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 June 30, 20192020
or
[ ]☐ 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 York22-2448962
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer
Identification No.)

250 GLEN STREET, GLENS FALLS, NEW YORK Glen StreetGlens FallsNew York12801
(Address of principal executive offices)   (Zip(Zip Code)
Registrant’s telephone number, including area code:   (518) 518 745-1000


Securities registered pursuant to Section 12(b) of the Act:
Title of Each ClassTrading SymbolName of Each Exchange on Which Registered
Common Stock, Par Value $1.00 per shareAROWNASDAQ Global Select Market


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


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


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

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


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


Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
ClassOutstanding as of July 31, 20192020
Common Stock, par value $1.00 per share14,519,27015,015,056




ARROW FINANCIAL CORPORATION
FORM 10-Q
TABLE OF CONTENTS
Page
PART I - FINANCIAL INFORMATION
3
4341
6970
6970
PART II - OTHER INFORMATION
7071
7071
7071
7071
7071
7172
7172
7273




2

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)
 June 30, 2019 December 31, 2018 June 30, 2018
ASSETS     
Cash and Due From Banks$34,650
 $56,529
 $38,552
Interest-Bearing Deposits at Banks28,045
 27,710
 22,189
Investment Securities:     
Available-for-Sale285,878
 317,535
 325,387
Held-to-Maturity (Approximate Fair Value of $266,068 at June 30, 2019; $280,338 at December 31, 2018; and $292,605 at June 30, 2018)262,541
 283,476
 297,885
Equity Securities1,850
 1,774
 1,802
Other Investments8,202
 15,506
 11,089
Loans2,280,308
 2,196,215
 2,057,862
Allowance for Loan Losses(20,695) (20,196) (19,640)
Net Loans2,259,613
 2,176,019
 2,038,222
Premises and Equipment, Net38,836
 30,446
 28,104
Goodwill21,873
 21,873
 21,873
Other Intangible Assets, Net1,730
 1,852
 2,060
Other Assets62,532
 55,614
 58,008
Total Assets$3,005,750
 $2,988,334
 $2,845,171
LIABILITIES     
Noninterest-Bearing Deposits$467,179
 $472,768
 $467,048
Interest-Bearing Checking Accounts741,395
 790,781
 861,959
Savings Deposits908,642
 818,048
 735,217
Time Deposits over $250,00097,220
 73,583
 70,950
Other Time Deposits289,317
 190,404
 169,607
Total Deposits2,503,753
 2,345,584
 2,304,781
Federal Funds Purchased and
Securities Sold Under Agreements to Repurchase		51,149
 54,659
 60,248
Federal Home Loan Bank Overnight Advances83,000
 234,000
 136,000
Federal Home Loan Bank Term Advances30,000
 45,000
 45,000
Junior Subordinated Obligations Issued to Unconsolidated
Subsidiary Trusts		20,000
 20,000
 20,000
Finance Leases5,270
 —
 —
Other Liabilities27,929
 19,507
 19,654
Total Liabilities2,721,101
 2,718,750
 2,585,683
STOCKHOLDERS’ EQUITY     
Preferred Stock, $1 Par Value and 1,000,000 Shares Authorized at June 30, 2019; $5 Par Value and 1,000,000 Shares Authorized at December 31, 2018 and June 30, 2018—
 —
 —
Common Stock, $1 Par Value; 30,000,000 Shares Authorized at June 30, 2019 and 20,000,000 Shares Authorized at December 31, 2018 and June 30, 2018 (19,035,565 Shares Issued at June 30, 2019 and December 31, 2018 and 18,481,301 at June 30, 2018)19,035
 19,035
 18,481
Additional Paid-in Capital316,229
 314,533
 292,020
Retained Earnings39,397
 29,257
 40,326
Unallocated ESOP Shares (5,001 Shares at June 30, 2019; 5,001 Shares at December 31, 2018 and 9,643 Shares at June 30, 2018)(100) (100) (200)
Accumulated Other Comprehensive Loss(9,647) (13,810) (11,804)
Treasury Stock, at Cost (4,517,412 Shares at June 30, 2019; 4,558,207 Shares at December 31, 2018 and 4,467,909 Shares at June 30, 2018)(80,265) (79,331) (79,335)
Total Stockholders’ Equity284,649
 269,584
 259,488
Total Liabilities and Stockholders’ Equity$3,005,750
 $2,988,334
 $2,845,171
ARROW FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In Thousands, Except Share and Per Share Amounts)
(Unaudited)
 June 30,
2020		December 31, 2019June 30,
2019
ASSETS  
Cash and Due From Banks$38,267  $47,035  $34,650  
Interest-Bearing Deposits at Banks215,003  23,186  28,045  
Investment Securities: 
Available-for-Sale at Fair Value378,778  357,334  285,878  
Held-to-Maturity (Approximate Fair Value of $241,875,000 at June 30, 2020; $249,618,000 at December 31, 2019; and $266,068,000 at June 30, 2019)233,517  245,065  262,541  
Equity Securities1,583  2,063  1,850  
FHLB and Federal Reserve Bank Stock5,574  10,317  8,202  
Loans2,561,915  2,386,120  2,280,308  
Allowance for Loan Losses(26,300) (21,187) (20,695) 
Net Loans2,535,615  2,364,933  2,259,613  
Premises and Equipment, Net41,231  40,629  38,836  
Goodwill21,873  21,873  21,873  
Other Intangible Assets, Net1,662  1,661  1,730  
Other Assets74,074  70,179  62,532  
Total Assets$3,547,177  $3,184,275  $3,005,750  
LIABILITIES  
Noninterest-Bearing Deposits$667,585  $484,944  $467,179  
Interest-Bearing Checking Accounts791,521  689,221  741,395  
Savings Deposits1,262,102  1,046,568  908,642  
Time Deposits over $250,000130,935  123,968  97,220  
Other Time Deposits216,630  271,353  289,317  
Total Deposits3,068,773  2,616,054  2,503,753  
Federal Funds Purchased and Securities Sold Under Agreements to Repurchase47,599  51,099  51,149  
Federal Home Loan Bank Overnight Advances—  130,000  83,000  
Federal Home Loan Bank Term Advances50,000  30,000  30,000  
Junior Subordinated Obligations Issued to Unconsolidated Subsidiary Trusts20,000  20,000  20,000  
Finance Leases5,239  5,254  5,270  
Other Liabilities37,879  30,140  27,929  
Total Liabilities3,229,490  2,882,547  2,721,101  
STOCKHOLDERS’ EQUITY  
Preferred Stock, $1 Par Value and 1,000,000 Shares Authorized at June 30, 2020, December 31, 2019 and June 30, 2019—  —  —  
Common Stock, $1 Par Value; 30,000,000 Shares Authorized (19,606,449 Shares Issued at June 30, 2020 and December 31, 2019 and 19,035,565 at June 30, 2019)19,606  19,606  19,035  
Additional Paid-in Capital336,643  335,355  316,229  
Retained Earnings42,704  33,218  39,397  
Unallocated ESOP Shares (NaN at June 30, 2020 and December 31, 2019 and 5,001 Shares at June 30, 2019)—  —  (100) 
Accumulated Other Comprehensive Loss(276) (6,357) (9,647) 
Treasury Stock, at Cost (4,595,891 Shares at June 30, 2020; 4,608,258 Shares at December 31, 2019 and 4,517,412 Shares at June 30, 2019)(80,990) (80,094) (80,265) 
Total Stockholders’ Equity317,687  301,728  284,649  
Total Liabilities and Stockholders’ Equity$3,547,177  $3,184,275  $3,005,750  
See Notes to Unaudited Interim Consolidated Financial Statements.


3
ARROW FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In Thousands, Except Per Share Amounts)
(Unaudited)
 Three Months Ended June 30, Six Months Ended June 30,
 2019 2018 2019 2018
INTEREST AND DIVIDEND INCOME       
Interest and Fees on Loans$23,520
 $19,909
 $45,923
 $38,767
Interest on Deposits at Banks195
 158
 390
 292
Interest and Dividends on Investment Securities:       
Fully Taxable2,284
 2,048
 4,653
 3,941
Exempt from Federal Taxes1,228
 1,475
 2,474
 3,008
Total Interest and Dividend Income27,227
 23,590
 53,440
 46,008
INTEREST EXPENSE       
Interest-Bearing Checking Accounts453
 388
 935
 775
Savings Deposits2,008
 711
 3,609
 1,233
Time Deposits over $250,000515
 328
 911
 532
Other Time Deposits1,131
 282
 1,844
 541
Federal Funds Purchased and
Securities Sold Under Agreements to Repurchase		25
 16
 47
 32
Federal Home Loan Bank Advances1,099
 656
 2,693
 1,070
Junior Subordinated Obligations Issued to
Unconsolidated Subsidiary Trusts		261
 247
 530
 461
Interest on Financing Leases28
 —
 43
 —
Total Interest Expense5,520
 2,628
 10,612
 4,644
NET INTEREST INCOME21,707
 20,962
 42,828
 41,364
Provision for Loan Losses455
 629
 927
 1,375
NET INTEREST INCOME AFTER PROVISION FOR
LOAN LOSSES		21,252
 20,333
 41,901
 39,989
NONINTEREST INCOME       
Income From Fiduciary Activities2,252
 2,647
 4,359
 4,844
Fees for Other Services to Customers2,545
 2,570
 4,947
 4,950
Insurance Commissions1,935
 2,192
 3,654
 4,095
Net Gain on Securities Transactions—
 223
 76
 241
Net Gain on Sales of Loans140
 23
 244
 61
Other Operating Income24
 256
 503
 609
Total Noninterest Income6,896
 7,911
 13,783
 14,800
NONINTEREST EXPENSE       
Salaries and Employee Benefits9,727
 9,812
 19,046
 19,181
Occupancy Expenses, Net1,279
 1,270
 2,699
 2,610
Technology and Equipment Expense3,243
 2,849
 6,384
 5,547
FDIC Assessments212
 223
 424
 440
Other Operating Expense2,447
 2,038
 5,007
 4,370
Total Noninterest Expense16,908
 16,192
 33,560
 32,148
INCOME BEFORE PROVISION FOR INCOME TAXES11,240
 12,052
 22,124
 22,641
Provision for Income Taxes2,306
 2,322
 4,456
 4,380
NET INCOME$8,934

$9,730

$17,668

$18,261
Average Shares Outstanding 1:
      
Basic14,487
 14,394
 14,478
 14,374
Diluted14,527
 14,480
 14,523
 14,459
Per Common Share:       
Basic Earnings$0.62
 $0.68
 $1.22
 $1.27
Diluted Earnings0.62
 0.67
 1.22
 1.26



ARROW FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In Thousands, Except Per Share Amounts)
(Unaudited)
 Three Months Ended June 30Six Months Ended June 30,
 2020201920202019
INTEREST AND DIVIDEND INCOME  
Interest and Fees on Loans$25,077  $23,520  $49,951  $45,923  
Interest on Deposits at Banks41  195  165  390  
Interest and Dividends on Investment Securities:
Fully Taxable1,871  2,284  4,064  4,653  
Exempt from Federal Taxes1,013  1,228  2,048  2,474  
Total Interest and Dividend Income28,002  27,227  56,228  53,440  
INTEREST EXPENSE  
Interest-Bearing Checking Accounts310  453  797  935  
Savings Deposits1,173  2,008  3,644  3,609  
Time Deposits over $250,000438  515  971  911  
Other Time Deposits784  1,131  1,784  1,844  
Federal Funds Purchased and
Securities Sold Under Agreements to Repurchase		16  25  38  47  
Federal Home Loan Bank Advances217  1,099  646  2,693  
Junior Subordinated Obligations Issued to
Unconsolidated Subsidiary Trusts		173  261  401  530  
Interest on Financing Leases49  28  99  43  
Total Interest Expense3,160  5,520  8,380  10,612  
NET INTEREST INCOME24,842  21,707  47,848  42,828  
Provision for Loan Losses3,040  455  5,812  927  
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES21,802  21,252  42,036  41,901  
NONINTEREST INCOME  
Income From Fiduciary Activities2,135  2,252  4,348  4,359  
Fees for Other Services to Customers2,278  2,545  4,729  4,947  
Insurance Commissions1,732  1,935  3,364  3,654  
Net (Loss) Gain on Securities(106) —  (480) 76  
Net Gain on Sales of Loans547  140  760  244  
Other Operating Income578  24  2,137  503  
Total Noninterest Income7,164  6,896  14,858  13,783  
NONINTEREST EXPENSE  
Salaries and Employee Benefits10,212  9,727  20,595  19,046  
Occupancy Expenses, Net1,345  1,279  2,794  2,699  
Technology and Equipment Expense3,227  3,243  6,579  6,384  
FDIC Assessments242  212  461  424  
Other Operating Expense2,219  2,447  4,570  5,007  
Total Noninterest Expense17,245  16,908  34,999  33,560  
INCOME BEFORE PROVISION FOR INCOME TAXES11,721  11,240  21,895  22,124  
Provision for Income Taxes2,562  2,306  4,609  4,456  
NET INCOME$9,159  $8,934  $17,286  $17,668  
Average Shares Outstanding 1:
  
Basic14,992  14,922  14,994  14,912  
Diluted14,998  14,963  15,010  14,958  
Per Common Share:  
Basic Earnings$0.61  $0.60  $1.15  $1.19  
Diluted Earnings0.61  0.60  1.15  1.18  

1 20182019 Share and Per Share Amounts have been restated for the September 27, 20182019 3% stock dividend.
See Notes to Unaudited Interim Consolidated Financial Statements.


ARROW FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In Thousands)
(Unaudited)
 Three Months Ended June 30, Six Months Ended June 30,
 2019 2018 2019 2018
Net Income$8,934
 $9,730
 $17,668
 $18,261
Other Comprehensive Income (Loss), Net of Tax:       
  Net Unrealized Securities Holding Gains (Losses)
Arising During the Period		1,744
 (635) 3,824
 (3,120)
  Amortization of Net Retirement Plan Actuarial Loss133
 75
 254
 121
  Amortization of Net Retirement Plan Prior
Service Cost		43
 41
 85
 40
Other Comprehensive Income (Loss)1,920
 (519) 4,163
 (2,959)
  Comprehensive Income$10,854
 $9,211
 $21,831
 $15,302
        

See Notes to Unaudited Interim Consolidated Financial Statements.

4




ARROW FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In Thousands)
(Unaudited)
Three Months Ended June 30Six Months Ended June 30,
2020201920202019
Net Income$9,159 $8,934 $17,286 $17,668 
Other Comprehensive Income, Net of Tax:
  Net Unrealized Securities Holding Gains Arising During 
 the Period2,021 1,744 6,119 3,824 
  Net Unrealized Gain (Loss) on Cash Flow Hedge
Agreements		18— (201)— 
  Amortization of Net Retirement Plan Actuarial Loss58 133 85 254 
  Amortization of Net Retirement Plan Prior Service Cost39 43 78 85 
Other Comprehensive Income2,136 1,920 6,081 4,163 
  Comprehensive Income$11,295 $10,854 $23,367 $21,831 

        See Notes to Unaudited Interim Consolidated Financial Statements.

5

ARROW FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(In Thousands, Except Share and Per Share Amounts)
(Unaudited)

Six-Month Period Ended June 30, 2020
Common
Stock		Additional
Paid-In
Capital		Retained
Earnings		Unallo-cated ESOP
Shares		Accumu-lated
Other Com-
prehensive
Loss		Treasury
Stock		Total
Balance at December 31, 2019$19,606  $335,355  $33,218  $—  $(6,357) $(80,094) $301,728  
Net Income—  —  17,286  —  —  —  17,286  
Other Comprehensive Income—  —  —  —  6,081  —  6,081  
Cash Dividends Paid, $.52 per Share—  —  (7,800) —  —  —  (7,800) 
Stock Options Exercised, Net  (17,155 Shares)—  237  —  —  —  171  408  
Shares Issued Under the Directors’ Stock
  Plan  (4,245 Shares)
—  83  —  —  —  42  125  
Shares Issued Under the Employee Stock
  Purchase Plan  (8,958 Shares)
—  176  —  —  —  89  265  
Shares Issued for Dividend
  Reinvestment Plans (32,030 Shares)
—  583  —  —  —  309  892  
Stock-Based Compensation Expense—  209  —  —  —  —  209  
Purchase of Treasury Stock
  (50,021 Shares)
—  —  —  —  —  (1,507) (1,507) 
Balance at June 30, 2020$19,606  $336,643  $42,704  $—  $(276) $(80,990) $317,687  
Three-Month Period Ended June 30, 2020
Common
Stock		Additional
Paid-In
Capital		Retained
Earnings		Unallo-cated ESOP
Shares		Accumu-lated
Other Com-
prehensive
Loss		Treasury
Stock		Total
Balance at March 31, 2020$19,606  $336,021  $37,441  $—  $(2,412) $(81,258) $309,398  
Net Income—  —  9,159  —  —  —  9,159  
Other Comprehensive Income—  —  —  —  2,136  —  2,136  
Cash Dividends Paid, $.26 per Share—  —  (3,896) —  —  —  (3,896) 
Stock Options Exercised, Net  (2,873 Shares)—  38  —  —  —  27  65  
Shares Issued Under the Directors’ Stock
  Plan  (4,245 Shares)
—  83  —  —  —  42  125  
Shares Issued Under the Employee Stock
  Purchase Plan  (5,310 Shares)
—  92  —  —  —  52  144  
Shares Issued for Dividend
  Reinvestment Plans (16,029 Shares)
—  303  —  —  —  147  450  
Stock-Based Compensation Expense—  106  —  —  —  —  106  
Balance at June 30, 2020$19,606  $336,643  $42,704  $—  $(276) $(80,990) $317,687  
6


Six-Month Period Ended June 30, 2019Six-Month Period Ended June 30, 2019
Common
Stock
 
Additional
Paid-In
Capital
 
Retained
Earnings
 
Unallo-cated ESOP
Shares
 
Accumu-lated
Other Com-
prehensive
Loss
 
Treasury
Stock
 TotalCommon
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
Balance at December 31, 2018$19,035  314,533  29,257  (100) $(13,810) $(79,331) $269,584  
Net Income—
 —
 17,668
 —
 —
 —
 17,668
Net Income—  —  17,668  —  —  —  17,668  
Other Comprehensive Income—
 —
 —
 —
 4,163
 —
 4,163
Cash Dividends Paid, $.52 per Share—
 —
 (7,528) —
 —
 —
 (7,528)
Other Comprehensive LossOther Comprehensive Loss—  —  —  —  4,163  —  4,163  
Cash Dividends Paid, $.505 per Share 1
Cash Dividends Paid, $.505 per Share 1
—  —  (7,528) —  —  —  (7,528) 
Stock Options Exercised, Net (62,712 Shares)—
 638
 —
 —
 —
 687
 1,325
Stock Options Exercised, Net (62,712 Shares)—  638  —  —  —  687  1,325  
Shares Issued Under the Directors’ Stock
Plan (3,997 Shares)
—
 86
 —
 —
 —
 44
 130
Shares Issued Under the Directors’ Stock
Plan (3,997 Shares)
—  86  —  —  —  44  130  
Shares Issued Under the Employee Stock
Purchase Plan (7,948 Shares)
—
 163
 —
 —
 —
 87
 250
Shares Issued Under the Employee Stock
Purchase Plan (7,948 Shares)
—  163  —  —  —  87  250  
Shares Issued for Dividend
Reinvestment Plans (26,698 Shares)
—
 615
 —
 —
 —
 289
 904
Shares Issued for Dividend
Reinvestment Plans (26,698 Shares)
—  615  —  —  —  289  904  
Stock-Based Compensation Expense—
 194
 —
 —
 —
 —
 194
Stock-Based Compensation Expense—  194  —  —  —  —  194  
Purchase of Treasury Stock
(60,560 Shares)
—
 —
 —
 —
 —
 (2,041) (2,041)
Purchase of Treasury Stock
(60,560 Shares)
—  —  —  —  —  (2,041) (2,041) 
Balance at June 30, 2019$19,035
 $316,229
 $39,397
 $(100) $(9,647) $(80,265) $284,649
             
Three-Month Period Ended June 30, 2019
Common
Stock
 
Additional
Paid-In
Capital
 
Retained
Earnings
 
Unallo-cated ESOP
Shares
 
Accumu-lated
Other Com-
prehensive
Loss
 
Treasury
Stock
 Total
Balance at March 31, 2019$19,035
 $315,262
 $34,231
 $(100) $(11,567) $(80,252) $276,609
Net Income—
 —
 8,934
 —
 —
 —
 8,934
Other Comprehensive Income—
 —
 —
 —
 1,920
 —
 1,920
Cash Dividends Paid, $.26 per Share—
 —
 (3,768) —
 —
 —
 (3,768)
Stock Options Exercised, Net (36,577 Shares)—
 389
 —
 —
 —
 401
 790
Shares Issued Under the Directors’ Stock
Plan (3,997 Shares)		—
 86
 —
 —
 —
 44
 130
Shares Issued Under the Employee Stock
Purchase Plan (4,239 Shares)		—
 87
 —
 —
 —
 46
 133
Shares Issued for Dividend
Reinvestment Plans (13,566 Shares)		—
 306
 —
 —
 —
 145
 451
Stock-Based Compensation Expense—
 99
 —
 —
 —
 —
 99
Purchase of Treasury Stock
(19,708 Shares)		—
 —
 —
 —
 —
 (649) (649)
Balance at June 30, 2019$19,035
 $316,229

$39,397
 $(100) $(9,647) $(80,265) $284,649
Balance at June 30, 2019$19,035  $316,229  $39,397  $(100) $(9,647) $(80,265) $284,649  
             

Three-Month Period Ended June 30, 2019
Common
Stock		Additional
Paid-In
Capital		Retained
Earnings		Unallo-cated ESOP
Shares		Accumu-lated
Other Com-
prehensive
Loss		Treasury
Stock		Total
Balance at March 31, 2019$19,035  $315,262  $34,231  $(100) $(11,567) $(80,252) $276,609  
Net Income—  —  8,934  —  —  —  8,934  
Other Comprehensive Loss—  —  —  —  1,920  —  1,920  
Cash Dividends Paid, $.252 per Share 1
—  —  (3,768) —  —  —  (3,768) 
Stock Options Exercised, Net (36,577 Shares)—  389  —  —  —  401  790  
Shares Issued Under the Directors’ Stock
  Plan  (3,997 Shares)
—  86  —  —  —  44  130  
Shares Issued Under the Employee Stock
  Purchase Plan  (4,239 Shares)
—  87  —  —  —  46  133  
Shares Issued for Dividend
  Reinvestment Plans (13,566 Shares)
—  306  —  —  —  145  451  
Stock-Based Compensation Expense—  99  —  —  —  —  99  
Purchase of Treasury Stock
 (19,708 Shares)
—  —  —  —  —  (649) (649) 
Balance at June 30, 2019$19,035  $316,229  $39,397  $(100) $(9,647) $(80,265) $284,649  
See Notes to Unaudited Interim Consolidated Financial Statements.





ARROW FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (Continued)
(In Thousands, Except Share and Per Share Amounts)
(Unaudited)
 Six-Month Period Ended June 30, 2018
 
Common
Stock
 
Additional
Paid-In
Capital
 
Retained
Earnings
 
Unallo-cated ESOP
Shares
 
Accumu-lated
Other Com-
prehensive
Loss
 
Treasury
Stock
 Total
Balance at December 31, 2017$18,481
 $290,219
 $28,818
 $(200) $(8,514) $(79,201) $249,603
Net Income—
 —
 18,261
 —
 —
 —
 18,261
Other Comprehensive Loss—
 —
 —
 —
 (2,959) —
 (2,959)
Impact of the Adoption of ASU 2014-09—
 —
 (102) —
 —
 —
 (102)
Impact of the Adoption of ASU 2016-01—
 —
 331
 —
 (331) —
 —
Cash Dividends Paid, $.485 per Share 1
—
 —
 (6,982) —
 —
 —
 (6,982)
Stock Options Exercised, Net (79,001 Shares)—
 804
 —
 —
 —
 888
 1,692
Shares Issued Under the Directors’ Stock
  Plan  (2,705 Shares)
—
 72
 —
 —
 —
 31
 103
Shares Issued Under the Employee Stock
  Purchase Plan  (7,613 Shares)
—
 167
 —
 —
 —
 85
 252
Shares Issued for Dividend
  Reinvestment Plans (24,305 Shares)
—
 580
 —
 —
 —
 276
 856
Stock-Based Compensation Expense—
 178
 —
 —
 —
 —
 178
Purchase of Treasury Stock
 (40,009 Shares)
—
 —
 —
 —
 —
 (1,414) (1,414)
Balance at June 30, 2018$18,481
 $292,020
 $40,326
 $(200) $(11,804) $(79,335) $259,488
              
 Three-Month Period Ended June 30, 2018
 
Common
Stock
 
Additional
Paid-In
Capital
 
Retained
Earnings
 
Unallo-cated ESOP
Shares
 
Accumu-lated
Other Com-
prehensive
Loss
 
Treasury
Stock
 Total
Balance March 31, 2018$18,481
 $290,980
 $34,093
 $(200) $(11,285) $(79,335) $252,734
Net Income—
 —
 9,730
 —
 —
 —
 9,730
Other Comprehensive Loss—
 —
 —
 —
 (519) —
 (519)
Cash Dividends Paid, $.242 per Share 1
—
 —
 (3,497) —
 —
 —
 (3,497)
Stock Options Exercised, Net (51,339 Shares)—
 497
 —
 —
 —
 585
 1,082
Shares Issued Under the Directors’ Stock
  Plan  (2,705 Shares)		—
 72
 —
 —
 —
 31
 103
Shares Issued Under the Employee Stock
  Purchase Plan  (3,939 Shares)		—
 91
 —
 —
 —
 45
 136
Shares Issued for Dividend
Reinvestment Plans (11,846 Shares)		—
 291
 —
 —
 —
 134
 425
Stock-Based Compensation Expense—
 89
 —
 —
 —
 —
 89
Purchase of Treasury Stock
 (21,294 Shares)		—
 —
 —
 —
 —
 (795) (795)
Balance at June 30, 2018$18,481
 $292,020
 $40,326
 $(200) $(11,804) $(79,335) $259,488

1 Cash dividends paid per share have been adjusted for the September 27, 201820193% stock dividend.
See Notes to Unaudited Interim Consolidated Financial Statements.








7

ARROW FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
Six Months Ended June 30,
Cash Flows from Operating Activities:20202019
Net Income$17,286  $17,668  
Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities:
Provision for Loan Losses5,812  927  
Depreciation and Amortization3,499  2,516  
Net Loss (Gain) on Securities Transactions480  (76) 
Loans Originated and Held-for-Sale(33,590) (10,310) 
Proceeds from the Sale of Loans Held-for-Sale22,493  9,336  
Net Gain on the Sale of Loans(760) (244) 
Net (Gain) Loss on the Sale of Premises and Equipment, Other Real Estate Owned and Repossessed Assets(97) 432  
Contributions to Retirement Benefit Plans(370) (324) 
Deferred Income Tax Benefit(1,742) (569) 
Shares Issued Under the Directors’ Stock Plan125  130  
Stock-Based Compensation Expense209  194  
Tax Benefit from Exercise of Stock Options33  179  
Net Increase in Other Assets(1,086) (2,062) 
Net Increase in Other Liabilities3,564  3,294  
Net Cash Provided By Operating Activities15,856  21,091  
Cash Flows from Investing Activities:
Proceeds from the Maturities and Calls of Securities Available-for-Sale42,640  51,686  
Purchases of Securities Available-for-Sale(56,832) (15,390) 
Proceeds from the Maturities and Calls of Securities Held-to-Maturity16,186  22,608  
Purchases of Securities Held-to-Maturity(5,006) (2,095) 
Net Increase in Loans(164,764) (84,695) 
Proceeds from the Sales of Premises and Equipment, Other Real Estate Owned and Repossessed Assets804  779  
Purchase of Premises and Equipment(2,040) (4,389) 
Net Decrease in Other Investments4,743  7,304  
Net Cash Used By Investing Activities(164,269) (24,192) 
Cash Flows from Financing Activities:
Net Increase in Deposits452,719  158,169  
Net Decrease in Short-Term Federal Home Loan Bank Borrowings(130,000) (151,000) 
Net Decrease in Short-Term Borrowings(3,500) (3,510) 
Finance Lease Payments(15) (12) 
Federal Home Loan Bank Advances40,000  —  
Repayments of Federal Home Loan Bank Term Advances(20,000) (15,000) 
Purchase of Treasury Stock(1,507) (2,041) 
Stock Options Exercised, Net408  1,325  
Shares Issued Under the Employee Stock Purchase Plan265  250  
Shares Issued for Dividend Reinvestment Plans892  904  
Cash Dividends Paid(7,800) (7,528) 
Net Cash Provided (Used) By Financing Activities331,462  (18,443) 
Net Increase (Decrease) in Cash and Cash Equivalents183,049  (21,544) 
Cash and Cash Equivalents at Beginning of Period70,221  84,239  
Cash and Cash Equivalents at End of Period$253,270  $62,695  
Supplemental Disclosures to Statements of Cash Flow Information:
Interest on Deposits and Borrowings$8,896  $9,990  
Income Taxes5,044  5,031  
Non-cash Investing and Financing Activity:
Transfer of Loans to Other Real Estate Owned and Repossessed Assets133  1,098  
 Six Months Ended June 30,
Cash Flows from Operating Activities:2019 2018
Net Income$17,668
 $18,261
Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities:   
Provision for Loan Losses927
 1,375
Depreciation and Amortization2,516
 2,408
Net Gain on Securities Transactions(76) (241)
Loans Originated and Held-for-Sale(10,310) (2,354)
Proceeds from the Sale of Loans Held-for-Sale9,336
 2,198
Net Gain on the Sale of Loans(244) (61)
Net Loss on the Sale of Premises and Equipment, Other Real Estate Owned and Repossessed Assets432
 117
Contributions to Retirement Benefit Plans(324) (352)
Deferred Income Tax Benefit(569) (261)
Shares Issued Under the Directors’ Stock Plan130
 103
Stock-Based Compensation Expense194
 178
Tax Benefit from Exercise of Stock Options179
 160
Net (Increase) Decrease in Other Assets(2,062) 186
Net Increase (Decrease) in Other Liabilities3,294
 (673)
Net Cash Provided By Operating Activities21,091
 21,044
Cash Flows from Investing Activities:   
Proceeds from the Maturities and Calls of Securities Available-for-Sale51,686
 25,035
Purchases of Securities Available-for-Sale(15,390) (56,598)
Proceeds from the Maturities and Calls of Securities Held-to-Maturity22,608
 39,616
Purchases of Securities Held-to-Maturity(2,095) (2,105)
Net Increase in Loans(84,695) (107,598)
Proceeds from the Sales of Premises and Equipment, Other Real Estate Owned and Repossessed Assets779
 644
Purchase of Premises and Equipment(4,389) (1,395)
Proceeds from the Sale of a Subsidiary, Net—
 49
Net Decrease (Increase) in Other Investments7,304
 (1,140)
Net Cash Used By Investing Activities(24,192) (103,492)
Cash Flows from Financing Activities:   
Net Increase in Deposits158,169
 59,665
Net (Decrease) Increase in Short-Term Federal Home Loan Bank Borrowings(151,000) 31,000
Net Decrease in Short-Term Borrowings(3,510) (4,718)
Finance Lease Payments(12) —
Repayments of Federal Home Loan Bank Term Advances(15,000) (10,000)
Purchase of Treasury Stock(2,041) (1,414)
Stock Options Exercised, Net1,325
 1,692
Shares Issued Under the Employee Stock Purchase Plan250
 252
Shares Issued for Dividend Reinvestment Plans904
 856
Cash Dividends Paid(7,528) (6,982)
Net Cash (Used) Provided By Financing Activities(18,443) 70,351
Net Decrease in Cash and Cash Equivalents(21,544) (12,097)
Cash and Cash Equivalents at Beginning of Period84,239
 72,838
Cash and Cash Equivalents at End of Period$62,695
 $60,741
    
Supplemental Disclosures to Statements of Cash Flow Information:   
Interest on Deposits and Borrowings$9,990
 $4,530
Income Taxes5,031
 5,294
Non-cash Investing and Financing Activity:   
Transfer of Loans to Other Real Estate Owned and Repossessed Assets1,098
 402


See Notes to Unaudited Interim Consolidated Financial Statements.

8


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 June 30, 2019,2020, December 31, 20182019 and June 30, 2018;2019; the results of operations for the three-monththree and six-month periods ended June 30, 20192020 and 2018;2019; the consolidated statements of comprehensive income for the three-monthsix-month periods ended June 30, 20192020 and 2018;2019; the changes in stockholders' equity for the three-monththree and six-month periods ended June 30, 20192020 and 2018;2019; and the cash flows for the six-month periods ended June 30, 20192020 and 2018.2019. All such adjustments are of a normal recurring nature.


Management’s Use of Estimates -The- The preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the United States of America (US GAAP) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of income and expenses during the reporting period.  Due to the uncertainty regarding the impact of the COVID-19 pandemic, management utilized estimates and assumptions in its evaluation of potential impairment of the Company's right-of-use lease assets, goodwill and intangible assets. Our most significant estimate is the allowance for loan losses. Other estimates include the evaluation of other-than-temporary impairment of investment securities, goodwill impairment, pension and other postretirementpost-retirement liabilities and an analysis of a need for a valuation allowance for deferred tax assets. Actual results could differ from those estimates.
A material estimate that is particularly susceptible to significant change in the near term is the allowance for loan losses.  In connection with the determination of the allowance for loan losses, management obtains appraisals for properties.  The allowance for loan losses is management’s best estimate of probable loan losses incurred as of the balance sheet date.  While management uses available information to recognize losses on loans, future adjustments to the allowance for loan losses may be necessary based on changes in economic conditions.  
The unaudited interim consolidated financial statements should be read in conjunction with the audited annual consolidated financial statements of Arrow for the year ended December 31, 20182019 included in Arrow's Annual Report on Form 10-K for the year ended December 31, 2018.2019.

Recently Adopted and Recently Issued Accounting Standards


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


In March 2017,August 2018, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2017-08 "Receivables-Nonrefundable Fees and Other Costs" which amends the amortization period for certain purchased callable debt securities held at a premium. This shortens the amortization period for the premiumASU 2018-13 "Disclosure Framework-Changes to the earliest call date. Under United States generally accepted accounting principles (GAAP), entities generally amortize the premiumDisclosure Requirements for Fair Value Measurement" as an adjustmentpart of yield over the contractual life of the instrument.its disclosure framework, and pursuant to which FASB has eliminated, amended and added disclosure requirements for fair value measurements. For Arrow, the standard wasbecame effective, on a prospective basis, on January 1, 2020. The adoption of this change in the first quarter of 2019 andfair value disclosure did not have a material impact on its financial position or the results of operations in the current quarter or in future periods.
In February 2016, the FASB issued ASU 2016-02, "Leases" (Topic 842) which requires lessees to recognize right-of-use assets and lease liabilities on the balance sheet for all leases with terms longer than 12 months. In January 2018, the FASB issued ASU 2018-01, Leases (Topic 842): "Land Easement Practical Expedient for Transition to Topic 842". In July 2018, the FASB issued ASU 2018-10 "Codification Improvements to Topic 842, Leases" which provided clarification on certain components of the original guidance, including that the rate implicit in the lease cannot be less than zero. Also in July 2018, the FASB issued ASU 2018-11 "Targeted Improvements" to Leases (Topic 842) which amends the original guidance to allow for the adoption of this standard to be applied retrospectively at the beginning of the period of adoption, which was January 1, 2019 for Arrow, without revising prior comparative periods.
The Company adopted this standard as of January 1, 2019 using the effective date method, also known as the modified retrospective method, with the cumulative-effect adjustment recorded at the beginning of the period of adoption. As a result of this adoption, the Company's assets increased $7.9 million and the Company's liabilities increased $8.0 million with no adjustment required to retained earnings and no material impact to the Consolidated Statements of Income.
Practical Expedients Elected At Adoption: The package of practical expedients were elected that did not require the Company to reassess whether an existing contract contains a lease, to reassess existing leases between operating leases and finance leases and to not reassess initial direct costs for any existing leases. These practical expedients were applied together. In addition, the Company also elected a practical expedient, which was required to be applied consistently to all of its leases, to use hindsight in determining the lease term when considering lessee options to extend or terminate the lease and in assessing impairment in the right-of-use asset.
Accounting Policy Elections: The Company also made two accounting policy elections related to the adoption of this standard. The first is a determination not to separate lease and non-lease components and account for the resulting combined component as a single lease component. The second election is to account for short-term leases, those leases with a "lease term" of twelve months or less, like an operating lease under current GAAP.
Determination of the Discount Rate to Calculate the Lease Liability: Since the Company was unable to determine the rate implicit in its leases, the secured borrowing rate from the Federal Home Loan Bank of New York as of the January 1, 2019 adoption date was utilized for existing leases for the effective lease term beginning with the effective date of each existing lease. The expected expiration date of each lease was determined on a lease-by-lease basis based on the availability of renewal options in the lease contracts, the amount of leasehold improvements at each location, total branch deposits at each location in addition to the feasibility of growth potential at each location. A similar process is followed to determine the expected lease expiration date for all leases executed subsequent to the January 1, 2019 adoption date.its adoption.




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. In April 2019, the FASB issued ASU 2019-04 "Codification Improvements to Topic 326, Financial Instruments-Credit Losses; Topic 815, Derivatives and Hedging; and Topic 825, Financial Instruments," which clarifies that the estimate of expected credit losses should include expected recoveries of financial assets, and that contractual extension or renewal options that are not unconditionally cancellable by the lender are considered when determining the contractual term over which expected credit losses are measured. The Company's loan terms for contractual extensions and renewal options are unconditionally cancellable by the Company (that is, the Company has no obligation to extend or renew existing loans), and therefore are not considered in measuring expected credit losses.
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 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 an 18-month reasonable and supportable forecast period. The Company has identified the economic data that best correlates with expected loan losses through the use of various regression analyses of historical economic information and loan losses. The Company continues to monitor new regulatory guidance and is updating relevant internal controls and processes. The adoption of this standard will likely have the effect of increasing the allowance for loan and lease losses and reducing shareholders' equity, the extent of which will depend upon the nature and characteristics of the Company's loan portfolio and economic conditions and forecasts at the adoption date. The Company expects to remain a well-capitalized financial institution under current regulatory calculations.     


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

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

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




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


In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting ("ASU 2020-04"). ASU 2020-04 provides companies with optional guidance to ease the potential accounting burden associated with transitioning away from reference rates that are expected to be discontinued, such as LIBOR. Companies can apply the ASU immediately. However, the guidance will only be available for a limited time (generally through December 31, 2022), and provides optional relief for contract modifications, hedge accounting and Held-to-maturity debt securities. For Arrow, this standard was effective January 1, 2020 and can be applied prospectively beginning January 1, 2020 for contract modifications and hedging relationships. The one-time election to sell and/or transfer securities classified as Held-to-maturity may be made at any point after March 12, 2020. Arrow is evaluating the impact of this standard as it will provide relief for contracts currently tied to LIBOR and hedge accounting relationships.
9

Note 2. INVESTMENT SECURITIES (In Thousands)


The following table is the schedule of Available-For-Sale Securities at June 30, 2019,2020, December 31, 20182019 and June 30, 2018:2019:
Available-For-Sale Securities
U.S. Government & Agency
Obligations		State and
Municipal
Obligations		Mortgage-
Backed
Securities		Corporate
and Other
Debt
Securities		Total
Available-
For-Sale
Securities
June 30, 2020
Available-For-Sale Securities,
at Amortized Cost		$5,002  $593  $363,339  $1,000  $369,934  
Gross Unrealized Gains190  —  9,278  —  9,468  
Gross Unrealized Losses—  —  (424) (200) (624) 
Available-For-Sale Securities,
at Fair Value		5,192  593  372,193  800  378,778  
Available-For-Sale Securities,
Pledged as Collateral, at Fair Value		240,747  
Maturities of Debt Securities,
at Amortized Cost:
Within One Year$—  $68  $10,777  $—  $10,845  
From 1 - 5 Years5,002  125  326,971  —  332,098  
From 5 - 10 Years—  400  25,591  1,000  26,991  
Over 10 Years—  —  —  —  —  
Maturities of Debt Securities,
at Fair Value:
Within One Year$—  $68  $11,079  $—  $11,147  
From 1 - 5 Years5,192  125  335,672  —  340,989  
From 5 - 10 Years—  400  25,442  800  26,642  
Over 10 Years—  —  —  —  —  
Securities in a Continuous
Loss Position, at Fair Value:
Less than 12 Months$—  $—  $28,008  $—  $28,008  
12 Months or Longer—  —  57,482  800  58,282  
Total$—  $—  $85,490  $800  $86,290  
Number of Securities in a
Continuous Loss Position		—  —  27  1  28  
Unrealized Losses on
Securities in a Continuous
Loss Position:
Less than 12 Months$—  $—  $82  $—  $82  
12 Months or Longer—  —  342  200  542  
Total$—  $—  $424  $200  $624  
Disaggregated Details:
US Agency Obligations,
at Amortized Cost		$5,002  
US Agency Obligations,
at Fair Value		5,192  
US Government Agency
Securities, at Amortized Cost		$73,546  
US Government Agency
Securities, at Fair Value		73,193  
Government Sponsored Entity
Securities, at Amortized Cost		289,793  
Government Sponsored Entity
Securities, at Fair Value		299,000  
10

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
June 30, 2019          
Available-For-Sale Securities,
  at Amortized Cost
 $17,506
 $965
 $266,235
 $1,000
 $285,706
Available-For-Sale Securities,
  at Fair Value
 17,524
 967
 266,587
 800
 285,878
Gross Unrealized Gains 31
 2
 1,293
 —
 1,326
Gross Unrealized Losses 13
 —
 941
 200
 1,154
Available-For-Sale Securities,
  Pledged as Collateral
         246,202
           
Maturities of Debt Securities,
  at Amortized Cost:
          
Within One Year $12,503
 $226
 $267
 $—
 $12,996
From 1 - 5 Years 5,003
 299
 165,852
 —
 171,154
From 5 - 10 Years —
 —
 75,603
 —
 75,603
Over 10 Years —
 440
 24,513
 1,000
 25,953
           
Maturities of Debt Securities,
  at Fair Value:
          
Within One Year $12,490
 $229
 $268
 $—
 $12,987
From 1 - 5 Years 5,034
 298
 166,178
 —
 171,510
From 5 - 10 Years —
 —
 75,538
 —
 75,538
Over 10 Years —
 440
 24,603
 800
 25,843
           
Securities in a Continuous
  Loss Position, at Fair Value:
          
Less than 12 Months $35
 $—
 $24,948
 $—
 $24,983
12 Months or Longer 12,454
 —
 130,229
 800
 143,483
Total $12,489
 $—
 $155,177
 $800
 $168,466
Number of Securities in a
  Continuous Loss Position
 2
 —
 61
 1
 64
           
Unrealized Losses on
  Securities in a Continuous
  Loss Position:
          
Less than 12 Months $—
 $—
 $234
 $—
 $234
12 Months or Longer 13
 —
 707
 200
 920
Total $13
 $—
 $941
 $200
 $1,154
           
Disaggregated Details:          
US Treasury Obligations,
  at Amortized Cost
 $—
        
US Treasury Obligations,
at Fair Value		 —
        
US Agency Obligations,
at Amortized Cost		 17,506
        
US Agency Obligations,
at Fair Value		 17,524
        
US Government Agency
  Securities, at Amortized Cost
     $67,760
    
US Government Agency
  Securities, at Fair Value
     67,613
    
Government Sponsored Entity
  Securities, at Amortized Cost
     198,475
    
Government Sponsored Entity
Securities, at Fair Value		     198,974
    
           


Available-For-Sale Securities
U.S. Government & Agency
Obligations		State and
Municipal
Obligations		Mortgage-
Backed
Securities		Corporate
and Other
Debt
Securities		Total
Available-
For-Sale
Securities
December 31, 2019
Available-For-Sale Securities,
at Amortized Cost		$5,002  $764  $349,944  $1,000  $356,710  
Gross Unrealized Gains52  —  1,852  —  1,904  
Gross Unrealized Losses—  —  (1,080) (200) (1,280) 
Available-For-Sale Securities,
at Fair Value		5,054  764  350,716  800  357,334  
Available-For-Sale Securities,
Pledged as Collateral,
at Fair Value		164,426  
Securities in a Continuous
Loss Position, at Fair Value:
Less than 12 Months$—  $—  $52,491  $—  $52,491  
12 Months or Longer—  —  97,164  800  97,964  
Total$—  $—  $149,655  $800  $150,455  
Number of Securities in a
Continuous Loss Position		—  —  54  1  55  
Unrealized Losses on
Securities in a Continuous
Loss Position:
Less than 12 Months$—  $—  $317  $—  $317  
12 Months or Longer—  —  763  200  963  
Total$—  $—  $1,080  $200  $1,280  
Disaggregated Details:
US Agency Obligations,
at Amortized Cost		$5,002  
US Agency Obligations,
at Fair Value		5,054  
US Government Agency
Securities, at Amortized Cost		$61,102  
US Government Agency
Securities, at Fair Value		60,616  
Government Sponsored Entity
Securities, at Amortized Cost		288,842  
Government Sponsored Entity
Securities, at Fair Value		290,100  
11

Available-For-Sale SecuritiesAvailable-For-Sale SecuritiesAvailable-For-Sale Securities
 
U.S. Government & Agency
Obligations
 
State and
Municipal
Obligations
 
Mortgage-
Backed
Securities
 
Corporate
and Other
Debt
Securities
 
Total
Available-
For-Sale
Securities
U.S. Government & Agency
Obligations		State and
Municipal
Obligations		Mortgage-
Backed
Securities		Corporate
and Other
Debt
Securities		Total
Available-
For-Sale
Securities
December 31, 2018          
June 30, 2019June 30, 2019
Available-For-Sale Securities,
at Amortized Cost
 $47,071
 $1,193
 $273,227
 $1,000
 $322,491
Available-For-Sale Securities,
at Amortized Cost		$17,506  $965  $266,235  $1,000  $285,706  
Available-For-Sale Securities,
at Fair Value
 46,765
 1,195
 268,775
 800
 317,535
Gross Unrealized Gains —
 2
 288
 —
 290
Gross Unrealized Gains31  2  1,293  —  1,326  
Gross Unrealized Losses 306
 —
 4,740
 200
 5,246
Gross Unrealized Losses(13) —  (941) (200) (1,154) 
Available-For-Sale Securities,
at Fair Value		Available-For-Sale Securities,
at Fair Value		17,524  967  266,587  800  285,878  
Available-For-Sale Securities,
Pledged as Collateral,
at Fair Value
         236,163
Available-For-Sale Securities,
Pledged as Collateral, at Fair Value		246,202  
          
Securities in a Continuous
Loss Position, at Fair Value:
          Securities in a Continuous
Loss Position, at Fair Value:
Less than 12 Months $—
 $—
 $107,550
 $—
 $107,550
Less than 12 Months$35  $—  $24,948  $—  $24,983  
12 Months or Longer 46,765
 —
 124,627
 800
 172,192
12 Months or Longer12,454  —  130,229  800  143,483  
Total $46,765
 $—
 $232,177
 $800
 $279,742
Total$12,489  $—  $155,177  $800  $168,466  
Number of Securities in a
Continuous Loss Position
 10
 —
 86
 1
 97
Number of Securities in a
Continuous Loss Position		2  —  61  1  64  
          
Unrealized Losses on
Securities in a Continuous
Loss Position:
          Unrealized Losses on Securities
in a Continuous Loss Position:
Less than 12 Months $—
 $—
 $841
 $—
 $841
Less than 12 Months$—  $—  $234  $—  $234  
12 Months or Longer 306
 —
 3,899
 200
 4,405
12 Months or Longer13  —  707  200  920  
Total $306
 $—
 $4,740
 $200
 $5,246
Total$13  $—  $941  $200  $1,154  
          
Disaggregated Details:          Disaggregated Details:
US Treasury Obligations,
at Amortized Cost
 $—
        
US Treasury Obligations,
at Fair Value		 —
        
US Agency Obligations,
at Amortized Cost		 47,071
        US Agency Obligations,
at Amortized Cost		$17,506  
US Agency Obligations,
at Fair Value		 46,765
        US Agency Obligations,
at Fair Value		17,524  
US Government Agency
Securities, at Amortized Cost
     $72,095
    US Government Agency
Securities, at Amortized Cost		$67,760  
US Government Agency
Securities, at Fair Value
     71,800
    US Government Agency
Securities, at Fair Value		67,613  
Government Sponsored Entity
Securities, at Amortized Cost
     201,132
    Government Sponsored Entity
Securities, at Amortized Cost		198,475  
Government Sponsored Entity
Securities, at Fair Value		     196,975
    Government Sponsored Entity
Securities, at Fair Value		198,974  
          




12

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
June 30, 2018          
Available-For-Sale Securities,
  at Amortized Cost
 $60,199
 $3,377
 $267,113
 $1,000
 $331,689
Available-For-Sale Securities,
  at Fair Value
 59,615
 3,383
 261,589
 800
 325,387
Gross Unrealized Gains —
 6
 332
 —
 338
Gross Unrealized Losses 584
 —
 5,856
 200
 6,640
Available-For-Sale Securities,
  Pledged as Collateral
         282,481
           
Securities in a Continuous
  Loss Position, at Fair Value:
          
Less than 12 Months $17,218
 $1,797
 $144,265
 $—
 $163,280
12 Months or Longer 42,397
 —
 72,209
 800
 115,406
Total $59,615
 $1,797
 $216,474
 $800
 $278,686
Number of Securities in a
  Continuous Loss Position
 14
 6
 79
 1
 100
           
Unrealized Losses on Securities
  in a Continuous Loss Position:
          
Less than 12 Months $297
 $—
 $2,409
 $—
 $2,706
12 Months or Longer 287
 —
 3,447
 200
 3,934
Total $584
 $—
 $5,856
 $200
 $6,640
           
Disaggregated Details:          
US Treasury Obligations,
at Amortized Cost		 $—
        
US Treasury Obligations,
at Fair Value		 —
        
US Agency Obligations,
at Amortized Cost		 60,199
        
US Agency Obligations,
at Fair Value		 59,615
        
US Government Agency
  Securities, at Amortized Cost
     $68,030
    
US Government Agency
  Securities, at Fair Value
     68,083
    
Government Sponsored Entity
  Securities, at Amortized Cost
     199,083
    
Government Sponsored Entity
Securities, at Fair Value		     193,506
    






The following table is the schedule of Held-To-Maturity Securities at June 30, 2019,2020, December 31, 20182019 and June 30, 2018:2019:
Held-To-Maturity Securities
State and
Municipal
Obligations		Mortgage-
Backed
Securities		Total
Held-To
Maturity
Securities
June 30, 2020
Held-To-Maturity Securities,
at Amortized Cost		$201,592  $31,925  $233,517  
Gross Unrealized Gains7,056  1,438  8,494  
Gross Unrealized Losses(136) —  (136) 
Held-To-Maturity Securities,
at Fair Value		208,512  33,363  241,875  
Held-To-Maturity Securities,
Pledged as Collateral, at Fair Value		227,528  
Maturities of Debt Securities,
at Amortized Cost:
Within One Year$19,115  $3,800  $22,915  
From 1 - 5 Years138,225  28,125  166,350  
From 5 - 10 Years43,189  —  43,189  
Over 10 Years1,063  —  1,063  
Maturities of Debt Securities,
at Fair Value:
Within One Year$19,199  $3,933  $23,132  
From 1 - 5 Years142,973  29,430  172,403  
From 5 - 10 Years45,260  —  45,260  
Over 10 Years1,080  —  1,080  
Securities in a Continuous
Loss Position, at Fair Value:
Less than 12 Months$1,433  $—  $1,433  
12 Months or Longer1,358  —  1,358  
Total$2,791  $—  $2,791  
Number of Securities in a
Continuous Loss Position		8  —  8  
Unrealized Losses on Securities
in a Continuous Loss Position:
Less than 12 Months$87  $—  $87  
12 Months or Longer49  —  49  
Total$136  $—  $136  
Disaggregated Details:
US Government Agency
Securities, at Amortized Cost		$11,706  
US Government Agency
Securities, at Fair Value		12,131  
Government Sponsored Entity
Securities, at Amortized Cost		20,219  
Government Sponsored Entity
Securities, at Fair Value		21,232  
13

Held-To-Maturity Securities
  
State and
Municipal
Obligations
 
Mortgage-
Backed
Securities
 
Total
Held-To
Maturity
Securities
June 30, 2019      
Held-To-Maturity Securities,
  at Amortized Cost
 $220,529
 $42,012
 $262,541
Held-To-Maturity Securities,
  at Fair Value
 223,654
 42,414
 266,068
Gross Unrealized Gains 3,206
 415
 3,621
Gross Unrealized Losses 81
 13
 94
Held-To-Maturity Securities,
  Pledged as Collateral
     251,639
       
Maturities of Debt Securities,
  at Amortized Cost:
      
Within One Year $24,060
 $1,884
 $25,944
From 1 - 5 Years 114,782
 40,128
 154,910
From 5 - 10 Years 80,037
 —
 80,037
Over 10 Years 1,650
 —
 1,650
       
Maturities of Debt Securities,
  at Fair Value:
      
Within One Year $24,109
 $1,907
 $26,016
From 1 - 5 Years 116,273
 40,507
 156,780
From 5 - 10 Years 81,593
 —
 81,593
Over 10 Years 1,679
 —
 1,679
       
Securities in a Continuous
  Loss Position, at Fair Value:
      
Less than 12 Months $159
 $(67) $92
12 Months or Longer 14,374
 1,711
 16,085
Total $14,533
 $1,644
 $16,177
       
Number of Securities in a
  Continuous Loss Position
 36
 1
 37
       
Unrealized Losses on Securities
   in a Continuous Loss Position:
      
Less than 12 Months $—
 $—
 $—
12 Months or Longer 81
 13
 94
Total $81
 $13
 $94
       
Disaggregated Details:      
US Government Agency
  Securities, at Amortized Cost
   $1,942
  
US Government Agency
  Securities, at Fair Value
   1,948
  
Government Sponsored Entity
  Securities, at Amortized Cost
   40,070
  
Government Sponsored Entity
Securities, at Fair Value		   40,466
  
       


Held-To-Maturity Securities
State and
Municipal
Obligations		Mortgage-
Backed
Securities		Total
Held-To
Maturity
Securities
December 31, 2019
Held-To-Maturity Securities,
at Amortized Cost		$208,243  $36,822  $245,065  
Gross Unrealized Gains4,170  477  4,647  
Gross Unrealized Losses(94) —  (94) 
Held-To-Maturity Securities,
at Fair Value		212,319  37,299  249,618  
Held-To-Maturity Securities,
Pledged as Collateral, at Fair Value		237,969  
Securities in a Continuous
Loss Position, at Fair Value:
Less than 12 Months$1,438  $—  $1,438  
12 Months or Longer1,994  —  1,994  
Total$3,432  $—  $3,432  
Number of Securities in a
Continuous Loss Position		10  —  10  
Unrealized Losses on
Securities in a Continuous
Loss Position:
Less than 12 Months$85  $—  $85  
12 Months or Longer9  —  9  
Total$94  $—  $94  
Disaggregated Details:
US Government Agency
Securities, at Amortized Cost		$1,703  
US Government Agency
Securities, at Fair Value		1,720  
Government Sponsored Entity
Securities, at Amortized Cost		35,119  
Government Sponsored Entity
Securities, at Fair Value		35,579  
June 30, 2019
Held-To-Maturity Securities,
at Amortized Cost		$220,529  $42,012  $262,541  
Gross Unrealized Gains3,206  415  3,621  
Gross Unrealized Losses(81) (13) (94) 
Held-To-Maturity Securities,
at Fair Value		223,654  42,414  266,068  
Held-To-Maturity Securities,
Pledged as Collateral, at Fair Value		251,639  
Securities in a Continuous
Loss Position, at Fair Value:
Less than 12 Months$159  $(67) $92  
12 Months or Longer14,374  1,711  16,085  
Total$14,533  $1,644  $16,177  
Number of Securities in a
Continuous Loss Position		36  1  37  
Unrealized Losses on
Securities in a Continuous
Loss Position:
Less than 12 Months$—  $—  $—  
14

Held-To-Maturity Securities
  
State and
Municipal
Obligations
 
Mortgage-
Backed
Securities
 
Total
Held-To
Maturity
Securities
December 31, 2018      
Held-To-Maturity Securities,
  at Amortized Cost
 $235,782
 $47,694
 $283,476
Held-To-Maturity Securities,
  at Fair Value
 233,359
 46,979
 280,338
Gross Unrealized Gains 486
 —
 486
Gross Unrealized Losses 2,909
 715
 3,624
Held-To-Maturity Securities,
  Pledged as Collateral
     266,341
       
Securities in a Continuous
  Loss Position, at Fair Value:
      
Less than 12 Months $32,093
 $33,309
 $65,402
12 Months or Longer 110,947
 13,670
 124,617
Total $143,040
 $46,979
 $190,019
Number of Securities in a
  Continuous Loss Position
 411
 47
 458
       
Unrealized Losses on
  Securities in a Continuous
  Loss Position:
      
Less than 12 Months $162
 $456
 $618
12 Months or Longer 2,747
 259
 3,006
Total $2,909
 $715
 $3,624
      
Disaggregated Details:      
US Government Agency
  Securities, at Amortized Cost
   $2,180
  
US Government Agency
  Securities, at Fair Value
   2,143
  
Government Sponsored Entity
  Securities, at Amortized Cost
   45,514
  
Government Sponsored Entity
Securities, at Fair Value		   44,836
  
       
June 30, 2018      
Held-To-Maturity Securities,
  at Amortized Cost
 $244,016
 $53,869
 $297,885
Held-To-Maturity Securities,
  at Fair Value
 239,841
 52,764
 292,605
Gross Unrealized Gains 497
 —
 497
Gross Unrealized Losses 4,672
 1,105
 5,777
Held-To-Maturity Securities,
  Pledged as Collateral
     278,627
       
Securities in a Continuous
  Loss Position, at Fair Value:
      
Less than 12 Months $68,612
 $49,977
 $118,589
12 Months or Longer 90,948
 2,787
 93,735
Total $159,560
 $52,764
 $212,324
Number of Securities in a
  Continuous Loss Position
 465
 47
 512
       
Unrealized Losses on
  Securities in a Continuous
  Loss Position:
      
Less than 12 Months $633
 $1,021
 $1,654
12 Months or Longer 4,039
 84
 4,123
Total $4,672
 $1,105
 $5,777
      
Held-To-Maturity Securities
State and
Municipal
Obligations		Mortgage-
Backed
Securities		Total
Held-To
Maturity
Securities
12 Months or Longer81  13  94  
Total$81  $13  $94  
June 30, 2019
Disaggregated Details:
US Government Agency
Securities, at Amortized Cost		$1,942  
US Government Agency
Securities, at Fair Value		1,948  
Government Sponsored Entity
Securities, at Amortized Cost		40,070  
Government Sponsored Entity
Securities, at Fair Value		40,466  


Held-To-Maturity Securities
  
State and
Municipal
Obligations
 
Mortgage-
Backed
Securities
 
Total
Held-To
Maturity
Securities
June 30, 2018      
Disaggregated Details:      
US Government Agency
  Securities, at Amortized Cost
   $3,265
  
US Government Agency
  Securities, at Fair Value
   2,346
  
Government Sponsored Entity
  Securities, at Amortized Cost
   50,604
  
Government Sponsored Entity
Securities, at Fair Value		   50,418
  


In the tables above, maturities of mortgage-backed securities are included based on their expected average lives. Actual maturities will differ because issuers may have the right to call or prepay obligations with or without prepayment penalties.
Securities in a continuous loss position, in the tables above for June 30, 2019,2020, December 31, 20182019 and June 30, 2018,2019, do not reflect any deterioration of the credit worthiness of the issuing entities.
 U.S. government agency securities, including mortgage-backed securities, are all rated AAA by Moody's and AA+ by Standard and Poor's.  The state and municipal obligations are general obligations supported by the general taxing authority of the issuer, and in some cases are insured.  Obligations issued by school districts are supported by state aid.  For any non-rated municipal securities, creditCredit analysis is performed in-house based upon data that has been submitted by the issuers to the New York State Comptroller. That analysis shows no deterioration in the credit worthiness of the municipalities.  Subsequent to June 30, 2019,2020, there were no securities downgraded below investment grade.  
The unrealized losses on these temporarily impaired securities are primarily the result of changes in interest rates for fixed rate securities where the interest rate received is less than the current rate available for new offerings of similar securities, changes in market spreads as a result of shifts in supply and demand, and/or changes in the level of prepayments for mortgage related securities. Because we do not currently intendthere is no current intention to sell any of our temporarily impaired securities, and because it is not more likely-than-not welikely than not that it would be required to sell the securities prior to recovery, the impairment is considered temporary.
Pledged securities, in the tables above, are primarily used to collateralize state and municipal deposits, as required under New York State law. A small portion of the pledged securities are used to collateralize repurchase agreements and pooled deposits of our trust customers.


The following table is the schedule of Equity Securities at June 30, 2019,2020, December 31, 20182019 and June 30, 2018:2019:
Equity Securities
June 30, 2020December 31, 2019June 30, 2019
Equity Securities, at Fair Value$1,583$2,063$1,850
Equity Securities
     
  June 30, 2019December 31, 2018June 30, 2018
Equity Securities, at Fair Value $1,850$1,774$1,802
     


The following is a summary of realized and unrealized gains and losses recognized in net income on equity securities during the three- and six-month periods ended June 30, 20192020 and 2018:2019:
Quarterly Period Ended:Year-to-Date Period Ended:
June 30, 2020June 30, 2019June 30, 2020June 30, 2019
Net (Loss) Gain on Equity Securities$(106) $—  $(480) $76  
Less: Net gain (loss) recognized during the reporting period on equity securities sold during the period—  —  —  —  
Unrealized net (loss) gain recognized during the reporting period on equity securities still held at the reporting date$(106) $—  $(480) $76  
15
 Quarterly Period Ended: Year-to-Date Period Ended:
 June 30, 2019 June 30, 2018 June 30, 2019 June 30, 2018
Net Gain on Equity Securities$—
 $223
 $76
 $241
Less: Net gain (loss) recognized during the reporting period on equity securities sold during the period—
 —
 —
 —
Unrealized net gain recognized during the reporting period on equity securities still held at the reporting date$—
 $223
 $76
 $241
        



Note 3. LOANS (In Thousands)



Loan Categories and Past Due Loans


The following table presents loan balances outstanding as of June 30, 2019,2020, December 31, 20182019 and June 30, 20182019 and an analysis of the recorded investment in loans that are past due at these dates.  Generally, Arrow considers a loan past due 30 or more days when the borrower is two payments past due. Loans held-for-sale of $12,007, $150 and $1,433 as of June 30, 2020, December 31, 2019 and June 30, 2019, respectively, are included in the residential real estate balances for current loans.
Schedule of Past Due Loans by Loan CategorySchedule of Past Due Loans by Loan CategorySchedule of Past Due Loans by Loan Category
  Commercial      Commercial
CommercialReal EstateConsumerResidentialTotal
June 30, 2020June 30, 2020
Loans Past Due 30-59 DaysLoans Past Due 30-59 Days$172  $—  $4,696  $194  $5,062  
Loans Past Due 60-89 DaysLoans Past Due 60-89 Days128  —  3,227  481  3,836  
Loans Past Due 90 or more DaysLoans Past Due 90 or more Days116  1,481  1,572  1,637  4,806  
Total Loans Past DueTotal Loans Past Due416  1,481  9,495  2,312  13,704  
Current LoansCurrent Loans276,255  531,551  818,998  921,407  2,548,211  
Total LoansTotal Loans$276,671  $533,032  $828,493  $923,719  $2,561,915  
Loans 90 or More Days Past Due
and Still Accruing Interest		Loans 90 or More Days Past Due
and Still Accruing Interest		$8  $237  $505  $151  $901  
Nonaccrual LoansNonaccrual Loans163  1,439  1,304  2,555  5,461  
December 31, 2019December 31, 2019
Loans Past Due 30-59 DaysLoans Past Due 30-59 Days$150  $—  $5,670  $152  $5,972  
Loans Past Due 60-89 DaysLoans Past Due 60-89 Days42  266  2,700  2,027  5,035  
Loans Past Due 90 or more DaysLoans Past Due 90 or more Days21  326  445  1,807  2,599  
Total Loans Past DueTotal Loans Past Due213  592  8,815  3,986  13,606  
Current LoansCurrent Loans150,447  509,949  802,383  909,735  2,372,514  
Total LoansTotal Loans$150,660  $510,541  $811,198  $913,721  $2,386,120  
Loans 90 or More Days Past Due
and Still Accruing Interest		Loans 90 or More Days Past Due
and Still Accruing Interest		$—  $—  $—  $253  $253  
Nonaccrual LoansNonaccrual Loans81  326  663  2,935  4,005  
Commercial Real Estate Consumer Residential Total
June 30, 2019         June 30, 2019
Loans Past Due 30-59 Days$119
 $—
 $4,935
 $1,606
 $6,660
Loans Past Due 30-59 Days$119  $—  $4,935  $1,606  $6,660  
Loans Past Due 60-89 Days73
 —
 948
 268
 1,289
Loans Past Due 60-89 Days73  —  948  268  1,289  
Loans Past Due 90 or more Days—
 328
 177
 1,337
 1,842
Loans Past Due 90 or more Days—  328  177  1,337  1,842  
Total Loans Past Due192
 328
 6,060
 3,211
 9,791
Total Loans Past Due192  328  6,060  3,211  9,791  
Current Loans138,139
 489,946
 772,964
 869,468
 2,270,517
Current Loans138,139  489,946  772,964  869,468  2,270,517  
Total Loans$138,331
 $490,274
 $779,024
 $872,679
 $2,280,308
Total Loans$138,331  $490,274  $779,024  $872,679  $2,280,308  
         
Loans 90 or More Days Past Due
and Still Accruing Interest
$—
 $220
 $45
 $192
 $457
Loans 90 or More Days Past Due
and Still Accruing Interest		$—  $220  $45  $192  $457  
Nonaccrual Loans58
 248
 412
 4,231
 4,949
Nonaccrual Loans58  248  412  4,231  4,949  
         
December 31, 2018         
Loans Past Due 30-59 Days$121
 $108
 $5,369
 $281
 $5,879
Loans Past Due 60-89 Days49
 —
 2,136
 1,908
 4,093
Loans Past Due 90 or more Days—
 789
 572
 1,844
 3,205
Total Loans Past Due170
 897
 8,077
 4,033
 13,177
Current Loans136,720
 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 Loans403
 789
 658
 2,309
 4,159
         
June 30, 2018         
Loans Past Due 30-59 Days$3
 $—
 $4,769
 $2,004
 $6,776
Loans Past Due 60-89 Days15
 —
 720
 273
 1,008
Loans Past Due 90 or more Days28
 963
 231
 771
 1,993
Total Loans Past Due46
 963
 5,720
 3,048
 9,777
Current Loans118,835
 463,430
 656,188
 809,632
 2,048,085
Total Loans$118,881
 $464,393
 $661,908
 $812,680
 $2,057,862
         
Loans 90 or More Days Past Due
and Still Accruing Interest
$—
 $—
 $28
 $142
 $170
Nonaccrual Loans633
 963
 459
 1,825
 3,880
        

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. Generally, these loans carry a higher risk than commercial real estate loans, due primarily to the nature of the underlying collateral, which can be business assets such as equipment and accounts receivable and generally have a lower liquidation value than real estate. In the event of default by the borrower, the Company may be required to liquidate collateral at deeply discounted values. To reduce the risk, management usually obtains personal guarantees to support the borrowing, as permitted by applicable law.





16

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


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


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


Allowance for Loan Losses


The following table presents a roll-forward of the allowance for loan losses and other information pertaining to the allowance for loan losses:
Allowance for Loan Losses
Commercial
CommercialReal EstateConsumerResidentialTotal
Roll-forward of the Allowance for Loan Losses for the Quarterly Periods:
March 31, 2020$1,639  $7,065  $10,004  $4,929  $23,637  
Charge-offs(6) —  (431) (50) (487) 
Recoveries3  —  107  —  110  
Provision281  1,296  959  504  3,040  
June 30, 2020$1,917  $8,361  $10,639  $5,383  $26,300  
March 31, 2019$1,250  $5,589  $9,409  $4,125  $20,373  
Charge-offs—  —  (368) —  (368) 
Recoveries—  —  235  —  235  
Provision(19) (130) 378  226  455  
June 30, 2019$1,231  $5,459  $9,654  $4,351  $20,695  
17

Allowance for Loan LossesAllowance for Loan LossesAllowance for Loan Losses
  Commercial      Commercial
Commercial Real Estate Consumer Residential TotalCommercialReal EstateConsumerResidentialTotal
Roll-forward of the Allowance for Loan Losses for the Quarterly Periods:         
March 31, 2019$1,250
 $5,589
 $9,409
 $4,125
 $20,373
Roll-forward of the Allowance for Loan Losses for the Year-to-Date Periods:Roll-forward of the Allowance for Loan Losses for the Year-to-Date Periods:
December 31, 2019December 31, 2019$1,386  $5,830  $9,408  $4,563  $21,187  
Charge-offsCharge-offs(20) —  (898) (50) (968) 
RecoveriesRecoveries3  —  266  —  269  
ProvisionProvision548  2,531  1,863  870  5,812  
June 30, 2020June 30, 2020$1,917  $8,361  $10,639  $5,383  $26,300  
December 31, 2018December 31, 2018$1,218  $5,644  $8,882  $4,452  $20,196  
Charge-offs—
 —
 (368) —
 (368)Charge-offs(1) (29) (786) (14) (830) 
Recoveries—
 —
 235
 —
 235
Recoveries—  —  402  —  402  
Provision(19) (130) 378
 226
 455
Provision14  (156) 1,156  (87) 927  
June 30, 2019$1,231
 $5,459
 $9,654
 $4,351
 $20,695
June 30, 2019$1,231  $5,459  $9,654  $4,351  $20,695  
         
March 31, 2018$1,119
 $5,412
 $8,019
 $4,507
 $19,057
Charge-offs—
 —
 (248) (16) (264)
Recoveries—
 3
 215
 —
 218
Provision(175) 423
 351
 30
 629
June 30, 2018$944
 $5,838
 $8,337
 $4,521
 $19,640
June 30, 2020June 30, 2020
Allowance for loan losses - Loans Individually Evaluated for ImpairmentAllowance for loan losses - Loans Individually Evaluated for Impairment$19  $—  $—  $37  $56  
Allowance for loan losses - Loans Collectively Evaluated for ImpairmentAllowance for loan losses - Loans Collectively Evaluated for Impairment1,898  8,361  10,639  5,346  26,244  
Ending Loan Balance - Individually Evaluated for ImpairmentEnding Loan Balance - Individually Evaluated for Impairment51  1,134  116  952  2,253  
Ending Loan Balance - Collectively Evaluated for ImpairmentEnding Loan Balance - Collectively Evaluated for Impairment$276,620  $531,898  $828,377  $922,767  $2,559,662  
         
December 31, 2019December 31, 2019
Allowance for loan losses - Loans Individually Evaluated for ImpairmentAllowance for loan losses - Loans Individually Evaluated for Impairment$5  $—  $—  $42  $47  
Allowance for creditlosses - Loans Collectively Evaluated for ImpairmentAllowance for creditlosses - Loans Collectively Evaluated for Impairment1,381  5,830  9,408  4,521  21,140  
Ending Loan Balance - Individually Evaluated for ImpairmentEnding Loan Balance - Individually Evaluated for Impairment35  —  107  959  1,101  
Ending Loan Balance - Collectively Evaluated for ImpairmentEnding Loan Balance - Collectively Evaluated for Impairment$150,625  $510,541  $811,091  $912,762  $2,385,019  
18

Allowance for Loan Losses
   Commercial      
 Commercial Real Estate Consumer Residential Total
Roll-forward of the Allowance for Loan Losses for the Year-to-Date Periods:         
December 31, 2018$1,218
 $5,644
 $8,882
 $4,452
 $20,196
Charge-offs(1) (29) (786) (14) (830)
Recoveries—
 —
 402
 —
 402
Provision14
 (156) 1,156
 (87) 927
June 30, 2019$1,231
 $5,459
 $9,654
 $4,351
 $20,695
          
December 31, 2017$1,873
 $4,504
 $7,604
 $4,605
 $18,586
Charge-offs(16) —
 (595) (23) (634)
Recoveries—
 12
 301
 —
 313
Provision(913) 1,322
 1,027
 (61) 1,375
June 30, 2018$944
 $5,838
 $8,337
 $4,521
 $19,640
          
June 30, 2019         
Allowance for loan losses - Loans Individually Evaluated for Impairment$5
 $—
 $—
 $—
 $5
Allowance for loan losses - Loans Collectively Evaluated for Impairment1,226
 5,459
 9,654
 4,351
 20,690
Ending Loan Balance - Individually Evaluated for Impairment37
 1
 124
 2,402
 2,564
Ending Loan Balance - Collectively Evaluated for Impairment$138,294
 $490,273
 $778,900
 $870,277
 $2,277,744
          
December 31, 2018         
Allowance for loan losses - Loans Individually Evaluated for Impairment$—
 $—
 $—
 $4
 $4
Allowance for loan losses - Loans Collectively Evaluated for Impairment1,218
 5,644
 8,882
 4,448
 20,192
Ending Loan Balance - Individually Evaluated for Impairment430
 793
 101
 1,899
 3,223
Ending Loan Balance - Collectively Evaluated for Impairment$136,460
 $483,769
 $719,409
 $853,354
 $2,192,992
          
June 30, 2018         
Allowance for loan losses - Loans Individually Evaluated for Impairment$88
 $44
 $—
 $53
 $185
Allowance for loan losses - Loans Collectively Evaluated for Impairment856
 5,794
 8,337
 4,468
 19,455
Ending Loan Balance - Individually Evaluated for Impairment489
 813
 110
 1,080
 2,492
Ending Loan Balance - Collectively Evaluated for Impairment$118,392
 $463,580
 $661,798
 $811,600
 $2,055,370
Allowance for Loan Losses
Commercial
CommercialReal EstateConsumerResidentialTotal
June 30, 2019
Allowance for loan losses - Loans Individually Evaluated for Impairment$5  $—  $—  $—  $5  
Allowance for credit losses - Loans Collectively Evaluated for Impairment1,226  5,459  9,654  4,351  20,690  
Ending Loan Balance - Individually Evaluated for Impairment37  1  124  2,402  2,564  
Ending Loan Balance - Collectively Evaluated for Impairment$138,294  $490,273  $778,900  $870,277  $2,277,744  
        


Through the provision for loan losses, an allowance for loan losses is maintained that reflects the best estimate of the incurred risk of loss in the Company’s loan portfolio as of the balance sheet date. Additions are made to the allowance for loan losses through a periodic provision for loan losses. Actual loan losses are charged against the allowance for loan losses when loans are deemed uncollectible and recoveries of amounts previously charged off are recorded as credits to the allowance for loan losses.
Our loan officers and risk managers meet at least quarterly to discuss and review the conditions and risks associated with certain criticized and classified commercial-related relationships. In addition, our independent internal loan review department performs periodic reviews of the credit quality indicators on individual loans in the commercial loan portfolio.
We useThe Company uses a two-step process to determine the provision for loan losses and the amount of the allowance for loan losses. We perform anAn evaluation of impaired loans is performed on a quarterly basis. Impaired loans are generally nonaccrual loans over $250 thousand and all troubled debt restructured loans. OurSpecific reserves on individually identified impaired loans that are generally considered to benot collateral dependent with the charge-off, if any, determinedare measured based on the present value of expected future cash flows discounted at the original effective interest rate of each loan. For loans that are collateral dependent, impairment is measured based on the fair value of the collateral less estimated selling costs, and such impaired amounts are generally charged off. In general, Arrow's impaired loans are collateral dependent impaired loans that have limited exposure or require limited specific reserves because of the amount of collateral support with respect to sell.these loans. Interest payments on impaired loans are typically applied to principal unless collectability of the principal amount is reasonably assured. In these cases, interest is recognized on a cash basis.
The remainder of the portfolio is evaluated on a pooled basis, as described below. For each homogeneous loan pool, we estimate a total loss factor is estimated based on the historical net loss rates adjusted for applicable qualitative factors. We update theThe total loss factors assigned to each loan category are updated on a quarterly basis. For the commercial, commercial construction and commercial real estate categories, we further segregate the loan categories are further segregated by credit risk profile (pools of loans graded pass, special mention and accruing substandard). Additional description of the credit risk classifications is detailed in the Credit Quality Indicators section of this note.
We determine theThe historical net loss rate is determined for each loan category using a trailing three-year net charge-off average. While historical net loss experience provides a reasonable starting point for analysis, historical net losses, or even recent trends in net losses, do not by themselves form a sufficient basis to determine the appropriate level of the allowance for loan losses. Therefore, we also consider and adjust historical net loss factors are considered and adjusted for qualitative factors that impact the incurred risk of loss associated with the loan categories within the total loan portfolio. These include:
•Changes in the volume and severity of past due, nonaccrual and adversely classified loans
•Changes in the nature and volume of the portfolio and in the terms of loans
•Changes in the value of the underlying collateral for collateral dependent loans
•Changes in lending policies and procedures, including changes in underwriting standards and collection, charge-off, and recovery practices not considered elsewhere in estimating credit losses
•Changes in the quality of the loan review system
•Changes in the experience, ability, and depth of lending management and other relevant staff
•Changes in international, national, regional, and local economic and business conditions and developments that affect the collectibility of the portfolio
•The existence and effect of any concentrations of credit, and changes in the level of such concentrations
•The effect of other external factors such as competition and legal and regulatory requirements on the level of estimated credit losses in the  existing portfolio or pool
        

19




Loan Credit Quality Indicators


The following table presents the credit quality indicators by loan category at June 30, 2019,2020, December 31, 20182019 and June 30, 2018:2019:
Loan Credit Quality Indicators
Commercial
CommercialReal EstateConsumerResidentialTotal
June 30, 2020
Credit Risk Profile by Creditworthiness Category:
Satisfactory$268,315  $498,049  $766,364  
Special Mention1,560  5,830  7,390  
Substandard6,796  29,153  35,949  
Doubtful—  —  —  
Credit Risk Profile Based on Payment Activity:
Performing$826,684  $921,013  $1,747,697  
Nonperforming1,809  2,706  4,515  
December 31, 2019
Credit Risk Profile by Creditworthiness Category:
Satisfactory$144,283  $484,267  $628,550  
Special Mention32  263  295  
Substandard6,345  26,011  32,356  
Doubtful—  —  —  
Credit Risk Profile Based on Payment Activity:
Performing$810,535  $910,533  $1,721,068  
Nonperforming663  3,188  3,851  
June 30, 2019
Credit Risk Profile by Creditworthiness Category:
Satisfactory$131,886  $461,211  $593,097  
Special Mention123  2,524  2,647  
Substandard6,322  26,539  32,861  
Doubtful—  —  —  
Credit Risk Profile Based on Payment Activity:
Performing$778,567  $868,256  $1,646,823  
Nonperforming457  4,423  4,880  
Loan Credit Quality Indicators
   Commercial      
 Commercial Real Estate Consumer Residential Total
June 30, 2019         
Credit Risk Profile by Creditworthiness Category:      ��  
Satisfactory$131,886
 $461,211
     $593,097
Special Mention123
 2,524
     2,647
Substandard6,322
 26,539
     32,861
Doubtful—
 —
     —
Credit Risk Profile Based on Payment Activity:         
Performing    $778,567
 $868,256
 $1,646,823
Nonperforming    457
 4,423
 4,880
          
December 31, 2018         
Credit Risk Profile by Creditworthiness Category:         
Satisfactory$129,584
 $456,868
     $586,452
Special Mention—
 —
     —
Substandard7,306
 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
          
June 30, 2018         
Credit Risk Profile by Creditworthiness Category:         
Satisfactory$110,911
 $436,670
     $547,581
Special Mention5,948
 —
     5,948
Substandard2,023
 26,915
     28,938
Doubtful—
 807
     807
Credit Risk Profile Based on Payment Activity:         
Performing    $661,449
 $810,855
 $1,472,304
Nonperforming    459
 1,825
 2,284


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.
The recorded investment of consumer mortgage loans secured by residential real estate properties for which formal foreclosure proceedings are in process is $1.4 million.
For the allowance calculation, we use an internally developed system of five credit quality indicators is used to rate the credit worthiness of each commercial loan defined as follows:


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


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


20

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


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


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


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


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





21


Impaired Loans


The following table presents information on impaired loans as of June 30, 2020, December 31, 2019 and June 30, 2019 based on whether the impaired loan has a recorded related allowance or has no recorded related allowance:
Impaired Loans
Commercial
CommercialReal EstateConsumerResidentialTotal
June 30, 2020
Recorded Investment:
With No Related Allowance$3  $1,130  $116  $697  $1,946  
With a Related Allowance46  —  —  256  302  
Unpaid Principal Balance:
With No Related Allowance3  1,134  116  697  1,950  
With a Related Allowance47  —  —  256  303  
December 31, 2019
Recorded Investment:
With No Related Allowance$—  $—  $108  $699  $807  
With a Related Allowance34  —  —  260  294  
Unpaid Principal Balance:
With No Related Allowance—  —  107  699  806  
With a Related Allowance35  —  —  260  295  
June 30, 2019
Recorded Investment:
With No Related Allowance$—  $1  $124  $2,402  $2,527  
With a Related Allowance37  —  —  —  37  
Unpaid Principal Balance:
With No Related Allowance—  1  124  2,402  $2,527  
With a Related Allowance36  —  —  —  36  
For the Quarter Ended:
June 30, 2020
Average Recorded Balance:
With No Related Allowance$2  $565  $112  $698  $1,377  
With a Related Allowance40  —  —  258  298  
Interest Income Recognized:
With No Related Allowance—  10  —  —  10  
With a Related Allowance—  —  —  —  —  
Cash Basis Income:
With No Related Allowance—  —  —  —  —  
With a Related Allowance—  —  —  —  —  
June 30, 2019
Average Recorded Balance:
With No Related Allowance$19  $195  $113  $2,410  $2,737  
With a Related Allowance19  —  —  —  19  
Interest Income Recognized:
With No Related Allowance—  —  —  —  —  
With a Related Allowance—  —  —  —  —  
Cash Basis Income:
With No Related Allowance—  —  —  —  —  
With a Related Allowance—  —  —  —  —  
Impaired Loans
   Commercial      
 Commercial Real Estate Consumer Residential Total
June 30, 2019  
      
Recorded Investment:         
With No Related Allowance$—
 $1
 $124
 $2,402
 $2,527
With a Related Allowance37
 —
 —
 —
 37
Unpaid Principal Balance:         
With No Related Allowance—
 1
 124
 2,402
 2,527
With a Related Allowance36
 —
 —
 —
 36
          
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 Allowance429
 793
 100
 1,606
 2,928
With a Related Allowance—
 —
 —
 293
 293
          
June 30, 2018         
Recorded Investment:         
With No Related Allowance$—
 $7
 $110
 $784
 $901
With a Related Allowance479
 790
 —
 351
 1,620
Unpaid Principal Balance:         
With No Related Allowance—
 7
 110
 797
 $914
With a Related Allowance489
 806
 —
 283
 1,578
          
For the Quarter Ended:         
June 30, 2019         
Average Recorded Balance:         
With No Related Allowance$19
 $195
 $113
 $2,410
 $2,737
With a Related Allowance19
 —
 —
 —
 19
Interest Income Recognized:         
With No Related Allowance—
 —
 —
 —
 —
With a Related Allowance—
 —
 —
 —
 —
Cash Basis Income:         
With No Related Allowance—
 —
 —
 —
 —
With a Related Allowance—
 —
 —
 —
 —
          
June 30, 2018         
Average Recorded Balance:         
With No Related Allowance$—
 $8
 $100
 $1,030
 $1,138
With a Related Allowance481
 787
 —
 354
 1,622
Interest Income Recognized:         
With No Related Allowance—
 —
 —
 —
 —
With a Related Allowance—
 —
 —
 —
 —
Cash Basis Income:         
With No Related Allowance—
 —
 —
 —
 —
With a Related Allowance—
 —
 —
 —
 —


At June 30, 2019,2020, December 31, 20182019 and June 30, 2018,2019, all impaired loans were considered to be collateral dependent and were therefore evaluated for impairment based on the fair value of collateral less estimated cost to sell. Interest income recognized in the table above represents income earned after the loans became impaired and includes restructured loans in compliance with their modified terms and nonaccrual loans where we have recognized interest income was recognized on a cash basis.



22


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
CommercialReal EstateConsumerResidentialTotal
For the Quarter Ended:
June 30, 2020
Number of Loans—  —  1  —  1  
Pre-Modification Outstanding Recorded Investment$—  $—  $16  $—  $16  
Post-Modification Outstanding Recorded Investment—  —  16  —  16  
Subsequent Default, Number of Contracts—  —  —  —  —  
Subsequent Default, Recorded Investment—  —  —  —  —  
June 30, 2019
Number of Loans—  —  4  —  4  
Pre-Modification Outstanding Recorded Investment$—  $—  $34  $—  $34  
Post-Modification Outstanding Recorded Investment—  —  34  —  34  
Subsequent Default, Number of Contracts—  —  —  —  —  
Subsequent Default, Recorded Investment—  —  —  —  —  
Loans Modified in Trouble Debt Restructurings During the Period
   Commercial      
 Commercial Real Estate Consumer Residential Total
For the Quarter Ended:         
June 30, 2019         
Number of Loans—
 —
 4
 —
 4
Pre-Modification Outstanding Recorded Investment$—
 $—
 $34
 $—
 $34
Post-Modification Outstanding Recorded Investment—
 —
 34
 —
 34
Subsequent Default, Number of Contracts—
 —
 —
 —
 —
Subsequent Default, Recorded Investment—
 —
 —
 —
 —
          
June 30, 2018         
Number of Loans—
 —
 3
 —
 3
Pre-Modification Outstanding Recorded Investment$—
 $—
 $26
 $—
 $26
Post-Modification Outstanding Recorded Investment—
 —
 26
 —
 26
Subsequent Default, Number of Contracts—
 —
 —
 —
 —
Subsequent Default, Recorded Investment—
 —
 —
 —
 —
          
For the Year-To-Date Period Ended:         
June 30, 2019         
Number of Loans—
 —
 5
 —
 5
Pre-Modification Outstanding Recorded Investment$—
 $—
 $47
 $—
 $47
Post-Modification Outstanding Recorded Investment—
 —
 47
 —
 47
Subsequent Default, Number of Contracts—
 —
 —
 —
 —
Subsequent Default, Recorded Investment—
 —
 —
 —
 —
          
June 30, 2018         
Number of Loans—
 —
 4
 —
 4
Pre-Modification Outstanding Recorded Investment$—
 $—
 $28
 $—
 $28
Post-Modification Outstanding Recorded Investment—
 —
 28
 —
 28
Subsequent Default, Number of Contracts—
 —
 —
 —
 —
Subsequent Default, Recorded Investment—
 —
 —
 —
 —


In general, prior to the novel coronavirus (COVID-19) pandemic, loans requiring modification are restructured to accommodate the projected cash-flows of the borrower. Such modifications may involve a reduction of the interest rate, a significant deferral of payments or forgiveness of a portion of the outstanding principal balance. As indicated in the table above, no loans modified during the preceding twelve months subsequently defaulted as of June 30, 2019.2020. In accordance with the Coronavirus Aid, Relief, and Economic Security (CARES) Act, if a short-term loan modification (e.g. six months) is made for a borrower as the result of the COVID-19 pandemic, and who was current on contractual payments as of December 31, 2019, this modification is not considered a troubled debt restructuring (TDR).




Note 4. GUARANTEESCOMMITMENTS AND CONTINGENCIES (In Thousands)


The following table presents the notional amount and fair value of Arrow's off-balance sheet commitments to extend credit and commitments under standby letters of credit as of June 30, 2019,2020, December 31, 20182019 and June 30, 2018:2019:
Commitments to Extend Credit and Letters of CreditCommitments to Extend Credit and Letters of CreditCommitments to Extend Credit and Letters of Credit
June 30, 2019 December 31, 2018 June 30, 2018June 30, 2020December 31, 2019June 30, 2019
Notional Amount:     Notional Amount:
Commitments to Extend Credit$329,337
 $321,143
 $324,173
Commitments to Extend Credit$378,430  $349,718  $329,337  
Standby Letters of Credit4,396
 4,466
 3,941
Standby Letters of Credit3,276  3,129  4,396  
Fair Value:     Fair Value:
Commitments to Extend Credit$—
 $—
 $—
Commitments to Extend Credit$—  $—  $—  
Standby Letters of Credit20
 12
 11
Standby Letters of Credit29  31  20  
        
Arrow is party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers.  These financial instruments include commitments to extend credit and standby letters of credit.  Commitments to extend credit include home equity lines of credit, commitments for residential and commercial construction loans and other personal and commercial lines of credit.  Those instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the consolidated balance sheets.  The contract or notional amounts of those instruments reflect the extent of the involvement Arrow has in particular classes of financial instruments.
23

Arrow's exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby letters of credit is represented by the contractual notional amount of those instruments.  Arrow uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments.
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract.  Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee.  Since many of the commitments are not expected to be fully drawn upon, the total commitment amounts do not necessarily represent future cash requirements.  Arrow evaluates each customer's creditworthiness on a case-by-case basis.  Home equity lines of credit are secured by residential real estate.  Construction lines of credit are secured by underlying real estate.  For other lines of credit, the amount of collateral obtained, if deemed necessary by Arrow upon extension of credit, is based on management's credit evaluation of the counterparty.  Collateral held varies, but may include accounts receivable, inventory, property, plant and equipment, and income-producing commercial properties.  Most of the commitments are variable rate instruments.
Arrow does not issue any guarantees that would require liability-recognition or disclosure, other than its standby letters of credit.
Arrow has issued conditional commitments in the form of standby letters of credit to guarantee paymentpayment 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 June 30, 2019,2020, December 31, 20182019 and June 30, 20182019 represent the maximum potential future payments Arrow could be required to make.  Typically, these instruments have terms of 12 months or less and expire unused; therefore, the total amounts do not necessarily represent future cash requirements.  Each customer is evaluated individually for creditworthiness under the same underwriting standards used for commitments to extend credit and on-balance sheet instruments. Company policies governing loan collateral apply to standby letters of credit at the time of credit extension.  Loan-to-value ratios will generally range from 50% for movable assets, such as inventory, to 100% for liquid assets, such as bank CD's.  Fees for standby letters of credit range from 1% to 3% of the notional amount.  Fees are collected upfront and amortized over the life of the commitment. The carrying amount and fair value of Arrow's standby letters of credit at June 30, 2019,2020, December 31, 20182019 and June 30, 2018,2019, were insignificant.  The fair value of standby letters of credit is based on the fees currently charged for similar agreements or the cost to terminate the arrangement with the counterparties.
The fair value of commitments to extend credit is determined by estimating the fees to enter into similar agreements, taking into account the remaining terms and present creditworthiness of the counterparties, and for fixed rate loan commitments, the difference between the current and committed interest rates.  Arrow provides several types of commercial lines of credit and standby letters of credit to its commercial customers.  The pricing of these services is not isolated as Arrow considers the customer's complete deposit and borrowing relationship in pricing individual products and services.  The commitments to extend credit also include commitments under home equity lines of credit, for which Arrow charges no fee.  The carrying value and fair value of commitments to extend credit are not material and Arrow does not expect to incur any material loss as a result of these commitments.
In the normal course of business, Arrow and its subsidiary banks become involved in a variety of routine legal proceedings.  At present, there are no legal proceedings pending or threatened, which in the opinion of management and counsel, would result in a material loss to Arrow.









24

Note 5. COMPREHENSIVE INCOME (In Thousands)


The following table presents the components of other comprehensive income for the three-three and six-month periods ended June 30, 20192020 and 2018:2019:
Schedule of Comprehensive Income
Three Months Ended June 30Six Months Ended June 30,
TaxTax
Before-Tax(Expense)Net-of-TaxBefore-Tax(Expense)Net-of-Tax
AmountBenefitAmountAmountBenefitAmount
2020
Net Unrealized Securities Holding Gains on Securities Available-for-Sale Arising During the Period$2,716  $(695) $2,021  $8,220  $(2,101) $6,119  
Net Unrealized Gains (Losses) on Cash Flow Swap25  (7) 18  (269) 68  (201) 
Amortization of Net Retirement Plan Actuarial Loss78  (20) 58  114  (29) 85  
Amortization of Net Retirement Plan Prior Service Cost52  (13) 39  106  (28) 78  
  Other Comprehensive Income$2,871  $(735) $2,136  $8,171  $(2,090) $6,081  
2019
Net Unrealized Securities Holding Gains on Securities Available-for-Sale Arising During the Period$2,340  $(596) $1,744  $5,128  $(1,304) $3,824  
Amortization of Net Retirement Plan Actuarial Loss179  (46) 133  342  (88) 254  
Amortization of Net Retirement Plan Prior Service Cost57  (14) 43  113  (28) 85  
  Other Comprehensive Income$2,576  $(656) $1,920  $5,583  $(1,420) $4,163  


25
Schedule of Comprehensive Income
 Three Months Ended June 30, Six Months Ended June 30,
   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 Period2,340
 $(596) 1,744
 5,128
 $(1,304) 3,824
Amortization of Net Retirement Plan Actuarial Loss179
 (46) 133
 342
 (88) 254
Amortization of Net Retirement Plan Prior Service Cost57
 (14) 43
 113
 (28) 85
  Other Comprehensive Income$2,576
 $(656) $1,920
 $5,583
 $(1,420) $4,163
            
2018           
Net Unrealized Securities Holding Losses on Securities Available-for-Sale Arising During the Period(853) $218
 (635) (4,185) $1,065
 (3,120)
Amortization of Net Retirement Plan Actuarial Loss103
 (28) 75
 163
 (42) 121
Accretion of Net Retirement Plan Prior Service Cost55
 (14) 41
 54
 (14) 40
  Other Comprehensive Loss$(695) $176
 $(519) $(3,968) $1,009
 $(2,959)





The following table presents the changes in accumulated other comprehensive income by component:
Changes in Accumulated Other Comprehensive Income (Loss) by Component (1)
Unrealized Gains and Losses on Available-for-Sale SecuritiesUnrealized Loss on Cash Flow SwapDefined Benefit Plan ItemsTotal
Net Actuarial Gain (Loss)Net Prior Service (Cost) Credit
For the Quarter-To-Date periods ended:
March 31, 2020$4,563  $(219) $(5,820) $(936) $(2,412) 
Other comprehensive income or loss before reclassifications2,021  18—  —  2,039  
Amounts reclassified from accumulated other comprehensive income—  —  58  39  97  
Net current-period other comprehensive income2,021  18  58  39  2,136  
June 30, 2020$6,584  $(201) $(5,762) $(897) $(276) 
March 31, 2019$(1,617) $—  $(8,850) $(1,100) $(11,567) 
Other comprehensive loss before reclassifications1,744  —  —  —  1,744  
Amounts reclassified from accumulated other comprehensive loss—  —  133  43  176  
Net current-period other comprehensive income1,744  —  133  43  1,920  
June 30, 2019$127  $—  $(8,717) $(1,057) $(9,647) 
For the Year-To-Date periods ended:
December 31, 2019$465  $—  $(5,847) $(975) $(6,357) 
Other comprehensive income or loss before reclassifications6,119  (201) —  —  5,918  
Amounts reclassified from accumulated other comprehensive income—  —  85  78  163  
Net current-period other comprehensive income6,119  (201) 85  78  6,081  
June 30, 2020$6,584  $(201) $(5,762) $(897) $(276) 
December 31, 2018$(3,697) $—  $(8,971) $(1,142) $(13,810) 
Other comprehensive income or loss before reclassifications3,824  —  —  —  3,824  
Amounts reclassified from accumulated other comprehensive income—  —  254  85  339  
Net current-period other comprehensive income3,824  —  254  85  4,163  
June 30, 2019$127  $—  $(8,717) $(1,057) $(9,647) 
Changes in Accumulated Other Comprehensive Income (Loss) by Component (1)
        
 Unrealized Defined Benefit Plan Items  
 Gains and      
 Losses on Net Net Prior  
 Available-for- Actuarial Service  
 Sale Securities Gain (Loss) (Cost) Credit Total
For the Quarter-To-Date periods ended:       
        
March 31, 2019$(1,617) $(8,850) $(1,100) $(11,567)
Other comprehensive income before reclassifications1,744
 —
 —
 1,744
Amounts reclassified from accumulated other comprehensive income
 133
 43
 176
Net current-period other comprehensive income1,744
 133
 43
 1,920
June 30, 2019$127
 $(8,717) $(1,057) $(9,647)
        
March 31, 2018$(4,066) $(6,334) $(885) $(11,285)
Other comprehensive loss before reclassifications(635) —
 —
 (635)
Amounts reclassified from accumulated other comprehensive loss—
 75
 41
 116
Net current-period other comprehensive income (loss)(635) 75
 41
 (519)
June 30, 2018$(4,701) $(6,259) $(844) $(11,804)
        
        
For the Year-To-Date periods ended:       
        
December 31, 2018$(3,697) $(8,971) $(1,142) $(13,810)
Other comprehensive income or loss before reclassifications3,824
 —
 —
 3,824
Amounts reclassified from accumulated other comprehensive income—
 254
 85
 339
Net current-period other comprehensive income3,824
 254
 85
 4,163
June 30, 2019$127
 $(8,717) $(1,057) $(9,647)
        
December 31, 2017$(1,250) $(6,380) $(884) $(8,514)
Other comprehensive income or loss before reclassifications(3,120) —
 —
 (3,120)
Amounts reclassified from accumulated other comprehensive income—
 121
 40
 161
Net current-period other comprehensive income(3,120) 121
 40
 (2,959)
Amounts reclassified from accumulated other comprehensive income$(331)     $(331)
June 30, 2018$(4,701) $(6,259) $(844) $(11,804)
        
 


(1) All amounts are net of tax.

26




The following table presents the reclassifications out of accumulated other comprehensive income:
Reclassifications Out of Accumulated Other Comprehensive Income
 
  Amounts Reclassified  
Details about Accumulated Other from Accumulated Other Affected Line Item in the Statement
Comprehensive Income (Loss) Components Comprehensive Income Where Net Income Is Presented
     
For the Quarter-to-date periods ended:    
     
June 30, 2019    
Amortization of defined benefit pension items:    
Prior-service costs $(57)
(1) 
Salaries and Employee Benefits
Actuarial gains/(losses) (179)
(1) 
Salaries and Employee Benefits
  (236) Total before Tax
  60
 Provision for Income Taxes
  $(176) Net of Tax
     
Total reclassifications for the period $(176) Net of Tax
     
June 30, 2018    
Amortization of defined benefit pension items:    
Prior-service costs $(55)
(1) 
Salaries and Employee Benefits
Actuarial gains/(losses) (103)
(1) 
Salaries and Employee Benefits
  (158) Total before Tax
  42
 Provision for Income Taxes
  $(116) Net of Tax
     
Total reclassifications for the period $(116) Net of Tax
     
For the Year-to-date periods ended:    
     
June 30, 2019    
Unrealized gains and losses on available-for-sale securities $—
 Gain on Securities Transactions
  —
 Total before Tax
  —
 Provision for Income Taxes
  $—
 Net of Tax
     
Amortization of defined benefit pension items:    
Prior-service costs $(113)
(1) 
Salaries and Employee Benefits
Actuarial gains/(losses) (342)
(1) 
Salaries and Employee Benefits
  (455) Total before Tax
  116
 Provision for Income Taxes
  $(339) Net of Tax
     
Total reclassifications for the period $(339) Net of Tax
     
Reclassifications Out of Accumulated Other Comprehensive Income
Amounts Reclassified
Details about Accumulated Otherfrom Accumulated OtherAffected Line Item in the Statement
Comprehensive Income (Loss) ComponentsComprehensive IncomeWhere Net Income Is Presented
For the Quarter-to-date periods ended:
June 30, 2020
Amortization of defined benefit pension items:
Prior-service costs$(52)
(1)
Salaries and Employee Benefits
Actuarial loss(78)
(1)
Salaries and Employee Benefits
(130)Total before Tax
33 Provision for Income Taxes
Total reclassifications for the period$(97)Net of Tax
June 30, 2019
Amortization of defined benefit pension items:
Prior-service costs$(57)
(1)
Salaries and Employee Benefits
Actuarial loss(179)
(1)
Salaries and Employee Benefits
(236)Total before Tax
60 Provision for Income Taxes
Total reclassifications for the period$(176)Net of Tax
For the Year-to-date periods ended:
June 30, 2020
Amortization of defined benefit pension items:
Prior-service costs$(106)
(1)
Salaries and Employee Benefits
Actuarial loss(114)
(1)
Salaries and Employee Benefits
(220)Total before Tax
57 Provision for Income Taxes
Total reclassifications for the period$(163)Net of Tax
June 30, 2019
Amortization of defined benefit pension items:
Prior-service costs$(113)
(1)
Salaries and Employee Benefits
Actuarial loss(342)
(1)
Salaries and Employee Benefits
(455)Total before Tax
116 Provision for Income Taxes
Total reclassifications for the period$(339)Net of Tax


Reclassifications Out of Accumulated Other Comprehensive Income
 
  Amounts Reclassified  
Details about Accumulated Other from Accumulated Other Affected Line Item in the Statement
Comprehensive Income (Loss) Components Comprehensive Income Where Net Income Is Presented
     
June 30, 2018    
Unrealized gains and losses on available-for-sale securities $—
 Gain on Securities Transactions
  —
 Total before Tax
  —
 Provision for Income Taxes
  $—
 Net of Tax
     
Amortization of defined benefit pension items:    
Prior-service costs (54)
(1) 
Salaries and Employee Benefits
Actuarial gains/(losses) $(163)
(1) 
Salaries and Employee Benefits
  (217) Total before Tax
  56
 Provision for Income Taxes
  $(161) Net of Tax
     
Total reclassifications for the period $(161) Net of Tax
     
     


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

27


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


Arrow has established three3 stock-based compensation plans: a 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 27, 20182019 3% stock dividend.


Long Term Incentive Plan

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


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


The following table summarizes information about stock option activity for the year to date period ended June 30, 2019.2020.

SharesWeighted Average Exercise Price
Outstanding at January 1, 2020241,242  $27.58  
Granted50,800  35.28  
Exercised(17,155) 23.74  
Forfeited(2,752) 29.65  
Outstanding at June 30, 2020272,135  29.24  
Vested at Period-End152,322  26.31  
Expected to Vest119,813  32.97  
Stock Options Granted
Weighted Average Grant Date Information:
Fair Value of Options Granted$4.99  
Fair Value Assumptions:
Dividend Yield2.90 %
Expected Volatility20.25 %
Risk Free Interest Rate1.53 %
Expected Lives (in years)6.68

 SharesWeighted Average Exercise Price
   
Outstanding at January 1, 2019284,522
$25.67
Granted52,000
31.71
Exercised(62,712)21.12
Forfeited(11,726)26.98
Outstanding at June 30, 2019262,084
27.90
Vested at Period-End145,120
24.89
Expected to Vest116,964
31.64
   
Stock Options Granted  
Weighted Average Grant Date Information:  
Fair Value of Options Granted$5.75
 
Fair Value Assumptions:  
Dividend Yield3.26% 
Expected Volatility22.58% 
Risk Free Interest Rate2.63% 
Expected Lives (in years)8.68
 


The following table presents information on the amounts expensed related to stock options for the three and six month periods ended June 30, 20192020 and 2018:2019:
For the Three Months Ended June 30,For the Six Months Ended June 30,
2020201920202019
Amount expensed$75  $79  $151  $158  
  For the Three Months Ended June 30, For the Six Months Ended June 30,
  2019 2018 2019 2018
Amount expensed $79
 $80
 $158
 $163


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



28


The following table summarizes information about restricted stock unit activity for the periodperiods ended June 30, 2020 and 2019.
Restricted Stock UnitsWeighted Average Grant Date Fair Value
Non-vested at January 1, 20207,496  $31.18  
Granted3,827  35.28  
Non-vested at June 30, 202011,323  32.57  
Non-vested at January 1, 20193,478  31.62  
Granted4,018  30.79  
Non-vested at June 30, 20197,496  31.18  
   
 Restricted Stock UnitsWeighted Average Grant Date Fair Value
Non-vested at January 1, 20193,377
$32.57
Granted3,901
31.71
Non-vested at June 30, 20197,278
32.11
   



The following table presents information on the amounts expensed related to restricted stock units for the periods ended June 30, 20192020 and 2018:2019:
For the Three Months Ended June 30,For the Six Months Ended June 30,
2020201920202019
Amount expensed$31  $20  $58  $36  
  For the Three Months Ended June 30, For the Six Months Ended June 30,
  2019 2018 2019 2018
Amount expensed $20
 $9
 $36
 $15


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


Employee Stock Ownership Plan
Arrow maintains an employee stock ownership plan ("ESOP").  SubstantiallyESOP, pursuant to which substantially all employees of Arrow and its subsidiaries are eligible to participate upon satisfaction of applicable service requirements.  The ESOP borrowed funds from one of Arrow’s subsidiary banks to purchase outstanding shares of Arrow’s common stock.  The notes, requirewhich were fully repaid as of December 31, 2019, required annual payments of principal and interest through 2019.  As the debt iswas repaid, shares arewere 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 arewere reported as unallocated ESOP shares in stockholders' equity. As shares arewere released from collateral, Arrow reportsreported compensation expense equal to the current average market price of the shares, and the shares becomebecame outstanding for earnings per share computations.

29


Note 7. RETIREMENT BENEFIT PLANS (Dollars in Thousands)


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

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

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

The mortality table used in determining the present value of December 31, 2018, Arrow also updated its mortality assumption for annuity/a lump sum conversionspayment/annuitizing cash balance accounts was changed to the applicable mortality table for the pension plans todetermination of present values under Internal Revenue Code (IRC) Section 417(e)(3)(B). This table is currently a 50/50 blend of male and female rates from the 20192020 sex distinct optional combined mortality tables, as prescribed under IRC Section 417(e)(3)B) applicable430. The change in mortality table. The revised assumption resultstable was made to reflect the continued improvement in mortality rates and resulted in an increase in postretirement liabilities for the pension plans.Employee's Pension Plan and the Select Executive Retirement Plan.

The interest rates used in determining the present value of a lump sum payment/annuitizing cash balance accounts were changed to the segment rates in effect for the January 1, 20192020 plan year (3.43%(2.04%, 4.46%3.09%, 4.88%3.68%) as of December 31, 2018.2019. This change was made to more accurately reflect current expected long-term interest rates and resulted in an increasea decrease in liability for the Arrow Financial Corporation Employees' Pension Plan and Trust and the Arrow Financial Corporation Select Executive Retirement Plan.


The following tables provide the components of net periodic benefit costs for the three-three and six-monthsix month periods ended June 30, 20192020 and 2018.2019.
Employees'Select ExecutivePostretirement
PensionRetirementBenefit
PlanPlanPlans
Net Periodic Benefit Cost
For the Three Months Ended June 30, 2020
Service Cost 1
$401  $101  $29  
Interest Cost 2
355  42  77  
Expected Return on Plan Assets 2
(900) —  —  
Amortization of Prior Service Cost 2
16  10  26  
Amortization of Net Loss (Gain) 2
40  40  (2) 
Net Periodic Cost$(88) $193  $130  
Plan Contributions During the Period$—  $116  $59  
For the Three Months Ended June 30, 2019:
Service Cost 1
$365  $65  $31  
Interest Cost 2
343  56  93  
Expected Return on Plan Assets 2
(761) —  —  
Amortization of Prior Service Cost 2
18  13  26  
Amortization of Net Loss (Gain) 2
154  30  (5) 
Net Periodic Cost$119  $164  $145  
Plan Contributions During the Period$—  $117  $54  
30

    Select  
  Employees' Executive Postretirement
  Pension Retirement Benefit
  Plan Plan Plans
Net Periodic Benefit Cost      
For the Three Months Ended June 30, 2019:      
Service Cost 1
 $365
 $65
 $31
Interest Cost 2
 343
 56
 93
Expected Return on Plan Assets 2
 (761) —
 —
Amortization of Prior Service Cost 2
 18
 13
 26
Amortization of Net Loss 2
 154
 30
 (5)
Net Periodic Cost $119
 $164
 $145
       
Plan Contributions During the Period $—
 $117
 $54
       
For the Three Months Ended June 30, 2018:      
Service Cost 1
 $431
 $196
 $35
Interest Cost 2
 274
 54
 68
Expected Return on Plan Assets 2
 (896) —
 —
Amortization of Prior Service (Credit) Cost 2
 (13) 15
 53
Amortization of Net Loss 2
 64
 33
 6
Net Periodic (Benefit) Cost $(140) $298
 $162
       
Plan Contributions During the Period $—
 $117
 $102
       


Net Periodic Benefit Cost      Net Periodic Benefit Cost
For the Six Months Ended June 30, 2019:      
For the Six Months Ended June 30, 2020:For the Six Months Ended June 30, 2020:
Service Cost 1
 $764
 $162
 $61
Service Cost 1
$831  $204  $62  
Interest Cost 2
 740
 108
 182
Interest Cost 2
772  96  155  
Expected Return on Plan Assets 2
 (1,531) —
 —
Expected Return on Plan Assets 2
(1,804) —  —  
Amortization of Prior Service (Credit) Cost 2
 35
 27
 51
Amortization of Prior Service Cost 2
Amortization of Prior Service Cost 2
32  21  53  
Amortization of Net Loss 2
 307
 57
 (22)
Amortization of Net Loss 2
41  73  —  
Net Periodic (Benefit) Cost $315
 $354
 $272
Net Periodic (Benefit) Cost$(128) $394  $270  
      
Plan Contributions During the Period $—
 $233
 $91
Plan Contributions During the Period$—  $233  $137  
      
Estimated Future Contributions in the Current Fiscal Year $—
 $—
 $—
Estimated Future Contributions in the Current Fiscal Year$—  $—  $—  
      
For the Six Months Ended June 30, 2018:      
For the Six Months Ended June 30, 2019:For the Six Months Ended June 30, 2019:
Service Cost 1
 $779
 $207
 $68
Service Cost 1
$764  $162  $61  
Interest Cost 2
 799
 104
 167
Interest Cost 2
740  108  182  
Expected Return on Plan Assets 2
 (1,681) —
 —
Expected Return on Plan Assets 2
(1,531) —  —  
Amortization of Prior Service (Credit) Cost 2
 (25) 29
 50
Amortization of Net Loss 2
 97
 66
 —
Net Periodic (Benefit) Cost $(31) $406
 $285
Amortization of Prior Service Cost 2
Amortization of Prior Service Cost 2
35  27  51  
Amortization of Net Loss (Benefit) 2
Amortization of Net Loss (Benefit) 2
307  57  (22) 
Net Periodic CostNet Periodic Cost$315  $354  $272  
      
Plan Contributions During the Period $—
 $233
 $119
Plan Contributions During the Period$—  $233  $91  
      
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 aA contribution to the qualified pension plan in 2019,2020 was not required, and currently, we do not expect to make additional contributions in 2019.2020 are not expected. Arrow makes contributions to its other post-retirement benefit plans in an amount equal to benefit payments for the year.




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


The following table presents a reconciliation of the numerator and denominator used in the calculation of basic and diluted earnings per common share (“EPS”) for periods ended June 30, 20192020 and 2018.2019.  All share and per share amounts have been adjusted for the September 27, 2018,2019, 3% stock dividend.
Earnings Per Share
Three Months EndedYear-to-Date Period Ended:
June 30, 2020June 30, 2019June 30, 2020June 30, 2019
Earnings Per Share - Basic:
Net Income$9,159  $8,934  $17,286  $17,668  
Weighted Average Shares - Basic14,992  14,922  14,994  14,912  
Earnings Per Share - Basic$0.61  $0.60  $1.15  1.19
Earnings Per Share - Diluted:
Net Income$9,159  $8,934  $17,286  $17,668  
Weighted Average Shares - Basic14,992  14,922  14,994  14,912  
Dilutive Average Shares Attributable to Stock Options6  41  16  46  
Weighted Average Shares - Diluted14,998  14,963  15,01014,958  
Earnings Per Share - Diluted$0.61  $0.60  $1.15  $1.18  
31
Earnings Per Share
 Quarterly Period Ended: Year-to-Date Period Ended:
 June 30, 2019 June 30, 2018 June 30, 2019 June 30, 2018
Earnings Per Share - Basic:       
Net Income$8,934
 $9,730
 $17,668
 $18,261
Weighted Average Shares - Basic14,487
 14,394
 14,478
 14,374
Earnings Per Share - Basic$0.62
 $0.68
 $1.22
 $1.27
        
Earnings Per Share - Diluted:       
Net Income$8,934
 $9,730
 $17,668
 $18,261
Weighted Average Shares - Basic14,487
 14,394
 14,478
 14,374
Dilutive Average Shares Attributable to Stock Options40
 86
 45
 85
Weighted Average Shares - Diluted14,527
 14,480
 14,523
 14,459
Earnings Per Share - Diluted$0.62
 $0.67
 $1.22
 $1.26



Note 9. FAIR VALUES (Dollars In Thousands)


FASB ASC Subtopic 820-10 defines fair value, establishes a framework for measuring fair value in GAAP and requires certain disclosures about fair value measurements. We do not have anyThere are no nonfinancial assets or liabilities measured at fair value on a recurring basis. The only assets or liabilities that Arrow measured at fair value on a recurring basis at June 30, 2019,2020, December 31, 20182019 and June 30, 20182019 were securities available-for-sale, and equity securities .and derivatives. Arrow held no securities or liabilities for trading on such dates.
The table below presents the financial instrument's fair value and the amounts within the fair value hierarchy based on the lowest level of input that is significant to the fair value measurement:
Fair Value of Assets and Liabilities Measured on a Recurring and Nonrecurring Basis
Fair Value Measurements at Reporting Date Using:
Fair Value
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:
June 30, 2020
Assets:
Securities Available-for Sale:
   U.S. Government & Agency Obligations$5,192  $—  $5,192  $—  
   State and Municipal Obligations593  —  593  —  
   Mortgage-Backed Securities372,193  —  372,193  —  
   Corporate and Other Debt Securities800  —  800  —  
     Total Securities Available-for-Sale378,778  —  378,778  —  
Equity Securities1,583  —  1,583  —  
     Total Securities Measured on a Recurring Basis380,361  —  380,361  —  
Derivatives, included in other assets6,390  —  6,390  —  
     Total Measured on a Recurring Basis$386,751  $—  $386,751  $—  
Liabilities:
Derivatives, included in other liabilities6,390  —  6,390  —  
     Total Measured on a Recurring Basis$6,390  $—  $6,390  $—  
December 31, 2019
Assets:
Securities Available-for Sale:
   U.S. Government & Agency Obligations$5,054  $—  $5,054  $—  
   State and Municipal Obligations764  —  764  —  
   Mortgage-Backed Securities350,716  —  350,716  —  
   Corporate and Other Debt Securities800  —  800  —  
     Total Securities Available-for-Sale357,334  —  357,334  —  
Equity Securities2,063  —  2,063  —  
32

Fair Value of Assets and Liabilities Measured on a Recurring and Nonrecurring BasisFair Value of Assets and Liabilities Measured on a Recurring and Nonrecurring BasisFair Value of Assets and Liabilities Measured on a Recurring and Nonrecurring Basis
  Fair Value Measurements at Reporting Date Using:Fair Value Measurements at Reporting Date Using:
Fair Value 
Quoted Prices
In Active Markets for Identical Assets
(Level 1)
 
Significant Other
Observable Inputs
(Level 2)
 
Significant Unobservable Inputs
(Level 3)
Fair Value
Quoted Prices
In Active Markets for Identical Assets
(Level 1)
Significant Other
Observable Inputs
(Level 2)
Significant Unobservable Inputs
(Level 3)
Fair Value of Assets and Liabilities Measured on a Recurring Basis:       
Total Securities Measured on a Recurring Basis Total Securities Measured on a Recurring Basis359,397  —  359,397  —  
Derivatives, included in other liabilitiesDerivatives, included in other liabilities69  —  69  —  
Total Measured on a Recurring BasisTotal Measured on a Recurring Basis$359,466  $—  $359,466  $—  
Liabilities:Liabilities:
Derivatives, included in other liabilitiesDerivatives, included in other liabilities$69  $—  $69  $—  
Total Measured on a Recurring BasisTotal Measured on a Recurring Basis$69  $—  $69  $—  
June 30, 2019       June 30, 2019
Securities Available-for Sale:       
U.S. Government & Agency Obligations$17,524
 $—
 $17,524
 $—
State and Municipal Obligations967
 —
 967
 —
Mortgage-Backed Securities266,587
 —
 266,587
 —
Corporate and Other Debt Securities800
 —
 800
 —
Total Securities Available-for-Sale285,878
 —
 285,878
 —
Equity Securities1,850
 —
 1,850
 —
Total Securities Measured on a Recurring Basis$287,728
 $—
 $287,728
 $—
December 31, 2018       
Securities Available-for Sale:       
U.S. Government & Agency Obligations$46,765
 $—
 $46,765
 $—
State and Municipal Obligations1,195
 —
 1,195
 —
Mortgage-Backed Securities268,775
 —
 268,775
 —
Corporate and Other Debt Securities800
 —
 800
 —
Total Securities Available-for-Sale317,535
   317,535
  
Equity Securities1,774
 —
 1,774
 —
Total Securities Measured on a Recurring Basis$319,309
 $—
 $319,309
 $—
June 30, 2018       
Assets:Assets:
Securities Available-for Sale:       Securities Available-for Sale:
U.S. Government & Agency Obligations$59,615
 $—
 $59,615
 $—
 U.S. Government & Agency Obligations$17,524  $—  $17,524  $—  
State and Municipal Obligations3,383
 —
 3,383
 —
 State and Municipal Obligations967  —  967  —  
Mortgage-Backed Securities261,589
 —
 261,589
 —
 Mortgage-Backed Securities266,587  —  266,587  —  
Corporate and Other Debt Securities800
 —
 800
 —
 Corporate and Other Debt Securities800  —  800  —  
Total Securities Available-for-Sale325,387
   325,387
   Total Securities Available-for-Sale285,878  —  285,878  —  
Equity Securities1,802
 —
 1,802
 —
Equity Securities1,850  —  1,850  —  
Total Securities Measured on a Recurring Basis$327,189
 $—
 $327,189
 $—
 Total Securities Measured on a Recurring Basis$287,728  $—  $287,728  $—  
       

Fair Value
Quoted Prices
In Active Markets for Identical Assets
(Level 1)
Significant Other
Observable Inputs
(Level 2)
Significant Unobservable Inputs
(Level 3)
Losses Recognized in Earnings
Fair Value of Assets and Liabilities Measured on a Nonrecurring Basis:
June 30, 2020
Collateral Dependent Impaired Loans$595  $—  $—  $595  
Other Real Estate Owned and Repossessed Assets, Net711  —  —  711  —  
December 31, 2019
Collateral Dependent Impaired Loans$285  $—  $—  $285  
Other Real Estate Owned and Repossessed Assets, Net1,261  —  —  1,261  (186) 
June 30, 2019
Collateral Dependent Impaired Loans$37  $—  $—  $37  
Other Real Estate Owned and Repossessed Assets, Net1,373  —  —  1,373  (164) 



 Fair Value 
Quoted Prices
In Active Markets for Identical Assets
(Level 1)
 
Significant Other
Observable Inputs
(Level 2)
 
Significant Unobservable Inputs
(Level 3)
 Gains (Losses) Recognized in Earnings
Fair Value of Assets and Liabilities Measured on a Nonrecurring Basis:         
June 30, 2019         
Collateral Dependent Impaired Loans$37
 $—
 $—
 $37
 
Other Real Estate Owned and Repossessed Assets, Net1,373
 —
 —
 1,373
 (164)
December 31, 2018         
Collateral Dependent Impaired Loans$—
 $—
 $—
 $—
 
Other Real Estate Owned and Repossessed Assets, Net1,260
 —
 —
 1,260
 (132)
June 30, 2018         
Collateral Dependent Impaired Loans$747
 $—
 $—
 $747
 
Other Real Estate Owned and Repossessed Assets, Net1,487
 —
 —
 1,487
 (85)

We determine theThe fair value of financial instruments is determined under the following hierarchy:
•Level 1 - Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities;
•Level 2 - Quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, or inputs that are observable, either directly or indirectly, for substantially the full term of the asset or liability;
•Level 3 - Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (i.e., supported by little or no market activity).


The Company determined that the previously reported U.S. Government & Agency Obligations of $59.6 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 June 30, 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 June 30, 2019, December 31, 2018 and June 30, 2018.
33


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


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


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


The fair value of collateral dependent impaired loans and other real estate owned was based on third-party appraisals less estimated cost to sell. The appraisals may be adjusted by management for qualitative factors such as economic conditions and estimated liquidation expenses. Other assets which might have been included in this table include mortgage servicing rights, goodwill and other intangible assets. Arrow evaluates each of these assets for impairment on an annual basis,at least annually, with no impairment recognized for these assets at June 30, 2019,2020, December 31, 20182019 and June 30, 2018.2019.


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


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

ASU 2016-01 "Recognition and Measurement of Financial Assets and Financial Liabilities" requires that the fair value for loans must be disclosed using the "exit price" notion which is a reasonable estimate of what another party might pay in an orderly transaction. Fair


values for loans are calculated for portfolios of loans with similar financial characteristics.  Loans are segregated by type such as commercial, commercial real estate, residential mortgage, indirect auto and other consumer loans.  Each loan category is further segmented into fixed and adjustable interest rate terms and by performing and nonperforming categories.  The fair value of performing loans is calculated by determining the estimated future cash flow, which is the contractual cash flow adjusted for estimated prepayments. The discount rate is determined by starting with current market yields, and first adjusting for a liquidity premium. This premium is separately determined for residential real estate loans vs. other loans.each loan type. Then a credit loss component is determined utilizing the credit loss assumptions used in the allowance for loan and lease loss model. Finally, a discount spread is applied separately for consumer loans vs. commercial loans based on market information and utilization of the Swap Curve.  Fair value for nonperforming loans is generally based on recent external appraisals.  If appraisals are not available, estimated cash flows are discounted using a rate commensurate with the risk associated with the estimated cash flows.  Assumptions regarding credit risk, cash flows and discount rates are judgmentally determined using available market information and specific borrower information.swap curve.  
The fair value of time deposits is based on the discounted value of contractual cash flows, except that the fair value is limited to the extent that the customer could redeem the certificate after imposition of a premature withdrawal penalty.  The discount rates are estimated using the Federal Home Loan Bank of New York ("FHLBNY") yield curve, which is considered representative of Arrow’s time deposit rates. The fair value of all other deposits is equal to the carrying value.
The fair value of FHLBNY advances is estimated based oncalculated by the discountedFHLBNY.
The carrying amount of FHLBNY and FRB stock approximates fair value. If the stock was redeemed, the Company will receive an amount equal to the par value of contractual cash flows.  The discount rate is estimated using current rates on FHLBNY advances with similar maturities and call features.the stock.
The book value of the outstanding trust preferred securities (Junior Subordinated Obligations Issued to Unconsolidated Subsidiary Trusts) are considered to approximate fair value since the interest rates are variable (indexed to LIBOR) and Arrow is well-capitalized.



34



Fair Value by Balance Sheet Grouping


The following table presents a summary of the carrying amount, the fair value or an amount approximating fair value and the fair value hierarchy of Arrow’s financial instruments:
Schedule of Fair Values by Balance Sheet Grouping
Fair Value Hierarchy
Carrying ValueFair ValueLevel 1Level 2Level 3
June 30, 2020
Cash and Cash Equivalents$253,270  $253,270  $253,270  $—  $—  
Securities Available-for-Sale378,778  378,778  —  378,778  —  
Securities Held-to-Maturity233,517  241,875  —  241,875  —  
Equity Securities1,583  1,583  —  1,583  —  
Federal Home Loan Bank and Federal
Reserve Bank Stock		5,574  5,574  —  5,574  —  
Net Loans2,535,615  2,529,544  —  —  2,529,544  
Accrued Interest Receivable6,421  6,421  —  6,421  —  
Derivatives, included in other assets6,390  6,390  6,390  
Deposits3,068,773  3,069,571  —  3,069,571  —  
Federal Funds Purchased and Securities
  Sold Under Agreements to Repurchase
47,599  47,599  —  47,599  —  
Federal Home Loan Bank Term Advances50,000  51,560  —  51,560  —  
Junior Subordinated Obligations Issued
  to Unconsolidated Subsidiary Trusts
20,000  20,000  —  20,000  —  
Accrued Interest Payable918  918  —  918  —  
Derivatives, included in other liabilities6,390  6,390  —  6,390  —  
35

Schedule of Fair Values by Balance Sheet GroupingSchedule of Fair Values by Balance Sheet GroupingSchedule of Fair Values by Balance Sheet Grouping
    Fair Value HierarchyFair Value Hierarchy
Carrying ValueFair ValueLevel 1Level 2Level 3
December 31, 2019December 31, 2019
Cash and Cash EquivalentsCash and Cash Equivalents$70,221  $70,221  $70,221  $—  $—  
Securities Available-for-SaleSecurities Available-for-Sale357,334  357,334  —  357,334  —  
Securities Held-to-MaturitySecurities Held-to-Maturity245,065  249,618  —  249,618  —  
Equity SecuritiesEquity Securities2,063  2,063  —  2,063  
Federal Home Loan Bank and Federal
Reserve Bank Stock		Federal Home Loan Bank and Federal
Reserve Bank Stock		10,317  10,317  —  10,317  —  
Net LoansNet Loans2,364,933  2,332,797  —  —  2,332,797  
Accrued Interest ReceivableAccrued Interest Receivable7,377  7,377  —  7,377  —  
Derivatives, included in other assetsDerivatives, included in other assets69  69  —  69  —  
DepositsDeposits2,616,054  2,614,170  —  2,614,170  —  
Federal Funds Purchased and Securities
Sold Under Agreements to Repurchase		Federal Funds Purchased and Securities
Sold Under Agreements to Repurchase		51,099  51,099  —  51,099  —  
Federal Home Loan Bank Overnight AdvancesFederal Home Loan Bank Overnight Advances130,000  130,000  —  130,000  —  
Federal Home Loan Bank Term AdvancesFederal Home Loan Bank Term Advances30,000  29,993  —  29,993  —  
Junior Subordinated Obligations Issued
to Unconsolidated Subsidiary Trusts
Junior Subordinated Obligations Issued
to Unconsolidated Subsidiary Trusts
20,000  20,000  —  20,000  —  
Accrued Interest PayableAccrued Interest Payable1,436  1,436  —  1,436  —  
Derivatives, included in other liabilitiesDerivatives, included in other liabilities69  69  —  69  —  
Carrying Value Fair Value Level 1 Level 2 Level 3
June 30, 2019         June 30, 2019
Cash and Cash Equivalents$62,695
 $62,695
 $62,695
 $—
 $—
Cash and Cash Equivalents$62,695  $62,695  $62,695  $—  $—  
Securities Available-for-Sale285,878
 285,878
 —
 285,878
 —
Securities Available-for-Sale285,878  285,878  —  285,878  —  
Securities Held-to-Maturity262,541
 266,068
 —
 266,068
 —
Securities Held-to-Maturity262,541  266,068  —  266,068  —  
Equity Securities1,850
 1,850
 —
 1,850
 —
Equity Securities1,850  1,850  —  1,850  
Federal Home Loan Bank and Federal
Reserve Bank Stock
8,202
 8,202
 —
 8,202
 —
Federal Home Loan Bank and Federal
Reserve Bank Stock		8,202  8,202  —  8,202  —  
Net Loans2,259,613
 2,218,244
 —
 —
 2,218,244
Net Loans2,259,613  2,218,244  —  —  2,218,244  
Accrued Interest Receivable7,491
 7,491
 —
 7,491
 —
Accrued Interest Receivable7,491  7,491  —  7,491  —  
Deposits2,503,753
 2,499,849
 —
 2,499,849
 —
Deposits2,503,753  2,499,849  —  2,499,849  —  
Federal Funds Purchased and Securities
Sold Under Agreements to Repurchase
51,149
 51,149
 —
 51,149
 —
Federal Funds Purchased and Securities
Sold Under Agreements to Repurchase		51,149  51,149  —  51,149  —  
Federal Home Loan Bank Overnight Advances83,000
 83,000
 —
 83,000
 —
Federal Home Loan Bank Overnight Advances83,000  83,000  —  83,000  —  
Federal Home Loan Bank Term Advances30,000
 29,943
 —
 29,943
 —
Federal Home Loan Bank Term Advances30,000  29,943  —  29,943  —  
Junior Subordinated Obligations Issued
to Unconsolidated Subsidiary Trusts
20,000
 20,000
 —
 20,000
 —
Junior Subordinated Obligations Issued
to Unconsolidated Subsidiary Trusts
20,000  20,000  —  20,000  —  
Accrued Interest Payable1,187
 1,187
 —
 1,187
 —
Accrued Interest Payable1,187  1,187  —  1,187  —  
         
December 31, 2018         
Cash and Cash Equivalents$84,239
 $84,239
 $84,239
 $—
 $—
Securities Available-for-Sale317,535
 317,535
 —
 317,535
 —
Securities Held-to-Maturity283,476
 280,338
 —
 280,338
 —
Equity Securities1,774
 1,774
   1,774
  
Federal Home Loan Bank and Federal
Reserve Bank Stock
15,506
 15,506
 —
 15,506
 —
Net Loans2,176,019
 2,114,372
 —
 —
 2,114,372
Accrued Interest Receivable7,035
 7,035
 —
 7,035
 —
Deposits2,345,584
 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 Advances234,000
 234,000
 —
 234,000
 —
Federal Home Loan Bank Term Advances45,000
 44,652
 —
 44,652
 —
Junior Subordinated Obligations Issued
to Unconsolidated Subsidiary Trusts
20,000
 20,000
 —
 20,000
 —
Accrued Interest Payable570
 570
 —
 570
 —
         
June 30, 2018         
Cash and Cash Equivalents$60,741
 $60,741
 $60,741
 $—
 $—
Securities Available-for-Sale325,387
 325,387
 —
 325,387
 —
Securities Held-to-Maturity297,885
 292,605
 —
 292,605
 —
Equity Securities1,802
 1,802
 —
 1,802
  
Federal Home Loan Bank and Federal
Reserve Bank Stock
11,089
 11,089
 —
 11,089
 —
Net Loans2,038,222
 1,971,756
 —
 —
 1,971,756
36
Schedule of Fair Values by Balance Sheet Grouping
     Fair Value Hierarchy
 Carrying Value Fair Value Level 1 Level 2 Level 3
Accrued Interest Receivable6,729
 6,729
 —
 6,729
 —
Deposits2,304,781
 2,295,796
 —
 2,295,796
 —
Federal Funds Purchased and Securities
  Sold Under Agreements to Repurchase
60,248
 60,248
 —
 60,248
 —
Federal Home Loan Bank Overnight Advances136,000
 136,000
 —
 136,000
 —
Federal Home Loan Bank Term Advances45,000
 44,495
 —
 44,495
 —
Junior Subordinated Obligations Issued
  to Unconsolidated Subsidiary Trusts
20,000
 20,000
 —
 20,000
 —
Accrued Interest Payable540
 540
 —
 540
 —



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 five5 of its branch offices, at market rates, from Stewart’s Shops Corp.  Mr. Gary C. Dake, President of Stewart’s Shops Corp., serves as a director on both the boardsboard of directors of each of Arrow and Saratoga National Bank and Trust Company.


The following includes quantitative data related to the Company's leases as of and for the six months ended June 30, 2020 and June 30, 2019:
Six Months Ended
Finance Lease Amounts:ClassificationJune 30, 2020June 30, 2019
Right-of-use AssetsPremises and Equipment, Net$5,080  $5,226  
Lease LiabilitiesFinance Leases5,239  5,270  
Operating Lease Amounts:
Right-of-use AssetsOther Assets$5,640  $5,859  
Lease LiabilitiesOther Liabilities5,718  5,918  
Other Information:
Cash Paid For Amounts Included In The Measurement Of Lease Liabilities:
Operating Outgoing Cash Flows From Finance Leases$99  $43  
Operating Outgoing Cash Flows From Operating Leases355  355  
Financing Outgoing Cash Flows From Finance Leases15  12  
Right-of-use Assets Obtained In Exchange For New Finance Lease Liabilities—  5,271  
Right-of-use Assets Obtained In Exchange For New Operating Lease Liabilities269  6,147  
Weighted-average Remaining Lease Term—Finance Leases (Yrs.)29.731.3
Weighted-average Remaining Lease Term—Operating Leases (Yrs.)13.214.1
Weighted-average Discount Rate—Finance Leases3.75 %3.75 %
Weighted-average Discount Rate—Operating Leases3.27 %3.47 %

Lease cost information for the Company's leases is as follows:
Three Months EndedSix Months Ended
June 30, 2020June 30, 2019June 30, 2020June 30, 2019
Lease Cost:
Finance Lease Cost:
   Reduction of Right-of-use assets$45  $27  $89  $44  
   Interest on Lease Liabilities49  28  99  43  
Operating Lease Cost203  193  410  366  
Short-term Lease Cost14  23  21  56  
Variable Lease Cost33  39  88  95  
Total Lease Cost$344  $310  $707  $604  
37

Finance Lease Amounts:Classification 
Right-of-use AssetsPremises and Equipment, Net$5,226
Lease LiabilitiesFinance Leases5,270
   
Operating Lease Amounts:  
Right-of-use AssetsOther Assets$5,859
Lease LiabilitiesOther Liabilities5,918
   
Lease Cost:  
Finance Lease Cost:  
   Amortization of Right-of-use assets $44
   Interest on Lease Liabilities 43
Operating Lease Cost 366
Short-term Lease Cost 56
Variable Lease Cost 95
Total Lease Cost $604
   
Other Information:  
Cash Paid For Amounts Included In The Measurement Of Lease Liabilities:  
Operating Outgoing Cash Flows From Finance Leases $43
Operating Outgoing Cash Flows From Operating Leases 355
Financing Outgoing Cash Flows From Finance Leases 12
Right-of-use Assets Obtained In Exchange For New Finance Lease Liabilities 5,271
Right-of-use Assets Obtained In Exchange For New Operating Lease Liabilities 6,147
Weighted-average Remaining Lease Term—Finance Leases (Yrs.) 31.29
Weighted-average Remaining Lease Term—Operating Leases (Yrs.) 14.07
Weighted-average Discount Rate—Finance Leases % 3.75%
Weighted-average Discount Rate—Operating Leases % 3.47%



Future Lease Payments at June 30, 2020 are as follows:
Operating
Leases
Financing
Leases
Twelve Months Ended:
6/30/2021$807  $241  
6/30/2022676  243  
6/30/2023599  95  
6/30/2024600  244  
6/30/2025564  252  
Thereafter3,900  8,084  
Total Undiscounted Cash Flows$7,146  $9,159  
Less: Net Present Value Adjustment1,428  3,920  
   Lease Liability$5,718  $5,239  
38

Future Lease Payments at June 30, 2019 are as follows:
   
 
Operating
Leases
Financing
Leases
Twelve Months Ended:  
6/30/2020$811
$186
6/30/2021735
233
6/30/2022604
242
6/30/2023529
243
6/30/2024530
244
Thereafter4,373
8,323
Total Undiscounted Cash Flows$7,582
$9,471
   
Less: Net Present Value Adjustment1,664
4,201
   
   Lease Liability$5,918
$5,270



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

Arrow adopted ASU 2016-02 usingis exposed to certain risks arising from both its business operations and economic conditions. Arrow principally manages its exposures to a modified retrospective adoptionwide variety of business and operational risks through management of its core business activities. The Bank manages economic risks, including interest rate, primarily by managing the amount, sources and duration of its assets and liabilities and through the use of derivative instruments. Specifically, the Bank enters into derivative financial instruments to manage exposures that arise from business activities that result in the receipt or payment of future known and uncertain cash amounts, the value of which are determined by interest rates. Arrow's derivative financial instruments are used to manage differences in the amount, timing and duration of the Bank’s known or expected cash receipts and its known or expected cash payments principally related to certain fixed rate borrowings. Arrow also has interest rate derivatives that result from a service provided to certain qualifying customers and, therefore, are not used to manage interest rate risk in the Company’s assets or liabilities. The Company manages a matched book with respect to its derivative instruments in order to minimize its net risk exposure resulting from such transactions.

Derivatives Not Designated as Hedging Instruments
Arrow enters into interest rate swap agreements with its commercial customers to provide them with a long-term fixed rate, while simultaneously Arrow entered into offsetting interest rate swap agreements with a counterparty to swap the fixed rate to a variable rate to manage interest rate exposure.
These interest rate swap agreements are not designated as a hedge for accounting purposes. As the interest rate swap agreements have substantially equivalent and offsetting terms, they do not present any material exposure to the Arrow's consolidated statements of income. The Bank records its interest rate swap agreements at January 1, 2019 as discussedfair value and is presented on a gross basis within other assets and other liabilities on the consolidated balance sheets. Changes in Note 1. the fair value of assets and liabilities arising from these derivatives are included, net, in other income in the consolidated statement of income.

The following disclosure is provided fortable depicts the period priorfair value adjustment recorded related to the adoption.notional amount of derivatives outstanding as well as the notional amount of the interest rate swap agreements.
Future minimum lease
Derivatives Not Designated as Hedging Instruments - Interest Rate Swap Agreements
June 30, 2020December 31, 2019June 30, 2019
Fair value adjustment included in other assets$6,390  $69  $—  
Fair value adjustment included in other liabilities6,390  69  —  
Notional amount146,065  44,531  —  

Derivatives Designated as Hedging Instruments
Arrow has entered into interest rate swaps to synthetically fix the variable rate interest payments associated with $20 million in outstanding subordinated trust securities. These agreements are designated as cash flow hedges.
For derivatives designated and that qualify as cash flow hedges of interest rate risk, the gain or loss on operating leases at December 31, 2018 werethe derivative is recorded in AOCI and subsequently reclassified into interest expense in the same period during which the hedge transaction affects earnings. Amounts reported in AOCI related to derivatives will be reclassified to interest expense as follows:interest payments are made on the Arrow's Junior Subordinated Obligations Issued to Unconsolidated Subsidiary Trusts borrowings.

The following table indicates the effect of cash flow hedge accounting on AOCI and on the unaudited interim consolidated statement of income.
Derivatives Designated as Hedging Instruments - Cash Flow Hedge Agreements
June 30, 2020December 31, 2019June 30, 2019
Amount of loss recognized in AOCI$(269)$— $— 
Amount of gain reclassified from AOCI interest expense— — — 




Note 12. COVID-19 PANDEMIC

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


39

 
Operating
Leases
2019$857
2020626
2021497
2022357
2023286
2024 and beyond2,776
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 andsubsidiaries (the Company) as of June 30, 20192020 and 2018,2019, the related consolidated statements of income, comprehensive income, and changes in stockholders’ equity for the three-month and six-month periods ended June 30, 20192020 and 2018,2019, the related consolidated statements of cash flows for the six-month periods ended June 30, 20192020 and 2018,2019, and the related notes (collectively, the consolidated interim financial information). Based on our reviews, we are not aware of any material modifications that should be made to the consolidated interim financial information for it to be in conformity with U.S. generally accepted accounting principles.

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

Basis for Review Results

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

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



/s/ KPMG LLP
Albany, New York
August 5, 20196, 2020






40

Item 2.
ARROW FINANCIAL CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
June 30, 20192020


NOTE ON TERMINOLOGY
In this Quarterly Report on Form 10-Q (this Report), the terms "Arrow," "the registrant," "the Company," "we," "us," and "our" generally refer to Arrow Financial Corporation and its subsidiaries as a group, except where the context indicates otherwise. At certain points in this Form 10-Q, ourArrow's performance is compared with that of ourthe Company's "peer group" of financial institutions. Unless otherwise specifically stated, the peer group for the purposes of this Form 10-Q is comprised of the group of 60146 domestic bank holding companies with $1$3 to $3$10 billion in total consolidated assets as identified in the Federal Reserve Board’s "Bank Holding Company Performance Report" for March 31, 20192020 (the most recent such report currently available), and peer group data contained herein has been derived from such report.


THE COMPANY AND ITS SUBSIDIARIES
Arrow is a two-bank holding company headquartered in Glens Falls, New York.  OurThe banking subsidiaries are Glens Falls National Bank and Trust Company (Glens Falls National) whose main office is located in Glens Falls, New York, and Saratoga National Bank and Trust Company (Saratoga National) whose main office is located in Saratoga Springs, New York.  Active subsidiaries of Glens Falls National include Upstate Agency, LLC (an insurance agency that sells property and casualty insurance policies and also specializes in selling and servicing group health care policies and life insurance), North Country Investment Advisers, Inc. (a registered investment adviser that provides investment advice to ourArrow's proprietary mutual funds) and Arrow Properties, Inc. (a real estate investment trust, or REIT). Arrow also owns directly two subsidiary business trusts, organized in 2003 and 2004, to issuewhich issued trust preferred securities (TRUPs), which are still outstanding.


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


These forward-looking statements may not be exhaustive, are not guarantees of future performance and involve certain risks and uncertainties that are difficult to quantify or, in some cases, to identify.  You should not place undue reliance on any such forward-looking statements. In the case of all forward-looking statements, our actual outcomes and results may differ materially from what the statements predict or forecast.  Factors that could cause or contribute to such differences include, but are not limited to:  to the following, which are or may be amplified by the novel coronavirus (COVID-19) pandemic:
•the current and rapidly evolving COVID-19 pandemic and its impact on economic, market and social conditions;
•other rapid and dramatic changes in economic and market conditions;
•sharp fluctuations in interest rates, economic activity, or consumer spending patterns;
•sudden changes in the market for products we provide,provided, such as real estate loans;
•significant changes in banking or other laws and regulations, including both enactment of new legal or regulatory measures (e.g., the Economic Growth, Regulatory Relief and Consumer Protection Act ("Economic Growth Act") and the Dodd-Frank Wall Street Reform and Consumer Protection Act ("Dodd-Frank")) or the modification or elimination of pre-existing measures;
•significant changes in U.S. monetary or fiscal policy, including new or revised monetary programs or targets adopted or announced by the Federal Reserve ("monetary tightening or easing") or significant new federal legislation materially affecting the federal budget ("fiscal tightening or expansion");
•competition from other sources (e.g., non-bank entities);
•similar uncertainties inherent in banking operations or business generally, including technological developments and changes; and
•other risks detailed from time to time within our filings with the Securities and Exchange Commission ("SEC").


We areThe Company is under no duty to update any of the forward-looking statements after the date of this Report to conform such statements to actual results. All forward-looking statements, express or implied, included in this Report and the documents we incorporateincorporated by reference and that are attributable to the Company are expressly qualified in their entirety by this cautionary statement. This cautionary statement should also be considered in connection with any subsequent written or oral forward-looking statements that the Company or any persons acting on our behalf may issue. This Report should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 20182019 (the 20182019 Annual Report) and our other filings with the SEC.



41


USE OF NON-GAAP FINANCIAL MEASURES
The SEC has adopted Regulation G, which applies to all public disclosures, including earnings releases, made by registered companies that contain "non-GAAP financial measures."  GAAP is generally accepted accounting principles in the United States of America.  Under Regulation G, companies making public disclosures containing non-GAAP financial measures must also disclose, along with each non-GAAP financial measure, certain additional information, including a reconciliation of the non-GAAP financial measure to the closest comparable GAAP financial measure and a statement of the Company’s reasons for utilizing the non-GAAP financial measure as part of its financial disclosures.  The SEC has exempted from the definition of "non-GAAP financial measures" certain commonly used financial measures that are not based on GAAP.  When these exempted measures are included in public disclosures, supplemental information is not required.  The following measures used in this Report, which are commonly utilized by financial institutions, have not been specifically exempted by the SEC and may constitute "non-GAAP financial measures" within the meaning of the SEC's rules, although we arethe Company is unable to state with certainty that the SEC would so regard them.


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


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


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


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

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






42

Arrow Financial Corporation
Selected Quarterly Information
(Dollars In Thousands, Except Per Share Amounts - Unaudited)
Quarter Ended6/30/2019
 3/31/2019
 12/31/2018
 9/30/2018
 6/30/2018
Net Income$8,934
 $8,734
 $8,758
 $9,260
 $9,730
Transactions in Net Income (Net of Tax):         
Net Changes in Fair Value of Equity Investments—
 57
 (106) 85
 166
          
Share and Per Share Data:(1)
         
Period End Shares Outstanding14,513
 14,474
 14,472
 14,441
 14,424
Basic Average Shares Outstanding14,487
 14,469
 14,451
 14,431
 14,394
Diluted Average Shares Outstanding14,527
 14,520
 14,514
 14,520
 14,480
Basic Earnings Per Share$0.62
 $0.60
 $0.61
 $0.64
 $0.68
Diluted Earnings Per Share0.62
 0.60
 0.60
 0.64
 0.67
Cash Dividend Per Share0.260
 0.260
 0.260
 0.252
 0.243
          
Selected Quarterly Average Balances:         
  Interest-Bearing Deposits at Banks$25,107
 $26,163
 $34,782
 $30,522
 $28,543
  Investment Securities584,679
 611,161
 637,341
 636,847
 647,913
  Loans2,255,299
 2,210,642
 2,160,435
 2,089,651
 2,026,598
  Deposits2,436,290
 2,347,985
 2,347,231
 2,279,709
 2,325,202
  Other Borrowed Funds250,283
 327,138
 315,172
 314,304
 219,737
  Stockholders’ Equity280,247
 272,864
 268,503
 263,139
 256,358
  Total Assets2,997,458
 2,977,056
 2,954,029
 2,879,854
 2,823,061
Return on Average Assets, annualized1.20% 1.19% 1.18% 1.28% 1.38%
Return on Average Equity, annualized12.79% 12.98% 12.94% 13.96% 15.22%
Return on Average Tangible Equity, annualized (2)
13.96% 14.22% 14.20% 15.36% 16.80%
Average Earning Assets$2,865,085
 $2,847,966
 $2,832,558
 $2,757,020
 $2,703,054
Average Paying Liabilities2,235,462
 2,224,403
 2,189,233
 2,110,924
 2,100,085
Interest Income27,227
 26,213
 26,000
 24,495
 23,590
Tax-Equivalent Adjustment  (3)
376
 373
 376
 376
 468
Interest Income, Tax-Equivalent (3)
27,603
 26,586
 26,376
 24,871
 24,058
Interest Expense5,520
 5,092
 4,343
 3,498
 2,628
Net Interest Income21,707
 21,121
 21,657
 20,997
 20,962
Net Interest Income, Tax-Equivalent (3)
22,083
 21,494
 22,033
 21,373
 21,430
Net Interest Margin, annualized3.04% 3.01% 3.03% 3.02% 3.11%
Net Interest Margin, Tax Equivalent, annualized (3)
3.09% 3.06% 3.09% 3.08% 3.18%
          
Efficiency Ratio Calculation: (4)
         
Noninterest Expense$16,908
 $16,652
 $16,881
 $16,026
 $16,192
Less: Intangible Asset Amortization44
 79
 65
 65
 66
Net Noninterest Expense$16,864
 $16,573
 $16,816
 $15,961
 $16,126
Net Interest Income, Tax-Equivalent (3)
$22,083
 $21,494
 $22,033
 $21,373
 $21,430
Noninterest Income6,896
 6,887
 6,799
 7,350
 7,911
Less: Net Changes in Fair Value of Equity Invest.—
 76
 (142) 114
 223
Net Gross Income$28,979
 $28,305
 $28,974
 $28,609
 $29,118
Efficiency Ratio (4)
58.19% 58.55% 58.04% 55.79% 55.38%
          
Period-End Capital Information:         
Total Stockholders’ Equity (i.e. Book Value)$284,649
 $276,609
 $269,584
 $264,810
 $259,488
Book Value per Share (1)
19.61
 19.11
 18.63
 18.34
 17.99
Goodwill and Other Intangible Assets, net23,603
 23,650
 23,725
 23,827
 23,933
Tangible Book Value per Share (1,2)
17.99
 17.48
 16.99
 16.69
 16.33
          
Capital Ratios:(5)
         
Tier 1 Leverage Ratio9.88% 9.73% 9.61% 9.67% 9.65%
Common Equity Tier 1 Capital Ratio12.99% 12.98% 12.89% 12.89% 13.01%
Tier 1 Risk-Based Capital Ratio13.93% 13.95% 13.87% 13.90% 14.04%
Total Risk-Based Capital Ratio14.91% 14.93% 14.86% 14.90% 15.06%
Assets Under Trust Admin. & Investment Mgmt.$1,496,966
 $1,483,259
 $1,385,752
 $1,551,289
 $1,479,753


Arrow Financial Corporation

Selected Quarterly Information
(Dollars In Thousands, Except Per Share Amounts- Unaudited)
Quarter Ended6/30/20203/31/202012/31/20199/30/20196/30/2019
Net Income$9,159  $8,127  $9,740  $10,067  $8,934  
Transactions in Net Income (Net of Tax):     
Net Changes in Fair Value of Equity Investments(80) (279) 50  109  —  
Share and Per Share Data:1
    
Period End Shares Outstanding15,011  14,982  14,998  14,969  14,949  
Basic Average Shares Outstanding14,992  14,996  14,978  14,955  14,922  
Diluted Average Shares Outstanding14,998  15,026  15,026  14,991  14,963  
Basic Earnings Per Share$0.61  $0.54  $0.65  $0.67  $0.60  
Diluted Earnings Per Share0.61  0.54  0.65  0.67  0.60  
Cash Dividend Per Share0.260  0.260  0.260  0.252  0.252  
Selected Quarterly Average Balances:    
  Interest-Bearing Deposits at Banks$155,931  $32,787  $28,880  $27,083  $25,107  
  Investment Securities607,094  603,748  582,982  545,073  584,679  
  Loans2,518,198  2,394,346  2,358,110  2,308,879  2,255,299  
  Deposits2,952,432  2,670,009  2,607,421  2,472,528  2,436,290  
  Other Borrowed Funds129,383  170,987  177,877  231,291  250,283  
  Stockholders’ Equity316,380  306,527  296,124  289,016  280,247  
  Total Assets3,437,155  3,180,857  3,113,114  3,023,043  2,997,458  
Return on Average Assets, annualized1.07 %1.03 %1.24 %1.32 %1.20 %
Return on Average Equity, annualized11.64 %10.66 %13.05 %13.82 %12.79 %
Return on Average Tangible Equity, annualized 2
12.58 %11.55 %14.18 %15.05 %13.96 %
Average Earning Assets$3,281,223  $3,030,881  $2,969,972  $2,881,035  $2,865,085  
Average Paying Liabilities2,457,690  2,362,515  2,293,804  2,213,642  2,235,462  
Interest Income28,002  28,226  28,367  27,952  27,227  
Tax-Equivalent Adjustment 3
281  288  321  344  376  
Interest Income, Tax-Equivalent 3
28,283  28,514  28,688  28,296  27,603  
Interest Expense3,160  5,220  5,449  5,649  5,520  
Net Interest Income24,842  23,006  22,918  22,303  21,707  
Net Interest Income, Tax-Equivalent 3
25,123  23,294  23,239  22,647  22,083  
Net Interest Margin, annualized3.05 %3.05 %3.06 %3.07 %3.04 %
Net Interest Margin, Tax Equivalent, annualized 3
3.08 %3.09 %3.10 %3.12 %3.09 %
Efficiency Ratio Calculation: 4
    
Noninterest Expense$17,245  $17,754  $17,099  $16,791  $16,908  
Less: Intangible Asset Amortization57  58  60  61  44  
Net Noninterest Expense$17,188  $17,696  $17,039  $16,730  $16,864  
Net Interest Income, Tax-Equivalent 3
$25,123  $23,294  $23,238  $22,647  $22,083  
Noninterest Income7,164  7,694  7,081  7,691  6,896  
Less: Net Changes in Fair Value of Equity Invest.(106) (374) 67  146  —  
Net Gross Income$32,393  $31,362  $30,252  $30,192  $28,979  
Efficiency Ratio 4
53.06 %56.42 %56.32 %55.41 %58.19 %
Period-End Capital Information:     
Total Stockholders’ Equity (i.e. Book Value)$317,687  $309,398  $301,728  $292,228  $284,649  
Book Value per Share 1
21.16  20.65  20.12  19.52  19.04  
Goodwill and Other Intangible Assets, net23,535  23,513  23,534  23,586  23,603  
Tangible Book Value per Share 1,2
19.60  19.08  18.55  17.95  17.46  
Capital Ratios:5
     
Tier 1 Leverage Ratio9.32 %9.87 %9.98 %10.04 %9.88 %
Common Equity Tier 1 Capital Ratio13.07 %12.84 %12.94 %12.93 %12.99 %
Tier 1 Risk-Based Capital Ratio13.94 %13.72 %13.83 %13.85 %13.93 %
Total Risk-Based Capital Ratio15.10 %14.76 %14.78 %14.81 %14.91 %
Assets Under Trust Admin. & Investment Mgmt.$1,502,866  $1,342,531  $1,543,653  $1,485,116  $1,496,966  
43

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

Footnotes:
1.Share and Per Share Data have been restated for the September 27, 2019, 3% stock dividend.
2.Non-GAAP Financial Measures Reconciliation: Tangible Book Value, Tangible Equity and Return on Tangible Equity exclude goodwill and other intangible assets, net from total equity.  These are non-GAAP financial measures which the Company believes provide investors with information that is useful in understanding our financial performance. See "Use of Non-GAAP Financial Measures" on page 43.
6/30/20203/31/202012/31/20199/30/20196/30/2019
Total Stockholders' Equity (GAAP)$317,687  $309,398  $301,728  $292,228  $284,649  
Less: Goodwill and Other Intangible assets, net23,535  23,513  23,534  23,586  23,603  
Tangible Equity (Non-GAAP)$294,152  $285,885  $278,194  $268,642  $261,046  
Period End Shares Outstanding15,011  14,982  14,998  14,969  14,949  
Tangible Book Value per Share
(Non-GAAP)		$19.60  $19.08  $18.55  $17.95  $17.46  
Net Income9,159  8,127  9,740  10,067  8,934  
Return on Average Tangible Equity (Net Income/Tangible Equity - Annualized)12.58 %11.55 %14.18 %15.05 %13.96 %
3.Non-GAAP Financial Measures Reconciliation: Net Interest Margin, Tax-Equivalent is the ratio of our annualized tax-equivalent net interest income to average earning assets. This is also a non-GAAP financial measure which Arrow believes provides investors with information that is useful in understanding our financial performance. See "Use of Non-GAAP Financial Measures" on page 43.
6/30/20203/31/202012/31/20199/30/20196/30/2019
Interest Income (GAAP)$28,002  $28,226  $28,367  $27,952  $27,227  
Add: Tax-Equivalent adjustment
(Non-GAAP)		281  288  321  344  376  
Interest Income - Tax Equivalent
(Non-GAAP)		$28,283  $28,514  $28,688  $28,296  $27,603  
Net Interest Income (GAAP)$24,842  $23,006  $22,918  $22,303  $21,707  
Add: Tax-Equivalent adjustment
(Non-GAAP)		281  288  321  344  376  
Net Interest Income - Tax Equivalent
(Non-GAAP)		$25,123  $23,294  $23,239  $22,647  $22,083  
Average Earning Assets$3,281,223  $3,030,881  $2,969,972  $2,881,035  $2,865,085  
Net Interest Margin (Non-GAAP)*3.08 %3.09 %3.10 %3.12 %3.09 %
4.Non-GAAP Financial Measures: Financial Institutions often use the "efficiency ratio", a non-GAAP ratio, as a measure of expense control. Arrow believes that the efficiency ratio provides investors with information that is useful in understanding our financial performance. Arrow defines efficiency ratio as the ratio of our noninterest expense to our net gross income (which equals tax-equivalent net interest income plus noninterest income, as adjusted). There is no GAAP financial measure that is closely comparable to the efficiency ratio. See "Use of Non-GAAP Financial Measures" on page 43.
5.For the current quarter, all of the regulatory capital ratios in the table above, as well as the Total Risk-Weighted Assets and Common Equity Tier 1 Capital amounts listed in the table below, are estimates based on, and calculated in accordance with, bank regulatory capital rules. All prior quarters reflect actual results. The CET1 ratio at June 30, 2020 listed in the tables (i.e., 13.07%) exceeds the sum of the required minimum CET1 ratio plus the fully phased-in Capital Conservation Buffer (i.e., 7.00%).
 6/30/20203/31/202012/31/20199/30/20196/30/2019
Total Risk Weighted Assets$2,283,430  $2,275,902  $2,237,127  $2,184,214  $2,121,541  
Common Equity Tier 1 Capital298,362  292,165  289,409  282,485  275,528  
Common Equity Tier 1 Capital Ratio13.07 %12.84 %12.94 %12.93 %12.99 %

Footnotes:        
           
1.Share and Per Share Data have been restated for the September 27, 2018, 3% stock dividend.
  
2.Non-GAAP Financial Measures Reconciliation: Tangible Book Value, Tangible Equity and Return on Tangible Equity exclude goodwill and other intangible assets, net from total equity.  These are non-GAAP financial measures which we believe provide investors with information that is useful in understanding our financial performance. See "Use of Non-GAAP Financial Measures" on page 44.
  6/30/2019 3/31/2019 12/31/2018 9/30/2018 6/30/2018
 Total Stockholders' Equity (GAAP)$284,649
 $276,609
 $269,584
 $264,810
 $259,488
 Less: Goodwill and Other Intangible assets, net23,603
 23,650
 23,725
 23,827
 23,933
 Tangible Equity (Non-GAAP)$261,046
 $252,959
 $245,859
 $240,983
 $235,555
           
 Period End Shares Outstanding14,513
 14,474
 14,472
 14,441
 14,424
 
Tangible Book Value per Share
     (Non-GAAP)
$17.99
 $17.48
 $16.99
 $16.69
 $16.33
 Net Income8,934
 8,734
 8,758
 9,260
 9,730
 Return on Tangible Equity (Net Income/Tangible Equity - Annualized)13.96% 14.22% 14.20% 15.36% 16.80%
           
3.Non-GAAP Financial Measures Reconciliation: Net Interest Margin is the ratio of our annualized tax-equivalent net interest income to average earning assets. This is also a non-GAAP financial measure which we believe provides investors with information that is useful in understanding our financial performance. See "Use of Non-GAAP Financial Measures" on page 44.
  6/30/2019 3/31/2019 12/31/2018 9/30/2018 6/30/2018
 Interest Income (GAAP)$27,227
 $26,213
 $26,000
 $24,495
 $23,590
 Add: Tax-Equivalent adjustment
(Non-GAAP)		376
 373
 376
 376
 468
 Interest Income - Tax Equivalent
(Non-GAAP)		$27,603
 $26,586
 $26,376
 $24,871
 $24,058
 Net Interest Income (GAAP)$21,707
 $21,121
 $21,657
 $20,997
 $20,962
 Add: Tax-Equivalent adjustment
(Non-GAAP)		376
 373
 376
 376
 468
 Net Interest Income - Tax Equivalent
(Non-GAAP)		$22,083
 $21,494
 $22,033
 $21,373
 $21,430
 Average Earning Assets$2,865,085
 $2,847,966
 $2,832,558
 $2,757,020
 $2,703,054
 Net Interest Margin (Non-GAAP)*3.09% 3.06% 3.09% 3.08% 3.18%
           
4.Non-GAAP Financial Measures: Financial Institutions often use the "efficiency ratio", a non-GAAP ratio, as a measure of expense control. We believe the efficiency ratio provides investors with information that is useful in understanding our financial performance. We define our efficiency ratio as the ratio of our noninterest expense to our net gross income (which equals our tax-equivalent net interest income plus noninterest income, as adjusted). There is no GAAP financial measure that is closely comparable to the efficiency ratio. See "Use of Non-GAAP Financial Measures" on page 44.
           
5.For the current quarter, all of the regulatory capital ratios in the table above, as well as the Total Risk-Weighted Assets and Common Equity Tier 1 Capital amounts listed in the table below, are estimates based on, and calculated in accordance with, bank regulatory capital rules. All prior quarters reflect actual results. The June 30, 2019 CET1 ratio listed in the tables (i.e., 12.99%) exceeds the sum of the required minimum CET1 ratio plus the fully phased-in Capital Conservation Buffer (i.e., 7.00%).
  6/30/2019 3/31/2019 12/31/2018 9/30/2018 6/30/2018
 Total Risk Weighted Assets$2,121,541
 $2,075,115
 $2,046,495
 $1,999,849
 $1,934,890
 Common Equity Tier 1 Capital275,528
 269,363
 263,863
 257,852
 251,666
 Common Equity Tier 1 Capital Ratio12.99% 12.98% 12.89% 12.89% 13.01%

  * Quarterly ratios have been annualized.


44

Arrow Financial Corporation
Selected Year-to-Date Information
(Dollars In Thousands, Except Per Share Amounts - Unaudited)
Six Months Ended6/30/2019
 6/30/2018
Net Income$17,668
 $18,261
Transactions Recorded in Net Income (Net of Tax):   
Net Changes in Fair Value of Equity Investments57
 179
    
Share and Per Share Data:(1)
   
Period End Shares Outstanding14,513
 14,424
Basic Average Shares Outstanding14,478
 14,374
Diluted Average Shares Outstanding14,523
 14,459
Basic Earnings Per Share$1.22
 $1.27
Diluted Earnings Per Share1.22
 1.26
Cash Dividend Per Share0.52
 0.49
    
Selected Year-to-Date Average Balances:   
  Interest-Bearing Deposits at Banks$25,632
 $28,262
  Investment Securities597,847
 645,193
  Loans2,233,094
 1,999,072
  Deposits2,392,381
 2,315,523
  Other Borrowed Funds288,498
 202,272
  Stockholders’ Equity276,576
 253,749
  Total Assets2,987,313
 2,793,551
Return on Average Assets, annualized1.19% 1.32%
Return on Average Equity, annualized12.88% 14.51%
Return on Average Tangible Equity, annualized (2) 
14.09% 16.03%
Average Earning Assets2,856,573
 2,672,527
Average Paying Liabilities2,229,963
 2,075,510
Interest Income53,440
 46,008
Tax-Equivalent Adjustment (3)
748
 959
Interest Income, Tax-Equivalent (3)
54,188
 46,967
Interest Expense10,612
 4,644
Net Interest Income42,828
 41,364
Net Interest Income, Tax-Equivalent (3)
43,576
 42,322
Net Interest Margin, annualized3.02% 3.12%
Net Interest Margin, Tax Equivalent, annualized (3)
3.08% 3.19%
    
Efficiency Ratio Calculation: (4)
   
Noninterest Expense$33,560
 $32,148
Less: Intangible Asset Amortization124
 132
Net Noninterest Expense33,436
 32,016
Net Interest Income, Tax-Equivalent (3)
43,576
 42,323
Noninterest Income13,783
 14,800
Less: Net Changes in Fair Value of Equity Securities76
 241
Net Gross Income57,283
 56,882
Efficiency Ratio (4)
58.37% 56.28%
    


Arrow Financial Corporation

Selected Year-to-Date Information

(Dollars In Thousands, Except Per Share Amounts- Unaudited)
Six Months Ended6/30/20206/30/2019
Net Income$17,286  $17,668  
Transactions Recorded in Net Income (Net of Tax):  
Net Changes in Fair Value of Equity Investments(359) 57  
Share and Per Share Data: 1
 
Period End Shares Outstanding15,011  14,949  
Basic Average Shares Outstanding14,994  14,912  
Diluted Average Shares Outstanding15,010  14,958  
Basic Earnings Per Share$1.15  $1.19  
Diluted Earnings Per Share1.15  1.18  
Cash Dividend Per Share0.52  0.51  
Selected Year-to-Date Average Balances: 
  Interest-Bearing Deposits at Banks$94,359  $25,632  
  Investment Securities605,421  597,847  
  Loans2,456,272  2,233,094  
  Deposits2,811,221  2,392,381  
  Other Borrowed Funds150,185  288,498  
  Stockholders’ Equity311,454  276,576  
  Total Assets3,309,007  2,987,313  
Return on Average Assets, annualized1.05 %1.19 %
Return on Average Equity, annualized11.16 %12.88 %
Return on Average Tangible Equity, annualized 2
12.07 %14.09 %
Average Earning Assets3,156,052  2,856,573  
Average Paying Liabilities2,410,103  2,229,963  
Interest Income56,228  53,440  
Tax-Equivalent Adjustment 3
569  748  
Interest Income, Tax-Equivalent 3
56,797  54,188  
Interest Expense8,380  10,612  
Net Interest Income47,848  42,828  
Net Interest Income, Tax-Equivalent 3
48,417  43,576  
Net Interest Margin, annualized3.05 %3.02 %
Net Interest Margin, Tax Equivalent, annualized 3
3.09 %3.08 %
Efficiency Ratio Calculation: 4
 
Noninterest Expense$34,999  $33,560  
Less: Intangible Asset Amortization115  124  
Net Noninterest Expense34,884  33,436  
Net Interest Income, Tax-Equivalent 3
48,417  43,576  
Noninterest Income14,858  13,783  
Less: Net Changes in Fair Value of Equity Securities(480) 76  
Net Gross Income63,755  57,283  
Efficiency Ratio 4
54.72 %58.37 %

45


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

Footnotes:
1.Share and Per Share Data have been restated for the September 27, 2019, 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 the Company believes provide investors with information that is useful in understanding our financial performance. See "Use of Non-GAAP Financial Measures" on page 43.
6/30/20206/30/2019
Total Stockholders' Equity (GAAP)$317,687  $284,649  
Less: Goodwill and Other Intangible assets, net23,535  23,603  
Tangible Equity (Non-GAAP)$294,152  $261,046  
Period End Shares Outstanding15,011  14,949  
Tangible Book Value per Share (Non-GAAP)$19.60  $17.46  
Net Income17,286  17,668  
Return on Tangible Equity (Net Income/Tangible Equity - Annualized)12.07 %14.09 %
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 the Company believes provides investors with information that is useful in understanding our financial performance. See "Use of Non-GAAP Financial Measures" on page 43.
6/30/20206/30/2019
Interest Income (GAAP)$56,228  $53,440  
Add: Tax-Equivalent adjustment (Non-GAAP)$569  $748  
Net Interest Income - Tax Equivalent (Non-GAAP)$56,797  $54,188  
Net Interest Income (GAAP)$47,848  $42,828  
Add: Tax-Equivalent adjustment (Non-GAAP)569  748  
Net Interest Income - Tax Equivalent (Non-GAAP)$48,417  $43,576  
Average Earning Assets$3,156,052  $2,856,573  
Net Interest Margin (Non-GAAP)*3.09 %3.08 %
4.Financial Institutions often use the "efficiency ratio", a non-GAAP ratio, as a measure of expense control. The Company believes efficiency ratio provides investors with information that is useful in understanding financial performance. Efficiency ratio is defined as the ratio of our noninterest expense to our net gross income (which equals our tax-equivalent net interest income plus noninterest income, as adjusted). See "Use of Non-GAAP Financial Measures" on page 43.
Footnotes:   
     
1.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 44.
  6/30/2019 6/30/2018
 Total Stockholders' Equity (GAAP)$284,649
 $259,488
 Less: Goodwill and Other Intangible assets, net23,603
 23,933
 Tangible Equity (Non-GAAP)$261,046
 $235,555
     
 Period End Shares Outstanding14,513
 14,424
 Tangible Book Value per Share (Non-GAAP)$17.99
 $16.33
 Net Income17,668
 18,261
 Return on Tangible Equity (Net Income/Tangible Equity - Annualized)14.09% 16.03%
     
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 44.
  6/30/2019 6/30/2018
 Interest Income (GAAP)$53,440
 $46,008
 Add: Tax-Equivalent adjustment (Non-GAAP)$748
 $959
 Net Interest Income - Tax Equivalent (Non-GAAP)$54,188
 $46,967
 Net Interest Income (GAAP)$42,828
 $41,364
 Add: Tax-Equivalent adjustment (Non-GAAP)748
 959
 Net Interest Income - Tax Equivalent (Non-GAAP)$43,576
 $42,323
 Average Earning Assets$2,856,573
 $2,672,527
 Net Interest Margin (Non-GAAP)*3.08% 3.19%
     
4.Financial Institutions often use the "efficiency ratio", a non-GAAP ratio, as a measure of expense control. We believe the efficiency ratio provides investors with information that is useful in understanding our financial performance. We define our efficiency ratio as the ratio of our noninterest expense to our net gross income (which equals our tax-equivalent net interest income plus noninterest income, as adjusted). See "Use of Non-GAAP Financial Measures" on page 44.


* Year-to-date ratios have been annualized.

46




Average Consolidated Balance Sheets and Net Interest Income Analysis
(Dollars In Thousands)
Quarter Ended June 30:20202019
InterestRateInterestRate
AverageIncome/Earned/AverageIncome/Earned/
BalanceExpensePaidBalanceExpensePaid
Interest-Bearing Deposits at Banks$155,931  $41  0.11 %$25,107  $195  3.12 %
Investment Securities:
Fully Taxable405,265  1,871  1.86  354,383  2,284  2.59  
Exempt from Federal Taxes201,829  1,013  2.02  230,296  1,228  2.14  
Loans2,518,198  25,077  4.01  2,255,299  23,520  4.18  
Total Earning Assets3,281,223  28,002  3.43  2,865,085  27,227  3.81  
Allowance for Credit Losses(23,588) (20,326) 
Cash and Due From Banks31,719  33,158  
Other Assets147,801  119,541  
Total Assets$3,437,155  $2,997,458  
Deposits:
Interest-Bearing Checking Accounts$740,284  310  0.17  $733,327  453  0.25  
Savings Deposits1,215,296  1,173  0.39  879,026  2,008  0.92  
Time Deposits of $250,000 or More135,978  438  1.30  97,703  515  2.11  
Other Time Deposits236,749  784  1.33  272,104  1,131  1.67  
Total Interest-Bearing Deposits2,328,307  2,705  0.47  1,982,160  4,107  0.83  
Short-Term Borrowings54,148  16  0.12  199,404  977  1.97  
FHLBNY Term Advances & Other Long-Term Debt70,000  390  2.24  50,879  408  3.22  
Finance Leases5,235  49  3.76  3,019  28  3.72  
Total Interest-Bearing Liabilities2,457,690  3,160  0.52  2,235,462  5,520  0.99  
Noninterest-bearing deposits624,125  454,130  
Other Liabilities38,960  27,619  
Total Liabilities3,120,775  2,717,211  
Stockholders’ Equity316,380  280,247  
Total Liabilities and Stockholders’ Equity$3,437,155  $2,997,458  
Net Interest Income$24,842  $21,707  
Net Interest Spread2.91 %2.82 %
Net Interest Margin3.05 %3.04 %
47


Average Consolidated Balance Sheets and Net Interest Income AnalysisAverage Consolidated Balance Sheets and Net Interest Income AnalysisAverage Consolidated Balance Sheets and Net Interest Income Analysis
(GAAP Basis)
(Dollars In Thousands)(Dollars In Thousands)(Dollars In Thousands)
   
Quarter Ended June 30:2019 2018
Six Months Ended June 30:Six Months Ended June 30:20202019
  Interest Rate   Interest RateInterestRateInterestRate
Average Income/ Earned/ Average Income/ Earned/AverageIncome/Earned/AverageIncome/Earned/
Balance Expense Paid Balance Expense PaidBalanceExpensePaidBalanceExpensePaid
Interest-Bearing Deposits at Banks$25,107
 $195
 3.12% $28,543
 $158
 2.22%Interest-Bearing Deposits at Banks$94,359  $165  0.35 %$25,632  $390  3.07 %
Investment Securities:           Investment Securities:
Fully Taxable354,383
 2,284
 2.59
 376,253
 2,048
 2.18
Fully Taxable402,286  4,064  2.03  366,186  4,653  2.56  
Exempt from Federal Taxes230,296
 1,228
 2.14
 271,660
 1,475
 2.18
Exempt from Federal Taxes203,135  2,048  2.03  231,661  2,474  2.15  
Loans2,255,299
 23,520
 4.18
 2,026,598
 19,909
 3.94
Loans2,456,272  49,951  4.09  2,233,094  45,923  4.15  
Total Earning Assets2,865,085
 27,227
 3.81
 2,703,054
 23,590
 3.50
Total Earning Assets3,156,052  56,228  3.58  2,856,573  53,440  3.77  
Allowance for Loan Losses(20,326)     (19,065)    
Allowance for Credit LossesAllowance for Credit Losses(22,887) (20,218) 
Cash and Due From Banks33,158
     34,935
    Cash and Due From Banks32,965  34,136  
Other Assets119,541
     104,137
    Other Assets142,877  116,822  
Total Assets$2,997,458
     $2,823,061
    Total Assets$3,309,007  $2,987,313  
Deposits:           Deposits:
Interest-Bearing Checking Accounts$733,327
 453
 0.25
 $866,996
 388
 0.18
Interest-Bearing Checking Accounts$724,016  797  0.22  $750,744  935  0.25  
Savings Deposits879,026
 2,008
 0.92
 750,352
 711
 0.38
Savings Deposits1,154,138  3,644  0.63  856,554  3,609  0.85  
Time Deposits of $250,000 or More97,703
 515
 2.11
 96,580
 328
 1.36
Time Deposits of $250,000 or More131,012  971  1.49  88,575  911  2.07  
Other Time Deposits272,104
 1,131
 1.67
 166,420
 282
 0.68
Other Time Deposits250,752  1,784  1.43  242,608  1,844  1.53  
Total Interest-Bearing Deposits1,982,160
 4,107
 0.83
 1,880,348
 1,709
 0.36
Total Interest-Bearing Deposits2,259,918  7,196  0.64  1,938,481  7,299  0.76  
Short-Term Borrowings199,404
 977
 1.97
 154,737
 465
 1.21
Short-Term Borrowings73,297  224  0.61  231,758  2,399  2.09  
FHLBNY Term Advances & Other Long-Term Debt50,879
 408
 3.22
 65,000
 454
 2.80
FHLBNY Term Advances and Other Long-Term DebtFHLBNY Term Advances and Other Long-Term Debt71,649  861  2.42  56,740  871  3.10  
Finance Leases3,019
 28
 3.72
 —
 —
 —
Finance Leases5,239  99  3.80  2,984  433.72  
Total Interest-Bearing Liabilities2,235,462
 5,520
 0.99
 2,100,085
 2,628
 0.50
Total Interest-Bearing Liabilities2,410,103  8,380  0.70  2,229,963  10,612  0.96  
Noninterest-bearing deposits454,130
     444,854
    Noninterest-bearing deposits551,303  453,900  
Other Liabilities27,619
     21,764
    Other Liabilities36,147  26,875  
Total Liabilities2,717,211
     2,566,703
    Total Liabilities2,997,553  2,710,738  
Stockholders’ Equity280,247
     256,358
    Stockholders’ Equity311,454  276,575  
Total Liabilities and Stockholders’ Equity$2,997,458
     $2,823,061
    Total Liabilities and Stockholders’ Equity$3,309,007  $2,987,313  
Net Interest Income  $21,707
     $20,962
  Net Interest Income$47,848  $42,828  
Net Interest Spread    2.82%     3.00%Net Interest Spread2.88 %2.81 %
Net Interest Margin    3.04%     3.11%Net Interest Margin3.05 %3.02 %





48
Average Consolidated Balance Sheets and Net Interest Income Analysis
(GAAP Basis)
(Dollars In Thousands)
 
 
Six Months Ended June 30:2019 2018
   Interest Rate   Interest Rate
 Average Income/ Earned/ Average Income/ Earned/
 Balance Expense Paid Balance Expense Paid
Interest-Bearing Deposits at Banks$25,632
 $390
 3.07% $28,262
 $292
 2.08%
Investment Securities:           
Fully Taxable366,186
 4,653
 2.56
 368,126
 3,941
 2.16
Exempt from Federal Taxes231,661
 2,474
 2.15
 277,067
 3,008
 2.19
Loans2,233,094
 45,923
 4.15
 1,999,072
 38,767
 3.91
Total Earning Assets2,856,573
 53,440
 3.77
 2,672,527
 46,008
 3.47
Allowance for Loan Losses(20,218)     (18,795)    
Cash and Due From Banks34,136
     35,270
    
Other Assets116,822
     104,547
    
Total Assets$2,987,313
     $2,793,549
    
Deposits:           
Interest-Bearing Checking Accounts$750,744
 935
 0.25
 $890,426
 775
 0.18
Savings Deposits856,554
 3,609
 0.85
 737,080
 1,233
 0.34
Time Deposits of $250,000 or More88,575
 911
 2.07
 80,085
 532
 1.34
Other Time Deposits242,608
 1,844
 1.53
 165,647
 541
 0.66
Total Interest-Bearing Deposits1,938,481
 7,299
 0.76
 1,873,238
 3,081
 0.33
Short-Term Borrowings231,758
 2,399
 2.09
 133,405
 661
 1.00
FHLBNY Term Advances and Other Long-Term Debt56,740
 871
 3.10
 68,867
 902
 2.64
Finance Leases2,984
 43
 3.72
 —
 —
 —
Total Interest-Bearing Liabilities2,229,963
 10,612
 0.96
 2,075,510
 4,644
 0.45
Noninterest-bearing deposits453,900
     442,285
    
Other Liabilities26,875
     22,005
    
Total Liabilities2,710,738
     2,539,800
    
Stockholders’ Equity276,576
     253,749
    
Total Liabilities and Stockholders’ Equity$2,987,313
     $2,793,549
    
Net Interest Income  $42,828
     $41,364
  
Net Interest Spread    2.81%     3.02%
Net Interest Margin    3.02%     3.12%




OVERVIEW
        
The following discussion and analysis focuses on and reviews ourthe results of operations for the three monththree-month period ended June 30, 20192020 and ourthe financial condition as of June 30, 20192020 and 2018.2019.  The discussion below should be read in conjunction with the selected quarterly and annual information set forth above and the Consolidated Financial Statements and other financial data presented elsewhere in this Report.  When necessary, prior-year financial information has been reclassified to conform to the current-year presentation.


COVID-19 Pandemic:
In March 2020, the World Health Organization recognized COVID-19 as a pandemic. In response, the United States federal government and various state and local governments have, among other actions, imposed travel and business restrictions and required or advised communities in which we do business to adopt stay-at-home orders and social distancing guidelines, causing some businesses to adjust, reduce or suspend operating activities. Like many businesses, we expect the operations and financial results to continue to be adversely impacted by the COVID-19 pandemic. The severity, magnitude and duration of the current pandemic are still uncertain, rapidly changing and hard to predict.
Arrow has been proactive and continually assessing the potential impact of the pandemic. It formed a Business Continuity Task Force in advance of the impending arrival of the pandemic to Upstate New York. The task force, representing leadership from across the organization, has overseen a robust and expansive effort to protect employees and customers while continuing to deliver essential banking services during the pandemic. In the second quarter, Arrow began to reopen lobbies to customers while still encouraging customers to use no-contact alternatives such as digital banking, drive-ins and ATMs. However, while certain restrictions and guidelines have been lifted or relaxed, they may be reinstituted in response to the continuing effects of the pandemic. Additionally, Arrow expanded remote work arrangements for a significant portion of its employee base, discontinued employee travel, minimized in-person meetings, and implemented social distancing for essential employees who remained on-site. Arrow believes that between remote working arrangements and cross training initiatives, current human capital resources should be able to continue operations during the current COVID-19 pandemic, absent unforeseen facts.
Demand for the Small Business Administration’s Paycheck Protection Program had been significant in the second quarter. Arrow funded over 1,400 loans totaling $140.0 million. Both of Arrow’s subsidiary banks are proudly participating in the program as a way to deliver relief for small businesses in Upstate New York. In order to process the large volume of Paycheck Protection Program applications, Arrow reinforced its lending team with resources and support from across the Company. Arrow effectively managed its liquidity position while being able to satisfy the significant demand for the Small Business Administration’s Paycheck Protection Program that had occurred in the second quarter.
The COVID-19 pandemic has significantly impacted economic activity and markets around the world, and we expect it will negatively impact Arrow's business in numerous ways. In particular, the rapid rise in unemployment and the temporary mandated closure of non-essential businesses in New York, will most likely reduce loan production as well as impact borrowers' ability to satisfy their obligations. Investments are analyzed to determine if any impairment not considered temporary exists. Municipal investments may be impacted if tax revenue deceases significantly. Management will continue to evaluate investment securities for impairment. Arrow has increased its allowance for loan losses as a result of the uncertainty surrounding the ability of its borrowers to satisfy loan obligations to Arrow. Arrow will continue to assess potential loan losses. Arrow does not currently anticipate any impairment of its right-of-use lease assets, goodwill or other intangible assets as a result of COVID-19, however, Arrow will continue to assess impairment throughout the pandemic.
We continue to monitor closely Arrow’s financial health and liquidity and the impact of the pandemic on our operations and financial results. As we cannot predict the duration or scope of the pandemic or its impact on economic and financial markets or its impact on our business, we are not able to reasonably estimate the overall impact on the Company. For further discussion of the impact COVID-19 has had and may in the future have on Arrow and its financial results and operations, please refer to the risk factor included in Item 8.01 of Arrow's Current Report on Form 8-K filed April 24, 2020.

Summary of Q2 20192020 Financial Results: Net income was $8.9 million for the second quarter of 2019, a decrease of $796 thousand, or 8.2%, over net income for the second quarter of 2018. 2020 was $9.2 million, compared to $8.9 million in the second quarter of 2019. Total loans grew in the second quarter by $147.7 million to $2.6 billion, including $140.0 million of the Small Business Administration's Paycheck Protection Program loans. Net interest income increased to $24.8 million in the second quarter of 2020, compared to $21.7 million for the comparable quarter of 2019.
Diluted earnings per share (EPS) for the quarter was $0.62, a decrease$0.61, an increase of 7.5%1.7% from the EPS of $0.67$0.60 reported for the second quarter of 2018.2019. Return on average equity (ROE) for the second quarter of 20192020 decreased to 12.79%11.64%, as compared to a ROE of 15.22%12.79% for the second quarter ended June 30, 2018.2019. Return on average assets (ROA) for the 20192020 second quarter was 1.20%1.07%, a decrease from an ROA of 1.38%1.20% for the second quarter ended June 30, 2018.2019.
Factors contributingTotal loans reached $2.6 billion as of June 30, 2020, which represents an increase of $281.6 million, or 12.3% as compared to June 30, 2019. The consumer loan portfolio grew by $49.5 million, or 6.4%, as compared to June 30, 2019, primarily within the results forindirect automobile lending program. Total outstanding residential real estate loans increased $51.0 million, or 5.8%, as compared to June 30, 2019. Total outstanding commercial loans increased $181.1 million, or 28.8%, as compared to June 30, 2019. The increase in commercial loans includes $140.0 million of the current quarterSmall Business Administration's Paycheck Protection Program loans.
At June 30, 2020, deposit balances reached $3.1 billion, up $565.0 million, or 22.6%, from the prior-year level. Noninterest-bearing deposits represented 21.8% of total deposits at June 30, 2020, compared to 18.7% of total deposits on June 30, 2019. At June 30, 2020, other time deposits were $216.6 million, a decrease of $72.7 million compared to the prior year comparableyear. Municipal deposits increased $155.6 million, or 27.2% from June 30, 2019. Total combined Federal Home Loan Bank Overnight and Term Advances declined $66.6 million from June 30, 2019.
Second quarter are as follows:
Net2020 net interest income increased 3.6% to $24.8 million, up 14.4% from $21.7 million driven byin the $3.6 million increase in total interest and dividend income resulting from continued strong loan growth.comparable quarter of 2019. The net interest margin was 3.04%3.05% for the quarter, compared to 3.11%3.04% for the second quarter of 2018.2019. The decreaseincrease in net
49

interest margin from the prior year was primarily due to the $2.9 million increase in interest expense. This increase was the resulta variety of factors including; balance sheet growth, lower market rates, and a 3.8% growth in depositsmore favorable funding mix, with higher deposit balances and higher rates paid on savings, time deposits and other borrowings due to higher short-term market interest rates. lower wholesale borrowings.
Noninterest income for the three-month periodthree months ended June 30, 2019,2020 was $6.9$7.2 million, compared to $7.9$6.9 million forin the comparable 20182019 quarter. Revenue generated fromFor the wealth management and insurance segments declinedsecond quarter of 2020, the fair value of equity securities at June 30, 2020 decreased $107 thousand primarily as a result of several factors including large estate settlements in 2018 as well as othercontinued equity market and competitive factors. Total noninterestdisruption related to the COVID-19 pandemic. In addition, income represented 24.1% of total revenues$547 thousand related to net gain on the sale of loans was recorded in the second quarter of 2019 compared to 27.4% for the same period of 2018.2020.
Noninterest expense for the second quarter of 20192020 increased 4.4%2.0% to $16.9$17.2 million, from $16.2$16.9 million for the second quarter of 2018. Technology2019. Salaries and equipment expensebenefits increased $394 thousand$0.5 million, primarily the result of increased cost of health insurance benefits.
Asset quality remained strong at June 30, 2020, with continued low levels of nonperforming loans and other operating expense increased $409net charge-offs. Nonperforming loans at June 30, 2020, were $6.5 million, up $964 thousand from the comparable quarterlevel at June 30, 2019. Net charge-offs, expressed as an annualized percentage of average loans outstanding, were 0.06% for the three-month period ended June 30, 2020, consistent with December 31, 2019, and an increase from 0.02% for the three-month period ended June 30, 2019. The allowance for loan losses was $26.3 million at June 30, 2020, which represented 1.03% of loans outstanding or 1.09% excluding the $140.0 million of Small Business Administration Paycheck Protection Program loans originated in 2018.
the second quarter. This is compared to 0.91% at June 30, 2019. The loss provision expense for income taxes was $2.3 million in both the second quarter of 2019 and 2018. The effective income tax rates2020 was $3.0 million, up $2.6 million from the provision expense for the three-month periods ended June 30,comparable 2019 and 2018 were 20.5% and 19.3%, respectively.quarter. Although credit quality remains very strong, the increase in loss provision reflects the uncertainty resulting from the COVID-19 pandemic.


The changes in net income, net interest income and net interest margin between the three-month periods are discussed in detail under the heading "RESULTS OF OPERATIONS," beginning on page 63.66.


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 June 30, 2019, we2020, Arrow continued to exceed by a substantial amount all required minimum capital ratios under the current bank regulatory capital rules as implemented under Dodd-Frank (the "Capital Rules") at both the holding company and bank levels.  At that date, both subsidiary banks, as well as the holding company, continued to qualify as "well-capitalized" under the capital classification guidelines as defined by the Capital Rules.  Because of continued profitability and strong asset quality, ourthe regulatory capital levels throughout recent years have consistently remained well in excess of the various required regulatory minimums in effect from time to time, as they do at present.  Pursuant to the Capital Rules, under Dodd-Frank, required minimum regulatory capital levels for insured banks and their parent holding companies increased in 2019. Pursuant to Economic Growth Act, the federal bank regulators are required to implement a simplified community bank leverage ratio capital standard that may be applicable to Arrow and its subsidiary banks to allow them to satisfy all applicable capital and leverage requirements, including the currently applicable risk-based capital ratio requirements.  The implementation of the new community bank leverage ratio standards will be subject to the notice and comment procedures of rulemaking.  The Economic Growth Act does not impose a deadline for this rulemaking.  
The federal bank regulators have issued a proposedfinal rule to implement the "community“community bank leverage ratio"ratio”, butintroducing an optional simplified measure of capital adequacy for qualifying community banking organizations (the CBLR framework).  To qualify for the CBLR framework, a community banking organization must satisfy certain requirements, including having a leverage ratio of greater than 9%, less than $10 billion in total consolidated assets, and limited amounts of off-balance-sheet exposures and trading assets and liabilities.  A qualifying community banking organization that rule isopts into the CBLR framework and meets all requirements under the CBLR framework will be considered to have met the well-capitalized ratio requirements under the “prompt corrective action” regulations and will not yet effectivebe required to report or calculate risk-based capital ratios. Subsequently, Section 4012 of the Coronavirus Aid, Relief, and Economic Security (CARES) Act required the federal banking agencies to temporarily lower the threshold for election of the CBLR framework, issuing two interim final rules to set the CLBR at 8% as of the second quarter of 2020 and is subjectthen gradually re-establish the CBLR at 9%.
Under the interim final rules, the CBLR will be set at 8% beginning in the second quarter of 2020 through the end of the year. Thus, community banks that have a leverage ratio of 8% or greater and meet certain other criteria may elect to change. Upon effectiveness,use the CBLR framework. Beginning in 2021, the CBLR will increase to 8.5% for the calendar year. Community banks will have until January 1, 2022, before the leverage ratio requirement to use the CBLR framework will return to 9%.
The CBLR final rule may impact Arrow's capital optionsbecame effective as of January 1, 2020, and requirements, although the potential impactArrow and both subsidiary banks have opted out of the final rule on Arrow will remain uncertain until the final rule is issued. Until the rule becomes final and effective, the enhancedutilizing CBLR framework. The Capital Rules promulgated under Dodd-Frank will remain applicable to Arrow.
Stockholders’ equity was $284.6$317.7 million at June 30, 2019,2020, an increase of $15.1$16.0 million, or 5.6%5.3%, from the December 31, 20182019 level of $269.6$301.7 million, and an increase of $25.2$33.0 million, or 9.7%11.6%, from the prior-year level. The increase in stockholders' equity over the first six months of 20192020 principally reflected the following factors: (i) $17.67$17.3 million of net income for the period, plus (ii) other comprehensive income of $4.16$6.1 million, plus (iii) issuance of $2.80$1.9 million of common stock through employee benefit and dividend reinvestment plans; reduced by (iv) cash dividends of $7.53$7.8 million; and (v) repurchases of common stock of $2.04$1.5 million. The components of the change in stockholders’ equity since year-end 20182019 are presented in the Consolidated Statement of Changes in Stockholders’ Equity on page 7,6, and are discussed in more detail in the next section.
At June 30, 2019,2020, book value per share was $19.61,$21.16, up by 9.0%11.1% over the prior-year level. Tangible book value per share (a non-GAAP measure that deducts intangible assets from stockholders' equity) was $17.99,$19.60, an increase of $1.66,$2.14, or 10.2%12.3%, over the level as of June 30, 2018.2019. See the disclosure on page 4443 related to the use of non-GAAP financial measures including tangible book value.


On June 30, 2019,2020, the Company's closing stock price was $34.73,$29.73, representing a trading multiple of 1.931.52 to tangible book value. In the second quarter of 2019,2020, the Company paid a quarterly cash dividend of $0.26 was paid.$0.26. Further discussion of dividends is included in the Capital Components; Stock Repurchases; Dividends section located on page 61.62.


Loan Quality: Net charge-offs for the second quarter of 20192020 were $133$377 thousand as compared to $46$133 thousand for the comparable 20182019 quarter. The ratio of net charge-offs to average loans (annualized) was 0.02%0.06% for the second quarter of 2020, consistent with December 31, 2019, compared to 0.01%and an increase from 0.02% for the second quarter of 2018.three-month period ended June 30, 2019. At June 30, 2019,2020, the allowance for loancredit losses was $20.7$26.3 million representing 0.91%1.03% of total loans, which is a decreasean increase from the June 30, 20182019 ratio of 0.95%0.91%. The allowance was determined to be appropriate andAlthough credit quality remains very strong, the increase in loan loss provision expense reflects the continuing stronguncertainty resulting from the COVID-19 pandemic. As permitted by the CARES Act, Arrow has elected to defer the adoption of the Current Expected Credit Losses ("CECL") methodology in determining credit quality in the loan portfolio.losses.
50

Nonperforming loans were $5.5$6.5 million at June 30, 2019,2020, representing 0.24%0.25% of period-end loans, an increase from the June 30, 20182019 ratio of 0.20%0.24%. The ratio continues to compare favorably with the weighted average ratio of the peer group of 0.64%0.53% at March 31, 2019.2020.


Loan Segments: During the quarter endedAs of June 30, 2019,2020, total loans grew by $45.1$175.8 million, or 2.0%7.4%, as compared to the balance at MarchDecember 31, 2019. The largest increase was in consumercommercial and commercial real estate loans, which increased during the quarter by $32.2$148.5 million, or 4.3%.22.5%, from December 31, 2019. The majority of the increase in commercial loans resulted from the origination of approximately $140.0 million of Small Business Administration's Paycheck Protection Program loans. In addition, residential real estateconsumer loans expanded by $10.9$17.3 million, or 1.3% and2.1%. The economic factors resulting from the total commercialCOVID-19 pandemic will most likely adversely impact loan portfolio increased by $1.9 million, or 0.3%.
Commercial Loans: These loans comprised 6.1%growth for the remainder of the total loan portfolio at period-end. The business sector in the Company's service area, including small-year.
•Commercial and mid-sized businesses with headquarters in our lending region, continued to be in reasonably good financial condition at period-end.
Commercial Real Estate Loans: These Combined, these loans comprised 21.5%comprise 31.6% of the total loan portfolio at period-end. Commercial property values in the Company's region have remained stable in recent periods.periods leading to the pandemic. Appraisals on nonperforming and watched CRE loan properties are updated as deemed necessary, usually when the loan is downgraded or when there has been significant market deterioration since the last appraisal.
The temporary closure of nonessential business in New York has impacted, and may continue to impact, the Bank's customer base. Government intervention, with programs such as the Small Business Administration’s Paycheck Protection Program, may mitigate the economic risk to both Arrow and its customers, however the full impact cannot be determined at this time.
•Consumer Loans: These loans (primarily automobile loans) comprised 34.2%32.3% of the total loan portfolio at period-end. Consumer automobile loans at June 30, 2019,2020, were $772$823 million, or 99.1%99.3% of this portfolio segment. In the first six months of 2019, the Company2020, Arrow did not experience any significant increase in the delinquency rate or in the percentage of nonperforming loans in this segment.
The vast majority of automobile loans are initiated through the purchase of vehicles by consumers with automobile dealers. The physical sale of vehicles through dealerships had been curtailed for the majority of the second quarter as part of the response to the COVID-19 pandemic in New York and Vermont, our primary dealer network. Thus, the volume of originations of consumer loans will be negatively impacted, although the magnitude of the impact cannot be determined.
•Residential Real Estate Loans: These loans, including home equity loans, made up 38.2%36.1% of the total loan portfolio at period-end. The residential real estate market in the Company's service area has been stable in recent periods. The CompanyArrow originated nearly all of the residential real estate loans currently held in the loan portfolio and applies conservative underwriting standards to loan originations. The CompanyArrow typically sells a portion of residential real estate mortgage originations into the secondary market. The ratio of the sales of originations to total originations tends to fluctuate from period to period based on market conditions.
Due to the COVID-19 pandemic, it is not yet possible to determine the long term economic impact of the mandated closure of non-essential business and its resulting impact on our residential real estate loan portfolio.


Liquidity and Access to Credit Markets: The Company has not experienced any liquidity problems or special concerns in recent years or thus far in 2019, or2020. Arrow’s liquidity position provides the necessary flexibility to address any unexpected near-term disruptions that may develop as a result of the COVID-19 pandemic such as: reduced cash-flows from the investment and loan portfolios and aggressive funding of programs associated with response efforts, including the Small Business Administration’s Paycheck Protection Program.  Interest-bearing cash balances at any time in our recent history.June 30, 2020 were $215.0 million compared to $28.0 million at June 30, 2019.  Contingent collateralized lines of credit are established and available through the FHLBNY and FRB, totaling $1.3 billion. The terms of the Company'sArrow's lines of credit with correspondent banks, the FHLBNY and the Federal Reserve Bank of New York have not changed significantly in recent periods (see the general liquidity discussion on page 62)63). Historically, the Company has principally relied on asset-based liquidity (i.e., funds in overnight investments and cash flow from maturing investments and loans) with liability-based liquidity as a secondary source of funds (the main liability-based sources are an overnight borrowing arrangement with a correspondent bank,banks, an arrangement for overnight borrowing and term credit advances from the FHLBNY, and an additional arrangement for short-term advances at the Federal Reserve Bank discount window). Regular liquidity stress tests and tests of the contingent liquidity plan are performed to ensure that an adequate amount of available funds can be generated to meet a wide variety of potential liquidity crises including a severe crisis.the current COVID-19 pandemic.


Visa Class B Common Stock: Arrow's subsidiary bank, Glens Falls National, like other Visa member banks, bears some indirect contingent liability for Visa's direct liability arising out of certain antitrust claims involving merchant discounts to the extent that Visa's liability might exceed the amount funded in theirits litigation escrow account. On September 18, 2018, Visa issued a press release announcing that theyit and other defendants entered into a settlement agreement with class action plaintiffs in the related litigation case, and they expect the damage class plaintiffs to file a motion for preliminary approvalcase. But certain merchants opted out of the class action settlement withand filed separate litigation cases. Once the court. If the settlement is approvedclass action and other merchant litigation cases are settled and the balance in the litigation escrow account is sufficient to cover the litigation claims and related expenses, Arrow could potentially realize a gain on the receipt of Visa Class A common stock. On September 27, 2019, Visa deposited $300 million into the litigation escrow account that was established pursuant to Visa’s U.S. retrospective responsibility plan, which reduces the conversion rate of Class B shares to Class A shares. This did not have a significant effect on the number of Class B shares currently convertible to Class A shares by Glens Falls National. At June 30, 2019,2020, Glens Falls National held 27,771 shares of Visa Class B common stock, and utilizing the conversion ratio to Class A common stock at that time, these Class B shares would convert to 45,000 shares of Visa Class A common stock. Since the litigation settlement is not certain, the Company does not recognize any economic value for these shares.

51



CHANGE IN FINANCIAL CONDITION

Summary of Selected Consolidated Balance Sheet Data
(Dollars in Thousands)
 June 30, 2019 
At Period-End


December 31,
2018
 June 30, 2018 
$ Change
From December
 
$ Change
From
June
 
% Change
From December (not annualized)
 
% Change
From
June
Interest-Bearing Bank Balances$28,045
 $27,710
 $22,189
 $335
 $5,856
 1.2 % 26.4 %
Securities Available-for-Sale285,878
 317,535
 325,387
 (31,657) (39,509) (10.0)% (12.1)%
Securities Held-to-Maturity262,541
 283,476
 297,885
 (20,935) (35,344) (7.4)% (11.9)%
Equity Securities1,850
 1,774
 1,802
 76
 48
    
Loans (1)
2,280,308
 2,196,215
 2,057,862
 84,093
 222,446
 3.8 % 10.8 %
Allowance for Loan Losses20,695
 20,196
 19,640
 499
 1,055
 2.5 % 5.4 %
Earning Assets (1)
2,866,824
 2,842,216
 2,716,214
 24,608
 150,610
 0.9 % 5.5 %
Total Assets$3,005,750
 $2,988,334
 $2,845,171
 $17,416
 $160,579
 0.6 % 5.6 %
Noninterest-Bearing Deposits$467,179
 $472,768
 $467,048
 $(5,589) $131
 (1.2)% — %
Interest-Bearing Checking
Accounts		741,395
 790,781
 861,959
 (49,386) (120,564) (6.2)% (14.0)%
Savings Deposits908,642
 818,048
 735,217
 90,594
 173,425
 11.1 % 23.6 %
Time Deposits over $250,00097,220
 73,583
 70,950
 23,637
 26,270
 32.1 % 37.0 %
Other Time Deposits289,317
 190,404
 169,607
 98,913
 119,710
 51.9 % 70.6 %
Total Deposits$2,503,753
 $2,345,584
 $2,304,781
 $158,169
 $198,972
 6.7 % 8.6 %
Federal Funds Purchased and
Securities Sold Under
Agreements to Repurchase		$51,149
 $54,659
 $60,248
 $(3,510) $(9,099) (6.4)% (15.1)%
FHLBNY Advances - Overnight83,000
 234,000
 136,000
 (151,000) (53,000) (64.5)% (39.0)%
FHLBNY Advances - Term30,000
 45,000
 45,000
 (15,000) (15,000) (33.3)% (33.3)%
Junior Subordinated Obligations Issued to Unconsolidated
Subsidiary Trusts		20,000
 20,000
 20,000
 —
 —
 — % — %
Stockholders' Equity284,649
 269,584
 259,488
 15,065
 25,161
 5.6 % 9.7 %
June 30, 2020
At Period-End


December 31,
2019
June 30, 2019$ Change
From December		$ Change
From
June		% Change
From December (not annualized)		% Change
From
June
Interest-Bearing Bank Balances$215,003 $23,186 $28,045 $191,817 $186,958 827.3 %666.6 %
Securities Available-for-Sale378,778 357,334 285,878 21,444 92,900 6.0 %32.5 %
Securities Held-to-Maturity233,517 245,065 262,541 (11,548)(29,024)(4.7)%(11.1)%
Equity Securities1,583 2,063 1,850 (480)(267)(23.3)%(14.4)%
Loans (1)
2,561,915 2,386,120 2,280,308 175,795 281,607 7.4 %12.3 %
Allowance for loan losses26,300 21,187 20,695 5,113 5,605 24.1 %27.1 %
Earning Assets (1)
3,396,370 3,024,085 2,866,824 372,285 529,546 12.3 %18.5 %
Total Assets$3,547,177 $3,184,275 $3,005,750 $362,902 $541,427 11.4 %18.0 %
Noninterest-Bearing Deposits$667,585 $484,944 $467,179 $182,641 $200,406 37.7 %42.9 %
Interest-Bearing Checking
Accounts		791,521 689,221 741,395 102,300 50,126 14.8 %6.8 %
Savings Deposits1,262,102 1,046,568 908,642 215,534 353,460 20.6 %38.9 %
Time Deposits over $250,000130,935 123,968 97,220 6,967 33,715 5.6 %34.7 %
Other Time Deposits216,630 271,353 289,317 (54,723)(72,687)(20.2)%(25.1)%
Total Deposits$3,068,773 $2,616,054 $2,503,753 $452,719 $565,020 17.3 %22.6 %
Federal Funds Purchased and 
 Securities Sold Under
 Agreements to Repurchase$47,599 $51,099 $51,149 $(3,500)$(3,550)(6.8)%(6.9)%
FHLBNY Advances - Overnight— 130,000 83,000 (130,000)(83,000)(100.0)%(100.0)%
FHLBNY Advances - Term50,000 30,000 30,000 20,000 20,000 66.7 %66.7 %
Junior Subordinated Obligations Issued to Unconsolidated
Subsidiary Trusts		20,000 20,000 20,000 — — — %— %
Stockholders' Equity317,687 301,728 284,649 15,959 33,038 5.3 %11.6 %
(1) Includes Nonaccrual Loans.
        
Changes in Earning Assets: The loan portfolio at June 30, 2019,2020, was $2.3$2.6 billion, an increase of $84.1$175.8 million, or 3.8%7.4%, from the December 31, 20182019 level and up by $222.4$281.6 million, or 10.8%12.3%, from the June 30, 20182019 level. The following trends were experienced in our largest segments:
•Commercial and commercial real estate loans: This segment of the loan portfolio increased by $7.2$148.5 million, or 1.2%22.5%, during the first six months of 2019, representing2020. The majority of the continued demand for suchincrease resulted from the origination of approximately of $140.0 million of the Small Business Administration's Payroll Protection Program loans.
•Consumer loans (primarily automobile loans through indirect lending):As of June 30, 2019,2020, these loans, primarily auto loans, increased by $59.5$17.3 million, or 8.3%2.1%, from the December 31, 20182019 balance, reflecting a continuation of strongslower demand for new and used vehicles throughout our region-wide dealer network.
network as a result of the COVID-19 pandemic. The physical sale of vehicles through dealerships had been curtailed and not deemed essential as part of the New York State and Vermont responses to the COVID-19 pandemic for the majority of the second quarter. The physical sales of vehicles through dealerships has resumed in New York State and Vermont as of June 30th. However, while certain restrictions and guidelines have been lifted or relaxed, they may be reinstituted in response to the continuing effects of the pandemic.
•Residential real estate loans:This segment increased during the first six months of 20192020 by $17.4$10.0 million, or 2.0%1.1%. Factors contributingThe likely impact of the COVID-19 pandemic on the volume of residential real estate loans is difficult to determine. We expect that high unemployment and the segment growth include solid originationsmandated closure of non-essential businesses in the quarter and a reduction of prepaymentsNew York State which occurred for the first six monthsmajority of 2019 asthe second quarter will have an adverse impact on new originations. The rapid decline of interest rates may, however, increase demand for refinancing loans, both with existing and new customers.

Changes in Sources of Funds: Deposit balances reached $3.1 billion, up $565.0 million, or 22.6%, from the prior-year level. Noninterest-bearing deposits represented 21.8% of total deposits at June 30, 2020, compared to 18.7% of total deposits on June 30, 2019. At June 30, 2020, other time deposits were $216.6 million, a decrease of $72.7 million compared to the first six months of 2018.prior year. Municipal deposits increased $155.6 million, or 27.2% from June 30, 2019. Total combined Federal Home Loan Bank Overnight and Term Advances declined $66.6 million from June 30, 2019.
52


Municipal Deposits:Fluctuations in balances of interest-bearing checking accounts are largely the result of timing and behavior of municipal deposits.  Municipal deposits on average represent 20% to 25% of total deposits. Municipal deposits are typically placed in interest-bearing checking, savings and various time deposit accounts.
In general, there is a seasonal pattern to municipal deposits which dip to a low point in August each year.  Account balances tend to increase throughout the fall and into early winter from tax deposits, flatten out after the beginning of the ensuing calendar year, and increase again at the end of March from the electronic deposit of NYS Aid payments to school districts.  In addition to these seasonal fluctuations within types of accounts,behavior, the overall level of municipal deposit balances fluctuates from year-to-year as a result of local economic factors as well as competition from other banks and non-bank entities.





Changes in Sources of Funds: Total deposits increased $158.2 million, or 6.7%, from December 31, 2018 to June 30, 2019 mainly due to the following: Other time deposits increased $98.9 million in 2019 mostly due to the acquisition of $84.5 million in brokered deposits as Arrow's subsidiary banks diversified funding at more favorable rates relative to FHLBNY overnight advances. Interest bearing checking accounts decreased $49.4 million from December 31, 2018 to June 30, 2019. Time deposits over $250,000 increased $23.6 million over the same period. The migration within our deposit offerings is largely due to certain municipal and non-municipal customers seeking a higher return on their deposit balances as a result of the rise in short-term interest rates. The addition of the brokered deposits contributed to the decrease in overnight FHLBNY advances by $151 million from December 31, 2018. At June 30, 2019, term advances from the FHLBNY were $30 million, reflecting the non-renewal of $15 million of advances that matured during 2019.


FINANCIAL CONDITION
Investment Portfolio Trends
The table below presents the changes in the period-end balances for available-for-sale, held-to-maturity and equity securities from December 31, 20182019 to June 30, 20192020 (in thousands).
The reduction in the portfolios on a combined basis during the period reflected the Company's continued strategy in recent years to reallocate earning assets from investment securities to higher yielding loans to maximize earning asset yields.
(Dollars in Thousands)(Dollars in Thousands)
Fair Value at Period-End 
Net Unrealized Gains (Losses)
For Period Ended
Fair Value at Period-EndNet Unrealized Gains (Losses)
For Period Ended
6/30/2019 12/31/2018 Change 6/30/2019 12/31/2018 Change6/30/202012/31/2019Change6/30/202012/31/2019Change
Securities Available-for-Sale:           Securities Available-for-Sale:
U.S. Agency Securities$17,524
 $46,765
 $(29,241) $18
 $(306) $324
U.S. Agency Securities$5,192  $5,054  $138  $190  $52  $138  
State and Municipal Obligations967
 1,195
 (228) 2
 2
 —
State and Municipal Obligations593  764  (171) —  —  —  
Mortgage-Backed Securities266,587
 268,775
 (2,188) 352
 (4,452) 4,804
Mortgage-Backed Securities372,193  350,716  21,477  8,854  772  8,082  
Corporate and Other Debt Securities800
 800
 —
 (200) (200) —
Corporate and Other Debt Securities800  800  —  (200) (200) —  
Total$285,878
 $317,535
 $(31,657) $172
 $(4,956) $5,128
Total$378,778  $357,334  $21,444  $8,844  $624  $8,220  
           
Securities Held-to-Maturity:           Securities Held-to-Maturity:
State and Municipal Obligations$223,654
 $233,359
 $(9,705) $3,125
 $(2,423) $5,548
State and Municipal Obligations$208,512  $212,319  $(3,807) $6,920  $4,076  $2,844  
Mortgage-Backed Securities42,414
 46,979
 (4,565) 402
 (715) 1,117
Mortgage-Backed Securities33,363  37,299  (3,936) 1,438  477  961  
Total$266,068
 $280,338
 $(14,270) $3,527
 $(3,138) $6,665
Total$241,875  $249,618  $(7,743) $8,358  $4,553  $3,805  
           
Equity Securities$1,850
 $1,774
 $76
 $—
 $—
 $—
Equity Securities$1,583  $2,063  $(480) $—  $—  $—  
           
At June 30, 2019,2020, the Company held no investment securities in the securities portfolios that consisted of or included, directly or indirectly, obligations of foreign governments or governmental agencies of foreign issuers.
In the periods referenced above, Mortgage-Backed Securities consisted solely of mortgage pass-through securities and Collateralized Mortgage Obligations ("CMOs") issued or guaranteed by U.S. federal agencies.  Mortgage pass-through securities provide to the investor monthly portions of principal and interest pursuant to the contractual obligations of the underlying mortgages. CMOs are pools of mortgage-backed securities, the repayments on which have generally been separated into two or more components (tranches), where each tranche has a separate estimated life and yield.  The Company's practice has been to purchase pass-through securities and CMOs that are issued or guaranteed by U.S. federal agencies, and the tranches of CMOs purchased are generally those having shorter average lives and/or durations. As a result of payment deferrals on underlying loan collateral that make up mortgage-backed securities, some cashflows may be temporarily impacted.


Other-Than-Temporary Impairment
Each quarter all investment securities with a fair value less than amortized cost are evaluated in the available-for-sale portfolio, the held-to-maturity portfolio and the equity securities portfolio, to determine if there exists other-than-temporary impairment for any such security as defined under generally accepted accounting principles. The evaluation also examined the potential impact of the COVID-19 pandemic on other-than-temporary impairment. There were no other-than-temporary impairment losses in the first six months of 2019.2020.
Change in Net Unrealized Securities Gains (Losses): Nearly all of the change in our net unrealized gains or losses during recent periods has been attributable to changes in the market yieldsrates during the periods in question, with no change in the credit-worthiness of the issuers.



53


InvestmentInvestment Sales, Purchases and Maturities
We hadThere were no sales of investment securities within the six-month periods ended June 30, 20192020 or 2018.2019.

Investment yields in the debt markets experienced some volatility in 2018 and the first six 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 and six-month periods ended June 30, 20192020 and 2018,2019, as well as proceeds from the maturity and calls of investment securities within each portfolio for the respective periods presented:
(In Thousands)Three Months EndedSix Months Ended
Purchases:6/30/20206/30/20196/30/20206/30/2019
Available-for-Sale Portfolio
Mortgage-Backed Securities$23,631  $15,390  $56,832  $15,390  
Maturities & Calls$25,196  $30,425  $42,640  $51.686  
(In Thousands)Three Months Ended Six Months Ended
Purchases:6/30/2019 6/30/2018 6/30/2019 6/30/2018
Available-for-Sale Portfolio       
State and Municipal Obligations$15,390
 $36,619
 $15,390
 $56,598
        
Maturities & Calls$30,425
 $15,655
 $51,686
 $25,035


Three Months EndedSix Months Ended
Purchases:6/30/20206/30/20196/30/20206/30/2019
Held-to-Maturity Portfolio
State and Municipal Obligations$4,289  $638  $5,006  $2,095  
Maturities & Calls$9,111  $17,289  $16,186  $22.608  
 Three Months Ended Six Months Ended
Purchases:6/30/2019 6/30/2018 6/30/2019 6/30/2018
Held-to-Maturity Portfolio       
State and Municipal Obligations$638
 $1,184
 $2,095
 $2,105
        
Maturities & Calls$17,289
 $33,157
 $22,608
 $39,616



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


Quarterly Average Loan Balances
(Dollars in Thousands)
 Quarter Ended
 6/30/2019 3/31/2019 12/31/2018 9/30/2018 6/30/2018
Commercial and Commercial Real Estate$627,634
 $624,058
 $609,343
 $590,254
 $583,004
Consumer Loans 
762,911
 733,154
 706,849
 678,048
 644,274
Residential Real Estate739,667
 725,274
 712,274
 686,705
 662,139
Home Equity125,087
 128,156
 131,969
 134,644
 137,182
Total Loans$2,255,299
 $2,210,642
 $2,160,435
 $2,089,651
 $2,026,599
Quarter Ended
6/30/20203/31/202012/31/20199/30/20196/30/2019
Commercial$234,732  $140,486  $133,550  $125,498  $120,979  
Commercial Real Estate530,808  518,931  505,639  493,819  492,673  
Consumer840,734  818,892  817,463  809,641  775,634  
Residential Real Estate911,924  916,037  901,458  879,921  866,013  
Total Loans$2,518,198  $2,394,346  $2,358,110  $2,308,879  $2,255,299  


Percentage of Total Quarterly Average Loans
Quarter Ended
6/30/20203/31/202012/31/20199/30/20196/30/2019
Commercial9.3 %5.9 %5.7 %5.4 %5.4 %
Commercial Real Estate21.1 %21.6 %21.4 %21.4 %21.8 %
Consumer33.4 %34.2 %34.7 %35.1 %34.4 %
Residential Real Estate36.2 %38.3 %38.2 %38.1 %38.4 %
Total Loans100.0 %100.0 %100.0 %100.0 %100.0 %

54

 Quarter Ended
 6/30/2019 3/31/2019 12/31/2018 9/30/2018 6/30/2018
Commercial and Commercial Real Estate27.9% 28.2% 28.2% 28.2% 28.7%
Consumer Loans 
33.8
 33.2
 32.7
 32.5
 31.8
Residential Real Estate32.8
 32.8
 33.0
 32.9
 32.7
Home Equity5.5
 5.8
 6.1
 6.4
 6.8
Total Loans100.0% 100.0% 100.0% 100.0% 100.0%


Quarterly Yield on Loans

Quarter Ended
6/30/20203/31/202012/31/20199/30/20196/30/2019
Commercial3.84 %4.52 %4.54 %4.60 %4.64 %
Commercial Real Estate4.05 %4.34 %4.53 %4.57 %4.53 %
Consumer3.90 %3.97 %4.01 %3.95 %3.85 %
Residential Real Estate4.08 %4.20 %4.20 %4.27 %4.28 %
Total Loans4.01 %4.18 %4.19 %4.23 %4.18 %

The average yield of the overall total loan portfolio increased throughout 2019 and remained steady for the large portion of the 1st quarter of 2020. The COVID-19 pandemic and the rapid decline to historically low market rates, as well as the addition of $140.0 million of Small Business Administration Paycheck Protection Program loans (as described below) will lower loan yields for the remainder of 2020.

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


Commercial Loans and Commercial Real Estate Loans: For the first six 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 primePrime, LIBOR or FHLBNY rates.
Although demand has been steady, it is possible that demand forMany of the commercial and commercial real estate loans may generally weakenare in upcoming periods and/orindustries that have been heavily impacted by the COVID-19 pandemic. In the second quarter of 2020, Arrow originated over 1,400 Small Business Administration Paycheck Protection Program ("PPP") loans totaling approximately $140.0 million. The PPP loans yield 1% and Arrow expects to earn approximately $5.1 million in fees related to the origination of these loans. The original term on the PPP loans is two years, however the borrower will have the option to apply for forgiveness. Subsequent to the funding of the loans, additional guidance was provided that the quality of this segmentterm of the portfolioloan may experience stress in upcoming periods. Generally,be extended to five years if both parties agree to the business sector inrevised terms. Arrow will recognize the Company's service area, appearedfees earned over the life of the loan and will accelerate recognition of the fees if the loan is forgiven by the Small Business Administration. Additional government intervention, if any, may mitigate the economic risk to both Arrow and its customers, however, the extent of such intervention and its impact cannot be in reasonably good financial conditiondetermined at period-end.this time.


Consumer Loans: At June 30, 2019,2020, consumer loans (primarily automobile loans originated through dealerships located primarily in upstate New York and Vermont) continuescontinue to be a significant component of Arrow's business, comprising more than aone third of thethis total loan portfolio. The physical sale of vehicles through dealerships had been curtailed for the majority of the second quarter and not deemed essential as part of the New York State and Vermont response to the COVID-19 pandemic. Accordingly, we believe, the volume of originations of consumer loans will be impacted. However, the magnitude of the impact cannot yet be determined.
New consumer loan volume for the first six months of 2019 remained strong, at $210.42020 was $179.0 million, updown from the $188.8$210.4 million originated in the first six months of 2018. As a result of these originations, the quarterly average balance of our consumer loan portfolio at June 30, 2019 grew by $56.1 million, or 7.9%, from our quarterly average balance at December 31, 2018.2019.
For credit quality purposes, the CompanyArrow assigns potential automobile loan customers into one of four tiers, ranging from lower to higher quality in terms of anticipated credit risk. The Company'sArrow'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 CompanyArrow believes that this disciplined approach to evaluating risk has contributed to maintaining the strong loancredit quality in this portfolio. However, if weakness in auto demand returns, the portfolio is likelyThe COVID-19 pandemic has created significant unemployment, which may impact borrowers' ability to experience limited, if any, overall growth regardless of whether the auto company affiliates are offering highly-subsidized loans. If demand levels off or declines, the financial performance in this important loan categorysatisfy their obligations to Arrow. Government intervention may be negatively impacted. In addition, the Company may sellmitigate a significant portion of the indirect loan portfolio if market conditions are favorable. Also, ifcredit risk, however, the local economy in our consumer lending areas were to experience a significant downturn, the qualityextent of our consumer loan portfolio may alsosuch intervention and its impact cannot be negatively impacted.determined at this time.


Residential Real Estate Loans: In recent years, residential real estate loans, including home equity loans, have represented the largest category of the total loan portfolio. Gross originations for residential real estate loans (including refinancings of mortgage loans) for the first six months of 20192020 were $55.8$78.8 million. Origination totals exceeded the sum of cash flows received from borrowers in the second quarter and the CompanyArrow has also sold portions of these originations in the secondary market. In the first six months of 2019,2020, the Company sold $9.6$22.2 million, or 17.2%28.2%, of originations. In the first six months of 2018, $2.12019, $9.6 million, or 3.2%17.2%, of originations were sold. The CompanyArrow expects to continue to sell a portion of mortgage loan originations in upcoming periods if market conditions warrant. At some point, itIt is not currently possible thatto determine the Company may experience a decrease in outstanding loan balances in this segmentlong term economic impact of the loan portfolio. Additionally, if the local economy or real estate market should suffer a major downturn, the quality of the real estate portfolio may also be negatively impacted.

The following table indicates the annualized tax-equivalent yield of each loan category for the past five quarters.
Quarterly Taxable Equivalent Yield on Loans
 Quarter Ended
 6/30/2019 3/31/2019 12/31/2018 9/30/2018 6/30/2018
Commercial and Commercial Real Estate4.57% 4.46% 4.50% 4.42% 4.47%
Consumer Loans3.89
 3.68
 3.64
 3.52
 3.44
Residential Real Estate4.12
 4.09
 4.09
 4.05
 4.06
Home Equity4.92
 4.70
 4.43
 4.13
 3.93
Total Loans4.20
 4.08
 4.05
 3.97
 3.96
The average yieldCOVID-19 pandemic, which had resulted in the total loan portfolio during the second quartertemporary closure of 2019non-essential business and increased compared to the average yield during the second 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.unemployment.




55


Deposit Trends
The following tables provide information on trends in the balance and mix of ourthe 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. Savings deposits and total time deposits, both over and under $250,000, have increased each quarter fromof the third quarter of 2018 through the second quarter of 2019,last five quarters as a result of the migration to higher yielding deposit accounts due to the previous rise in short-term market rates. The volatilityrates, which occurred for the majority of 2019. Market rates, beginning to decline prior to the COVID-19 pandemic, reached historic lows in interest-bearing checking account balances was mainly the resultfirst quarter and are expected to remain low for remainder of the decline in municipal deposits. The increase in Other Time Deposits in 2019 was largely due to $84.5 million in brokered deposits the Company acquired to diversify its source of funds at more favorable rates as compared to FHLBNY overnight advances.2020.


Quarterly Average Deposit Balances
(Dollars in Thousands)
Quarter Ended
6/30/20203/31/202012/31/20199/30/20196/30/2019
Noninterest-bearing deposits$624,125  $478,481  $491,494  $490,177  $454,130  
Interest-Bearing Checking Accounts740,284  707,747  724,668  686,017  733,327  
Savings Deposits1,215,296  1,092,980  1,003,612  924,868  879,026  
Time Deposits over $250,000135,978  126,046  120,321  86,018  97,703  
Other Time Deposits236,749  264,755  267,326  285,448  272,104  
Total Deposits$2,952,432  $2,670,009  $2,607,421  $2,472,528  $2,436,290  
 Quarter Ended
 6/30/2019 3/31/2019 12/31/2018 9/30/2018 6/30/2018
Noninterest-bearing deposits$454,130
 $453,668
 $473,170
 $483,089
 $444,854
Interest-Bearing Checking Accounts733,327
 768,354
 817,788
 801,193
 866,996
Savings Deposits879,026
 833,832
 793,299
 744,808
 750,352
Time Deposits over $250,00097,703
 79,346
 76,640
 75,888
 96,580
Other Time Deposits272,104
 212,785
 186,334
 174,731
 166,420
Total Deposits$2,436,290
 $2,347,985
 $2,347,231
 $2,279,709
 $2,325,202


Percentage of Total Quarterly Average Deposits
Quarter EndedQuarter Ended
6/30/2019 3/31/2019 12/31/2018 9/30/2018 6/30/20186/30/20203/31/202012/31/20199/30/20196/30/2019
Noninterest-bearing deposits18.6% 19.3% 20.2% 21.2% 19.1%Noninterest-bearing deposits21.1 %17.9 %18.8 %19.8 %18.6 %
Interest-Bearing Checking Accounts30.1
 32.7
 34.8
 35.1
 37.3
Interest-Bearing Checking Accounts25.1  26.5  27.8  27.7  30.1  
Savings Deposits36.1
 35.5
 33.8
 32.6
 32.3
Savings Deposits41.3  41.0  38.5  37.5  36.0  
Time Deposits over $250,0004.0
 3.4
 3.3
 3.3
 4.2
Time Deposits over $250,0004.6  4.7  4.6  3.5  4.0  
Other Time Deposits11.2
 9.1
 7.9
 7.7
 7.2
Other Time Deposits8.0  9.9  10.3  11.5  11.2  
Total Deposits100.0% 100.0% 100.0% 100.0% 100.0%Total Deposits100.0 %100.0 %100.0 %100.0 %100.0 %
        
Quarterly Cost of Deposits
Quarter EndedQuarter Ended
6/30/2019 3/31/2019 12/31/2018 9/30/2018 6/30/20186/30/20203/31/202012/31/20199/30/20196/30/2019
Demand Deposits—% —% —% —% —%Demand Deposits— %— %— %— %— %
Interest-Bearing Checking Accounts0.25
 0.25
 0.22
 0.19
 0.18
Interest-Bearing Checking Accounts0.17 %0.28 %0.30 %0.29 %0.25 %
Savings Deposits0.92
 0.78
 0.66
 0.48
 0.38
Savings Deposits0.39 %0.91 %0.98 %0.99 %0.92 %
Time Deposits over $250,0002.11
 2.02
 1.81
 1.57
 1.36
Time Deposits over $250,0001.30 %1.70 %1.88 %2.08 %2.11 %
Other Time Deposits1.67
 1.36
 1.08
 0.84
 0.68
Other Time Deposits1.33 %1.52 %1.67 %1.74 %1.67 %
Total Deposits0.68
 0.55
 0.45
 0.34
 0.29
Total Deposits0.37 %0.68 %0.72 %0.73 %0.68 %
        
During the quarter ended June 30, 2019,2020, the total cost of deposits continued to increase consistent with marketdecrease. The Federal Reserve set the targeted short-term rates includingto 0.00-0.25 in response to the costeconomic uncertainty related to the COVID-19 pandemic. The balance sheet of savings deposits and both categories of time deposits. In the current rate environment, savings and time deposit customers continue to seek a higher rate of return. Although 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, market indicators anticipate a decline in short-term rates through the remainder of 2019. The Company is confident in its ability to manage throughwell positioned for a variety of rate environments.environments, see Part I, Item 3, entitled "Quantitative and Qualitative Disclosures About Market Risk," for further discussion.
56


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 Dodd-Frank 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 June 30, 20192020 (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 6061 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 anyof such an event would be an adverse change in tax laws that might deny the Company the ability to deduct interest paid on these obligations for federal income tax purposes.

In the first quarter of 2020, Arrow entered into an interest rate swap agreement to synthetically fix the variable rate interest payments associated with $20 million in outstanding subordinated trust securities.

57



ASSET QUALITY
The following table presents information related to ourthe 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)
6/30/20203/31/202012/31/20199/30/20196/30/2019
Loan Balances:
Period-End Loans$2,561,915  $2,414,193  $2,386,120  $2,335,591  $2,280,308  
Average Loans, Year-to-Date2,456,272  2,394,346  2,283,707  2,258,633  2,233,094  
Average Loans, Quarter-to-Date2,518,198  2,394,346  2,358,110  2,308,879  2,255,299  
Period-End Assets3,547,177  3,291,332  3,184,275  3,112,822  3,005,750  
Allowance for loan losses, Year-to-Date:
Allowance for loan losses, Beginning of Period$21,187  $21,187  $20,196  $20,196  20,196  
Provision for Loan Losses, YTD5,812  2,772  2,079  1,445  927  
Loans Charged-off, YTD(968) (481) (1,735) (1,232) (830) 
Recoveries of Loans Previously Charged-off269  159  647  522  402  
Net Charge-offs, YTD(699) (322) (1,088) (710) $(428) 
Allowance for loan losses, End of Period$26,300  $23,637  $21,187  $20,931  $20,695  
Allowance for loan losses, Quarter-to-Date:
Allowance for loan losses, Beginning of Period$23,637  $21,187  $20,931  $20,695  $20,373  
Provision for Loan Losses, QTD3,040  2,772  634  518  455  
Loans Charged-off, QTD(487) (481) (503) (402) (368) 
Recoveries of Loans Previously Charged-off110  159  125  120  235  
Net Charge-offs, QTD(377) (322) (378) (282) (133) 
Allowance for loan losses, End of Period$26,300  $23,637  $21,187  $20,931  $20,695  
Nonperforming Assets, at Period-End:
Nonaccrual Loans$5,461  $4,943  $4,005  $3,465  $4,949  
Loans Past Due 90 or More Days
and Still Accruing Interest		901  437  253  1,066  457  
Restructured and in Compliance with
Modified Terms		150  136  143  150  142  
Total Nonperforming Loans6,512  5,516  4,401  4,681  5,548  
Repossessed Assets116  160  139  76  115  
Other Real Estate Owned595  782  1,122  1,198  1,258  
Total Nonperforming Assets$7,223  $6,458  $5,662  $5,955  $6,921  
Asset Quality Ratios:
Allowance to Nonperforming Loans403.87 %428.52 %481.41 %447.15 %373.02 %
Allowance to Period-End Loans1.03 %0.98 %0.89 %0.90 %0.91 %
Provision to Average Loans (Quarter) (1)
0.49 %0.47 %0.11 %0.09 %0.08 %
Provision to Average Loans (YTD) (1)
0.48 %0.47 %0.09 %0.09 %0.08 %
Net Charge-offs to Average Loans (Quarter) (1)
0.06 %0.05 %0.06 %0.05 %0.02 %
Net Charge-offs to Average Loans (YTD) (1)
0.06 %0.05 %0.05 %0.04 %0.04 %
Nonperforming Loans to Total Loans0.25 %0.23 %0.18 %0.20 %0.24 %
Nonperforming Assets to Total Assets0.20 %0.20 %0.18 %0.19 %0.23 %
  (1) Annualized
 6/30/2019 3/31/2019 12/31/2018 9/30/2018 6/30/2018
Loan Balances:         
Period-End Loans$2,280,308
 $2,235,208
 $2,196,215
 $2,126,100
 $2,057,862
Average Loans, Year-to-Date2,233,094
 2,210,642
 2,062,575
 2,029,597
 1,999,072
Average Loans, Quarter-to-Date2,255,299
 2,210,642
 2,160,435
 2,089,651
 2,026,598
Period-End Assets3,005,750
 2,984,883
 2,988,334
 2,953,220
 2,845,171
          
Allowance for Loan Losses, Year-to-Date:         
Allowance for Loan Losses, Beginning of Period$20,196
 $20,196
 $18,586
 $18,586
 $18,586
Provision for Loan Losses, YTD927
 472
 2,607
 1,961
 1,375
Loans Charged-off, YTD(830) (462) (1,532) (960) (634)
Recoveries of Loans Previously Charged-off402
 167
 535
 416
 313
Net Charge-offs, YTD(428) (295) (997) (544) (321)
Allowance for Loan Losses, End of Period$20,695
 $20,373
 $20,196
 $20,003
 $19,640
          
Allowance for Loan Losses, Quarter-to-Date:         
Allowance for Loan Losses, Beginning of Period$20,373
 $20,196
 $20,003
 $19,640
 $19,057
Provision for Loan Losses, QTD455
 472
 646
 586
 629
Loans Charged-off, QTD(368) (462) (573) (325) (264)
Recoveries of Loans Previously Charged-off235
 167
 120
 102
 218
Net Charge-offs, QTD(133) (295) (453) (223) (46)
Allowance for Loan Losses, End of Period$20,695
 $20,373
 $20,196
 $20,003
 $19,640
          
Nonperforming Assets, at Period-End:         
Nonaccrual Loans$4,949
 $5,143
 $4,159
 $4,468
 $3,880
Loans Past Due 90 or More Days
and Still Accruing Interest		457
 64
 1,225
 1,172
 170
Restructured and in Compliance with
  Modified Terms
142
 141
 138
 115
 106
Total Nonperforming Loans5,548
 5,348
 5,522
 5,755
 4,156
Repossessed Assets115
 123
 130
 47
 76
Other Real Estate Owned1,258
 1,322
 1,130
 1,173
 1,412
Total Nonperforming Assets$6,921
 $6,793
 $6,782
 $6,975
 $5,644
          
Asset Quality Ratios:         
Allowance to Nonperforming Loans373.02% 380.95% 365.74% 347.58% 472.57%
Allowance to Period-End Loans0.91% 0.91% 0.92% 0.94% 0.95%
Provision to Average Loans (Quarter) (1)
0.08% 0.09% 0.12% 0.11% 0.12%
Provision to Average Loans (YTD) (1)
0.08% 0.09% 0.13% 0.13% 0.14%
Net Charge-offs to Average Loans (Quarter) (1)
0.02% 0.05% 0.08% 0.04% 0.01%
Net Charge-offs to Average Loans (YTD) (1)
0.04% 0.05% 0.05% 0.04% 0.03%
Nonperforming Loans to Total Loans0.24% 0.24% 0.25% 0.27% 0.20%
Nonperforming Assets to Total Assets0.23% 0.23% 0.23% 0.24% 0.20%
  (1) Annualized
         


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


adoption of the Current Expected Credit Losses ("CECL") methodology in determining credit losses.
In the second quarter of 2019,2020, the Company made a $455 thousand$3.0 million provision for loan losses, compared to a provision of $629$455 thousand for the second quarter of 20182019 and a provision of $472 thousand$2.8 million for the first quarter of 2019.2020. The significant increase in loss provision expense was largely driven by growth in outstandingfor loan balances. Additional items impactinglosses reflects the current quarter provision include changes to qualitative factors that reflect management’s view on current economic and market risks, and net charge-offsuncertainty resulting from the COVID-19 pandemic despite the continued strong asset quality of $133 thousand.
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Arrow. See Note 3 to the unaudited interim consolidated financial statements for a discussion on how the Company classifies credit quality indicators as well as the balance in each category.
The ratio of the allowance for loancredit losses to total loans was 1.03% at June 30, 2020, an increase from 0.89% at December 31, 2019 and an increase of 12 basis points from 0.91% at June 30, 2019, a decrease from 0.92% at December 31, 2018 and a decrease of 4 basis points from 0.95% at June 30, 2018.2019.
The accounting policy relating to the allowance for loancredit 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 ourthe results of operations. The process for determining the provision for loan losses is described in Note 3 to the unaudited interim consolidated financial statements.


Risk Elements
Nonperforming assets at June 30, 20192020 amounted to $6.9$7.2 million, consistent withup from the $5.7 million total at December 31, 2018 total2019 and an increase of $1.3$0.3 million, from June 30, 2018.2019. For the three-month periods ended June 30, 20192020 and 2018,2019, ratios of nonperforming assets to total assets have remained below the average ratios for the peer group. (See page 4342 for a discussion of the peer group.) At March 31, 2019,2020, the ratio of loans past due 90 or more days plus nonaccrual loans plus other real estate owned to total assets was 0.22%0.19%, well below the 0.60%0.48% ratio of the peer group at such date (the latest date for which peer group information is available). At June 30, 20192020 the ratio is 0.23%was 0.20%, which is below the most recent ratio for the peer group.
The following table presents the balance of other non-current loans at period-end as to which interest income was being accrued (i.e. loans 30 to 89 days past due, as defined in bank regulatory guidelines). These non-current loans are not included in nonperforming assets, but entail heightened risk.
Loans Past Due 30-89 Days and Accruing Interest
($ in 000's)
Loans Past Due 30-89 Days and Accruing Interest
($ in 000's)
Loans Past Due 30-89 Days and Accruing Interest
($ in 000's)
6/30/2019 12/31/2018 6/30/20186/30/202012/31/20196/30/2019
Commercial Loans$175
 $170
 $18
Commercial Loans$299  $192  $175  
Commercial Real Estate Loans—
 108
 —
Commercial Real Estate Loans—  266  —  
Residential Real Estate Loans1,482
 2,190
 2,014
Residential Real Estate Loans509  1,960  1,482  
Consumer Loans - Primarily Indirect Automobile5,769
 7,414
 5,440
Consumer Loans - Primarily Indirect Automobile7,756  8,305  5,769  
Total Loans Past Due 30-89 Days
and Accruing Interest
$7,426
 $9,882
 $7,472
 Total Loans Past Due 30-89 Days
and Accruing Interest		$8,564  $10,723  $7,426  
        
At June 30, 2019,2020, the loans in the above-referenced category totaled $7.4$8.6 million, a decrease of $2.5$2.2 million, or 24.9%20.1%, from the $9.9$10.7 million of such loans at December 31, 2018.2019. The June 30, 20192020 total of non-current loans equaled 0.33% of loans then outstanding, compared to 0.45%0.49% at December 31, 20182019 and 0.36%0.33% at June 30, 2018.2019. The decrease from December 31, 20182019 is primarily attributable to a decrease in delinquent automobile loans which tend to reflect seasonally elevated levels in the second half of the year.as well as residential real estate loans.
The number and dollar amount of performing loans that demonstrate characteristics of potential weakness from time-to-time (potential problem loans) typically is a very small percentage of the loan portfolio. See the table of Credit Quality Indicators in Note 3 to the unaudited interim consolidated financial statements. The Company considers all performing commercial and commercial real estate loans classified as substandard or lower (as reported in Note 3) to be potential problem loans. The dollar amount of such loans at June 30, 20192020 was $32.9$35.9 million, down slightlyup from the dollar amount of such loans at December 31, 2018,2019, when the amount was $35.0$32.4 million. These loans will continue to be closely monitored and the Company expects to collect all payments of contractual interestprincipal and principalinterest in full on these classified loans. Total nonperforming assets at period-end increased by $1.3$0.3 million, or 22.6%4.4% from June 30, 2018.2019.
The economy in the Company's market area has been relatively strong in recent years, but any general weakeningeconomic impact of the U.S. economyCOVID-19 pandemic, specifically unemployment levels and the temporary mandated closure of nonessential businesses, may impact the borrowers' ability to satisfy their obligations, and may therefore result in upcoming periods would likelydelinquencies. Government interventions, on both the federal and state level, have an adverse effectbeen deployed to mitigate a significant portion of the credit risk. Arrow cannot make a determination as to the overall impact on its business of the economy inCOVID-19 pandemic at this market area as well, and ultimately on the loan portfolio, particularly the commercial and commercial real estate portfolio.time.
As of June 30, 2019,2020, the Company held for sale threeone commercial propertiesproperty in other real estate owned. The Company does not expect to acquire a significant number of other real estate properties in the near term as a result of payment defaults or the foreclosure process.

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Loan Deferrals Related to COVID-19 Pandemic
The Company doesCOVID-19 pandemic has created economic uncertainty resulting in increased unemployment as well as the temporary closure of nonessential businesses. In the table below, the loan portfolio is presented with loan deferrals as the result of the COVID-19 pandemic as of June 30, 2020. In accordance with the CARES Act, the deferrals listed below are not currently anticipate significant increasesconsidered troubled debt restructuring. In the second quarter of 2020, Arrow originated $140.0 million of Small Business Administration Paycheck Protection Program loans. These loans are included in nonperforming assets, other non-currentthe loan balances by sector as listed below, however, these loans are not considered deferred as to which interest income is still being accrued or potential problem loans, but can give no assurances in this regard.of June 30, 2020.

COVID-19 Deferrals by Loan Category at June 30, 2020
($ in 000's)
Balances by SectorDeferrals
Total% of Total LoansBalance% of Loan Segment% of Total Loans
Commercial and Commercial Real Estate Loans:
Health Care and Social Assistance$132,229  5.2 %$20,884  2.6 %0.8 %
Lessors of Non-Residential Real Estate129,244  5.0 %37,675  4.7 %1.5 %
Hotels & Motels108,700  4.2 %74,775  9.2 %2.9 %
Lessors of Residential Real Estate100,815  3.9 %9,593  1.2 %0.4 %
Arts/Recreation/Restaurants/Vacation Camps52,717  2.1 %17,902  2.2 %0.7 %
Retail43,177  1.7 %7,500  0.9 %0.3 %
Construction & Related35,364  1.4 %759  0.1 %— %
Other339,686  13.3 %28,919  3.5 %1.1 %
Total Commercial and Commercial Real Estate Loans809,703  31.6 %198,007  24.5 %7.7 %
Consumer Loans828,493  32.3 %39,138  4.7 %1.5 %
Residential Real Estate Loans923,719  36.1 %81,867  8.9 %3.2 %
Total Loans2,561,915  319,012  12.5 %


CAPITAL RESOURCES


Regulatory Capital Standards


Capital Adequacy Requirements.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 agenciesregulators have issued a final rule to establish aimplement the Community Bank Leverage Ratio (CBLR)("CBLR"), introducing an optional simplified measure of between 8% and 10%, calculated by dividing tangible equity capital by average total consolidated assets of "qualifyingadequacy for qualifying community banks"banks that meetsatisfy certain requirements, to be set by those regulatory agencies.  A qualifying community bank isincluding having a depository institution or bank holding company withleverage ratio of greater than 9%, less than $10 billion in total consolidated assets, such as Arrow, that meets other requirements to be established by the regulators.  If aand limited amounts of off-balance-sheet exposures and trading assets and liabilities.  A qualifying community bank exceedsthat opts into the CBLR itframework and meets all requirements under the CBLR framework will be deemedconsidered to have met all applicable capitalthe well-capitalized ratio requirements under the “prompt corrective action” regulations and leverage requirements, including the generally applicable leverage capital requirements andwill not be required to report or calculate risk-based capital requirements and (if the community bankratios.  The CBLR is a depository institution) the "well capitalized" requirement under the federal "prompt corrective action" capital standards.  Upon its implementation, this new CBLR standard is intended to reduce the burden of compliance with regard to regulatory capital adequacy for qualifying community banks.  However, the implementation of this standard will be subject to the notice and comment procedures of rulemaking, and the Economic Growth Act does not impose a deadline for this rulemaking. 
On November 21, 2018, federal banking regulators issued a notice of proposed rulemaking under the Economic Growth Act that would set the threshold for the CBLR at greater than 9 percent, calculated as the ratio of “CBLR tangible equity”“tier 1 capital” divided by “average total consolidated assets.”  Based on the parametersThis final rule was effective as of this proposed rulemaking,January 1, 2020, and qualifying community banks can utilize the CBLR framework for purposes of filing their call reports or Form FR Y-9C, as applicable, for the first quarter of 2020 (i.e., as of March 31, 2020). Arrow and both subsidiary banks is estimatedelected to exceedopt out of utilizing the 9 percent threshold. However, the proposed rule is not yet effective or 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, theCBLR framework. The Capital Rules promulgated under Dodd-Frank will remain applicable to Arrow.


The following is a summary of certain definitions of capital under the various capital measures in the 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(the Company made such an election). Mortgage-servicing assets, deferred tax assets, and investments in financial institutions are limited to 15 percent of CET1 in the aggregate and 10 percent of CET1 for each such item individually.
Additional Tier 1 Capital: Equals the sum of noncumulative perpetual preferred stock, tier 1 minority interests, grandfathered TRUPs, and Troubled Asset Relief Program instruments, minus applicable regulatory adjustments and deductions.
Tier 2 Capital: Equals the sum of subordinated debt and preferred stock, total capital minority interests not included in Tier 1, and allowance for loan and lease losses (not exceeding 1.25% of risk-weighted assets) minus applicable regulatory adjustments and deductions.

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The following table presents the minimum regulatory capital ratios applicable to ourthe holding company and banks under the current Capital Rules:
Capital Ratio2020
2019
Minimum CET1 Ratio4.500%
Capital Conservation Buffer ("Buffer")2.500%
Minimum CET1 Ratio Plus Buffer7.000%
Minimum Tier 1 Risk-Based Capital Ratio6.000%
Minimum Tier 1 Risk-Based Capital Ratio Plus Buffer8.500%
Minimum Total Risk-Based Capital Ratio8.000%
Minimum Total Risk-Based Capital Ratio Plus Buffer10.500%
Minimum Leverage Ratio4.000%

These minimum capital ratios, especially the CET1 ratio (4.5%) and the enhanced Tier 1 risk-based capital ratio (6.0%), represent a heightened and more restrictive capital regime than institutions like Arrow previously had to meet under the prior capital rules.
At June 30, 2019,2020, Arrow's holding company and both of its subsidiary banks exceeded by a substantial amount each of the applicable minimum capital ratios established under the 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 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 rankings of these capitalization categories, i.e., as "well-capitalized" or "adequately capitalized."


Current Capital Ratios:The table below sets forth the regulatory capital ratios of Arrow's holding company and two subsidiary banks, Glens Falls National and Saratoga National, under the current Capital Rules, as of June 30, 2019:2020:

Common Tier 1 Total  CommonTier 1Total
Equity Risk-Based Risk-Based Tier 1EquityRisk-BasedRisk-BasedTier 1
Tier 1 Capital Capital Capital LeverageTier 1 CapitalCapitalCapitalLeverage
Ratio Ratio Ratio RatioRatioRatioRatioRatio
Arrow Financial Corporation12.99% 13.93% 14.91% 9.88%Arrow Financial Corporation13.07 %13.94 %15.10 %9.32 %
Glens Falls National Bank & Trust Co.13.54% 13.54% 14.54% 9.42%Glens Falls National Bank & Trust Co.13.88 %13.89 %15.05 %8.89 %
Saratoga National Bank & Trust Co.13.11% 13.11% 14.03% 9.96%Saratoga National Bank & Trust Co.12.02 %12.02 %13.13 %8.79 %
       
FDICIA's Prompt Corrective Action - "Well-Capitalized" Standard (2019)6.500% 8.000% 10.000% 5.000%FDICIA's Prompt Corrective Action - "Well-Capitalized" Standard (2019)6.50 %8.00 %10.00 %5.00 %
Regulatory Minimum effective 1/1/2019
7.000%(1)

 
8.500%(1)

 
10.500%(1)

 4.000%Regulatory Minimum effective 1/1/2019
7.000%(1)
8.500%(1)
10.500%(1)
4.00 %
       
(1) Including the fully phased-in 2.50% capital conservation buffer
(1) Including the fully phased-in 2.50% capital conservation buffer
(1) Including the fully phased-in 2.50% capital conservation buffer


At June 30, 2019,2020, Arrow and its subsidiary banks exceeded the minimum regulatory capital ratios established under the current Capital Rules and each also qualified as "well-capitalized", the highest category in the new capital classification scheme established by federal bank regulatory agencies under the "prompt corrective action" standards, as described above.


Capital Components; Stock Repurchases; Dividends
Stockholders' Equity:Stockholders'Stockholders’ equity was $284.6$317.7 million at June 30, 2019,2020, an increase of $15.1$16.0 million, or 5.6%5.3%, from the December 31, 2018.  This2019 level of $301.7 million, and an increase wasof $33.0 million, or 11.6%, from the resultprior-year level. The increase in stockholders' equity over the first six months of 2020 principally reflected the following factors: (i) $17.3 million of net income for the
61

period, of $17.67 million; increases in book equity from various stock-based compensation and dividend reinvestment plans of $2.80 million; andplus (ii) other comprehensive income of $4.16 million. These increases to equity during the quarter were offset$6.1 million, plus (iii) issuance of $1.9 million of common stock through employee benefit and dividend reinvestment plans; reduced by a decrease related to(iv) cash dividends of $7.53 million$7.8 million; and purchases(v) repurchases of the Company's own common stock in the aggregate amount of $2.04$1.5 million under the Board-approved stock repurchase program described below.


Trust Preferred Securities:In each of 2003 and 2004, the Company issued $10 million of trust preferred securities (TRUPs) in a private placement. Under the Federal Reserve Board's regulatory capital rules then in effect, TRUPs proceeds typically qualified as Tier 1 capital for bank holding companies such as Arrow, but only in amounts up to 25% of Tier 1 capital, net of goodwill less any associated deferred tax liability. Under the Dodd-Frank Act, any trust preferred securities that Arrow might issue on or after the grandfathering date set forth in Dodd-Frank (May 19, 2010) would not qualify as Tier 1 capital under bank regulatory capital guidelines. For Arrow, TRUPs outstanding prior to the grandfathering cutoff date set forth in Dodd-Frank (May 19, 2010) would continue to qualify as Tier 1 capital until maturity or redemption, subject to limitations. Thus, Arrow's outstanding TRUPs continue to qualify as Tier 1 regulatory capital, subject to such limitations.

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

Stock Repurchase Program: In JanuaryOctober 2019, the Board of Directors approved a $5.0 million stock repurchase program, effective January 1, 2020 (the 20192020 Repurchase Program), under which management is authorized, in its discretion, to permit the Company to repurchase up to $5 million of shares of Arrow's common stock over the period from January 30, 2019 through December 31, 2019,during 2020, in the open market or in privately negotiated transactions, to the extent management believes the Company's stock is reasonably priced and such repurchases appear to be an attractive use of available capital and in the best interests of shareholders. This 20192020 Repurchase Program replaced a similar repurchase program which was in effect during 20182019 (the 20182019 program), which also authorized the repurchase of up to $5.0 million of shares of Arrow's common stock. As of June 30, 20192020 approximately $1.1$1.5 million had been used under the 20192020 Repurchase Program to repurchase Arrow shares. No stock repurchases have occurred in the second quarter. This total does not include repurchases of Arrow's Common Stock other than through its 20192020 Repurchase Program, i.e., repurchases of Arrow shares on the market utilizing funds accumulated under Arrow's Dividend Reinvestment Plan and the surrender or deemed surrender of Arrow stock to the Company in connection with employees' stock-for-stock exercises of compensatory stock options to buy Arrow stock.






Dividends:The Company's common stock is traded on NasdaqGS® under the symbol AROW. The high and low stock prices for the past six quarters listed below represent actual sales transactions, as reported by NASDAQ. On July 31, 2019,29, 2020, the Board of Directors declared a 20192020 third quarter cash dividend of $0.26 payable on September 13, 2019.15, 2020. Per share amounts and share counts in the following tabletables have been restated for ourthe September 27, 20182019 3% stock dividend.
Cash
Market PriceDividends
LowHighDeclared
2019
First Quarter$29.57  $35.19  $0.252  
Second Quarter30.96  33.93  0.252  
Third Quarter30.26  35.31  0.252  
Fourth Quarter32.03  38.31  0.260  
2020
First Quarter$20.79  $38.04  $0.260  
Second Quarter23.56  31.68  0.260  
Third QuarterTBDTBD0.260  
     Cash
 Market Price Dividends
 Low High Declared
2018     
First Quarter$29.91
 $34.53
 $0.243
Second Quarter31.89
 37.23
 0.243
Third Quarter35.19
 38.98
 0.252
Fourth Quarter30.45
 37.55
 0.260
2019     
First Quarter$30.46
 $36.25
 $0.260
Second Quarter31.89
 34.95
 0.260
Quarter Ended June 30
20202019
Cash Dividends Per Share$0.260  $0.252  
Diluted Earnings Per Share0.61  0.60  
Dividend Payout Ratio42.62 %42.00 %
Total Equity (in thousands)317,687  $284,649  
Shares Issued and Outstanding (in thousands)15,011  14,949  
Book Value Per Share$21.16  $19.04  
Intangible Assets (in thousands)23,535  23,603  
Tangible Book Value Per Share$19.60  $17.46  
 Quarter Ended June 30,
 2019 2018
Cash Dividends Per Share$0.260
 $0.243
Diluted Earnings Per Share0.62
 0.67
Dividend Payout Ratio41.94% 36.27%
Total Equity (in thousands)284,649
 $259,488
Shares Issued and Outstanding (in thousands)14,513
 14,424
Book Value Per Share$19.61
 $17.99
Intangible Assets (in thousands)23,603
 23,933
Tangible Book Value Per Share$17.99
 $16.33


LIQUIDITY
The objective of effective liquidity management is to ensure that the Company has the ability to raise cash when needed at a reasonable cost.  This includes the capability of meeting expected and unexpected obligations to the Company's customers at any time.  Given the uncertain nature of customer demands and the need to maximize earnings, the Company must have available reasonably priced sources of funds, both on- and off-balance sheet, that can be accessed quickly in time of need. With the COVID-19 pandemic, liquidity management is critical for Arrow. Arrow’s liquidity position provides the necessary flexibility to address any unexpected near-term disruptions that may develop as a result of the COVID-19 pandemic such as: reduced cash-flows from the investment and loan
The
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portfolios and aggressive funding of programs associated with response efforts, including the Small Business Administration’s Paycheck Protection Program. 
Arrow's primary sources of available liquidity are overnight investments in federal funds sold, interest bearing bank balances at the Federal Reserve Bank of New York, and cash flow from investment securities and loans.  Certain investment securities are selected at purchase as available-for-sale based on their marketability and collateral value, as well as their yield and maturity.  The securities available-for-sale portfolio was $285.9$378.8 million at June 30, 2019, a decrease2020, an increase of $31.7$21.4 million, from the year-end 20182019 level. Due to the potential for volatility in market values, the CompanyArrow may not always be able to sell securities on short notice at their carrying value, even to provide needed liquidity. Arrow also held interest-bearing cash balances at June 30, 2020 of $215.0 million compared to $28.0 million at June 30, 2019.
In addition to liquidity from cash, short-term investments, investment securities and loans, the Company has supplemented available operating liquidity with additional off-balance sheet sources such as a federal funds lines of credit with correspondent banks and credit lines with the FHLBNY. The federal funds lines of credit are with threetwo correspondent banks totaling $57$52 million which were not drawn on during the three months ended June 30, 2019.2020.
To support the borrowing relationship with the FHLBNY, the Company has pledged collateral, including residential mortgage, and home equity and commercial real estate loans. At June 30, 2019,2020, the Company had outstanding collateral obligations with the FHLBNY of $128$95 million; as of that date, the unused borrowing capacity at the FHLBNY was approximately $439$740 million. Brokered deposits have also been identified as an available source of funding accessible in a relatively short time period. At June 30, 2019,2020, the balance of outstanding brokered deposits totaled $129.6$88.1 million. Also, the Company'sArrow's two bank subsidiaries have each established a borrowing facility with the Federal Reserve Bank of New York, pledging certain consumer loans as collateral for potential "discount window" advances, which are maintained for contingency liquidity purposes. At June 30, 2019,2020, the amount available under this facilitythese facilities was approximately $551$567 million in the aggregate, and there were no advances then outstanding.
The CompanyArrow performs regular liquidity stress tests and tests of the contingent liquidity plan to ensure that an adequate amount of available funds can be generated to meet a wide variety of potential liquidity crises including the current COVID-19 pandemic.
Arrow measures and monitors basic liquidity as a ratio of liquid assets to total short-term liabilities, both with and without the availability of borrowing arrangements. Based on the level of overnight funds investments, available liquidity from the investment securities portfolio, cash flows from the loan portfolio, the stable core deposit base and the significant borrowing capacity, the Company believes that the available liquidity is sufficient to meet all funding needs that may arise in connection with the COVID-19 pandemic or any other reasonably likely events or occurrences.occurrences, although there can be no assurance that it will be sufficient. At June 30, 2019,2020, the basic liquidity ratio, including the FHLBNY collateralized borrowing capacity, was 13.4%31.5% of total assets, or $281$975 million in excess of the internally-set minimum target ratio of 4%.
Because of its consistently favorable credit quality and strong balance sheet, the CompanyArrow did not experience any significant liquidity constraints in the six-month period ended June 30, 20192020 and did not experience any such constraints in recent prior years. The CompanyArrow 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.



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RECENTLY ISSUED ACCOUNTING STANDARDS

The following accounting standards have been issued and become effective for the Company at a future date:
In June 2016, the FASB issued ASU 2016-13 "Financial Instruments - Credit Losses" ("CECL") which will change the way financial entities measure expected credit losses for financial assets, primarily loans. Under this ASU, the "incurred loss" model will be replaced with an "expected loss" model which will recognize losses over the life of the instrument and requires consideration of a broader range of reasonable and supportable information. Currently, credit losses on available-for-sale securities reduce the carrying value of the instrument and cannot be reversed. Under CECL, the amount of the credit loss is carried as a valuation allowance and can be reversed. The standard also requires expanded credit quality disclosures. In April 2019, the FASB issued ASU 2019-04 "Codification Improvements to Topic 326, Financial Instruments-Credit Losses; Topic 815, Derivatives and Hedging; and Topic 825, Financial Instruments," which clarifies that the estimate of expected credit losses should include expected recoveries of financial assets, and that contractual extension or renewal options that are not unconditionally cancellable by the lender are considered when determining the contractual term over which expected credit losses are measured. The Company's loan terms for contractual extensions and renewal options are unconditionally cancellable by the Company (that is, the Company has no obligation to extend or renew existing loans), and therefore are not considered in measuring expected credit losses. In May 2019, the FASB issued ASU 2019-05 "Targeted Transition Relief," which allows entities to irrevocably elect the fair value option for certain financial assets measured at amortized cost, not including held-to-maturity investment securities which will continue to be measured at amortized cost. This will apply to those institutions that elect the fair value option on newly originated or purchased financial assets, to avoid the possibility of dual measurement methodologies for identical or similar financial assets.
As permitted by the Coronavirus Aid, Relief, and Economic Security ("CARES") Act, Arrow has elected to defer the adoption of the Current Expected Credit Losses ("CECL") methodology in determining credit losses. The initial adjustment will not be reported in earnings, but as the cumulative effect of a change in accounting principle and the adoption will require additional disclosures in future periods. The Company has held CECL working group meetings that included individuals from various functional areas relevant to the implementation of CECL. The Company's CECL working group has developed accounting policies for credit losses including, among other things, management’s decisions regarding portfolio segmentation, life of loan considerations, and a reasonable and supportable forecasting methodology. The CECL pronouncement describes several acceptable methodologies for calculating expected losses on a loan or a pool of loans. The Company has identified the discounted cash flow method for determining losses for the commercial loan portfolios and the residential real estate portfolios, and the vintage method for the consumer indirect loan portfolio. As a result of analyses performed, including the availability of future economic data, the Company will utilize an 18-month reasonable and supportable forecast period, and revert to an historic loss rate using the straight-line method over a two year reversion period. The Company has identified the economic data that it believes best correlate with expected loan losses through the use of various regression analyses of historical economic information and loan losses. The adoption of this standard will change the way qualitative factors are determined as compared to the current incurred loss allowance for loan losses model.
The Company has performed parallel CECL reserve calculations as of December 31, 2019, March 31, 2020 and June 30, 2020. The Company has also developed a control framework and continues to monitor updates to financial reporting requirements and regulatory guidance, and evaluates the impact on the consolidated financial statements, disclosures, processes and internal controls.
Based on the December 31, 2019 parallel run, review of the portfolio, including the composition, characteristics and quality of the underlying loans, and the prevailing economic conditions and forecasts as of the adoption date, the Company believes the adjustment to retained earnings related to the initial adoption of CECL will result in an immaterial impact. Assuming the CECL reserve for credit losses was recorded, Arrow would still remain a well-capitalized financial institution. Regulators have developed two deferral options related to the adoption of CECL and the resulting computation of regulatory capital ratios. The initial deferral method, the 2019 CECL Rule, allows a financial institution to elect a three-year deferral of the initial CECL adoption amount for the computation of regulatory capital. An additional deferral method, the Interim Final Rule, allows a financial institution that implements CECL before the end of 2020, the option to delay for two years an estimate of CECL's effect on regulatory capital, followed by a three-year transition period. Arrow is in the process of evaluating these deferral methods.
In 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 December 2019, the FASB issued ASU 2019-12 "Simplifying the Accounting for Income Taxes" (Topic 740), which removes certain exceptions to the general principles in Topic 740 and improves consistent application of and simplifies GAAP for other areas of Topic 740 by clarifying and amending existing guidance. This ASU is effective for fiscal years beginning after December 15, 2020 and interim periods within those fiscal years, with early adoption permitted. Arrow will adopt this standard effective on January 1, 2021. The Company does not expect that the adoption of this standard will have a material impact on its financial position or the results of operations in periods subsequent to its adoption.
64

RESULTS OF OPERATIONS
Three Months Ended June 30, 20192020 Compared With
Three Months Ended June 30, 20182019


Summary of Earnings Performance
(Dollars in Thousands, Except Per Share Amounts)
Quarter Ended    Three Months Ended
6/30/2019
 6/30/2018 Change % ChangeJune 30, 2020June 30, 2019Change% Change
Net Income$8,934
 $9,730
 $(796) (8.2)%Net Income$9,159  $8,934  $225  2.5 %
Diluted Earnings Per Share0.62
 0.67
 (0.05) (7.5)%Diluted Earnings Per Share0.61  0.60  0.01  1.7 %
Return on Average Assets1.20% 1.38% (0.18)% (13.0)%Return on Average Assets1.07 %1.20 %(0.13)%(10.8)%
Return on Average Equity12.79% 15.22% (2.43)% (16.0)%Return on Average Equity11.64 %12.79 %(1.15)%(9.0)%
        
Net income was $8.9$9.2 million and diluted earnings per share (EPS) of $.62$.61 for the second quarter of 2019,2020, compared to net income of $9.7$8.9 million and diluted EPS of $.67$.60 for the second quarter of 2018.2019. Return on average assets (ROA) for the second quarter of 20192020 was 1.20%1.07%, downup from 1.38%1.20% in the second quarter of 2018.2019. In addition, return on average equity (ROE) decreased to 12.79%11.64% for the second quarter of 2019,2020, down from 15.22%12.79% in the second quarter of 2018.2019.
         
The following narrative discusses the quarter-to-quarter changes in net interest income, noninterest income, noninterest expense and income taxes.


Net Interest Income
Summary of Net Interest Income
(Dollars in Thousands)
Three Months Ended
June 30, 2020June 30, 2019Change% Change
Interest and Dividend Income$28,002  $27,227  $775  2.8 %
Interest Expense3,160  5,520  (2,360) (42.8)%
Net Interest Income24,842  21,707  3,135  14.4 %
Average Earning Assets(1)
3,281,223  2,865,085  416,138  14.5 %
Average Interest-Bearing Liabilities2,457,690  2,235,462  222,228  9.9 %
Yield on Earning Assets(1)
3.43 %3.81 %(0.38) (10.0)%
Cost of Interest-Bearing Liabilities0.52  0.99  (0.47) (47.5) 
Net Interest Spread2.91  2.82  0.09  3.2  
Net Interest Margin3.05  3.04  0.01  0.3  
 Quarter Ended    
 6/30/2019 6/30/2018 Change % Change
Interest and Dividend Income (GAAP Basis)$27,227
 $23,590
 $3,637
 15.4 %
Tax-Equivalent Adjustment376
 468
 (92) (19.7)%
Interest and Dividend Income (Tax-equivalent Basis) (2)
27,603
 24,058
 3,545
 14.7 %
        
Interest Expense5,520
 2,628
 2,892
 110.0 %
Net Interest Income (GAAP Basis)21,707
 20,962
 745
 3.6 %
Net Interest Income (Tax-equivalent Basis) (2)
22,083
 21,430
 653
 3.0 %
Average Earning Assets (1)
2,865,085
 2,703,054
 162,031
 6.0 %
Average Interest-Bearing Liabilities2,235,462
 2,100,085
 135,377
 6.4 %
        
Yield on Earning Assets (GAAP Basis) (1)
3.81% 3.50% 0.31
 8.9 %
Yield on Earning Assets (Tax-equivalent Basis) (1) (2)
3.86
 3.57
 0.29
 8.1
Cost of Interest-Bearing Liabilities0.99
 0.50
 0.49
 98.0
        
Net Interest Spread (GAAP Basis)2.82
 3.00
 (0.18) (6.0)
Net Interest Spread (Tax-equivalent Basis) (2)
2.87
 3.07
 (0.20) (6.5)
        
Net Interest Margin (GAAP Basis)3.04
 3.11
 (0.07) (2.3)
Net Interest Margin (Tax-equivalent Basis) (2)
3.09
 3.18
 (0.09) (2.8)
(1) Includes Nonaccrual Loans.
(2) See "Use of Non-GAAP Financial Measures" on page 44; reported on a fully taxable basis using a marginal federal tax rate of 21%.


Net interest income for the recently completed quarter on a GAAP basis, increased by $0.7$3.1 million, or 3.6%14.4%, from the second quarter of 2018,2019, due primarily to continued loan growth.a variety of factors including; balance sheet growth, lower market rates, and a more favorable funding mix, with higher deposit balances and lower wholesale borrowings. Total loans increased $45.1$147.7 million in the second quarter of 2019. In addition, average earning assets increased 6.0% from2020, mostly the result of $140.0 million of Small Business Administration's Paycheck Protection Program loans. At June 30, 2018. In order to fund the consistent loan growth, total average-interest-bearing liabilities increased 6.4%2020, deposit balances reached $3.1 billion, up $565.0 million, or 22.6%, from the second quarterprior-year level. Noninterest-bearing deposits represented 21.8% of 2018. The current rate environment has compressed net interest margin.total deposits at June 30, 2020, compared to 18.7% of total deposits on June 30, 2019. Net interest margin on a GAAP basis decreased 7increased 1 basis points in the second quarter of 20192020 to 3.04%3.05%, from 3.11%3.04% during the second quarter of 2018.2019. Average earning asset yields were 3138 basis points higherlower as compared to the second quarter of 20182019 due primarily to the continued increasedecrease in market yields andrates as well as the higher compositionaddition of loans as a percentage of earning assets. Yield on loans specifically increased 24 basis points from the second quarter of 2018.Paycheck Protection Program loans. The cost of interest-bearing liabilities increased 49decreased 47 basis points from the quarter ended June 30, 2018. Cost of funds continues to be impacted by the migration to higher-yield deposit accounts due to the rise in short-term rates.2019. The Company defines net interest margin as net interest income divided by average earning assets, annualized. The Company defines tax-equivalent net interest margin as net interest income on a tax-equivalent basis divided by average earning assets, annualized. Tax-equivalent net interest margin, as well as tax-equivalent net interest income, from which the margin is derived, are non-GAAP financial measures. (See


the discussion under "Use of Non-GAAP Financial Measures," on page 44, and the tabular information and notes on pages 45 through 48, regarding the Company's reasons for using these and other non-GAAP measures and the reconciliation thereof to comparable GAAP measures.) Further detailed information is presented above under the section entitled "Average Consolidated Balance Sheets and Net Interest Income Analysis." The impact of recent interest rate changes on Arrow's deposit and loan portfolios are discussed above in this Report under the sections entitled "Deposit Trends" and "Loan Trends."
As discussed previously under the heading "Asset Quality" beginning on page 58,59, the provision for loan losses for the second quarter of 20192020 was $455 thousand,$3.04 million, compared to a provision of $629$455 thousand for the second quarter of 2018.2019.


65

Noninterest Income
Summary of Noninterest Income
(Dollars in Thousands)
Three Months Ended    Three Months Ended
6/30/2019 6/30/2018 Change % ChangeJune 30, 2020June 30, 2019Change% Change
Income From Fiduciary Activities$2,252
 $2,647
 $(395) (14.9)%Income From Fiduciary Activities$2,135  $2,252  $(117) (5.2)%
Fees for Other Services to Customers2,545
 2,570
 (25) (1.0)%Fees for Other Services to Customers2,278  2,545  (267) (10.5)%
Insurance Commissions1,935
 2,192
 (257) (11.7)%Insurance Commissions1,732  1,935  (203) (10.5)%
Net Gain on Securities—
 223
 (223) (100.0)%
Net (Loss) Gain on Securities TransactionsNet (Loss) Gain on Securities Transactions(106) —  (106) 100.0 %
Net Gain on the Sale of Loans140
 23
 117
 508.7 %Net Gain on the Sale of Loans547  140  407  290.7 %
Other Operating Income24
 256
 (232) (90.6)%Other Operating Income578  24  554  2,308.3 %
Total Noninterest Income$6,896
 $7,911
 $(1,015) (12.8)%Total Noninterest Income$7,164  $6,896  $268  3.9 %
        
Total noninterest income in the current quarter was $6.9$7.2 million, a decreasean increase of $1.0 million$268 thousand from the comparable quarter of 2018.2019. Income from fiduciary activities for the second quarter of 20192020 decreased by $395$117 thousand, or 14.9% over5.2% from the second quarter of 2018.2019. The decrease in income from fiduciary activities was primarily due to both marketthe result of increased competition as well as large estate settlements which occurred during the second quartermarket value fluctuation of 2018.
assets under management. Fees for other services to customers were $2.5$2.3 million for the second quarter of 2019. In addition to service charge income on deposits, this category also includes debit card interchange income, revenue related to the sale of mutual funds to customers by third party providers, and servicing income on sold loans. Debit card usage by customers continues to grow, which has had (and if such growth persists, will continue to have) a positive impact on debit card fee income.
2020. Insurance commissions decreased to $1.7 million for the second quarter of 2020 compared to $1.9 million for the second quarter of 2019, compared to $2.2 million for the second quarter of 2018, due primarily to continued competitive pressurea decline in the property, casualty and employee benefits sectorssector of the business.
Net loss on security gainstransactions of $106 thousand for the secondfirst quarter of 2018 were $223 thousand. There were no gains or losses2020 was the result in the second quarterdecrease in the fair value of 2019.
equity securities. Net gain on the sale of loans in the second quarter of 20192020 increased by $117$407 thousand from the second quarter of 2018.2019. The change was a result of favorable market conditions leading to an increase in loan sale volume. See page 5652 for the discussion of loan sales.
Other operating income decreased $232 thousandincreased $0.6 million from the comparable quarter in 2018,2019, primarily as athe result of a charge to dispose fixed assets within our branch networkfees received as part of our continued efforts to improve customer experience.interest rate swap agreements.


Noninterest Expense
Summary of Noninterest Expense
(Dollars in Thousands)
 Quarter Ended    
 6/30/2019 6/30/2018 Change % Change
Salaries and Employee Benefits$9,727
 9,812
 $(85) (0.9)%
Occupancy Expense of Premises, Net1,279
 1,270
 9
 0.7 %
Technology and Equipment Expense3,243
 2,849
 394
 13.8 %
FDIC and FICO Assessments212
 223
 (11) (4.9)%
Amortization44
 66
 (22) (33.3)%
Other Operating Expense2,403
 1,972
 431
 21.9 %
Total Noninterest Expense$16,908
 $16,192
 $716
 4.4 %
Efficiency Ratio58.19% 55.38% 2.81
 5.1 %
Noninterest expense for the second quarter of 2019 was $16.9 million, an increase of $716 thousand, or 4.4%, from the second 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 58.19% for the second quarter of 2019 and 55.38% for the comparable 2018 quarter. The efficiency ratio (a ratio where lower is better), is a commonly used non-GAAP financial measure in the banking industry that purports to reflect an institution's operating efficiency. The Company calculates the efficiency ratio as the ratio of noninterest expense (excluding, under the Company's definition, intangible asset amortization) to (i) net interest income (on a tax-equivalent basis) plus (ii) noninterest income (excluding net securities gains or losses). See the discussion on this non-GAAP measure on page 44 of this Report under the heading "Use of Non-GAAP Financial Measures" and the related tabular information and notes on pages 45 through 48 of this Report.


The efficiency ratio included by the Federal Reserve Board in its "Bank Holding Company Performance Reports" excludes net securities gains or losses from the denominator (as does the Company's calculation), but unlike the Company's ratio does not exclude intangible asset amortization from the numerator. The Company's efficiency ratios in recent periods have generally compared favorably to the ratios of the peer group as disclosed in the Federal Reserve Performance Reports (see page 43 for a discussion of the peer group). For the three-month period ended March 31, 2019 (the most recent reporting period for which peer group information is available), the peer group's efficiency ratio was 65.32% compared to the Company's ratio of 58.55% (not adjusted for the definitional difference).
Income Taxes
Summary of Income Taxes
(Dollars in Thousands)
 Quarter Ended    
 6/30/2019 6/30/2018 Change % Change
Provision for Income Taxes$2,306
 $2,322
 $(16) (0.7)%
Effective Tax Rate20.5% 19.3% 1.2
 6.2 %




RESULTS OF OPERATIONS
Six Months Ended June 30, 2019 Compared With
Six Months Ended June 30, 2018

Summary of Earnings Performance
(Dollars in Thousands, Except Per Share Amounts)
 Six Months Ended    
 6/30/2019
 6/30/2018 Change % Change
Net Income$17,668
 $18,261
 $(593) (3.2)%
Diluted Earnings Per Share1.22
 1.26
 (0.04) (3.2)
Return on Average Assets1.19% 1.32% (0.13)% (9.8)
Return on Average Equity12.88% 14.51% (1.63)% (11.2)
Net income was $17.7 million and diluted earnings per share (EPS) of $1.22 for the first six months of 2019, compared to net income of $18.3 million and diluted EPS of $1.26 for the first six months of 2018. Return on average assets (ROA) for the first six months of 2019 was 1.19%, a decrease from 1.32% for the first six months of 2018. In addition, return on average equity (ROE) decreased to 12.88% for the first six months of 2019 from 14.51% for the first six months of 2018.
The following narrative discusses the period-to-period changes in net interest income, noninterest income, noninterest expense and income taxes.

Net Interest Income
Summary of Net Interest Income
(Taxable Equivalent Basis, Dollars in Thousands)
 Six Months Ended    
 6/30/2019 6/30/2018 Change % Change
Interest and Dividend Income$53,440
 $46,008
 $7,432
 16.2 %
Tax-Equivalent Adjustment748
 959
 (211) (22.0)%
Interest and Dividend Income (Tax-equivalent) (2)
54,188
 46,967
 7,221
 15.4 %
        
Interest Expense10,612
 4,644
 5,968
 128.5 %
Net Interest Income42,828
 41,364
 1,464
 3.5 %
Net Interest Income (Tax-equivalent) (2)
43,576
 42,323
 1,253
 3.0 %
Average Earning Assets (1)
2,856,573
 2,672,527
 184,046
 6.9 %
Average Interest-Bearing Liabilities2,229,963
 2,075,510
 154,453
 7.4 %
        
Yield on Earning Assets (1)
3.77% 3.47% 0.30 % 8.6 %
Yield on Earning Assets (Tax-equivalent) (1) (2)
3.83
 3.54
 0.29 % 8.2 %
Cost of Interest-Bearing Liabilities0.96
 0.45
 0.51 % 113.3 %
        
Net Interest Spread2.81
 3.02
 (0.21)% (7.0)%
Net Interest Spread (Tax-equivalent) (2)
2.87
 3.09
 (0.22)% (7.1)%
        
Net Interest Margin3.02
 3.12
 (0.10)% (3.2)%
Net Interest Margin (Tax-equivalent) (2)
3.08
 3.19
 (0.11)% (3.4)%
(1) Includes Nonaccrual Loans
(2) See "Use of Non-GAAP Financial Measures" on page 44; reported on a fully taxable basis using a marginal federal tax rate of 21%.
Net interest income on a GAAP basis, for the six-month period ended June 30, 2019 increased by $1.5 million, or 3.5%, over six-month period ended June 30, 2018. The largest driver of the increase in net interest margin was the $222.4 million year-over-year increase in loans. For the first six months of 2019, net interest margin decreased to 3.02% from 3.12% for the comparative period of 2018. The cost of interest-bearing liabilities to fund continued loan growth have increased to 0.96% from 0.45% for the comparable prior period due largely to the higher short-term market rates. The Company defines net interest margin as net interest income divided by average earning assets, annualized. The Company defines tax-equivalent net interest margin as net interest income on a tax-equivalent basis divided by average earning assets, annualized.Tax-equivalent net interest margin, as well as tax-equivalent net interest income, from which the margin is derived, are non-GAAP financial measures. (See the discussion under "Use of Non-GAAP Financial Measures," on page 44, and the tabular information and notes on pages 45 through 48, regarding net interest margin and tax-equivalent net interest income, which are commonly used non-GAAP financial measures.) Further detailed information is presented above under the section entitled "Average Consolidated Balance Sheets and Net Interest Income Analysis." The impact of recent interest rate changes on Arrow's deposit and loan portfolios are discussed above in this Report under the sections entitled "Deposit Trends" and "Loan Trends."


As discussed previously under the heading "Asset Quality" beginning on page 58, the provision for loan losses for the first six months of 2019 was $0.93 million, compared to a provision of $1.38 million for the 2018 period.

Noninterest Income
Summary of Noninterest Income
(Dollars in Thousands)
 Six Months Ended    
 6/30/2019 6/30/2018 Change % Change
Income From Fiduciary Activities4,359
 4,844
 $(485) (10.0)%
Fees for Other Services to Customers4,947
 4,950
 (3) (0.1)
Insurance Commissions3,654
 4,095
 (441) (10.8)
Net Gain on Securities76
 241
 (165) (68.5)
Net Gain on the Sale of Loans244
 61
 183
 300.0
Other Operating Income503
 609
 (106) (17.4)
Total Noninterest Income$13,783
 $14,800
 $(1,017) (6.9)%
Total noninterest income in the first six months of 2019 was $13.8 million, a decrease of $1.0 million, or 6.9%, from total noninterest income of $14.8 million for the first six months of 2018. Fees for other services to customers, the largest segment of noninterest income, were $4.9 million consistent with the first six months of 2018.
Income from fiduciary activities for the first six months of 2019 decreased by $485 thousand, or 10.0% over the first six months of 2018 primarily due to large estate settlements that occurred in the second quarter of 2018. Insurance commissions declined 10.8% to $3.7 million for the first six months of 2019, compared to $4.1 million in the first six months of 2018, due primarily to the increased competition in the property, casualty and employee benefits sectors of the business.
Net gains on securities were $76 thousand in the first six months of 2019 compared to $241 thousand for the first six months of 2018.
Net gain on the sale of loans in the first six months of 2019 increased by $183 thousand, or 300.0% from the first six months of 2018. The increase was largely the result of an increase in loan sale volume which is consistent with the Company's business strategy. See page 56 for the discussion of loan sales.
The decrease in other operating income between the periods was due primarily to the disposal of fixed assets in the first six months of 2019 within our branch network as part of our continued effort to improve customer experience.

Noninterest Expense
Summary of Noninterest Expense
(Dollars in Thousands)
Three Months Ended
June 30, 2020June 30, 2019Change% Change
Salaries and Employee Benefits$10,212  9,727  $485  5.0 %
Occupancy Expense of Premises, Net1,345  1,279  66  5.2 %
Technology and Equipment Expense3,227  3,243  (16) (0.5)%
FDIC and FICO Assessments242  212  30  14.2 %
Amortization57  44  13  29.5 %
Other Operating Expense2,162  2,403  (241) (10.0)%
Total Noninterest Expense$17,245  $16,908  $337  2.0 %
Efficiency Ratio53.06 %58.19 %(5.13) (8.8)%
Noninterest expense for the second quarter of 2020 was $17.2 million, an increase of $0.3 million, or 2.0%, from the second quarter of 2019. Salaries and benefit expenses increased $0.5 million, or 5.0%, from the comparable quarter in 2019. The increase in salaries and benefits was primarily due to the increase in the cost of health insurance benefits.
The efficiency ratio continues to be solid at 53.06% for the second quarter of 2020 and 58.19% for the comparable 2019 quarter. The efficiency ratio (a ratio where lower is better), is a commonly used non-GAAP financial measure in the banking industry that purports to reflect an institution's operating efficiency. The Company calculates the efficiency ratio as the ratio of noninterest expense (excluding, under the Company's definition, intangible asset amortization) to (i) net interest income (on a tax-equivalent basis) plus (ii) noninterest income (excluding net securities gains or losses). See the discussion on this non-GAAP measure on page 43 of this Report under the heading "Use of Non-GAAP Financial Measures" and the related tabular information and notes on pages 44 through 47 of this Report. The efficiency ratio included by the Federal Reserve Board in its "Bank Holding Company Performance Reports" excludes net securities gains or losses from the denominator (as does the Company's calculation), but unlike the Company's ratio does not exclude intangible asset amortization from the numerator. The Company's efficiency ratios in recent periods have generally compared favorably to the ratios of the peer group as disclosed in the Federal Reserve Performance Reports (see page 42 for a discussion of the peer group). For the three-month period ended March 31, 2020 (the most recent reporting period for which peer group information is available), the peer group's efficiency ratio was 63.68% compared to the Company's ratio of 57.13% (not adjusted for the definitional difference).
66

 Six Months Ended    
 6/30/2019 6/30/2018 Change % Change
Salaries and Employee Benefits$19,046
 $19,181
 $(135) (0.7)%
Occupancy Expense of Premises, Net2,699
 2,610
 89
 3.4
Technology and Equipment Expense6,384
 5,547
 837
 15.1
FDIC and FICO Assessments424
 440
 (16) (3.6)
Amortization124
 132
 (8) (6.1)
Other Operating Expense4,883
 4,238
 645
 15.2
Total Noninterest Expense$33,560
 $32,148
 $1,412
 4.4
Efficiency Ratio58.37% 56.28% 2.09
 3.7

Income Taxes
Summary of Income Taxes
(Dollars in Thousands)
Three Months Ended
June 30, 2020June 30, 2019Change% Change
Provision for Income Taxes$2,562  $2,306  $256  11.1 %
Effective Tax Rate21.9 %20.5 %1.4  6.8 %

The increase in the effective tax rate in the three months ended June 30, 2020 over the three months ended June 30, 2019 was primarily due to the reduction of tax exempt investments held and the related investment income combined with the reduced tax benefit related to stock based compensation.
.
67

RESULTS OF OPERATIONS
Six Months Ended June 30, 2020 Compared With
Six Months Ended June 30, 2019

Summary of Earnings Performance
(Dollars in Thousands, Except Per Share Amounts)
Six Months Ended
June 30, 2020June 30, 2019Change% Change
Net Income$17,286  $17,668  $(382) (2.2)%
Diluted Earnings Per Share1.15  1.18  (0.03) (2.5) 
Return on Average Assets1.05 %1.19 %(0.14)%(11.8) 
Return on Average Equity11.16 %12.88 %(1.72)%(13.4) 
Net income was $17.3 million and diluted earnings per share (EPS) of $1.15 for the first six months of 2020, compared to net income of $17.7 million and diluted EPS of $1.18 for the first six months of 2019. Return on average assets (ROA) for the first six months of 2020 was 1.05%, a decrease from 1.19% for the first six months of 2019. In addition, return on average equity (ROE) decreased to 11.16% for the first six months of 2020 from 12.88% for the first six months of 2019.
The following narrative discusses the period-to-period changes in net interest income, noninterest income, noninterest expense and income taxes.

Net Interest Income
Summary of Net Interest Income
(Dollars in Thousands)
Six Months Ended
June 30, 2020June 30, 2019Change% Change
Interest and Dividend Income$56,228  $53,440  $2,788  5.2 %
Interest Expense8,380  10,612  (2,232) (21.0)%
Net Interest Income47,848  42,828  5,020  11.7 %
Average Earning Assets (1)
3,156,052  2,856,573  299,479  10.5 %
Average Interest-Bearing Liabilities2,410,103  2,229,963  180,140  8.1 %
Yield on Earning Assets (1)
3.58 %3.77 %(0.19)%(5.0)%
Cost of Interest-Bearing Liabilities0.70  0.96  (0.26)%(27.1)%
Net Interest Spread2.88  2.81  0.07 %2.5 %
Net Interest Margin3.05  3.02  0.03 %1.0 %
(1) Includes Nonaccrual Loans
Net interest income, for the six-month period ended June 30, 2020 increased by $5.0 million or 11.7%, over the six-month period ended June 30, 2019. For the first six months of 2020, net interest margin increased to 3.05% from 3.02% for the comparable period of 2019. The cost of interest-bearing liabilities have decreased to 0.70% from 0.96% for the comparable prior period due largely to the decrease in market rates in the current year. Arrow defines net interest margin as net interest income divided by average earning assets, annualized. Further detailed information is presented above under the section entitled "Average Consolidated Balance Sheets and Net Interest Income Analysis." The impact of recent interest rate changes on Arrow's deposit and loan portfolios are discussed above in this Report under the sections entitled "Deposit Trends" and "Loan Trends."
As discussed previously under the heading "Asset Quality" beginning on page 59, the provision for loan losses for the first six months of 2020 was $5.81 million, compared to a provision of $0.93 million for the 2019 period.

Noninterest Income
Summary of Noninterest Income
(Dollars in Thousands)
Six Months Ended
June 30, 2020June 30, 2019Change% Change
Income From Fiduciary Activities4,348  4,359  $(11) (0.3)%
Fees for Other Services to Customers4,729  4,947  (218) (4.4) 
Insurance Commissions3,364  3,654  (290) (7.9) 
Net (Loss) Gain on Securities(480) 76  (556) (731.6) 
Net Gain on the Sale of Loans760  244  516  211.5  
Other Operating Income2,137  503  1,634  324.9  
Total Noninterest Income$14,858  $13,783  $1,075  7.8 %
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Total noninterest income in the first six months of 2020 was $14.9 million, an increase of $1.1 million, or 7.8%, from total noninterest income of $13.8 million for the first six months of 2019. Fees for other services to customers, the largest segment of noninterest income, were $4.7 million. Income from fiduciary activities for the first six months of 2020 was consistent with 2019. Insurance commissions declined 7.9% to $3.4 million for the first six months of 2020, compared to $3.7 million in the first six months of 2019, due primarily to the increased competition in the employee benefits sectors of the business. Net loss on securities were $480 thousand in the first six months of 2020 compared to a net gain of $76 thousand for the first six months of 2019. This was the result of a decrease in the fair value of equity securities. Net gain on the sale of loans in the first six months of 2020 increased by $516 thousand, or 211.5% from the first six months of 2019. The change was a result of favorable market conditions leading to an increase in loan sale volume. See page 52 for the discussion of loan sales. Other operating income was $2.1 million, an increase of 324.9% from the comparative six month period of 2019. The increase is primarily the result of $1.1 million of fees received as part of interest rate swap agreements in 2020 and a loss on the disposal of fixed assets that occurred in 2019.

Noninterest Expense
Summary of Noninterest Expense
(Dollars in Thousands)
Six Months Ended
June 30, 2020June 30, 2019Change% Change
Salaries and Employee Benefits$20,595  $19,046  $1,549  8.1 %
Occupancy Expense of Premises, Net2,794  2,699  95  3.5  
Technology and Equipment Expense6,579  6,384  195  3.1  
FDIC and FICO Assessments461  424  37  8.7  
Amortization115  124  (9) (7.3) 
Other Operating Expense4,455  4,883  (428) (8.8) 
Total Noninterest Expense$34,999  $33,560  $1,439  4.3  
Efficiency Ratio54.72 %58.37 %(3.65) (6.3) 
        
Noninterest expense for the first six months of 20192020 was $33.6$35.0 million, an increase of $1.4 million, or 4.4%4.3%, from the expense for the first six months of 2018. The Company's efficiency ratio was 58.37%2019. Salaries and employee benefits expense increased 8.1% in the first six months of 2020 over the 2019 period, primarily driven by increased benefit costs. Pursuant to ASU 2017-07 Compensation-Retirement Benefits, Arrow has reclassified the non-service cost components of retirement plans from salaries and benefits to other operating expenses. Occupancy expense of premises have increased $95.0 thousand, or 3.5%, for the first six months of 2020 in comparison to the first six months of 2019. Technology and Equipment Expense increased by $0.2 million, or 3.1%, as compared to the 2019 period.
The Company's efficiency ratio was 54.71% for the first six months of 2020 and 56.28%58.37% for the comparable 20182019 period. This ratio (a ratio where lower is better), is a commonly used non-GAAP financial measure in the banking industry that purports to reflect operating efficiency. The Company calculates the efficiency ratio as the ratio of noninterest expense (excluding, under the Company's definition, intangible asset amortization) to (i) net interest income (on a tax-equivalent basis) plus (ii) noninterest income (excluding net securities gains or losses). See the discussion on this non-GAAP measure on page 4443 of this Report under the heading "Use of Non-GAAP Financial Measures" and the related tabular information and notes on pages 4544 through 4847 of this Report.Report
Salaries and employee benefits expense decreased 0.7% in the first six months of 2019 over the 2018 period, reflecting an effort to manage open positions and control benefit costs. Pursuant to ASU 2017-07 Compensation-Retirement Benefits, Arrow has reclassified the non-service cost components of retirement plans from salaries and benefits to other operating expenses.
Technology and Equipment Expense increased by $837 thousand, or 15.1%, as compared to the 2018 period. The increase was primarily the result of our continued commitment to ongoing projects to improve efficiency and our customer experience.


Income Taxes
Summary of Income Taxes
(Dollars in Thousands)
Six Months Ended
June 30, 2020June 30, 2019Change% Change
Provision for Income Taxes$4,609  $4,456  $153  3.4 %
Effective Tax Rate21.1 %20.1 %1.0  5.0  

The increase in the effective tax rate in the first six months of 2020 over the first nine months of 2019 was primary due to the reduction of tax exempt investments held and the related investment income combined with the reduced tax benefit related to stock based compensation.
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69
 Six Months Ended    
 6/30/2019 6/30/2018 Change % Change
Provision for Income Taxes$4,456
 $4,380
 $76
 1.7%
Effective Tax Rate20.1% 19.3% 0.8
 4.1









Item 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
In addition to credit risk in the loan portfolio and liquidity risk, discussed earlier, the Company's business activities also generate market risk.  Market risk is the possibility that changes in future market rates (interest rates) or prices (market value of financial instruments) will make the Company's position (i.e., assets and operations) less valuable.  The Company's primary market risk is interest rate volatility. The ongoing monitoring and management of interest rate risk is an important component of the asset/liability management process, which is governed by policies that are reviewed and approved annually by the Board of Directors.  The Board of Directors delegates responsibility for carrying out asset/liability oversight and control to management's Asset/Liability Committee ("ALCO").  In this capacity ALCO develops guidelines and strategies impacting the asset/liability profile based upon estimated market risk sensitivity, policy limits and overall market interest rate levels and trends.  
Changes in market interest rates, whether increases or decreases, can trigger repricing and changes in the pace of payments for both assets and liabilities (prepayment risk). This may individually or in combination affect net interest income, net interest margin, and ultimately net income, either positively or negatively. ALCO utilizes the results of a detailed and dynamic simulation model to quantify this interest rate risk by projecting net interest income in various interest rate scenarios.  
The Company's standard simulation model applies a parallel shift in interest rates, ramped over a 12-month period, to capture the impact of changing interest rates on net interest income.  The results are compared to ALCO policy limits which specify a maximum tolerance level for net interest income exposure over a one-year horizon, assuming no balance sheet growth and a 200 basis point upward and a 100 basis point downward shift in interest rates. Additional tools to monitor potential longer-term interest rate risk, including periodic stress testing involving hypothetical sudden and significant interest rate spikes, are also evaluated.
The following table summarizes the percentage change in net interest income as compared to the base scenario, which assumes no change in market interest rates as generated from the standard simulation model. The results are presented for each of the first two years of the simulation period for the 200 basis point increase in interest rate scenario and the 100 basis point decrease in interest rate scenario.
As of June 30, 2019:2020:
Change in Interest Rate
+ 200 basis points- 100 basis points
Calculated change in Net Interest Income - Year 1(1.39)%(0.24)%
Calculated change in Net Interest Income - Year 2(0.28)%(9.24)%
 Change in Interest Rate 
 + 200 basis points - 100 basis points 
Calculated change in Net Interest Income - Year 1(2.40)% 0.40% 
Calculated change in Net Interest Income - Year 21.10% (3.60)% 


Historically, there has existed an inverse relationship between changes in prevailing rates and the Company's net interest income, suggesting that liabilities and sources of funds generally reprice more quickly than earning assets (near-term liability sensitivity). However, when net interest income is simulated over a longer time frame, this exposure is limited, and actually reverses, as asset yields continue to reprice while the cost of funding reaches assumed ceilings or floors (long-term asset sensitivity).
The hypothetical estimates underlying the sensitivity analysis are based upon numerous assumptions, including: the nature and timing of changes in interest rates including yield curve shape, prepayments on loans and securities, deposit decay rates, pricing decisions on loans and deposits, reinvestment/replacement of asset and liability cash flows, and others.  While assumptions are developed based upon current economic and local market conditions, the Company cannot make any assurance as to the predictive nature of these assumptions including how customer preferences or competitor influences might change.
Also, as market conditions vary from those assumed in the sensitivity analysis, actual results will differ due to: prepayment/refinancing levels likely deviating from those assumed, the varying impact of interest rate changes on caps or floors on adjustable rate assets, the potential effect of changing debt service levels on customers with adjustable rate loans, depositor early withdrawals and product preference changes, unanticipated shifts in the yield curve and other internal/external variables.  Furthermore, the sensitivity analysis does not reflect actions that ALCO might take in responding to or anticipating changes in interest rates. The COVID-19 pandemic may impact markets, rates, behavior and other estimates used in the above scenarios.


Item 4.
CONTROLS AND PROCEDURES
Senior management, including the Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the design and operation of Arrow's disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended) as of June 30, 2019.2020. Based upon that evaluation, senior management, including the Chief Executive Officer and Chief Financial Officer, concluded that our disclosure controls and procedures were effective. Further, there were no changes made in the Company's internal control over financial reporting that occurred during the most recent fiscal quarter that had materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.

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PART II - OTHER INFORMATION
Item 1.
Legal Proceedings
The Company, including its subsidiary banks, is not currently the subject of any material pending legal proceedings, other than ordinary routine litigation occurring in the normal course of their business. On an ongoing basis, the Company is often the subject of, or a party to, various legal claims by other parties against the Company, by the Company against other parties, or involving the Company, which arise in the normal course of business. The various pending legal claims against the Company will not, in the opinion of management based upon consultation with counsel, result in any material liability.
Item 1.A.
Risk Factors
The Risk Factors identified in the Company's Annual Report on Form 10-K for the year ended December 31, 2018,2019, as supplemented by the risk factor included in Item 8.01 of the Company's Current Report on Form 8-K filed April 24, 2020, continue to represent the most significant risks to the Company's future results of operations and financial conditions, without further 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, 2018.
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
Unregistered Sales of Equity Securities
None.


Issuer Purchases of Equity Securities
The following table presents information about purchases by Arrow during the three months ended June 30, 20192020 of common stock (our only class of equity securities registered pursuant to Section 12 of the Securities Exchange Act of 1934):
Second Quarter
2020
Calendar Month
(A)
Total Number of
Shares Purchased 1
(B)
Average Price
Paid Per Share 1
(C)
Total Number of
Shares Purchased as
Part of Publicly
Announced
Plans or Programs 2
(D)
Maximum
Approximate Dollar
Value of Shares that
May Yet be
Purchased Under the
Plans or Programs 2
April2,850  $26.88  —  $3,493,345  
May901  26.74  —  3,493,345  
June17,888  28.27  —  3,493,345  
   Total21,639  28.02  —  
Second 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
April1,350
 $34.26
 —
 $4,194,019
May17,759
 33.14
 5,000
 4,033,119
June17,118
 33.04
 3,138
 3,932,734
   Total36,227
 33.14
 8,138
  
1The 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 in connection with their stock-for-stock exercise of such options and (iii) shares purchased under the publicly-announced 20192020 Repurchase Program. In the months indicated, the listed number of shares purchased included the following number of shares purchased by Arrow through such methods: April - DRIP purchases (1,350(2,850 shares); May - DRIP purchases (1,189 shares), stock-for-stock exercises (11,570 shares) and repurchased under the 2019 Repurchase Program (5,000(901 shares); and June - DRIP purchases (13,980 shares) and repurchased under the 2019 Repurchase Program (3,138(17,888 shares.)
2Includes only those shares acquired by Arrow pursuant to its publicly-announced stock repurchase programs. Our only publicly-announced stock repurchase program in effect for the second quarter of 20192020 was the 20192020 Repurchase Program approved by the Board of Directors and announced in JanuaryOctober 2019, under which the Board authorized management, in its discretion, to repurchase from time to time from January 30, 2019 through December 31, 2019,during calendar year 2020, in the open market or in privately negotiated transactions, up to $5 million of Arrow common stock subject to certain exceptions.
Item 3.
Defaults Upon Senior Securities - None
Item 4.
Mine Safety Disclosures - None

71


Item 5.
Other Information - None
Item 6.
Exhibits
Exhibit NumberExhibit
3.(i)
3.(ii)
15
31.1
31.2
32
101.INSXBRL Instance Document
101.SCHXBRL Taxonomy Extension Schema Document
101.CALXBRL Taxonomy Extension Calculation Linkbase Document
101.DEFXBRL Taxonomy Extension Definition Linkbase Document
101.LABXBRL Taxonomy Extension Labels Linkbase Document
101.PREXBRL Taxonomy Extension Presentation Linkbase Document


















72


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
August 6, 2020
August 5, 2019/s/Thomas J. Murphy
DateThomas J. Murphy President and
President and Chief Executive Officer
August 5, 20196, 2020/s/Edward J. Campanella
DateEdward J. Campanella
Senior Vice President, Treasurer and
Treasurer and Chief Financial Officer
(Principal Financial Officer and
Principal Accounting Officer)





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