,000		)	(91,000		)	(159,500		)	(105,000		)
Net Increase (Decrease) in Short-Term Borrowings	9,991			(3,801		)
Net Increase in Short-Term Borrowings							3,748			9,991
Finance Lease Payments							(4		)	—
Repayments of Federal Home Loan Bank Term Advances	(10,000		)	—			(10,000		)	(10,000		)
Purchase of Treasury Stock	(619		)	(1,176		)	(1,392		)	(619		)
Stock Options Exercised, Net	610			388			535			610
Shares Issued Under the Employee Stock Purchase Plan	116			106			117			116
Shares Issued for Dividend Reinvestment Plans	431			425			453			431
Cash Dividends Paid	(3,485		)	(3,374		)	(3,760		)	(3,485		)
Net Cash Provided By Financing Activities	58,201			41,558
Net Increase in Cash and Cash Equivalents	27,434			7,448
Net Cash (Used) Provided By Financing Activities							(25,290		)	58,201
Net (Decrease) Increase in Cash and Cash Equivalents							(23,010		)	27,434
Cash and Cash Equivalents at Beginning of Period	72,838			57,355			84,239			72,838
Cash and Cash Equivalents at End of Period	$	100,272		$	64,803		$	61,229		$	100,272

Supplemental Disclosures to Statements of Cash Flow Information:
Interest on Deposits and Borrowings	$	1,949		$	1,539		$	4,924		$	1,949
Income Taxes	390			294			311			390
Non-cash Investing and Financing Activity:
Transfer of Loans to Other Real Estate Owned and Repossessed Assets	270			359			728			270

See Notes to Unaudited Interim Consolidated Financial Statements.

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 1. ACCOUNTING POLICIES

In the opinion of the management of Arrow Financial Corporation (Arrow, the Company, we, or us), the accompanying unaudited interim consolidated financial statements contain all of the adjustments necessary to present fairly the financial position as of March 31, ~~2018,~~ 2019, December 31, ~~2017~~2018 and March 31, ~~2017;~~2018; the results of operations for the three-month periods ended March 31, ~~2018~~2019 and ~~2017;~~2018; the consolidated statements of comprehensive income for the three-month periods ended March 31, ~~2018~~2019 and ~~2017;~~2018; the changes in stockholders' equity for the ~~three-month~~three-month periods ended March 31, ~~2018~~2019 and ~~2017~~;2018; and the cash flows for the ~~three-month~~three-month periods ended March 31, ~~2018~~2019 and ~~2017~~.2018. All such adjustments are of a normal recurring nature.

~~Management~~’sManagement’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 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 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~~’smanagement’s best estimate of probable loan losses incurred as of the balance sheet date. While management uses available information to recognize losses on loans, future adjustments to the allowance for loan losses may be necessary based on changes in economic conditions.

The unaudited interim consolidated financial statements should be read in conjunction with the audited annual consolidated financial statements of Arrow for the year ended December 31, ~~2017~~,2018 included in Arrow's Annual Report on Form 10-K for the year ended December 31, ~~2017.~~2018.

Recently Adopted and Recently Issued Accounting Standards

The following accounting standards have been adopted in the first ~~quarter~~three months of ~~2018:~~

ASU 2016-01 "Recognition and Measurement of Financial Assets and Financial Liabilities" significantly changed the income statement impact of equity investments. For Arrow, the standard became effective for the first quarter of 2018, and requires that equity investments be measured at fair value, with changes in fair value measured in net income. The cumulative effect of 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 determining the fair value of loans. Accordingly, we refined the calculation used to determine the disclosed fair value of our loans as part of adopting this standard. See Note 9. Fair Value of Financial Instruments.

ASU 2016-15, "Statement of Cash Flows (Topic 230) - Classification of Certain Cash Receipts and Cash Payments" will reduce existing diversity in practice with respect to eight specific cash flow issues. The amendment is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period. If an entity early adopts the amendments in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes the interim period. An entity that elects early adoption must adopt all of the amendments in the same period. The amendments in this update should be applied using a retrospective transition method to each period presented. Arrow adopted this ASU in the first quarter of 2018.

ASU 2017-01 "Business Combinations" 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. Previously, the three elements required to be present in a business are inputs, processes, and outputs. The amendments in this update allow for a business to consist of inputs, processes, and the ability to create output. For Arrow, the standard became effective in the first quarter of 2018. This update had no effect on our accounting for acquisitions and dispositions of businesses.

ASU 2017-07 "Compensation-Retirement Benefits" 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 became effective in the first quarter of 2018. In accordance with the practical expedient adoption 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 out of salaries and benefits and into other operating expenses. The adoption of this change in accounting for pension costs did not have a material impact on our financial position or the results of operations.

ASU 2017-09 "Compensation-Stock Compensation" 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 became2019:

effective in the first quarter of 2018. The adoption of this change in accounting for share-based payment awards did not have a material impact on our financial position or the results of operations in periods subsequent to its adoption.

ASU 2014-09 - "Revenue from Contracts with Customers (Topic 606)" clarifies the principles for recognizing revenue and supersedes most current revenue recognition guidance. The ASU is intended to clarify and converge the revenue recognition principles under current generally accepted accounting principles (GAAP) to streamline revenue recognition requirements in addition to expanding required revenue recognition disclosures. In ~~August 2015,~~March 2017, the Financial Accounting Standards Board (FASB) issued ASU 2015-14, Deferral of the Effective Date, which provides a one year deferral to the effective date, therefore, ASU 2014-09 is effective for public companies for annual periods, and interim periods within those annual periods, beginning on or after December 15, 2017. As such, the Company adopted ASU 2014-09 as of January 1, 2018 using the modified retrospective approach, and have identified the recognition of revenue related to specific types of fiduciary activities and specific types of revenue from insurance commissions to be in the scope of this guidance. Regarding fiduciary activities, under prior GAAP, revenue was recognized from settling client estates over the time period the work was performed. With the adoption of Topic 606, revenue will be recognized when the performance obligation is completed, which is when the settlement of the client estate is closed. This change will not have a material impact on our consolidated financial statements. Regarding revenue from property and casualty insurance policies in which the client elected to pay premiums in installments, under prior GAAP, revenue was recognized when the client premiums were billed. With the adoption of Topic 606, revenue is recognized when the performance obligation is substantially completed , i.e., when the insurance policy is issued. This change will not have a material impact to our consolidated financial statements. The adoption of Topic 606 related to the previously described fiduciary activity and insurance commission required a cumulative effect adjustment as of January 1, 2018 to decrease retained earnings by $102 thousand. Additional information related to net revenue generated from contracts with customers is as follows:

~~Revenue Recognition -~~Accounting Standard Codification ("ASC") Topic 606, Revenue from Contracts with Customers ("ASC Topic 606"), 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 requires an entity to recognize revenue to depict the transfer of promised goods or services a customer in an amount that reflects the consideration to which the entity expects to receive in exchange for those goods or services as performance obligations are satisfied.

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 our 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 these 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, we mainly recognize 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 such performance obligations are 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 our property and casualty business is recognized when our performance obligation is satisfied, which is generally the effective date of the bound coverage since there are no significant performance obligations remaining. Revenue from our employment benefit brokerage business is recognized when our benefit servicing performance obligations are satisfied, generally on a monthly basis.

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

~~ASU 2016-02 "Leases" will require the recognition of operating leases. In February 2016, the FASB issued ASU 2016-02,~~ ~~Leases (Topic 842)~~. ASU 2016-02 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 leases 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. ASU 2018-01 was issued to address concerns about the cost and complexity of complying with the transition provisions of ASU 2018-01. Early adoption is permitted in any interim or annual period. 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 March 31, 2018, we have less than $2.2 million in minimum lease payments for existing operating leases of branch and insurance locations with varying expiration dates from 2018 to 2031.

ASU 2016-13 "Financial Instruments - Credit Losses" will change the way we and other financial entities recognize losses on credit instruments, primarily loans and available-for-sale securities. Currently, loan losses are recognized using an "incurred loss" methodology that delays recognition until it is probable a loss has been incurred. Under the ASU, the incurred loss model will be replaced with a methodology that reflects current expected credit losses (CECL) over the life of the instrument and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. Currently, credit losses on available-for-sale securities reduce the carrying value of the instrument and cannot be reversed. Under the ASU, 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. We plan on adopting the standard in the first quarter of 2020, in order to maximize the accumulation of data needed to calculate the new

CECL methodologies. The ASU describes several acceptable methodologies for calculating expected losses on a loan or a pool of loans. Although other methodologies are allowed, we plan on only using the methodologies described in the ASU. Arrow is still evaluating criteria for loan segments and the appropriate methodology for each segment. We expect that the use of the CECL methodology will result in higher levels of the allowance for loan losses than the incurred loss model. The initial adjustment will not be reported in earnings, but as the cumulative effect of a change in accounting principle. We expect that the adoption of the new standard will have a material impact on the level of the allowance for loan losses, but we do not expect that the periodic provision for loan losses to be materially higher than our historic amounts. The adoption of the standard will have an impact on shareholders’ equity, but we expect that we will remain well-capitalized under current regulatory calculations. The standard also requires new disclosures about the loan portfolio. Both the FASB and banking regulators have made estimates of the range of percentage increases in the allowance for loan losses. One FASB board member has commented that the initial range of 30% to 50% for increases in bank allowances is too high, and that the most likely range is in the single digits, although some institutions will experience higher increases. Due to our historical low level of loan losses and our current conservative underwriting standards, we believe that the increase in our loan loss allowance will be in the single digits. 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. In 2016 we selected a third-party software product to calculate our CECL methodologies. We also began to accumulate a database of monthly loan data, beginning with June 2015, of the fields needed to make the loss calculations under the new CECL methodologies. During 2018, we plan on refining our loan segment criteria and, for most segments, we will calculate expected losses (for an expanding database) using two or more of the applicable methodologies before determining the most appropriate methodology for each loan segment or sub-segment.

ASU 2017-04 "Intangibles-Goodwill and Other" changes 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 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 this standard, entities should perform goodwill impairment testing by comparing the fair value of a reporting unit to its carrying value. This change 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~~Standards Update (ASU) 2017-08 "Receivables-Nonrefundable Fees and Other Costs" which amends the amortization period for certain purchased callable debt securities held at a premium. This shortens the amortization period for the premium to the earliest call date. Under ~~GAAP,~~United States 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 was effective in the first quarter of 2019 and did not have a material impact on its financial position or the results of operations in the current quarter or in future periods.

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

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

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

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

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

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

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

In August 2018, the FASB issued ASU 2018-13 "Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement" which as part of its disclosure framework, the FASB has eliminated, amended and added disclosure requirements for fair value measurements. The following disclosure requirements were eliminated: Amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy; the policy of the timing of transfers between levels of the fair value hierarchy; the valuation processes for Level 3 fair value measurements. For public companies such as Arrow, the following new disclosures will be required: Changes in unrealized gains and losses for the period included in other comprehensive income (OCI); the range and weighted average of significant unobservable inputs used; alternatively, a company may choose to disclose other quantitative information if it determines that it is a more reasonable and rational method that reflects the distribution of unobservable inputs used. For Arrow, the standard becomes effective in the first quarter of ~~2019. We do~~2020. The Company does not expect that the adoption of this change in ~~accounting for certain callable debt securities~~fair value disclosure will have a material impact on ~~our~~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.

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 March 31, ~~2018,~~ 2019, December 31, ~~2017~~2018 and March 31, ~~2017:~~2018:

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

Maturities of Debt Securities, at Amortized Cost:
Within One Year		$	13,018	$	8,363	$	891	$	—			$	22,272	$	30,516	$	201	$	494	$	—	$	31,211
From 1 - 5 Years		47,246		650		121,977		—				169,873		5,003		433		125,267		—		130,703
From 5 - 10 Years		—		208		71,473		—				71,681		—		—		117,616		—		117,616
Over 10 Years		—		520		45,692		1,000				47,212		—		480		19,970		1,000		21,450

Maturities of Debt Securities, at Fair Value:
Within One Year		$	12,949	$	8,360	$	896	$	—			$	22,205	$	30,432	$	203	$	498	$	—	$	31,133
From 1 - 5 Years		46,708		655		118,649		—				166,012		4,951		433		124,175		—		129,559
From 5 - 10 Years		—		208		70,140		—				70,348		—		—		117,008		—		117,008
Over 10 Years		—		520		45,704		800				47,024		—		480		19,832		800		21,112

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

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

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

																							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		U.S. Government & Agency Obligations		State and Municipal Obligations		Mortgage- Backed Securities		Corporate and Other Debt Securities		Total Available- For-Sale Securities
US Government Agency Securities, at Amortized Cost					$	59,446
US Government Agency Securities, at Fair Value					59,469
Government Sponsored Entity Securities, at Amortized Cost					180,587
Government Sponsored Entity Securities, at Fair Value					175,920

December 31, 2017
December 31, 2018
Available-For-Sale Securities, at Amortized Cost	$	60,328	$	10,351	$	229,077	$	1,000	$	1,120	$	301,876	$	47,071	$	1,193	$	273,227	$	1,000	$	322,491
Available-For-Sale Securities, at Fair Value	59,894		10,349		227,596		800		1,561		300,200		46,765		1,195		268,775		800		317,535
Gross Unrealized Gains	—		9		485		—		441		935		—		2		288		—		290
Gross Unrealized Losses	434		11		1,966		200		—		2,611		306		—		4,740		200		5,246
Available-For-Sale Securities, Pledged as Collateral, at Fair Value											183,052										236,163

Securities in a Continuous Loss Position, at Fair Value:
Less than 12 Months	$	20,348	$	8,498	$	70,930	$	—	$	—	$	99,776	$	—	$	—	$	107,550	$	—	$	107,550
12 Months or Longer	39,546		—		80,759		800		—		121,105		46,765		—		124,627		800		172,192
Total	$	59,894	$	8,498	$	151,689	$	800	$	—	$	220,881	$	46,765	$	—	$	232,177	$	800	$	279,742
Number of Securities in a Continuous Loss Position	14		36		55		1		—		106		10		—		86		1		97

Unrealized Losses on Securities in a Continuous Loss Position:
Less than 12 Months	$	172	$	11	$	363	$	—	$	—	$	546	$	—	$	—	$	841	$	—	$	841
12 Months or Longer	262		—		1,603		200		—		2,065		306		—		3,899		200		4,405
Total	$	434	$	11	$	1,966	$	200	$	—	$	2,611	$	306	$	—	$	4,740	$	200	$	5,246

Disaggregated Details:
US Treasury Obligations, at Amortized Cost	$	—											$	—
US Treasury Obligations, at Fair Value	—												—
US Agency Obligations, at Amortized Cost	60,328												47,071
US Agency Obligations, at Fair Value	59,894												46,765
US Government Agency Securities, at Amortized Cost					$	40,832											$	72,095
US Government Agency Securities, at Fair Value					40,832												71,800
Government Sponsored Entity Securities, at Amortized Cost					188,245												201,132
Government Sponsored Entity Securities, at Fair Value					186,764												196,975

																							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		U.S. Government & Agency Obligations		State and Municipal Obligations		Mortgage- Backed Securities		Corporate and Other Debt Securities		Total Available- For-Sale Securities
March 31, 2017
March 31, 2018
Available-For-Sale Securities, at Amortized Cost	$	147,012	$	25,467	$	170,601	$	3,501	$	1,120	$	347,701	$	60,264	$	9,741	$	240,033	$	1,000	$	311,038
Available-For-Sale Securities, at Fair Value	147,231		25,507		169,728		3,298		1,395		347,159		59,657		9,743		235,389		800		305,589
Gross Unrealized Gains	270		40		934		—		275		1,519		—		7		347		—		354
Gross Unrealized Losses	52		—		1,806		203		—		2,061		607		5		4,991		200		5,803
Available-For-Sale Securities, Pledged as Collateral											295,797										229,857

Securities in a Continuous Loss Position, at Fair Value:
Less than 12 Months	$	42,937	$	828	$	127,931	$	2,498	$	—	$	174,194	$	17,128	$	7,421	$	112,078	$	—	$	136,627
12 Months or Longer	—		—		—		800		—		800		42,529		—		80,759		800		124,088
Total	$	42,937	$	828	$	127,931	$	3,298	$	—	$	174,994	$	59,657	$	7,421	$	192,837	$	800	$	260,715
Number of Securities in a Continuous Loss Position	11		5		41		4		—		61		14		29		69		1		113

Unrealized Losses on Securities in a Continuous Loss Position:
Less than 12 Months	$	52	$	—	$	1,806	$	3	$	—	$	1,861	$	266	$	6	$	1,940	$	—	$	2,212
12 Months or Longer	—		—		—		200		—		200		341		—		3,050		200		3,591
Total	$	52	$	—	$	1,806	$	203	$	—	$	2,061	$	607	$	6	$	4,990	$	200	$	5,803

Disaggregated Details:
US Treasury Obligations, at Amortized Cost	$	54,649											$	—
US Treasury Obligations, at Fair Value	$	54,695											—
US Agency Obligations, at Amortized Cost	$	92,363											60,264
US Agency Obligations, at Fair Value	92,536												59,657
US Government Agency Securities, at Amortized Cost					$	1,616											$	59,446
US Government Agency Securities, at Fair Value					1,625												59,469
Government Sponsored Entity Securities, at Amortized Cost					168,985												180,587
Government Sponsored Entity Securities, at Fair Value					168,103												175,920

The following table is the schedule of Held-To-Maturity Securities at March 31, ~~2018,~~ 2019, December 31, ~~2017~~2018 and March 31, ~~2017:~~2018:

															Held-To-Maturity Securities
	State and Municipal Obligations		Mortgage- Backed Securities		Corporate and Other Debt Securities		Total Held-To Maturity Securities		State and Municipal Obligations		Mortgage- Backed Securities		Total Held-To Maturity Securities
March 31, 2018
March 31, 2019
Held-To-Maturity Securities, at Amortized Cost	$	272,938	$	57,186	$	—	$	330,124	$	234,454	$	44,946	$	279,400
Held-To-Maturity Securities, at Fair Value	268,605		56,333		—		324,938		235,576		44,838		280,414
Gross Unrealized Gains	646		—		—		646		1,695		97		1,792
Gross Unrealized Losses	4,979		853		—		5,832		573		205		778
Held-To-Maturity Securities, Pledged as Collateral							307,273						265,465

Maturities of Debt Securities, at Amortized Cost:
Within One Year	$	35,115	$	—	$	—	$	35,115	$	25,205	$	—	$	25,205
From 1 - 5 Years	81,312		51,243		—		132,555		94,100		44,946		139,046
From 5 - 10 Years	153,111		5,943		—		159,054		112,788		—		112,788
Over 10 Years	3,400		—		—		3,400		2,361		—		2,361

Maturities of Debt Securities, at Fair Value:
Within One Year	$	35,160	$	—	$	—	$	35,160	$	25,244	$	—	$	25,244
From 1 - 5 Years	81,634		50,490		—		132,124		94,590		44,838		139,428
From 5 - 10 Years	148,412		5,843		—		154,255		113,343		—		113,343
Over 10 Years	3,399		—		—		3,399		2,399		—		2,399

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

Number of Securities in a Continuous Loss Position	495		47		—		542		193		29		222

Unrealized Losses on Securities in a Continuous Loss Position:
Less than 12 Months	$	1,981	$	767	$	—	$	2,748	$	—	$	—	$	—
12 Months or Longer	2,998		86		—		3,084		573		205		778
Total	$	4,979	$	853	$	—	$	5,832	$	573	$	205	$	778

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

															Held-To-Maturity Securities
	State and Municipal Obligations		Mortgage- Backed Securities		Corporate and Other Debt Securities		Total Held-To Maturity Securities		State and Municipal Obligations		Mortgage- Backed Securities		Total Held-To Maturity Securities
December 31, 2017
December 31, 2018
Held-To-Maturity Securities, at Amortized Cost	$	275,530	$	60,377	$	—	$	335,907	$	235,782	$	47,694	$	283,476
Held-To-Maturity Securities, at Fair Value	275,353		60,548		—		335,901		233,359		46,979		280,338
Gross Unrealized Gains	1,691		269		—		1,960		486		—		486
Gross Unrealized Losses	1,868		98		—		1,966		2,909		715		3,624
Held-To-Maturity Securities, Pledged as Collateral							318,622						266,341

Securities in a Continuous Loss Position, at Fair Value:
Less than 12 Months	$	55,648	$	13,764	$	—	$	69,412	$	32,093	$	33,309	$	65,402
12 Months or Longer	65,152		3,257		—		68,409		110,947		13,670		124,617
Total	$	120,800	$	17,021	$	—	$	137,821	$	143,040	$	46,979	$	190,019
Number of Securities in a Continuous Loss Position	352		14		—		366		411		47		458

Unrealized Losses on Securities in a Continuous Loss Position:
Less than 12 Months	$	442	$	56	$	—	$	498	$	162	$	456	$	618
12 Months or Longer	1,425		43		—		1,468		2,747		259		3,006
Total	$	1,867	$	99	$	—	$	1,966	$	2,909	$	715	$	3,624

Disaggregated Details:
US Government Agency Securities, at Amortized Cost			$	2,680							$	2,180
US Government Agency Securities, at Fair Value			2,661								2,143
Government Sponsored Entity Securities, at Amortized Cost			57,697								45,514
Government Sponsored Entity Securities, at Fair Value			57,887								44,836

March 31, 2017
March 31, 2018
Held-To-Maturity Securities, at Amortized Cost	$	263,642	$	71,569	$	—	$	335,211	$	272,938	$	57,186	$	330,124
Held-To-Maturity Securities, at Fair Value	263,255		71,850		—		335,105		268,604		56,333		324,937
Gross Unrealized Gains	2,410		298		—		2,708		646		—		646
Gross Unrealized Losses	2,796		17		—		2,813		4,979		853		5,832
Held-To-Maturity Securities, Pledged as Collateral							316,966						307,273

Securities in a Continuous Loss Position, at Fair Value:
Less than 12 Months	$	95,450	$	7,682	$	—	$	103,132	$	101,695	$	53,076	$	154,771
12 Months or Longer	657		—		—		657		65,012		3,257		68,269
Total	$	96,107	$	7,682	$	—	$	103,789	$	166,707	$	56,333	$	223,040
Number of Securities in a Continuous Loss Position	251		8		—		259		495		47		542

Unrealized Losses on Securities in a Continuous Loss Position:
Less than 12 Months	$	2,793	$	17	$	—	$	2,810	$	1,981	$	767	$	2,748
12 Months or Longer	3		—		—		3		2,998		86		3,084
Total	$	2,796	$	17	$	—	$	2,813	$	4,979	$	853	$	5,832

Held-To-Maturity Securities

State and
Municipal
Obligations

Mortgage-
Backed
Securities

Corporate
and Other
Debt
Securities

Total
Held-To
Maturity
Securities
March 31, 2017
Disaggregated Details:
US Government Agency
  Securities, at Amortized Cost
$ 3,106

US Government Agency
  Securities, at Fair Value
3,121

Government Sponsored Entity
  Securities, at Amortized Cost
68,463

Government Sponsored Entity
Securities, at Fair Value 68,729

The following table is the schedule of Equity Securities at March 31, 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

March 31, 2018
Equity Securities, at Fair Value $ 1,579

Held-To-Maturity Securities

State and

Municipal

Obligations

Mortgage-

Backed

Securities

Total

Held-To

Maturity

Securities

March 31, 2018

Disaggregated Details:

US Government Agency

Securities, at Amortized Cost

2,530

US Government Agency

Securities, at Fair Value

2,483

Government Sponsored Entity

Securities, at Amortized Cost

54,656

Government Sponsored Entity
Securities, at Fair Value

53,850

In the tables above, maturities of 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 March 31, ~~2018,~~ 2019, December 31, ~~2017~~2018 and March 31, ~~2017,~~2018, do not reflect any deterioration of the credit worthiness of the issuing entities. U.S. ~~Government and Agency issues,~~government agency securities, including ~~agency-backed collateralized mortgage obligations and~~ mortgage-backed securities, are all rated ~~at least Aaa~~AAA by Moody's orand AA+ by Standard and Poor's.

The state and municipal obligations are general obligations supported by the general taxing authority of the issuer, and in some cases are insured. Obligations issued by school districts are supported by state aid. For any non-rated municipal securities, credit analysis is performed in-house based upon data that has been submitted by the issuers to the New York State Comptroller. That analysis ~~reflects satisfactory~~shows no deterioration in the 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 March 31, ~~2018, and through the date of the filing of this Quarterly Report on Form 10-Q Arrow held~~2019, there were no securities downgraded below investment grade.

The unrealized losses on these temporarily impaired securities are primarily the result of changes in interest rates for fixed rate securities where the interest rate received is less than the current rate available for new offerings of similar securities, changes in market spreads as a result of shifts in supply and demand, and/or changes in the level of prepayments for mortgage related securities. Because we do not currently intend to sell any of our temporarily impaired securities, and because it is not more likely-than-not ~~that~~ we would be required to sell the securities prior to recovery, the impairment is considered temporary.

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

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



Equity Securities

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

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



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

Note 3. LOANS (In Thousands)

Loan Categories and Past Due Loans

The following table presents loan balances outstanding as of March 31, ~~2018,~~ 2019, December 31, ~~2017~~2018 and March 31, ~~2017~~2018 and an analysis of the recorded investment in loans that are past due at these dates. Generally, Arrow considers ~~an amortizing~~a loan past due 30 or more days when the borrower is two payments past due. ~~Loans held-for-sale of $171, $327 and $896 as of March 31, 2018,~~ ~~December 31, 2017~~ ~~and March 31, 2017, respectively, are included in the residential real estate balances for current loans.~~


Schedule of Past Due Loans by Loan Category											Schedule of Past Due Loans by Loan Category
													Commercial
			Commercial								Commercial		Real Estate		Consumer		Residential		Total
March 31, 2019
Loans Past Due 30-59 Days											$	168	$	208	$	4,758	$	1,345	$	6,479
Loans Past Due 60-89 Days											—		—		1,387		207		1,594
Loans Past Due 90 or more Days											17		108		369		1,610		2,104
Total Loans Past Due											185		316		6,514		3,162		10,177
Current Loans											133,091		493,071		740,285		858,584		2,225,031
Total Loans											$	133,276	$	493,387	$	746,799	$	861,746	$	2,235,208

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

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

Loans 90 or More Days Past Due and Still Accruing Interest											$	—	$	—	$	144	$	1,081	$	1,225
Nonaccrual Loans											403		789		658		2,309		4,159
	Commercial		Real Estate		Consumer		Residential		Total
March 31, 2018
Loans Past Due 30-59 Days	$	45	$	156	$	3,673	$	1,711	$	5,585	$	45	$	156	$	3,673	$	1,711	$	5,585
Loans Past Due 60-89 Days	60		—		751		481		1,292		60		—		751		481		1,292
Loans Past Due 90 or more Days	41		807		252		321		1,421		41		807		252		321		1,421
Total Loans Past Due	146		963		4,676		2,513		8,298		146		963		4,676		2,513		8,298
Current Loans	127,528		454,095		621,964		781,152		1,984,739		127,528		454,095		621,964		781,152		1,984,739
Total Loans	$	127,674	$	455,058	$	626,640	$	783,665	$	1,993,037	$	127,674	$	455,058	$	626,640	$	783,665	$	1,993,037

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

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

March 31, 2017
Loans Past Due 30-59 Days	$	189	$	—	$	3,882	$	2,021	$	6,092
Loans Past Due 60-89 Days	9		—		1,145		684		1,838
Loans Past Due 90 or more Days	120		—		335		835		1,290
Total Loans Past Due	318		—		5,362		3,540		9,220
Current Loans	118,524		435,316		546,601		701,144		1,801,585
Total Loans	$	118,842	$	435,316	$	551,963	$	704,684	$	1,810,805

Loans 90 or More Days Past Due and Still Accruing Interest	$	—	$	—	$	—	$	—	$	—
Nonaccrual Loans	$	144	$	870	$	656	$	2,603	4,273

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 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 - 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 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 ~~our~~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. ~~Our~~The Company's policy allows for a maximum loan to value ratio of 80%, although periodically higher advances are allowed. The Company originates home equity lines of credit and second mortgage loans (loans secured by a second junior lien position on one-to-four-family residential real estate). Risk is generally reduced through underwriting criteria, which include credit verification, appraisals, a review of the borrower's financial condition, and personal cash flows. A security interest, with title insurance when necessary, is taken in the underlying real estate.

Allowance for Loan Losses

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

																															Allowance for Loan Losses
				Commercial															Commercial
	Commercial			Real Estate			Consumer			Residential			Total			Commercial			Real Estate			Consumer			Residential			Total
Roll-forward of the Allowance for Loan Losses for the Quarterly Periods:
December 31, 2018																$	1,218		$	5,644		$	8,882		$	4,452		$	20,196
Charge-offs																(1		)	(29		)	(418		)	(14		)	(462		)
Recoveries																—			—			167			—			167
Provision																33			(26		)	778			(313		)	472
March 31, 2019																$	1,250		$	5,589		$	9,409		$	4,125		$	20,373

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

December 31, 2016	$	1,017		$	5,677		$	6,120		$	4,198		$	17,012
Charge-offs	(16		)	—			(254		)	—			(270		)
Recoveries	7			—			109			—			116
Provision	(69		)	(228		)	727			(72		)	358
March 31, 2017	$	939		$	5,449		$	6,702		$	4,126		$	17,216

																					Allowance for Loan Losses
			Commercial										Commercial
											Commercial		Real Estate		Consumer		Residential		Total
March 31, 2019
Allowance for loan losses - Loans Individually Evaluated for Impairment											$	—	$	—	$	—	$	—	$	—
Allowance for loan losses - Loans Collectively Evaluated for Impairment											1,250		5,589		9,409		4,125		20,373
Ending Loan Balance - Individually Evaluated for Impairment											40		387		101		2,417		2,945
Ending Loan Balance - Collectively Evaluated for Impairment											$	133,236	$	493,000	$	746,698	$	859,329	$	2,232,263

December 31, 2018
Allowance for loan losses - Loans Individually Evaluated for Impairment											$	—	$	—	$	—	$	4	$	4
Allowance for loan losses - Loans Collectively Evaluated for Impairment											1,218		5,644		8,882		4,448		20,192
Ending Loan Balance - Individually Evaluated for Impairment											430		793		101		1,899		3,223
Ending Loan Balance - Collectively Evaluated for Impairment											$	136,460	$	483,769	$	719,409	$	853,354	$	2,192,992
	Commercial		Real Estate		Consumer		Residential		Total
March 31, 2018
Allowance for loan losses - Loans Individually Evaluated for Impairment	$	92	$	42	$	—	$	58	$	192	$	92	$	42	$	—	$	58	$	192
Allowance for loan losses - Loans Collectively Evaluated for Impairment	2,076		4,321		8,019		4,449		18,865		2,076		4,321		8,019		4,449		18,865
Ending Loan Balance - Individually Evaluated for Impairment	489		815		91		1,564		2,959		489		815		91		1,564		2,959
Ending Loan Balance - Collectively Evaluated for Impairment	$	127,185	$	454,243	$	626,549	$	782,101	$	1,990,078	$	127,185	$	454,243	$	626,549	$	782,101	$	1,990,078

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

March 31, 2017
Allowance for loan losses - Loans Individually Evaluated for Impairment	$	—	$	34	$	—	$	—	$	34
Allowance for loan losses - Loans Collectively Evaluated for Impairment	939		5,415		6,702		4,126		17,182
Ending Loan Balance - Individually Evaluated for Impairment	—		884		88		1,094		2,066
Ending Loan Balance - Collectively Evaluated for Impairment	$	118,841	$	434,432	$	551,876	$	703,590	$	1,808,739

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.

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

We use a two-step process to determine the provision for loan losses and the amount of the allowance for loan losses. We ~~measure impairment~~perform an evaluation of impaired loans on a quarterly basis. ~~Our impaired~~Impaired loans are generally nonaccrual loans over $250 thousand and all troubled debt restructured loans. Our 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, as described below. For each homogeneous loan pool, we estimate a total loss factor based on the historical net loss rates adjusted for applicable qualitative factors. We update the total loss factors assigned to each loan category on a quarterly basis. For the commercial, commercial construction and commercial real estate categories, we further segregate the loan categories by credit risk profile (pools of loans graded pass, special mention and accruing substandard). Additional description of the credit risk classifications is detailed in the Credit Quality Indicators section of this note.

We determine the ~~annualized~~ historical net loss rate for each loan category using a trailing three-year net charge-off average. While historical net loss experience provides a reasonable starting point for analysis, historical net losses, or even recent trends in net losses, do not by themselves form a sufficient basis to determine the appropriate level of the allowance for loan losses. Therefore, we also consider and adjust historical net loss factors 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

Loan Credit Quality Indicators

The following table presents the credit quality indicators by loan category at March 31, ~~2018,~~2019, December 31, ~~2017~~2018 and March 31, ~~2017:~~2018:

																					Loan Credit Quality Indicators
			Commercial										Commercial
											Commercial		Real Estate		Consumer		Residential		Total
March 31, 2019
Credit Risk Profile by Creditworthiness Category:
Satisfactory											$	125,918	$	465,216					$	591,134
Special Mention											133		2,268						2,401
Substandard											7,225		25,903						33,128
Doubtful											—		—						—
Credit Risk Profile Based on Payment Activity:
Performing															$	746,211	$	857,790	$	1,604,001
Nonperforming															588		3,956		4,544

December 31, 2018
Credit Risk Profile by Creditworthiness Category:
Satisfactory											$	129,584	$	456,868					$	586,452
Special Mention											—		—						—
Substandard											7,306		26,905						34,211
Doubtful											—		789						789
Credit Risk Profile Based on Payment Activity:
Performing															$	718,708	$	851,863	$	1,570,571
Nonperforming															802		3,390		4,192
	Commercial		Real Estate		Consumer		Residential		Total
March 31, 2018
Credit Risk Profile by Creditworthiness Category:
Satisfactory	$	107,838	$	430,121	$	—	$	—	$	537,959	$	107,838	$	430,121					$	537,959
Special Mention	17,220		611		—		—		17,831		17,220		611						17,831
Substandard	2,615		23,521		—		—		26,136		2,615		23,521						26,136
Doubtful	—		807		—		—		807		—		807						807
Credit Risk Profile Based on Payment Activity:
Performing	$	—	$	—	$	626,198	$	781,095	$	1,407,293					$	626,198	$	781,095	$	1,407,293
Nonperforming	—		—		441		2,570		3,011						441		2,570		3,011

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

March 31, 2017
Credit Risk Profile by Creditworthiness Category:
Satisfactory	$	109,416	$	402,266	$	—	$	—	$	511,682
Special Mention	1,349		2,233		—		—		3,582
Substandard	8,077		30,817		—		—		38,894
Doubtful	—		—		—		—		—
Credit Risk Profile Based on Payment Activity:
Performing	$	—	$	—	$	551,307	$	702,081	$	1,253,388
Nonperforming	—		—		656		2,603		3,259

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

For the allowance calculation, we use an internally developed system of five credit quality indicators 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 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

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

Commercial loans are generally evaluated on an annual basis depending on the size and complexity of the loan relationship, unless the credit related quality indicator falls to a level of "special mention" or below, when the loan is evaluated quarterly. The credit quality indicator is one of the factors used in assessing the level of ~~inherent~~incurred risk of loss in 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
March 31, 2019
Recorded Investment:
With No Related Allowance											$	38	$	389	$	101	$	2,417	$	2,945
With a Related Allowance											—		—		—		—		—
Unpaid Principal Balance:
With No Related Allowance											424		2		101		2,416		2,943
With a Related Allowance											—		—		—		—		—

December 31, 2018
Recorded Investment:
With No Related Allowance											$	430	$	793	$	101	$	1,605	$	2,929
With a Related Allowance											—		—		—		294		294
Unpaid Principal Balance:
With No Related Allowance											429		793		100		1,606		2,928
With a Related Allowance											—		—		—		293		293
	Commercial		Real Estate		Consumer		Residential		Total
March 31, 2018
Recorded Investment:
With No Related Allowance	$	—	$	8	$	90	$	1,276	$	1,374	$	—	$	8	$	90	$	1,276	$	1,374
With a Related Allowance	483		783		—		356		1,622		483		783		—		356		1,622
Unpaid Principal Balance:
With No Related Allowance	—		8		90		1,279		1,377		—		8		90		1,279		$	1,377
With a Related Allowance	489		807		—		286		1,582		489		807		—		286		1,582

December 31, 2017
Recorded Investment:
For the Quarter Ended:
March 31, 2019
Average Recorded Balance:
With No Related Allowance	$	—	$	781	$	94	$	1,269	$	2,144	$	234	$	591	$	101	$	2,011	$	2,937
With a Related Allowance	485		725		—		333		1,543		—		—		—		147		147
Unpaid Principal Balance:
Interest Income Recognized:
With No Related Allowance											—		—		—		—		—
With a Related Allowance											—		—		—		—		—
Cash Basis Income:
With No Related Allowance	—		816		95		1,274		2,185		—		—		—		—		—
With a Related Allowance	489		721		—		288		1,498		—		—		—		—		—

March 31, 2017
Recorded Investment:
With No Related Allowance	$	—	$	884	$	88	$	806	$	1,778
With a Related Allowance	—		—		—		288		288
Unpaid Principal Balance:
With No Related Allowance	—		884		88		806		$	1,778
With a Related Allowance	—		—		—		288		288

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

March 31, 2017
Average Recorded Balance:
With No Related Allowance	$	—	$	887	$	90	$	952	$	1,929
With a Related Allowance	—		—		—		144		144
Interest Income Recognized:
With No Related Allowance	—		—		1		—		1
With a Related Allowance	—		—		—		—		—
Cash Basis Income:
With No Related Allowance	—		—		—		—		—
With a Related Allowance	—		—		—		—		—

At March 31, ~~2018,~~ 2019, December 31, ~~2017~~2018 and March 31, ~~2017,~~2018, 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.

																					Loans Modified in Trouble Debt Restructurings During the Period
			Commercial										Commercial
	Commercial		Real Estate		Consumer		Residential		Total		Commercial		Real Estate		Consumer		Residential		Total
For the Quarter Ended:
March 31, 2019
Number of Loans											—		—		1		—		1
Pre-Modification Outstanding Recorded Investment											$	—	$	—	$	13	$	—	$	13
Post-Modification Outstanding Recorded Investment											—		—		13		—		13
Subsequent Default, Number of Contracts											—		—		—		—		—
Subsequent Default, Recorded Investment											—		—		—		—		—

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

March 31, 2017
Number of Loans	—		—		2		—		2
Pre-Modification Outstanding Recorded Investment	$	—	$	—	$	15	$	—	$	15
Post-Modification Outstanding Recorded Investment	—		—		15		—		15
Subsequent Default, Number of Contracts	—		—		—		—		—
Subsequent Default, Recorded Investment	—		—		—		—		—

In general, loans requiring modification are restructured to accommodate the projected cash-flows of the borrower. Such modifications may involve a reduction of the interest rate, a significant deferral of payments or forgiveness of a portion of the outstanding principal balance. As indicated in the table above, no loans modified during the preceding twelve months subsequently defaulted as of March 31, ~~2018.~~2019.

Note 4. GUARANTEES (In Thousands)

The following table presents the notional amount and fair value of Arrow's off-balance sheet commitments to extend credit and commitments under standby letters of credit as of March 31, ~~2018,~~ 2019, December 31, ~~2017~~2018 and March 31, ~~2017:~~2018:

													Commitments to Extend Credit and Letters of Credit
	March 31, 2018		December 31, 2017		March 31, 2017		March 31, 2019		December 31, 2018		March 31, 2018
Notional Amount:
Commitments to Extend Credit	$	328,774	$	315,256	$	294,618	$	310,749	$	321,143	$	328,774
Standby Letters of Credit	3,584		3,526		3,371		4,431		4,466		3,584
Fair Value:
Commitments to Extend Credit	$	—	$	—	$	—	$	—	$	—	$	—
Standby Letters of Credit	24		23		28		20		12		24

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~~Those instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the consolidated balance sheets. The contract or notional amounts of those instruments reflect the extent of the involvement Arrow has in particular classes of financial instruments.

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

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are not expected to ~~expire without being~~be fully drawn upon, the total commitment amounts do not necessarily represent future cash requirements. Arrow evaluates each customer's creditworthiness on a case-by-case basis. Home equity lines of credit are secured by residential real estate. Construction ~~commitments~~lines of credit are secured by underlying real estate. For other lines of credit, the amount of collateral obtained, if deemed necessary by Arrow upon extension of credit, is based on management's credit evaluation of the counterparty. Collateral held varies, but may include accounts receivable, inventory, property, plant and equipment, and income-producing commercial properties. Most of the commitments are variable rate instruments.

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

Arrow has issued conditional commitments in the form of standby letters of credit to guarantee payment on behalf of a customer and guarantee the performance of a customer to a third party. Standby letters of credit generally arise in connection with commercial lending relationships. The credit risk involved in issuing these instruments is essentially the same as that involved in extending loans to customers. Contingent obligations under standby letters of credit at March 31, ~~2018,~~ 2019, December 31, ~~2017~~2018 and March 31, ~~2017~~2018 represent the maximum potential future payments Arrow could be required to make. Typically, these instruments have terms of 12 months or less and expire unused; therefore, the total amounts do not necessarily represent future cash requirements. Each customer is evaluated individually for creditworthiness under the same underwriting standards used for commitments to extend credit and on-balance sheet instruments. Company policies governing loan collateral apply to standby letters of credit at the time of credit extension. Loan-to-value ratios will generally range from 50% for movable assets, such as inventory, to 100% for liquid assets, such as bank CD's. Fees for standby letters of credit ~~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~~value of Arrow's standby letters of credit at March 31, ~~2018,~~ 2019, December 31, ~~2017~~2018 and March 31, ~~2017,~~2018, were insignificant. The fair value of standby letters of credit is based on the fees currently charged for similar agreements or the cost to terminate the arrangement with the counterparties.

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

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

Note 5. COMPREHENSIVE INCOME (In Thousands)

The following table presents the components of other comprehensive income for the three-month periods ended March 31, ~~2018~~2019 and ~~2017~~:2018:

																			Schedule of Comprehensive Income
	Three Months Ended March 31,									Three Months Ended March 31,
				Tax									Tax
	Before-Tax			(Expense)			Net-of-Tax			Before-Tax			(Expense)			Net-of-Tax
	Amount			Benefit			Amount			Amount			Benefit			Amount
2019
Net Unrealized Securities Holding Gains on Securities Available-for-Sale Arising During the Period										2,788			$	(708	)	2,080
Amortization of Net Retirement Plan Actuarial Loss										163			(42		)	121
Amortization of Net Retirement Plan Prior Service Cost										56			(14		)	42
Other Comprehensive Income										$	3,007		$	(764	)	$	2,243

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

2017
Net Unrealized Securities Holding Gains on Securities Available-for-Sale Arising During the Period	77			$	(30	)	47
Amortization of Net Retirement Plan Actuarial Loss	178			(69		)	109
Accretion of Net Retirement Plan Prior Service Credit	(3		)	1			(2		)
Other Comprehensive Income	$	252		$	(98	)	$	154

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:

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

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

December 31, 2016	$	(382	)	$	(5,737	)	$	(715	)	$	(6,834	)
Other comprehensive income or loss before reclassifications	47			—			—			47
Amounts reclassified from accumulated other comprehensive income	—			109			(2		)	107
Net current-period other comprehensive income (loss)	47			109			(2		)	154
March 31, 2017	$	(335	)	$	(5,628	)	$	(717	)	$	(6,680	)

(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:

March 31, 2018

March 31, 2019
Amortization of defined benefit pension items:
Prior-service costs	$	1		⁽²⁾	Salaries and Employee Benefits	$	(56	)	⁽¹⁾	Salaries and Employee Benefits
Actuarial gains/(losses)	(60		)	⁽²⁾	Salaries and Employee Benefits	(163		)	⁽¹⁾	Salaries and Employee Benefits
	(59		)		Total before Tax	(219		)		Total before Tax
	14				Provision for Income Taxes	56				Provision for Income Taxes
	$	(45	)		Net of Tax	$	(163	)		Net of Tax

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

March 31, 2017

March 31, 2018
Amortization of defined benefit pension items:
Prior-service costs	$	3		⁽²⁾	Salaries and Employee Benefits	$	(1	)	⁽¹⁾	Salaries and Employee Benefits
Actuarial gains/(losses)	(178		)	⁽²⁾	Salaries and Employee Benefits	60			⁽¹⁾	Salaries and Employee Benefits
	(175		)		Total before Tax	59				Total before Tax
	68				Provision for Income Taxes	(14		)		Provision for Income Taxes
	$	(107	)		Net of Tax	$	45			Net of Tax

Total reclassifications for the period	$	(107	)		Net of Tax	$	45			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 (Dollars In Thousands, Except Share and Per Share Amounts)

Arrow has established three ~~stock based~~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 September ~~28, 2017~~ 3%27, 2018 3% stock dividend.

Long Term Incentive Plan

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

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

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



	Shares			Weighted Average Exercise Price

Outstanding at January 1, 2019	284,522			$	25.67
Granted	52,000			31.71
Exercised	(26,135		)	20.46
Forfeited	(5,797		)	21.12
Outstanding at March 31, 2019	304,590			27.24
Vested at Period-End	183,685			24.34
Expected to Vest	120,905			31.63

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

The following table presents information on the ~~roll forward of~~amounts expensed related to stock options ~~issued pursuant to~~for the ~~Long Term Incentive Plan by Shares~~periods ended March 31, 2019 and ~~Weighted Average Exercise Prices.~~2018:

Roll-Forward of Shares Outstanding:
Outstanding at January 1, 2018 346,155
Granted 55,188
Exercised (27,662 )
Forfeited —
Outstanding at March 31, 2018 373,681
Exercisable at Period-End 247,333
Vested and Expected to Vest 126,348

Roll-Forward of Shares Outstanding - Weighted Average Exercise Price:
Outstanding at January 1, 2018 $ 24.12
Granted 30.85
Exercised 22.03
Forfeited —
Outstanding at March 31, 2018 25.27
Exercisable at Period-End 22.57
Vested and Expected to Vest 30.54

Schedule of Other Long Term Incentive Plan Information
Grants Issued During 2018 - Weighted Average Information:
Fair Value $ 5.76
Fair Value Assumptions:
Dividend Yield 2.98 %
Expected Volatility 21.55 %
Risk Free Interest Rate 2.68 %
Expected Lives (in years) 6.98



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

Restricted Stock Units - The Company grants restricted stock units which gives the recipient the right to receive shares of Company stock upon vesting. The fair value of each restricted stock unit is the market value of Company stock on the date of grant. 100% of the restricted stock unit awards vest three years from the grant date. Once vested, the restricted stock units become vested units. Vested units settle upon retirement of the recipient. Unvested restricted stock unit awards will generally be forfeited if the recipient ceases to be employed by the Company, with limited exceptions.

The following table ~~presents the roll forward of~~summarizes information about restricted stock ~~units by units and weighted average grant-date fair value.~~unit activity for the period ended March 31, 2019.




~~Roll-Forward of Restricted Stock Units~~
~~Non-vested at January 1, 2018~~	—
~~Granted~~	~~3,279~~
~~Vested~~	—
~~Canceled~~	—
~~Non-vested at March 31, 2018~~	~~3,279~~

~~Roll-Forward of Non-vested Restricted Stock Units - Weighted Average Fair Value:~~
~~Non-vested at January 1, 2018~~	$	—
~~Granted~~	~~33.55~~
~~Vested~~	—
~~Canceled~~	—
~~Non-vested at March 31, 2018~~	~~33.55~~




	Restricted Stock Units	Weighted Average Grant Date Fair Value
Non-vested at January 1, 2019	3,377	$	32.57
Granted	3,901	31.71
Non-vested at March 31, 2019	7,278	32.11

The following table presents information on the amounts expensed related to restricted stock units for the periods ended March 31, ~~2018~~2019 and ~~2017:~~2018:

Share-Based Compensation Expense
For the Three Months Ended March 31,
2018 2017
Share-Based Compensation Expense $ 89
$ 83



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

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.~~employee stock ownership plan ("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~~’sArrow’s subsidiary banks to purchase outstanding shares of ~~Arrow~~’sArrow’s common stock. The notes require annual payments of principal and interest through ~~2018.~~2019. 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 BENEFIT 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~~’sparticipant’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~~’participants’ contributions adjusted annually. ~~Arrow~~’sArrow’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, ~~2016,~~2018, Arrow updated its mortality assumption to the RP-2014 Mortality Table for annuitants and non-annuitants with projected generational mortality improvements using Scale ~~MP-2016.~~MP-2018 for the pension plans and the RPH-2014 Mortality Table for annuitants and non-annuitants with projected generational mortality improvements using Scale MP-2018 for the retiree health plan. The revised ~~assumption~~assumptions resulted in a decrease in postretirement liabilities. As of December 31, 2018, Arrow also updated its mortality assumption for annuity/lump sum conversions for the pension plans to the 2019 IRC Section 417(e)(3)B) applicable mortality table. The revised assumption results in an increase in postretirement liabilities for the pension plans.

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

The following tables provide the components of net periodic benefit costs for the ~~three month~~three-month periods ended March 31, ~~2018~~2019 and ~~2017.~~2018.


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

Plan Contributions During the Period									$	—		$	116	$	37

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

Plan Contributions During the Period	$	—		$	116	$	17		$	—		$	116	$	17

For the Three Months Ended March 31, 2017:
Service Cost ¹	$	350		$	10	$	37
Interest Cost ²	350			50		86
Expected Return on Plan Assets ²	(800		)	—		—
Amortization of Prior Service (Credit) Cost ²	(14		)	14		(3		)
Amortization of Net Loss ²	148			30		—
Net Periodic Benefit Cost	$	34		$	104	$	120

Plan Contributions During the Period	$	—		$	113	$	53

Footnotes:

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

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

We are not required to make a contribution to the qualified pension plan in ~~2018,~~2019, and currently, we do not expect to make additional contributions in ~~2018.~~2019. 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 March 31, ~~2018~~2019 and ~~2017~~.2018. 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:				Quarterly Period Ended:
	March 31, 2018		March 31, 2017		March 31, 2019		March 31, 2018
Earnings Per Share - Basic:
Net Income	$	8,531	$	6,631	$	8,734	$	8,531
Weighted Average Shares - Basic	13,936		13,889		14,469		14,354
Earnings Per Share - Basic	$	0.61	$	0.48	$	0.60	$	0.59

Earnings Per Share - Diluted:
Net Income	$	8,531	$	6,631	$	8,734	$	8,531
Weighted Average Shares - Basic	13,936		13,889		14,469		14,354
Dilutive Average Shares Attributable to Stock Options	80		112		51		82
Weighted Average Shares - Diluted	14,016		14,001		14,520		14,436
Earnings Per Share - Diluted	$	0.61	$	0.47	$	0.60	$	0.59

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

FASB ASC Subtopic 820-10 defines fair value, establishes a framework for measuring fair value in GAAP and requires certain disclosures about fair value measurements. We do not have any nonfinancial assets or liabilities measured at fair value on a recurring basis. The only assets or liabilities that Arrow measured at fair value on a recurring basis at March 31, 2019, December 31, 2018 and March 31, 2018 were securities available-for-sale and equity securities ~~and for~~ ~~December 31, 2017~~ ~~and March 31, 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)		Life-to-Date 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)
Fair Value of Assets and Liabilities Measured on a Recurring Basis:
March 31, 2019
Securities Available-for Sale:
U.S. Government & Agency Obligations												$	35,383	$	—	$	35,383	$	—
State and Municipal Obligations												1,116		—		1,116		—
Mortgage-Backed Securities												261,513		—		261,513		—
Corporate and Other Debt Securities												800		—		800		—
Total Securities Available-for-Sale												298,812		—		298,812		—
Equity Securities												1,850		—		1,850		—
Total Securities Measured on a Recurring Basis												$	300,662	$	—	$	300,662	$	—
December 31, 2018
Securities Available-for Sale:
U.S. Government & Agency Obligations												$	46,765	$	—	$	46,765	$	—
State and Municipal Obligations												1,195		—		1,195		—
Mortgage-Backed Securities												268,775		—		268,775		—
Corporate and Other Debt Securities												800		—		800		—
Total Securities Available-for-Sale												317,535				317,535
Equity Securities												1,774		—		1,774		—
Total Securities Measured on a Recurring Basis												$	319,309	$	—	$	319,309	$	—
March 31, 2018
Securities Available-for Sale:
U.S. Government & Agency Obligations	$	59,657	$	59,657	$	—	$	—				$	59,657	$	—	$	59,657	$	—
State and Municipal Obligations	9,743		—		9,743		—					9,743		—		9,743		—
Mortgage-Backed Securities	235,389		—		235,389		—					235,389		—		235,389		—
Corporate and Other Debt Securities	800		—		800		—					800		—		800		—
Total Securities Available-for-Sale	305,589		59,657		245,932		—					305,589				305,589
Equity Securities	1,579		—		1,579		—					1,579		—		1,579		—
Total Securities Measured on a Recurring Basis	$	307,168	$	59,657	$	247,511	$	—				$	307,168	$	—	$	307,168	$	—
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	$	59,894	$	240,306	$	—
March 31, 2017
Securities Available-for Sale:
U.S. Government & Agency Obligations	$	147,231	$	54,695	$	92,536	$	—
State and Municipal Obligations	25,507		—		25,507		—
Mortgage-Backed Securities	169,728		—		169,728		—
Corporate and Other Debt Securities	3,298		—		3,298		—
Equity Securities	1,395		—		1,395		—
Total Securities Available-for Sale	$	347,159	$	54,695	$	292,464	$	—

Fair Value of Assets and Liabilities Measured on a Nonrecurring Basis:
March 31, 2018
Collateral Dependent Impaired Loans	$	1,295	$	—	$	—	$	1,295	$	(58	)
Other Real Estate Owned and Repossessed Assets, Net	1,647		—		—		1,647		(582		)
December 31, 2017
Collateral Dependent Impaired Loans	$	—	$	—	$	—	$	—	$	—
Other Real Estate Owned and Repossessed Assets, Net	$	1,847	$	—	—		1,847		$	(569	)
March 31, 2017
Collateral Dependent Impaired Loans	$	288	$	—	$	—	$	288	$	(34	)
Other Real Estate Owned and Repossessed Assets, Net	1,734		—		—		1,734		(500		)



	Fair Value		Quoted Prices In Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Life-to-Date Gains (Losses)
Fair Value of Assets and Liabilities Measured on a Nonrecurring Basis:
March 31, 2019
Collateral Dependent Impaired Loans	$	684	$	—	$	—	$	684	$	—
Other Real Estate Owned and Repossessed Assets, Net	1,445		—		—		1,445		(826		)
December 31, 2018
Collateral Dependent Impaired Loans	$	—	$	—	$	—	$	—	$	—
Other Real Estate Owned and Repossessed Assets, Net	1,260		—		—		1,260		(669		)
March 31, 2018
Collateral Dependent Impaired Loans	$	1,295	$	—	$	—	$	1,295	$	(58	)
Other Real Estate Owned and Repossessed Assets, Net	1,647		—		—		1,647		(582		)

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;

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

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

There were no transfers between Levels 1, 2 and 3 for the three months ended March 31, ~~2018,~~2019, December 31, ~~2017~~2018 and March 31, ~~2017.~~2018.

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

The fair value of Level 1 securities available-for-sale are based on unadjusted, quoted market prices from exchanges in active markets. The fair value of Level 2 securities available-for-sale are based on an independent bond and equity pricing service for identical assets or significantly similar securities and an independent equity pricing service for equity securities not actively traded. The pricing services use a variety of techniques to arrive at fair value including market maker bids, quotes and pricing models. Inputs to the pricing models include recent trades, benchmark interest rates, spreads and actual and projected cash flows.

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

The fair value of collateral dependent impaired loans and other real estate owned was based on third-party appraisals less estimated cost to sell. The appraisals may be adjusted by management for qualitative factors such as economic conditions and estimated liquidation expenses. Other assets which might have been included in this table include mortgage servicing rights, goodwill and other intangible assets. Arrow evaluates each of these assets for impairment on an annual basis, with no impairment recognized for these assets at March 31, ~~2018,~~ 2019, December 31, ~~2017~~2018 and March 31, ~~2017.~~2018.

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

~~Securities~~

The fair value for securities held-to-maturity ~~are fair valued~~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~~’sArrow’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										Fair Value Hierarchy
											Carrying Value		Fair Value		Level 1		Level 2		Level 3
March 31, 2019
Cash and Cash Equivalents											$	61,229	$	61,229	$	61,229	$	—	$	—
Securities Available-for-Sale											298,812		298,812		—		298,812		—
Securities Held-to-Maturity											279,400		280,414		—		280,414		—
Equity Securities											1,850		1,850		—		1,850		—
Federal Home Loan Bank and Federal Reserve Bank Stock											7,878		7,878		—		7,878		—
Net Loans											2,214,835		2,164,298		—		—		2,164,298
Accrued Interest Receivable											8,180		8,180		—		8,180		—
Deposits											2,490,097		2,484,479		—		2,484,479		—
Federal Funds Purchased and Securities Sold Under Agreements to Repurchase											58,407		58,407		—		58,407		—
Federal Home Loan Bank Overnight Advances											74,500		74,500		—		74,500		—
Federal Home Loan Bank Term Advances											35,000		34,805		—		34,805		—
Junior Subordinated Obligations Issued to Unconsolidated Subsidiary Trusts											20,000		20,000		—		20,000		—
Accrued Interest Payable											737		737		—		737		—

December 31, 2018
Cash and Cash Equivalents											$	84,239	$	84,239	$	84,239	$	—	$	—
Securities Available-for-Sale											317,535		317,535		—		317,535		—
Securities Held-to-Maturity											283,476		280,338		—		280,338		—
Equity Securities											1,774		1,774				1,774
Federal Home Loan Bank and Federal Reserve Bank Stock											15,506		15,506		—		15,506		—
Net Loans											2,176,019		2,114,372		—		—		2,114,372
Accrued Interest Receivable											7,035		7,035		—		7,035		—
Deposits											2,345,584		2,338,410		—		2,338,410		—
Federal Funds Purchased and Securities Sold Under Agreements to Repurchase											54,659		54,659		—		54,659		—
Federal Home Loan Bank Overnight Advances											234,000		234,000		—		234,000		—
Federal Home Loan Bank Term Advances											45,000		44,652		—		44,652		—
Junior Subordinated Obligations Issued to Unconsolidated Subsidiary Trusts											20,000		20,000		—		20,000		—
Accrued Interest Payable											570		570		—		570		—
	Book Value		Fair Value		Level 1		Level 2		Level 3
March 31, 2018
Cash and Cash Equivalents	$	100,272	$	100,272	$	100,272	$	—	$	—	$	100,272	$	100,272	$	100,272	$	—	$	—
Securities Available-for-Sale	305,589		305,589		—		305,589		—		305,589		305,589		—		305,589		—
Securities Held-to-Maturity	330,124		324,938		—		324,938		—		330,124		324,937		—		324,937		—
Equity Securities	1,579		1,579		—		1,579		—		1,579		1,579		—		1,579
Federal Home Loan Bank and Federal Reserve Bank Stock	4,780		4,780		—		4,780		—		4,780		4,780		—		4,780		—
Net Loans	1,973,980		1,915,978		—		—		1,915,978		1,973,980		1,915,978		—		—		1,915,978
Accrued Interest Receivable	7,662		7,662		—		7,662		—		7,662		7,692		—		7,692		—
Deposits	2,411,273		2,402,122		—		2,402,122		—		2,411,273		2,402,122		—		2,402,122		—
Federal Funds Purchased and Securities Sold Under Agreements to Repurchase	74,957		74,957		—		74,957		—		74,957		74,957		—		74,957		—
Federal Home Loan Bank Term Advances	45,000		44,484		—		44,484		—		45,000		44,484		—		44,484		—
Junior Subordinated Obligations Issued to Unconsolidated Subsidiary Trusts	20,000		20,000		—		20,000		—		20,000		20,000		—		20,000		—
Accrued Interest Payable	361		361		—		361		—		361		361		—		361		—

December 31, 2017
Cash and Cash Equivalents	$	72,838	$	72,838	$	72,838	$	—	$	—
Securities Available-for-Sale	300,200		300,200		59,894		240,306		—
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		—

March 31, 2017
Cash and Cash Equivalents	$	64,803	$	64,803	$	64,803	$	—	$	—
Securities Available-for-Sale	347,159		347,159		54,695		292,464		—
Securities Held-to-Maturity	335,211		335,105		—		335,105		—
Federal Home Loan Bank and Federal Reserve Bank Stock	6,826		6,826		—		6,826		—
Net Loans	1,793,589		1,773,895		—		—		1,773,895
Accrued Interest Receivable	7,530		7,530		—		7,530		—
Deposits	2,256,536		2,248,066		—		2,248,066		—
Federal Funds Purchased and Securities Sold Under Agreements to Repurchase	32,035		32,035		—		32,035		—
Federal Home Loan Bank Overnight Advances	32,000		32,000		—		32,000		—
Federal Home Loan Bank Term Advances	55,000		55,130		—		55,130		—
Junior Subordinated Obligations Issued to Unconsolidated Subsidiary Trusts	20,000		20,000		—		20,000		—
Accrued Interest Payable	240		240		—		240		—

Note 10. LEASES (Dollars In Thousands)

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

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

The following includes quantitative data related to the Company's leases as of March 31, 2019:



Finance Lease Amounts:	Classification
Right-of-use Assets	Premises and Equipment, Net	$	2,922
Lease Liabilities	Finance Leases	2,946

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

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

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



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

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

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

Lease Liability	$	5,639	$	2,946

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

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



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

Report of Independent Registered Public Accounting Firm

To the Stockholders and Board of Directors

Arrow Financial Corporation:

Results of Review of Interim Financial Information

We have reviewed the consolidated balance sheet of Arrow Financial Corporation and subsidiaries (the Company) as of March 31, ~~2018~~2019 and ~~2017,~~2018, the related consolidated statements of income and comprehensive income, consolidated statements of changes in stockholders’ equity and cash flows for the three-month periods ended March 31, ~~2018~~2019 and ~~2017,~~2018, and the related notes (collectively, the consolidated interim financial information). Based on our reviews, we are not aware of any material modifications that should be made to the consolidated interim financial information for it to be in conformity with U.S. generally accepted accounting principles.

We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheet of the Company as of December 31, ~~2017,~~2018, 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,~~8, 2019, 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,~~2018, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.

Basis for Review Results

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

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

/s/ KPMG LLP

Albany, New York

May 9, ~~2018~~2019

Item 2.

ARROW FINANCIAL CORPORATION AND SUBSIDIARIES

MANAGEMENT'S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

March 31, ~~2018~~2019

~~Note on Terminology -~~NOTE ON TERMINOLOGY

In this Quarterly Report on Form 10-Q, the terms ~~“Arrow,” “the~~"Arrow," "the registrant,~~” “the company,” “we,” “us,”~~" "the Company," "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 ~~320~~66 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 December 31, ~~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 -~~ 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~~Active subsidiaries of Glens Falls National include ~~Capital Financial Group, Inc.~~Upstate Agency, LLC (an insurance agency ~~specializing~~that sells property and casualty insurance policies and also specializes in selling and servicing group health care ~~policies); Upstate Agency, LLC (an insurance agency specializing in property~~policies and ~~casualty~~life insurance);, 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~~Arrow 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 -~~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 "may," "will," ~~“expect,” “believe,” “anticipate,” “estimate,~~"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.

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~~

b.rapid and dramatic changes in economic and market conditions;

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;


d.	significant changes in banking or other laws and regulations, including both enactment of new legal or regulatory measures (e.g., the Dodd-Frank 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.	~~competition from other sources (e.g., so-called Fintech enterprises);~~


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


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

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

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

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

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

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

~~Readers~~We are ~~cautioned not~~under no duty to ~~place undue reliance on~~update any of the forward-looking statements after the date of this Report to conform such statements to actual results. All forward-looking statements, express or implied, included in this Report ~~which speak only as of~~and the ~~date hereof.~~ ~~We undertake no general obligation~~documents we incorporate by reference and that are attributable to ~~revise~~the Company are expressly qualified in their entirety by this cautionary statement. This cautionary statement should also be considered in connection with any subsequent written or ~~update the~~oral forward-looking statements ~~contained in this Report to reflect~~that the ~~occurrence of unanticipated events at~~Company or any ~~point in the future.~~persons acting on our behalf may issue. This Quarterly Report should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, ~~2017~~2018 (the 2018 Annual Report) 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’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 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. ~~Historically, this~~This adjustment ~~has been~~is considered helpful in comparing ~~the~~one financial institution's net interest income ~~(before tax)~~ to that of another institution or in analyzing ~~the~~any institution’s net interest income trend line over time, to correct any analytical distortion that might otherwise arise from the fact that financial institutions vary widely in the proportions of their portfolios that are invested in tax-exempt securities, orand 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~~and to better demonstrate a single institution’s performance over time. ~~Arrow follows~~We follow 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’ equity less intangible assets. Tangible book value per share is tangible equity divided by total shares issued and outstanding. Tangible book value per share is often regarded as a more meaningful comparative ratio than book value per share as calculated under GAAP, that is, total stockholders’ equity including intangible assets divided by total shares issued and outstanding. Intangible assets includes many items, but in our case, essentially represents goodwill.

Adjustments for Certain Items of Income or Expense: In addition to our regular utilization in our public filings and disclosures of the various non-GAAP measures commonly utilized by financial institutions discussed above, 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	3/31/2018			12/31/2017			9/30/2017			6/30/2017			3/31/2017			3/31/2019			12/31/2018			9/30/2018			6/30/2018			3/31/2018
Net Income	$	8,531		$	8,071		$	7,416		$	7,208		$	6,631		$	8,734		$	8,758		$	9,260		$	9,730		$	8,531
Transactions Recorded in Net Income (Net of Tax):
Net Gain (Loss) on Securities Transactions	—			(278		)	6			—			—
Tax Benefit from Net Deferred Tax Liability Revaluation	—			1,116			—			—			—
Transactions in Net Income (Net of Tax):
Net Changes in Fair Value of Equity Investments																57			(106		)	85			166			13

Share and Per Share Data:⁽¹⁾
Period End Shares Outstanding	13,950			13,930			13,891			13,900			13,886			14,474			14,472			14,441			14,424			14,368
Basic Average Shares Outstanding	13,936			13,905			13,889			13,890			13,889			14,469			14,451			14,431			14,394			14,354
Diluted Average Shares Outstanding	14,016			14,006			13,966			13,975			14,001			14,520			14,514			14,520			14,480			14,436
Basic Earnings Per Share	$	0.61		$	0.58		$	0.53		$	0.52		$	0.48		$	0.60		$	0.61		$	0.64		$	0.68		$	0.59
Diluted Earnings Per Share	0.61			0.58			0.53			0.52			0.47			0.60			0.60			0.64			0.67			0.59
Cash Dividend Per Share	0.250			0.250			0.243			0.243			0.243			0.260			0.260			0.252			0.243			0.243

Selected Quarterly Average Balances:
Interest-Bearing Deposits at Banks	27,978			27,047			27,143			24,480			23,565			$	26,163		$	34,782		$	30,522		$	28,543		$	27,978
Investment Securities	642,442			660,043			677,368			684,570			695,615			611,161			637,341			636,847			647,913			642,442
Loans	1,971,240			1,930,590			1,892,766			1,842,543			1,781,113			2,210,642			2,160,435			2,089,651			2,026,598			1,971,240
Deposits	2,305,736			2,284,206			2,193,778			2,206,365			2,161,798			2,347,985			2,347,231			2,279,709			2,325,202			2,305,736
Other Borrowed Funds	184,613			187,366			262,864			207,270			205,436			327,138			315,172			314,304			219,737			184,613
Stockholders’ Equity	251,109			247,253			243,801			239,396			235,257			272,864			268,503			263,139			256,358			251,109
Total Assets	2,763,706			2,744,180			2,725,653			2,677,843			2,626,470			2,977,056			2,954,029			2,879,854			2,823,061			2,763,706
Return on Average Assets, annualized	1.25		%	1.17		%	1.08		%	1.08		%	1.02		%	1.19		%	1.18		%	1.28		%	1.38		%	1.25		%
Return on Average Equity, annualized	13.78		%	12.95		%	12.07		%	12.08		%	11.43		%	12.98		%	12.94		%	13.96		%	15.22		%	13.78		%
Return on Tangible Equity, annualized ⁽²⁾	15.24		%	14.36		%	13.40		%	13.45		%	12.76		%
Return on Average Tangible Equity, annualized ⁽²⁾																14.22		%	14.20		%	15.36		%	16.80		%	15.24		%
Average Earning Assets	2,641,660			2,617,680			2,597,277			2,551,593			2,500,293			$	2,847,966		$	2,832,558		$	2,757,020		$	2,703,054		$	2,641,660
Average Paying Liabilities	2,050,661			2,029,811			2,012,802			2,005,421			1,977,628			2,224,403			2,189,233			2,110,924			2,100,085			2,050,661
Net Interest Income (GAAP)	20,402			20,314			19,650			19,227			18,461
Net Interest Margin, annualized (GAAP)	3.13		%	3.08		%	3.00		%	3.02		%	2.99		%
Net Interest Income, Tax-Equivalent (Non-GAAP) ⁽³⁾	20,893			21,294			20,616			20,176			19,409
Tax-Equivalent Adjustment (Non-GAAP) ⁽³⁾	491			980			966			949			948
Net Interest Margin, annualized (Non-GAAP) ⁽³⁾	3.21		%	3.23		%	3.15		%	3.17		%	3.15		%
Interest Income																26,213			26,000			24,495			23,590			22,418
Tax-Equivalent Adjustment ⁽³⁾																373			376			376			468			491
Interest Income, Tax-Equivalent ⁽³⁾																26,586			26,376			24,871			24,058			22,909
Interest Expense																5,092			4,343			3,498			2,628			2,016
Net Interest Income																21,121			21,657			20,997			20,962			20,402
Net Interest Income, Tax-Equivalent ⁽³⁾																21,494			22,033			21,373			21,430			20,893
Net Interest Margin, annualized																3.01		%	3.03		%	3.02		%	3.11		%	3.13		%
Net Interest Margin, Tax Equivalent, annualized ⁽³⁾																3.06		%	3.09		%	3.08		%	3.18		%	3.21		%

Efficiency Ratio Calculation: ⁽⁴⁾
Noninterest Expense	$	15,955		$	16,045		$	15,548		$	15,637		$	15,475		$	16,652		$	16,881		$	16,026		$	16,192		$	15,956
Less: Intangible Asset Amortization	67			69			69			70			71			79			65			65			66			67
Net Noninterest Expense	15,888			15,976			15,479			15,567			15,404			$	16,573		$	16,816		$	15,961		$	16,126		$	15,889
Net Interest Income, Tax-Equivalent (Non-GAAP) ⁽³⁾	20,893			21,294			20,616			20,176			19,409
Net Interest Income, Tax-Equivalent ⁽³⁾																$	21,494		$	22,033		$	21,373		$	21,430		$	20,893
Noninterest Income	6,888			6,752			7,141			7,057			6,695			6,887			6,799			7,350			7,911			6,888
Less: Net Securities Gain (Loss)	—			(458		)	10			—			—
Less: Net Unrealized Gain on Equity Securities	18			—			—			—			—
Less: Net Changes in Fair Value of Equity Invest.																76			(142		)	114			223			18
Net Gross Income	27,763			28,504			27,747			27,233			26,104			$	28,305		$	28,974		$	28,611		$	29,118		$	27,763
Efficiency Ratio (Non-GAAP)	57.23		%	56.05		%	55.79		%	57.16		%	59.01		%
Efficiency Ratio ⁽⁴⁾																58.55		%	58.04		%	55.79		%	55.38		%	57.23		%

Period-End Capital Information:
Total Stockholders’ Equity (i.e. Book Value)	$	252,734		$	249,603		$	244,648		$	240,752		$	236,111		$	276,609		$	269,584		$	264,810		$	259,488		$	252,734
Book Value per Share ⁽¹⁾	18.12			17.92			17.61			17.32			17.00			19.11			18.63			18.34			17.99			17.59
Goodwill and Other Intangible Assets, net	24,045			24,162			24,268			24,355			24,448			23,650			23,725			23,827			23,933			24,045
Tangible Book Value per Share ^(1,2)	16.39			16.18			15.86			15.57			15.24			17.48			16.99			16.69			16.33			15.92

Capital Ratios:⁽⁵⁾
Tier 1 Leverage Ratio	9.62		%	9.49		%	9.30		%	9.35		%	9.37		%	9.73		%	9.61		%	9.67		%	9.65		%	9.62		%
Common Equity Tier 1 Capital Ratio	12.97		%	12.89		%	12.70		%	12.68		%	12.84		%	12.98		%	12.89		%	12.89		%	13.01		%	12.97		%
Tier 1 Risk-Based Capital Ratio	14.03		%	13.97		%	13.79		%	13.79		%	13.99		%	13.95		%	13.87		%	13.90		%	14.04		%	14.03		%
Total Risk-Based Capital Ratio	15.04		%	14.99		%	14.77		%	14.77		%	14.98		%	14.93		%	14.86		%	14.90		%	15.06		%	15.04		%

Assets Under Trust Administration and Investment Management	$	1,470,191		$	1,452,994		$	1,411,608		$	1,356,262		$	1,333,690
Assets Under Trust Admin. & Investment Mgmt.																$	1,483,259		$	1,385,752		$	1,551,289		$	1,479,753		$	1,470,191

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 37.																Non-GAAP Financial Measures Reconciliation: Tangible Book Value, Tangible Equity and Return on Tangible Equity exclude goodwill and other intangible assets, net from total equity. These are non-GAAP financial measures which we believe provide investors with information that is useful in understanding our financial performance. See "Use of Non-GAAP Financial Measures" on page 39.
		3/31/2018			12/31/2017			9/30/2017			6/30/2017			3/31/2017				3/31/2019			12/31/2018			9/30/2018			6/30/2018			3/31/2018
	Total Stockholders' Equity (GAAP)	$	252,734		$	249,603		$	244,648		$	240,752		$	236,111		Total Stockholders' Equity (GAAP)	$	276,609		$	269,584		$	264,810		$	259,488		$	252,734
	Less: Goodwill and Other Intangible assets, net	24,045			24,162			24,268			24,355			24,448			Less: Goodwill and Other Intangible assets, net	23,650			23,725			23,827			23,933			24,045
	Tangible Equity (Non-GAAP)	$	228,689		$	225,441		$	220,380		$	216,397		$	211,663		Tangible Equity (Non-GAAP)	$	252,959		$	245,859		$	240,983		$	235,555		$	228,689

	Period End Shares Outstanding	13,950			13,930			13,891			13,900			13,886			Period End Shares Outstanding	14,474			14,472			14,441			14,424			14,368
	Tangible Book Value per Share (Non-GAAP)	$	16.39		$	16.18		$	15.86		$	15.57		$	15.24		Tangible Book Value per Share (Non-GAAP)	$	17.48		$	16.99		$	16.69		$	16.33		$	15.92
	Net Income	8,531			8,071			7,416			7,208			6,631			Net Income	8,734			8,758			9,260			9,730			8,531
	Return on Tangible Equity (Net Income/Tangible Equity - Annualized)	15.24		%	14.36		%	13.40		%	13.45		%	12.76		%	Return on Tangible Equity (Net Income/Tangible Equity - Annualized)	14.22		%	14.20		%	15.36		%	16.80		%	15.24		%

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 37.																Non-GAAP Financial Measures Reconciliation: Net Interest Margin is the ratio of our annualized tax-equivalent net interest income to average earning assets. This is also a non-GAAP financial measure which we believe provides investors with information that is useful in understanding our financial performance. See "Use of Non-GAAP Financial Measures" on page 39.
		3/31/2018			12/31/2017			9/30/2017			6/30/2017			3/31/2017				3/31/2019			12/31/2018			9/30/2018			6/30/2018			3/31/2018
	Interest Income (GAAP)	$	22,418		$	22,135		$	21,599		$	20,926		$	19,997		Interest Income (GAAP)	$	26,213		$	26,000		$	24,495		$	23,590		$	22,418
	Add: Tax-Equivalent adjustment (Non-GAAP)	491			980			966			949			948			Add: Tax-Equivalent adjustment (Non-GAAP)	373			376			376			468			491
	Interest Income - Tax Equivalent (Non-GAAP)	$	22,909		$	23,115		$	22,565		$	21,875		$	20,945		Interest Income - Tax Equivalent (Non-GAAP)	$	26,586		$	26,376		$	24,871		$	24,058		$	22,909
	Net Interest Income (GAAP)	$	20,402		$	20,314		$	19,650		$	19,227		$	18,461		Net Interest Income (GAAP)	$	21,121		$	21,657		$	20,997		$	20,962		$	20,402
	Add: Tax-Equivalent adjustment (Non-GAAP)	491			980			966			949			948			Add: Tax-Equivalent adjustment (Non-GAAP)	373			376			376			468			491
	Net Interest Income - Tax Equivalent (Non-GAAP)	$	20,893		$	21,294		$	20,616		$	20,176		$	19,409		Net Interest Income - Tax Equivalent (Non-GAAP)	$	21,494		$	22,033		$	21,373		$	21,430		$	20,893
	Average Earning Assets	$	2,641,660		$	2,617,680		$	2,597,277		$	2,551,593		$	2,500,293		Average Earning Assets	$	2,847,966		$	2,832,558		$	2,757,020		$	2,703,054		$	2,641,660
	Net Interest Margin (Non-GAAP)*	3.21		%	3.23		%	3.15		%	3.17		%	3.15		%	Net Interest Margin (Non-GAAP)*	3.06		%	3.09		%	3.08		%	3.18		%	3.21		%

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

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 March 31, 2018 that is listed in the tables (i.e., 12.97%) 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%).																For the current quarter, all of the regulatory capital ratios in the table above, as well as the Total Risk-Weighted Assets and Common Equity Tier 1 Capital amounts listed in the table below, are estimates based on, and calculated in accordance with, bank regulatory capital rules. All prior quarters reflect actual results. The March 31, 2019 CET1 ratio listed in the tables (i.e., 12.98%) exceeds the sum of the required minimum CET1 ratio plus the fully phased-in Capital Conservation Buffer (i.e., 7.00%).
		3/31/2018			12/31/2017			9/30/2017			6/30/2017			3/31/2017				3/31/2019			12/31/2018			9/30/2018			6/30/2018			3/31/2018
	Total Risk Weighted Assets	$	1,889,719		$	1,856,242		$	1,830,730		$	1,802,455		$	1,747,318		Total Risk Weighted Assets	$	2,075,115		$	2,046,495		$	1,999,849		$	1,934,890		$	1,889,719
	Common Equity Tier 1 Capital	265,066			259,378			232,473			228,586			224,369			Common Equity Tier 1 Capital	269,363			263,863			257,852			251,666			245,015
	Common Equity Tier 1 Capital Ratio	12.97		%	12.89		%	12.70		%	12.68		%	12.84		%	Common Equity Tier 1 Capital Ratio	12.98		%	12.89		%	12.89		%	13.01		%	12.97		%

* Quarterly 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 federal tax rate of 35% for 2017, 21% for 2018)
(Dollars In Thousands)

Quarter Ended March 31: 2018 2017
Interest Rate Interest Rate
Average Income/ Earned/ Average Income/ Earned/
Balance Expense Paid Balance Expense Paid
Interest-Bearing Deposits at Banks $ 27,978
$ 134
1.94 % $ 23,565
$ 60
1.03 %
Investment Securities:
Fully Taxable 359,908
1,895
2.14
403,930
1,994
2.00
Exempt from Federal Taxes 282,534
1,947
2.79
291,685
2,361
3.28
Loans 1,971,240
18,933
3.90
1,781,113
16,530
3.76
Total Earning Assets 2,641,660
22,909
3.52
2,500,293
20,945
3.40
Allowance for Loan Losses (18,523 ) (16,976 )
Cash and Due From Banks 35,608
35,525

Other Assets 104,961
107,628

Total Assets $ 2,763,706
$ 2,626,470

Deposits:
Interest-Bearing Checking Accounts $ 914,116
387
0.17
$ 894,911
331
0.15
Savings Deposits 723,660
522
0.29
677,662
291
0.17
Time Deposits of $250,000 or More 63,406
204
1.30
33,758
55
0.66
Other Time Deposits 164,866
259
0.64
165,861
228
0.56
Total Interest-Bearing Deposits 1,866,048
1,372
0.30
1,772,192
905
0.21
Short-Term Borrowings 111,835
197
0.71
130,436
211
0.66
FHLBNY Term Advances and Other Long-Term Debt 72,778
447
2.49
75,000
420
2.27
Total Interest-Bearing Liabilities 2,050,661
2,016
0.40
1,977,628
1,536
0.31
Demand Deposits 439,688
389,606

Other Liabilities 22,248
23,979

Total Liabilities 2,512,597
2,391,213

Stockholders’ Equity 251,109
235,257

Total Liabilities and Stockholders’ Equity $ 2,763,706
$ 2,626,470

Net Interest Income (Tax-equivalent Basis)
(Non-GAAP) ⁽¹⁾
20,893
19,409

Reversal of Tax Equivalent Adjustment (491 ) (0.08 )% (948 ) (0.15 )%
Net Interest Income $ 20,402
$ 18,461

Net Interest Spread (Non-GAAP) ⁽¹⁾
3.12 % 3.09 %
Net Interest Margin (Non-GAAP) ⁽¹⁾
3.21 % 3.15 %

¹~~See Note 3 on p. 39.~~



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

Quarter Ended March 31:	2019							2018
				Interest		Rate					Interest		Rate
	Average			Income/		Earned/		Average			Income/		Earned/
	Balance			Expense		Paid		Balance			Expense		Paid
Interest-Bearing Deposits at Banks	$	26,163		$	195	3.02	%	$	27,978		$	134	1.94	%
Investment Securities:
Fully Taxable	378,120			2,369		2.54		359,908			1,893		2.13
Exempt from Federal Taxes ⁽²⁾	233,041			1,246		2.17		282,534			1,533		2.20
Loans ⁽²⁾	2,210,642			22,403		4.11		1,971,240			18,858		3.88
Total Earning Assets	2,847,966			26,213		3.73		2,641,660			22,418		3.44
Allowance for Loan Losses	(20,108		)					(18,523		)
Cash and Due From Banks	35,125							35,608
Other Assets	114,073							104,961
Total Assets	$	2,977,056						$	2,763,706
Deposits:
Interest-Bearing Checking Accounts	$	768,354		482		0.25		$	914,116		387		0.17
Savings Deposits	833,832			1,601		0.78		723,660			522		0.29
Time Deposits of $250,000 or More	79,346			396		2.02		63,406			204		1.30
Other Time Deposits	212,785			713		1.36		164,866			259		0.64
Total Interest-Bearing Deposits	1,894,317			3,192		0.68		1,866,048			1,372		0.30
Short-Term Borrowings	264,471			1,421		2.18		111,835			197		0.71
FHLBNY Term Advances & Other Long-Term Debt	62,667			464		3.00		72,778			447		2.49
Finance Leases	2,948			15		2.06		—			—		—
Total Interest-Bearing Liabilities	2,224,403			5,092		0.93		2,050,661			2,016		0.40
Noninterest-bearing deposits	453,668							439,688
Other Liabilities	26,121							22,248
Total Liabilities	2,704,192							2,512,597
Stockholders’ Equity	272,864							251,109
Total Liabilities and Stockholders’ Equity	$	2,977,056						$	2,763,706
Net Interest Income				$	21,121						$	20,402
Net Interest Spread						2.80	%						3.04	%
Net Interest Margin						3.01	%						3.13	%

OVERVIEW

~~We reported~~

The following discussion and analysis focuses on and reviews our results of operations for the three month period ended March 31, 2019 and our financial condition as of March 31, 2019 and 2018. The discussion below should be read in conjunction with the selected quarterly and annual information set forth above and the Consolidated Financial Statements and other financial data presented elsewhere in this Report. When necessary, prior-year financial information has been reclassified to conform to the current-year presentation.

Summary of Q1 2019 Financial Results: Net income was $8.7 million for the first quarter of 2019, an increase of $203 thousand, or 2.4%, over net income for the first quarter of ~~2018 of $8.5 million, an increase of $1.9 million, or 28.7%, over our net income for the first quarter of 2017.~~2018. Diluted earnings per share (EPS) for the quarter was ~~$0.61,~~$0.60, an increase of ~~29.8%~~1.7% from the EPS of ~~$0.47~~$0.59 reported for the first quarter of ~~2017.~~2018. Return on average equity (ROE) for the first quarter of ~~2018 continued~~2019 decreased to ~~be strong at 13.78%~~12.98%, ~~up from an~~as compared to a ROE of ~~11.43%~~13.78% for the first quarter ended March 31, ~~2017.~~2018. Return on average assets (ROA) for the ~~2018~~2019 first quarter was ~~1.25%~~1.19%, ~~an increase~~a decrease from an ROA of ~~1.02%~~1.25% for the first quarter ended March 31, ~~2017.~~ 2018.

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

Net interest income on a GAAP basis increased 3.5% to ~~$20.4~~$21.1 million ~~up 10.5% over~~primarily due to the ~~$18.5~~increase in total interest and dividend income of $3.8 million ~~total~~as a result of strong loan growth. The net interest margin was 3.01% for the quarter, compared to 3.13% for the first quarter of 2018. The decrease in net interest margin was primarily due to the $3.1 million increase in interest expense. This increase was the result of a 3.3% growth in deposits and higher rates paid on money market savings, time deposits and other borrowings due to higher short-term market interest rates. Noninterest income for the three-month period ended March 31, 2019, was $6.9 million, compared to $6.9 million in the comparable 2018 quarter. Revenue generated from the wealth management and insurance segments, remains consistent, and total noninterest income represented 24.6% of total revenues in the first quarter of ~~2017. Net interest margin~~2019 compared to 25.2% for the same period of 2018.

Noninterest expense for the first quarter of ~~2018 was 3.13%, up~~2019 increased 4.4% to $16.7 million, from 2.99% for the first quarter of 2017. Tax-equivalent net interest income (a non-GAAP measure) also increased by approximately 7.6%, mainly due to the 5.7% increase in average earning assets from the first quarter of 2017, and a 6 basis point increase in the tax-equivalent net interest margin, increasing from 3.15% from the first quarter of 2017 to 3.21% for the first quarter 2018. The composition of average earning assets changed in the current quarter through a 10.7% increase in higher relative yielding average loans and a 7.6% decrease in lower relative yielding average investment securities. In addition to the composition of the balance sheet, a significant factor contributing to increased profitability was reduced tax rates resulting from the Tax Act. The provision for income taxes for the first quarter of 2018 decreased to $2.1 million as compared to $2.7$16.0 million for the first quarter of ~~2017. Total loans~~2018. Technology and equipment expense increased ~~between~~$443 thousand and other operating expense increased $228 thousand from the ~~respective period ends by $182.2~~comparable quarter in 2018.

The provision for income taxes was $2.2 million or 10.1%, while investment securities decreased by $394 thousand, or 0.1%. On the funding side, average interest-bearing deposits increased 5.3% and average non-interest bearing demand deposits increased 12.9% in the first quarter of ~~2018 as compared to~~2019 versus $2.1 million in the same quarter ~~in 2017.~~of 2018. The ~~provision~~effective income tax rates for ~~loan losses increased $388 thousand during~~ the ~~first quarter of~~three-month periods ended March 31, 2019 and 2018 ~~as compared to the first quarter of 2017, mainly due to total loan growth~~were 19.8% and ~~the mix of the loan portfolio. Noninterest income increased $194 thousand or 2.9% while noninterest expense increased $480 thousand or 3.1%.~~19.4%, respectively.

The changes in net income, net interest income and net interest margin between the three month periods are discussed in detail under the heading "RESULTS OF OPERATIONS," beginning on page ~~54.~~55.

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

Regulatory Capital and Increase in Stockholders' Equity: At March 31, ~~2018,~~2019, we continued to exceed by a substantial amount all required minimum capital ratios under the current bank regulatory capital rules at both the holding company and bank levels. At that date, both ~~of our~~subsidiary banks, as well as ~~our~~the holding company, continued to qualify as "well-capitalized" under the capital classification guidelines as defined by the current bank regulatory capital ~~rules.~~rules as implemented under Dodd-Frank (the Capital 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 Capital Rules under Dodd-Frank, ~~Act, however,~~ required minimum regulatory capital levels for insured banks and their parent holding companies ~~will continue to increase, as a percentage of risk-based assets~~increased in 2019. Pursuant to Economic Growth Act, the federal bank regulators are required to implement a simplified community bank leverage ratio capital standard that may be applicable to Arrow and its subsidiary banks to allow them to satisfy all applicable capital and leverage requirements, including the currently applicable risk-based capital ratio requirements. The implementation of the new community bank leverage ratio standards will be subject to the notice and comment procedures of rulemaking. The Economic Growth Act does not impose a deadline for this rulemaking. The federal bank regulators have issued a proposed rule to implement the "community bank leverage ratio", but that rule is not yet effective or final, and is subject to change. Upon effectiveness, the final rule may impact Arrow's capital options and requirements, although the potential impact of the final rule on Arrow will remain uncertain until the final rule is issued. Until the rule becomes final and effective, the enhanced Capital Rules promulgated under Dodd-Frank will remain applicable to Arrow.

Stockholders’ equity was ~~$252.7~~$276.6 million at March 31, ~~2018,~~2019, an increase of ~~$3.1~~$7.0 million, or ~~1.3%~~2.6%, from the December 31, ~~2017~~2018 level of ~~$249.6~~$269.6 million, and an increase of ~~$16.6~~$23.9 million, or ~~7.0%~~9.4%, from the prior-year level. The components of the change in stockholders’ equity since year-end ~~2017~~2018 are presented in the Consolidated Statement of Changes in Stockholders’ Equity on page 6, and are discussed in more detail in the next ~~section~~section.

At March 31, ~~2018, our~~2019, book value per share was ~~$18.12,~~$19.11, up by ~~6.6%~~8.6% 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 ~~$16.39,~~$17.48, an increase of ~~$1.15,~~$1.56, or ~~7.5%~~9.8%, over the level as of March 31, ~~2017.~~2018. See the disclosure on page 3739 related to ~~our~~the use of non-GAAP financial measures ~~generally, and~~including tangible book ~~value, specifically.~~value. In the first three months of ~~2018,~~2019, total stockholders' equity increased by ~~1.3% (not annualized)~~2.6% and ~~our~~ total book value per share ~~also~~ increased by ~~8.1%~~2.6%. The increase in stockholders' equity over the first three months of ~~2018~~2019 principally reflected the following factors: (i) ~~$8.5~~$8.73 million of net income for the period, ~~and~~plus (ii) other comprehensive income of $2.24 million, plus (iii) issuance of ~~$2.7~~$1.20 million of common stock through ~~our~~ employee benefit and dividend reinvestment plans; reduced by ~~(iii)~~(iv) cash dividends of ~~$3.5~~$3.76 million; and ~~(iv)~~(v) repurchases of ~~our own~~ common

stock ~~primarily in connection with our approved treasury stock repurchase plan,~~ of ~~$0.6~~$1.39 million. On March 31, ~~2018, our~~2019, the Company's closing stock price was ~~$33.95,~~$32.89, representing a trading multiple of ~~2.07~~1.88 to ~~our~~ tangible book value. ~~As adjusted for a 3.0% stock dividend distributed September 28, 2017,~~In the ~~Company paid~~first quarter of 2019, a quarterly cash dividend of ~~$0.243 per share for~~$0.260 was paid. Further discussion of dividends is included in the ~~first quarter of 2017, and a cash dividend of $0.25 per share for the last quarter of 2017 and the first quarter of 2018.~~Capital Components; Stock Repurchases; Dividends section located on page 53.

Loan Quality: ~~Our net~~Net charge-offs for the first quarter of ~~2018~~2019 were ~~$275~~$295 thousand as compared to ~~$153~~$275 thousand for the comparable ~~2017~~2018 quarter. ~~Our~~The ratio of net charge-offs to average loans (annualized) was 0.05% for the first quarter of 2019 compared to 0.06% for the first quarter of ~~2018 compared to 0.03% for the first quarter of 2017.~~2018. At March 31, ~~2018, our~~2019, the allowance for loan losses was ~~$19.1~~$20.4 million representing ~~0.96%~~0.91% of total loans, ~~up 1 basis point~~which is a decrease from the December 31, ~~2017 ratio. We believe this~~2018 ratio of 0.92%. The allowance iswas determined to be appropriate and reflects the continuing strong credit quality in the loan portfolio.

Nonperforming loans were ~~$4.6~~$5.3 million at March 31, ~~2018,~~2019, representing ~~0.23%~~0.24% of period-end loans, a decrease from the December 31, 2018 ratio of ~~1 basis point from our prior year comparable quarter ratio,~~0.25%, which compares favorably with the weighted average ratio of ~~our~~the peer group of ~~0.67%~~0.56% at December 31, ~~2017.~~2018.

Loan Segments: During the ~~first~~ quarter ~~of 2018, we experienced increases in outstanding balances in all three segments of our loan portfolio, without any significant deterioration in our credit quality. During the quarter, our~~ended March 31, 2019, total loans grew by ~~$42.3~~$39.0 million, or ~~2.2%~~1.8% as compared to the balance at December 31, ~~2017.~~2018. The largest increase was in consumer loans, which increased during the quarter by ~~$23.8~~$27.3 million, or ~~4.0%~~3.8%. In addition, ~~our~~residential real estate loans expanded by $6.5 million, or 0.8% and the total commercial loan portfolio increased by ~~$9.2~~$5.2 million, or ~~1.6%, and our residential real estate loans expanded by $9.2 million, or 1.2%~~0.8%.

Commercial Loans: These loans comprised ~~6.4%~~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.

Commercial Real Estate Loans: These loans comprised ~~22.8%~~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 ~~31.4%~~33.4% of ~~our~~the total loan portfolio at period-end. Consumer automobile loans at March 31, ~~2018,~~2019, were ~~$620~~$739 million, or 99.0% of this portfolio segment. In the first three months of ~~2018, we~~2019, 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%~~38.5% 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. WeThe Company originated nearly all of the residential real estate loans currently held in ~~our~~the loan portfolio and ~~apply~~applies 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 ~~2018, nor did we~~2019, or in any prior years back to and during the financial crisis. The terms of ~~our~~the Company's lines 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 ~~53)~~54). 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, 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, 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 March 31, ~~2018, the Company~~2019, Glens Falls National held 27,771 shares of Visa Class B common ~~stock. A potential future~~stock, and utilizing the conversion ~~of these shares into Visa~~ratio to Class A common stock ~~could result in our receiving approximately 46 thousand~~at that time, these Class B shares would convert to 45,000 shares of Visa Class A common stock. ~~There continue to be restrictions remaining on Visa Class B shares held by us. We continue~~Since the 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
	March 31, 2018		December 31, 2017		March 31, 2017		From December			From March			From December (not annualized)		From March		March 31, 2019		At Period-End December 31, 2018		March 31, 2018		$ Change From December			$ Change From March			% Change From December (not annualized)		% Change From March
Interest-Bearing Bank Balances	$	70,747	$	30,276	$	14,645	$	40,471		$	56,102		133.7	%	383.1	%	$	25,031	$	27,710	$	70,747	$	(2,679	)	$	(45,716	)	(9.7	)%	(64.6	)%
Securities Available-for-Sale	305,589		300,200		347,159		5,389			(41,570		)	1.8	%	(12.0	)%	298,812		317,535		305,589		(18,723		)	(6,777		)	(5.9	)%	(2.2	)%
Securities Held-to-Maturity	330,124		335,907		335,211		(5,783		)	(5,087		)	(1.7	)%	(1.5	)%	279,400		283,476		330,124		(4,076		)	(50,724		)	(1.4	)%	(15.4	)%
Equity Securities ⁽¹⁾	1,579		—		—		1,579			1,579
Loans⁽²⁾	1,993,037		1,950,770		1,810,805		42,267			182,232			2.2	%	10.1	%
Equity Securities																	1,850		1,774		1,579		76			271
Loans⁽¹⁾																	2,235,208		2,196,215		1,993,037		38,993			242,171			1.8	%	12.2	%
Allowance for Loan Losses	19,057		18,586		17,216		471			1,841			2.5	%	10.7	%	20,373		20,196		19,057		177			1,316			0.9	%	6.9	%
Earning Assets⁽²⁾	2,705,856		2,627,102		2,514,646		78,754			191,210			3.0	%	7.6	%
Earning Assets⁽¹⁾																	2,848,179		2,842,216		2,705,856		5,963			142,323			0.2	%	5.3	%
Total Assets	$	2,826,687	$	2,760,465	$	2,656,386	$	66,222		$	170,301		2.4	%	6.4	%	$	2,984,883	$	2,988,334	$	2,826,687	$	(3,451	)	$	158,196		(0.1	)%	5.6	%
Demand Deposits	$	452,347	$	441,945	$	402,506	$	10,402		$	49,841		2.4	%	12.4	%
Noninterest-Bearing Deposits																	$	453,089	$	472,768	$	452,347	$	(19,679	)	$	742		(4.2	)%	0.2	%
Interest-Bearing Checking Accounts	944,161		907,315		959,170		36,846			(15,009		)	4.1	%	(1.6	)%	823,301		790,781		944,161		32,520			(120,860		)	4.1	%	(12.8	)%
Savings Deposits	762,220		694,573		696,625		67,647			65,595			9.7	%	9.4	%	866,861		818,048		762,220		48,813			104,641			6.0	%	13.7	%
Time Deposits over $250,000	85,403		38,147		30,993		47,256			54,410			123.9	%	175.6	%	83,834		73,583		85,403		10,251			(1,569		)	13.9	%	(1.8	)%
Other Time Deposits	167,142		163,136		167,242		4,006			(100		)	2.5	%	(0.1	)%	263,012		190,404		167,142		72,608			95,870			38.1	%	57.4	%
Total Deposits	$	2,411,273	$	2,245,116	$	2,256,536	$	166,157		$	154,737		7.4	%	6.9	%	$	2,490,097	$	2,345,584	$	2,411,273	$	144,513		$	78,824		6.2	%	3.3	%
Federal Funds Purchased and Securities Sold Under Agreements to Repurchase	$	74,957	$	64,966	$	32,035	$	9,991		$	42,922		15.4	%	134.0	%	$	58,407	$	54,659	$	74,957	$	3,748		$	(16,550	)	6.9	%	(22.1	)%
FHLBNY Advances - Overnight	—		105,000		32,000		(105,000		)	(32,000		)	(100.0	)%	(100.0	)%	74,500		234,000		—		(159,500		)	74,500			(68.2	)%	—	%
FHLBNY Advances - Term	45,000		55,000		55,000		(10,000		)	(10,000		)	(18.2	)%	(18.2	)%	35,000		45,000		45,000		(10,000		)	(10,000		)	(22.2	)%	(22.2	)%
Junior Subordinated Obligations Issued to Unconsolidated Subsidiary Trusts																	20,000		20,000		20,000		—			—			—	%	—	%
Stockholders' Equity	252,734		249,603		236,111		3,131			16,623			1.3	%	7.0	%	276,609		269,584		252,734		7,025			23,875			2.6	%	9.4	%

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

Changes in Earning Assets: The loan portfolio at March 31, 2019, was $2.2 billion, an increase of $39.0 million, or 1.8%, from the December 31, 2018 level and up by $242.2 million, or 12.2%, from the March 31, 2018 level. The following trends were ~~included~~experienced in ~~Securities Available-for-Sale prior~~our largest segments:

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

Consumer loans (primarily automobile loans through indirect lending). As of March 31, 2019, these loans, primarily auto loans, increased by $27.3 million, or 3.8%, from the December 31, 2018 balance, reflecting a continuation of strong demand for new and used vehicles throughout our region-wide dealer network.

Residential real estate loans. This segment increased during the first three months of 2019 by $6.5 million, or 0.8%. Factors contributing to the ~~January 1, 2018 adoption~~segment growth include solid originations in the quarter and a reduction of ~~ASU 2016-01~~prepayments.

~~(2) Includes Nonaccrual Loans~~

Municipal Deposits: Fluctuations in balances of ~~our~~ interest-bearing checking accounts are largely the result of timing and behavior of municipal ~~deposit fluctuations.~~deposits. Municipal deposits on average represent ~~27%~~20% to ~~33%~~30% 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~~a result of local economic factors as well as competition from other banks and ~~out of our 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.~~non-bank entities.

If in the future, interest rates begin to rise significantly or the competition for municipal deposits otherwise becomes more intense, we may experience an elevation in the rates we are forced to pay on such deposits above our normal rates or, if we decline to pay such rates, we may experience a decrease in municipal deposit levels.

Changes in Sources of Funds: ~~Our total~~Total deposits increased ~~$166.2~~$144.5 million, or ~~7.4%~~6.2%, from December 31, ~~2017~~2018 to March 31, ~~2018. Our municipal deposits increased by 15.2% during the period,~~2019 mainly due to the ~~receipt~~following: Other time deposits increased $72.6 million in the first quarter of ~~NYS Aid payments~~2019 mostly due to ~~school districts~~the acquisition of $66.5 million in ~~March 2018, while~~brokered deposits as Arrow's subsidiary banks diversified funding at favorable rates relative to FHLBNY overnight advances in order to support the continued loan growth. Interest bearing checking accounts increased $32.5 million. Time deposits over $250,000 increased $10.3 million. These increasing balances were offset by a $19.7 million decrease in Non-Interest Bearing Deposits. The migration within our ~~consumer~~deposit offerings is due to certain municipal and ~~business~~non-municipal customers seeking a higher return on their deposit balances ~~increased by 4.3%. Due to this deposit growth along with~~as a result of the ~~15.4% increase~~rise in ~~our securities sold under agreements to repurchase, we were able to pay off our FHLBNY Advances-Overnight at March 31, 2018.~~short-term interest rates. The ~~first quarter increase in deposit balances also included seasonal municipal deposit growth and~~addition of the ~~use of~~ brokered deposits allowed the banks to ~~diversify balance sheet funding.~~decrease overnight FHLBNY advances by $159.5 million. At March 31, ~~2018, our~~2019, term advances from the FHLBNY were ~~$45~~$35 million, reflecting the non-renewal of a $10 million advance that matured during the ~~quarter.~~first quarter of 2019.

~~Changes~~

FINANCIAL CONDITION

Investment Portfolio Trends

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

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



	(Dollars in Thousands)
	Fair Value at Period-End							Net Unrealized Gains (Losses) For Period Ended
	3/31/2019		12/31/2018		Change			3/31/2019			12/31/2018			Change
Securities Available-for-Sale:
U.S. Agency Securities	$	35,383	$	46,765	$	(11,382	)	$	(136	)	$	(306	)	$	170
State and Municipal Obligations	1,116		1,195		(79		)	2			2			—
Mortgage-Backed Securities	261,513		268,775		(7,262		)	(1,834		)	(4,452		)	2,618
Corporate and Other Debt Securities	800		800		—			(200		)	(200		)	—
Total	$	298,812	$	317,535	$	(18,723	)	$	(2,168	)	$	(4,956	)	$	2,788

Securities Held-to-Maturity:
State and Municipal Obligations	$	235,576	$	233,359	$	2,217		$	1,122		$	(2,423	)	$	3,545
Mortgage-Backed Securities	44,838		46,979		(2,141		)	(108		)	(715		)	607
Total	$	280,414	$	280,338	$	76		$	1,014		$	(3,138	)	$	4,152

Equity Securities	$	1,850	$	1,774	$	76		$	—		$	—		$	—

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

In the periods referenced above, Mortgage-Backed Securities consisted solely of mortgage pass-through securities and Collateralized Mortgage Obligations ("CMOs") issued or guaranteed by U.S. federal agencies. Mortgage pass-through securities provide to the investor monthly portions of principal and interest pursuant to the contractual obligations of the underlying mortgages. CMOs are pools of mortgage-backed securities, the repayments on which have generally been separated into two or more components (tranches), where each tranche has a separate estimated life and yield. The Company's practice has been to purchase pass-through securities and CMOs that are issued or guaranteed by U.S. federal agencies, and the tranches of CMOs purchased are generally those having shorter average lives and/or durations.

Other-Than-Temporary Impairment

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

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 no change in the credit-worthiness of the issuers.

Investment Sales, Purchases and Maturities

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

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

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



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

Maturities & Calls	$	21,261	$	9,380



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

Maturities & Calls	$	5,319	$	6,459

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, Home Equity loans have been separately disclosed from Residential Real Estate loans (they are otherwise included in a single category in this Report). Commercial Loans and Commercial Real Estate Loans have been combined into a single category (they are treated as separate categories in other sections of this Report). Over the last five quarters, the average balances for 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 in recent quarters.

Quarterly Average Loan Balances

(Dollars in Thousands)



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

Percentage of Total Quarterly Average Loans



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

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

Commercial Loans and Commercial Real Estate Loans: For the first three months of 2019, combined commercial and commercial real estate loan originations continued to increase.

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

Although demand has been steady, it is 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. Generally, the business sector in the Company's service area, appeared to be in reasonably good financial condition at period-end.

Consumer Loans: At March 31, 2019, consumer loans (primarily automobile loans originated through dealerships located primarily in upstate New York and Vermont) represented the largest category of loans in the loan portfolio, and continued to be a significant component of business comprising more than a third of the total loan portfolio.

New consumer loan volume for the first three months of 2019 remained strong, at $100.4 million, up from the $88.9 million originated in the first three months of 2018. As a result of these originations, the quarterly average balance of our consumer loan portfolio at March 31, ~~2018, was $1.99 billion, up~~2019 grew by ~~$42.3~~$27 million, or ~~2.2%,~~3.6% from ~~the~~ our quarterly average balance at December 31, ~~2017~~ ~~level~~2018.

For credit quality purposes, the Company assigns potential automobile loan customers into one of four tiers, ranging from lower to higher quality in terms of anticipated credit risk. The Company's experienced lending staff not only utilizes credit evaluation software tools but also reviews and ~~up by $182.2 million, or 10.1%, from~~evaluates each loan individually prior to the ~~March 31, 2017 level. We experienced~~loan being funded. The Company believes that this disciplined approach to evaluating risk has contributed to maintaining the ~~following trends~~strong loan quality in this portfolio. However, if weakness in auto demand returns, the portfolio is likely to experience limited, if any, overall growth regardless of whether the auto company affiliates are offering highly-subsidized loans. If demand levels off, so will the financial performance in this important loan category. Additionally, if the local economy in our ~~four largest segments:~~consumer lending areas were to experience a significant downturn, the quality of our consumer loan portfolio may also be negatively impacted.


1.	~~Commercial loans. This segment of our portfolio decreased slightly by $1.6 million, or 1.2%, during the first three months of 2018, representing a slight softening of demand for such loans during the period.~~

2. Residential Real Estate Loans:~~Commercial~~ In recent years, residential real estate loans~~. This segment~~ have represented the second-largest category of ~~our portfolio increased by $10.8~~the total loan portfolio. Gross originations for residential real estate loans (including refinancings of mortgage loans) for the first three months of 2019 were $23.3 million. Origination totals exceeded the sum of cash flows received from borrowers in the first quarter and the Company has also sold portions of these originations in the secondary market. In the first three months of 2019, the Company sold $3.6 million, or ~~2.4%~~15.5%, ~~during~~of originations. In the first three months of 2018, ~~representing the continued strong demand for such loans.~~


3.	~~Consumer loans (primarily automobile loans through indirect lending)~~. As of March 31, 2018, these loans, primarily auto loans, had increased by $23.8 million, or 4.0%, from the December 31, 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 three months of 2018, by $9.2~~$1.2 million, or ~~1.2%. As in prior periods, we elected~~3.9%, of our originations were sold. The Company expects to continue to sell a portion of mortgage loan originations in upcoming periods, although perhaps a decreasing percentage of overall originations if rates continue their slow rise across longer maturities. At the ~~residential mortgage loans we originated~~same time, if prevailing rates rise substantially, there may be a slowdown in loan growth and perhaps decreasing total originations, particularly if the general economy also falters. At some point, it is possible that the Company may experience a decrease in outstanding loan balances in this 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.

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

Quarterly Taxable Equivalent Yield on Loans



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

The average yield in the total loan portfolio during the ~~period to Freddie Mac. Gross originations were down during the period,~~first quarter of 2019 increased compared to the average yield during the first quarter of 2018. For the quarter, yields on all loan types increased in comparison to the comparable ~~2017 period reflecting lower housing inventory levels and~~quarter of 2018 with the largest increase being in the home equity portfolio mainly because many of these loans have a ~~rising~~variable rate ~~environment.~~tied to the prime rate.

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 ~~from March 31, 2017 was the steady and significant increase in demand deposits~~have decreased and savings deposits ~~as well as an increase in time deposits over $250,000 as of~~have increased from the quarter ended September 30, 2018 through March 31, ~~2018~~2019, as a result of the migration to higher yielding deposit accounts due to the ~~increase~~rise in short-term market rates. In addition, first quarter increase in deposit balances also included $45 million of floating rate brokered deposits, based on the one-month LIBOR rate, which were acquired to diversify balance sheet funding. As mentioned previously, theThe volatility in interest-bearing checking ~~deposit~~ account balances iswas mainly ~~due to seasonal fluctuations~~the result of the decline in municipal deposits. ~~If and to the extent that interest rates, and corresponding deposit rates, across all maturities, begin to~~The increase in ~~future periods, even if such increases are very gradual, we would expect~~Other Time Deposits in the first quarter of 2019 was due to ~~see further growth~~$66.5 million in ~~time deposits.~~brokered deposits the Company acquired to diversify its source of funds at more favorable rates as compared to FHLBNY overnight advances.

Quarterly Average Deposit Balances

(Dollars in Thousands)


	Quarter Ended										Quarter Ended
	3/31/2018		12/31/2017		9/30/2017		6/30/2017		3/31/2017		3/31/2019		12/31/2018		9/30/2018		6/30/2018		3/31/2018
Demand Deposits	$	439,688	$	441,761	$	443,840	$	408,214	$	389,606
Noninterest-bearing deposits											$	453,668	$	473,170	$	483,089	$	444,854	$	439,688
Interest-Bearing Checking Accounts	914,116		945,414		869,748		918,235		894,911		768,354		817,788		801,193		866,996		914,116
Savings Deposits	723,660		701,694		682,347		681,197		677,662		833,832		793,299		744,808		750,352		723,660
Time Deposits over $250,000	63,406		32,430		31,067		31,126		33,758		79,346		76,640		75,888		96,580		63,406
Other Time Deposits	164,866		162,907		166,776		167,593		165,861		212,785		186,334		174,731		166,420		164,866
Total Deposits	$	2,305,736	$	2,284,206	$	2,193,778	$	2,206,365	$	2,161,798	$	2,347,985	$	2,347,231	$	2,279,709	$	2,325,202	$	2,305,736

Percentage of Total Quarterly Average Deposits


	Quarter Ended										Quarter Ended
	3/31/2018		12/31/2017		9/30/2017		6/30/2017		3/31/2017		3/31/2019		12/31/2018		9/30/2018		6/30/2018		3/31/2018
Demand Deposits	19.1	%	19.3	%	20.2	%	18.5	%	18.0	%
Noninterest-bearing deposits											19.3	%	20.2	%	21.2	%	19.1	%	19.1	%
Interest-Bearing Checking Accounts	39.6		41.5		39.6		41.6		41.4		32.7		34.8		35.1		37.3		39.6
Savings Deposits	31.4		30.7		31.2		30.9		31.3		35.5		33.8		32.7		32.2		31.4
Time Deposits over $250,000	2.7		1.4		1.4		1.4		1.6		3.4		3.3		3.3		4.2		2.7
Other Time Deposits	7.2		7.1		7.6		7.6		7.7		9.1		7.9		7.7		7.2		7.2
Total Deposits	100.0	%	100.0	%	100.0	%	100.0	%	100.0	%	100.0	%	100.0	%	100.0	%	100.0	%	100.0	%

Quarterly Cost of Deposits


	Quarter Ended										Quarter Ended
	3/31/2018		12/31/2017		9/30/2017		6/30/2017		3/31/2017		3/31/2019		12/31/2018		9/30/2018		6/30/2018		3/31/2018
Demand Deposits	—	%	—	%	—	%	—	%	—	%	—	%	—	%	—	%	—	%	—	%
Interest-Bearing Checking Accounts	0.17		0.18		0.17		0.17		0.15		0.25		0.22		0.19		0.18		0.17
Savings Deposits	0.29		0.23		0.21		0.19		0.17		0.78		0.66		0.48		0.38		0.29
Time Deposits over $250,000	1.30		1.17		0.84		0.85		0.66		2.02		1.81		1.57		1.36		1.30
Other Time Deposits	0.64		0.60		0.57		0.56		0.56		1.36		1.08		0.84		0.68		0.64
Total Deposits	0.24		0.20		0.19		0.18		0.17		0.55		0.45		0.34		0.29		0.24

During the quarter ended March 31, ~~2018,~~2019, the total cost of ~~total~~ deposits ~~increased 4 basis points from 0.20%~~continued to ~~0.24%. Cost of savings deposits increased from 0.23% to 0.29% in the first quarter of 2018, while~~increase consistent with market rates, including the cost of Savings Deposits and both categories of Time Deposits. In the current rate environment, savings and time ~~deposits over $250,000 increased from 1.17%~~deposit customers continue to ~~1.30%. Cost~~seek a higher rate of other time deposits increased from 0.60% to 0.64%, while cost of interest bearing checking accounts decreased one basis point in the first quarter of 2018. Some of the recent growth in relative higher paying deposit accounts may be due to higher market interest rates.return. 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 policy may be.

~~Non-Deposit Sources~~Investment Portfolio Trends

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



	(Dollars in Thousands)
	Fair Value at Period-End							Net Unrealized Gains (Losses) For Period Ended
	3/31/2019		12/31/2018		Change			3/31/2019			12/31/2018			Change
Securities Available-for-Sale:
U.S. Agency Securities	$	35,383	$	46,765	$	(11,382	)	$	(136	)	$	(306	)	$	170
State and Municipal Obligations	1,116		1,195		(79		)	2			2			—
Mortgage-Backed Securities	261,513		268,775		(7,262		)	(1,834		)	(4,452		)	2,618
Corporate and Other Debt Securities	800		800		—			(200		)	(200		)	—
Total	$	298,812	$	317,535	$	(18,723	)	$	(2,168	)	$	(4,956	)	$	2,788

Securities Held-to-Maturity:
State and Municipal Obligations	$	235,576	$	233,359	$	2,217		$	1,122		$	(2,423	)	$	3,545
Mortgage-Backed Securities	44,838		46,979		(2,141		)	(108		)	(715		)	607
Total	$	280,414	$	280,338	$	76		$	1,014		$	(3,138	)	$	4,152

Equity Securities	$	1,850	$	1,774	$	76		$	—		$	—		$	—

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

Other-Than-Temporary Impairment

Investment Sales, Purchases and Maturities

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

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

The following table summarizes purchases of ~~funding other than new deposits. Historically, we have borrowed funds~~investment securities within the available-for-sale and held-to-maturity portfolios for the three-month periods ended March 31, 2019 and 2018, as well as proceeds from the ~~FHLBNY under a variety~~maturity and calls of ~~programs, including fixed and variable rate short-term borrowings and borrowings in~~investment securities within each portfolio for the form of "structured advances." These structured advances typically have original maturities of 3 to 10 years with some advances being callable by the FHLBNY at certain dates. If the advances are called, we may elect to receive replacement advances from the FHLBNY at the then prevailing FHLBNY rates of interest. We currently do not have, and have not had in recentrespective periods ~~any structured advances in this portfolio.~~presented:

We no longer rely 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, we like all insured financial institutions of our 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 consolidated balance sheet as of March 31, 2018 (i.e., our previously issued TRUPS) will, subject to certain limits, continue to qualify as Tier 1 regulatory capital for Arrow until such TRUPs mature or are redeemed, as is further discussed under “Capital Resources” beginning on page 51 of this Report. These trust preferred securities are subject to early redemption by us 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 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.



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

Maturities & Calls	$	21,261	$	9,380



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

Maturities & Calls	$	5,319	$	6,459

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 separately disclosed~~ 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 in recent quarters.

Quarterly Average Loan Balances

(Dollars in Thousands)


	Quarter Ended										Quarter Ended
	3/31/2018		12/31/2017		9/30/2017		6/30/2017		3/31/2017		3/31/2019		12/31/2018		9/30/2018		6/30/2018		3/31/2018
Commercial and Commercial Real Estate	$	569,126	$	564,073	$	561,260	$	556,014	$	541,187	$	609,785	$	595,359	$	577,793	$	576,311	$	569,126
Consumer Loans											799,174		771,684		736,937		696,586		662,929
Residential Real Estate	600,076		584,981		563,793		538,884		518,263		673,527		661,423		640,277		616,519		600,076
Home Equity	139,109		137,975		137,251		138,125		135,910		128,156		131,969		134,644		137,182		139,109
Consumer Loans	662,929		643,562		630,462		609,520		585,753
Total Loans	$	1,971,240	$	1,930,591	$	1,892,766	$	1,842,543	$	1,781,113	$	2,210,642	$	2,160,435	$	2,089,651	$	2,026,598	$	1,971,240

Percentage of Total Quarterly Average Loans


	Quarter Ended										Quarter Ended
	3/31/2018		12/31/2017		9/30/2017		6/30/2017		3/31/2017		3/31/2019		12/31/2018		9/30/2018		6/30/2018		3/31/2018
Commercial and Commercial Real Estate	28.9	%	29.2	%	29.7	%	30.2	%	30.4	%	27.6	%	27.6	%	27.7	%	28.4	%	28.9	%
Consumer Loans											36.1		35.7		35.2		34.3		33.5
Residential Real Estate	30.5		30.3		29.8		29.2		29.1		30.5		30.6		30.7		30.5		30.5
Home Equity	7.1		7.1		7.3		7.5		7.6		5.8		6.1		6.4		6.8		7.1
Consumer Loans	33.5		33.4		33.2		33.1		32.9
Total Loans	100.0	%	100.0	%	100.0	%	100.0	%	100.0	%	100.0	%	100.0	%	100.0	%	100.0	%	100.0	%

Maintenance of High Quality in the Loan Portfolio: In the first three months of ~~2018, we did not experience any~~2019, there were no 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 occasionally ~~made~~makes 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 loan portfolio. Our gross originations for residential real estate loans (including refinancings of mortgage loans) were $31.7 million and $47.5 million for the first three months of 2018 and 2017, respectively. Origination totals exceeded the sum of repayments and prepayments in the first quarters of both years, but we have also sold portions of these originations in the secondary market, primarily to Freddie Mac. In the first three months of 2018, we sold $1.2 million, or 3.9%, of our originations. In the first three months of 2017, we sold a larger dollar amount, $1.8 million, or 3.7%, of our originations, and at a higher premium. We expect to continue to sell a portion of our mortgage loan originations in upcoming periods, 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, we may see a slowdown in loan growth and perhaps decreasing total originations, particularly if the general economy also falters. At some point, it is possible that we may experience a decrease in our outstanding balances in this largest segment of our portfolio. Additionally, if our local economy or real estate market should suffer a major downturn, the quality of our real estate portfolio may also be negatively impacted.

Commercial Loans and Commercial Real Estate Loans: For the first three months of ~~2018,~~2019, combined commercial and commercial real estate loan originations continued to 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 markets. ~~Many~~A portion of the loans in the commercial portfolio have variable rates tied to prime or FHLBNY rates.

Although demand has been steady, it is 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):~~Loans: At March 31, ~~2018, our automobile~~2019, consumer loans (primarily automobile loans originated through dealerships located primarily in upstate New York and Vermont) represented the ~~second~~ largest category of loans in ~~our~~the loan portfolio, and continued to be a significant component of ~~our~~ business comprising ~~almost~~more than a third of ~~our~~the total loan portfolio.

~~Our new automobile~~New consumer loan volume for the first three months of ~~2018~~2019 remained strong, at ~~$88.9~~$100.4 million, up from the ~~$74.6~~$88.9 million originated in the first three months of ~~2017.~~2018. As a result of these originations, the quarterly average balance of our consumer loan portfolio ~~also~~at March 31, 2019 grew ~~in the first three months of 2018,~~ by ~~$23.8~~$27 million, or ~~4.0%,~~3.6% from our quarterly average balance at December 31, ~~2017 balance.~~2018.

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 experienced lending staff not only utilizes credit evaluation software tools but also reviews and evaluates each loan ~~individually. We believe our~~individually prior to the loan being funded. The Company believes that this disciplined approach to evaluating risk has contributed to maintaining ~~our~~the strong loan quality in this ~~segment of our~~ portfolio.

Recently, market data has suggested that auto loan demand is weakening somewhat on a national scale, although not in every market area. Our average maturity for automobile loan originations has expanded in recent years, reflective of a larger market development. If we encounter some weakening However, if weakness in auto demand ~~in our service area (and we have not,~~returns, the portfolio is likely to ~~date), we may~~ experience limited, if any, overall growth ~~in this segment of our portfolio in upcoming periods,~~ regardless of whether the auto company affiliates are offering highly-subsidized loans. If demand levels off, so will the financial performance in this important loan category. Additionally, if the local economy in our consumer lending ~~affiliates~~areas were to experience a significant downturn, the quality of our consumer loan portfolio may also be negatively impacted.

Residential Real Estate Loans: In recent years, residential real estate loans have represented the second-largest category of the total loan portfolio. Gross originations for residential real estate loans (including refinancings of mortgage loans) for the first three months of 2019 were $23.3 million. Origination totals exceeded the sum of cash flows received from borrowers in the first quarter and the Company has also sold portions of these originations in the secondary market. In the first three months of 2019, the Company sold $3.6 million, or 15.5%, of originations. In the first three months of 2018, $1.2 million, or 3.9%, of our originations were sold. The Company expects to continue to ~~offer highly-subsidized loans. Of course,~~sell a portion of mortgage loan originations in upcoming periods, although perhaps a decreasing percentage of overall originations if rates continue their slow rise across longer maturities. At the same time, if prevailing rates rise substantially, there may be a slowdown in loan growth and perhaps decreasing total originations, particularly if the general economy also falters. At some point, it is possible that the Company may experience a decrease in outstanding loan balances in this segment of ~~our~~the loan portfolio. Additionally, if the local economy or real estate market should suffer a major downturn, the quality of the real estate portfolio 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 originations. The samemay also ~~may occur if economic conditions in our indirect loan service area should generally weaken in upcoming periods.~~be negatively impacted.

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

Quarterly Taxable Equivalent Yield on Loans


	Quarter Ended										Quarter Ended
	3/31/2018		12/31/2017		9/30/2017		6/30/2017		3/31/2017		3/31/2019		12/31/2018		9/30/2018		6/30/2018		3/31/2018
Commercial and Commercial Real Estate	4.38	%	4.36	%	4.32	%	4.30	%	4.25	%	4.51	%	4.50	%	4.42	%	4.47	%	4.38	%
Consumer Loans											3.72		3.64		3.52		3.44		3.34
Residential Real Estate	4.09	%	3.99	%	3.98	%	4.03	%	4.10	%	4.14		4.09		4.05		4.06		4.09
Home Equity	3.70	%	3.57	%	3.55	%	3.41	%	3.28	%	4.75		4.43		4.13		3.93		3.70
Consumer Loans	3.34	%	3.29	%	3.23	%	3.21	%	3.14	%
Total Loans	3.90	%	3.83	%	3.80	%	3.79	%	3.76	%	4.13		4.05		3.97		3.96		3.90

The average yield in ~~our~~the total loan portfolio during the first quarter of ~~2018 was up~~2019 increased compared to the average yield during the first quarter of ~~2017.~~2018. For the quarter, yields on all loan types increased in comparison to the ~~immediately preceding~~comparable quarter of 2018 with the largest increase being in the home equity portfolio mainly because many of these loans have a variable rate tied to the prime rate. ~~However,~~

Deposit Trends

The following tables provide information on trends in the ~~average rates on newly-originated loans made by us in all segments~~balance and mix of our deposit portfolio ~~were at least equal~~by presenting, for each of the last five quarters, the quarterly average balances by deposit type and the percentage of total deposits represented by each deposit type. Noninterest-bearing deposit balances have decreased and savings deposits have increased from the quarter ended September 30, 2018 through March 31, 2019, as a result of the migration to ~~and~~higher yielding deposit accounts due to the rise in ~~most cases slightly above,~~short-term market rates. The volatility in interest-bearing checking account balances was mainly the ~~average rates for comparable loans originated by us~~result of the decline in municipal deposits. The increase in Other Time Deposits in the ~~year-earlier quarter.~~first quarter of 2019 was due to $66.5 million in brokered deposits the Company acquired to diversify its source of funds at more favorable rates as compared to FHLBNY overnight advances.

Quarterly Average Deposit Balances

(Dollars in Thousands)



	Quarter Ended
	3/31/2019		12/31/2018		9/30/2018		6/30/2018		3/31/2018
Noninterest-bearing deposits	$	453,668	$	473,170	$	483,089	$	444,854	$	439,688
Interest-Bearing Checking Accounts	768,354		817,788		801,193		866,996		914,116
Savings Deposits	833,832		793,299		744,808		750,352		723,660
Time Deposits over $250,000	79,346		76,640		75,888		96,580		63,406
Other Time Deposits	212,785		186,334		174,731		166,420		164,866
Total Deposits	$	2,347,985	$	2,347,231	$	2,279,709	$	2,325,202	$	2,305,736

Percentage of Total Quarterly Average Deposits



	Quarter Ended
	3/31/2019		12/31/2018		9/30/2018		6/30/2018		3/31/2018
Noninterest-bearing deposits	19.3	%	20.2	%	21.2	%	19.1	%	19.1	%
Interest-Bearing Checking Accounts	32.7		34.8		35.1		37.3		39.6
Savings Deposits	35.5		33.8		32.7		32.2		31.4
Time Deposits over $250,000	3.4		3.3		3.3		4.2		2.7
Other Time Deposits	9.1		7.9		7.7		7.2		7.2
Total Deposits	100.0	%	100.0	%	100.0	%	100.0	%	100.0	%

~~Regardless~~

Quarterly Cost of Deposits



	Quarter Ended
	3/31/2019		12/31/2018		9/30/2018		6/30/2018		3/31/2018
Demand Deposits	—	%	—	%	—	%	—	%	—	%
Interest-Bearing Checking Accounts	0.25		0.22		0.19		0.18		0.17
Savings Deposits	0.78		0.66		0.48		0.38		0.29
Time Deposits over $250,000	2.02		1.81		1.57		1.36		1.30
Other Time Deposits	1.36		1.08		0.84		0.68		0.64
Total Deposits	0.55		0.45		0.34		0.29		0.24

During the quarter ended March 31, 2019, the total cost of deposits continued to increase consistent with market rates, including the cost of Savings Deposits and both categories of Time Deposits. In the current rate environment, savings and time deposit customers continue to seek a higher rate of return. Given the uncertainty surrounding the future ~~direction or magnitude~~ of ~~changes in prevailing~~ interest rates, the ~~yield on our loan portfolio will ultimately be impacted by such changes. However,~~Company is unable to predict at this time what 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 factors, including the extent of federal government participation in the home mortgage market, the makeup of our loan portfolio, the shapeshort- or long-term effect of the ~~yield curve, consumer expectations and preferences, and the~~Federal Reserve’s interest rate ~~at which the portfolio expands.~~policy may be.

Investment Portfolio Trends

The table below presents the changes in the period-end balances for available-for-sale, held-to-maturity and equity securities ~~investment portfolios~~ from December 31, ~~2017~~2018 to March 31, ~~2018~~2019 (in thousands).

The slight reduction in the portfolios on a combined basis during the period 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
	3/31/2018		12/31/2017		Change			3/31/2018			12/31/2017			Change			3/31/2019		12/31/2018		Change			3/31/2019			12/31/2018			Change
Securities Available-for-Sale:
U.S. Agency Securities	$	59,657	$	59,894	$	(237	)	$	(607	)	$	(434	)	$	(173	)	$	35,383	$	46,765	$	(11,382	)	$	(136	)	$	(306	)	$	170
State and Municipal Obligations	9,743		10,349		(606		)	2			(2		)	4			1,116		1,195		(79		)	2			2			—
Mortgage-Backed Securities	235,389		227,596		7,793			(4,644		)	(1,481		)	(3,163		)	261,513		268,775		(7,262		)	(1,834		)	(4,452		)	2,618
Corporate and Other Debt Securities	800		800		—			(200		)	(200		)	—			800		800		—			(200		)	(200		)	—
Mutual Funds and Equity Securities ¹	—		1,561		(1,561		)	—			441			(441		)
Total	$	305,589	$	300,200	$	5,389		$	(5,449	)	$	(1,676	)	$	(3,773	)	$	298,812	$	317,535	$	(18,723	)	$	(2,168	)	$	(4,956	)	$	2,788

Securities Held-to-Maturity:
State and Municipal Obligations	$	268,605	$	275,353	$	(6,748	)	$	(4,333	)	$	(177	)	$	(4,156	)	$	235,576	$	233,359	$	2,217		$	1,122		$	(2,423	)	$	3,545
Mortgage-Backed Securities	56,333		60,548		(4,215		)	(853		)	171			(1,024		)	44,838		46,979		(2,141		)	(108		)	(715		)	607
Total	$	324,938	$	335,901	$	(10,963	)	$	(5,186	)	$	(6	)	$	(5,180	)	$	280,414	$	280,338	$	76		$	1,014		$	(3,138	)	$	4,152

Equity Securities ¹	$	1,579	$	—	$	1,579		$	459		$	—		$	459
Equity Securities																	$	1,850	$	1,774	$	76		$	—		$	—		$	—

~~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 March 31, ~~2018, we~~2019, 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.

In the periods referenced above, Mortgage-Backed Securities consisted solely of mortgage pass-through securities and Collateralized Mortgage Obligations ("CMOs") issued or guaranteed by U.S. federal agencies. Mortgage pass-through securities provide to the investor monthly portions of principal and interest pursuant to the contractual obligations of the underlying mortgages. CMOs are pools of mortgage-backed securities, the repayments on which have generally been separated into two or more components (tranches), where each tranche has a separate estimated life and yield. ~~Our~~The Company's practice has been to purchase ~~only~~ pass-through securities and CMOs that are issued or guaranteed by U.S. federal agencies, and the tranches of CMOs ~~that we purchase~~purchased are generally ~~are~~ those having shorter 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 three months of ~~2018.~~2019.

Investment Sales, Purchases and Maturities

We had no sales of investment securities within the ~~three month~~three-month periods ended March 31, ~~2018 and 2017.~~2019 or 2018.

Investment yields in the debt markets experienced some volatility in ~~2017~~2018 and the first three months of ~~2018. We~~2019. 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 month~~three-month periods ended March 31, ~~2018~~2019 and ~~2017,~~2018, as well as proceeds from the maturity and calls of investment securities within each portfolio for the respective periods presented:


(In Thousands)	Three Months Ended				Three Months Ended
Purchases:	3/31/2018		3/31/2017		3/31/2019		3/31/2018
Available-for-Sale Portfolio
State and Municipal Obligations	19,979		—		$	—	$	19,979
Mortgage-Backed Securities	—		12,324
Total Purchases	$	19,979	$	12,324

Maturities & Calls	$	9,380	$	11,826	$	21,261	$	9,380


	Three Months Ended				Three Months Ended
Purchases:	3/31/2018		3/31/2017		3/31/2019		3/31/2018
Held-to-Maturity Portfolio
State and Municipal Obligations	$	921	$	556	$	1,457	$	921

Maturities & Calls	$	6,459	$	10,474	$	5,319	$	6,459

Loan Trends

Quarterly Average Loan Balances

(Dollars in Thousands)



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

Percentage of Total Quarterly Average Loans



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

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

Commercial Loans and Commercial Real Estate Loans: For the first three months of 2019, combined commercial and commercial real estate loan originations continued to increase.

Although demand has been steady, it is 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. Generally, the business sector in the Company's service area, appeared to be in reasonably good financial condition at period-end.

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

For credit quality purposes, the Company assigns potential automobile loan customers into one of four tiers, ranging from lower to higher quality in terms of anticipated credit risk. The Company's experienced lending staff not only utilizes credit evaluation software tools but also reviews and evaluates each loan individually prior to the loan being funded. The Company believes that this disciplined approach to evaluating risk has contributed to maintaining the strong loan quality in this portfolio. However, if weakness in auto demand returns, the portfolio is likely to experience limited, if any, overall growth regardless of whether the auto company affiliates are offering highly-subsidized loans. If demand levels off, so will the financial performance in this important loan category. Additionally, if the local economy in our consumer lending areas were to experience a significant downturn, the quality of our consumer loan portfolio may also be negatively impacted.

Residential Real Estate Loans: In recent years, residential real estate loans have represented the second-largest category of the total loan portfolio. Gross originations for residential real estate loans (including refinancings of mortgage loans) for the first three months of 2019 were $23.3 million. Origination totals exceeded the sum of cash flows received from borrowers in the first quarter and the Company has also sold portions of these originations in the secondary market. In the first three months of 2019, the Company sold $3.6 million, or 15.5%, of originations. In the first three months of 2018, $1.2 million, or 3.9%, of our originations were sold. The Company expects to continue to sell a portion of mortgage loan originations in upcoming periods, although perhaps a decreasing percentage of overall originations if rates continue their slow rise across longer maturities. At the same time, if prevailing rates rise substantially, there may be a slowdown in loan growth and perhaps decreasing total originations, particularly if the general economy also falters. At some point, it is possible that the Company may experience a decrease in outstanding loan balances in this 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.

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

Quarterly Taxable Equivalent Yield on Loans



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

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

Deposit Trends

The following 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. Noninterest-bearing deposit balances have decreased and savings deposits have increased from the quarter ended September 30, 2018 through March 31, 2019, as a result of the migration to higher yielding deposit accounts due to the rise in short-term market rates. The volatility in interest-bearing checking account balances was mainly the result of the decline in municipal deposits. The increase in Other Time Deposits in the first quarter of 2019 was due to $66.5 million in brokered deposits the Company acquired to diversify its source of funds at more favorable rates as compared to FHLBNY overnight advances.

Quarterly Average Deposit Balances

(Dollars in Thousands)



	Quarter Ended
	3/31/2019		12/31/2018		9/30/2018		6/30/2018		3/31/2018
Noninterest-bearing deposits	$	453,668	$	473,170	$	483,089	$	444,854	$	439,688
Interest-Bearing Checking Accounts	768,354		817,788		801,193		866,996		914,116
Savings Deposits	833,832		793,299		744,808		750,352		723,660
Time Deposits over $250,000	79,346		76,640		75,888		96,580		63,406
Other Time Deposits	212,785		186,334		174,731		166,420		164,866
Total Deposits	$	2,347,985	$	2,347,231	$	2,279,709	$	2,325,202	$	2,305,736

Percentage of Total Quarterly Average Deposits



	Quarter Ended
	3/31/2019		12/31/2018		9/30/2018		6/30/2018		3/31/2018
Noninterest-bearing deposits	19.3	%	20.2	%	21.2	%	19.1	%	19.1	%
Interest-Bearing Checking Accounts	32.7		34.8		35.1		37.3		39.6
Savings Deposits	35.5		33.8		32.7		32.2		31.4
Time Deposits over $250,000	3.4		3.3		3.3		4.2		2.7
Other Time Deposits	9.1		7.9		7.7		7.2		7.2
Total Deposits	100.0	%	100.0	%	100.0	%	100.0	%	100.0	%

Quarterly Cost of Deposits



	Quarter Ended
	3/31/2019		12/31/2018		9/30/2018		6/30/2018		3/31/2018
Demand Deposits	—	%	—	%	—	%	—	%	—	%
Interest-Bearing Checking Accounts	0.25		0.22		0.19		0.18		0.17
Savings Deposits	0.78		0.66		0.48		0.38		0.29
Time Deposits over $250,000	2.02		1.81		1.57		1.36		1.30
Other Time Deposits	1.36		1.08		0.84		0.68		0.64
Total Deposits	0.55		0.45		0.34		0.29		0.24

Non-Deposit Sources of Funds

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

Arrow no longer relies on TRUPs as a source of new funds. As a result of the passage of the Dodd-Frank Act in 2010 and its removal of Tier 1 regulatory capital treatment for TRUPs issued after Dodd-Frank's grandfathering date, the Company, like other banking organizations of Arrow's size or larger, have not issued any TRUPs since that date and are not likely to issue any TRUPs in the future. However, consistent with the grandfathering provision in Dodd-Frank, the $20 million principal amount of Junior Subordinated Obligations Issued to Unconsolidated Subsidiary Trusts listed on the consolidated balance sheet as of March 31, 2019 (i.e., our previously issued TRUPs) will, subject to certain limits, continue to qualify as Tier 1 regulatory capital for Arrow until such TRUPs mature or are redeemed. This is further discussed under "Capital Resources" beginning on page 52 of this Report. These trust preferred securities are subject to early redemption by the Company if the proceeds cease to qualify as Tier 1 capital of Arrow for any reason, or if certain other unanticipated but negative events should occur. An example is any adverse change in tax laws that might deny the Company the ability to deduct interest paid on these obligations for federal income tax purposes.

~~Asset Quality~~

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)


	3/31/2018			12/31/2017			9/30/2017			6/30/2017			3/31/2017			3/31/2019			12/31/2018			9/30/2018			6/30/2018			3/31/2018
Loan Balances:
Period-End Loans	$	1,993,037		$	1,950,770		$	1,908,799		$	1,878,632		$	1,810,805		$	2,235,208		$	2,196,215		$	2,126,100		$	2,057,862		$	1,993,037
Average Loans, Year-to-Date	1,971,240			1,862,247			1,839,216			1,811,998			1,781,113			2,210,642			2,062,575			2,029,597			1,999,072			1,971,240
Average Loans, Quarter-to-Date	1,971,240			1,930,590			1,892,766			1,842,543			1,781,113			2,210,642			2,160,435			2,089,651			2,026,598			1,971,240
Period-End Assets	2,826,687			2,760,465			2,744,462			2,721,721			2,656,386			2,984,883			2,988,334			2,953,220			2,845,171			2,826,687

Allowance for Loan Losses, Year-to-Date:
Allowance for Loan Losses, Beginning of Period	$	18,586		$	17,012		$	17,012		$	17,012		$	17,012		$	20,196		$	18,586		$	18,586		$	18,586		$	18,586
Provision for Loan Losses, YTD	746			2,736			1,580			780			358			472			2,607			1,961			1,375			746
Loans Charged-off, YTD	(370		)	(1,559		)	(1,197		)	(574		)	(270		)	(462		)	(1,532		)	(960		)	(634		)	(370		)
Recoveries of Loans Previously Charged-off	95			397			300			224			116			167			535			416			313			95
Net Charge-offs, YTD	(275		)	(1,162		)	(897		)	(350		)	(154		)	(295		)	(997		)	(544		)	(321		)	(275		)
Allowance for Loan Losses, End of Period	$	19,057		$	18,586		$	17,695		$	17,442		$	17,216		$	20,373		$	20,196		$	20,003		$	19,640		$	19,057

Allowance for Loan Losses, Quarter-to-Date:
Allowance for Loan Losses, Beginning of Period	$	18,586		$	17,695		$	17,442		$	17,216		$	17,012		$	20,196		$	20,003		$	19,640		$	19,057		$	18,586
Provision for Loan Losses, QTD	746			1,157			800			422			358			472			646			586			629			746
Loans Charged-off, QTD	(370		)	(363		)	(622		)	(305		)	(270		)	(462		)	(573		)	(325		)	(264		)	(370		)
Recoveries of Loans Previously Charged-off	95			97			75			109			116			167			120			102			218			95
Net Charge-offs, QTD	(275		)	(266		)	(547		)	(196		)	(154		)	(295		)	(453		)	(223		)	(46		)	(275		)
Allowance for Loan Losses, End of Period	$	19,057		$	18,586		$	17,695		$	17,442		$	17,216		$	20,373		$	20,196		$	20,003		$	19,640		$	19,057

Nonperforming Assets, at Period-End:
Nonaccrual Loans	$	4,470		$	5,526		$	5,482		$	5,222		$	4,273		$	5,143		$	4,159		$	4,468		$	3,880		$	4,470
Loans Past Due 90 or More Days and Still Accruing Interest	—			319			967			1,821			—			64			1,225			1,172			170			—
Restructured and in Compliance with Modified Terms	100			105			828			101			101			141			138			115			106			100
Total Nonperforming Loans	4,570			5,950			7,277			7,144			4,374			5,348			5,522			5,755			4,156			4,570
Repossessed Assets	120			109			62			90			103			123			130			47			76			120
Other Real Estate Owned	1,525			1,738			1,651			1,523			1,631			1,322			1,130			1,173			1,412			1,525
Total Nonperforming Assets	$	6,215		$	7,797		$	8,990		$	8,757		$	6,108		$	6,793		$	6,782		$	6,975		$	5,644		$	6,215

Asset Quality Ratios:
Allowance to Nonperforming Loans	417.00		%	312.37		%	243.16		%	244.15		%	393.60		%	380.95		%	365.74		%	347.58		%	472.57		%	417.00		%
Allowance to Period-End Loans	0.96		%	0.95		%	0.93		%	0.93		%	0.95		%	0.91		%	0.92		%	0.94		%	0.95		%	0.96		%
Provision to Average Loans (Quarter) ⁽¹⁾	0.15		%	0.24		%	0.17		%	0.09		%	0.08		%	0.09		%	0.12		%	0.11		%	0.12		%	0.15		%
Provision to Average Loans (YTD) ⁽¹⁾	0.15		%	0.15		%	0.11		%	0.09		%	0.08		%	0.09		%	0.13		%	0.13		%	0.14		%	0.15		%
Net Charge-offs to Average Loans (Quarter) ⁽¹⁾	0.06		%	0.05		%	0.11		%	0.04		%	0.03		%	0.05		%	0.08		%	0.04		%	0.01		%	0.06		%
Net Charge-offs to Average Loans (YTD) ⁽¹⁾	0.06		%	0.06		%	0.07		%	0.04		%	0.03		%	0.05		%	0.05		%	0.04		%	0.03		%	0.06		%
Nonperforming Loans to Total Loans	0.23		%	0.31		%	0.38		%	0.38		%	0.24		%	0.24		%	0.25		%	0.27		%	0.20		%	0.23		%
Nonperforming Assets to Total Assets	0.22		%	0.28		%	0.33		%	0.32		%	0.23		%	0.23		%	0.23		%	0.24		%	0.20		%	0.22		%
⁽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 first quarter of ~~2018, we~~2019, the Company made a ~~$746~~$472 thousand provision for loan losses, compared to a provision of ~~$358~~$746 thousand for the first quarter of ~~2017~~2018 and a provision of ~~$1,157~~$646 thousand for the fourth quarter of ~~2017.~~2018. The provision expense was ~~primarily~~largely driven by ~~net charge-offs of $275 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 $295 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 0.91% at March 31, 2019, a decrease from 0.92% at December 31, 2018 and a decrease of 5 basis points from 0.96% at March 31, ~~2018, an increase of 1 basis point from 0.95% at December 31, 2017 and an increase of 1 basis point from 0.95% at March 31, 2017.~~2018.

~~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 March 31, ~~2018~~2019 amounted to ~~$6.2~~$6.8 million, ~~a decrease of $1.6 million, from~~consistent with the December 31, ~~2017~~2018 total and an increase of ~~$107~~$578 thousand, from the year earlier total. ~~In all recent~~For the three-month periods ~~our~~ended March 31, 2019 and 2018, 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 3738 for a discussion of ~~our~~the peer group.) At December 31, ~~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 ~~0.27%~~0.25%, well below the ~~0.61%~~0.56% ratio of ~~our~~the peer group at such date (the latest date for which peer group information is available). At March 31, ~~2018 our~~2019 the ratio ~~decreased slightly to 0.22%~~is 0.23%, ~~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)
	3/31/2018		12/31/2017		3/31/2017		3/31/2019		12/31/2018		3/31/2018
Commercial Loans	$	90	$	158	$	174	$	157	$	170	$	90
Commercial Real Estate Loans	156		—		—		208		108		156
Residential Real Estate Loans	1,706		1,696		2,497		1,552		2,190		1,706
Consumer Loans - Primarily Indirect Automobile	4,306		7,064		5,048		6,113		7,414		4,306
Total Delinquent Loans	$	6,258	$	8,918	$	7,719
Total Loans Past Due 30-89 Days and Accruing Interest							$	8,030	$	9,882	$	6,258

At March 31, ~~2018, our~~2019, the loans in ~~this~~the above-referenced category totaled ~~$6.3~~$8.0 million, a decrease of ~~$2.7~~$1.9 million, or ~~29.8%~~18.7%, from the ~~$8.9~~$9.9 million of such loans at December 31, ~~2017.~~2018. The March 31, ~~2018~~2019 total of non-current loans equaled ~~0.31%~~0.36% of loans then outstanding, ~~whereas the year-end 2017 total equaled 0.46% of loans then outstanding.~~compared to 0.45% at December 31, 2018 and 0.31% at March 31, 2018. The decrease from December 31, ~~2017~~2018 is primarily attributable to a decrease in delinquent automobile loans, which ~~were at a~~tend to reflect seasonally elevated ~~level at year-end~~ ~~2017~~ ~~but declined (improved) during~~levels in the ~~first three months~~second half of ~~2018.~~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~~the loan 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 March 31, ~~2018~~2019 was ~~$26.1~~$33.1 million, down slightly from the dollar amount of such loans at December 31, ~~2017,~~2018, when the amount was ~~$28.8 million, due primarily to the upgrade of several commercial borrowers.~~$35.0 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 by ~~$107 thousand,~~$0.6 million, or ~~1.8%~~9.3% from March 31, ~~2017.~~2018.

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 March 31, ~~2018, we~~2019, the Company held for sale three ~~residential real estate properties and two~~ commercial properties 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 Economic Growth Act 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 (CBLR) 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, that meets other requirements to be established by the regulators. If a qualifying community bank exceeds the CBLR, 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 (if the community bank is a depository institution) the "well capitalized" requirement under the federal "prompt corrective action" capital standards. Upon its implementation, this new CBLR standard is intended to reduce the burden of compliance with regard to regulatory capital adequacy for community banks. However, the implementation of this standard will be subject to the notice and comment procedures of rulemaking, and the Economic Growth Act does not impose a deadline for this rulemaking.

On November 21, 2018, federal banking regulators issued a notice of proposed rulemaking under the Economic Growth Act that would set the threshold for the CBLR at greater than 9 percent, calculated as the ratio of “CBLR tangible equity” divided by “average total consolidated assets.” Based on the parameters of this proposed rulemaking, the CBLR for Arrow and both subsidiary banks is estimated to exceed the 9 percent threshold. However, the proposed rule is not yet final, and the terms of the rule may change before becoming final. Upon effectiveness, the final rule may impact Arrow’s capital options and requirements, although the potential impact of the final rule on Arrow will remain uncertain until the final rule is issued. Until the rules becomes effective and final, the Capital Rules promulgated under Dodd-Frank will remain applicable to Arrow.

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

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, 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, 2019):

current Capital Rules:

Capital Ratio
Year, as of January 1

2018 2019
Minimum CET1 Ratio 4.500 % 4.500 %
Capital Conservation Buffer ("Buffer") 1.875 % 2.500 %
Minimum CET1 Ratio Plus Buffer 6.375 % 7.000 %
Minimum Tier 1 Risk-Based Capital Ratio 6.000 % 6.000 %
Minimum Tier 1 Risk-Based Capital Ratio Plus Buffer 7.875 % 8.500 %
Minimum Total Risk-Based Capital Ratio 8.000 % 8.000 %
Minimum Total Risk-Based Capital Ratio Plus Buffer 9.875 % 10.500 %
Minimum Leverage Ratio 4.000 % 4.000 %



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

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

At March 31, ~~2018, our~~2019, 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,~~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". Under the current capital classifications, a banking institution is considered "well-capitalized" if it meets the following capitalization standards on the date of measurement: a CET1 risk-based capital ratio of 6.50% or greater, a Tier 1 risk-based capital ratio of 8.00% or greater, a total risk-based capital ratio of 10.00% or greater, and a Tier 1 leverage ratio of 5.00% or greater, provided the institution is not subject to any regulatory order or written directive regarding capital maintenance. Federal banking law also ties the ability of banking organizations to engage in certain types of activities and to utilize certain procedures to such organizations' continuing to qualify for inclusion in one of the two highest ~~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,~~Capital Rules, as of March 31, ~~2018:~~2019:

Common Tier 1 Total
Equity Risk-Based Risk-Based Tier 1
Tier 1 Capital Capital Capital Leverage
Ratio Ratio Ratio Ratio
Arrow Financial Corporation 12.97 % 14.03 % 15.04 % 9.62 %
Glens Falls National Bank & Trust Co. 13.82 % 13.82 % 14.84 % 9.26 %
Saratoga National Bank & Trust Co. 12.50 % 12.50 % 13.47 % 9.31 %

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 %

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



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

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

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

At March 31, ~~2018, our holding company~~2019, Arrow and ~~both~~its subsidiary banks exceeded the minimum regulatory capital ratios established under the current ~~capital rules~~Capital Cules 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 ~~$252.7~~$276.6 million at March 31, ~~2018,~~2019, an increase of ~~$3.1~~$7.0 million, or ~~1.3%~~2.6%, from December 31, ~~2017.~~2018. This increase was the result of net income for the period of ~~$8.5 million, and~~$8.73 million; increases in book equity from ~~our~~ various stock-based compensation and dividend reinvestment plans of ~~$1.2~~$1.20 million; and other comprehensive income of $2.24 million. These increases to equity ~~enhancing developments~~ during the quarter were offset by a decrease ~~in other comprehensive income of $2.4 million,~~related to cash dividends of ~~$3.5~~$3.76 million and purchases of ~~our~~the Company's own common stock in the aggregate amount of ~~$619 thousand~~$1.39 million under ~~our~~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,~~Arrow, but only in amounts up to 25% of Tier 1 capital, net of goodwill less any associated deferred tax liability. Under the Dodd-Frank Act, any trust preferred securities that Arrow might issue on or after the grandfathering date set forth in Dodd-Frank (May 19, 2010) would ~~no longer~~not qualify as Tier 1 capital under bank regulatory capital ~~guidelines, whereas~~guidelines. For Arrow, TRUPs outstanding prior to the grandfathering cutoff date set forth in Dodd-Frank (May 19, 2010) would continue to qualify as Tier 1 capital until maturity or redemption, subject to limitations. Thus, ~~our~~Arrow's outstanding TRUPs continue to qualify as Tier 1 regulatory capital, subject to such limitations.

Stock Repurchase Program: In ~~October 2017,~~January 2019, the Board of Directors approved a $5.0 million stock repurchase program ~~effective January 1, 2018~~ (the ~~2018 stock repurchase program)~~2019 Repurchase Program), under which management is authorized, in its discretion, to cause the Company to repurchase up to $5 million of shares of Arrow's common stock over the period from ~~time-to-time during 2018,~~January 30, 2019 through December 31, 2019, 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 reasonably priced and such repurchases appear to be an attractive use of available capital and in the best interests of ~~stockholders. The 2018 stock repurchase program~~shareholders. This 2019 Repurchase Program replaced a similar repurchase program which was in effect during ~~2017~~2018 (the ~~2017 stock repurchase~~2018 program), which also authorized the repurchase of up to $5.0 million of ~~Arrow~~shares of Arrow's common stock. As of March 31, ~~2018~~2019 approximately ~~$389~~$806 thousand had been used under the ~~2018~~2019 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.

Dividends: ~~Our~~The Company's common stock is traded on NasdaqGS^® under the symbol AROW. The high and low stock prices for the past five quarters listed below represent actual sales transactions, as reported by NASDAQ. On April ~~25, 2018, our~~24, 2019, the Board of Directors declared a ~~2018~~2019 second quarter cash dividend of ~~$0.250~~$0.26 payable on June ~~15, 2018.~~14, 2019. 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
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	33.50		38.60		0.250		30.45		37.55		0.260
2018
2019
First Quarter	$	30.81	$	35.57	$	0.250	$	30.46	$	36.25	$	0.260
Second Quarter	TBD		TBD		0.250
Second Quarter (dividend payable June 14, 2019)							TBD		TBD		0.260


	Quarter Ended March 31,						Quarter Ended March 31,
	2018			2017			2019			2018
Cash Dividends Per Share	$	0.250		$	0.243		$	0.260		$	0.243
Diluted Earnings Per Share	0.61			0.47			0.60			0.59
Dividend Payout Ratio	40.98		%	51.70		%	43.33		%	41.19		%
Total Equity (in thousands)	252,734			$	236,111		276,609			$	252,734
Shares Issued and Outstanding (in thousands)	13,950			13,886			14,474			14,368
Book Value Per Share	$	18.12		$	17.00		$	19.11		$	17.59
Intangible Assets (in thousands)	24,045			24,448			23,650			24,045
Tangible Book Value Per Share	$	16.39		$	15.24		$	17.48		$	15.92

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 of New York, and cash flow from investment securities and loans. Certain investment securities are selected at purchase as available-for-sale based on their marketability and collateral value, as well as their yield and maturity. ~~Our~~The securities available-for-sale portfolio was ~~$305.6~~$298.8 million at March 31, ~~2018, an increase~~2019, a decrease of ~~$5.4~~$18.7 million, from the year-end ~~2017~~2018 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 correspondent banks and credit lines with the FHLBNY. ~~Our~~The federal funds ~~line~~lines of credit isare with ~~one~~three correspondent ~~bank~~banks totaling ~~$15 million; we did~~$57 million which were not ~~draw~~drawn on ~~this line~~ during the three months ended March 31, ~~2018.~~2019.

To support ~~our~~the borrowing relationship with the FHLBNY, ~~we have~~the Company has pledged collateral, including residential mortgage and home equity loans. At March 31, ~~2018, we~~2019, the Company had outstanding collateral obligations with the FHLBNY of ~~$260~~$169 million; ~~on such~~as of that date, ~~our~~the unused borrowing capacity at the FHLBNY was approximately ~~$263~~$391 million. ~~In addition we~~Brokered deposits have also been identified ~~brokered deposits~~ as an available source of funding accessible in a relatively short time period. At March 31, ~~2018,~~2019, the balance of ~~floating rate~~outstanding brokered deposits totaled ~~$45~~$111.6 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 March 31, ~~2018,~~2019, the amount available under this facility was approximately ~~$436~~$520 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 March 31, ~~2018, our~~2019, the basic liquidity ratio, including ~~our~~the FHLBNY collateralized borrowing capacity, was ~~11.2%~~12.1% of total assets, or ~~$226~~$242 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 March 31, ~~2018~~2019 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 above-market rates to obtain retail deposits or other funds from any source.

RESULTS OF OPERATIONS

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

Three Months Ended March 31, ~~2017~~2018

Summary of Earnings Performance

(Dollars in Thousands, Except Per Share Amounts)


	Quarter Ended											Quarter Ended
	3/31/2018			3/31/2017			Change			% Change		3/31/2019			3/31/2018			Change			% Change
Net Income	$	8,531		$	6,631		$	1,900		28.7	%	$	8,734		$	8,531		$	203		2.4	%
Diluted Earnings Per Share	0.61			0.47			0.14			29.8	%	0.60			0.59			0.01			1.7	%
Return on Average Assets	1.25		%	1.02		%	0.23		%	22.5	%	1.19		%	1.25		%	(0.06		)%	(4.8	)%
Return on Average Equity	13.78		%	11.43		%	2.35		%	20.6	%	12.98		%	13.78		%	(0.80		)%	(5.8	)%

~~We reported net~~Net income ~~of $8.5~~was $8.7 million and diluted earnings per share (EPS) of ~~$.61~~$.60 for the first quarter of ~~2018~~,2019, compared to net income of ~~$6.6~~$8.5 million and diluted EPS of ~~$.47~~$.59 for the first quarter of ~~2017~~.2018. Return on average assets (ROA) for the first quarter of ~~2018~~2019 was ~~1.25%~~1.19%, ~~up 23~~down 6 basis points from ~~1.02%~~1.25% in the first quarter of ~~2017.~~2018. In addition, ~~our~~ return on average equity (ROE) ~~increased~~decreased to ~~13.78%~~

12.98% for the first quarter of ~~2018, up 235~~2019, down 80 basis points from ~~11.43%~~13.78% in the first quarter of ~~2017.~~2018.

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
	3/31/2018			3/31/2017			Change			% Change		3/31/2019			3/31/2018			Change			% Change
Interest and Dividend Income	$	22,909		$	20,945		$	1,964		9.4	%
Interest and Dividend Income (GAAP Basis)												$	26,213		$	22,418		$	3,795		16.9	%
Tax-Equivalent Adjustment												373			491			(118		)	(24.0	)%
Interest and Dividend Income (Tax-equivalent Basis) ⁽²⁾												26,586			22,909			3,677			16.1	%

Interest Expense	2,016			1,536			480			31.3	%	5,092			2,016			3,076			152.6	%
Net Interest Income	20,893			19,409			1,484			7.6	%
Tax-Equivalent Adjustment	491			948			(457		)	(48.2	)%
Net Interest Income (GAAP Basis)												21,121			20,402			719			3.5	%
Net Interest Income (Tax-equivalent Basis) ⁽²⁾												21,494			20,893			601			2.9	%
Average Earning Assets ⁽¹⁾	2,641,660			2,500,293			141,367			5.7	%	2,847,966			2,641,660			206,306			7.8	%
Average Interest-Bearing Liabilities	2,050,661			1,977,628			73,033			3.7	%	2,224,403			2,050,661			173,742			8.5	%

Yield on Earning Assets ⁽¹⁾	3.52		%	3.40		%	0.12		%	3.5	%
Yield on Earning Assets (GAAP Basis) ⁽¹⁾												3.73		%	3.44		%	0.29			8.4	%
Yield on Earning Assets (Tax-equivalent Basis) ^{(1) (2)}												3.79			3.52			0.27			7.7
Cost of Interest-Bearing Liabilities	0.40			0.31			0.09		%	29.0	%	0.93			0.40			0.53			132.5
Net Interest Spread	3.12			3.09			0.03		%	1.0	%
Net Interest Margin	3.21			3.15			0.06		%	1.9	%

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

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

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

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

Net interest income for the ~~just~~recently completed quarter, on a ~~taxable equivalent~~GAAP basis, increased by ~~$1.5~~$0.7 million, or ~~7.6%~~3.5%, from the first quarter of ~~2017,~~2018, due primarily to continued loan growth. Total loans increased $39.0 million in ~~part, to an increase in our~~the first quarter of 2019 and overall average earning assets increased 7.8%. In order to fund the consistent loan growth, total average-interest-bearing liabilities increased 8.5% in the first quarter of ~~5.7%, as compared to the 3.7% increase in our average interest-bearing liabilities. In addition, our~~2019. The current rate environment has compressed net interest margin. Net interest margin ~~increased 6~~on a GAAP basis decreased 12 basis points in the first quarter of ~~2018~~2019 to ~~3.21%~~3.01%, from ~~3.15%~~3.13% during the first quarter of ~~2017. Due~~2018. Average earning asset yields were 29 basis points higher as compared to ~~our strong loan growth,~~ the ~~composition~~first quarter of ~~our average earning assets during the~~ 2018 ~~period includes more relatively higher yielding loans and less relatively lower yielding investment securities~~ due to the ~~strategy~~continued increase in market yields and the higher composition of ~~not reinvesting~~loans as a ~~portion~~percentage of ~~the maturing securities. As a result, the yield~~earning assets. Yield on ~~average earning assets~~loans specifically increased 1223 basis points from the first quarter of 2018. Cost of funds continues to be impacted by the recent rise in ~~the current year period. Meanwhile, our growth in non-interest bearing demand deposits during the 2018 period has resulted in slowing the increase in our~~short-term rates. The cost of interest-bearing liabilities increased 53 basis points due to ~~9 basis points. We define~~the higher rates paid on money market savings, time deposits and other borrowings, due to higher short-term market interest rates. 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 ~~37,~~39, and the tabular information and notes on pages 3840 and ~~39,~~41, 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 ~~49,~~50, the provision for loan losses for the first quarter of ~~2018~~2019 was ~~$746~~$472 thousand, compared to a provision of ~~$358~~$746 thousand for the ~~2017~~2018 quarter.

Noninterest Income

Summary of Noninterest Income

(Dollars in Thousands)


	Quarter Ended									Quarter Ended
	3/31/2018		3/31/2017		Change			% Change		3/31/2019		3/31/2018		Change			% Change
Income From Fiduciary Activities	$	2,197	$	2,018	$	179		8.9	%	$	2,107	$	2,197	$	(90	)	(4.1	)%
Fees for Other Services to Customers	2,380		2,256		124			5.5	%	2,402		2,380		22			0.9	%
Insurance Commissions	1,903		2,198		(295		)	(13.4	)%	1,719		1,903		(184		)	(9.7	)%
Net Gain on Securities Transactions	—		—		—			—	%
Net Unrealized Gain on Equity Securities	18		—		18			100.0	%
Net Gain on Securities										76		18		58			322.2	%
Net Gain on the Sale of Loans	38		45		(7		)	(15.6	)%	104		38		66			173.7	%
Other Operating Income	353		178		175			98.3	%	479		353		126			35.7	%
Total Noninterest Income	$	6,889	$	6,695	$	194		2.9	%	$	6,887	$	6,889	$	(2	)	—	%

Total noninterest income in the current quarter was $6.9 million, ~~up $194 thousand from~~consistent with total noninterest income for the first quarter of ~~2017.~~ 2018. Income from fiduciary activities for the first quarter of 2019 decreased by $90 thousand, or 4.1% over the first quarter of 2018 due to market performance as well as other competitive factors.

Fees for other services to customers ~~the largest segment of our noninterest income,~~ increased to $2.4 million for the first quarter of ~~2018, as compared to $2.3 million for the first quarter of 2017.~~2019. 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 continues to grow, which has had (and if such growth persists, will continue to have) a positive impact on ~~our~~ debit card fee income.

Income from fiduciary activities for the first quarter of 2018 increased by $179 thousand, or 8.9% over the first quarter of 2017. This growth in income from fiduciary activities can be attributed to an increase in assets under trust administration and investment management which was primarily attributable to market performance. Insurance commissions decreased to $1.9 million for the first quarter of 2018 from the $2.2 million level for the first quarter of 2017.

The ~~$18~~$58 thousand increase in net ~~unrealized gains~~gain on ~~equity~~ securities between the periods was primarily due to the change in ~~accounting for these unrealized gains on~~the fair value of marketable equity securities as compared to the first quarter of ~~2017 pursuant to Accounting Standards Update 2016-01.~~2018.

Net gain on the sale of loans in the first quarter of ~~2018decreased~~2019 increased by $7$66 thousand from the first quarter of ~~2017. This decrease~~2018. The change was a result of ~~both a decrease~~an increase in loan sale ~~volume and a slight reduction in the premium achieved by those sales.~~volume. See page 4548 for ~~our~~the discussion of loan sales.

Insurance commissions decreased to $1.7 million for the first quarter of 2019 compared to $1.9 million for the first quarter of 2018 due to increased competition for commercial insurance clients in the Company's markets.

Noninterest Expense

Summary of Noninterest Expense

(Dollars in Thousands)


	Quarter Ended											Quarter Ended
	3/31/2018			3/31/2017			Change			% Change		3/31/2019			3/31/2018			Change			% Change
Salaries and Employee Benefits	$	9,369		$	9,008		$	361		4.0	%	$	9,319		9,369			$	(50	)	(0.5	)%
Occupancy Expense of Premises, Net	1,340			1,347			(7		)	(0.5	)%	1,420			1,340			80			6.0	%
Furniture and Equipment Expense	1,201			1,197			4			0.3	%
Technology and Equipment Expense												3,141			2,698			443			16.4	%
FDIC and FICO Assessments	217			226			(9		)	(4.0	)%	212			217			(5		)	(2.3	)%
Amortization	67			71			(4		)	(5.6	)%	79			67			12			17.9	%
Other Operating Expense	3,761			3,626			135			3.7	%	2,481			2,265			216			9.5	%
Total Noninterest Expense	$	15,955		$	15,475		$	480		3.1	%	$	16,652		$	15,956		$	696		4.4	%
Efficiency Ratio	57.23		%	59.01		%	(1.78		)%	(3.0	)%	58.55		%	57.23		%	1.32			2.3	%

Noninterest expense for the first quarter of ~~2018~~2019 was ~~$16.0~~$16.7 million, an increase of ~~$480~~$696 thousand, or ~~3.1%~~4.4%, from the ~~expense~~first quarter of 2018. Salaries and benefit expenses remain consistent from the comparable quarter in 2018. Technology and equipment expenses have increased from the previous year as a result of the implementation of certain ongoing projects to achieve operational efficiencies while delivering improved customer experiences.

The efficiency ratio continues to be solid at 58.55% for the first quarter of ~~2017~~. 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 was2019 and 57.23% for the ~~first quarter of~~comparable 2018 ~~down 178 basis points from our ratio for the comparable 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 3739 of this Report under the heading ~~“Use~~"Use of Non-GAAP Financial ~~Measures”~~Measures" and the related tabular information and notes on pages 3840 and 3941 of this Report. The efficiency ratio included by the Federal Reserve Board in its ~~"Peer~~"Bank Holding Company Performance Reports" excludes net securities gains or losses from the denominator (as does ~~our~~the Company's calculation), but unlike ~~our~~the Company's ratio does not exclude intangible asset

amortization from the numerator. ~~Our~~The Company's efficiency ratios in recent periods have generally compared favorably to the ratios of ~~our~~the peer group as disclosed in the ~~Fed's~~Federal Reserve Performance Reports (see page 3738 for a discussion of ~~our~~the peer group). For the three-month period ended December 31, ~~2017~~2018 (the most recent reporting period for which peer group information is available), the peer group's efficiency ratio was ~~65.60%, and our~~65.27% compared to the Company's ratio ~~was~~ ~~56.05%~~of 58.04% (not adjusted for the definitional difference).

Salaries and employee benefits expense increased by 2.4% in the first quarter of 2018 compared to the first quarter of 2017 due to normal salary increases and increases in pension expense. Other operating expense increased by 3.7%, primarily due to an increase in the cost of providing our customers with a wide and more complex variety of electronic banking products and services.

Income Taxes

Summary of Income Taxes

(Dollars in Thousands)


	Quarter Ended											Quarter Ended
	3/31/2018			3/31/2017			Change			% Change		3/31/2019			3/31/2018			Change		% Change
Provision for Income Taxes	$	2,058		$	2,692		$	(634	)	(23.6	)%	$	2,150		$	2,058		$	92	4.5	%
Effective Tax Rate	19.4		%	28.9		%	(9.5		)	(32.9	)	19.8		%	19.4		%	0.4		2.1	%

~~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.~~

Item 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

In addition to credit risk in ~~our~~the loan portfolio and liquidity risk, discussed earlier, ~~our~~the Company's business activities also generate market risk. Market risk is the possibility that changes in future market rates (interest rates) or prices (market value of financial instruments) will make ~~our~~the Company's position (i.e., ~~our~~ assets and operations) less valuable. ~~Our~~The Company's primary market risk is interest rate volatility. The ongoing monitoring and management of 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 Asset/Liability Committee ("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.

Changes in market interest rates, whether increases or decreases, can trigger repricing and changes in the pace of payments for both assets and liabilities (prepayment risk)~~, which~~. This may individually or in combination ~~may~~ affect net interest income, net interest margin, and ultimately net income, either positively or negatively. ALCO utilizes the results of a detailed and dynamic simulation model to quantify this interest rate risk by projecting net interest income in various interest rate scenarios.

~~Our~~The Company's standard simulation model applies a parallel shift in interest rates, ramped over a 12-month period, to capture the impact of changing interest rates on net interest income. The results are compared to ALCO policy limits which specify a maximum tolerance level for net interest income exposure over a ~~one- year~~one-year horizon, assuming no balance sheet growth and a 200 basis point upward and a 100 basis point downward shift in interest rates. Additional tools to monitor potential longer-term interest rate risk, including periodic stress testing involving hypothetical sudden and significant interest rate spikes, are also evaluated.

AsThe following table summarizes the percentage change in net interest income as compared to the base scenario, which assumes no change in market interest rates as generated from the standard simulation model. The results are presented for each of ~~March 31, 2018, a~~the first two years of the simulation period for the 200 basis point increase in interest ~~rates produces a 1.87% decrease in simulated net interest income,~~rate scenario and athe 100 basis point decrease in interest ~~rates produces a 0.03% decrease in net interest income in the first year modeled. These results are well within our ALCO policy limits~~rate scenario.

As of ~~10%.~~ March 31, 2019:



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

Historically, there has existed an inverse relationship between changes in prevailing rates and ~~our~~the Company's net interest income, suggesting that liabilities and sources of funds generally reprice more quickly than ~~our~~ earning ~~assets.~~assets (near-term liability sensitivity). However, when net interest income is simulated over a longer time ~~horizon,~~frame, this exposure is limited, and actually reverses, as ~~our~~ asset yields continue to reprice while ~~our~~the cost of funding reaches assumed ceilings or floors (long-term asset sensitivity). As a result, in year two of simulated results a 200 basis point increase in interest rates produces a 2.46% increase in simulated net interest income, and a 100 basis point decrease in interest rates produces a 3.49% decrease in net interest income. These results are also well within our ALCO policy limits for year two of 15%.

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 will differ due to: prepayment/refinancing levels likely deviating from those assumed, the varying impact of interest rate changes on caps or floors on adjustable rate assets, the potential effect of changing debt service levels on customers with adjustable rate loans, depositor early withdrawals and product preference changes, unanticipated shifts in the yield curve and other internal/external variables. Furthermore, the sensitivity analysis does not reflect actions that ALCO might take in responding to or anticipating changes in interest rates.

Item 4.

CONTROLS AND PROCEDURES

Senior management, including the Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the design and operation of Arrow's disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended) as of March 31, ~~2018.~~2019. 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~~is not currently the subject of any material pending legal proceedings, other than ordinary routine litigation occurring in the normal course of their business. On an ongoing basis, ~~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, ~~2017~~2018, 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, ~~2017~~2018.

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.~~None.

Issuer Purchases of Equity Securities

The following table presents information about purchases by Arrow ~~of its common stock~~ during the ~~quarter~~three months ended March 31, ~~2018:~~2019 of common stock (our only class of equity securities registered pursuant to Section 12 of the Securities Exchange Act of 1934):


First 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
First Quarter 2019 Calendar Month							(A) Total Number of Shares Purchased ¹	(B) Average Price Paid Per Share ¹		(C) Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs ²	(D) Maximum Approximate Dollar Value of Shares that May Yet be Purchased Under the Plans or Programs ²
January	1,772	$	34.59	—	$	5,000,000	9,619	$	32.14	4,474	$	4,859,024
February	17,927	32.57		12,000	4,610,800		32,985	34.70		17,700	4,261,092
March	19,335	34.45		—	4,610,800		17,681	34.21		2,100	4,194,019
Total	39,034	33.60		12,000			60,285	34.15		24,274

¹ The total number of shares purchased by the Company and the average price paid per share listed in columns (A) and (B) consist of (i) any shares purchased in such periods in open market or private transactions under the Arrow Financial Corporation Automatic Dividend Reinvestment Plan (the "DRIP") by the administrator of the DRIP, (ii) shares surrendered or deemed surrendered to Arrow in such periods by holders of options to acquire Arrow common stock received by them under Arrow's long-term incentive plans ("LTIPs") in connection with their stock-for-stock exercise of such options and (iii) shares ~~repurchased by Arrow pursuant to its 2018 stock repurchase program.~~purchased under the publicly-announced 2019 Repurchase Program. In the months indicated, the listed number of shares purchased included the following number of shares purchased by Arrow through such methods: January - DRIP purchases ~~(1,772~~(2,782 shares), stock-for-stock exercises (2,363 shares) and repurchased under the 2019 Repurchase Program (4,474 shares.); February - DRIP purchases ~~(4,581~~(1,070 shares), stock-for-stock exercises ~~(1,346~~(14,215 shares), and repurchased under the ~~2018 stock repurchase program (12,000~~2019 Repurchase Program (17,700 shares); and March - DRIP purchases ~~(13,966~~(15,581 shares), and ~~stock-for-stock exercises (5,369 shares).~~repurchased under the 2019 Repurchase Program (2,100 shares.)

² Includes only those shares acquired by Arrow pursuant to its ~~2018~~publicly-announced stock repurchase ~~program.~~programs. Our only publicly-announced stock repurchase program in effect for the first quarter of ~~2018~~2019 was the ~~program~~2019 Repurchase Program approved by the Board of Directors and announced in ~~October 2017,~~January 2019, under which the Board authorized management, in its discretion, to repurchase from time to time ~~during 2018,~~from January 30, 2019 through December 31, 2019, 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 program"). Arrow repurchased 12,000 of its shares in the first quarter of 2018 under the 2018 stock repurchase program.~~exceptions.

Item 3.

Defaults Upon Senior Securities - None

Item 4.

Mine Safety Disclosures - None

Item 5.

Other Information - None

Item 6.

Exhibits



Exhibit Number	Exhibit
10.1	~~Amendment #9 to Arrow Select Executive Retirement Plan - Amendment to Add New Schedule C SERP Benefit for~~Employment Agreement between the Company and Thomas J. Murphy effective February 1, 2019 incorporated herein by reference from the Registrant's Current Report on Form 8-K, filed February 4, 2019, Exhibit 10.1
10.2	Employment Agreement between the Company and Edward J. Campanella effective February 1, 2019 incorporated herein by reference from the Registrant's Current Report on Form 8-K, filed February 4, 2019, Exhibit 10.2*
10.3	Employment Agreement between the Company and David S. DeMarco effective February 1, 2019 incorporated herein by reference from the Registrant's Current Report on Form 8-K, filed February 4, 2019, Exhibit 10.3*
10.4	Employment Agreement between the Company and David D. Kaiser effective February 1, 2019 incorporated herein by reference from the Registrant's Current Report on Form 8-K, filed February 4, 2019, Exhibit 10.4*
10.5	Employment Agreement between the Registrant and Andrew J. Wise, Chief Operating Officer and Senior Vice President, effective February 1, 2019 incorporated herein by reference from the Registrant's Annual Report on Form 10-K, filed March 8, 2019, Exhibit 10.23*
10.6	Restricted Share Unit Grant Agreement between the Registrant and Thomas J. Murphy, effective February 1, 2019 incorporated herein by reference from the Registrant's Annual Report on Form 10-K, filed March 8, 2019, Exhibit 10.24*
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




May 9, ~~2018~~2019	/s/Thomas J. Murphy
Date	Thomas J. Murphy, President and
	Chief Executive Officer

May 9, ~~2018~~2019	/s/Edward J. Campanella
Date	Edward J. Campanella, Senior Vice President,
	Treasurer and Chief Financial Officer
	(Principal Financial Officer and
	Principal Accounting Officer)

# 61



	Page
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements	3
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations	3738
Item 3. Quantitative and Qualitative Disclosures About Market Risk	58
Item 4. Controls and Procedures	58


PART II - OTHER INFORMATION
Item 1. Legal Proceedings	59
Item 1.A. Risk Factors	59
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	59
Item 3. Defaults Upon Senior Securities	59
Item 4. Mine Safety Disclosures	59
Item 5. Other Information	60
Item 6. Exhibits	60

SIGNATURES	61




Roll-Forward of Shares Outstanding:
Outstanding at January 1, 2018	346,155
Granted	55,188
Exercised	(27,662		)
Forfeited	—
Outstanding at March 31, 2018	373,681
Exercisable at Period-End	247,333
Vested and Expected to Vest	126,348

Roll-Forward of Shares Outstanding - Weighted Average Exercise Price:
Outstanding at January 1, 2018	$	24.12
Granted	30.85
Exercised	22.03
Forfeited	—
Outstanding at March 31, 2018	25.27
Exercisable at Period-End	22.57
Vested and Expected to Vest	30.54

Schedule of Other Long Term Incentive Plan Information
Grants Issued During 2018 - Weighted Average Information:
Fair Value	$	5.76
Fair Value Assumptions:
Dividend Yield	2.98		%
Expected Volatility	21.55		%
Risk Free Interest Rate	2.68		%
Expected Lives (in years)	6.98



Share-Based Compensation Expense
	For the Three Months Ended March 31,
	2018		2017
Share-Based Compensation Expense	$	89	$	83



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 federal tax rate of 35% for 2017, 21% for 2018)
(Dollars In Thousands)

Quarter Ended March 31:	2018								2017
				Interest			Rate					Interest			Rate
	Average			Income/			Earned/		Average			Income/			Earned/
	Balance			Expense			Paid		Balance			Expense			Paid
Interest-Bearing Deposits at Banks	$	27,978		$	134		1.94	%	$	23,565		$	60		1.03	%
Investment Securities:
Fully Taxable	359,908			1,895			2.14		403,930			1,994			2.00
Exempt from Federal Taxes	282,534			1,947			2.79		291,685			2,361			3.28
Loans	1,971,240			18,933			3.90		1,781,113			16,530			3.76
Total Earning Assets	2,641,660			22,909			3.52		2,500,293			20,945			3.40
Allowance for Loan Losses	(18,523		)						(16,976		)
Cash and Due From Banks	35,608								35,525
Other Assets	104,961								107,628
Total Assets	$	2,763,706							$	2,626,470
Deposits:
Interest-Bearing Checking Accounts	$	914,116		387			0.17		$	894,911		331			0.15
Savings Deposits	723,660			522			0.29		677,662			291			0.17
Time Deposits of $250,000 or More	63,406			204			1.30		33,758			55			0.66
Other Time Deposits	164,866			259			0.64		165,861			228			0.56
Total Interest-Bearing Deposits	1,866,048			1,372			0.30		1,772,192			905			0.21
Short-Term Borrowings	111,835			197			0.71		130,436			211			0.66
FHLBNY Term Advances and Other Long-Term Debt	72,778			447			2.49		75,000			420			2.27
Total Interest-Bearing Liabilities	2,050,661			2,016			0.40		1,977,628			1,536			0.31
Demand Deposits	439,688								389,606
Other Liabilities	22,248								23,979
Total Liabilities	2,512,597								2,391,213
Stockholders’ Equity	251,109								235,257
Total Liabilities and Stockholders’ Equity	$	2,763,706							$	2,626,470
Net Interest Income (Tax-equivalent Basis) (Non-GAAP) ⁽¹⁾				20,893								19,409
Reversal of Tax Equivalent Adjustment				(491		)	(0.08	)%				(948		)	(0.15	)%
Net Interest Income				$	20,402							$	18,461
Net Interest Spread (Non-GAAP) ⁽¹⁾							3.12	%							3.09	%
Net Interest Margin (Non-GAAP) ⁽¹⁾							3.21	%							3.15	%



Capital Ratio	Year, as of January 1
	2018		2019
Minimum CET1 Ratio	4.500	%	4.500	%
Capital Conservation Buffer ("Buffer")	1.875	%	2.500	%
Minimum CET1 Ratio Plus Buffer	6.375	%	7.000	%
Minimum Tier 1 Risk-Based Capital Ratio	6.000	%	6.000	%
Minimum Tier 1 Risk-Based Capital Ratio Plus Buffer	7.875	%	8.500	%
Minimum Total Risk-Based Capital Ratio	8.000	%	8.000	%
Minimum Total Risk-Based Capital Ratio Plus Buffer	9.875	%	10.500	%
Minimum Leverage Ratio	4.000	%	4.000	%